TAXATION LAW REVIEW by Queddeng and Manginga
JANUARY 14, 2020
 SHELL v. VAÑO
- A municipality imposed a tax on all
installation managers.
Q: Is it constitutional or unconstitutional?
A: Constitutional because the imposition of the tax is
germane to the purpose of the law and it shall apply to all
future conditions.
So, even if Shell has an installation manager and that
installation manager is the only installation manager in that
municipality, it does not matter because once another
installation manager will enter the municipality and
practice his profession as installation manager, then the
same type of tax will be imposed on the same installation
manager.
In which case, the ordinance is constitutional.
In the book of Ingles, it was held that the ruling of the SC
was that the ordinance is unconstitutional which is wrong.
That’s why Ma’am do not suggest the use of this book. There
are several others daw.
Taxation can be described as a power or a process.
 TAXATION AS A POWER
Q: How do we describe power of taxation of the State?
A: The power of taxation is comprehensive, unlimited,
plenary and supreme.
It is COMPREHENSIVE as it covers persons,
businesses, activities, professions, rights and privileges.
It is UNLIMITED since Congress has the power to
tax certain objects without limitation but of course subject
to the constitutional and inherent limitations. The power to
impose taxes is one so unlimited in force and so searching
in extent that the courts scarcely venture to declare that it
is subject to any restrictions whatever, except such as rest
in the discretion of the authority which exercises it.
It is PLENARY since taxation as a power is complete
in that, there are certain remedies in order to enforce
taxation.
It is SUPREME because the power of taxation is
supreme insofar as the selection of the subject of taxation is
concerned. It does not mean that it is superior to the other
inherent powers of the State. But it is likened to a power to
destroy but it is not likewise absolute.
Q: Why is the concept penned by Justice Marshall is not
absolute or the concept of the power to tax being the power
to destroy?
A: The power to tax, being the power to destroy, is not
absolute because the power to tax as the power to destroy
applies to valid taxes.
If there are invalid taxes, then the courts can
declare that as invalid. And thus, it will limit the power of
taxation.
And that is the reason why, Justice Holmes had
penned the tenet that the power to tax is not the power to
destroy while this court sits.
Q: Another description of power of taxation?
A: It is INHERENT. The power to tax emanates from
necessity as dictated by the Legislature and also, in relation
to the lifeblood doctrine.
Taxes are the lifeblood of the government and no
government can function or work without taxes.
Q: Why do we say that the power of taxation of the State is
inherent? Why is it considered as an inherent power?
A: It is an inherent attribute of the State because the State
cannot exist without the power of taxation. Its duty is to
promote the welfare of the people and it cannot do so
without taxes.
Basically, power of taxation of the State is inherent
because the moment that a State exists, the power of
taxation exist.
So, a Constitution or an enabling law is not
necessary in order for a State to exercise the power of
taxation.
Meaning, once a State has been created, it is not
needed that the people would draft a Constitution in order
for the State to collect taxes because the moment that the
State exists, then the State can immediately levy taxes.
Q: What is the reason why the State’s power of taxation is
inherent?
A: Because of necessity. And that is the reason why you
have your necessity theory.
Necessity theory provides that the power to tax
emanates from necessity because taxes are needed for the
survival of the State.
So if you will observe, all these principles on
necessity, on lifeblood, on inherent power of the State are
all together lit into one general principle.
Q: What is that general principle?
A: The power of taxation is needed in order for the
Government to exist.
Another description would be the power of taxation
is BOUND BY LIMITATIONS. There are two types of
limitations as provided under jurisprudential tenets.
Q: What are these?
A: Inherent and Constitutional Limitations.
The power of taxation is also called THE POWER
TO DESTROY.
NOTE:
This principle will only be applicable if the power of
taxation is being used in order to regulate the
activities of the people of a particular State.
Q: Is the power of taxation by LGU inherent?
A: The power of taxation by LGU is not inherent. It is directly
conferred by the Constitution but the Local Government
Code provides the guidelines and restrictions to the exercise
of such power.
Page 1 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Legal basis of the LGU’s taxing power?
A: Art. X Sec 5 of the 1987 Constitution provides for local
autonomy.
In this particular section, it provides that subject to
the limitations provided by the Congress, the LGUs already
have the power to levy taxes in order for them to create their
own sources of revenue.
NOTE:
This constitutional provision has granted the power
of tax in favor of a LGU but it is still be subject to
the limitations to be set by the Congress.
Q: Can the Congress prohibit LGUs to impose taxes? If the
Congress enacted a law prohibiting a LGU to impose a
certain type of tax, will that particular law be considered as
unconstitutional?
A: It is unconstitutional because it is already a prohibition,
not a mere restriction.
Q: What is the rule on pre-emption?
A: It restricts a particular governmental entity from taxing
goods or other taxable things if it has been already taxed by
the National Government.
This rule of pre-emption is found under the Local
Government Code particularly Sec. 133.
Q: Will we consider this particular provision of the Local
Government Code as prohibition or restriction?
A: It is only a restriction.
Q: Why?
A: Because from the facts, there is only a particular tax that
had been restricted; not a total prohibition on the power of
taxation by the national government to the LGU.
Q: What’s the difference between restriction and
prohibition?
A: Restriction is mere guideline set by the Congress to the
LGUs on imposing taxes; while the prohibition is a total ban
on the imposition of taxes by the LGU.
If the law enacted merely regulates the imposition
of a particular tax, then that’s basically a restriction so that
is valid because under Sec. 5, Art. X of the 1987 PC, the
Congress can restrict or can set guidelines.
But the Congress cannot remove such particular
power from the LGUs because that will directly
circumvent Sec. 5, Art. X of the 1987 Constitution.
Kung prohibition yan, dapat ang sagot daw natin sa quiz is
that it is unconstitutional.
Q: Bakit?
A: It circumvents Sec. 5, Art. X of the 1987 PC.
If the problem is a situation where the Congress had
merely set restrictions as to the power of the Local
Government to impose taxes; meaning, merely set
guidelines for the LGUs to impose the tax, then that
particular law is constitutional because Sec. 5, Art. X of the
1987 PC provides that the Local Government’s taxing power
shall still be subject to the guidelines set by the Congress.
 SITUATION:
The BIR impose a documentary stamp tax on the
contracts entered into by HMOs. It is very clear from the
assessment notice that there is actually no legal basis in the
computation of the documentary stamp tax.
Other than that, it likewise shows that the amount of
tax being collected from the taxpayer is worth 10 B, but from
the financial statements of this HMOs, it clearly appears
that the net worth of this HMO is only 1 B. The government
is collecting a tax worth 10 B during a period where the net
worth of the taxpayer is pegged only at 1 B.
Q: What is an assessment notice?
A: It is statement containing the computation of the amount
of the tax liability. It contains the liability of the taxpayer.
Q: Is this act considered as a valid act on the part of the
BIR?
This situation is similar to the factual milieu on the
Philippine Health Care Providers v. CIR.
The SC held that legitimate businesses enjoy the
Constitutional right or constitutional protection not to be
taxed out of existence.
Hence, the collection of the BIR of a tax worth 10 B
which is several times higher than the net worth of the
taxpayer is considered as a confiscatory collection of taxes
from Philippine Health Care provider because that is along
with the fact that the imposition of the tax has no legal
basis.
In this case, the SC likewise provided that
obviously, the tax collector cannot kill the hen that lays the
golden egg.
Q: What is the theory and basis of taxation?
A: It is simply the NECESSITY THEORY. The power of
taxation emanates from necessity.
The basis of taxation is your LIFEBLOOD
DOCTRINE.
Q: What is lifeblood doctrine?
A: Taxes are the lifeblood of the government. Without taxes,
the government cannot function properly.
It is also the basis why the collection of taxes should
not be delayed and hampered. It should remain
unhampered.
 JUSTIFICATIONS IN THE IMPOSITION OF
TAXES
1. NECESSITY THEORY
- The theory behind the power of taxation
emanates from necessity because without taxes, the
government cannot fulfil its mandate to promote the
welfare and well-being of its citizens.
2. SYMBIOTIC RELATIONSHIP THEORY OR
PRINCIPLE
- Despite the natural reluctance of the citizen
to forthwith his hard-earned money, this citizen
should contribute to the government in order for
them to receive tangible and intangible benefits.
3. BENEFITS-RECEIVED THEORY
- The citizen should contribute to the State
for the benefits that are derived from the
Government.
Apparently, they are the same.
Q: But what is the difference?
Page 2 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: In symbiotic relationship, para siyang magbabayad
ako kasi makakareceive ako ng benefit in the form of
tangible or intangible benefit, doon sa benefits-received
principle, magbabayad ako kasi may narecieve akong
benefit.
Kaya nga, pag sinulat mo ang benefits-received
principle, nakapast tense siya.
Hindi siya nagrarise sa difference sa kung tangible
ba or intangible benefit kasi those benefits can be in the
form of tangible or intangible.
Ma’am: If you were asked to define symbiotic
relationship theory during the time that you will take
the Bar Exams or whenever I would ask it during your
quiz, I am expecting that you would not misquote the
definition as provided in the case of CIR v. Algue. I am
expecting you to mention that definition because you
are preparing for the Bar Exams.
 PURPOSES OF THE POWER OF TAXATION
1. PRIMARY PURPOSE
- To raise revenue
2. SECONDARY PURPOSE
a. IT CAN BE REGULATION.
If we talked about the power of taxation being used
in order to regulate certain type of activities, then this would
mean that the power of taxation is being used as an
implement of police power.
And if the power of taxation is being used as an
implement of police power, this would mean that the power
of taxation is being imposed in order to promote the general
welfare of the people.
Q: Can the Government impose higher taxes on all makeup
products?
A: Yes. That would mean that the Government is
discouraging the use of makeup.
Q: Can the Government impose higher taxes on night club?
A: Yes because that would mean that the Government is
discouraging that type of activity.
Q: Can these night club operators raise the argument that
it is confiscatory?
A: No because the power to tax can be used as the power to
destroy when the power of taxation is being used as an
implement of police power.
So, basta ginagamit pala ang power of taxation as
an implement of police power, pwede siyang power to
destroy.
Q: Pano kung sabihin ng night club operator. Teka, 30% ang
tax namin, tapos sa ibang establishment, ang tax lang nila
3%. Pwede ba nilang sabihin na legitimate businesses enjoy
the constitutional protection not to be taxed out of
existence?
A: No.
Q: Why not?
A: Because the power of taxation is being used as an
implement of police power.
And that is also the reason why in the case of Tio
v. Videogram where they impose taxes on all videogram
operators in order for them to discourage piracy and to
protect the movie industry.
The SC ruled that the imposition of such tax is valid.
Q: Why?
A: Because the imposition of the tax is intended to regulate
the activity. Meaning, the power of taxation is being used as
an implement of police power.
b. THE POWER OF TAXATION WILL
LIKEWISE BE USED AS AN IMPLEMENT OF
EMINENT DOMAIN.
Q: Why is it being used as an implement of eminent domain?
A: This particular discussion was made in the case of
Carlos Drug Corporation dealing with Senior Citizen’s
discount.
In this particular case, a law has been enacted by
the Congress granting 20% discount to all senior citizens.
And then, Carlos Drug complained. It raised the argument
that the Government took a portion of its earnings kasi
imagine, instead of it collecting 100 php, it will only collect
80 php because the government had mandated the grant of
20% discount. So, Carlos Drug Corporation argued that that
is considered as a taking of private property without any just
compensation.
RULING:
No. The law is considered as valid and
constitutional because even on the assumption that there
has been a taking of a property equivalent to the 20%
discount, there is still just compensation.
Q: Why was there just compensation?
A: There was just compensation because under the same
law, the 20% discount granted to the senior citizens can be
used as a Tax Credit.
So sabi ng SC, ganito kasi yan (similar din to sa
Central Luzon Drug Corporation), diba nagbigay ka ng
20% discount, nawala sayo yan. Pero, yung binigay mong
20% discount doon sa Senior Citizen, magagamit mo yan na
Tax Credit. Ibig sabihin, yung binigay mo sa kanyang 20%,
pwede mo yang pambayad ng tax mo. Ibig sabihin, yung
binigay mo sa kanya, pinapalitan lang namin kasi pwede mo
yang pambayad ng tax sa amin. So, parang cinonvert mo
lang yung binigay mo sa senior citizen as a memo or debit
memo. Para siyang gift certificate, na yung gift certificate na
yun na 20%, yun ang pambabayad mo ng tax sa amin.
Kaya ang sabi ng SC, there is no taking of private
property without just compensation because even on the
assumption that we had taken your private property, there
is still just compensation equivalent to the tax credit that
we had granted to you under the same law.
Now, this particular law had been amended. So,
nag-enact na naman ang Congress, pinalitan ngayon, hindi
na Tax Credit. Yung Senior Citizen’s discount, naging tax
deduction na.
So, quinestion na naman. Sabi nila, considered na
yan na walang compensation. Kasi kung Tax Credit siya,
maeenjoy nila ng buo. Pag tax deduction, hindi na nila
maeenjoy ng buo kasi bawas lang yan sa gross income. So,
hindi buo ang maeenjoy nilang benefit from that.
 NORTHERN LUZON DRUG CASE
RULING:
Page 3 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
In reality, the grant of 20% discount is considered
as an exercise of police power because the grant of 20%
discount is intended to alleviate the burden of senior
citizens paying for their food and medicines.
And since the grant of 20% discount is for the
general welfare, then it is considered as an exercise of police
power.
Q: And being an exercise of police power, can power of
taxation be use likewise as an implement of police power?
A: Yes.
So, sabi nila police power yan, hindi eminent
domain. And since exercise yan ng police power, hindi
kailangan ng just compensation.
At kahit pa eminent domain yan, yung tax
deduction is still considered as just compensation.
 BAR Q:
R.A 9257 has been enacted granting Senior citizen’s
discount where the senior citizen’s discount shall now be
used as a tax deduction in favor of corporations which
granted the senior citizen’s discount.
Petitioner Cinema Corporation questioned the law on
the ground that the tax deduction is not considered as just
compensation.
Q: If you are the judge who will decide on the case, will you
rule in favor of Cinema Corporation?
A: Nung wala pang Northern Luzon Drug, ang expectation
lang sa atin would be the tax deduction is considered as just
compensation.
But since meron na yung Northern Luzon Drug
case, kailangang dagdagan ng “the grant of 20% discount is
not really considered as an exercise of the power of eminent
domain; rather it is considered as an exercise of police
power. Hence, just compensation is not even necessary.
c. PROTECTIONISM
- The enactment of a law in order to protect
local products or to protect local industries.
- This applies to custom duties.
 STORY: Marikina bag v. coach bag
Q: If the Marikina bag is worth 4k kasi nga leather, and the
coach bag is likewise 4k, what would you choose? Would
you buy the coach or the Marikina bag?
A: Coach
And that’s the reason why the Congress needs to
protect these local products. Kasi imagine, pag same price
lang sila, paano bebenta yung local product.
So, ang ginawa ng Congress is to impose custom
duties. And that’s the reason why these imported products
are subject to custom duties, excise tax, VAT.
So, if all these taxes will be imposed on these
imported products, yung price na 4k, magiging 15k na yan.
Yung price niya talaga na 4k, yung coach, idadagdag na niya
jan yung VAT, excise tax, customs and yung mark up niya;
kaya mahal yung imported products. Hindi dahil mas
maganda yung quality nung mga products na yun but
because of custom duties, excise, etc.
d. TO REDUCE SOCIAL INEQUITY.
It is in line with the ability to pay principle. The
taxpayer’s ability to pay is being considered as basis of his
tax liability that will be paid to the government in the form
of tax.
Q: What is that principle again?
A: Progressive system of taxation. It means that higher taxes
is imposed when tax base is increased.
Through the use of progressive system of taxation, the
power of taxation can be used to reduce social inequity.
Q: Why would it be used to reduce social inequity?
A: Because in progressive system of taxation, the ability to
pay of the taxpayer is considered in the collection of the tax.
Meaning, higher amount of taxes will be collected from
taxpayers who earned higher amount of income.
Q: Does the Philippine government adopts progressive
system of taxation?
A: Yes.
Q: Does the Government prohibits regressive system of
taxation?
A: No.
Q: What is your legal basis in concluding that regressive
system of taxation is not prohibited in the Philippine tax
system?
A: Art. VI, Sec. 28 of the 1987 PC provides that the
Congress shall evolve a progressive system of taxation.
Thus, the Constitution does not expressly provides
that regressive system of taxation is prohibited. It is merely
frowned upon. It is merely discouraged but it is not
prohibited.
This provision merely provides the evolution of
progressive system of taxation. From such provision, it
clearly appears that regressive taxes are not prohibited but
are merely frowned upon. And that is likewise clearly
provided under jurisprudential tenet.
If we talk about progressive tax, it means that the ability to
pay of the taxpayer is considered.
Q: Is VAT considered under regressive system of taxation or
progressive system of taxation? How do we classify VAT, is
it considered as a progressive tax or a regressive tax?
A: Regressive
Q: VAT is being paid by whom? Is it being paid by the
taxpayer?
Ma’am here is not referring to the impact of tax rather she
is referring to the incidence of tax.
Q: If we talk about incidence, what is the other term?
A: Burden of tax
Q: Who shoulders the burden of tax in the imposition of
VAT? Is the seller or the statutory taxpayer shoulders the
burden of tax? Siya ba ang nagbayad?
A: Consumer, shinift nga eh.
Q: So, tinignan ba ng batas, yung ability to pay ni Mcdo
bago nag-impose ng VAT?
A: No kasi ang gagawin ng Mcdo, ishishift niya sayo eh.
Q: So, is VAT considered as a progressive tax or a regressive
tax.
A: It is a regressive tax. It does not even consider the ability
to pay of the consumer. This type of tax does not consider
the ability of the taxpayer to pay. The taxpayer can in fact
Page 4 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
shift it to the consumer. And that is why it is not considered
as a progressive tax.
And it has been explicitly provided in the case
ABAKADA GURO v. Ermita that VAT is regressive tax.
Q: Is the imposition of VAT valid?
A: Yes.
Q: Why?
A: Because the Constitution and other related laws do not
provide for a prohibition in the imposition of regressive
taxes.
e. ENCOURAGES ECONOMIC GROWTH
Q: How?
A: If the Republic of the Philippines will serve incentives
such as tax exemptions and tax reliefs for foreign investors,
then there will be an increase in direct investments.
And an increase in direct investments would mean
a higher economy on the part of the Philippines
And this is the reason why the power of taxation can
be used to encourage economic growth.
There’s also this tax called Regulatory Tax
TAX REGULATORY TAX
It speaks of the Under the case of PAL v.
contributions of the EDU, the landmark case
citizens of the State but the which mentioned the
main purpose of tax in concept of regulatory tax,
general would be to raise this is a tax where there are
revenue. two purposes in the
imposition of this type of
exaction.
Q: What are the 2 purposes
of this exaction?
A: To raise revenue and for
purposes of regulation.
And then, we also have this term called fee.
Q: Can we use fee and tax interchangeably?
A: No. They are not the same. They are different. The two
exactions are different.
Q: What is the difference between a tax and a fee?
TAX FEE
It is for the purpose of For regulation
raising revenue
Q: How would we know if the exaction is considered a fee or
a tax?
A: You have to determine the purpose of the exaction.
If the purpose of the exaction is to raise revenue,
then it is a tax. If the purpose of the exaction is to regulate
an activity, then it will be considered a fee.
Q: What if the exaction has two purposes and the two
purposes are to raise revenue and to regulate an activity?
How would we know the classification of the exaction?
A: You determine the primary purpose.
If the primary purpose of the exaction is to raise
revenue, then the exaction is called a regulatory tax.
Ginagamit natin yung konsepto ng regulatory tax kapag
may two purposes which are regulation and revenue raising.
Pag ang primary purpose niya is to raise revenue,
then it is called regulatory tax; kung ang primary purpose
is to regulate an activity, then it would be considered a fee.
Q: Is automobile registration fee considered a regulatory tax
or a fee? How would we know if the purpose is for regulation
or to raise revenue? Where will you see the purpose?
A: You will see the purpose from the provision of the law
imposing such exaction.
If the provision of the law states that the exaction
shall be used to construct buildings, roads, etc., and not
really as a fund in order to perform or conduct an activity;
then, the main purpose of such exaction is to raise revenue.
If the purpose of the exaction is to perform the
activity that sought to be regulated, then quite obviously,
the purpose of the exaction is regulation, so fee siya.
 The law imposing automobile registration fee
provides that the fee shall be used to construct
roads, bridges, etc.
Q: That being said, how will we classify automobile
registration fee? Is it a regulatory tax or a fee?
A: It’s a regulatory tax.
In Ferrer v. Bautista, the SC added an additional
requirement in order to determine whether an exaction is
considered a fee or a tax.
RULING:
If there is no additional requirement in the payment
of such exaction, then it is considered as a regulatory tax.
But, if there are additional requirements to be
submitted by the taxpayer, then the exaction is considered
as a fee especially if the amount to be collected from the
taxpayer is minimal in nature which is merely equivalent to
the cost of regulation and inspection.
 RECAP:
Q: What are the rules in order to determine whether an
exaction is considered a tax or a fee?
A:
1. The primary purpose
2. The cost being collected.
If the amount of exaction is merely
equivalent to the cost of regulation or inspection;
quite obviously the exaction is not intended to raise
revenue kasi enough lang siya eh for regulation and
inspection.
3. Additional requirement.
Q: Pag wala nang additional requirement, ano siya?
A: Obviously, hindi siya for regulation kasi kung for
regulation yan, magpapasubmit sila sayo ng additional
requirement.
Pag wala namang additional requirement na, tapos
ang laki pa ng babayaran mo, tax yan.
Pag may dagdag klang isasubmit pa or additional
requirements, ibig sabihin may nireregulate sila ng
activity.
e.g Building permit fee
i. Pag kolekta lang sila ng kolekta, diba ang building
permit fee,pag ininspect yung buiding mo; ibig sabihin
Page 5 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
kailangan mong magsubmit ng floor plans, survey
plans, etc.
Nangolekta lang sila, hindi naman sila nag-inspect.
Q: Ano yan? Tax or fee?
A: Walang additional requirement kaya tax kasi ang
intention nean magraise lang ng revenue.
ii. Ang kinolekta sayo equivalent lang to 300 kasi
kailangan nilang mag-inspect at kailangan nilang
icheck yung mga documents mo. Nagpadagdag pa sayo
ng pagsubmit ng documentary requirements.
Q: Ibig sabihin, anong gusto ng gobyerno dun?
A: I-regulate yung pagbuild mo.
Q: So, ano yan? Tax or fee?
A: Fee
So, if there are additional requirements to be
submitted and the amount is merely trivial in nature or
it is equivalent only to the cost of regulation and
inspection, then quite obviously the exaction is
considered a fee, and not a tax.
 TAXATION AS A PROCESS
Q: What is the definition of the process of taxation?
A: It is the process of collecting money to defray the
expenses of the government.
It is the mode or means by which the government
through its legislative body levy a law in order raise
revenue or income in order to defray the expenses of the
government.
It is one where you have to indicate the law-making
body of the State. And the law-making body of the State in
the Philippines is called legislative branch of the
Government.
And this is the reason why one of the inherent
limitations of the power of taxation is that it is inherently
legislative because the power of taxation is essentially
exercise by the legislative body or the law-making body of a
particular state.
There are 3 stages if we talk about taxation as a process.
 3 STAGES IN THE PROCESS OF TAXATION
1. LEVY
- The act of legislature in choosing the
persons, properties, rights or privileges to be
subjected to taxation.
- It is the enactment of a law
- It is the process whereby the law-making
body makes a law to determine which business,
profession or persons shall be the subject of
taxation.
2. ASSESSMENT
- It is the computation of the liability of the
taxpayer.
- It is the execution of the law through an
administrative body to determine the liability of the
taxpayer.
3. COLLECTION
- The enforcement of the liability of the
taxpayer to satisfy the tax liability from the
taxpayer.
We do not include payment because that is on the
part of the taxpayer. Since we are talking about taxation as
a process, then we are talking about the activity to be
conducted by the State which is called collection.
Q: Which body of the government shall perform levy
function?
A: The law-making body or the Congress.
Q: Assessment?
A: Executive Branch of the Government such as BIR and
Customs.
Q: Collection?
A: Executive Branch
 3 PRINCIPLES OF SOUND TAX SYSTEM
1. FISCAL ADEQUACY
- Tax collection or sources of revenues must
be adequate to support government expenditures
other public needs and the operation of the
government.
- The amount of money should be sufficient
enough to defray the expenses of the government.
2. THEORETICAL JUSTICE
- It is in line with the ability to pay principle
or the progressive system of taxation.
- It is a kindred concept of progressive
system of taxation; meaning, the amount to be
collected from the taxpayer must be commensurate
to the ability of the taxpayer to pay the liability.
3. ADMINISTRATIVE FEASIBILITY
- Tax laws should be capable of convenient,
just and effective administration.
 SITUATION:
A law has been enacted imposing VAT on toll fees. In order
for the taxpayer to collect in these taxes, apparently, the
taxpayer needs to get the information of the person to pay
the toll fee such as the TIN, the address and other personal
details.
A group of individuals questioned the legality of this law
imposing VAT on toll fees because according to these
taxpayers, the law is illegal and unconstitutional because
the law violates one principle of sound tax system which is
administrative feasibility.
Q: Will a violation of a principle of sound tax system namely
fiscal adequacy, administrative feasibility and theoretical
justice be considered as a ground in order to nullify a
particular law?
A: No. They are merely considered in order to determine the
soundness of the tax system. They are not grounds in order
to nullify a particular law.
Franzel mentioned that there is no violation of any law or
Constitution if the principles of fiscal adequacy and
administrative feasibility are violated but there will be a
Page 6 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
violation of the law or the Constitution if there is a violation
of theoretical justice.
Q: If ma’am would agree with her, then if there is an
imposition of regressive tax, then, such law imposing a
regressive tax will be considered as unconstitutional
because it violates theoretical justice. Kasi pag theoretical
justice, progressive system of taxation.
Q: Ngayon, pag nag-impose tayo ng regressive tax, will that
violate theoretical justice?
A: Yes kasi theoretical justice, dapat progressive, dapat
cinoconsider yung ability to pay.
Q: Are we now saying that the imposition of VAT is
considered as illegal or invalid because it violates theoretical
justice?
In this particular situation or case, quite obviously,
the law imposing VAT on toll fees will be considered as a
violation of the principle of sound tax system of
administrative feasibility because it’s not feasible and not
convenient for the taxpayers to gather all the personal
details of those who would pay the VAT.
We all agree that it is not in consonance with
administrative feasibility.
Q: Would that be considered as a ground in order to nullify
this law?
A: No.
Q: Why not?
A: Since administrative feasibility is only a principle which
is designated to determine whether the tax system is sound.
Q: What about fiscal adequacy and theoretical justice? Will
a violation of any of these principle be considered as a
ground in order to nullify a law?
A: It will only be considered as a ground in order to nullify
a law if it pertains to theoretical justice.
Ma’am: Going back, if it pertains to theoretical justice, then
are we saying now that we could actually nullify the
imposition of VAT because VAT is considered a regressive
tax and since it is a regressive tax, it violates the principle
of theoretical justice?
A: Only if it is considered as gross violation.
 DIAZ v. SECRETARY OF FINANCE
RULING:
Non-observance of any of these principles or canons
of sound tax system will not result to the nullification of a
law not UNLESS it can be shown that a statutory or
constitutional provision has been impaired.
So, kapag wala lang observance sa fiscal adequacy,
okay lang. Hindi yan considered as ground to nullify the law.
Pag walang observance sa administrative feasibility,
again okay lang, as long as no statutory or constitutional
provision has been impaired.
Pag merong violation of theoretical justice, again,
okay lang basta walang statutory or constitutional provision
na nainfringed.
So, ang magnanullify sa isang batas ay hindi dahil
nagviolate siya ng fiscal adequacy, administrative feasibility
or theoretical justice; but the reason for the nullification
must be a violation of a statutory provision or a
constitutional provision.
Q: When will there be a gross violation of theoretical justice?
A: There is gross violation of theoretical justice when the
payment of tax becomes confiscatory, discriminatory or
there is already a violation of due process.
EXAMPLE:
A law provides that a fixed income tax of 40k will be collected
from all taxpayers. Obviously, the tax does not consider the
ability to pay of a particular taxpayer.
Q: Will this be considered as a violation of theoretical
justice?
A: Yes because it does not consider the ability to pay of a
taxpayer.
Q: Will that be considered as a ground in order to nullify a
law?
A: No because canons or principles of sound tax system are
merely directive.
The law will be nullified not on the ground that
there is non-observance of the canons; rather, the law will
be nullified if there is a violation of any statutory or
constitutional provision.
Q: Can you think of a constitutional or statutory provision
that will be violated in the enactment of this particular law?
A: Due process
Q: Why?
A: It becomes confiscatory to those taxpayers who are
earning only 20k, 10k, 30k, etc. Imagine, you are only
earning 10k and then the government will collect a tax of
40k.
It violates theoretical justice but the ground in order
to nullify this law is not based on the non-observance of a
canon but rather because of the tax being confiscatory. And
that being said, it infringes the due process clause of the
Constitution.
Q: What are taxes?
A: Taxes are enforced proportional contribution from
persons and property, levied by the State by virtue of its
sovereignty for the support of the government and for all its
public needs.
Taxes are enforced proportional contributions
levied by the law-making body having territorial jurisdiction
over a person or property for the purpose of raising money
and other public needs.
Q: What are the CHARACTERISTICS OF TAXES?
A:
1. ENFORCED
- Taxes are mandatory.
Page 7 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

Under the Constitution, non-payment of poll tax Pag yung basis is yung non-payment lang nung 600
will not result to imprisonment. No one can be imprisoned php, hindi ka pwedeng makulong kasi nga yung
by non-payment of poll tax. constitutional provision.
Q: Since no one will be imprisoned for non-payment of poll But, if the basis for the indictment is her act of
tax, would it mean that the imposition of poll tax is not falsifying that particular public document, then she can be
mandatory? indicted for a criminal charge and when she will be
A: No. It is still mandatory. convicted, then she can be imprisoned.
Q: Why? 2. PROPORTIONATE
A: Diba sabi natin, yung equation lagi pag due process Q: Why?
clause; there should be no tax if there is no law enacted kaya A: Because as a general rule, we adopt progressive system
sa process mo lagi kang may levy, hindi mo pwedeng of taxation.
tanggalin ang levy kasi dapat pag mangongolekta ang
3. LEVIED BY THE LAW-MAKING BODY OF
government ng tax, dapat meron munang batas.
THE STATE
Q: Why? - The power of taxation is inherently legislative and
A: Kasi if there’s a violation of this particular principle, then the first stage of the process of taxation is levy,
there is an infringement of due process. meaning the enactment of a law by the Congress.
4. TERRITORIAL
The due process clause will be infringed if there is a
5. PERSONAL IN NATURE
collection of tax without the enactment of a law kaya
- It is personal in nature because the tax
important to.
liability remains to be with the person who earns
And that is also the main reason why taxes are enforced. the income.
Taxes are mandatory because the source of the obligation of
Q: Is VAT personal in nature?
taxpayers is a law.
e.g Bumili si ma’am sa Mcdo.
Q: In poll tax, ano ang basis of the obligation for the
Q: Sinong kumita?
taxpayer to pay poll tax?
A: Mcdo.
A: A law particularly Local Government Code.
Bumili si ma’am sa Mcdo ng Happy Meal. Ang cost lang
Q: So, is it mandatory even if you will not get imprisoned if
naman nung pagkain ng anak is 100 php. Ang
you don’t pay it?
babayaran niya sa Mcdo 112 php.
A: Yes.
Q: Why?
EXAMPLE:
A: 100 yung cost ng binibili niya, 12 yung VAT.
Ma’am went to city hall. She paid 5 pesos. She told
them that she is a student. But in reality, she is not a Q: Sinong nagbayad?
student; she earn N amount during the year, so she should A: Si ma’am.
pay 650 php but since she do not want to shell out Q: Sinong kumita?
additional 600 php, she decided to tell them that she is a
A: Mcdo
student.
Q: Is VAT personal in nature, eh hindi naman si
Then, they discovered that she is not a student and
taxpayer ang nagbayad? Will we consider VAT as an
they wanted to collect the 600 php from her plus surcharges
exception to the characteristic of VAT being personal in
and interest.
nature?
Her only concern is will she get imprisoned for that.
A: Yes because the tax liability remains to be with Mcdo.
Q: Will she get imprisoned for what she did? You need to remember the immortalized principle that
They want to indict her for a criminal case and she said that in indirect taxes or in all kinds of taxes; the tax liability
no they cannot do that because she learned in taxation that always remains to be with the taxpayer.
no person can be imprisoned for non-payment of poll tax. Only the burden of the tax can be shifted to another
Q: Can she validly raise that argument? individual but the tax liability remains to be with the
A: No because that particular provision shall only apply to taxpayer.
the deficiency which is 600 php. IMPACT OF TAX INCIDENCE OF TAX
But, her act likewise constitutes a violation of the Revised Tax liability Burden of tax
Penal Code for falsification.
- It can Q: Can it be shifted to
Q: Will she get imprisoned for that? never be shifted. another individual?
A: Yes. It will always A: Yes
remain to be with
Thus, tignan mo yung basis. e.g
the taxpayer

Page 8 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

- And Nalimutan ni Mcdo na dapat yang 700 php; dapat yang 700 idivide mo yan by 1/16
that’s the reason mangolekta ng tax. kasi ang liability ko lang sa inyo yung 1/16 at hindi yung
why taxes are Hindi nangolekta ng buong 700 php.
personal in VAT. Q: Can the government collect the entire 700 php from
nature. Q: Pwede bang sabihin Manuel Pineda?
ni Mcdo sa Taxes are personal in nature. Meaning, the person who
nangongolekta na must be liable for those taxes is the taxpayer.
pasensya na kasi
Q: Doon sa estate tax, sino ang taxpayer?
nakalimutan niyang
magshift? A: Si estate.
So ibig sabihin, hindi So dapat yung estate tax, kinokolekta mo lang sa estate.
nakabayad sa kanya Hindi ka pwedeng mangolekta sa ibang tao kasi ang
yung customer niya ng taxpayer mo nga, si estate.
VAT. Q: Nung kinokolekta yung buong 700 php kay Manuel
And since hindi sila Pineda, kumokolekta pa rin ba sila doon sa estate?
nakabayad ng VAT, wala A: Yes.
daw siyang ireremit kasi Q: Bakit?
wala daw siyang shinift.
A: Na kay Manuel Pineda yung share na niya eh, yung 2500.
Q: Pwede ba yun?
Q: Galing din ba yan sa estate?
A: No because again, the
liability remains to be A: Yes.
with Mcdo. Q: So, pwede ba nilang kolektahin yung buong 700 php
Ngayon, ang ginagawa ng BIR, very aggressive sila from Manuel Pineda?
sa collection kasi gusto ni Duterte, mataas ang collection for A: Yes kasi yung 2500 kay estate yun eh. So, mangolekta
the Build, Build, Build project. na lang siya sa mga co-heirs niya.
So, ang ginagawa nila ngayon, collect sila ng collect. And when we go back to Tax 2, you will learn that
Wala na silang ginawa kundi cumollect. there are 2 modes in collecting estate taxes. It’s either to
So, ang nangyayari, yung mga taxpayer na walang collect from all of them or to collect from one as long as the
masyadong knowledge about sa taxes, natatakot kasi ang collection of the tax will not exceed his distributive share.
ginagawa ng BIR, kunwari, nagsulat sila ng collection letter Dapat hanggang distributive share lang.
doon sa corporate taxpayer, siyempre hindi papansanin.
Q: Bakit?
Q: Bakit hindi papansinin?
A: Kasi yun yung galing sa estate.
A: Kasi the corporation is separate and distinct from the
stockholders, so in which case, the liability of stockholder
would only be up to the extent of her share in the 6. THE PURPOSE OF WHICH IS TO RAISE
corporation. REVENUE AND OTHER PUBLIC NEEDS.
7. PAYABLE IN MONEY
Then, ang next letter ng BIR would be, they will
already be collect from the stockholders. Ilalagay nila doon Taxes are generally payable in money.
na magcocollect na sila from stockholders. At the present time, the government is fond of giving
Q: Can that be validly done? Can the government collect warrant of distraint or levy. Rather than filing a collection
from the personal assets of the stockholders? case in court, they’d rather serve warrant of distraint or levy
upon the taxpayer.
A: QUIZZZZZZZZZZZZ
Q: If we talk about distraint, it talks about what type of
In the case of CIR v. PINEDA, yung ang dami nilang
property?
magkakapatid. 15 silang magkakapatid. Si Manuel Pineda
yung abogado sa 15 na magkakapatid plus yung nanay, edi A: Personal property
16 sila na heirs. Q: Levy?
Natigok yung tatay. So ang natira, yung 15 na anak A: Real Property
plus one surviving spouse. Q: So, if the government will collect through a warrant of
Ang ginawa ng BIR, hindi niya kinolekta doon sa 16 distraint ,it would mean that the government would take a
na heirs.Kinolekta niya lang doon sa iisa. personal property and it depends on whether it is actual or
Q: Pwede ba yun? Is that possible? constructive.
Kasi doon sabi ni Pineda, ang usapan dun ang mana ni The BIR decided to conduct an actual distraint of
Pineda 2500. Ang kinokolekta na tax 700 php. Sabi ni the property. Meaning, the BIR will get the personal
Pineda, teka bakit mo sakin kinokelekta yang 700 php, property.

Page 9 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: And what would the BIR do with such personal property?
Ibig sabihin ba kanya na yun and that personal property
would satisfy the tax liability?
A: No.
Q: Why not?
A: The BIR will only hold the property in custodia legis.
Q: What would the BIR do to that personal property?
A: It can sell for public auction.
The BIR will set it for public auction.
Q: Bakit hindi pwedeng kanya na yun?
A: Because of this characteristic of tax which is taxes are
generally payable in money. So hindi pwedeng kukuha siya
ng personal property, tapos sasabihin niya na kanya na yun
kasi it would satisfy the liability.
Q: Anong gagawin ng government?
A: Ang gagawin ng government, kukunin niya yung property
at ibebenta niya yun sa public auction.
Now, the proceeds of the sale will now be used to satisfy the
taxpayer’s liability.
Q: Why is that so?
A: It goes back to the basic characteristic of tax which is it
is generally payable in money.
 REQUISITES OF A VALID TAX
1. The tax should be for public purpose.
2. The tax must be uniform.
3. The tax must be imposed by the State
having jurisdiction over the person or property
being taxed.
4. The tax must not contravene any inherent
and constitutional limitation on the power of
taxation.
 TAXES BEING COMPARED TO OTHER
EXACTIONS
1. TAX v. TOLL
As to NATURE, TAX is a government exaction, TOLL
is not a government exaction.
As to PURPOSE OF COLLECTION, TAX is imposed
under the taxing power of the government; TOLL is
being collected by private tollgate operators.
As to the PROPER PARTY TO COLLECT, TAX may
be imposed only by the government; TOLL may be
demanded either by the government or private
individuals or entities.
2. TAX v. FEE
- Already discussed
3. TAX v. SPECIAL ASSESSMENT
Q: What is a special assessment?
A: A special assessment by LGus.
Q: Bakit nila yan kinokolekta?
A: Kasi usually, ganito ang ginagawa ng LGU. Maga-
appropriate sila ng fund para maimprove etong road na to.
Tapos yung road na to, ang maaapektuhan lang, bahay ng
for example anim na tao.
Ang nagbuild nung road, LGU.
Ang affected lang o ang nagbenefit, yung anim.
Ang gagawin ng LGU, irereimburse niya yung
ginastos niya.
Q: Kanino niya irereimburse?
A: Sa nagbenefit, doon sa anim.
At yung reimbursement na yun, ang tawag dun, SPECIAL
ASSESSMENT.
As to PURPOSE, TAXES are for revenue; SPECIAL
ASSESSMENTS are levied to pay for a specific local
infrastructure project.
As to PERSONS FROM WHOM THE EXACTION
SHALL BE COLLECTED, TAX is charged to property owners
or income owners without regard to any direct benefit;
SPECIAL ASSESSMENT is charged only to the owners of
property in the neighbourhood that will benefit from the
project.
4. TAX v. DEBT
As to SOURCE OF OBLIGATION; the source of
obligation of a TAX is a law; for DEBTS, contract.
As to the CAPACITY OF THE GOVERNMENT TO
COLLECT, TAXES are due to the government in its
sovereign capacity, DEBTS are due to the government in its
proprietary or corporate capacity.
 DIFFERENT TYPES OF TAXES
1. AS TO SUBJECT MATTER
a. PROPERTY TAX
- A tax on the property
e.g Real Property Tax
b. POLL TAX/CAPITATION TAX
- A tax on the person
e.g Community Tax
c. EXCISE TAX
- A tax imposed on transactions, rights,
interests and privileges.
e.g
Income Tax because it is a tax on the right to earn
an income
VAT or percentage tax which are both in the nature
of business taxes because they are a tax on the privilege to
conduct a business
Donor’s tax and estate tax which are both in the
nature of transfer taxes are considered as excise taxes
because these are taxes imposed on the privilege of
transferring a property gratuitously.
Capital Gains Tax because it is also in the nature of
income tax or tax on the right to earn an income.
Quite obviously, under the National Internal
Revenue Code, all internal revenue taxes are in the nature
of excise tax.
Page 10 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

2. AS TO SHIFTING OF BURDEN
Q: Is capital gains tax considered a direct tax or an indirect 4. AS TO PURPOSE
tax? a. GENERAL OR FISCAL
- Imposed solely to raise revenues for the
Under the Law on Sales, the buyer and the seller
government.
can agree that the buyer would pay the tax, instead of the
b. SPECIAL/REGULATORY/SUMPTUARY
seller paying for the tax. And CGT is that type of tax being
- Imposed to achieve a particular legitimate
discussed in the law on sales.
object of the government.
Q: Who will pay the CGT?
A: The seller because he is the income-earner. 5. AS TO SCOPE OR AUTHORITY TO
Q: Can the buyer and the seller agree that the buyer would IMPOSE
pay for the CGT? a. NATIONAL
- National in scope, being collected by the
A: Yes. That’s base on the principle of autonomy. national government
Q: That being said, will we consider CGT as direct tax or an b. LOCAL
indirect tax? - Within the jurisdiction of the local
Q: Kunwari nag-agree si buyer and seller na si buyer ang government unit and can only be collected by the
magbabayad. LGU.
Q: Shinift ba nung seller yung burden kay buyer?
6. AS TO GRADUATION
A: Yes. a. PROGRESSIVE
Q: So how do we classify CGT? Direct or indirect? - One whereby the rate increases as the tax
A: Direct. base increases
b. REGRESSIVE
a. DIRECT TAX - One where the tax rate decreases as the tax
The seller cannot automatically shift the base increases.
burden of tax. There has to be a stipulation by the c. PROPORTIONATE
parties that the seller will shift the same to the SOURCE: BM NOTES
buyer.
JANUARY 16, 2020
Q: If the buyer and the seller will not agree that the  LIMITATIONS ON THE EXERCISE OF
buyer would shoulder the burden of paying the CGT, TAXING POWER
can the seller insist on shifting the burden to the buyer?
Relevance:
A: No because CGT is in the nature of a direct tax.
“If there is a question related to the constitutionality of a tax
b. INDIRECT TAX law, use the following principles.”
Q: Do the seller and the buyer need to agree on the shifting?
A. Inherent Limitations
A: No because by nature, the seller can automatically shift B. Constitutional Limitations
the burden to the buyer.
And that is the reason why, if we talk about VAT, it “But, a violation of the inherent limitations is a violation of
is considered as an indirect tax because notwithstanding the due process clause.”
the absence of a stipulation between the buyer and the
seller; the seller can automatically shift the burden of the
tax to the buyer.  INHERENT LIMITATIONS
1. Public Purpose
- THE OTHER TERMS ARE LEFT TO OUR 2. International Comity
READING DAW BECAUSE THEY ARE EASY BUT 3. Inherently Legislative
THEY ARE THE FF: 4. Territoriality
3. AS TO TAX RATES 5. Tax Exemption of the Government
a. SPECIFIC
- Imposed and based on weight or volume
capacity or any other physical unit of measurement. 1. PUBLIC PURPOSE
i.e excise tax on distilled spirits, tobacco, and petroleum If the state collects taxes from citizens, it must be
products. appropriated for public purpose.
b. AD VALOREM Public purpose= public use= public welfare
- Based on selling price or other specified If not for public purpose, it must be struck down for it
value of the goods is in in violation of due process.
i.e tax on automobiles and non-essential goods
c. MIXED
Page 11 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
i.e. The tax law is unconstitutional for violating due
process. The taxes were not used for public
purpose.
 PLANTERS PRODUCTS INC. V. FERTIPHIL
CORPORATION
GR No. 166006, 14 March 2008
On June 3, 1985, then President Ferdinand Marcos,
exercising his legislative powers, issued LOI No. 1465 which
provided, among others, for the imposition of a capital
recovery component (CRC) on the domestic sale of all grades
of fertilizers in the Philippines. A capital contribution
component of not less than ₱10 per bag. This capital
contribution is intended to be collected until adequate
capital is raised to make PPI viable.
Hence, Fertiphil paid ₱10 for every bag of fertilizer
it sold in the domestic market to the Fertilizer and Pesticide
Authority (FPA). FPA then remitted the amount collected to
the Far East Bank and Trust Company, the depositary bank
of PPI. Fertiphil paid ₱6,689,144 to FPA from July 8, 1985
to January 24, 1986.
Q: Is the LOI constitutional?
A: No.
The government’s commitment to support the
successful rehabilitation and continued viability of PPI,
a private corporation, is an unmistakable attempt to
mask the subject statute’s impartiality.
There is no way to treat the self-interest of a
favored entity, like PPI, as identical with the general
interest of the country’s farmers or even the Filipino
people in general.
Well to stress, substantive due process exacts
fairness and equal protection disallows distinction where
none is needed. When a statute’s public purpose is spoiled
by private interest, the use of police power becomes a
travesty which must be struck down for being an arbitrary
exercise of government power.
 PASCUAL V. SECRETARY OF PUBLIC WORKS
G.R. No. L-10405, December 29, 1960
Respondent Zulueta is the owner of several parcels
of residential land situated in Pasig, Rizal, and known as the
Antonio Subdivision, certain portions of which had been
reserved for the projected feeder roads aforementioned,
which, admittedly, were private property of said respondent
when Republic Act No. 920, appropriating P85,000.00 for
the "construction, reconstruction, repair, extension and
improvement" of said roads, was passed by Congress, as
well as when it was approved by the President on June 20,
1953.
The law has no clear intent if for public use.
Moreover, after the enactment of the law, the land was
donated to the Republic.
Q: Is the law constitutional?
A: No. the legislature is without power to appropriate public
revenue for anything but a public purpose.
Q: How about the subsequent donation?
A: It has no effect. The law is void ab initio. The defect can’t
be cured.
Q: What if the law provided it is for public use?
A: It will not change the fact that X is the owner of the land.
Consequently, X can collect toll fees; X can benefit
therefrom. Hence, the appropriation is for private use.
 LUTZ V. ARANETA
G.R. No. L-7859 December 22, 1955
Commonwealth Act No. 567, otherwise known as
the Sugar Adjustment Act was promulgated in 1940 due to
emergency of the threat by the imminent imposition of
export taxes upon sugar as provided in the Tydings-McDuffe
Act, and the "eventual loss of its preferential position in the
United States market"
Section 2 of the law provides for an increase of the
existing tax on the manufacture of sugar, on a graduated
basis, on each picul of sugar manufactured; while section 3
levies on owners or persons in control of lands devoted to
the cultivation of sugar cane and ceded to others for a
consideration, on lease or otherwise.
Q: Is the law constitutional?
A: Yes. Analysis of the Act, will show that the tax is
levied with a regulatory purpose, to provide means for
the rehabilitation and stabilization of the threatened
sugar industry. In other words, the act is primarily an
exercise of the police power.
The Court took judicial notice of the fact that
sugar production is one of the great industries of our
nation, sugar occupying a leading position among its
export products; that it gives employment to thousands of
laborers in fields and factories; that it is a great source of
the state's wealth, is one of the important sources of foreign
exchange needed by our government, and is thus pivotal in
the plans of a regime committed to a policy of currency
stability. Its promotion, protection and advancement,
therefore redounds greatly to the general welfare.
 GOMEZ V. PALOMAR
G.R. No. L-23645, October 29, 1968
Republic Act 1635, as amended by Republic Act 2631
mandated the Director of Posts to order for the period from
Page 12 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

August nineteen to September thirty every year the printing Basis: Consti (Article X, Sec 5)
and issue of semi-postal stamps of different denominations
with face value showing the regular postage charge plus the 2. PRESIDENT
additional amount of five centavos for the said purpose The
Basis: Consti- Flexible Tariff Clause (Article VI, Sec 28
additional proceeds realized from the sale of the semi-postal
(2)
stamps shall constitute a special fund and be deposited with
the National Treasury to be expended by the Philippine
Tuberculosis Society in carrying out its noble work to **but BOTH are still subject to limitations/ guidelines set by
prevent and eradicate tuberculosis. congress

Q: Is the law constitutional?  ABAKADA GURO V. ERMITA

A: Yes. The eradication of a dreaded disease is a public
G.R. No. 168056, September 1, 2005
purpose, but if by public purpose the petitioner means
benefit to a taxpayer as a return for what he pays, then
CONCEPT OF PERMISSIBLE DELEGATION
it is sufficient answer to say that the only benefit to
*Standby Authority of the President (RA 9337)
which the taxpayer is constitutionally entitled is that
- The power of the president to increase VAT rate from 10%-
derived from his enjoyment of the privileges of living in
12%. Upon the fulfillment of certain conditions.
an organized society, established and safeguarded by
the devotion of taxes to public purposes.
Q: Is the standby authority legal?
Any other view would preclude the levying of taxes
A: Yes.
except as they are used to compensate for the burden on
those who pay them and would involve the abandonment of
COMPLETENESS TEST
the most fundamental principle of government — that it
The law must be complete in its essential terms and
exists primarily to provide for the common good.
conditions when it leaves the legislature so that there will
be nothing left for the delegate to do when it reaches him
2. INTERNATIONAL COMITY except enforce it.
- The relaxation of a rule to accommodate a foreign
state. SUFFICIENT STANDARD TEST
Basis: pacta sunt servanda A sufficient standard is intended to map out the
A state must respect all tax treaties it has entered into. boundaries of the delegate’s authority by defining legislative
Q: Can the income of a foreign government be taxed by the policy and indicating the circumstances under which it is to
Philippines? be pursued and effected; intended to prevent a total
A: Section 32b of the Tax Code includes the exemption of transference of legislative power from the legislature to the
foreign government income from taxation. delegate.

Q: May the income of the foreign government be subject to BOTTOMLINE:

tax? “The authority to make a complete law can never be
A: No. Violation of the principle on international comity. delegated. The law must be complete in itself such that
the person whom the power has been delegated cannot
exercise discretion.”
NOTE:
Kahit walang batas kung violation ng inherent
limitation, invalid pa rin. The president is only implementing a law which is
complete in itself. Hence, a permissible delegation
3. INHERENTLY/ ESSENTIALLY LEGISLATIVE
Taxation is an inherent power of the state
 PEPSI V. MUN. OF TANAUAN
Q: Why legislative? G.R. No. L-31156 February 27, 1976
A: Because of matters that can only be determined by the
legislative: Republic Act No. 2264. otherwise known as the
1. Coverage Local Autonomy Act delegated taxing authority to
2. Object/ purpose municipalities. Pursuant thereto, Municipal Ordinance No.
3. Nature/ kind 23, of Tanauan, Leyte, which was approved on September
4. Extent/ rate 25, 1962, levied and collected "from soft drinks producers
5. Situs and manufacturers a tail of one-sixteenth (1/16) of a
centavo for every bottle of soft drink corked."
GENERAL RULE: Congress. Hindi pwedeng i-delegate.
EXCEPTIONS: Q: Is there undue delegation of the power of taxation?
A: No.
1. LGU
Page 13 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

The power of taxation is an essential and

inherent attribute of sovereignty, belonging as a matter However if there is double taxation, there must be
of right to every independent government, without a provision to contravene its effects.
being expressly conferred by the people.
It is a power that is purely legislative and which the If the question is:
central legislative body cannot delegate either to the “Is it valid?”
executive or judicial department of the government without use Section 42 of the NIRC
infringing upon the theory of separation of powers. “May it be allowed?”
The exception, however, lies in the case of use the three principles
municipal corporations, to which, said theory does not
apply. e.g.
Legislative powers may be delegated to local A owns property in China. It is leased to B for
governments in respect of matters of local concern. This is $1000/ month. A is a citizen of Phil but is residing in China.
sanctioned by immemorial practice.
By necessary implication, the legislative power to
Q: Is the income subject to tax?
create political corporations for purposes of local self-
A: No. A nonresident citizen will be subject to tax only if the
government carries with it the power to confer on such local
income is sourced from within the Philippines.
governmental agencies the power to tax.
Under the New Constitution, local governments are
Q: May it be subject to tax?
granted the autonomous authority to create their own
A: Yes. Citizenship principle.
sources of revenue and to levy taxes.

 PEPSI V. CITY OF BUTUAN
G.R. No. L-22814, August 28, 1968
Ordinance No. 110 of the City of Buttuan imposed
a tax on any person, association, etc., of P0.10 per case of
24 bottles of Pepsi-Cola.
Q: Is there undue delegation of the power of taxation?
A: No.
The general principle against delegation of
legislative powers, in consequence of the theory of
separation of powers is subject to one well-established
exception, namely: legislative powers may be delegated to
local governments — to which said theory does not apply —
in respect of matters of local concern.
5. EXEMPTION
Tax exemption to the republic of the Philippines ONLY.
Will not extend to GOCC.
It is preposterous for the state to tax itself.
Q: Diba sa MIAA/MCIAA case, exempt ang instrumentality?
A: Exempt sya kase sabi sa batas exempt sya. Hence, there
is actually no bar in imposing taxes to government
instrumentalities.
 CURRENT LAWS:
1. NIRC
- Instrumentalities are exempt from income tax
- Political subdivisions and agencies are also exempt
(i.e. LGU)

2. Section 133 of LGC

4. TERRITORIALITY - For local tax exemptions (includes real property
Bases: taxes)
1. SOURCE PRINCIPLE  LRTA CASE
Can impose a tax if it is the source of an income - No question as to status na GOCC sya
LRTA owns structures:
2. RESIDENCE PRINCIPLE Terminal stations
- To its residents. Basta resident ka, kahit saan mo Carriageways Attach to public road
pa kinita yan. LRTA contentions
1.Since attached to public road, it is a public structure,
3. CITIZENSHIP PRINCIPLE hence not taxable.
- To its citizens. 2. The structures are for public use since these are used by
commuters
Q: what principles apply with the NIRC?
A: Source- yes
Q: Is LRTA exempt from paying Real Property Tax?
Residence- no
A: No.
Citizenship- yes
Q: Can the congress amend the NIRC and impose tax to the 1. Carriageways and stations can be detached
residents? from the public road.
A: Yes. Kase may basis- Residence principle
Page 14 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

2. Not for public use. These properties can A. DUE PROCESS

only be used by clients of LRTA. 1. SUBSTANTIVE DUE PROCESS
 PRINCIPLES TO REMEMBER:
a. Tax law must not be oppressive/ confiscatory/
GENERAL RULE: GOCC are subject to tax.
arbitrary tax law
EXCEPTION: The charter provides for exemption.
b. Double Taxation
Since LRTA’s charter does not provide for
-refers to direct double taxation (obnoxious)
exemption, then not exempted.
Requisites:
Q: Is it important to know the status of entity to determine (1) on the same subject matter
the taxability? (2) for the same purpose
A: Yes. Check first if GOCC or Instrumentality. (3) by the same taxing authority
(4) within the same taxing jurisdiction
(5) for the same taxing periods
 MCIAA and MIAA cases
**if one of the requisites is missing, INDIRECT double
Q: How will you determine if an entity is a GOCC or taxation – valid na.
instrumentality?
A: If it’s neither stock or nonstock- instrumentality c. No law, no tax principle
If either- GOCC If there is no law for imposition/collection
e.g.
Mayor issued an executive order for tax
Q: Exempt from income taxes and real property taxes
Invalid- mayor has no power
Hence, a violation of due process
MIAA/ MCIAA
Land- owned by the republic
d. For income taxes, must not be a tax to the capital
Structures sa airport- constructed by MIAA/ MCIAA
e.g.
CREBA Case
Q: Are these properties taxable?
Subject of case: MCIT
A: Land- no
Contention: Imposed on gross income hence invalid.
Structures- yung nalease sa private concessionaires-
taxable
No. the MCIT imposed on gross income is already a
 Basis: NIRC 234a tax on income excluding the capital.

Except if the beneficial use of the property is transferred Gross income= Cost of sales is deducted from gross
to a taxable entity. sales. Hence, not a tax on the capital

 EXAMPLES OF INSTRUMENTALITY: 2. PROCEDURAL DUE PROCESS

1. Bangko Sentral ng Philippines Opportunity to be heard ONLY, before the collection of the
2. Philippines Rice Research Institute tax imposed.
3. Laguna Lake Development Authority
4. Fisheries Development Authority i.e.
5. Bases Conversion and Development yung requisites of a valid assessment: (pero tax 2 pa to)
Authority 1. Factual and Legal Basis of assessment
6. Philippine Port Authority 2. Letter of Authority
7. Cagayan de Oro Port Authority 3. Notice of Informal conference
8. San Fernando Port Authority 4. Preliminary Assessment Notice
9. Cebu Port Authority 5. Formal Assessment Notice
10. Philippine National Railways 6. Sent to and received by the taxpayer
7. Demand to pay
8. Addressed to the taxpayer
9. Issued within the prescriptive period
January 28, 2020 10. Definite amount of the tax due
11. Definite time to pay
Q: Can the government just cancel a tax credit certificate
CONSTITUTIONAL LIMITATIONS issued to a taxpayer?

Page 15 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

A: NO. The moment tax credit certificate is issued, the
government recognizes that it owes the taxpayer. Its
cancellation is a violation of procedural due process.
Q: Allowable deductions?
A: Mere privilege. Can be cancelled by the government.
B. EQUAL PROTECTION
 PRINCIPLES TO REMEMBER:
1. Whether or not there is singling out of a taxpayer
NOTE:
General rule lang, singling out does not necessarily mean
violation of Equal Protection Clause
 RATIONAL BASIS TEST= may foundation and
reasonable ang classification dapat
4. Philreca case
CDA registered cooperatives v. those not registered
Philreca is Registered with NEA.
RA 7160, coop enjoy real prop tax exemptions.
However, it must be registered with the CDA.
Philreca is not registered with CDA. Hence it
questioned, violation of Equal Protection Clause.
Q: Is there a violation?
A: NO.

DISTINCTION
e.g. Privileges: kung iba di nakatanggap, does not UNDER CDA
OF UNDER NEA
necesarrily mean violation of Equal Protection Clause
COOPERATIVES
Q: Why? CAPITAL equitable the articles of
A: There might be a substantial distinction CONTRIBUTIONS contributions cooperation of a
BY MEMBERS to the capital cooperative
2. There must be substantial distinction between two required and applying for
groups and the distinction must be related to the purpose accepting a fair registration must
of the tax law share of the be accompanied
e.g. Road users tax- distinction must be established and risks and with the bonds of
must be related to the purpose of the law benefits of the the accountable
undertaking in officers and a
NOTE: accordance sworn statement
There must be a valid classification. with of the treasurer
Requisites: universally elected by the
accepted subscribers
a. Must be based on substantial distinction
cooperative
b. Must be germane for the purposes of the law
principles at least twenty-
c. Must not apply to existing conditions only
five per cent (25%)
d. Must apply to all members of the same class.
of the authorized
3. Juday Case share capital has
Equal Protection is not limited to enactment of the been subscribed
law but also to its enforcement/implementation. Hence, it and at least
can be used to question the implementation of the law. twenty-five per
cent (25%) of the
But take note, natalo sa kaso.. total subscription
“Uy dinismiss niyo kay Regine, kung di niyo rin idismiss has been paid and
sakin, violation of Eqp” in no case shall
the paid-up share
She failed to establish clear and undue capital be less
discrimination. than Two
thousand pesos
“The prosecution of one guilty person while others (P2,000.00).
equally guilty are not prosecuted, however, is not, by itself,
EXTENT OF the NEA is The State shall,
a denial of the equal protection of the laws.”
GOVERNMENT given the power except as
A discriminatory purpose is not presumed, there
CONTROL OVER of supervision provided in this
must be a showing of "clear and intentional
COOPERATIVES and Act, maintain
discrimination."
control over the policy of
electric noninterference
TIP SA QUIZ: cooperatives in the
the act of singling out phrase + identify substantial management
distinction + determine if germane to the purpose of law and operation of
cooperatives.

Page 16 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

5. SHELL V. VANO CASE 2. churches and parsonages or convents appurtenant

Installation managers are taxed. shell questioned thereto,
the ordinance since it is the only installation manager in the 3. mosques,
locality. 4. non-profit cemeteries, and
The fact that there is no other person in the locality 5. all lands, buildings
who exercises such a "designation" or calling does not make CONDITION: used for Religious, Educational and Charity,
the ordinance discriminatory and hostile, inasmuch as it is Actually, Directly and Exclusively
and will be applicable to any person or firm who NOTE:
exercises such calling or occupation named or designated
as "installation manager." Ownership is not important, USAGE LANG
e.g
6. Ormoc Sugar Case  LUNG CENTER CASE
Tax ordinance against Ormoc Sugar specifically.
Undoubted na charitable institution
At the time of the taxing ordinance's enactment,
PROPERTIES OF LUNG CENTER
Ormoc Sugar Company, Inc., it is true, was the only sugar
central in the city of Ormoc.  For patients…nontaxable
Still, the classification, to be reasonable, should be  For private clinics(leased)….Taxable
in terms applicable to future conditions as well. The taxing  Idle lot…taxable
ordinance should not be singular and exclusive as to  Elliptical garden….taxable
exclude any subsequently established sugar central, of
the same class as plaintiff, for the coverage of the tax.
As it is now, even if later a similar company is set up, it  TEST OF CHARITY
cannot be subject to the tax because the ordinance Whether the enterprise exists to carry out a purpose
expressly points only to Ormoc City Sugar Company, Inc. as reorganized in law as charitable or whether it is maintained
the entity to be levied upon. for gain, profit, or private advantage.
C. UNIFORMITY, EQUITABILITY , PROGRESSIVITY
OF TAXATION
Q: Since it is a charitable institution, automatic ba na
UNIFORMITY means that all taxable articles or kinds of exempt?
property of the same class shall be taxed at the same rate. A: No. Ownership is immaterial.

Taxation is EQUITABLE when its burden falls on those

Q: Will your answer change if lung center accepts paying
better able to pay.
patients?
Taxation is PROGRESSIVE when its rate goes up depending A: No. A charitable institution does not lose its character as
on the resources of the person affected. such and its exemption from taxes simply because it derives
income from paying patients, whether out-patient, or
D. TRADITIONAL TAX EXEMPTION confined in the hospital, or receives subsidies from the
 PRINCIPLES TO REMEMBER: government, so long as the money received is devoted or
1. Section 28 (3) Article VI in relation with Section 234 used altogether to the charitable object which it is intended
of LGC to achieve; and no money inures to the private benefit of the
persons managing or operating the institution.

2. Section 4(3) Article XIV in relation with Section 30  ADE= solely

of NIRC
Q: Paano daw kung yung building is owned by a corporation
 SECTION 28(3) ARTICLE VI and is being lease to a religious entity, will the building be
Charitable institutions, churches and parsonages or subhect to RPT?
convents appurtenant thereto, mosques, non-profit
cemeteries, and all lands, buildings, and improvements,
actually, directly, and exclusively used for religious,  VP BARLIS:
charitable, or educational purposes shall be exempt from
Direct use: religious ; exempt
taxation.
COVERAGE: REAL PROPERTY TAXES ONLY
SUBJECT OF TAX:  ASSOCIATE DEAN CARANTES:
1. Charitable institutions, If the property is being leased= then it is being used for
proprietary purpose, hence, taxable.
Page 17 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If not being leased, then religious use, hence, exempt
from tax.
CASE OF HERRERA AND ABRA VALLEY no longer
applicable.
Exemption by reason of incidental use of the
real property for REC purposes is only applicable during
the effectivity of the 1973 constitution.
 SECTION 4(3) ARTICLE XIV
All revenues and assets of non-stock, non-profit
educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from
taxes and duties.
Upon the dissolution or cessation of the corporate
existence of such institutions, their assets shall be disposed
of in the manner provided by law.
COVERAGE: DUTIES AND TAXES
SUBJECT MATTER: REVENUE AND ASSETS of NON-
STOCK, NON-PROFIT EDUCATIONAL INSTITUION
CONDITION: Actually, Directly and Exclusively
educational purpose
Q: Can we utilize this constitutional provision to income of
proprietary educ institution?
A: No. Non-stock, non-profit only
1. ANGELES UNIVERSITY CASE
Q: Is Angeles university exempt from paying permit fee?
A: No. It does not cover exemption from fees.
Q: Is it important to determine whether a tax is regulatory
or not?
A: Yes.
For Regulation- it can be used as a power to destroy
If for revenue- can never be used to destroy
 Section 30 NIRC
The following organizations shall not be taxed under this
Title in respect to income received by them as such:
(A) Labor, agricultural or horticultural organization not
organized principally for profit;
(B) Mutual savings bank not having a capital stock
represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and
without profit;
(C) A beneficiary society, order or association, operating for
the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual
aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness,
accident, or other benefits exclusively to the members of
such society, order, or association, or nonstock corporation
or their dependents;
(D) Cemetery company owned and operated exclusively for
the benefit of its members;
(E) Nonstock corporation or association organized and
operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of
veterans, no part of its net income or asset shall belong to
or inure to the benefit of any member, organizer, officer or
any specific person;
(F) Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net income
of which inures to the benefit of any private stock-holder, or
individual;
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare;
(H) A nonstock and nonprofit educational institution;
(I) Government educational institution;
(J) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a
purely local character, the income of which consists solely
for of assessments, dues, and fees collected from members for
the sole purpose of meeting its expenses; and
(K) Farmers', fruit growers', or like association organized
and operated as a sales agent for the purpose of marketing
the products of its members and turning back to them the
proceeds of sales, less the necessary selling expenses on the
basis of the quantity of produce finished by them;
Notwithstanding the provisions in the preceding
paragraphs, the income of whatever kind and character
of the foregoing organizations from any of their
properties, real or personal, or from any of their
activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax
imposed under this Code.
TWO TESTS:
1. Organizational Test
The organization of the institution refers to its
corporate form, as shown by its articles of incorporation, by-
laws and other constitutive documents. It should be non-
stock and that any profit obtained as an incident to its
operations shall, whenever necessary or proper, be used for
the furtherance of the purpose or purposes for which the
corporation was organized.
2. Operational test
The regular act of corp/ ass be exclusively devoted
to the accomplishment of purpose specified in sec 30.
If the corpo failes to meet the operational test, and
the activity is conducted is for profit, it is no longer exempt.
Hence, you apply the 2nd paragraph.
e.g.
Page 18 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

 Sec. 27 (B) of NIRC

2. SLU, Non-stock, non-profit educational Proprietary educational institutions and hospitals
institution which are nonprofit shall pay a tax of ten percent (10%) on
SOURCE USE OF Section Section BOTTO their taxable income except those covered by Subsection (D)
OF INCOME 4(3) 30 NIRC MLINE hereof:
INCOME Article Provided, that if the gross income from 'unrelated trade,
XIV business or other activity' exceeds fifty percent (50%) of the
total gross income derived by such educational institutions
Exempt Exempt Exempt or hospitals from all sources, the tax prescribed in
Subsection (A) hereof shall be imposed on the entire taxable
Improvem Used Income income. For purposes of this Subsection, the term
ent of ADE for is from 'unrelated trade, business or other activity' means any
school educ regular trade, business or other activity, the conduct of which is not
facilities purpose activity substantially related to the exercise or performance by such
s (educ) educational institution or hospital of its primary purpose or
function.
Tuition
fees e.g.
N/A Exempt Exempt
1. If 50% or more of the income of the NSNP Hospital is
sourced from related activities – the NSNP Hospital is
Used entitled to a preferential tax rate of 10%
Taal ADE for
donation educ 2. If 50% or more of the income of the NSNP Hospital is
purpose sourced from unrelated activities – the NSNP Hospital is
s subjected to the normal tax rate of 30%.

Exempt Taxable Exempt  SECTION 4(4) ARTICLE 14

Subject to conditions prescribed by law, all grants,
endowments, donations, or contributions used actually,
Used (failed Consti directly, and exclusively for educational purposes shall be
ADE for operatio prevails exempt from tax.
Improvem educ nal test)
ent of purpose SUBJECT MATTER:
school s 1. Grants
facilities 2. Contributions
Concessi 3. endowments
onaires does not
(Café care
about It applies to educational institutions.
Luis)
source Q: Does it specify whether proprietary or nonstock?
Taxable Taxable Taxable A: No.
But remember the first phrase: subject to
Donated not used (failed limitations set by congress
to Taal ADE for operatio
children educ nal test)
Q: Will a donation given to an educ institution be exempt
purpose
from tax ?
s
 SECTION 101 OF NIRC:
Gifts in favor of an educational and/or charitable,
Q: What if SLU is proprietary?
religious, cultural or social welfare corporation, institution,
Q: Income taxable? accredited nongovernment organization, trust or
A: From Tuition fees- taxable philanthropic organization or research institution or
From Concessionaires- taxable organization: Provided, however, That not more than thirty
percent (30%) of said gifts shall be used by such donee for
Q: Real properties tax? administration purposes.
A: Exempt. Section 28(3), Article VI does not qualify.

Hence:
PREDOMINANCE TEST (tax 2)
A: Yes. Provided:
Page 19 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
1. It must be NSNP educ institution
2. not more than thirty percent (30%) of said gifts shall
be used by such donee for administration purposes
DOF Dept Order 137-87
Mere interpretation as to exemptions of NSNP
educational institution. Do not use as legal basis kanu.
Q: Why then?
A: Tinanong daw sa Bar.
SEC. 2. COVERAGE OF EXEMPTION UNDER SECTION
4(3),ARTICLE XIV Of THE NEW CONSTITUTION -
The exemption herein contemplated refers to
internal revenue taxes and customs duties, in appropriate
cases, imposed by the national government on all revenues
and assets of non-stock, non-profit educational institutions
used actually, directly and exclusively for educational
purposes.
2.1. Non-stock, non-profit educational institutions are
exempt from tax on all revenues derived in pursuance of its
purpose as an educational institution and used actually,
directly, and exclusively for educational purposes. They
shall, however, be subject to internal revenue taxes on
income from trade, business or other activity the conduct of
which is not related to the exercise of performance by such
educational institution of its educational purpose or
function.
2.2. Revenues derived from and assets used in the
operations of cafeterias/canteens, dormitories, bookstores
are exempt from taxation provided they are owned and
operated by the educational institution as ancillary
activities and the same are located within the school
premises.
2.3. Revenues derived from and assets used in the
operations of hospitals are exempt from taxation provided
they are owned and operated by the educational institution
as an indispensable requirement in the operation and
maintenance of its medical school/ college/institute.
Q: Is an Educational Institution exempt from VAT?
A: output- exempt
input-(purchase)
-no, not for purchaser(incidence/burden of tax lang)
-Section 30- for direct taxes only
Q: Withholding taxes.. required to withhold?
A: Yes. Di nya tax yun, withholding agent lang. Hence,
section 30 will not apply.
JANUARY 30, 2020
QUIZ 1 ANSWERS
1.
a. TAX v. TOLL FEE
NOTE:
Hindi for regulation ang toll. It should have been fee kung
regulation. Namimix up daw kasi.
b. NATIONAL TAX v. LOCAL TAX
As to scope, in national tax, the scope of the tax is
nationwide; in local tax, the scope would be within the
locality of the municipality.
2. Previous BAR Q
The first argument relates to the prohibited double taxation.
Q: So if we talk about prohibited double taxation, are we
referring to direct double taxation or indirect double
taxation?
A: Direct double taxation.
It would only be considered as a direct double
taxation if the taxing authorities are the same.
In this particular case, the taxing authorities are
not the same. So, there’s no direct double taxation; only an
indirect double taxation if we talk about tax impositions
made by the national government and the local government.
The second argument relates to the rule on pre-emption.
Q: Can the local government impose taxes already being
imposed by the national government?
A: No because under Sec. 5 Art X of the 1987 PC, the power
of taxation of LGUs is subject to limitations set by Congress.
And one of the limitations set by Congress if you
have read the cases indicated in the syllabus, is the rule on
pre-emption.
That is, if a tax is already being imposed by the
national government, then the local government can no
longer impose the same not unless it is provided under the
Local Government Code.
Q: As a general rule, again, if we talk about the Local
Government Code, what are the taxes that are akin to VAT
or percentage tax which can be imposed by the local
government unit?
A: Local business tax, kasi base pa rin siya sa gross receipts
but kahit na pareho siya sa VAT or percentage tax; it is
allowed because the Local Government Code allows it.
The power of taxation of a LGU is subject to
limitations. And one of the limitations provided under the
Local Government Code is the rule on pre-emption; meaning
the local government can no longer impose a tax on a
subject matter that is being subjected to tax by the national
government.
Q: So, if we talk about gross receipts, is that already subject
to tax by a national tax?
A: Yes. We have VAT. VAT is based on the gross receipts.
Percentage tax is likewise imposed on the gross receipts.
So, any type of tax that is being imposed on the
gross receipts could not be allowed not unless the Local
Government Code allows it.
Q: So ano yung train of analysis mo?
Page 20 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Una, pwedeng mag-impose kasi nga power to tax yan ng
LGU under Sec. 5 Art. X.
Q: Pero ano yung restriction?
A: Rule of pre-emption.
Q: Ano ang exception sa rule of pre-emption?
A: Pag inaallow sa Local Government Code.
Q: What are the taxes being allowed by the Local
Government Code?
A: Local business tax because local business tax is still
being imposed on the gross receipts.
Q: What else?
A: Amusement tax, franchise tax
Q: Why are these allowed?
A: These are allowed because the Local Government Code
allows it as well.
However, one important tricky phrase here is that
the local tax being imposed by the LGU is imposed on the
gross receipts INCLUSIVE OF VAT.
Here, hindi siya gross receipts na tanggal ang VAT.
Iniimpose siya dun sa gross receipts inclusive of VAT.
Q: So yung local tax ba, iniimpose dun sa tax na iniimpose
ng national government?
A: Yes.
Q: Is that allowed?
A: No. That is a violation of due process clause because the
LGU cannot impose a tax on a tax.
Ang tawag jan sa case ni People v. Tan is tax
pyramiding.
A government cannot impose a tax on a tax because
if that happens, the tax law becomes confiscatory and
obnoxious. A tax should only be imposed on the income.
3. Is it important to know whether a tax is
regulatory or not?
Naansweran na to previously ni ma’am. It talks about police
power kasi pwede siyang power to destroy.
4. There are two laws. The first law mandates
LGUs to impose amusement tax. The second law
prohibits LGUs to impose amusement tax.
A: The first law is valid because the Congress has the power
to determine the coverage, object, nature, extent and situs
of the tax. It is the Congress who has the sole authority to
determine all those subject matters, and hence; under Sec.
5, Art. X of the 1987 PC, the power of tax of LGUs shall still
be subject to limitations set by Congress.
The second law is no longer considered a limitation rather a
prohibition. And since it constitutes a prohibition on the
power of LGUs to levy taxes, fees and charges; then it
violates Sec. 5, Art. X of the 1987 PC.
NOTE: Most of you argued along the line of
protectionism. Obviously, if you would take a look
at the bulk of the factual antecedents in this
particular question; the crooks of your answer
should have revolved around Sec. 5, Art. X of the
1987 PC and your argument on protectionism
should have been incidental.
5. Q: Are taxes payable in money?
A: Yes. Taxes are generally payable in money because such
is one of the characteristics of taxes.
Q: But, if the Congress amends a law and allows taxpayers
to pay taxes in kind; can the law be legally permissible?
A: Yes because there is no inherent or constitutional
limitation that would prohibit the collection of taxes in kind.
6. Q: Is the imposition of regressive tax
constitutionally prohibited?
A: No. The imposition of regressive tax is not constitutionally
prohibited.
The Constitution provides that the Congress shall
evolve progressive system of taxation.
By virtue of this provision, the Congress did not
mandate the imposition of progressive taxes but rather it
merely encourage the imposition of progressive tax.
Stated otherwise, the imposition of regressive tax is
merely frowned upon but not prohibited.
7. It talks about permissible delegation.
The first requirement here was for us to mention what
permissible delegation is and we should have stated two
tests such as the completeness test and the sufficient
standard test. Then, we should have defined both tests.
Q: Is the law granting the President the authority to increase
the rate from 10% to any rate ranging from 11 to 12 %
constitutional?
A: No. It is not constitutional because it fails to meet the
completeness test and sufficient standard test.
In this particular case, the President is already
given the discretion to choose rates ranging from 11 to 12.
And hence, the President no longer have any ministerial
function to increase the rate.
Such being said, the President now has the
authority to legislate a law. And hence, it is unconstitutional
by reason of the violation of the doctrine of separation of
powers.
8. It relates to International Comity.
Some of us mentioned Art. II of the 1987 PC. That
is merely a declaratory principle. It is not self-executory. So,
in which case, the reason why this law will be considered as
unconstitutional is not because of a violation of Sec. 2, Art.
II but rather because of the violation of the due process
clause.
Q: Why is that so?
A: Because of the well-entrenched principle laid down in the
case of Sison v. Ancheta that any violation of the inherent
limitation will be considered as a violation of the due process
clause.
Q: And what is the inherent limitation that has been violated
in this case?
A: The principle of international comity.
NOTE:
A lot of us mentioned pacta sunt servanda without
mentioning a particular treaty.
We should use pacta sunt servanda if you know that
there exist a treaty between two States; meaning the
Philippines and another State with respect to the tax
exemption of the salaries of diplomats.
Page 21 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
But, if you are not aware of any treaty between the
Philippines and the United States which grants tax
exemption to the salaries of diplomats; then do not mention
the principle of pacta sunt servanda because if we talk
about pacta sunt servanda, it relates to compliance with the
provisions of treaties.
Simply put, you can just state that the Philippine
government should respect the sovereignty of the US
government in accordance with the principle of
international comity or maintaining friendly relations with
other States.
If you will mention pacta sunt servanda, then you have
to likewise mention the existence of a treaty between the
Philippine government and the US government.
Q: Is there a tax treaty between the Philippine government
and the US government?
A: Yes.
Q: Does that treaty provides a tax exemption on the salaries
of diplomats?
A: Yes.
 CONTINUATION OF CONSTITUTIONAL
LIMITATIONS
E. TAXATION BY LGUS
- Already discussed.
The usual question in the BAR would be describe the power
of taxation of a LGU.
NOTE:
There is a huge difference between imposition and collection
and exercise.
Q: If we talk about the exercise of the power of taxation,
would that require a law?
A: No.
Q: Would the collection require the enactment of a law?
A: Yes.
If we talk about the exercise of the power of
taxation, that does not require a law.
Q: Why?
A: Because the power of taxation of the State is inherent.
But if we talk about the act of collecting the tax, it
must be preceded by the enactment of a law in compliance
with the due process clause.
Q: What is the rationale behind the local autonomy under
the 1987 PC?
A: The rationale behind this law is to shatter the
dependence of the LGUs on the Congress.
Because prior to the enactment of the 1987 PC, the
power to tax of LGUs is merely delegated; meaning they need
to lobby for the enactment of a law from the Congress in
order for them to collect the tax.
And that culture of dependency has been shattered
by virtue of the local autonomy under Sec. 5, Art. X of the
1987 PC.
Q: At the present time, do LGUs need to lobby for the
enactment of a law in order for them to collect taxes?
A: No.
Q: But in order for LGUs to impose and collect taxes, will
they need to enact ordinances?
A: Yes. That is in compliance with the due process clause.
In the enactment of these ordinances, LGUs must
still comply with the Statutes enacted by the national
government.
NOTE:
Municipal statutes are still inferior to the statutes
enacted by the Congress.
Hence, the qualifying phrase subject to the limitations
set forth by the Congress.
F. NON-IMPRISONMENT FOR NON-PAYMENT OF
POLL TAX
- Self-explanory
No one can get imprisoned for non-payment of poll
tax.
But in the event that the taxpayer falsifies a public
document in order to pay lower amount of cedula, then that
taxpayer can still be indicted to a criminal charge.
However, with respect to the non-payment of the
deficiency taxes, then this taxpayer cannot get imprisoned.
Q: With respect to other taxes, can the taxpayer be indicted
for a criminal charge for non-payment of the tax?
A: Yes. Only if the non-payment constitutes tax evasion.
Because a simple non-payment of tax will not result
to a tax evasion. There has to be a wilful and deliberate
intent to evade the tax in order that there be tax evasion.
G. NON-IMPAIRMENT CLAUSE
What you need to remember is that this clause will
apply to CONTRACTUAL TAX EXEMPTION.
If the tax exemption has been granted under
legislative franchises, it can be subject to alteration,
modification or revocation because under the Constitution,
all legislative franchises shall be subject to alteration,
modification and revocation.
Q: So, if we talk about tax exemptions granted to
telecommunication companies, water districts, and electric
companies; can these tax exemptions be revoked anytime
without violating the non-impairment clause?
A: Yes because the tax exemptions under these legislative
franchise were granted under the sovereign function of the
government.
And if the tax exemption is granted pursuant to the
sovereign function of the government, the non-impairment
clause is not applicable.
Remember the principle that non-impairment
clause will only be applicable if it relates to contractual tax
exemptions.
Q: What are contractual tax exemptions?
A: They are tax exemptions granted by the taxing authorities
in contracts such as those contained in government bonds;
in which the government, acting on its private capacity,
sheds its cloak of authority.
All that we need to do is to determine whether the
tax exemption is contractual in nature.
Because if the tax exemption is contractual in
nature, then obviously, we will apply the non-impairment
clause.
Page 22 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Hence, the tax exemption cannot be revoked at any
time because the revocation of the tax exemption will
definitely violate the non-impairment clause of the
Constitution.
 SITUATION:
i. The Congress enacted a law granting tax exemption
in favor of pioneer enterprises.
Under the said law, if a taxpayer established a
pioneer enterprise and infuse a capital investment of 10 M,
along with the condition that it will hire at least 100 filipino
employees; then these pioneer enterprises shall be exempt
from tax for a period of 10 years.
If a tax exemption is limited in nature, meaning
limited in period; we call that tax exemption as tax holiday
kasi hindi forever.
After a period of 5 years, the Congress enacted a law
revoking the tax exemption granted under R.A XXX.
Q: Is this law constitutional or is this law unconstitutional
on the ground that it infringes the non-impairment clause?
For you to answer this correctly, you need to think
first whether the tax exemption is contractual in nature
because the non-impairment clause will apply only if the tax
exemption is contractual in nature.
Q: Is the tax exemption contractual in nature?
A: No.
Q: Therefore, can it be revoked anytime?
A: Yes.
Q: Why is it not contractual in nature?
A: Can you see here a contract entered into by the
government with another individual or entity? None.
ii. There are T-Bills or treasury bills. Yan yung mga
bonds na iniissue ng government. Pag bonds yan or
T-Bills, ibig sabihin, umuutang sayo yung
government.
T-Bills, nagvavary yung conditions depende kung ano
yung gusto ng government na condition.
Let’s assume, in this particular pleading, if the holding
period is 2 years, then the interest income will be exempt.
Under the Tax Code, interest income shall be subject to
20% final withholding tax.
Q: Is there a possibility that the interest income will be
exempt from tax? Peso muna, wag muna foreign.
A: Yes. If the interest income was earned from long-term
deposit.
Q: Kailan masasabing long-term siya?
A: If the holding period is at least 5 years.
Sa T-Bill, sabi, holding period is 2 years; exempt yung
interest income. Technically, the grant of tax exemption is
not pursuant to the provision of the Tax Code, but rather
because of the provision under the T-Bill.
After one year, nagenact ng batas. Dun sa batas, sabi,
all tax exemptions granted to T-Bill holders shall be hereby
revoked.
Q: Is the law constitutional or unconstitutional?
A: Unconstitutional.
Q: Why?
A: Because it violates the non-impairment clause of the
Constitution.
The tax exemption being revoked under this R.A or Law
is considered as contractual tax exemption.
Hence, it is protected by the non-impairment clause of
the Constitution.
Kaya madali ang non-impairment clause kasi ang
ichecheck mo lang contractual tax exemption ba yan or
hindi.
Pag contractual tax exemption yan, hindi yan pwedeng
irevoke anytime. Dapat, irespect ng government yan
because the government granted the tax exemption
pursuant to a contract where the government entered into
that contract in its private capacity.
H. FREEDOM OF RELIGION
There are two aspects:
a. FREE EXERCISE CLAUSE
- It encompasses two matters:
1. Freedom to believe
2. Freedom to act one’s belief
If there’s a prior restriction on the freedom to exercise
one’s religion, then, there’s a violation of the freedom of
religion particularly the free exercise clause of the
Constitution.
Q: What is the determining factor in order that there be
an infringement of the free exercise clause of the
Constitution?
A: Prior restraint
b. NON-ESTABLISHMENT CLAUSE
- The government cannot appropriate funds
for a particular religion.
 AMERICAN BIBLE SOCIETY v. CITY OF MANILA
A license fee was imposed on the sale of Bibles.
License fee is an exaction which will be collected
prior to the conduct of an activity, such that an entity
cannot conduct an activity not unless there has been
payment of such license fee or mayor’s permit fee.
There is a violation of the freedom of religion
because there is a prior restraint.
 TOLENTINO v. SECRETARY OF FINANCE
VAT is imposed on the sale of Bibles.
VAT is imposed on the sale of products in the
ordinary course of business.
Such is imposed after the conduct of such activity.
There is no violation of freedom of religion because
such is imposed after the conduct of the activity.
There is no prior restraint.
Q: Can the Government impose license fees on the sale of
Bibles?
Q: Can the Government impose VAT on the sale of Bibles?
A: For you to correctly answer these questions, you need to
think of prior restraint.
Q: Will there be a prior restraint on the sale of Bibles if the
Government will impose license fees?
A: Yes, definitely, because that would mean that these
religious institutions cannot sell the Bibles not unless they
would pay the license fees.
Page 23 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Is the payment of license fee considered as condition sine
qua non for the sale of Bible?
A: Yes
Since it is considered as a condition sine qua non or a
requisite for the conduct of a religious activity, then there is
a prior restraint.
Q: What clause shall be violated if the government will
impose license fees on the sale of the Bible?
A: Free Exercise clause.
Q: What about VAT? Will the imposition of VAT be
considered as a violation of the free exercise clause of the
Constitution?
A: No.
Q: Why not?
A: Because the payment of VAT will be made after the
conduct of the activity.
That being said, the payment of VAT is not considered as a
condition sine qua non for the conduct of a religious activity.
Hence, it is not considered a prior restraint.
Q: What about income taxes? Will the imposition of income
tax be considered a violation of the free exercise clause?
Ang titignan mo is kung condition ba siya before the
conduct of the activity.
Q: Condition ba siya before the conduct of an activity?
A: No.
Q: Is it considered as a prior restraint?
A: No.
Q: Therefore, will there be a violation of the free exercise
clause?
A: None.
 IN RE: LETTER OF TONY VALENCIANO
For non-establishment clause, yung nagcoconduct sila ng
mass sa City Hall.
Q: Is this considered as a violation of the non-establishment
clause?
A: No. It is merely an accommodation.
I. ORIGIN OF REVENUE, APPROPRIATION AND
TARIFF BILLS
Q: For revenue, appropriation and tariff bills, where should
it originate?
A: From the House of Representatives
Q: But does it mean that the Senate cannot propose
amendments?
A: No because the Senate can propose amendments to the
House Bill.
 ABAKADA GURO v. ERMITA
The House Bill is totally different from the Senate Bill.
The law enacted is similar to the Senate Bill.
Hence, they questioned that the law is considered as
unconstitutional because since the Senate Bill basically
changed the House Bill; then the law did not originate from
the House of Representatives. That was the argument.
Q: Is that argument meritorious?
A: No because the Constitution likewise grants the Senate
the power to propose amendments.
J. FLEXIBLE TARIFF CLAUSE
The Congress, may by law, authorize the President
to fix within specified limits, and subject to such limitations
and restrictions as the Congress may impose; tariff rates,
import and export quotas, thonage and wharfage dues and
other duties and imposts.
Q: Can we use Flexible Tariff Clause in arguing the merit of
your answer related to VAT?
A: No because quite obviously, Flexible Tariff Clause will not
apply to VAT; rather it will apply only to those taxes that
ma’am had enumerated.
NOTE:
This power to tax of the President is still subject to the
limitations set by Congress.
Q: Is that the same limitation with respect to the power to
tax by the LGUs?
A: Yes.
Q: Why?
A: Because it all goes back to the inherent limitation that
the power of taxation is inherently or essentially legislative.
K. VOTING REQUIREMENT REGARDING THE
GRANT OF TAX EXEMPTION
Majority of all members of the Congress
Q: What about revocation of tax exemption?
A: No Hindi ganyan kastringent. Pag revocation, para rin
lang siyang same vote with respect to the enactment of other
laws.
Stringent lang pag grant; pag revocation, same
voting requirement with respect to the enactment of other
laws.
Q: What about grant of tax amnesty?
A: Same vote. Parang nage-enact din lang sila ng other laws.
Q: So this constitutional provision will only apply to what?
A: Grant of tax exemption.
The voting requirement on majority of all members
of the Congress will apply only to grant of tax exemption.
Q: What’s the difference between tax amnesty and tax
exemption?
A: If we talk about tax exemption, the taxpayer has not yet
incurred any liability and hence it is considered as an
immunity from future liability; if we talk about tax
amnesty, there is already an existing tax liability and hence
it is not considered as immunity but rather a condonation
of tax liability.
TAX LAWS AND DOCTRINES
IN TAXATION
 SOURCES OF TAX LAWS
1. CONSTITUTION
NOTE:
The Constitution does not impose any liability.
Page 24 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

So, the Government cannot state that I am imposing Q: Except when the
this tax because of or by virtue of the Constitution because ruling is in the
the Constitution merely provides for the Constitutional nature of?
limitations to the power of taxation of the State. It does not Q: Ano yung DA
impose taxes. 489-03? Anong
tawag dun?
2. STATUTES
A: General
We are talking about the laws enacted by the Congress. Interpretative
Q: Can statutes impose or levy taxes? Ruling
A: Yes, definitely. As a General
Q: Can it also impose limitations? Rule, it applies only
A: Yes, particularly limitations to the power of Local to the taxpayer
Government Units and limitations as to the power of the requesting the
President. same except in
3. ISSUANCE BY THE SECRETARY OF cases of general
FINANCE interpretative
Q: What do we call the issuances made by the Secretary of ruling where there
Finance? is no requesting
A: Revenue Regulations taxpayer because
the requesting
- Are issued by Secretary of Finance upon entity is the agency
the recommendation of the Commissioner of tasked to
Internal Revenue or the Commissioner of Customs implement the law
with respect to custom duties. such as in this
Q: Is there a difference between the issuances made by the case.
Secretary of Finance and the issuances made by the Yung DA 489-
Commissioner? 03, ang nagrequest
A: Yes. yung drawback
REVENUE ADMINISTRATIVE agency in charge of
REGULATIONS RULINGS/ VAT.
ISSUANCE Q: So since ang
Issued by the Issued by the nagrequest ay
ISSUING
Secretary of Commissioner or isang government
BODY
Finance its subordinates agency or
except if the ruling government
is in the nature of a division; will we
ruling of first classify it as a
impression. general
Because if we interpretative
talk about rulings ruling?
of first impression, A: Yes.
only the Q: So, will it apply
Commissioner can to all taxpayers?
issue the same. A: Yes
Q: What is a ruling NATURE Subordinate Best guess of the
of first impression? legislation Commissioner on a
A: Is one which subject matter
involves a novel because it is merely
issue; meaning the interpretation
there’s yet no of the
precedent with Commissioner with
respect to the respect to a
matters resolved in provision of law.
that ruling. BINDING Binding upon Not binding upon
APPLICABILITY Applies to all It applies only to EFFECT courts for being the courts but they
taxpayers the taxpayer who a subordinate are entitled to great
requested for the legislation. weight.
issuance of the
ruling.
Page 25 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
For administrative issuances, it might be in the
nature of revenue memorandum orders, revenue
memorandum circulars, revenue administrative orders or
revenue delegation of authority orders.
 CIR v. CA and FORTUNE
The SC did not mention Revenue Regulations;
rather, the SC mentioned Legislative Ruling.
The SC did not mention Administrative Rulings;
rather the SC mentioned Interpretative Rulings.
Q: Is a legislative rule and revenue regulation the same?
A: Yes.
Q: Is an interpretative rule and administrative ruling the
same?
A: Yes
Hence, if we talk about the discussion of the
Supreme Court in this case, legislative rule and
interpretative rule were differentiated in this wise:
LEGISLATIVE INTERPRETATIVE
RULE RULE
NATURE It is in the Is interpretative in
nature of nature
subordinate
legislation
PURPOSE Is designed to Is designed to
implement a provide guidelines
primary to the law which
legislation by the agency is in
providing the charge of enforcing.
details thereof.
REQUIREMENT Requires Needs nothing
FOR publication and further than its
APPLICABILITY hearing bear issuance.
In this case of CIR v. CA and FORTUNE where the
BIR issued a revenue memorandum circular supposedly
implementing or providing guidelines for the imposition of
the tax on cigars and cigarettes; it could have been
concluded that since it is just and RMC(diba isa to sa mga
naenumarate na administrative ruling, then the bear
issuance will be sufficient.
However, what is very peculiar about this case is
the fact that the Revenue Memorandum Circular reclassify
local products as one that bears foreign brands.
Prior to the issuance of the Revenue Memorandum
Circular, there were several cigarettes such as Hope Luxury,
Premium More and Champion or these local products are
classified as local products not bearing foreign brands. And
therefore, lower tax rates were imposed on these products.
Under the RMC, these cigars and cigarettes were
classified as local products bearing foreign brands.
By reason of the reclassification of these products,
a higher amount of tax was imposed on them.
Here, the RMC did not merely provide a guideline,
rather it expanded the law.
Since it expanded the law, it is already considered
a subordinate legislation.
Q: And since it is in the nature of subordinate legislation,
does it require publication and hearing?
A: Yes.
In this particular case, there was no publication
and hearing.
Hence, the RMC was declared null and void.
Q: Can an administrative issuance supplant or supersede a
law?
A: No. So all administrative issuances must not run
contrary to the provisions of a law.
 PB COM CASE
It involves the issuance of a RMC where the
Commissioner opined that the prescriptive period in filing a
claim for refund is 10 years, instead of 2 years.
This RMC was nullified because it runs contrary to
the provisions of the NIRC.
Q: Is the nullification of the RMC proper?
A: Yes
Q: Why?
A: Because an administrative issuance cannot supersede
the basic framework of the law that it seeks to implement.
4. TAX ORDINANCES
- It can only be applicable within the locality
of the municipality which enacted the tax
ordinance.
5. TAX TREATIES
- Bilateral agreements between two States.
- The main purpose of a tax treaty is to
countervail the effects of international double
taxation because it is intended to reconcile the
national fiscal legislations of the two States.
Pursuant to the principle of international comity,
the Philippine government must comply with the provisions
of the tax treaties pursuant to the principle of pacta sunt
servanda.
Q: International double taxation is what type of double
taxation? Direct or Indirect?
A: Indirect because the taxing authorities are different.
 CIR v. SC JOHNSON AND SON
Two treaties ang pinag-aawayan dito. RP-US and
RP-West Germany.
Q: Taga saan ang SC Johnsons? Anong domiciliary
country?
A: US
So sa Us, merong tax rate na nakalagay dun. Yun
lang sa RP-US tax treaty, meron siyang most-favored nation
clause.
Q: Ano yung most-favored nation clause?
A: Ang sinasabi niya lang dun, kapag nagbigay ng mas
mababa pang rate dito to other States to which the
Philippines is a signatory or US is a signatory; dapat ibigay
mo din sa akin yung pinakamababang rate.
Eh sa RP-West Germany treaty, 10% kasi yung
iniimpose na tax doon sa royalties. Ngayon, yang 10% na
rate na yan, wala yan doon sa RP-US Treaty; nasa RP-West
Germany.
So, sabi ng SC Johnsons and Johnsons, dapat
iapply mo sa akin yung 10% kasi binibigay mo yan sa mga
Page 26 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
entities na ang domiciliary country niya eh West Germany.
Yun ang argument.
Q: If we talk about pacta sunt servanda, would that be a
meritorious agreement?
A: Yes kasi basta merong most-favored nation clause sa
isang tax treaty, pwede nilang iapply ang provisions ng other
tax treaties.
But, regrettably, this provision will only be
applicable if the conditions are similar.
In this particular case, the conditions under the RP-
West Germany and RP-US tax treaties are not similar.
Q: Why is that so?
A: In RP-West Germany, there is a grant of a tax credit but
there’s none in RP-US tax treaty.
In this particular case, the SC held that there are
TWO METHODS IN ORDER TO AVOID THE EFFECTS OF
INTERNATIONAL DOUBLE TAXATION.
A. EXEMPTION METHOD
- The State of residence will grant the
exemption; the State of source will impose the tax.
B. CREDIT METHOD
- Both States will impose the tax; only that,
one State will grant tax credit.
Q: What State is that?
A: The State of residence.
If you will observe, in both methods ang laging
naga-adjust the State of residence. So, the State of
source will always impose the tax.
 DEUTSCHE BANK v. CIR
MAIN ISSUE: WON it is possible for the BIR to add
requirements in order that the BIR will recognize the tax
exemption under a treaty.
Q: Can the BIR impose additional conditions before the
grant of tax exemption provided under tax treaties?
- Because in this particular case, apparently,
Deutsche Bank is exempt under a tax treaty entered
into by the Philippine government.
Q: Pwede bang magdagdag and sabihin ni BIR na bago ka
maging exempt Deutsche Bank under that treaty, kailangan
magsubmit ka muna ng mga documents na to kasi kapag
hindi ka nagsubmit ng mga documents na to, hindi ka tax
exempt? Pwede ba yun?
A: No. If those conditions or requirements are not provided
under the tax treaty, then the Philippine Government
cannot do the same.
Otherwise, Philippine government will violate pacta
sunt servanda.
 CONSTRUCTIONS AND INTERPRETATIONS OF
TAX LAWS
1. RULE ON STRICT INTERPRETATION
Q: What if it talks about the imposition of the tax? Eto na
yung mag-iimpose na sila ng tax at mangongolekta na sila
ng tax.
A: We will apply the principle of strict interpretation because
taxes are burden.
Hence, any ambiguity in the law imposing the tax
must be strictly construed against the government.
2. PRINCIPLE OF STRICTISSIMI JURIS
Q: What if we talk about tax exemption?
A: Apply the principle of strictissimi juris.
Q: What if it speaks of deductions?
A: Same, because these are mere privileges granted by the
State.
Q: What if we talk about refunds?
A: Same
3. RULE IN THE GRANT OF THE POWER OF
TAXATION
Q: If there is an ambiguity in the law granting the power to
tax, will the law be construed strictly against the State or
liberally in favour of the State?
A: Liberally in favour of the State kasi hindi naman niya
kailangan ng batas eh to exercise the power to tax, kaya
liberal interpretation yan.
Q: What if there is an ambiguity with respect to both the
provision of a law imposing the tax and the provision of the
law extending tax exemption? What do we apply first?
A: In the case of CIR v. ATENEO, the principle of strict
interpretation must be applied first before applying the
principle of strictissimi juris.
As held in this case, it must be first established that
the subject matter is covered by the tax law imposing the
tax.
Because, if it is not established that the subject
matter is covered by the law mandating the imposition of
the tax, then, the tax should not be imposed on such subject
matter.
Once it has been established that the subject
matter is covered by the tax law imposing the tax; then
that’s the time that we will apply the principle of strictissimi
juris.
The principle or the rule on strictissimi juris will
NOT apply to the following situations:
1. When the statute granting the tax
exemption expressly provides for a liberal
interpretation.
2. When the exempting law refers to special
taxes relating to special cases and affecting special
classes of persons.
3. When the exemption is in favor of
traditional exempt entities.
4. When the exemption is granted in favor of
the government, its political subdivisions and
instrumentalities.
5. When the exemption refers to public
properties owned by the State or its political
subdivisions.
6. When the taxpayer falls within the purview
of the exemption by clear legislative intent.
February 4, 2020
 DOCTRINES
1. DOUBLE TAXATION
- Already discussed so skipped.
Page 27 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
- Remember the difference between direct and
indirect double taxation.
Q: How would we really know if it is really double taxation?
A: Check the checklist.
Q: What if we’re not really sure if same kind or subject
matter? Paano mo malalaman kung same subject matter?
A: Madaling idetermine kung magkaiba. Like for example,
donor’s tax.
Q: What’s the subject matter for donor’s tax?
A: Privilege of transferring property
Ang mahihirap idetermine yung same tax sa business, tapos
parehas sila na based sa gross receipts.
Q: Ano ang trick pagkaganun?
A: Ang trick would be first, tignan mo kung based ba siya
sa gross receipts. Pag based yan sa gross receipts, similar
yan to VAT and percentage tax.
Hence, dapat ang general rule, the local government
can no longer impose a tax on the same.
However, memorize all the taxes under the Local
Government Code.
Kasi kapag within the list siya of those taxes, then
it’s allowed.
It will only violate the rule on pre-emption if it is not
among those taxes listed under the Local Government Code.
Q: What are the taxes listed under the Local Government
Code which a LGU can impose?
A:
1. Local Business Tax
2. Franchise Tax
3. Tax on Transfer of Real Property Ownership
4. Tax on Sand, Gravel and Other Quarry Resources
5. Professional Tax
6. Amusement Tax
7. Annual Fixed Tax For Every Delivery Truck or Van
of Manufacturers or Producers, Wholesalers of,
Dealers, or Retailers in, Certain Products.
(basta check niyo guys Local Government Code
particularly Chapter II)
If it is within this list, that means that the LGU can
impose the same.
 COCA-COLA BOTTLERS CASE
Q: What is the effect if a tax is imposed on wholesalers and
then a tax is imposed on retailers?
Coca-Cola was being imposed a tax under Sec. 14
of the Tax Ordinance (Tax on the wholesalers)
Then, Coca-Cola is again subject to a tax under Sec.
21 of the same Tax Ordinance (Tax on the retailers)
Sabi ng Local Government, it’s not double taxation
because 14 relates to tax on wholesalers and 21 relates to a
tax on retailers.
RULING:
Since the tax is still being imposed by the LGU on
the same gross receipts, so notwithstanding the fact that
you are a wholesaler or retailer, it stands for a fact that it is
still a tax on the gross receipts; then there is definitely
double taxation.
So for example, 10 M ang tax ni Coca-Cola. Yung 5
M, naearn niya as wholesaler, yung 5 M naearn niya as
retailer.
Q: Ano ang ginagawa ng Local Government Code?
A: The tax under Sec. 14 is being imposed on the entire 10
M. And then again, under Sec. 21, the entire gross receipts
of 10 M is again the basis.
That is the reason why in this particular case, the
SC held that this is an explicit case of direct double taxation.
And since it is a direct double taxation, the tax law
becomes confiscatory.
And when a tax law becomes confiscatory, then it
violates or infringes the due process clause of the
Constitution.
So ang titignan mo, ang taxing authority ba ay
parehas. Ang tinataxan din ba ay parehas.
Kung parehas ang taxing authority at ang tinataxan
parehas ay gross receipts that has been earned for the entire
year, then quite obviously; there is direct double taxation.
2. PROSPECTIVITY OF TAX LAWS
Tax Laws are prospective in operation, unless the
language of the Statute clearly provides for retroactive effect.
Interrelate it with Sec. 246.
Laws are prospective nature. And then you have
learned about rule on non-retroactivity of ruling.
Q: What is the non-retroactivity of ruling?
A: If there is a revocation, modification or reversal of a
ruling; the revocation, modification or reversal will not have
any retroactive effect.
Q: If it does not have any retroactive effect, what was that
mean?
 SITUATIONS:
I. (PB COM CASE) A revenue memorandum circular
was issued by the CIR stating that the period to file
a refund is 10 years.
The court nullified the said memorandum circular.
Because according to the court, this RMC contravenes Sec.
204 c and Sec. 222 of the Tax Code, where it clearly provides
that the period to file a claim for refund is 2 years from the
date of payment.
Q: Will the revocation of the RMC have a retroactive effect?
NOTE:
We are not speaking of the law which will have
retroactive effect.
We are speaking of the revocation.
Page 28 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If we talk about prospectivity of a tax law, in that
principle; we are talking about the prospective application
of the tax law.
Under Sec. 246, we are not speaking of the retroactive
effect of a law; rather, we are speaking of the retroactive
application of the revocation.
Q: What will happen if this is the scenario? Will the
revocation be prejudicial to the taxpayer assuming that the
taxpayer relied on the RMC?
Q: If PB Com relied on the RMC in good faith or PB Com filed
the application for refund within the 10-year period but
beyond the 2-year period; can PB Com claim that since the
revocation cannot have any retroactive effect, then that
means that it can rely on the ruling in good faith?
A:
II. DA 489-03
It talks about the relaxation of the mandatory rule 120
plus 30.
Under DA 489-03, taxpayers are allowed to immediately
file the petition before the CTA without awaiting for the lapse
of the 120-day period. So, pwede ang premature filing under
DA 489-03.
Then, this DA 489-03 was revoked by the Aichi Doctrine
because according to the SC, the interpretation under DA
489-03 is erroneous apparently because the law is explicit
on the point that the period of 120 days must expire before
the taxpayer can elevate the case to the CTA.
If you would take a look at both situations, obviously,
both of them referred to a situation where the issuance was
revoked.
In the case of PB Com, the issuance was revoked. In the
Aichi Doctrine or CIR v. Aichi, DA 489-03 was likewise
revoked.
Q: Will the revocation have a retroactive effect?
NOTE:
Ma’am is not speaking of a law which will have a retroactive
effect. We are speaking of the revocation having a retroactive
effect.
Q: What does it mean when we speak of a revocation having
a retroactive effect? Pag tong revocation na ito, if it will have
a retroactive effect, ibig sabihin nun ano?
A: It would mean that this memorandum circular will be
deemed as if it has not been issued at all. Yun ang effect pag
rinevoke mo retroactively.
Kasi kunwari kapag rinevoke mo ngayon, sana
prospective diba. Doctrine of operative fact, meaning lahat
ng na-issue before that valid kasi nung time na yun, hindi
pa naman siya narerevoke.
Yun yung sinasabi na the revocation should not
have a retroactive effect because if the revocation will have
a retroactive effect, then the immediate result would be the
RMC will be nullified. So, it will be deemed as if it has not
been issued at all.
So, all pending claims for refund pursuant to this
RMC will be denied kasi nga parang walang naissueng DA
489-03. So, wala na ngayon silang pagbabasehan.
If the revocation under the Aichi doctrine will have
a retroactive effect, then it is as if DA 489-03 as an issuance
is not valid. So, all premature filings will be denied because
they don’t have any basis for the premature filing.
Q: Ano ang prospectivity of tax laws if we will compare it
with that?
A: Pag may na-enact na ruling, hindi mo yan pwedeng
iapply retroactively, forward lang tayo.
So, you cannot use both principles in the same
problem because Ma’am had seen students who will use
both.
If the question deals with a revocation of a ruling,
then use 246. If it talks about the enactment of a law or
issuance, then we talk about prospectivity of tax laws.
So, hindi mo pwedeng gamitin ang prospectivity
kung ang tanong is dealing with revocation of a ruling. Use
the proper legal basis.
Q: Will the revocation in PB Com case have a retroactive
effect?
A: Yes
Q: Why?
A: Because it is erroneous. The RMC is erroneous. It is
contrary to law.
Therefore, this will not stand. No person can
acquire vested right over a wrong construction of a law.
Q: Apparently DA 489-03 is likewise an erroneous
construction of a law. So would this mean that we will apply
the principle of PB Com that the revocation will be
retroactively applied because DA 489-03 involves an
erroneous interpretation of a law and hence, no person can
acquire vested right over a wrong construction of a law?
A: No. This is different.
Q: Why is that so?
A: In the case of CIR v. San Roque, the court held that the
taxpayer can rely on the issuance in good faith because the
provision under Sec. 112 is not clear in itself and subject to
different interpretations. Hence, the taxpayer can rely on it
in good faith.
Q: And if the taxpayer relied on it in good faith, will we apply
non-retroactivity of rulings?
A: Yes.
If we would talk about a newly-issued ruling, apply
prospectivity. If we would talk about a ruling which has been
issued in order to modify or reverse a previously issued
ruling; do not apply prospectivity, apply Sec. 246 on non-
retroactivity.
3. PRINCIPLE ON IMPRESCRIPTIBILITY OF
TAXES
Page 29 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
GENERAL RULE: Taxes are imprescriptible. This means
that the Government’s right to assess and collect the tax do
not prescribe.
EXCEPTION: If the Congress has clearly manifested its
intention that it should be bound by prescription.
Under the present tax laws, obviously for National
Internal Revenue taxes, their collection and assessment are
subject to prescription because the Congress said so.
Q: Can the Congress remove that provision on prescription?
A: Yes
Q: If the Congress did, will it be valid?
A: Yes because we go back to the general rule on
imprescriptibility of taxes.
Q: The only National Internal Revenue Tax, if ma’am may
call it a tax, whose collection and assessment do not
prescribe would be what?
A: Prior to the imposition of a return for improperly
accumulated earnings tax, she would have properly
answered such but right now, there’s already a return for
improperly accumulated earnings tax.
Q: So since improperly accumulated earnings tax is now
covered by a tax return, is it already subject to prescription?
A: Yes
The only act that the Government that is seemingly
imprescriptible if you would still remember the case of Lim
is a criminal charge for tax evasion.
Q: Bakit siya seemingly imprescriptible?
Q: In this case, saan nagcacount yung 5-year prescriptive
period of criminal case?
A: From discovery and filing of the complaint with the Office
of the Prosecutor. So imagine, dapat yun magsasabay bago
magbilang ng 5 years. So, hindi importanteng nadiscover
mo.
Parang dun, na-unearth nila nung 1964 tapos
nagfile lang sila ng complaint 1980s na. Kaya sila nagraise
ng defense ng prescription.
Q: Pero anong sabi ng SC?
A: Teka, nung nadiscover mo, hindi pa nagsastart yung
counting ng 5-year period. Sa Sec. 281, dapat magsastart
yan kapag nafile niya rin yung case sa Office of the City
Prosecutor.
So, kapag nadiscover yan pero wala pa ring filing ng
affidavit complaint with the Office of the City Prosecutor, the
5-year period will not begin to run.
The 5-year period will only begin to run upon
discovery and the filing of an affidavit complaint with the
Office of the City Prosecutor.
In the case of Lim, the SC described it as seemingly
imprescriptible because the law made it appear that it is
prescriptible but in realilty, imprescriptible.
4. ESCAPE FROM TAXATION
a. TAX AVOIDANCE
- Legally permissible means in order to reduce the
amount of taxes.
NOTE:
The means by which the taxes are reduced must be
sanctioned by law.
b. TAX EVASION
3 ELEMENTS AS DISCUSSED IN THE CASE OF TODA:
1. End to be achieved and the end to be achieved shall
refer to reduction of the tax or total elimination of
the tax.
2. State of mind
3. Course of action which must not be permissible or
sanctioned by law
Q: How would we know if it is really tax evasion or tax
avoidance?
A: If it is permitted by law, then it is tax avoidance; but if it
is not, then it is tax evasion.
 SITUATIONS:
1. TODA CASE
A building was sold to Altonaga. A deed of sale was
executed between Altonaga and CIC. At that time, it is
subjected to 35% corporate income tax.
On the same day, Altonaga sold it to RMI. And this is
subject to 5% capital gains tax.
So if we would compute the total amount of taxes paid
and compare it with when CIC will directly sell it to RMI, CIC
will reduce the taxes in a huge amount if they will adopt the
first scheme because if CIC will directly sell it to RMI, the
taxes to be paid by CIC is greater apparently because the
net income derived from that sale is way huge.
If we would compare the first scheme with the second
scheme, CIC will save a huge amount of tax if it will resort
to the first scheme. And they did because there was a deed
of sale between CIC and Altonaga. And on the same day,
there was a deed of sale between Altonaga and RMI.
If we would take a look at this set up, we can just
conclude that most probably, Altonaga got fed up with the
property several hours after the purchase that’s why he
immediately sold it. We can think of it that way.
But, based on the books of RMI, it talks about CIC.
And way before the sale, CIC already received 40 M. And
apparently, the 40 Million or a certain amount was received
not from Altonaga, but rather from RMI.
So, if we would take a look at the entire set of
circumstances, it is very obvious that Altonaga was just
used as a ploy in order for them to reduce taxes.
Take a look at the different elements of tax evasion:
1. End to be achieved.
Q: Nakabawas ba sa tax nila?
A: Yes.
2. State of mind
Q: Do they have bad faith or fraudulent motive?
Page 30 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yes, apparently.
3. Course of action
Q: Is it legally permissible for you to use a ploy just for
you to reduce a tax?
A: No.
Thus. It is a clear case of TAX EVASION.
2. Maria Suerte owns several parcel of land. Then, she
was contemplating on selling the property.
Maria Suerte got an advice from a tax lawyer. The tax
lawyer said that she can sell it to her corporation, X Corp.
Maria Suerte then, transferred these parcels of land to
X Corp. in exchange for shares of stock.
Q: Is this tax free or is it subject to tax?
A: NO.
Q: Why not?
A: Tax-Free Exchange yan.
Q: But what is the condition?
A: Maria Suerte should obtain control or that she would at
least own 51% of the X Corporation, which she did.
So Maria Suerte did not pay any tax.
After she transferred the parcels of land to the
corporation, Maria Suerte sold her shares to Y Corporation.
Q: If you’re the lawyer of Maria Suerte, will you advise her
the same?
Q: But before that, what is the tax implication?
Q: If Maria Suerte will directly sell it to Y Corporation, what
is the tax implication?
A: Capital Gains Tax at the rate of 6% based on the gross
selling price or the fair market value whichever is higher;
and that’s huge.
In this situation, what Maria Suerte did was to
transfer her property to X Corporation so that she can
acquire shares.
Q: What’s the tax implication?
A: Tax-exempt because it is a tax free exchange under Sec.
40 c.
Instead of selling the parcels of land, she instead
sold her shares to Y Corporation.
Q: What is the tax implication of sale of shares?
A: It depends on whether the shares are listed or not listed.
In this case, the shares are not listed in the stock
exchange.
Q: If it is unlisted, what’s the tax implication?
A: We call it Capital Gains Tax as well which is dati 5% of
the first 100,000 and 10% for the excess of a 100K.
Q: But under the T.R.A.I.N Law, what’s the tax rate?
A: 15% based on the net gain.
Pag binenta niya yung parcel of land diretso kay X
Corporation, 6% yan based on the gross selling price or fair
market value kahit wala pa siyang kinita or kahit trinasfer
niya at a cost.
Pag yung shares of stocks ang nililipat niya, ang
basis niya, 15% of the net gain.
Ang titignan mo lang jan, magkano yung gross
selling price ni Maria Suerte less yung book value nung
shares na yan. Yan ang kanyang net gain.
Q: Eh pwede bang ang liit liit ng net gain nay an?
A: Yes kasi hindi mo naman vinavalue yung shares based
dun sa value nung property.
Q: By reason of Maria resorting to this option; was she able
to reduce taxes?
A: Yes, definitely.
Q: Is there tax evasion?
A: None.
Kung wala sa facts na may fraud unlike in the case
of Toda na may ploy na nangyari; ang titignan mo is kung
yung scheme is legally allowed because if the scheme is
legally allowed, then obviously, it is Tax Avoidance.
Q: Is the scheme legally allowed?
A: Yes
Q: Is it within the means permissible by law?
A: Yes.
Q: Is there tax evasion or tax avoidance?
A: Tax Avoidance
3. Ma’am had a client. Her client owns several
properties. The problem of the client is that by
reason of the several properties that she owns, she
is actually worried about a payment of a huge
amount of estate tax.
So, she asked her lawyer if she could transfer some of
her properties to her children during her lifetime, which she
did.
After the transfer, the children already possessed and
enjoyed the property.
Q: Is this tax avoidance or tax evasion?
A: Hindi mo yan pwedeng iclassify na transfer in
contemplation of death because there should have been a
reservation of interest like anak sayo ko lang ipapangalan,
pero ako ang mag-aani at ako ang magkokolekta ng mga
ani.
Pagkaganun, transfer in contemplation of death yan
kaya mo pa rin siya iinclude as part of the gross estate.
Q: Why?
A: Because that is considered as evasion of tax. So
pagkaganyan, tax evasion.
Q: Eh dito sa example natin, trinansfer niya tapos inenjoy
na ng anak niya; is this tax evasion or tax avoidance?
A: Tax Avoidance. This is a clear case of estate tax planning.
NOTE:
The story would be different if the parent would just
transfer the naked title but the parent will still enjoy the
benefits from the property. That is still tax evasion.
Page 31 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
And that is the reason why, in estate taxation, one of
the inclusions is transfer in contemplation of death. And in
contemplation of death does not really mean that the
transfer must be one where the thought of dying is the
motive, it’s just one example.
But there are several types of transfer in contemplation
of death like transfer with revertionary interest, transfer
with retention of title and donation mortis causa.
Q: Bakit may ganyang konsepto sa estate taxation?
A: Kasi nga tax evasion yan.
c. TAX EXEMPTION
- Refers to immunity from taxes
KINDS:
1. EXPRESS
- A categorical grant of tax exemption
2. IMPLIED
- A tax exemption based on inference. This is not
applicable under the Philippine setting because
under the Philippine setting, in order for there to be
a grant of tax exemption, the grant should be
categorical in language.
3. CONTRACTUAL
- The tax exemption is provided under a contract
entered into by the Government and the taxpayer.
If we talk about the non-impairment clause, it would
apply only to contractual tax exemption.
TAX EXEMPTION TAX AMNESTY
Immunity from taxes. The taxpayer had already
The taxpayer did not incur incurred a liability but the
any liability yet Government will condone a
certain portion of the
liability.
d. TAX ASSUMPTION
- This is a situation where the Government would
shoulder the tax liabilities of another entity.
 MITSUBISHI v. CIR
It is a situation where the Republic of the
Philippines and Japan entered into an exchange of notes
which is in the nature of a treaty where the Philippine
government had undertaken to shoulder the liabilities of the
contractors to be hired by the Philippine Government with
respect to the hydro project of the Philippine Government.
The reason why the government undertook this
promise is because the government of Japan will extend a
huge amount of loan in favor of the Philippine government.
The Philippine government complied with the
promise.
The Philippine government, through the
implementing agency Napocor hired Mitsubishi which is a
Japanese contractor because under the exchange of notes,
the Philippine government must hire Japanese contractors;
only that Mitsubishi paid taxes.
Maybe it realized, that it should not have paid the
taxes at all because under the exchange of notes; it shall be
relieved from paying the tax.
So according to them, it is in the nature of a tax
exemption. And being a tax exemption, there should have
been a ratification coming from the Senate.
RULING:
This is not in the nature of a tax exemption because
if we talk about tax exemption, the liability will be relieved
at the outset.
But in this particular case, there still exist a
liability. Only that, it will be assumed by another entity
which is the Philippine government.
Napocor should of course shoulder the liability.
Q: Is Mitsubishi entitled to the refund coming from the BIR?
A: Yes. And then the BIR can just collect from Napocor.
[ JUST READ ABOUT SHIFTING, CAPITALIZATION AND
TRANSFORMATION DAW ] pero eto siya according to
Ignacio Notes:
5. SHIFTING, CAPITALIZATION AND TRANSFORMATION
1. SHIFTING
- What is being shifted to the taxpayer is not the tax
liability, but only the burden of tax. Hence, the
taxpayer remains to be the person directly liable for
the tax obligation.
2. CAPITALIZATION
- Reduction of price of the taxed object to reduce the
amount of the tax.
3. TRANSFORMATION
- The manufacturer or producer upon whom the tax
is imposed increases his process of production, the
additional oncome being used to shoulder the tax
absorbed.
EXAMPLE:
Php 100K is the gross income. The taxpayer is imposed
with Php 12,000 worth of tax. The taxpayer would
increase the production so that the additional income
would compensate the tax absorbed.
6. EQUITABLE RECOUPMENT
Claims for refund barred by prescription can be used to
setoff existing tax liability provided they arose from same
transaction.
Not applicable in Philippines. Once barred- taxpayer
can no longer claim
7. PROHIBITION ON COMPENSATION AND SET
OFF
REMEMBER: not applicable to taxes
a) “Govt and taxpayers are not mutual
creditors and debtors of each other”
b) Source of Obligation is not the same:
Debt – contract
Page 32 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

Tax – law
anytime There is a
 PHILEX CASE
TIME OF period set by
May claim for refund:
APPLICATIO law
Govt- meron kaming sisingilin sayo
Philex- nagfile na ako ng refund, pwede bang N
kwits na lang tayo?

Q: Is that allowed?
A: No. Prohibition of set-off. 9. TAX EXCLUSION
No substantial difference from tax exemption: still
NOTE: immunity from tax
Offset- verb
Set-off- noun Only that, exclusion refers to the list of items in
Section 32 (B) of the NIRC.
 CITY TRUST CASE  EXCLUSIONS FROM GROSS INCOME:
Citytrust filed for refund of tax for taxable year (a) Life Insurance.
1984- grant ng CTA (b) Amount Received by Insured as Return of
Premium.
BIR-appealed: “ba’t mo grinant e may pending yang (c) Gifts, Bequests, and Devises.
assessment for the same taxable year of 1984?” (d) Compensation for Injuries or Sickness.
(e) Income Exempt under Treaty.
Q: Is there effect of the pending assessment? (f) Retirement Benefits, Pensions, Gratuities, etc
(g) Prizes and Awards. - Prizes and awards made
A: Yes, causes doubt as to the validity of the claim. primarily in recognition of religious, charitable,
scientific, educational, artistic, literary, or civic
Q: Anong ginawa ni City trust?
achievement but only if:
A: The lawyer paid the assessment. Then the CTA granted (i) The recipient was selected without any
the refund. action on his part to enter the contest or
proceeding; and
Q: Anong ginawa ng BIR? (ii) The recipient is not required to render
substantial future services as a condition to
A: Nag-issue ng bagong assessment for the taxable year receiving the prize or award.
1985 (h) Prizes and Awards in sports Competition. - All
prizes and awards granted to athletes in local and
RULING: Cannot be. Dapat same taxable year lang. the new international sports competitions and tournaments
assessment does not affect the claim for refund for the year whether held in the Philippines or abroad and
1984. sanctioned by their national sports associations.
(i) 13th Month Pay and Other Benefits. -
Q: Inargue ba na set-off na lang? (j) GSIS, SSS, Medicare and Other
A: No, kasi ‘di pwede. Compensation and set off not allowed. Contributions.
(k) Gains from the Sale of Bonds, Debentures or
8. COMPROMISE AND AMNESTY other Certificate of Indebtedness. - Gains
Both involve reduction of tax liability realized from the same or exchange or retirement of
Difference: basis for application bonds, debentures or other certificate of
COMPROMIS AMNEST indebtedness with a maturity of more than five (5)
E Y years.
(l) Gains from Redemption of Shares in Mutual
Fund.
a. financial depends on
inablitiy to condition set 10. JUDICIAL NON-INTERFERENCE
pay, and forth by the The judiciary cannot inquire into the wisdom or
tax amnesty expediency of the acts of the executive or the legislative
GROUND department, for each department is supreme and
law
independent of the others, and each is devoid of
b. doubtlful authority not only to encroach upon the powers or field
validity of of action assigned to any of the other department, but
assessment also to inquire into or pass upon the advisability or

Page 33 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
wisdom of the acts performed, measures taken or
decisions made by the other departments.
11. TAXPAYERS SUIT
ELEMENTS:
a. There has to be an illegal disbursement of
public funds; or, public money has been deflected
to any unlawful purpose
b. The person filing the suit is a taxpayer
c. Taxpayer has personal and substantial
interest (has sustain/ will sustain injury)
12. LEGISLATIVE APPROVAL BY REENACTMENT
Where a statute is susceptible of the meaning
placed upon it by a ruling of the government agency
charged with its enforcement and the Legislature
thereafter re-enacts the provisions without substantial
change, such action is to some extent confirmatory that
the ruling carries out the legislative purpose.
INCOME TAXATION
Income is the flow wealth; capital is the wealth
itself.
When we discussed this, we referred to them as
return of capital and return on capital.
If we talk about return of capital, that is not subject
to income tax.
Q: Why is it not subject to income tax?
A: Because we learned in the case of CREBA that income
tax should not be imposed on capital.
Q: What about return on capital?
A: That’s basically the income.
In order for a subject matter to be imposed with
income tax, there are 3 requisites of taxability:
1. EXISTENCE OF GAIN
- There are several tests indicated in the
syllabus:
a. SEVERANCE TEST
- If you can separate items that are
exchangeable in value, then there is an income.
b. TAX BENEFIT RULE
There is a seemingly non-taxable event which shall become
taxable because the taxpayer recognized the expense as an
allowable deduction and the taxpayer obtained a benefit
from the recognition of an expense.
It shall apply not only to Bad Debts Expense but to all types
of expenses.
The typical example would be bad debts expense but you
can apply it to all types of expenses.
e.g BAD DEBTS EXPENSE
Joan borrowed money from ma’am in the amount of
100K. Ma’am is engaged in the lending business.
They bought agreed that Joan will pay it within the
period of 1 year.
1 year had lapsed, and ma’am can’t collect from her.
Then ma’am sent demand letters to her last known address
but she didn’t respond to it.
Later, ma’am realized that it is pointless so ma’am just
recognized the bad debts as an expense.
After ma’am had written off the receivable from her
books and declared it as bad debt expense, Joan went to
ma’am and paid the 100k a year after ma’am recognized it
as an expense.
Q: If we would just take a look at that event, is that a taxable
event? Yung part na nagpautang si ma’am tapos binalik sa
kanya?
A: Pinautang ni ma’am si Joan ng 100k. Nabawasan si
ma’am ng 100k; yumaman si Joan ng 100k. But since it is
a liability, she cannot treat that as an income because there
is a definite and unconditional obligation to return.
On ma’am’s end, nabawasan siya ng 100K.
Binayaran ni Jo pabalik yung inutang.
Q: Is that a taxable amount?
A: No. That’s just a return of capital. And that’s the reason
why it is not a taxable event.
The recovery of expense, as is, is not a taxable event
because it is just a return of capital.
The story would be different if Joan paid interests.
For example, instead na 100k lang ang babayaran niya, ang
binayad niya is 110k.
Yung 100k, return of capital; yung 10, return on
capital na. So yung 100 is not subject to income because it
is a return of capital. Yung 10k is subject to income tax
because it is a return on the capital. And that’s the
severance test.
If you can separate items that are exchangeable in
value, then there is an income.
Q: In that case, can ma’am separate the 100k from the 10k?
A: Yes. And that’s the reason why the 10k is an income.
Q: If that is a non-taxable event, then when can it become
taxable? When can the recovery of that expense become
taxable?
Page 34 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

A: If the taxpayer who recovered the expense recognized Q: So nagbenefit siya?

such as an expense or as an allowable deduction, and then
obtained a benefit therefrom. A: Yes.

Q: What from? Q: Since there is a tax benefit obtained by the taxpayer, if

A: From the recognition of the expense.
Kasi ang tinataxan dun, hindi yung pagbalik niya. Hindi
yung return of capital; ang tinataxan dun yung benefit
derived from the recognition of the expense; that’s why we
call it Tax Benefit Rule.
later on, the debtor of the corporation paid the 100K
(meaning narecover din lang pala niya yung inexpense out
na niya), will the recovery of the bad debt be considered as
an income?
A: Yes. Yung recovery mismo, hindi dapat yan income
because it is just a return of capital.

NET INCOME 300K 0 50K However, by reason of the fact that X Corporation
BEFORE THE recognized such bad debt as an expense, and X Corporation
RECOGNITION obtained a benefit from the recognition of the expense; the
OF THE BAD recovery now of the expense would be subject to tax.
DEBTS
EXPENSE Q: Paano kung hindi niya naman dineduct as an expense
tapos narecover niya, is that considered as an income?
BAD DEBTS 100K 100K 100K
EXPENSE A: No. That’s just a return of capital.
Q: In the second situation, what if the 100k bad debts has
NET INCOME 200K Net loss of Net loss of
been recovered by the corporation; will the recovery of the
AFTER THE 100K 50K
100k be considered a taxable income?
RECOGNITION
OF THE BAD Q: Was the bad debt recognized as an expense?
DEBTS
EXPENSE A: Yes.

EFFECT TAXABLE NOT TAXABLE Q: Did the taxpayer obtained a benefit from the recognition
TAXABLE UP TO 50K of the expense?
A: No.

Q: What are the two elements in order that there will be an
income recognized from the recovery of an expense?
A:
1. The taxpayer should have recognized it as
an allowable deduction.
Q: Did the taxpayer recognized it as an allowable deduction?
A: Yes.
2. The taxpayer should have obtained a
benefit from the recognition of such expense.
Q: What do we mean when we speak of benefit?
A: That would mean that the taxpayer should have at least
reduced his net income in order to pay a lower amount of
tax liability.
Q: Therefore, will the recovery be subject to tax?
A: No. There was no tax benefit.
Q: Even prior to the recognition of the bad debts as expense,
will there be a liability on the part of the corporation?
A: There’s none. Zero na ang net income niya eh.
Q: Under the third situation, if the entire amount of 100k
is recovered, will the amount be considered a taxable
income?
Q: Was the bad debt considered as an expense?
A: Yes.
Q: Did the taxpayer obtained a benefit from the recognition
of the expense?
A: Yes.

Q: Under the first independent situation, did the Q: For the entire amount?
corporation obtained a benefit from the recognition of the
A: No. Only up to 50k.
bad debts expense?
Q: If in case the 100K is recovered, how much is the taxable
A: Yes because instead of paying 30% of 100K, the
income?
corporation will now pay 30% of 200K.(diba ang corporation
30%) A: 50K.

Page 35 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

 PREVIOUS BAR EXAM QUESTION: A: By 50. Kasi ang kailangan niya lang ibit, 250 kasi pag
250 na siya exempt na.
Dona Avelina paid local business tax. And then later,
Dona Avelina realized that she should not have paid local Q: So pag narecover yung 100, magkano yung taxable
business tax. Hence she filed a claim for refund of the local income?
business tax. And she was successful in claiming refund.
A: 50. Hindi buong 100.
Q: Will the refund of the local business tax be subject to
income tax? That’s the difference if the taxpayer is a corporation
and the taxpayer is an individual.
Q: Pwede bang expense ang local business tax?
Kasi kapag individual, ang binibit mo lang na
A: Yes. amount para maging exempt 250. Sa corporation ang binibit
mo na amount zero.
 LIST OF DEDUCTIBLE TAXES:
c. ECONOMIC BENEFIT RULE
CAM IMPORT LOCAL DOPE
d. CLAIM OF RIGHT DOCTRINE
1. Community Tax It talks about the existence of a claim of right in the
2. Automobile Registration Fees absence of a definite unconditional obligation to return.
3. Municipal Tax
4. Import Duties Because if there is an existence of a claim of right,
5. Local Business Tax and an absence of a definite unconditional obligation to
6. Documentary Stamp Tax return, then there is income.
7. Occupational Tax e.g Professional Tax
8. Percentage Tax  SITUATIONS:
9. Excise Tax I. Joan will borrow money from ma’am in the
amount of 100k. Ma’am gave Joan 100k.
Q: Is it possible for Dona Avelina to deduct local business
taxes from her net income in the business? Q: Is Joan 100k richer?

A: Yes. A: Yes.

Q: And if she did, will the refund thereof be subject to tax? Q: Will it be considered an income?

A: Yes, if she obtained a benefit from the recognition of the
local business tax as expense.
If it refers to a recovery of an expense, we do not
stop our analysis with it is a plain recovery of an expense,
then it is just return of capital.
Q: What if the taxpayer is an individual taxpayer? Will the
recovery of the 100k pesos as bad debt be subject to tax
(referring to the first situation)?
Q: How much is the tax-exempt income, under the T.R.A.I.N
Law?
A: 250
Q: How much is the net income before the recognition of the
expense?
A: 300K
Q: So exempt ba siya nung wala pang bad debts?
A: Hindi siya exempt kung wala pang bad debts expense.
Q: So nagbenefit ba siya jan sa bad debts?
A: Yes.
Q: By how much?
Q: Is there an existence of a claim of right over the 100k on
the part of Joan?
A: Yes.
Q: Is there an absence of a definite unconditional obligation
to return?
A: None because there is an existence of a definite
unconditional obligation to return. Both of them agreed that
Joan will return it to Ma’am after a certain period.
Hence, if she is richer by a 100k but she is likewise
liable to ma’am of a 100k; that will just set off.
And that’s the reason why that amount will not be
considered an income on the part of Joan because it failed
to pass claim of right doctrine.
II. Ma’am left 100k and Joan took it without
Ma’am’s permission. And then ma’am didn’t
realized that she took it kasi nga madami naman
daw pera si madam hehe
Q: Will that be considered an income on the part of Joan?
Is there existence of a claim of right?
A: Yes. She can claim that it hers.
Q: Is there an absence of a definite unconditional obligation
to return?
Page 36 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yes. They didn’t agree that Joan will return it to Ma’am.
Q: Paano kung kinasuhan, eh diba ibabalik din naman?
A: Yes.
Q: Pero definite unconditional obligation to return ba yan?
A: No. That’s not even definite.
Q: Will that be considered an income on the part of Joan?
A: Yes.
And then, you interrelate it with income from
whatever source principle that notwithstanding the fact that
the income has been sourced from an illegal activity, then
such amount will still be considered an income.
 CIR v. JAVIER
Javier regularly receives a certain amount of money
from his relative abroad.
He receives 100 US Dollars. Then, there was this
one time that instead of receiving a 100 US Dollars, Javier
receives 1000.
Then he claimed it. Nobody claimed the 1k. The
bank didn’t even debited back the 1k US Dollars.
What Javier did was he declared in his return as a
footnote that he received 1k US Dollars from an unknown
person and he does not know what to do with it or deal with
it, but he did not include as part of his gross income.
Nakalagay lang siya na footnote. Pag nakalagay
lang siya na footnote, ibig sabihin, hindi siya matataxan.
Parang nireport lang niya na nakatanggap siya ng
1k.
Q: Is that subject to tax?
Q: Is there an existence of the claim of right over the 1k?
A: Yes.
Q: Is there an absence of a definite unconditional obligation
to return?
A: Yes.
Q: Is that an income?
A: Yes. And that’s the reason why the SC held that that is
taxable. It’s part of its gross income because it had claimed
a right over it. Hence it is subjected to tax.
In Tax 2, the next issue was would it be subject to
50% fraud penalty or would it be subject to ordinary rate of
25%.
25 sabi ng SC kasi in good faith siya. Linagay niya
as a footnote. If he really intended to resort to fraudulent
means, he should not have declared it as a footnote.
e. INCOME FROM WHATEVER SOURCE
Income, no matter where earned, whether legal or
illegal activity, shall be subject to tax.
This concept can be seen under Sec. 32 a of the Tax
Code.
If we will take a look at Sec. 32 a of the Tax Code,
gross income has been defined as all income from whatever
source.
And then, the Congress had enlisted or enumerated
the items that shall be included as part of the gross income.
- We remove All-events test. It should not be
here daw but it can be used as a test of income and
test for liabilities.
2. REALIZATION OF GAIN
Three concepts:
A. ACTUAL REALIZATION OF GAIN
This is one where the income or earnings are
already possessed by the taxpayer.
e.g Salary
B. CONSTRUCTIVE REALIZATION OF GAIN
This is a situation where the right of the taxpayer
over the earnings had already accrued but the taxpayer does
not at yet possessed earnings.
e.g Dividend Income
In Dividend Income, there are two important dates
which are date of declaration and date of distribution.
And we know that it might happen that the date of
declaration might be in the year 2019 and the date of
distribution would be in the year 2020.
Q: When would the income be reflected for tax purposes or
when would the tax be paid for tax purposes? Will we
consider the income as having been accrued in the year
2019 or in the year 2020?
A: 2019 because the taxpayer had already acquired a right
over the dividends at the date of declaration. So,
notwithstanding the fact that the dividend income has not
yet been distributed to the stockholder, there will still be an
income to be reported and a tax to be imposed on such
income notwithstanding the fact that it will be distributed
in 2020.
We call this as constructive realization of gain.
 THE CONCEPTS UNDER GPP AND
BUSINESS PARTNERSHIPS.
Q: Is a GPP an income taxpayer?
Page 37 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: No. It is a pass-through entity. And being a pass-through
entity, we know that it is not an income taxpayer. And that
is also the reason why it is not subject to income tax.
Q: Who are the taxpayers?
A: The partners themselves.
Q: How do we consider a business partnership?
A: Corporate taxpayer
Q: Being a corporate taxpayer, will it be subject to tax?
A: Yes.
Q: Being a corporate taxpayer, will it have its own
personality from the partners?
A: Yes.
So, basically, the business partnership will be taxed
differently from the partners.
If we talk about a general professional partnership,
the income of the partners shall be categorized as income
from business trade and profession.
If we talk about the income earned by a partner of
a business partnership, it is considered as passive income
because it will be considered as a dividend income.
Q: Why?
A: Kasi nga yung business partnership is akin to a
corporation for tax purposes.
So, the tax implication will likewise vary.
Q: Pag income yan from business trade or profession, ano
ang tax implication?
A: Normal tax.
Q: Pag dividend income yan, ano ang tax implication?
A: Final withholding tax.
If it is a general professional partnership, the
partnership will not be subject to income tax but the
partners will be subject to normal tax because their income
shall be classified as income from business, trade or
profession.
If we talk about a business partnership, the
business partnership shall be subject to corporate income
tax and the share of the partners in the partnership shall be
treated as a dividend income subject to final withholding
tax.
 SITUATIONS:
I. The partnership earned 2M net
distributable income. The partners decided to
leave the 1M with them and distribute 500K
each.
Q: How much is the income to be declared by the partners?
Each?
A: 1M
Q: Why?
A: Because in cases of GPPs, the type of realization of
income is constructive. Kasi nga, parang hindi naman
talaga nageexist yung GPP.
Q: So sino talaga ang kumita ng 2M?
A: Yung partners kaya merong constructive realization of
gain.
II. The business partnership decided not to
distribute the entire amount. But each of them
will just receive 500k.
Q: How much of the income shall be declared by each
partner?
A: If the entire amount has been earmarked for distribution,
then each of them will reflect 1M because in cases of
business partnership, the partners are likewise bound by
actual and constructive realization of gain. So,
notwithstanding the fact that they had only received 500k,
if the entire 2M has been earmarked for distribution; then
each of them shall reflect a million.
But, if not the entire amount has been earmarked for
distribution, let’s say that only a million was earmarked for
distribution and the 1M shall allotted for the next operations
of the corporation.
Q: How much of the income shall be reflected?
A: 500K each.
BOTTOMLINE:
With respect to the type of realization of gain, you apply both
actual and constructive realization of gain with respect to
both GPP and BP.
 GENERAL PROFESSIONAL PARTNERSHIP
1) For deductions, if the partnership claimed
itemized deduction; can the partners claim optional
standard deduction?
A: No kasi ang GPP, hindi talaga nag eexist. Hindi siya
income taxpayer.
Q: Sino talaga si GPP?
A: Yung partners.
Q: So pag ang pinili ng partnership ay itemized deduction,
sino talaga ang pumili ng itemized deduction?
A: Yung partners kasi nga pass-through entity lang yung
GPP eh.
Page 38 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Can the taxpayer change its option with respect to the
type of deduction?
A: No. If a taxpayer had already chosen a type of deduction,
either itemized or optional, such option is considered
irrevocable for that taxable period.
Q: So pag pumili na ang GPP ng itemized, pwede bang
gamitin naman ng partner ang optional?
A: Hindi pwede kasi sila rin yun eh. That’s why it is not
allowed.
2) If the partnership claimed optional
standard deduction; can the partners claim
optional standard deduction?
A: No. Kasi dodoble ka.
Q: Sino ang nagdeduct nung 40% sa partnership?
A: Sila rin yun eh. Tapos pag sila na ang magkanya-kanya,
magdeduct ulit siya ng 40 so hindi pwede.
3) If the partnership claimed optional
standard deduction; can the partners claim
itemized deduction?
A: No. Kasi it’s technically changing again the option, so it’s
not allowed.
4) If the partnership claimed itemized
deduction; can the partners claim itemized
deduction?
A: Yes. As long as the deductions being claimed by the
partner were not claimed by the partnership para walang
double deductions.
 BUSINESS PARTNERSHIP
1. For deductions, if the partnership claimed
itemized deduction; can the partners claim optional
standard deduction?
Q: Magkaiba ba sila?
A: Yes. So technically, iba yung naga-itemized tapos iba rin
ngayon si partners kasi separate personalities.
Q: So can this be done?
A: Yes. But the optional standard deduction should not be
deducted from the dividend income.
Q: Why?
A: Because the 10% final withholding tax is based on the
gross, not the net. So yung OSD niya ideduct niya sa ibang
business income niya except the dividend income because
the tax implication of dividend income is equivalent to 10%
of the entire amount of dividend income.
Q: Pwede ba tayong magbawas ng expense on withholding
tax?
A: NO. Pag withholding tax, ang basis niya lagi, gross.
2. If the partnership claimed optional
standard deduction; can the partners claim
optional standard deduction?
A: Yes. It can be but only with respect to the other business
income of the taxpayer.
Q: With respect to the dividend income, can that be done?
A: No.
Q: Why?
A: Because dividend income shall be taxed based on the
gross amount.
So if ma’am earned 100k dividend income, then the tax
implication is 10% of 100k.
Q: Can she deduct optional standard deduction equivalent
to 40%?
A: No because if we talk about final withholding tax, that
will always be based on the gross amount.
3. If the partnership claimed optional
standard deduction; can the partners claim
itemized deduction?
A: Yes. The same conclusion. Pwede pero sa ibang types of
income niya, but not with respect to the dividend income.
4. If the partnership claimed itemized
deduction; can the partners claim itemized
deduction?
A: Yes. The same conclusion. Pwede pero sa ibang types of
income niya, but not with respect to the dividend income.
C. PRESUMPTIVE REALIZATION OF GAIN
- One where the gain is dictated by law.
e.g 6% Capital Gains Tax.
This is because this is based on the gross selling price
or the market value in accordance with Sec. 60 whichever is
higher.
And market value under Sec. 60 has been defined as the
higher value between the value prescribed by the
Commissioner which is also called Zonal Value and the
value prescribed by the City or Provincial Assessor which is
called Assessed Value.
So, notwithstanding the fact that the taxpayer incurred
a loss from the sale of real property classified as capital
asset, it would still be subject to tax because the law already
dictated the amount of gain.
3. THE GAIN MUST NOT BE EXCLUDED BY
LAW
February 11, 2020
Page 39 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
NOTE:
1. Consider first the type of taxpayer
2. Then, check also the situs because under the
present Tax Code, taxpayers who or which are not
resident citizens and domestic corporation shall be
taxed only if the income has been source from
within.
3. Lastly, you need to know the kind of income just for
you to determine the tax rate.
 EXCLUSIONS FROM GROSS INCOME
o SEC. 32 b of the Tax Code
I. PROCEEDS OF LIFE INSURANCE
Under the Tax Code, it explicitly states that the
proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured shall be
excluded from the gross income.
NOTE:
The Tax Code does not refer to premium payments;
rather it refers to the proceeds. So, the exclusion merely
refers to proceeds and not premium payments.
Q: If the employer paid the premium payments for the life
insurance policy of the employee, will the premium
payments paid by the employer be considered as a taxable
income of the employee?
e.g Ang employee ni ma’am ay si Yna. Kinuhanan ni ma’am
si Yna ng life insurance policy. Instead na si Yna ang
magbabayad, si ma’am ang magbabayad ng premium
payments.
A: It depends on who the beneficiary is. Because quite
obviously, if the beneficiary is the heir of Yna or Yna if she
survived the policy, then it will benefit her. And since the
premium payment will benefit her, then the premium
payments paid by ma’am as the employer in favor of the life
insurance policy of the employee Yna; shall be considered a
taxable income on the part of the employee.
It all goes back to the general principle that income
is considered as a flow of wealth.
Q: Can ma’am likewise impose upon her that she will pay
the premium payments as long as ma’am is the beneficiary
of the life insurance policy?
A: Yes. That’s likewise possible.
Q: If the employer is the beneficiary of the life insurance
policy of the employee, will the premium payments paid for
the life insurance policy of the employee be considered a
taxable income on the employee?
A: No because no benefit will redound to her because at the
end of the day if she dies, then the proceeds will not go to
her family; rather it will go to the employer.
Q: Can ma’am treat the premium payments as deductible
expense, meaning as an allowable deduction since she is the
employer and she paid for the insurance payments?
A: It depends because if the life insurance policy will
redound to the benefit of Yna Darla, then the premium
payments that she had paid will be considered as allowable
deductions. But, if ma’am will derive a benefit from the life
insurance policy of the employee where she paid the
premium payments; those premium payments cannot be
treated as allowable deductions under Sec. 36 b of the Tax
Code.
BOTTOMLINE:
Pag taxable income kay employee, deductible
expense kay employer. Pag hindi siya taxable income kay
employee, hindi siya deductible expense kay employer.
Pag nagredound yung benefit kay employee or pag
taxable income kay employee; deductible expense. Pag hindi
taxable income kay employee, ibig sabihin hindi din siya
deductible expense kay employer because under Sec. 36 of
the Tax Code, it is very explicit that all premium payments
paid for the life insurance policy of the employee whose
proceeds shall redound to the benefit of the employer shall
not be considered a deductible expense on the part of the
employer.
 SITUATION
The employee dies.
Q: Ano ang lalabas pagkanamatay?
A: Proceeds.
Q: Under the first situation who will receive the proceeds?
A: The heirs.
Q: Will the proceeds be considered a taxable income on the
part of the heirs?
A: No. Not because there is no flow of wealth because there
is. Do not argue that there is no flow of wealth because there
is. But rather because, notwithstanding the fact that there
is flow of wealth on the part of the heirs, such income will
not be considered as taxable because under Sec.32 b,
proceeds of life insurance are excluded from gross income.
Hence, exempt from tax.
Proceeds of life insurance represents indemnity for
the loss of life of an individual. And that’s the rationale
behind the exclusion of proceeds of life insurance.
Q: Assuming that the beneficiary is the employer, will the
proceeds received by the employer be considered as a
taxable income on the part of the employer?
A: No because the law does not make any qualification. The
law does not state that the proceeds should be received by
the heirs in order for it to be excluded from the gross
income.
Section 32 b mentions that the proceeds can be
paid to the heirs or the beneficiaries.
Q: So, do we call the employer as a beneficiary?
A: Yes.
Q: So if the employer receives the proceeds, will that amount
be still be considered as excluded from the gross income?
A: Definitely.
What is not included in the list of exclusion would
be the interest income from the proceeds or imposed on the
proceeds.
Page 40 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
So if the proceeds will earn an amount of interest
income pegged at the rate of 2%, the amount of interest
income will be subject to income tax, but the proceeds will
be exempt.
NOTE:
So pag sa problem, tignan. Pag nagdagdag ng
interest on the proceeds, yung face value ng proceeds
exempt pero any added value to the proceeds will be
considered as interest income. Hence, it is not covered by
the exclusion.
II. AMOUNT RECEIVED BY THE INSURED AS A
RETURN OF PREMIUM.
Q: Why is this considered as excluded from the gross
income?
A: Even if it is not included under Sec. 32 b, it is still
excluded from the gross income because it just represents
return of capital.
Nagbayad ka ng premium payments mo sa life
insurance policy, binalik sayo yung binayad mo, kaya
return of capital lang yun.
If in the event that Congress remove it from the list,
it will still be excluded from the gross income because
income tax should only be imposed on the amount of
income.
III. GIFTS, BEQUESTS AND DEVICE
 SITUATION:
Ma’am had given an amount of money to Franzel
worth 100k. Sabi ni ma’am, sayo na lang kasi hindi na
kasya sa bulsa ko. Kinuha niya.
Q: Is that considered an income on the part of Franzel?
A: Yes, yumaman siya ng 100k. That’s an income.
Q: Will it be an income subject to income tax?
A: No because that is in the nature of a gift. And under Sec.
32 b of the Tax Code, gift bequests and device are considered
as excluded from the gross income. Hence, exempt from tax.
NOTE:
Exclusions from the gross income can be
considered as an income only that it is not subject to tax
because the law grants an exemption by including it in the
list of exclusions from the gross income.
Q: If the Congress removes this item from exclusions, will
that now be considered as subject to income tax?
A: Yes because there’s a flow of wealth.
Q: What type of tax shall be imposed?
A: Donor’s tax.
Q: Who will pay the donor’s tax?
A: Ma’am as the donor.
NOTE:
It is erroneous for you to explain or argue that it is not
subject to income tax because the transaction is already
subject to donor’s tax. That’s wrong. That’s incongruent
because we are not talking about the same type of tax.
Donor’s tax and income tax can be imposed on the same
transaction because the subject matters are different. That’s
not even double taxation.
The main reason why that amount is exempt from tax
is because the law included it as part of exclusion from gross
income. And that is equally true with respect to inheritance.
Q: Assuming that Mr. A receives an amount of inheritance
from his father, will we consider this inheritance as a flow
of wealth on the part of Mr. A?
A: Yes, ikinayaman niya yun eh.
Q: Will it be subject to income tax?
A: No because of the fact that under Sec. 32 b, bequests and
device which are both in the nature of inheritance, shall be
excluded from the gross income. Hence, exempt from tax.
Q: What if the person had given political contribution to a
political party or political candidate, will we consider that as
a gift?
A: Yes. In the case of CIR v.Abello, the SC held that political
contributions are gift because there is increase of the
recipient and decrease in the patrimony of the transferor
and animus donandi.
However, under the Omnibus Election Code,
political contributions enjoy tax exemption. And in fact, the
tax exemption of political contribution were reiterated under
the T.R.A.I.N Law.
Under the T.R.A.I.N Law, it has already been
explicitly included that political contributions are exempt
from donor’s tax, provided that there is compliance with the
reportorial requirements provided under the Omnibus
Election Code.
Under the same law, the donor’s tax will not be
imposed only if the gifts or political contributions were
utilized. And if the political contributions were not utilized,
then, the amount of contribution shall now be subject to
donor’s tax.
Under the present administrative issuances,
those political contributions to be used as payments to the
suppliers must be subject to 5% or 10% creditable
withholding tax.
If the political candidate or political party did not
withhold the corresponding withholding taxes on the
payments to be made to the suppliers, then those
contributions; shall be deemed as unutilized or parang hindi
nagamit.
At kung parang hindi nagamit, ang effect is that the
political contribution will now be subject to donor’s tax.
 ILLUSTRATION:
Ma’am gave to JP political contributions worth 500k
kasi tatakbo siyang mayor to be used for his tarpaulins and
T-shirts.
So ang mangyayari, gagamitin niya yung buong political
contributions.
When ma’am had given that amount of money to him,
that in itself is considered a political contribution because
Page 41 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
the reason ma’am had given it to him is because he will run
for public office and he is a political candidate, and the
amount shall be used for his campaign.
But that is not sufficient for donor’s tax exemption
purposes because JP needs to file the necessary report to
the COMELEC in order that there is a compliance with the
reportorial requirements provided under the Omnibus
Election Code.
Then, when JP disburses that amount of money for
tarpaulins, t-shirts, etc.; JP is required to withhold taxes
before he pays that amount of money to the suppliers.
Si Leander ang supplier. So, hindi ibabayad lahat ni JP
yung 500 kay Leander. Ang dapat gawin ni JP, magwithhold
siya ng 10% from the 500k. So ang ibibigay lang ni JP kay
Leander ay 90% of the 500k. At si JP, ireremit niya sa BIR
yung 10%.
Q: What is the effect if JP will not withhold the 10%?
A: JP shall be personally liable as a withholding agent, and
resultantly, the amount of political contribution shall be
deemed as unutilized.
If the political contribution shall be deemed as
unutilized, the effect would be the donations will now be
subject to tax.
(guys nung Tax 2, sabi ni ma’am si supplier dapat
magwithhold pero ditey, naiba so di ko sure ano ang true
hehe)
Under the present revenue regulations, unutilized
political contributions shall be subject to income tax.
Ma’am do not agree because of this. Under Abello,
political contributions are considered as gifts. Gifts are
excluded from the gross income.
Q: Assuming that the political contributions are not utilized,
will they remain as gifts?
A: Yes. And that’s the reason why ma’am do not agree with
this revenue regulation because she think this revenue
regulation should be stricken down for being illegal because
it contravenes Sec. 32 b of the Tax Code. But right now, it
has to be valid because it has not yet been revoked and
nullified by any courts.
 PROBLEMS:
1. Noel Santos is a very bright computer science
graduate. He was hired by Hewlett Packard.
To entice him to accept the offer for employment, he
was offered the arrangement that part of his compensation
would be an insurance policy with a face value of 20 M. The
parents of Noel are made the beneficiaries of the insurance
policy.
a. Will the proceeds of the insurance form part of the
income of the parents of Noel and be subject to
income tax?
A: While it is true that there is flow of wealth on the part
of parents of Noel, such amount of income is not
considered as a taxable income because proceeds of life
insurance received by the heirs or beneficiaries shall be
excluded from the gross income.
b. If Noel dies, will the proceeds form part of the gross
estate of Noel?
Q: If we talk about rules on estate taxation for purposes
of determining whether proceeds of life insurance shall
be included as part of the gross estate or not, what’s the
rule again?
NOTE:
Pag proceeds of life insurance for income tax
purposes, ang titignan mo lang, proceeds ba yan or
interest. Kasi, kung proceeds yan, no matter who the
beneficiary is, exclude.
Q: For estate tax purposes, ano ang titignan mo?
A: You have to determine the type of designation of the
beneficiary whether it’s revocable or irrevocable.
Q: If it is irrevocable, will the proceeds of life insurance
form part of the gross estate?
A: No.
Q: What if it is revocable?
A: It depends on whether the right to revoke has been
exercised.
If the right to revoke has been exercised during the
lifetime of the policy, then obviously; that is considered
as a revocable designation. Hence, the amount of life
insurance proceeds shall form part of the gross estate
of the decedent.
If the right to revoke has never been exercised
during the entire life of the policy, then it shall be
converted to an irrevocable designation. If it is now an
irrevocable designation, then the proceeds of life
insurance will no longer form part of the gross estate.
Q: What if the designation is irrevocable but the named
beneficiary is the estate? Will the life insurance
proceeds form part of the gross estate?
A: Yes. Irrevocable nga siya pero estate naman, so
pupunta siya sa gross estate.
Q: In this case, does the problem state whether the
designation is revocable or irrevocable?
A: It does not.
If the problem does not indicate whether the
designation is revocable or irrevocable, how would you
answer the problem?
NOTE:
You make an immediate assumption. Ma’am do not
suggest that we answer it by stating I qualify. It’s really a big
turn off for examiners to see an answer which begins with I
qualify or it depends because it gives the impression that
the student does not know or is not really certain or definite
on his argument. Immediately make a point.
A: On the assumption that the designation is revocable
along with the fact that the right to revoke has not been
exercised during the lifetime of Noel, then the designation of
the beneficiary is now considered as irrevocable. And
Page 42 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
consequently, the proceeds of life insurance will not form
part of the gross estate.
2. Antonia Santos, 30 years old, gainfully employed, is
the sister of Edgardo Santos. She died in an
airplane crash.
Edgardo is a lawyer and he negotiated with the Airline
Company and insurance company, and they were able to
agree total settlement of 10 M.
This is what Antonia would have earned as somebody
who was gainfully employed.
Edgardo was her only heir.
1. Is the 10M subject to estate tax?
Q: What shall form part of the gross estate that is subject to
estate tax?
A: All rights, properties, interest existing at the time of
death.
Q: What do you call that rule again?
A: Date of death valuation rule.
MAIN ANSWER:
No. It is a post-death development. It is well-entrenched
in jurisprudence that post-death development are
immaterial to the valuation of the gross estate.
The 10M arose from a post-death development. Hence,
it will not form part of the gross estate. You can likewise use
date of death valuation rule.
2. Should Edgardo report the 10 M as his income
being Antonia’s only heir?
NOTE:
Pag ang tanong ay report, ibig sabihin ang rinerefer niya
ay taxable income. Wag mong sasabihin na income niya yan
kasi may flow of wealth.
A: No. It is considered as compensation for personal injury.
And that is the reason why, ma’am need to emphasized that
if we talk about compensation for personal injuries or
sickness, it does not merely refer to physical injuries but it
includes all types of injuries including mental anguish,
sleepless nights, loss of earning capacity EXCEPT loss of
profits because if we talk about loss of profits, it is not
considered as covered by the exclusions.
NOTE:
Loss of profits will not form part of the concept of
compensation for injury.
Q: What shall be encompassed under the concept of
compensation for personal injuries or sickness?
A: Amounts received through an accident or life insurance
as compensation for personal injuries or sickness.
NOTE:
It does not refer merely to physical injuries, rather it
refers to personal injury.
Q: So if someone sustained injuries arising from libel, will
the damages from that case be considered as excluded from
the gross income?
A: Yes. It will be covered by the concept of personal injuries.
IV. AMOUNTS OF DAMAGES RECEIVED WHETHER
BY SUIT OR AGREEMENT ON ACCOUNT OF
SUCH INJURY OR SICKNESS.
- The case of Edgardo is the perfect example for this.
When they had entered into an agreement with the
airline company, is it because of the suffering that he
sustained by reason of the death of her sister. And that is
considered as an injury.
Q: Is it considered as in the nature of damage?
A: Yes.
Q: Was it entered into by agreement or by suit?
A: By agreement.
Q: So is it considered as excluded from the gross income?
A: Yes.
 PROBLEM:
Ms. A and her minor children instituted an action for
damages arising from a crime.
The court awarded them with actual, consequential,
moral and exemplary damages.
Separately, Ms. A also instituted a civil case for the
annulment of a sale of real property.
The Court granted the annulment of the sale with
damages and ordered the transfer of the subject property to
A.
All the damages have been granted in favor of Ms. A.
Q: Do you think the damages will be excluded?
Q: Actual damages, would it be considered as excluded from
the gross income?
A: Yes, still compensation for injury plus it’s just a
reimbursement of what you had incurred, so it’s basically a
return of capital.
Q: What about moral and exemplary, excluded?
A: Yes by reason of personal injury.
Q: What about consequential?
A: According to the CIR in this particular ruling BIR Ruling
No. 026-2018; the CIR opined that consequential damage
will not be considered as excluded from the gross income
because it represents loss of profits; rather than loss of
earning. Hence, the CIR opined that it shall be subject to
tax.
V. INCOME EXEMPT UNDER A TREATY
 CBK POWER COMPANY LIMITED v. CIR
It had echoed the case of Deutsche Bank.
The Philippine Constitution provides for adherence
to the general principles of international law as part of the
laws of the land. The time-honoured international principle
of pacta sunt servanda demands the performance in good
faith of treaty obligations on the part of the States that enter
into the agreement.
In this jurisdiction, treaties have the force and effect
of law.
Page 43 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If the CIR issues a ruling or a regulation imposing
additional conditions for the recognition of tax exemption,
such ruling shall be considered as null and void because if
the tax treaty does not impose additional conditions for the
tax exemption, then the Philippine government must respect
that and should not impose additional conditions.
Q: Is the exemption under Sec. 4(3) Articile XIV of the 1987
PC automatic?
A: No kasi nga there has to be a proof that the income or the
asset has been actually directly and exclusively used for
educational purpose.
Q: Pag naprove na, sasabihin ba ng BIR na since ngayon ka
lang nagsubmit ng requirements, yung prior year mo
taxable; pwede ba yun?
A: Hindi because that ruling is not considered a condition
sine quo non for the grant of tax exemption. It is merely a
confirmatory ruling. It confirms that indeed, the revenues
had been used actually, directly and exclusively for
educational purpose. But, it cannot be used as condition for
tax exemption because the condition for tax exemption
merely relates to the usage of the income.
VI. RETIREMENT BENEFIT
 RA 4917
Retirement benefit shall be granted to employees who
had rendered at least 10 years in service, who at the time of
retirement is at least 50 years of age.
But, in order for it to be exempt from tax, the requisites
are:
a. The taxpayer should be at least 50 years of age
b. The taxpayer should have rendered 10 years in
benefit.
c. The benefit should have been availed of once.
It contemplates a situation wherein there is a
reasonable private benefit plan approved by the BIR.
Because if there is no reasonable private benefit plan
approved by the BIR, then the retirement benefit will not be
granted pursuant to R.A 4917 because 4917 deals with
retirement benefits granted pursuant to a reasonable
private benefit plan.
If there’s no reasonable private benefit plan, then the
retirement benefit shall be granted pursuant to R.A 7641.
 RA 7641
It may be granted under a CBA or it may be granted
even without a CBA.
The taxpayer can claim retirement benefits if the
taxpayer is at least 60 years old but not more than 65 and
had rendered at least 5 years in service.
NOTE:
Ang sinasabi ni ma’am GRANT. Mabibigyan ka kung
ikaw ay at least 60, but not more than 65 and you have
rendered at least 5 years; that is if there’s no CBA.
Pag may CBA, it will entirely depend on the provisions
of the CBA kasi pwede siyang below 60 or below 65.
Kanina sabi natin grant, para mabigyan ka, dapat
nakarender ka ng at least 5 years in service. But that does
not mean that such amount is immediately exempt from tax.
In reality, ang ruling ng BIR pagdating sa retirement
benefit pabago-bago. Pero eto daw ang pinili ni ma’am kasi
ito yung pinakafair at most reasonable interpretation and
Atty. Lumbera likewise uses the same interpretation in her
lectures.
Sa ruling na to, ang nangyari, merong individual na
gusto niya maging exempt siya. Yung kumpanya niya na
nagbigay sa kanya ng retirement benefit, walang reasonable
private benefit plan. So ang iapply natin is 7641.
Nagrender siya ng 5 years in service and at least 60
years old siya.
Q: So ibig sabihin nun, pwede na ba siyang magkaroon ng
retirement benefit?
A: Yes. Kasi under 7641, an employee is entitled to
retirement benefit if he is at least 60 but not more than 65
and he had rendered at least 5 years in service.
Q: Exempt na ba siya? Ang claim siyempre ng employee,
exempt siya kasi nagqualify siya sa 7641.
Ang sabi naman ng Regional Director, hindi ka
pwedeng maging exempt kasi wala ka pang 10 years in
service.
Ang explanation ni Commissioner, tama yung
interpretation ng Regional Director kasi sabi niya, unfair
naman na wala lang silang reasonable private benefit plan
eh maeexempt na sila simply because pag nagrender sila ng
5 years in service eh entitled na sila to retirement benefit.
So ibig sabihin, mas hihilingin mo pa pala na
walang reasonable private benefit plan yung employer mo.
Kasi pag meron siyang reasonable private benefit plan, for
the retirement benefits to be exempt, dapat 10 years in
service. At pag wala siyang reasonable private benefit plan,
5 lang ang kailangan mo para maging exempt.
Kaya sabi ng ruling na yun, dapat ang requisites for
tax exemption (HINDI NA LANG TO GRANT!) would be:
If the benefit has been granted under the CBA, the
requirement would be 50-10-once.
If there is no CBA, 60-65-10-once
Q: Eh bat hindi na lang ginawang 50?
A: Kasi under 7641, hindi siya makakatanggap ng
retirement benefit not unless he is at least 60 to 65.
BAR Q:
Meron siyang private benefit plan under a
reasonable private benefit plan approved by the BIR. 50
years of age na siya, naglipat-lipat nga lang siya sa iba’t
ibang corporation. Merong isang umbrella corporation
ABCDE. Dati president siya kay A, tapos linipat siya kay B
as president din, tapos C President din tapos VP. Pero same
umbrella corporation. Nung linilipat siya sa bawat
corporation, it is without loss of security of tenure and
seniority rights.
Page 44 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
After 15 years in service, nagretire siya. And he
receives retrirement benefit plan under the NEERP of the
company which has been approved by the BIR.
Q: 4917 or 7641?
A: 4917 because there is a reasonable private benefit plan.
Q: Is he at least 50 years of age?
A: Yes.
Q: Did he at least rendered 10 years in service?
A: Yes.
Q: Kahit paiba-iba?
A: Yes kasi under the same umbrella corporation naman
siya.
Q: Availed of the benefit only once?
A: Yes.
Q: So, are the retirement benefit under the NERRP exempt
from tax?
A: Yes.
Pero nagdagdag. Ang sabi dun, on the last day of
his work, they surprised him and made a tarpaulin which
says you will be missed Sir Tony and then they had given
him the car key because the company likewise give him a
car.
Q: What’s the tax implication of the car given to Sir Tony?
Last day niya yun so meron pang employer-employee
relationship.
Q: Will it be considered as part of his benefit as a president?
A: Yes.
Q: So anong tawag mo dun?
A: Fringe Benefit so subject to Fringe Benefit Tax.
Q: Hindi ba siya retirement benefit?
A: No kasi ang retirement benefit dapat granted kasi nga
may NEERP siya eh, eh di dapat nagrant under NEERP. So,
it cannot even be considered as a retirement benefit.
VII. RETIREMENT BENEFITS, SOCIAL SECURITY
BENEFITS AND OTHER BENEFITS RECEIVED BY
RESIDENT OR NON-RESIDENT CITIZENS OF
THE PHILIPPINES OR ALIEN WHO COME TO
RESIDE PERMANENTLY IN THE PHILIPPINES
FROM FOREIGN GOVERNMENT AGENCIES AND
OTHER INSTITUTIONS, PUBLIC OR PRIVATE
 STORY:
One of ma’am’s professional engagements is the
issuance of a legal opinion. Then, the legal opinion that she
typically issue will be submitted either to a foreign
corporation in US, etc. or a foreign authority like IRS or an
investing company in Bermuda.
And when ma’am do issue that certification legal
opinion, typically, they will just rely on it as long as of course
it is well-written; may treaty ka or may law ganern.
Merong isa, matagal na daw siyang nakatira dito sa
Philippines. Actually, nakahanap na daw siya ng asawa niya
dito. Foreigner siya.
Nung bata bata siya, nagtratrabaho siya sa University
of Chicago as a janitor. Ang retirement benefit pala nila sa
US, ang laki. So, may pension siya na natatanggap every
month aside from the lump sum amount that he had
received upon retirement.
So, nung nandito na siya Philippines, narereceive niya
pa rin yung pension na yun from University of Chicago.
Ngayon, yung University of Chicago, nagrequest sila
kung pwede ba siyang humingi ng legal opinion from any
tax consultant in the Philippines so that they know whether
the foreigner is really relieved from their responsibility to the
Philippine government.
Q: Taxable ba yun dito sa Philippines or not?
Kasi ang notion ng University of Chicago, since nandito na
siya, tapos winawire na yung money dito, dapat taxan daw
ng Philippine government.
A: Not taxable because the amount received by him is in the
nature of a retirement gratuity. He is a resident alien. He is
residing permanently in the Philippines. But, the retirement
benefit or the retirement gratuity is from an institution
outside the country; it is from a foreign institution whether
public or private.
University of Chicago falls within the definition of
foreign institution, a private institution at that.
And that’s the reason why that amount will not be
subject to tax.
Under the Republic of the Philippines and US Tax
treaty, it is very explicit that those types of benefits being
received by individuals of the other State particularly the US
or the Philippine government if we talk about Filipino
citizens in the US, shall likewise be exempt from tax on
either of the contracting party.
VIII. ALL BENEFITS RECEIVED FROM OR ENJOYED
UNDER SSS AND GSIS
e.g Maternity Leave Benefit, Paternity Leave Benefit
IX. SEPARATION PAY
This refers to the termination of the employer-employee
relationship by reason of just or authorized causes.
You need to take a look at the reason of the termination
of the employer-employee relationship.
If the reason for the termination is retirement, then it
will be considered as a retirement pay.
If the reason for the separation is either just or
authorized cause, then it will be categorized as separation
pay.
Q: Why do we need to know the nature of the pay?
A: Because there are different rules when it comes to the
taxability or tax exemption of retirement pay or retirement
benefit and there is likewise another rule with respect to the
taxability or tax exemption of separation pay.
Q: What is the rule if we talk about taxability or tax
exemption of separation pay?
A: We just take a look of whether or not the cause of
separation is beyond the control of the employee.
Page 45 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Because if the cause of separation is beyond the
control of the employee, then obviously, the separation pay
shall be exempt from tax.
Under the Labor Code of the Philippines, separation
pay is mandatory when the cause of separation is
authorized cause.
Q: Can the employer still grant separation pay
notwithstanding the fact that the cause of separation is a
just cause?
A: Yes. It’s possible.
Q: If the employee resigns, and get separation pay, will the
separation pay be considered as taxable or not taxable?
A: Taxable because the cause of separation is within the
control of the employee, and that is, the employee resigned.
So, any amount of separation pay received by the employee
will be considered as taxable.
Q: What if the cause of separation is automation? Will the
separation pay be considered as taxable or not taxable?
A: Not taxable because automation is considered as an
authorized cause.
Q: What if the cause of separation is gross negligence? Just
cause yan. Will the separation pay be considered as taxable
or not taxable? Is it a cause beyond the control of the
employee?
A: Taxable
Q: What if the cause of separation is a just cause, will that
be considered as a cause within the control of the employee?
A: Yes. It is within the control of the employee. Therefore,
any separation pay given to the employee who had been
dismissed on the ground of just cause shall still be subject
to tax.
 BAR Q:
Meron daw naretrench, mga 60 employees. Yung 60
employees daw na yun, nakatanggap lahat ng separation
pay.
Kalahati daw nun, nanotify within 30 days prior to the
effectivity of the retrenchment. Yung remaining 30, hindi
nanotify.
So, nagcomplain. Nagrant naman lahat ng separation
pay nila. Pero yung remaining 30, nabigyan din ng damages.
Q: Will the amount received by the employees be subject to
tax?
NOTE: The problem deals with two aspects, yung
separation pay and then yung damage. Wag daw
excited maxado. Wag daw yung separation pay lang
ang sagutin hehe.
Q: Will the separation pay be subject to tax?
A: No because the cause is beyond the control of the
employee. Therefore, the separation pay shall be excluded
from the gross income.
Q: What about the amount of damages received by the
employees who had not been notified?
A: Excluded because it is a compensation for personal
injuries.
That amount of damages is in the nature of nominal
damages. And nominal damages shall be covered by the
compensation for personal injuries which under Sec. 32 b
is still excluded from the gross income.
X. INCOME DERIVED BY FOREIGN GOVERNMENT
This provision under Sec. 32 b of the Tax Code is
premised on the Inherent Limitation which is International
Comity.
Sec. 32 b extended the concept of exemption in favor of
financing institutions and owned, controlled, or enjoying
their financing from the foreign government or international
or regional financial institutions established by foreign
governments.
If we talk about financing institutions, it is not
important that such financing institution is being owned or
controlled by the foreign government. It is sufficient that
such financing institution had been established by the
foreign government.
XI. INCOME DERIVED BY THE GOVERNMENT OR
ITS POLITICAL SUBDIVISIONS
NOTE:
Not all income derived by the government or its political
subdivisions shall be exempt from tax under Sec. 32 b.
If the income was derived from any public utility, it shall
be covered by the tax exemption.
If the income was derived from the exercise of any
essential governmental function, then it will be considered
as excluded from the gross income.
Q: What if the income was derived by the Republic of the
Philippines from a patrimonial property of the Republic of
the Philippines, will the income be exempt from tax?
A: Yes.
Q: Why? Eh sabi jan, dapat public utility. Eh yung income,
hindi naman from a public utility.
A: Yes pero meron kang inherent limitation which is tax
exemption of the Government, and that Government refers
to the Republic of the Philippines.
So, pag Republic of the Philippines pala, kahit saan
pa kinuha yang income na yan, exempt under that inherent
limitation.
 SITUATION:
Let’s talk about a brgy. Kasi merong problema ang isang
LGU (Baguio)
Sabi, bakit daw ganun, tinataxan daw sila ng BIR.
Q: Exempt daw ba ang local government of Baguio sa
income tax?
Q: Yung tax exemption ba na inherent limitation will extend
to the City of Baguion?
A: No. Ma’am highly emphasized that the inherent limitation
pertains only to the Republic of the Philippines.
Page 46 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
And hence, you have to limit the tax exemption of
political subdivisions and instrumentalities within the
ambit of the law granting the exemption.
And under Sec. 32 b, it will only be exempt from tax
if the income of these political subdivisions has been derived
from any public utility or has been derived from the exercise
of any essential governmental function.
Q: If the income has been derived outside of the purview of
this exemption, will the income be subject to tax?
A: Yes because the political subdivision does not enjoy the
inherent limitation on tax exemption.
Q: Eh bakit ganun, for the longest time, hindi naman
naniningil dati ang BIR?
A: Yes. It will not excuse the imposition of the tax.
XII. PRIZES AND AWARDS
Pag price siya, general rule taxable.
Pag winning, general rule taxable.
Q: What’s the tax implication of winning?
A: 20% final withholding tax
Q: Prizes?
A: It depends on the amount.
If the amount is 10k or less, the prize shall be
subject to normal tax.
If the prize is more than 10k, it shall be subject to
20% final withholding tax.
If we talk about winnings, regardless of the amount,
the entire amount of winning shall be subject to 20% final
withholding tax.
If we talk about the prize or a prize, the tax
implication will entirely depend on the amount of the prize.
Q: Ano ang isasubject sa final withholding tax, yung excess
lang nung 10k?
A: Hindi. Yung buo. So, kung ang prize niya ay 20K, yung
buong 20k ang subject to 20% final withholding tax.
 ILLUSTRATION:
Ma’am joined a singing contest. She won. She won
10k.
Q: What is the tax implication of the 10k that she had won
from the singing contest?
Pag winning, by chance, walang effort. Pag prize,
may effort.
A: Prize yan, so it will be subject to normal tax.
Under the T.R.A.I.N Law, there is another concept
for winning. Kasi nga, ang winning ay by chance.
Under R.A 8424, all winnings from PCSO and Lotto
shall be exempt. Under the T.R.A.I.N Law, that has been
changed.
Because under the T.R.A.I.N Law, PCSO and Lotto
winnings will only be exempt if the amount is 10k or less.
So, tigtignan daw natin. Pag prize, 10k din yung
threshold amount. Pero ang prize 10k or less, subject to
normal tax. Pag winning from PCSO or Lotto, 10k or less
exempt. Wag imix up.
Q: If the amount of winning from Lotto is 20k, will the 10k
be exempt and the excess shall be subject to 20% final
withholding tax?
A: No. the entire amount shall be subject to 20% final
withholding tax.
Q: Are there exempt prizes? Kasi obviously, if we would take
a look at the rule, pag 10k or less subject to normal tax, pag
more than 10k, the entire amount is subject to 20% final
withholding tax.
Q: So, is there a possibility that prizes might as well enjoy
tax exemption?
A: Yes.
1. PRIZES AND AWARDS RECEIVED IN
RECOGNITION OF RELIGIOUS, EDUCATIONAL,
CHARITABLE, LITERARY, ARTISTIC, CIVIC AND
SCIENTIFIC ACHIEVEMENTS
In order for these types of awards to be excluded from
the gross income, hence exempt from tax; it is necessary
that the recipient was selected without any action on his
part to enter the contest or proceeding and that the recipient
is not required to render future substantial services as a
condition to receiving the prize or award.
 SITUATION:
Ma’am joined the Miss Universe and she won. And so,
she received a crown.
Q: Will we consider this prize as exempt from tax? Pwede
bang sabihin ni Pia na required siya to render future
substantial service kasi pag naging Ms. U na siya, kailangan
niyang magcharitable works for an organization.
A: No. It is not covered within RECLACS. The recipient was
selected with action on her part. She joined that, she
auditioned for that. Hence it is not considered as falling with
the purview of the exemption.
 BEST EXAMPLE:
Efren Penaflorida is CNN hero of the year.
Q: Paano siya nakuha sa CNN?
A: Nanominate siya. Hindi siya nagsubmit ng application
niya, ninominate siya.
Then, nung nanalo siya, wala na siyang gagawin,
pwede na siya ulit mag-ikot dun sa kariton niya na may mga
libro.
Q: Will the amount received by Efren Penaflorida be
considered as exempt from tax?
Q: Is it considered as given in recognition of any of the
purposes mentioned under the law?
A: Yes. It’s a civic achievement.
Q: Was he selected without any action on his part?
A: Yes
Q: Is he required to render future substantial services?
Page 47 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: No.
Q: Therefore, will the prize be considered as excluded from
the gross income, hence exempt from tax?
A: Yes.
So, kung nanalo ka na Nanay of the Year awardee,
tapos may konti naman na cash prize such as 10k. Pag 10k
ang prize mo, normal tax sana yun.
Q: Pero pag ganun ang prize mo, na you are nominated. And
then you won and you are not required to render future
substantial services and it’s by reason of a civic
achievement, will it be considered as exluded from gross
income, hence exempt from tax?
A: Yes.
2. PRIZES AND AWARDS GIVEN OR GRANTED TO
ATHLETES IN LOCAL AND INTERNATIONAL
SPORTS COMPETITIONS AND TOURNAMENTS
WHETHER HELD IN THE PHILIPPINES OR
ABROAD AND SANCTIONED BY THE NATIONAL
SPORTS ASSOCIATION
2 REQUISITES:
a. The prize should have been given in favor of an
athlete in a sport competition
b. The sports competition should have been
sanctioned by the National Sports Association.
Under the law and existing ruling, national sports
association would refer only to Philippine Olympics
Committee.
Q: So, if we talk about the prize earned by Carlos Yulo,
will it be exempt from tax?
A: Yes only if that prize had been granted in a sports
competition sanctioned by Philippine Olympics
Committee. Outside that, it will not be covered by the
tax exemption.
 PROBLEM:
Mr. A, citizen and resident of the Philippines, is a
professional boxer.
In a professional boxing match held in 2013, he won
prize money in US Dollars equivalent to 3M.
a. Is the prize money paid to and received by Mr. A in
the US taxable in the Philippines? Why?
A: He’s a resident citizen so regardless of the source of the
income, it will be subject to tax.
The tax implication would be normal tax.
Q: Why?
A: He won the boxing match outside the Philippines. So, the
payor is located outside the Philippines.
If the Philippine government will impose a tax on
this income earned outside the Philippines, that’s possible
but not to withholding tax.
Q: Why not?
A: Because if it will be subject to final withholding tax, then
the Philippine government will dictate on an entity located
outside its jurisdiction as a withholding agent.
And that cannot happen. It will violate the principle
of territoriality and it will likewise violate the principle of
International Comity.
And that’s the plain logic behind the reality that the
income of Manny Pacquiao from his boxing bound at Las
Vegas is not subject to final withholding tax in the
Philippines, but it will rather be subject to income tax.
So Manny Pacquiao is mandated to reflect it in his
annual income tax return and subject it to normal tax.
b. May Mr. A’s prize money qualify as an exclusion
from his gross income?
A: No. The sports competition is not sanctioned by the
Philippine Olympics Committee. Hence, it is subject to tax.
Under Sec. 32 b of the Tax Code, prizes given to
athletes in a sports competition sanctioned by the Philippine
Olympics Committee shall be excluded from the gross
income.
In this particular case, the sports competition is not
sanctioned by the Philippine Olympics Committee.
Hence, the amount of prize received by Mr. A falls
beyond the ambit of the tax exemption.
c. The Us already imposed and withheld income taxes
from Mr. A’s prize money. How may Mr. A use or
apply the income taxes he paid on his prize money
to the US when he computes his income tax liability
in the Philippines for 2013?
Q: How do we apply foreign income tax payments under Sec.
34 of the Tax Code? Do we automatically consider it as a
Tax Credit?
A: No
Q: Why not?
Yung binayaran sa ibang bansa. Halimbawa, si
Manny, nagbayad na siya sa US.
Q: Will the foreign tax payments made to the US government
be considered as a tax credit in the Philippines?
A: It depends on the option.
If the taxpayer files his return, he should pick the
box that he’s availing of the foreign tax payments as tax
credit.
If the taxpayer failed to indicate his option to avail
of the foreign tax payments as tax credits, the foreign tax
payments shall be treated as tax deductions.
So, foreign tax payments for income tax purposes
shall not be immediately considered as tax credits.
MAIN ANSWER:
Mr. A can use the foreign income tax payments to
the US Government as tax deductions or tax credits.
If he indicates in his return his intention to avail of
it as a tax credit, then he can apply the foreign tax payment
as tax credit.
Page 48 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If he fails to indicate his option, then, the foreign
tax payment shall be treated as tax deductions.
 CIR v. SC JOHNSON AND SONS
2 METHODS:
a. Exemption Method
b. Credit Method
- That has been detailed under the Tax Code.
Q: What’s the detail?
A: We cannot immediately use it as a tax credit; rather, it
can either be a tax credit or a tax deduction depending on
how the taxpayer had indicated his option in the income tax
return.
XIII. 13TH MONTH PAY AND OTHER BENEFITS
The exempt amount is 90K.
13th month pay and other benefits in an amount not
exceeding 90k shall be excluded from the gross income,
hence, exempt from tax.
Q: If the 13th month pay and other benefits amounted to
100k, will the entire amount of 100k be subject to tax?
A: No. 90k will be exempt from tax; 10k shall be taxable.
Q: Paano malalaman kung other benefits yan?
A: All supplements to the salary shall be considered as other
benefits.
 DE MINIMIS BENEFITS
is a benefit of small value which is intended to promote good
will, good health and contentment.
If the amount of de minimis benefits exceeds the
ceiling amount provided under the Revenue Regulations,
then the excess shall be treated as other benefits.
a.
MONETIZED UNUSED VACATION LEAVE
CREDITS
It talks about unused vacation leave lang. Hindi kasama
ang sick leave. At private employees lang yung not exceeding
10 days.
Kasi pag government employees, non-taxable both sick
leave and vacation leave.
NOTE:
This rule on monetized unused vacation leave, refers to
private employees, and there is a maximum amount of 10
days.
If we talk about government employees, it covers both
sick leave and vacation leave. And there is no ceiling
amount.
ILLUSTRATION:
 j. PRODUCTIVITY INCENTIVE BONUSES OR
Si ma’am yung type of employee na absent ng
absent. Sa isang buong taon, may 5 days service incentive
leave as long as the employee rendered service for at least 1
year. So si ma’am nag1 year naman, so may 5 days na
siyang SIL.
Q: Eto ba eh naicoconvert to cash or commutative?
A: Yes.
So ginamit niya yung 3 days. Bayad pa rin siya ng
3 days kasi leave credit niya yan eh.
Q: Yung bayad sa kanya ng 3 araw na ginamit niya yung
leave credit niya, yun na ba yung monetized na binabanggit
dito?
A: Hindi. Kasi dito, dapat unused.
Q: Eh saan mapupunta yung 3 days na ginamit ni ma’am?
A: Sa salary niya.
So, magiging part lang siya ng konsepto ng de
minimis benefit if unused, tapos pinamonetized niya.
So, hindi niya ginamit yung 2 days. At the end of
the year, pinaconvert niya to cash.
Q: Is that considered a de minimis benefit?
A: Yes.
So if it has been used, part yan ng salary; pag
unused at pinamonetized, part ng de minimis benefit.
b. MEDICAL CASH ALLOWANCE TO DEPENDENTS
OF EMPLOYEES NOT EXCEEDING 1500 PER
EMPLOYEE PER SEMESTER.
- This is granted to the dependents.
c. RICE SUBSIDY- 150kg sack of rice per month
worth not more than 2k
d. UNIFORM AND CLOTHING ALLOWANCE NOT
EXCEEDING 6K PER ANNUM
e. ACTUAL MEDICAL ASSISTANCE
- It refers to the medical assistance to the employees.
f. LAUNDRY ALLOWANCE NOT EXCEEDING 300
PER MONTH.
g. EMPLOYEES ACHIEVEMENT AWARDS
NOTE:
In order for it to be considered de minimis benefit,
it must be in the form of intangible personal property other
than a cash or gift certificate. And it must not exceed 10k.
This is the additional highlight under Revenue
Regulation 11-2018 which does not exist under the previous
regulations. It must be under an established written plan.
So hindi pwedeng walang written plan on the grant
of employees achievement awards. Otherwise, it will not be
exempt from tax.
h. GIFTS GIVEN DURING CHRISTMAS AND MAJOR
ANNIVERSARY CELEBRATIONS NOT
EXCEEDING 5K PER EMPLOYEE PER ANNUM.
i. DAILY MEAL ALLOWANCE FOR OVERTIME
WORK AND NIGHT OR GRAVEYARD SHIFT NOT
EXCEEDING 25% OF THE BASIC MINIMUM
WAGE
MONETARY VALUE RECEIVED FROM BOTH THE
CBA OR PRODUCTIVE INCENTIVE SCHEMES,
PROVIDED THAT IT WILL NOT EXCEED MORE
THAN 10K K PER EMPLOYEE PER TAXABLE
YEAR.
NOTE:
Page 49 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Ang importante, ilagay mo yung type of benefit like
uniform allowance, yung ceiling amount na 6k na ngayon,
at kung para saang period siya like per annum or per
month.
Favorite sa Bar Exam is Rice Subsidy
 TIP:
Dun sa mga companies na consultant si ma’am,
usually, inuubos niya yun pag willing yung employee.
Yung iba, gugustuhin nila mas mataas yung salary
bracket nila for loan purposes; pero yung iba mas
gugustuhin nilang mas mataas yung take home pay.
Usually, ang ginagawa daw nila ma’am, instead of
including a salary increase in the plan, ang gagawin na lang
nila, magdagdag ng de minimis benefit.
Kunwari nagsalary increase sila ng 2k, yung 2k na
yun pag more than 20,833 ang monthly pay niya, taxable
nay un kasi more than the exempt amount na siya eh.
Pag linagay nila yan sa de minimis benefit, hindi
mababawasan yung 2k. Take home agad yun.
Usually, minimeeting muna yung mga managers in
order to determine which is more beneficial to the employee.
Q: Is this tax avoidance or tax evasion?
A: Avoidance
 PROBLEMS:
I. Nutrition Chippy Corporation gives all its
employees (rank and file, supervisors and
managers) one sack of rice every month valued
at Php 800 per sack.
During an audit investigation made by the BIR, the
BIR assessed the company for failure to withhold the
corresponding withholding tax on the amount equivalent to
the one sack of rice received by all the employees,
contending that the sack of rice is considered as additional
compensation for the rank and file employees and additional
fringe benefit for the supervisors and managers.
Therefore, the value of the one sack of rice every
month should be considered as part of the compensation of
the rank and file subject to tax.
For the supervisors and managers, the employers
should be the one assessed pursuant to Sec. 33 a of the
NIRC.
Is there a legal basis for the assessment made by
the BIR? Explain your answer.
NOTE:
Ang income na exempt, obviously ay hindi rin
masasubject to withholding tax.
Q: Sino ang inaassess ng BIR?
A: employer
Q: Can the employer be held liable?
A: Yes as a withholding agent.
A withholding agent can be held personally liable
for the taxes that the withholding agent had failed to
withhold.
Q: Withholding agent ba si Nutrition Chippy?
A: Yes.
Q: Can it be held personally liable?
A: Yes kahit pa hindi siya ang income earner kasi nga
withholding agent siya.
So wag mong isasagot na the assessment has no
legal basis because the income earner is the employee, and
not the employer. Kaya nga ang tinanong jan, withholding
tax.
Q: How will you answer this question? Dalawa actually ang
tanong. Ang tanong jan, managerial or supervisory tsaka
rank and file. Tapos ang tanung din jan is hinalo na ang
fringe benefit. How do we summarize the rules?
A: The rule when it comes to benefits would be:
You need to determine the type of benefit. That’s the
first thing that you need to consider for you to consider the
taxability.
If the benefit falls within the concept of 13 th month pay
and other benefits, you need to consider first whether it is a
de minimis benefit or not because if it is a de minimis
benefit, then it will be subject to the exemption or not
taxable.
If it is not considered a de minims benefit, it will fall
within the category of 13th month pay and other benefits.
So, if it is within the 90k threshold, it will be exempt. If
it si more than the 90k threshold, then the excess shall be
taxed as follows:
1. If the employee who received the benefit is a rank
and file employee, then the amount will form part
as an additional compensation income subject to
normal tax.
2. If the employee is managerial or supervisory
employee, then the excess of the 90k shall be
treated as a fringe benefit, subject to 35% fringe
benefit tax.
Q: If it falls within the concept of 13th month pay and other
benefits, what’s the first thing that we need to check?
A: Ichecheck natin kung within ba yan ng de minimis.
Tapos pag within siya ng de minimis, tignan mo
yung amount.
Pag within siya dun sa amount provided under the
revenue regulations, automatically, exempt.
Pag more than siya dun sa amount indicated in the
revenue regulations, halimbawa, ang binigay na rice
subsidy is 5k, yung 2k lang ang de minimis benefit. Yung
2k lang ang exempt. Yung 3k will form part of 13 th month
pay and other benefits.
Q: De minimis benefit ba ang rice subsidy?
A: Yes
Page 50 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: How much?
A: 2000 per month.
Q: Dito magkano?
A: 800 per month.
Q: That being said, will we consider this as a de minimis
benefit?
A: Yes.
Q: Are the rules on de minimis benefit apply to both
managerial and supervisory and rank and file employees?
A: Yes.
Q: Do managerial or supervisory employees enjoy tax
exemption with respect to de minimis benefit?
A: Yes. The law does not make any qualification as to the
type of employee who will enjoy this tax exemption with
respect to de minimis benefit.
Q: Will the 800 php be exempt from tax?
A: It will be exempt from tax because it falls within the
purview of de minimis benefits excluded from the gross
income.
Since it is exempt from tax, then it will not likewise
be subject to withholding tax.
 STORY:
My client daw si ma’am, doctor. Nagdeduct ng
expenses yung dati niyang accountant. So,
namomrobleman ngayon kasi sabi ng BIR, nagdeduct ka ng
salary’s expense pero wala kang withholding tax.
Kung may empleyado ka, dapat nagdeduct ka ng
withholding tax.
Q: Pag hindi ka nagwithhold ng tax doon sa sahod, ano yung
effect?
A: Hindi mo madededuct yun as expense because under
Sec. 34, if the expense is subject to withholding tax, then
the tax should have been withheld.
If the tax has not been withheld, then such expense
shall be disqualified.
Madidisallow yung expense, at kapag nadisallow
yung expense, tataas yung net income niya and tataas din
yung tax niya.
Q: At bukod dun, pwede ba siyang kolektahin ng BIR for the
taxes that she failed to withhold?
A: Yes. So, dalawa ang magiging impact sa kanya,
disallowance of her expense and at the same time, she will
likewise be personally liable as a withholding agent.
Nung nalaman daw yun ni ma’am, tinanong niya si
Doc kung magkano ba ang sahod nung Secretary niya, and
sabi is 10k daw.
Kunwari, ang minimum wage is 6k. Eh di may 4
siya na added.
Q: Pwede bang itreat yun na de minimis benefit?
A: Yes. Irereconstruct niya lang yung payroll. 6k yung
sahod. 1500 at that time yung rice subsidy. And then,
another amount for laundry allowance hanggang mareach
niya yung 4k.
Q: If that is the situation and that is how the payroll looks
like, is she required to withhold taxes?
A: No.
Q: Will she be liable for withholding taxes?
A: No.
Q: Will her salary’s expense be disallowed?
A: No because the expense is not subject to withholding tax.
And that’s the same thing in this particular problem.
Nutrition Chippy Corporation is not personally
liable as a withholding agent because the income earned by
the employees are not subject to tax.
II. Mapagbigay Corporation grants all its
employees 5% discount of the purchase price of
its products.
During an audit investigation the BIR assessed the
company the corresponding tax on the amount equivalent
to the courtesy discount received by all the employees,
contending that the courtesy discount is considered as
additional compensation for rank and file employees and
additional fringe benefit for the supervisors and managers.
In its defense, the company argues that the discount
given to the rank and file employees is a de minimis benefit
and not subject to tax.
As to its managerial employees, it contends that the
discount is nothing more than a privilege and its availment
is restricted.
Q: Is the BIR’s assessment correct?
Q: Sino ang kinokolektahan? Employer or employee?
A: Employee, so do not argue again that the assessment is
wrong because the income earners are the employees kasi
nga yung liability is not based on the fact that the employer
is the income earner, but rather because the employer is the
withholding agent which can be held personally liable for
the taxes that the withholding agent had failed to withhold.
Q: Ano ulit yung first stage of analysis?
A: De minimis ba yan?
NOTE:
The list of de minimis benefit is EXCLUSIVE. Meaning,
if the item is not included in the list provided under Revenue
Regulation 11-2018, it cannot be considered as a de
minimis benefit.
But if we talk about fringe benefits such as
HEVHIMTHEL, that list of fringe benefits is NOT
EXCLUSIVE. Under Sec. 33 of the Tax Code, all other
benefits received by a managerial or a supervisory employee
shall be considered as fringe benefit.
Q: Ano yung pagkakaiba nung fringe benefit na nasa list at
tsaka yung fringe benefit na wala dun sa list?
A: Yung fringe benefit na nasa list ng HEVHIMTHEL,
automatic yan na subject agad sa 35% fringe benefit tax.
Hindi mo na iapply yung 90k parameter.
Page 51 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Pag housing benefit ang binigay ay 300k, magmaminus
ka pa ba ng 90k?
A: No. Yung buong 300k subject to 35% Fringe Benefit Tax.
Pag outside that list, it will form part of the 90k
parameter.
Thus, hindi siya de minimis because it does not fall
within the list.
Q: Eh pano yun, 5% lang naman which is a small amount?
A: Notwithstanding the fact that the benefit is just of small
value, it still not considered as a de minimis benefit.
A: If the 13th month pay and other benefits of both the
managerial or supervisory and rank and file employees do
not exceed 90k during the year, then the amount of courtesy
discounts together with the 13th month pay and other
benefits, shall be exempt from tax.
If the sum of the 13th month pay and other benefits
including the courtesy discount exceeds 90k, then the
excess shall be subject to normal tax for rank and file
employees or fringe benefit tax for managerial employees.
 Under RMC 50-2018
- It is not a law
- It is just a mere interpretation.
Q: What is the treatment for the premium on health card
paid by the employer for the rank and file employees, as well
as their employees holding managerial and supervisory
function?
A: Under this RMC, premium on health card paid by the
employer for all employees, whether rank and file or
managerial, under a group insurance shall be included as
part of other benefits which are subject to 90k threshold.
However, individual premiums, not part of a group
insurance paid for selected employees holding managerial
or supervisory functions are considered as fringe benefit
subject to 35% fringe benefit tax.
Q: Why?
A: Kasi kung babasahin mo si HEVHIMTHEL, yung L hindi
lang yan life. Life and other non-life premiums.
Q: So kasama ba jan ang health premiums?
A: Yes. So, since kasama siya dun sa HEVHIMTHEL, subject
ba siya dun sa 90k threshold?
A: Hindi,io-automatically subject sa 35% fringe benefit tax.
NOTE:
L does not merely refers to life insurance premiums, but
it include non-life insurance premiums paid by the employer
for the employee.
Q: What would be the treatment of additional income as a
result of the benefits provided under the Attrition Law
wherein the employees who are performing well will receive
rewards?
Q: What would the treatment of commission given to an
employee in addition to regular compensation received from
the same employee? Are these benefits considered as part of
the salary or part ot the 13th month pay and other benefits
or fringe benefit?
February 13, 2020
Q: What would be the treatment of additional income as a
result of the benefits provided under the Attrition Law
wherein the employees who are performing well will receive
rewards? Are these benefits considered as part of the salary
or part of the 13th month pay and other benefits or fringe
benefits?
Ma;am Tin: This should fall within the concept of 13th
month pay and other benefits because it is not part of the
basic salary.
So if it forms part of the 13th month pay and other
benefits, then obviously it is not considered a de minimis
benefit.
Q: What’s the rule again?
A: First 90k shall be exempt. Excess shall be subject to
depends whether the employee is rank and file or
managerial.
If the employee is rank and file, then it is considered
as additional compensation income subject to normal tax or
withholding tax.
If we talk about managerial and supervisory
employees, then the excess shall be subject to Fringe Benefit
Tax.
And we had apply that when we were discussing
about the premium payments on health card.
A: (RMC 50-2018): The CIR opined that the benefits or the
awards given under the Attrition Law shall be considered as
additional compensation income that is subject to
withholding tax.
So ibig sabihin, hindi mo na siya sinasubject to the
90k limit. Kasi nga kinoconsider agad siya as part of
additional compensation which would mean that
automatically, it would be subject to withholding tax.
NOTE:
Ma’am do not agree with the opinion of the CIR. But
ma’am is just telling us so that we have a choice whether to
treat is as other benefits or not.
This RMC is merely an interpretation of the CIR on
this matter.
So if we would answer using the opinion of the CIR
with respect to tax treatment of benefits under Attrition
Law, then we might as well put RMC 50-2018.
Because if we can’t remember such, then we might
as well stick with the provision of the law; that is, if we talk
about 13th month pay and other benefits. Quite obviously, if
we talk about these types of rewards, these are not
considered as part of the basic pay which is subject to
withholding tax; rather it would be considered as other
benefits.
It is not equally true when it comes to
Representation and Transportation Allowance (RATA)
because for RATA, there is a revenue regulation dealing with
the tax treatment.
Q: Ano ang pagkakaiba?
Page 52 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Ang RMC is merely interpretative rule. And therefore, it
is just the best guess of the CIR on the matter.
If we talk about a revenue regulation, it is issued by
the Secretary of Finance.
Q: What is the nature again of a Revenue Regulation?
A: It is a subordinate legislation. Hence, it has a binding
effect upon all the courts.
So if we talk about RATA, there is a revenue
regulation dealing with this.
Under the existing revenue regulation, if the RATA
has been granted to government employees, the RATA shall
be exempt from tax.
e.g Prosecutor, PAO lawyer
If we talk about the RATA of private employees,
under the revenue regulations, it will not form part of the
concept of the 13th month pay and other benefits; rather it
shall be treated as additional salary or compensation
income. So it will not be subject to the 90k threshold, it will
be automatically subject to withholding tax.
 STORY
May client si ma’am na call center. Yung mga
managers nila, meron RATA na fixed. Hindi lahat ng
employees nakakatanggap ng ganun. Fixed yun na amount.
So the question was, is there a possibility na hindi
mataxan sa kanila yung RATA.
Sabi ni ma’am pwede.
Pag fixed amount yung ibinibigay buwan-buwan or
for example 10k a month, additional compensation income.
Pero kunwari, ang papalabasin lang ay
nagpapareimburse ng gas. Tapos every month, nag-iipon ng
resibo ng pangkain with a client, ang tawag dun
representation expense. Nag-iipon kayo ng resibo ng
gasoline, papalabasin mo na for a meeting. Those would be
considered as the expense of the employer which the
employee had incurred in the course of the performance of
his functions.
Q: If the employee sought for a reimbursement of an expense
that the employee incurred for the benefit of the employer,
will that be considered as taxable income on the part of the
employee?
A: No because of Employer’s Convenience Rule.
Kaya sabi ni ma’am, kung ayaw mo mataxan, eh di
ang gawin is para ka lang nagpapaliquidate ng gasoline
expense, representation expense. Pero hindi dapat fixed
every month. Dapat bagu-baguhin. Otherwise, pag nakita
ng BIR, makikita nila na you are just trying to get away with
the additional imposition of withholding tax.
e.g Ngayon, nagpaliquidate ka ng 7k. Tapos siyempre kapos
ka ng 3k. Eh di sa next month, magpaliquidate ka ng 13k
para mabuo yung 20k.
BOTTOMLINE:
If we talk about RATA for private employees, the
moment that it becomes fixed in amount, then it will be
considered as additional compensation subject to
withholding tax.
It will not be subject to the 90k threshold.
This RATA will not be subject to tax if it is in the
form of a reimbursement of expense by the employee by
reason of the fact that those expenses had been incurred for
the benefit of the employer. That is well within the ambit of
Employer’s Convenience Rule.
Q: What would be the treatment of commission given to an
employee in addition to regular compensation received from
the same employee?
Q: Will the commission be treated as 13th month pay and
other benefits on the part of the employee, and therefore
subject to the 90k threshold?
A: Ma’am believe so.
But in RMC 50-2018, it has been opined by the
commissioner that the commission granted to employees
will be considered as additional compensation income,
automatically subject to withholding tax.
So regardless of whether the commission is
considered as part of the basic salary or not, the moment
that is being given to the employee, such commission shall
be subject to withholding tax notwithstanding the fact that
it didn’t reach the 90k limit.
Ma’am Tin:
It is subject to the 90k limit. And she will just
defend that it is part of other benefits because it is not
regularly given.
Kasi pano kunwari kung commission lang yun, pag
nakabenta ka lang.
Q: Buwan-buwan mo ba siyang natatanggap?
A: Hindi.
Q: So technically, other benefits ba siya?
A: Yes. That is if you performed well. So para siyang
productivity bonus.
But nevertheless, if we want to use RMC 50-2018,
then we may likewise do so.
XIV. GAINS FROM SALE OF BONDS, DEBENTURES OR
OTHER CERTIFICATE OF INDEBTEDNESS
In review classes, ma’am would typically discuss
this topic along with interest income.
Q: Why?
A: Because of the fact that for interest income and for gains,
the holding period is seemingly the same in order for it to be
exempt but they are really not.
When it comes to gains from sale of bonds,
debentures or other certificate of indebtedness, the gain will
be exempt from tax if the holding period is MORE than 5
years.
If we talk about interest income, the interest income
shall be exempt from tax if the holding period is AT LEAST
5 years.
 INTEREST INCOME
As a GENERAL RULE, it will be subject to 20% Final
Withholding tax.
There are exceptions to this particular rule because
there are instances wherein which the interest income will
be exempt from the 20% FWT and there are also instances
Page 53 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
wherein which, instead of being subjected to 20% FWT, the
taxpayer will be subjected to 15% FWT.
NOTE:
Do not tell ma’am about 7 ½% FWT because that is
already outdated. That is before the effectivity of T.R.A.I.N
Law.
Do not insist on 7 ½ % FWT EXCEPT when we are
speaking of resident foreign corporations and non-resident
foreign corporations.
But for all other types of taxpayers, the 7 ½% FWT
had been increased to 15% FWT.
EXCEPTIONS:
1. THE INTEREST INCOME IS EXEMPT FROM
TAX.
a. IF THE INTEREST INCOME HAS BEEN EARNED
FROM A LONG TERM DEPOSIT.
Q: When will it be exempt from tax?
A: The interest income will be exempt from tax if the interest
income arose from a long-term deposit.
And it is considered a long-term deposit if the
holding period is AT LEAST 5 years.
b. IF THE INTEREST INCOME HAS BEEN EARNED
BY A NON-RESIDENT FROM AN EXPANDED
FOREIGN CURRENCY DEPOSIT UNIT.
Q: What if the interest income arose from an expanded
foreign currency deposit system? What is the tax implication
of the interest income?
A: It depends on whether who the income earner or who the
depositor is (meaning kung sino yung nagdeposito kasi
kung sino yung nagdeposito, siya yung nagpautang)
Q: If the depositor is a resident, what is the tax implication?
A: 15%
Q: What if the depositor is a non-resident citizen who earned
the interest income from an expanded foreign currency
deposit system?
A: Exempt
 ILLUSTRATION: Judge Jen story
Judge Jen is a resident citizen. Judge Jen has a
mother who happens to have a business in Australia.
After nun, nagtanong si Judge Jen kay ma’am kasi
daw yung mommy niya, pag umuuwi, ang ginagawa daw ni
Judge Jen, dinedeposit niya sa dollar account niya. So
technically, hindi niya talaga yun pera. Alam talaga niya na
sa mommy niya yun. Yun lang, sa kanya pinapatago.
That time 7.5 % yung interest. Eh technically
malaki yun kasi dollars yun.
Ang tanong is pano maiiwasan yung imposition ng
7.5% or meron bang pwedeng gawin.
Meron which is dapat ipangalan niya sa nanay niya
kasi nasa batas, if the interest income has been earned from
an expanded foreign currency deposit system such as dollar
account, yen, what have you; and it has been earned by a
non-resident whether an alien or a citizen; the interest
income will be exempt.
Q: Eh yung nanay niya ano?
A: Filipino citizen but residing in Australia.
Q: So ano ang classification ng nanay niya?
A: Non-resident citizen.
Q: So if her mommy will set up a bank account in the
Philippines, a dollar account at that, will that be considered
as expanded foreign currency deposit unit?
A: Yes.
Q: And if her mom who happens to be a non-resident citizen
earns interest income from that unit, will that be exempt
from tax?
A: Yes.
NOTE:
Whether citizen or alien. Basta ang sabi sa batas,
non-resident.
NOTE FURTHER:
These rules shall apply only if the interest income
has been earned from bank deposits and deposit
substitutes. Because the moment that the interest income
has not been earned from a bank deposit or deposit
substitute; then the interest income shall now be subject to
normal tax whether the taxpayer is engaged in business or
not.
Q: So kahit di ka nagpapautang business, at kumita ka ng
interest income from a loan agreement, will that be subject
to normal tax?
A: Yes.
Q: In which case, since we know that this rule shall apply
only to interest income earned from bank deposits and
deposit substitutes, is it important for us to know the
definition or the meaning of bank deposits or deposit
substitutes? Kasi pag bank deposit madali lang eh.
A: Yes because if it qualifies as a deposit substitute, then
obviously, the interest income earned from that unit shall
be subject to 20% FWT. But if the loan agreement or the
borrowing does not fall within the purview of deposit
substitute, then the interest income derived therefrom shall
be subject to normal tax. And that has been extensively
discussed in the case of BDO v. Republic.
 BDO v. REPUBLIC (putting MR)
The SC had echoed the definition of deposit
substitute which is already indicated in the NIRC:
“The term deposit substitutes shall mean an
alternative form of obtaining funds from the public (the term
public means borrowing from 20 or more individual or
corporate lenders at any one time) other than deposits,
through the issuance, endorsement, or acceptance of debt
instruments for the borrowers own account, for the purpose
of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of
their agent or dealer. These instruments may include , but
need not be limited to bankers’ acceptances, promissory
notes, repurchase agreements, including reverse
repurchase agreements entered into by and between the
BSP and any authorized agent bank, certificates of
assignment or participation and similar instruments with
recourse: Provided however, That debt instruments issued
for interbank call loans with maturity of not more than 5
days to cover deficiency in reserves against deposit
Page 54 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit substitute
debts instruments”
It would mean a public borrowing. And we will only
speak of it as a public borrowing if the borrowing is from 20
or more individuals or corporate lenders at any one time.
This is your 20 or more lender rule.
NOTE:
As examinees we do not have the right to just state
20 lender rule. Lazy!
We have to state the rule like this:
Under the NIRC, a borrowing shall be qualified as a
deposit substitute if the borrowing is from 20 or more
individual or corporate lenders at any one time.
Q: What is the definition of any one time? Is it important for
us to know the definition of at any one time?
A: Yes.
In this case, Bureau of Treasury (BOT) sold at
public auction a 10-year zero coupon bond. And we call this
zero coupon bond as peace bonds.
Q: Kanino binigay?
A: Kay CODE NGO.
Q: Bakit kay CODE NGO?
A: Kasi siya yung nanalo sa public bidding.
Nung nanalo si CODE NGO sa bidding, kinuha niya
si RCBC capital as an underwriter.
Q: Ano ang trabaho ng underwriter, bibilhin ba niya yung
bond?
A: No. Parang si CODE NGO, sinasabi niya kay RCBC na uy
ibenta mo naman to sa iba.
So, si RCBC dinistribute niya ngayon sa iba-ibang
bank.
Kung titignan lang natin yung unang benta, this is
called primary sale or sale at the primary market.
Etong sumunod RCBC to other banks. Ang tawag
jan is sale at the secondary market.
NOTE:
Hindi natin icacount si CODE NGO to RCBC kasi si RCBC
is merely an agent of CODE NGO.
Q: So, ano yung konsepto ng at any one time? Would it
merely refer to the sale at the primary market or do we
consider the sales made at the secondary market as well?
Q: Kasi kung yung phrase na at any one time would mean
sale at the primary market, will this qualify as a deposit
substitute?
A: No it won’t. It will not qualify as a deposit substitute and
hence, the interest income derived from the transaction
shall be subject to normal tax.
If not, then it will be subject to 20% FWT.
Q: Do you think the interest income will be subject to 20%
FWT or to normal tax?
A: 20% FWT
In this case of BDO v. REPUBLIC, the SC held that
the definition of the phrase at any one time would mean the
lifetime of the bond.
If there are 20 or more lenders during the entire
lifetime of the bond, then it will be considered as a deposit
substitute.
Hence, in this particular case, it should be
determined how many individuals got the bond from RCBC.
Because if it would result to 20 or more lenders, then quite
obviously, this will be considered as a deposit substitute.
And if it is a deposit substitute, then the interest
income derived by the holders of the bond from these
transactions shall be subject to 20% FWT.
Q: Sino ang kikita nung interest income?
A: Yung bond holder.
Halimbawa si Metro Bank. Si Metro Bank na
ngayon ang naghahawak nung bond.
Q: So, ibig sabihin, si Metro Bank ba yung nagpautang?
A: Yes. Kasi ang itsura ng bond. Para siyang utang na may
certificate lang.
Kinuha kay BOT, ibibigay niya kay CODE
NGO(Gee).
Q: Anong kapalit nun bago ibigay ni BOT yung bond kay
Gee?
A: Magbibigay ng pera si Gee kay BOT.
Q: So sinong may utang?
A: Si BOT.
Si CODE NGO, siya ngayon yung nagpautang. So,
para siyang negotiable instrument. Inenegotiate niya
ngayon sa iba na naman. Sa ibang banko. Si CODE NGO to
different banks.
Q: Sino na ngayon ang creditor?
A: Yung different banks. Si Gee na ngayon ang may utang.
Q: So sino ang mage-earn ng interest income?
A: Yung mga bond holders or kung sino ang may hawak ng
bond.
Ang gagawin naman ngayon ng mga banko, kukuha
ngayon kunwari si ma’am sa Metro Bank (after niya
magtanong sa bond kung may bond ba sila sa bank). So
may isa na namang phase of negotiation. Pero within the
secondary market pa rin yun.
Q: So sino na ngayon ang creditor?
A: Si ma’am na ngayon kasi siya na ang final bond holder
eh.
Q: Sinong kumita?
A: Si ma’am.
But other than that, the trading of the bond will
likewise earn gain from sale.
Kaya dito sa case, sabi ng SC, from this transaction,
there are two types of income that can be derived:
a. INTEREST INCOME
b. GAIN FROM SALE
Q: Ano yung gain from sale?
A: From BOT to CODE NGO. Tawag dun issuance of the
bond. Hindi yun sale.
Si Gee ngayon ibebenta niya sa iba. Yan na yung
sale. Kasi gain na siya from trading. Hindi siya gain from
holding the bond. Yun yung pagkakaiba.
Page 55 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If we talk about gain from holding a bond or a
certificate of indebtedness, that income is called interest
income.
Pag ninegotiate niya sa iba. Ang tawag jan gain from
trading. So dito siya papasok sa gain from sale of bonds.
Binenta ngayon ni Gee kay Metro Bank.
Q: Posible bang may kitain si Gee doon sa pagbenta kay
Metro Bank?
A: Yes. Ang tawag dun, hindi interest income. Ang tawag
dun, gain from sale.
Q: Is that subject to tax?
A: Yes. That is subject to normal tax. Gain from sale of
bonds is subject to normal tax.
Q: Is there a possibility that it will not be subject to tax?
A: Yes. If the maturity period is more than 5 years.
In the case of BDO v. REPUBLIC, sabi ng SC, para
maging exempt yang interest income, ang titignan mo yung
maturity period eh AT LEAST 5 years.
Yung more than 5 years, gagamitin yan pagka-
trading. Yun yung gain from sale.
XV. MINIMUM WAGE EARNERS AND SENIOR CITIZENS
 MINIMUM WAGE EARNER
- A taxpayer who earns income based on the
minimum wage within the region where he is
working.
A senior citizen will be exempt from tax only if he
qualifies as a minimum wage earner.
NOTE:
It is erroneous for you to argue that all senior
citizens shall be exempt from income tax.
Q: Kasi pag ang Senior Citizen na yan ay nag e-earn ng
150k, halimbawa justice ka na eh diba hanggang 70 ang
retirement ng judges or justices, or 65 ka na or 60 ka na
tapos kumikita ka ng 200k a month, exempt ba yung
income mo as senior citizen?
A: No. That is subject to tax because even if you are a senior
citizen, you do not qualify as a minimum wage earner.
Q: What about the interest income of senior citizens? Will
that be subject to tax?
A: Yes because that income is not within the ambit of
exemption.
Under R.A 9994, the only exemption granted to
senior citizens with respect to income earned by them shall
be compensation income of a senior citizen who is a
minimum wage earner.
NOTE:
However, under the T.R.A.I.N Law, if the taxable
income is 250k or less, then the taxable income shall be
exempt.
250k is not a deduction. It is exempt only because
if you take a look at the tax table, the first item on the tax
table refers to a taxable income in the amount of 250k or
less. And you can see here, tax rate is 0.
So if the taxable income goes higher, then you can
now see a particular tax rate.
Right now, if the monthly income is 20, 833 or less,
then it is exempt from tax.
Kaya ngayon, pag narerestructure daw sila ma’am
ng payroll for a new client at ang gusto talaga ng mga
empleyado is higher takehome; dati ang binibit ni ma’am
minimum wage tapos magdadagdag na lang siya ng de
minimis.
Ngayon, ang ginagawa na nila is ibibit yung 20, 833.
Para hindi masyadong obvious, 20k. And then yung others
na, de minimis. Para malaki yung take home pay.
XVI. CONTRIBUTIONS FOR SSS, PAG-IBIG,
PHILHEALTH AND UNION DUES
If we talk about contributions for these, kindly be
reminded that this shall only pertain to the mandatory
contribution.
If in the BAR Exams, we have been asked that the
employee contributed 1k PAG-IBIG dues, and we do not
know how much the mandatory contribution is, then just
state that the amount excluded from the gross income shall
only be limited to the mandatory contributions.
 EMPLOYER’S CONVENIENCE RULE
- Refers to one where an amount has been given to
the employee which will redound to the benefit of
the employer.
If an amount of money is given to the employee which
will redound to the benefit of the employer, then that
amount shall not be subject to tax.
Q: Why?
A: Because there is no flow of wealth on the part of the
employee.
Q: What are the usual questions dealing with this?
A: Usual questions would be one where the employer will
grant a housing benefit in favor of the employee but then
the employee is on call or maybe the employee shall be
required to…
 SAMPLE BAR EXAM QUESTIONS:
1. Sa Bar, meron yung isa, ang sabi dun, si Mr. A
binigyan niya ng nipa hut si Mr. B dun sa lupain ni
Mr. A para bantayan ni Mr. B yung lupain niya for
24 hours.
So dun, free accommodation nga naman. But then,
if we will take a look at the facts of the case, the grant of the
free accommodation was really intended for the benefit of
the employer.
Q: Can we use Employer’s Convenience Rule?
A: Yes.
Q: Will the reasonable value of the accommodation granted
to the employee be considered as a taxable income on the
part of the employee?
A: No because it is for the benefit of the employer. Hence the
amount or the benefit given to the employee will not be
considered a taxable income.
2. Calvin went on a breakfast meeting with a
prospective client and then a lunch meeting with
Page 56 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
the Regional Director of HLURB because they are
trying to process some papers with HLURB.
Calvin sought for a reimbursement for all the expenses
that he had incurred during the breakfast and the lunch
meeting.
a. Will the reimbursement of the expense be
considered as a taxable income on the part of
Calvin?
Q: Will that redound to the benefit of the employer?
A: Yes.
Q: Will that fall within employer’s convenience rule?
A: Yes. And that is the reason why the reimbursement of
expense will not be considered as a taxable income of Calvin.
Quite obviously, you should have explained your
answer using employer’s convenience rule.
b. Will the expenses be considered as an allowable
deduction on the part of the employer?
A: Yes. Kaya nga hindi mo siya taxable income kay Calvin
eh, kasi expense yan ni employer.
Q: Paano yung lunch meeting with the HLURB head? Pwede
din ba yun na expense na?
Pag yung breakfast meeting, ang tawag jan,
representation expense. Yun lang may limit.
Q: Ano ulit yung limit ng representation expense for it to be
considered as reasonable?
A: 1% of net receipt or ½% of net sales.
We all agree that it will not be considered as a
taxable income on the part of Calvin because that particular
expense is for the benefit of the business of the employer.
Q: That being said, can we treat it as expense on the part of
the employer, meaning allowable deduction on the part of
the employer?
A: Yes EXCEPT when it comes to the lunch meeting with the
Regional Director because that is considered as facilitation
fee which is not allowed under the law.
Facilitation fee is the better term for bribe or
kickback. And under the law, expenses which are contrary
to customs, law and etc. shall not be considered as an
allowable deduction.
FRINGE BENEFITS
- These are benefits granted to managerial or
supervisory employees.
If a managerial or supervisory employee receives other
benefits on top of their basic salary, then, that benefit shall
be considered as fringe benefit subject to fringe benefit tax.
Fringe benefit tax is equivalent to 35% of the gross up
monetary value.
Q: What is gross up monetary value?
A: It is the amount of benefit that is still inclusive of the
Fringe Benefit Tax.
Q: What do you call the amount that is exclusive of fringe
benefit tax? Meaning, yung tinaggal mo na yung fringe
benefit tax?
A: Ang tawag jan ay monetary value.
So, simply put, gross up monetary value is the sum
of the monetary value and the fringe benefit tax.
So, the tax is imposed not on the monetary value,
but rather on the gross up monetary value.
If an employee receives a benefit, and the employee
is a managerial or supervisory employee, will the amount
received by the employee be considered as the gross up
monetary value or the monetary value?
A: Whatever that he has received is considered as a
monetary value.
Kaya nga, this is the best scheme for tax shielding.
 ILLUSTRATION:
Si Leander, managerial or supervisory; si Arce rank
and file.
Both sila nakareceive ng housing benefit.
Pag nagbigay si employer ng housing benefit kay
Arce na 100k, the law treats this as gross. So ibig sabihin,
hindi pwedeng makuha ni Arce ng buo yung 100. Kasi
sinasabi ng batas na gross pa lang yang nakuha mo. At
sinasabi ng batas na yung employer, required siya to
withhold a tax.
For example, yung amount ng income ni Arce would
be subject to 30%. So, ang makukuha lang ni Arce sa benefit
is 70% lang.
Si Leander, yung ibinigay sa kanya ni employer will
be considered as monetary value.
Ibig sabihin, cinoconsider ng batas na net na yun
ng tax.
Q: So, technically, makukuha ba ni Leander ng buo yung
100k?
A: Yes because the law treats this as the monetary value.
So, shinield lang siya ng batas by stating na ang
nagbabayad ng batas ay si employee.
Q: Pero technically if you do the math, sino talaga ang
nagsoshoulder ng tax pag fringe benefit?
A: Yung employer kasi yung binibigay ni employer kay
employee is already considered as net of tax.
Q: Eh pag rank and file ka, net of tax ba yung natatanggap
mo?
A: Hindi. Gross yan.
Q: So babawasan pa ba yan ni employer?
A: Yes.
NOTE:
If we talk about fringe benefit, whatever it is that
has been received by the employee shall be considered as
net of tax because that is the amount of monetary value.
FRINGE BENEFITS (HEVHIMTHEL)
1. HOUSING BENEFIT
Not all housing benefit shall be subject to fringe benefit
tax.
Page 57 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If the housing benefit has been granted adjacent to the
business premises, then the housing benefit shall be exempt
from tax because it will fall within Employer’s Convenience
Rule.
If the housing benefit is temporary in nature, meaning
for a period of 3 months or less, then the housing benefit
shall likewise be exempt from tax.
If the housing benefit has been granted to a member of
the AFP, the housing benefit shall likewise be exempt from
tax.
2. EXPENSE
This refers to personal expenses.
All personal expenses of the employee paid by the
employer shall be considered as fringe benefit on the part of
the managerial or supervisory employee.
NOTE:
This will not cover expenses for the operations of the
employer.
Q: Why?
A: Because, in this type of expense, it will fall within the
concept of Employer’s Convenience Rule.
3. VEHICLE
If the employee receives a company car or receives a
privilege of using the company car for his personal benefit,
then it will be considered as fringe benefit.
Q: Paano yung mga Med Rep?
A: Ang context ng med rep, ginagamit lang nila yung
company vehicle nila for their duties as a med rep, and not
for their personal benefit.
Q: So, will that be considered as fringe benefit assuming
that the Med Rep is a managerial or supervisory employee?
A: No. That will fall under Employer’s Convenience Rule.
4. HOUSEHOLD EXPENSE
If the employer pays for the salary of the househelper of
the employee or the driver of the employee; then it will be
considered as fringe benefit.
 SEGWAY:
May client sina ma’am. Inassess ng fringe benefit
tax. In reality, ang hinahabol naman ng BIR, yung employer,
hindi yung employee. For example, kulang ang winithhold
mong sahod doon sa empleyado mo, alam mo naman na ang
kumita ay yung empleyado mo, at hindi mo naman talaga
nawithhold yung tax sa empleyado mo.
So for example, eto, fringe benefit tax. Ang
nagbenefit naman talaga dito ay si employee. Pero ang
hahabulin ay si employer kasi mas madaling habulin ang
employer not as an income earner, but rather, as a
withholding agent.
Kaya sa Bar Exam Questions, ang laging hinahabol
is yung employer kasi in real life, BIR will not run after the
employee; BIR will run after the employer.
Sabi doon, inassess siya kasi may mobile phone
siya. Yung mobile phone ginagamit niya. Siyempre, ang
pinalabas, for business purposes.
Ngayon, sabi ng BIR, hindi daw yan considered as
fringe benefits. Therefore, subject to tax.
MA’AM TIN’S DEFENSE in order that they will cancel the
assessment for fringe benefit tax:
The employee shall be mandated to return the cp
gadget to the employer at the end of a certain period.
Q: If that is the case, may personal benefit ba on the part of
the employee?
A: None. So, that’s the reason why they are successful in
cancelling the assessment.
5. INTEREST FORGONE
If the employer will extend a loan to the employee where
the interest rate imposed is lower than the market rate for
loans, then the interest foregone shall be considered as a
fringe benefit.
Q: So ano ang kinukumpara mo dito?
A: It is the interest rate imposed and market rate.
If the market rate is more than the interest rate
imposed, then we have an interest foregone. And the interest
foregone shall be considered as fringe benefit.
EXAMPLE:
Ang market rate ay 10%. Ang interest rate lang na
imposed ay 1%.
Q: So, ilang percent ang finorgo nung employer dahil sa
employee niya yung pinageextendan niya ng loan?
A: 9%. So, yung 9% na interest foregone will be considered
as fringe benefit.
NOTE:
Market rate is different from legal rate. You do not
compare it with the legal rate. You compare it with the
market rate.
If the problem does not indicate a market rate, then
you assume that the market rate is equivalent to legal rate.
That’s the only time that you can use the legal rate as a
market rate.
6. MEMBERSHIP DUES
If the membership dues in athletic clubs and social
clubs and other similar organizations were paid by the
employer for the benefit of the employee; then it will be
considered as fringe benefit.
7. FOREIGN TRAVEL
Q: If the foreign travel is for business convention being
required by the employer for the employee to attend, will the
cost of the foreign travel shouldered by the employer be
considered as taxable income on the part of the employee?
A: No because of Employer’s Convenience Rule.
Q: If the employee goes on a foreign travel so that he can
study, but such is not being mandated by the employer but
the employer anyway, shouldered the cost of the travel; will
the cost of the travel be considered as fringe benefit on the
part of the employee?
A: Yes.
8. EDUCATIONAL ASSISTANCE
As a GENERAL RULE, educational assistance granted
to the employee or to the dependents of the employee shall
be considered as fringe benefit.
However, there are EXCEPTIONS to the rule:
a. EDUCATIONAL ASSISTANCE GRANTED TO THE
EMPLOYEE
Page 58 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
If the educational assistance is covered by a written
contract where the educational assistance is needed or
necessary for the business, trade or profession of the
employer, and the employee shall render future substantial
services; then the cost of the education shall be exempt from
tax.
Q: What do you think is the reason behind this?
A: Again, employer’s convenience rule. Kahit nga hindi yan
sinabi sa revenue regulations, exempt pa rin yan because of
such.
b. EDUCATIONAL ASSISTANCE GRANTED TO THE
DEPENDENT OF THE EMPLOYEE
The scholarship grant is granted through a competitive
scheme.
9. LIFE OR NON-LIFE PREMIUM PAID BY
EMPLOYER FOR THE EMPLOYEE
This refers to premium payments, not insurance
proceeds.
Q: If the beneficiary is the employee, is it an allowable
deduction to the employer?
A: Yes.
Q: If the beneficiary is the employer, is it an allowable
deduction?
A: No
If not a taxable income on employee; it is not an
allowable deduction to the employer.
If it is a taxable income on the part of the employee;
deductible kay employer.
NOTE:
The list is not exclusive. You can only use the list
for automatic determination that it is a fringe benefit (hence,
di na kailangang lumagpas sa 90k threshold)
All other benefits, not listed, in excess of the 90l
threshold for supervisory or managerial employees will be
considered as fring benefit.
EXAMPLE:
If Leander earned 500k productivity bonus in a
year, the amount of productivity bonus shall be exempt only
up to 10k since it is a de minimis benefit.
490k minus 90k threshold (since such fringe
benefit is not part of the list.
So, 400k shall be subject to Fringe Benefit Tax.
FBT is a final tax. Once, withheld and remitted; it
already extinguishes the liability.
February 18, 2020
 QUIZ 2 ANSWERS:
1. BOT AGREEMENTS
What is involved here is tax assumption because of the
phrase “shall be shouldered by the Government”
It does not involve contractual tax exemption. Non-
impairment clause will not apply.
2. MOBILE CHURCH
Motor vehicle registration fee is not a fee but rather it is
a regulatory tax.
Q: Can we assume that it is a fee?
A: No because that has already been ruled upon by the SC
that a motor vehicle registration fee is not a fee; rather it is
a regulatory tax.
It is not covered by the tax exemption because this
motor vehicle registration fee is in the nature of an excise
tax on the privilege of using roads.
3. It does not involve imposition of limitations; rather
it involves deletion of the power of the President.
If we talk about LGUs, ma’am mentioned in class that
LGU’s power and President’s power are technically the same
if we talk about imposition of restrictions because the
Congress can impose restrictions on the LGU’s power in the
same way that the Congress can impose restrictions on the
power of the President to adjust tariff rates, import quotas,
tonnages, wharfage dues, etc. That is with respect to
restrictions.
Q: But with respect to the removal of power, can the
Congress remove the power of the local government units to
levy taxes?
A: No because such power is already directly conferred
under the Constitution. So, if we talk about the power of the
LGUs, the Congress can merely restrict but cannot delete.
If we talk about the President’s power to adjust
these rates, the Congress can restrict and likewise, the
Congress can delete.
So, if we talk about restrictions, the same. But if we
talk about complete prohibition or removal of the power, the
Congress cannot remove the power of the LGUs to levy taxes
but the Congress can remove the power of the President to
adjust rates. That is clear from the Flexible Tariff Clause
itself.
If we would take a look or read the law, nandun na
yung sagot. Pag minemorize daw yung Flexible Tariff Clause,
nandun na yung sagot.
“The Congress may authorize”
Q: So ibig sabihin, sino ang nago-authorized sa President?
A: Congress.
Sa power of the LGU, ang nakasulat, “subject to the
limitations, the LGU can levy taxes.
So, ibig sabihin, ang pwede lang gawin pala ng
Congress, pagdating sa LGU, magrestrict pag limit pero
hindi pwedeng magtanggal.
Pero kay President, pwede siyang magrestrict,
pwede pa siyang magtanggal.
4. Angeles University is exempt from paying taxes and
duties provided that the revenues and assets of
Angeles University has been actually, directly and
exclusively used for educational purposes.
In this case, a building permit fee is neither a tax nor a
duty for which a non-stock, non-profit educational
institution is exempt.
A building permit fee is a fee because it only represents
collection for the cost of regulation.
NOTE:
Most mentioned that it is exempt from only taxes and
did not include duties. And then some mentioned that taxes
Page 59 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
which are actually, directly and exclusively use…Hindi yung
tax ang actually, directly and exclusively used for
educational purpose. Ang actually, directly and exclusively
used for educational purpose ay yung revenues and assets.
Yung iba daw kasi satin “when the taxes are actually directly
and exclusive used for educational purpose” which is mali.
Q: Ang ginagamit mo ba for educational purpose yung tax?
A: Hindi. Yung revenue or yung assets.
Even if you know the idea but if you have written it
an erroneous manner, then your answer will be incorrect.
5. TAX EXEMPTION v. TAX ASSUMPTION
Give a point of distinction or point of differentiation. Do
not define it.
6. PROGRESSIVE TAX v. REGRESSIVE TAX
7. NECESSITY THEORY
NOTE:
You cannot define necessity theory by defining life-
blood theory because these theories are different.
Necessity theory means that the power of taxation
emanates from necessity and hence, taxes should be
collected without any hindrance.
Basically, it revolves around where the power of
taxation has emanated.
8. DOCTRINE OF EQUITABLE RECOUPMENT
It talks about a claim for refund which is barred by
prescription and this claim for refund which has been
barred by prescription shall be used to set off existing tax
liabilities and indicate as well that both taxes arose from the
same transaction.
9. TAX FREE EXCHANGE
Q: Should B pay taxes on the exchange? And there was also
a question on tax evasion.
So, we should have addressed the tax-free exchange
concept and the concept of tax evasion.
Our legal basis shall revolved around the elements
of tax evasion just for us to pound on our answer that there
is no tax evasion because the question deals with one where
there exist an argument on tax evasion. Hence, we cannot
just state that it is a tax-free exchange. Hence, it is not
subject to tax. We must likewise address the argument on
tax evasion.
There will only be tax evasion if the means resorted
is not sanctioned by law.
Under Section 40c of the Tax Code, a taxpayer can
transfer property in exchange for shares of stocks and such
transfer shall be exempt from tax if as a result of the
transfer, the transferor shall obtain control over the
transferee corporation.
In this particular case, all elements or all factual
circumstances would dictate that there is tax-free exchange
which is exempt from tax.
Hence, since there is no tax evasion, then the
government cannot collect deficiency taxes arising from the
transaction.
10. SAN JUAN. This is a previous BAR Q.
If we talk about San Juan University, there are 3
buildings. And then two buildings are devoted for
classrooms, laboratory, canteen, bookstore and
administrative offices. The third building is used as a
dormitory.
If we simply mentioned that if the properties are
actually, directly, and exclusively used for educational
purpose, it would be exempt from tax; us disregarding the
fact that the factual circumstances of this problem are very
specific.
The problem specifies how the property has been used.
Hence, we have to analyze it based on the manner of usage
of the property.
Q: Can we say that the two buildings had been used
actually, directly and exclusively for educational purpose?
Q: Laboratory?
A: Yes
Q: Classroom?
A: Yes
Q: Administrative offices?
A: Yes
Q: How about the canteen and the bookstores?
A: No because these portions had been leased to private
individuals.
Hence, this portion should be subject to tax.
Yung iba daw, sasabihin, “these buildings were the
canteen and the bookstores are located”, so ibig sabihin
yung buong building which is mali.
Dapat the portion or the area being used for the
canteen and the bookstore shall be subject to tax because
such portions are not being actually directly and exclusively
used for educational purpose.
Q: Is the dormitory being used for educational purpose?
Yung dormitory ginagamit siya ng mga athletes na scholar
nung school.
Q: Is that educational? If you operate a school, is it
necessary for you to give a dormitory to the athletes?
A: No.
Q: So, is this for educational purpose?
A: No.
Q: Is it for religious purpose?
A: No.
Q: Is this for charitable purpose?
A: Yes.
Q: So, is it exempt?
A: Yes but not on the ground that it is being used for
educational purpose, rather it is being used for charitable
purpose.
And for this, it can be gleaned that the test of
charity had been complied with.
Kapag may ginawa ka na dapat gobyerno ang
gumagawa, mapapass mo ang test of charity.
Q: Dito, sino dapat ang nagbibigay ng assistance dun sa
mga students?
A: Government.
Q: Pero sino nagbibigay?
A: Educational Institution, yung school which is SJU.
Page 60 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: In which case, is the third building being used for
charitable purpose?
A: Yes.
11. Q: What is non-impairment clause?
We know what this is daw pero we should have defined
it based on the Constitutional provision which is “no law
shall be passed abridging the obligations of a contract “
For the example, you should have illustrated how it applies,
hindi lang yung sasabihin nating government bonds,
debentures, etc.
To illustrate, if the government grants a tax
exemption in a particular bond or debenture, then such
contractual tax exemption can no longer be revoked.
If the tax exemption has been revoked, then there is
a violation of the non-impairment clause.
Q: Pwede bang iapply yan sa tax credit certificate?
A: No. You cannot apply that in a tax credit certificate
because that’s not in the nature of contractual tax
exemption.
Yung iba daw kinopya lang yung BOT Agreements.
Pagkaganun, tamad ka daw bilang isang barrister. kasi
kumopya ka lang ng factual circumstances, tapos doon pa
mismo sa questionnaire. Mag-iinit ang ulo nung examiner.
DIFFERENT TYPES OF
TAXPAYERS
 TAXPAYERS WHO WILL BE TAXED FOR INCOME
SOURCED FROM WITHIN AND OUTSIDE THE
PHILLIPINES
- Meaning, they will be taxed for their worldwide
income.
1. Resident Citizen
2. Domestic Corporation
3. Estate or Trust
If the problem deals with them, whether the income has
been sourced within the Philippines or outside the
Philippines, then it will be subject to tax.
The only thing that we need to worry about is a question
dealing with withholding tax.
Kasi, pag resident citizen yan, whether earned within or
without, taxable.
But we also need to consider the type of tax being
imposed.
Kasi kung ang tanong sa Bar is, is it subject to
withholding tax, magchechange na ngayon ang answer.
Q: Why?
A: If we talk about withholding taxes, the government will
constitute a withholding agent.
In which case, if the income has been sourced
outside the Philippines, then the Government cannot
constitute the payor as a withholding agent.
Q: Why?
A: That will violate the principle of International Comity and
Territoriality.
The Philippine government cannot dictate a non-
resident foreign corporation to be the withholding agent
without violating those principles.
And that’s the reason why, if Manny Pacquiao earns
from a boxing bound abroad, the Philippine government
cannot constitute Top Rank as withholding agent.
The prize earned by Manny Pacquiao in Las Vegas
cannot be subject to withholding tax.
Q: But will it be subject to tax?
A: Yes definitely because Manny Pacquiao is a resident
citizen.
Q: So paano yun tataxan?
A: It will be subject to normal tax. And Manny is actually
required to include such amount of price as part of his gross
income subject to normal tax.
There’s a huge difference between a question
dealing with whether an income shall be subject to tax and
a question dealing with whether an income shall be subject
to withholding tax.
 FINAL WITHHOLDING TAX v. CREDITABLE
WITHHOLDING TAX
If we talk about these two types of taxes, there exist
a withholding agent. And the withholding agent shall be
personally liable for the taxes that the withholding agent
failed to withhold.
So, even if the withholding agent is not the income
taxpayer, the withholding agent will still be held personally
liable for the taxes that the withholding agent failed to
withhold.
The main reason why we need to know whether the
withholding tax is in the nature of a creditable withholding
tax or in the nature of a final withholding tax is because of
the concept that creditable withholding tax is in the nature
of advance payment.
Meaning, notwithstanding the fact that the monthly
income of the taxpayer has already been subjected to
creditable withholding tax, such income will still be subject
to tax at the end of the taxable year. It is because of the
reality that what has been withheld from the salary of the
employee, for example, is just in the nature of an advance
payment.
 ILLUSTRATION:
Si Kuya Lester ang sahod niya is 100k. Pag
sumahod siya ng enero, meron siyang withholding tax kasi
hindi siya minimum wage earner at hindi siya 20, 833 which
is the monthly exempt income. Basta ang income niya ay
more than 20, 833 a month, may tax yan na naiimpose. So,
merong tax na kinukuha kay Kuya Lester. For example, 20k
a month.
Page 61 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
So yung 20k every month na withholding tax,
kailangan alam natin kung final withholding tax yan or
creditable withholding tax siya.
Kasi kung in the nature yan ng creditable
withholding tax, at the end of the taxable year, pag
icocompute na ang tax due ni Kuya Lester, idadagdag pa
dun yung 100k na nasubject na sa withholding tax.
Q: So kung buwan-buwan, kumikita siya ng 100k, magkano
sa buong taon?
A: 1.2 M.
Q: Pag creditable yan, tataxan mo pa ba yung buwan-buwan
niyang kinikita?
A: Yes.
Q: Why?
A: Because the tax is just in the nature of an advance
payment. Meaning, yung 1.2 tataxan mo pa rin yan ng buo.
Kunwari, ang total amount ng nacompute na tax is
300K for the entire year for the entire 1.2 income.
Q: Yun na ba ang babayaran ni Kuya Lester?
A: Hindi
Q: Ano yan?
A: Tax due yan pero hindi yan yung tax payable.
Q: Bakit?
A: Kasi nagadvance payment na siya buwan-buwan.
Q: Ano ang inadvance payment niya?
A: Yung creditable withholding tax.
Q: Eh magkano yung winithhold sa kanya buwan-buwan?
A: 20K. So, 20k times 12 months is 240k.
So ibig sabihin, nakabayad na siya in advance ng
240k.
Q: So, magkano na lang ang babayaran niya at the end of
the year?
A: 60K.
Ganto ang konsepto ng creditable withholding tax.
Yung income na nasubject sa creditable withholding tax,
matatax pa rin siya at the end of the taxable year, kasi nga
yung winithhold sa kanya is just in the nature of an advance
payment.
Q: Paano kung yung income is subject to final withholding
tax?
Let’s assume that Kuya Lester receives dividend
income from a corporation of a 100k every month. Divided
income is subject to final withholding tax.
Ang sahod subject to creditable withholding tax.
Ang rental income ay subject to creditable withholding tax.
Ang passive income as a general rule is subject to final
withholding tax .
Q: If we talk about a dividend income, is it as a general rule
subject to final withholding tax?
A: Yes.
Kuya Lester is a resident citizen. So, the dividend
income will be subject to 10% final withholding tax.
So dito sa 100k na dividend income ni Kuya Lester,
hindi niya matatanggap yung buo kasi may withholding tax,
meaning kakaltasan siya. Ganun din, pag empleyado.
Q: So dito, magkano ang ikakaltas kay Kuya Lester?
A: 10k
Eh final withholding tax yan.
Q: What was that mean?
A: It would mean that that amount of tax withheld from the
dividend income of Kuya Lester shall already extinguish his
liability.
So, the moment that the tax has been withheld from
the income, that extinguishes the taxpayer’s liability.
Q: So, at the end of the taxable year, masasubject pa ba to
sa normal tax?
A: Hindi na kasi subject siya sa final withholding tax.
EXAMPLE:
Ang lessor si Arce. Si ma’am yung umuupa. So
instead na magbabayad si ma’am ng 100k kay Arce, hindi
siya magbabayad sa kanya ng 100k.
Q: Magkano ang ibabayad ni ma’am?
A: 95k
Q: Bakit?
A: Kasi ang rental income ay subject to 5% creditable
withholding tax.
So ma’am will pay Arce 95k every month.
Q: Magkano ang total monthly income ni Arce?
A: Hindi 95k. Ang kita niya 100k. 95K yung natanggap niya
kasi kinukuha na ni ma’am yung 5k na advance payment
niya ng tax niya.
Natanggap lang niya yung 95k kasi sabi ng
gobyerno kay ma’am, Oy Christine kunins mo na yung tax
ni Arce jan sa income niya. And we call that creditable
withholding tax which is just an advance payment of tax
liability.
At the end of the year, hindi pala kumita si Arce.
May loss siya. Eh nagwithhold na si ma’am ng 5k buwan-
buwan sa kanya.
Q: 5k times 12 is how much?
A: 60k so meron na siyang binayaran na 60k in advance sa
government; eh yun pala wala siya dapat tax kasi may loss
siya during the year.
Q: Kailan siya pwedeng magfile ng refund?
A: Within two years from the date of payment?
Q: Kailan yung date of payment, yun bang time na kinuha
ni ma’am yung 5k kay Arce at rinemit ni ma’am sa
government?
A: Hindi
Q: Kailan?
A: April 15 because that is the filing of the final adjustment
return.
The date of filing of the final adjustment return is
the date when the taxpayer can finally determine whether
the taxpayer incur a liability or not. Kaya yung 2-year
period, dun icacount sa date of filing of the final adjustment
return.
Q: Bakit?
A: Kasi nga, yung creditable withholding tax, advance
payment lang yan eh.
Q: In which case, will the payment be considered as just
provisional in nature?
Page 62 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yes subject to the final computation upon the filing of
final adjustment return.
Q: Will we apply that rule in cases of final withholding
taxes?
A: No. Metrobank Case
Q: Why?
Q: Applying the same logic, ang final withholding tax, nung
winithhold na ba yung tax, naextinguish na yung liability?
A: Yes.
Q: So nung winithhold na yung tax at rinemit sa gobyerno,
is that considered as the final determination of the tax
liability?
A: Yes. Kaya sa Metrobank case, sabi dun, wag mong
iapply ang filing of the final adjustment return kasi final
withholding tax yan eh. Alam na niya yung liability niya at
the time of withholding and remittance.
That’s why the 2-year period shall be counted from
the date that the tax has been remitted to the government;
not from the date of filing of the final adjustment return.
Q: Since, we know that resident citizens, domestic
corporation, estates and trusts are subject to income tax for
their worldwide income; then we need to know the
differences.
INDIVIDUAL TAXPAYERS
If we talk about RESIDENT CITIZENS, the
component of the gross income shall be the income sourced
from within and without.
If we talk about allowable deductions, all taxpayers
can avail of allowable deductions except NON-RESIDENT
ALIEN NOT ENGAGED IN TRADE OR BUSINESS.
Q: Why?
A: Because non-resident alien not engaged in trade or
business is subject to 25% final withholding tax based on
gross income.
Filing of the return would be required for resident
citizens, non-resident citizen, resident alien and non-
resident alien engaged in trade or business but a non-
resident alien not engaged in trade or business is not
required to file an annual income tax return.
Q: Why?
A: Because obviously, the income is subject to final
withholding tax.
Q: So sino ang nagfafile ng return?
A: Yung withholding agent. So, hindi na niya kailangan
magfile nga annual income tax return kasi nga, nung time
na winithhold yung tax dun sa kanyang income at rinemit
sa government, that extinguishes the taxpayer’s liability.
Q: What about substituted filing?
A: Resident citizen, non-resident citizen are qualified for
substituted filing but non-resident aliens are not qualified
for substituted filing.
Q: What about for DOMESTIC CORPORATIONS?
A: If we talk about domestic corporation, the component of
the gross income would be within and without.
Resident foreign corporation and non-resident
foreign corporation will only be taxed for income sourced
from within.
For allowable deductions purposes, quite obviously,
non-resident foreign corporations are not entitled to
allowable deductions.
Q: Why?
A: Because non-resident foreign corporations are subject to
30% final withholding tax based on the gross income. Kaya
wala siyang allowable deduction.
Q: Pero dinededuct ba ang cost of sale?
A: Yes kasi nga sa CREBA case, you cannot impose an
income tax on the capital.
Q: Eh ano ang capital dun?
A: Yung amount of cost of sale.
Filing of return is not required for non-resident
foreign corporation.
Q: Why?
A: Because the withholding agent will file the return.
Q: All these being said, and since we know that only
domestic corporation, resident citizens, estates and trusts
are subject to income tax for income source from within and
without, then we need to know the situs of the income with
respect to other types of taxpayers; because for other types
of taxpayers, they will only be taxed for income sourced from
within.
SITUS OF INCOME
And for us to know this, we should learn about Sec.
42 of the Tax Code.
The first thing under Sec. 42 of the Tax Code speaks
of interest income.
1. INTEREST INCOME
The situs of interest income is the place of residence of
the debtor.
CAVEAT:
In several review centers, the other lecturers would tell
that the situs of the interest income is the place of residence
of the creditor because the creditor is the income earner.
That’ wrong because there is a jurisprudence to support
that that is wrong.
NOTE:
The place of residence of the debtor determines the
situs of the tax.
2. SERVICES
Page 63 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
For services, it is the place where the service was
performed.
 TAX IMPLICATIONS:
For INTEREST INCOME, as a general rule, you
check first whether the interest income has been earned
from bank deposits or deposit substitutes or not. Because,
if the interest income has been earned from bank deposits
or deposit substitute, then the interest income shall be
subject to 20% final withholding tax.
However, if the interest income was not earned from
bank deposit or deposit substitutes, then the interest
income shall be subject to normal tax.
If we talk about services, it is an income from
business trade and profession, hence, it will be subject to
normal tax.
For ma’am to highlight her point on the situs of
interest income, let’s talk about NDC v. CIR.
 NDC v. CIR
This case involves the sale of vessels. NDC purchase
several vessels and they are paid in foreign currency. Also,
NDC needs to secure a loan in order to purchase these
vessels.
In securing this loan, there is a consequent interest
being imposed on the loan obligation.
What NDC did was to obtain a loan from the
Japanese ship building companies and the contracts were
executed at Tokyo.
Q: Sinong umutang?
A: NDC
Q: Kanino umutang?
A: Japanese ship building company
Q: Saan naexecute yung contract?
A: Tokyo
Q: Ano ang currency nung contract?
A: Foreign currency, not peso.
Q: If interest income will be earned from this transaction,
which entity is the income earner, NDC or the ship building
companies?
A: The ship building companies.
Q: If the ship building companies are considered the income
earner from this particular transaction, is it necessary for
us to determine whether the income has been sourced
within or outside the Philippines?
A: Yes.
Q: Why?
A: Because the ship building companies are non-resident
foreign corporations. And they can only be taxed for income
sourced from within.
Hence, it is primordial for us to determine the situs
of the income.
The income here is in the nature of interest income.
And looking at Section 42 of the Tax Code, the
interest income shall be considered as sourced from the
place of residence of the debtor.
Q: Who is the debtor in this case?
A: NDC
Q: Where is the residence of NDC?
A: Well, from this particular case, the case states that,
based on the Articles of Incorporation of the NDC, the
principal office address of NDC is at Manila. So obviously, it
is located within the Philippines.
Q: That being said, is it considered as sourced from within
or sourced outside of the Philippines?
A: Source from within.
Q: Hence, will the interest income be subject to tax?
A: Yes.
In this case, the interest income was subject to tax.
Regrettably, yung Philippine government, hindi
kumokolekta doon sa ship building company.
Q: Bakit?
A: Kasi logically, pag ang pinag-uusapan natin non-resident
foreign corporation at non-resident alien not engaged in
trade or business, ang hirap mangolekta sa kanila kasi
located sila outside the Phiippine jurisdiction. The taxing
arm of the Government cannot reach them.
e. g
Adam Levine nagconcert dito. Pag kumita yan dito,
tapos hindi nagbayad ng tax dito kasi hindi naman pwedeng
pabalikin siya dito sa April 15 at magfile ng income tax
return. Pag lumipad na yan, ang hirap nang kolektahan si
Adam Levine. And that’s the logic behind the imposition of
final withholding tax on non-resident alien not engaged in
trade or business and non-resident foreign corporation
because of the risk of life. Ang hirap na mangolekta sa
kanila ng taxes pag wala na sila dito sa Philippines.
Q: Eh bakit yung non-resident alien engaged in business?
A: Eh may negosyo sila dito kaya ang daling panghawakan
ng government yung mga non-resident alien na yan. Pero
kung hindi sila engaged in business, ang hirap.
Q:Kaya nag-impose ng final withholding tax, para kung
hindi makakolekta dito sa mga entities nato, sino ang
kokolektahan?
A: Yung withholding agent. Ganun kawise ang Government.
Dito, ang kinolektahan, hindi naman talaga yung
ship building companies eh. Ang hinabol dito, NDC because
NDC is the payor of the income. And being the payor of the
income, NDC is constituted as the withholding agent.
And that’s the reason why in this particular case,
NDC was actually mandated to pay the taxes on the income
earned by the ship building companies.
NOTE:
The liability that NDC had paid is not a liability as
a taxpayer; rather a liability as a withholding agent.
 BOAC CASE
- Asked several times in the Bar.
BOAC has no landing rights in the Philippines.
Q: If an airline company has no landing rights in
Philippines, what do you call that airline company?
A: Offline. Pag sinabing offline carrier, ibig sabihin, wala
siyang landing rights dito sa Philippines.
Page 64 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Pag online carrier, ibig sabihin, may landing rights
siya dito sa Philippines.
Q: What is the implication if the airline company is
considered offline or online?
A: Pag offline carrier, never yan nasasubject sa Gross
Philippine Billings Tax.
Q: Ano ang gross Philippine billings tax?
A: It is a tax imposed on the gross Philippine billings. And
we will only consider it as a gross Philippine billing, meaning
the revenue as a gross Philippine billing; if it refers to
revenue earned from the transport of passengers, excess
baggages or cargoes originating from the Philippines.
So if it will not originate from the Philippines, then
obviously, it will not be subject to gross Philippine billings
tax.
Q: If it’s an online carrier, is there a possibility that the
income will be subject to gross Philippine billings tax?
A: Yes because the airline carrier has landing rights
originating from the Philippines.
Going back. BOAC has no landing rights in the
Philippines, but BOAC has a liaison officer in the Philippines
or a general sales agent in the Philippines. And the general
sales agent sells ticket for BOAC.
Q: Where is the source of the income? Because in this
particular case, BOAC argued that it is engaged in service.
So since it is engaged in service, the service has
been performed outside the Philippines because the
transport of the passengers occurred outside the
Philippines. And hence, since the service has been
performed outside the Philippines, then BOAC should not
be held liable for income tax.
Q: Is the argument of BOAC meritorious?
A: No. Because this particular case does not refer to income
from service; but rather refers to income from the sale of
personal property, and that personal property refers to the
ticket.
In this case, the SC held that the test of taxability
is the source. And the source of an income is that activity
which produced the income.
So in this particular case, the activity that produced
the income refers to the sale of tickets which occurred in the
Philippines.
Hence, the sale of the tickets shall be subject to tax.
Q: What kind of tax? Diba offline siya.
Q: Yung income ba niya earned from sales of ticket be
subject to gross Philippine billings tax?
A: No because it does not refer to income source from
transport of passengers from the Philippines to a point of
destination outside the Philippines; rather it refers to the
sale of tickets.
Q: So, anong type of tax?
A: Normal Corporate Income Tax
Q: Can an online carrier be subject to both gross Philippine
billings tax and normal corporate income tax?
A: Yes.
NOTE:
The income will not be subject to both gross
Philippine billings tax and normal tax because that is direct
double taxation.
But, the income earned for the transport of
passengers from the Philippines to another point of
destination outside the Philippines will definitely be subject
to Gross Philippine Billings Tax.
Only that, the income from the sale of tickets in the
Philippines for transport of passengers outside the
Philippines, which will not originate from the Philippines,
will not be subject to gross Philippine billings tax but would
rather be subject to normal corporate income tax, for the
same reason.
Bar Examination questions deal with the argument
on Territoriality.
Q: Will the imposition of the tax on the sale of tickets be
considered as a violation of the principle of territoriality?
A: No because principle of territoriality encompasses source
principle.
And in this particular case, if we talk about source
principle, then we look at the situs of the income or the
source of the income.
Q: In this particular case, where is the source of the income?
A: The source is the activity that produced the income which
is the sale of the tickets that had transpired in the
Philippines.
 BAIER-NICKEL v. CIR
Baier-Nickel is the President of Jubanitex. She was
likewise constituted as a commission agent of Jubanitex.
Basically, as a commission agent, she went to Germany
in order to get clients. And she was very successful. She got
clients in Germany. Her services were obviously performed
in Germany. She refer this client to Jubanitex.
And by reason thereof, she earned commission income.
Q: Us knowing that Jubanitex is a domestic corporation and
Baier-Nickel is a non-resident german citizen who also
happens to be the President of this domestic corporation,
will the income earned by Baier-Nickel be subject to tax?
NOTE:
Ang unang phase of analysis would be existence of
gain, realization of gain, gain is not excluded by law, check
na yan agad.
Next is the kind of taxpayer.
Q: Ano yung kind of taxpayer?
A: Kung resident citizen ba siya or hindi.
Q: Resident citizen or hindi?
A: Hindi. In which case, she will only be subject to tax for
income source from within.
Hence, we move on to the next point of analysis
which is situs of income.
Q: Para malaman mo ang situs income, dapat alam mo
muna ba kung ano ang nature ng income niya?
A: Yes kasi under Section 42, ang situs of income will
depend on the type of income earned.
Q: Ano ang type of income earned?
Page 65 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: It is income from services.
Q: Under Sec. 42, where is the situs of service?
A: Place where the service has been performed.
Q: Where was the service performed in this particular case?
A: Germany
Q: Therefore, where is the situs of the income?
A: Germany
Q: Will the income of Baier-Nickel be subject to tax in the
Philippines?
Q: Using that alone, will it be subject to tax?
A: No.
Q: Do we consider the residence of the payor kasi yung
payment galing sa domestic corporation eh. Ang magbibigay
ng commission yung domestic corporation eh.
Q: Do we determine the residence of the payor such that
since the payor is located in the Philippines, then it will be
subject to tax.
A: No. Do not extend the provision of the law. The law merely
speaks of, when it comes to services, the income from
services shall be considered as having been earned in the
place where the service has been rendered.
In this particular case, the SC held that the
important factor therefore which determines the source of
the income of personal services is not the residence of the
payor or the place where the contract or service has been
entered into or the place of payment; but the place where
the services were actually rendered.
Hence, in this particular case, since the services
were rendered in Germany, then it will not be subject to tax
in the Philippines considering that the income earner is a
non-resident alien who will only be subject to tax for income
source from within.
 RECAP:
With respect to situs of services, you do not
consider the residence of the payor, you do not consider the
place where the contract for service is entered into, you do
not consider the place of payment; rather you consider the
place where the services were actually rendered. And that is
just pursuant to Section 42 of the Tax Code.
In the same case of Baier-Nickel, BOAC has been
cited. The SC likewise echoed the case of Howden.
In the case of Howden, the SC held that the situs
of insurance premiums shall be the place where the risk are
located. So if the risk are located in the Philippines, then the
income is considered as sourced from within.
Q: WHO IS A NON-RESIDENT
CITIZEN?
 Section 22 of the Tax Code
(E) The term 'nonresident citizen' means:
(1) A citizen of the Philippines who establishes to the
satisfaction of the Commissioner the fact of his physical
presence abroad with a definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines
during the taxable year to reside abroad, either as an
immigrant or for employment on a permanent basis.
(3) A citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to
be physically present abroad most of the time during the
taxable year.
(4) A citizen who has been previously considered as 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 in which he arrives in the
Philippines with respect to his income derived from sources
abroad until the date of his arrival in the Philippines.
(5) The taxpayer shall submit proof to the Commissioner to
show his intention of leaving the Philippines to reside
permanently abroad or to return to and reside in the
Philippines as the case may be for purpose of this Section.
A: There are different definitions:
a. One who from the very beginning is residing outside
b. Who from the start of the year was still in the
Philippines, and then, left the Philippines as an
immigrant or for permanent employment
c. One who is a balikbayan. He is a non-resident
citizen at the start of the year and he arrived in the
Philippines anytime during the taxable year for
permanent residence in the Philippines. In which
case, we consider him as a non-resident citizen
from the start of the year up to the date of his
arrival.
d. Staying out of the Philippines for employment most
of the time during the taxable year.
There are two important phrases that we see under
Section 22 of the Tax Code:
1. Employment thereat
2. Most of the time
These two phrases are very important because if a
citizen stay most of the time outside the Philippines, then
he is considered as a non-resident citizen.
Most of the time means staying out in the Philippines
for more than 183 days.
Q: Saan nakuha yung 183 days?
A: Kasi yung 365 divided by 2 is 182.5. So obviously, pag
nagstay na siya ng more than half of the year, then he is
considered a non-resident citizen.
BUT, that will not complete the equation.
Q: Why?
A: Because if we will read that definition, it will also includes
the phrase employment thereat.
Page 66 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
There are different opinions or rulings related to
this matter, but let’s harmonize these rulings.
Q: How do we harmonize the rulings?
A: We need to consider the phrase employment thereat
because if the taxpayer is still considered as an employee of
a domestic corporation, then he is not considered as a non-
resident citizen no matter how long he stayed out of the
country.
We need to consider both phrases because if the
citizen is not employed in that foreign country, and still
employed in the Philippines, then we will not consider that
citizen as a non-resident citizen, notwithstanding the fact
that he stayed out of the Phililppines for the entire year.
But, if his employment is considered as an
employment thereat, meaning employment abroad, then we
now consider whether he stayed most of the time in that
particular place abroad. Because if he did, then he will
considered as a non-resident citizen.
 BAR Q:
Kronge Konsult, Inc. (KKI) is a Philippine corporation
engaged in architectural design, engineering, and
construction work. Its principal office is located in Makati
City, but it has various infrastructure projects in the
country and abroad. Thus, KKI employs both local and
foreign workers. The company has adopted a policy that the
employees' salaries are paid in the currency of the country
where they are assigned or detailed.
Below are some of the employees of KKI. Determine whether
the compensation they received from KKI in 2017 is taxable
under Philippine laws and whether they are required to file
tax returns with the Bureau of Internal Revenue (BIR). (2%
each)
(a) Kris Konejero, a Filipino accountant in KKl's Tax
Department in the Makati office, and married to a Filipino
engineer also working in KKI;
(b) Klaus Kloner, a German national who heads KKl's Design
Department in its Makati office;
(c) Krisanto Konde, a Filipino engineer in KKl's Design
Department who was hired to work at the principal office
last January 2017. In April 2017, he was assigned and
detailed in the company's project in Jakarta, Indonesia,
which project is expected to be completed in April 2019;
(d) Kamilo Konde, Krisanto's brother, also an engineer
assigned to KKl's project in Taipei, Taiwan. Since KKI
provides for housing and other basic needs, Kamila
requested that all his salaries, paid in Taiwanese dollars, be
paid to his wife in Manila in its Philippine Peso equivalent;
and
(e) Karen Karenina, a Filipino architect in KKl's Design
Department who reported back to KKl's Makati office in
June 2017 after KKl's project in Kuala Lumpur, Malaysia
was completed.
A: Madali lang yung sa return kasi ang gagamitin mo lang
na konsepto is substituted filing kasi iisa lang ang employer
nila. Tapos, purely compensation income yun.
So, they are qualified for substituted filing except
when the problem involves a non-resident alien engaged in
trade or business because this type of taxpayer is not
qualified for substituted filing, notwithstanding the fact that
they are considered as purely compensation income earner.
 TAXABILITY OF THE INCOME
Q: Paano yung empleyado na nandidito sa Philippines, at
dito rin nakastation sa Philippines, will the income be
subject to tax?
A: Yes because he is a resident citizen who will be subject
to tax whether the income has been sourced from within or
outside.
Q: Paano yung alien or german citizen na nasa Makati office,
is his income subject to tax?
A: Yes because the source of income is in the Philippines.
Q: What about the Filipino engineer who stayed in Taiwan
for 2 years in order to finish the project? Paano yung Filipino
engineer who stayed in Taiwan only for six months? Will we
consider them as a resident citizen?
A: Walang duda na yung source of the income is abroad for
those period where they rendered services abroad. Ang situs
nun talaga, outside.
Ang una nating dapat problemahin is yung
classification niya. Kasi kung ang classification niya ay
resident citizen, obviously, the income will be subject to tax,
notwithstanding the fact that the income has been sourced
outside.
If we will classify him as a non-resident citizen,
then, that income will not be subject to tax because the
income was sourced from outside.
Q: So, how do we classify these employees? Do we classify
them as a resident citizens or as non-resident citizens?
A: Ma’am will adopt one ruling because it is the only way
that we can harmonize all the conflicting rulings of the BIR
on this matter.
If the employee remains to be the domestic
corporation’s and power of control remains to be vested with
domestic corporation, then the individual taxpayer is
considered as still being employed by the domestic
corporation.
NOTE:
Ma’am is not changing the situs of the service
because the situs is still outside the Philippines for services
performed outside the Philippines. Ma’am is looking at the
phrase “employment thereat: in order for them to be
qualified as a non-resident citizen. Ma’am is determining the
concept or the existence of the qualification “employment
thereat”, meaning, he must be employed abroad.
Q: In this problem, meron bang nagcocontrol sa kanila na
foreign corporation?
A: None.
Q: Sino lang ang nagcocontrol sa kanila?
Page 67 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yung domestic corporation.
Q: So will we consider this as an employment abroad?
A: No. It is still considered as employment here in the
Philippines.
Q: In which case, do we still consider them as resident
citizens?
A: Yes.
Q: What is this ruling that ma’am is referring to?
A: It’s a ruling involving an employee of the Department of
Foreign Affairs.
Dito, yung taxpayer was sent in Taiwan for Asean
Summit. And she needs to stay in Taiwan for 2 years.
Siyempre kumikita siya.
Q: Sino ang employer niya?
A: DFA
Siyempre kumikita siya ng kanyang income sa
services niya being performed in Taiwan.
Sabi niya, hindi siya dapat mataxan kasi 2 years na
siyang nasa Taiwan so consider na siya as non-resident
citizen. And since yung services niya daw were performed
outside of the Philippines for that 2-year period, then the
income that she had earned for that particular period
should not be subject to tax in the Philippines because it is
an income sourced from outside of the Philippines and she
is a non-resident citizen during this taxable period. Hence,
her income should not be subject to tax.
Q: What was the opinion of the CIR in this matter?
A: The CIR opined that she is not considered a non-resdient
citizen because her employer remains to the DFA. Hence,
her employment is not considered as employment abroad.
And since it is not considered as an employment
abroad, then she is not qualified as a non-resident citizen;
rather she remains to be a resident citizen. Consequently,
all her income whether sourced from within or outside the
Philippines, shall be subject to tax.
There is another opinion. Dito naman sa opinion na
to, eto yung opinion na kinoypa dun sa 2019 Bar.
A Corporation. Ang empleyado is si Debs. Si A
corporation pinadala niya si Debs sa kanyang parent
company in Japan, si B Corporation. Si B Corp is a non-
resident foreign corporation.
Q: Will the income earned by Debs at the time that she
stayed in Japan, be considered as a taxable income in the
Philippines?
Q: Ano ba si Debs? Resident citizen or non-resident citizen?
Kasi kung resident citizen siya, di yung income niya
earned in Japan will be subject to tax because a resident
citizen shall be subject to tax for income sourced from
within and without.
Kung non-resident citizen si Debs, then hindi siya
masasubject to tax.
Q: Do we apply the ruling in that case involving the
employee of DFA?
A: The CIR opined na considered si Debs as a non-resident
citizen because she stayed out of the Philippines most of the
time during the taxable year.
Tapos sabi sa opinion na yun, since considered siya
as non-resident citizen, then all her income when she was
in Japan shall not be subject to tax.
Q: So ano ba talaga? How do we harmonize?
A: We can harmonize it in this manner:
Q: If we would take a look at a situation involving a parent
company and the subsidiary, will the parent company
control the manner on how debs will perform her functions?
A: Yes
Q: So may power of control ba ang parent company na nasa
abroad sa employement ni Debs?
A: Yes.
Q: Can we consider that as an employment in the foreign
jurisdiction?
A: Yes kasi merong control eh.
Q: Kahit na ang nagbabayad pa rin ng sahod niya ay si
domestic corporation?
A: Yes. Kasi, ang tinitignan naman dun, employment
thereat.
And the consistent (sic) in terms of the ruling of the
CiR is the definition of employment thereat.
Every time the Commissioner would define the
place employment thereat, the CIR will always interpret it in
the context of Labor Laws, and that is control.
So if there is an exercise of control by the parent
company, we will consider it as employment in that foreign
jurisdiction. Hence, the taxpayer would be classified as a
non-resident citizen. So, only her income that has been
sourced in the Philippines will be subject to tax.
 BOTTOMLINE:
If we would take a look at these rulings, check if
there is a foreign entity which will manage and supervise the
services of the employee.
So, even if the domestic corporation still pays the
salaries of these employees, then he is still considered as an
employee of the foreign corporation once the foreign
corporation exercises power of control over the services
being rendered by the employee of the domestic corporation.
If the problem lack such a factual circumstance,
then still treat the employee as a resident citizen such as
that particular case involving the employee of DFA.
Q: Is there a jurisprudence on this matter?
A: There is none. So, we can argue either way as long as we
can defend our answer. But if we will defend our answer,
then we should defend it in the context of the two elements
in order that the taxpayer will be considered as a non-
resident citizen.
Q: What are the two elements?
A: Employment thereat meaning abroad; and he should
have stayed most of the time abroad during the taxable year.
Most of the time meaning 183 days or more.
Q: What about resident alien? When do we consider the
taxpayer as a resident alien?
A: Pag resident siya, yun yung may VISA na siya as a
resident of the Philippines. But if he already stayed here for
Page 68 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
a year or for 1 calendar year, then he is already considered
as a resident alien.
Q: Paano mo macoconsider kung engaged or not engaged?
A: If the non-resident alien has a business here in the
Philippines, then he is engaged in business kahit nagstay
lang siya dito for 2 days.
Kahit nagstay lang siya dito for 2 days basta meron
siyang business, he is considered as a non-resident alien
engaged.
Q: Eh bakit sabi sa batas, more than 180 days?
A:Sabi jan, deemed. So pag nagstay na siya dito sa
Philippines for more than 180 days, he is deemed to be
engaged in business. So, kahit wala silyang negosyo dito at
nagstay siya dito for more than 180 days, then he is deemed
to be engaged in business. Dun gagamitin yun.
Q: Pero kung meron na siyang business dito, how do we
classify him?
A: He is a non-resident alien engaged in business.
Q: Pag wala siyang negosyo tapos nagqualify siya dun sa
period na 180 days, considered ba siya as engaged?
A: Yes.
Q: Pano pag nagstay lang siya dito isang araw pero may
negosyo siya dito, how do we classify him?
A: Engaged
3. DIVIDEND INCOME
For dividend income, we consider the issuer
corporation.
Q: Why would it all depends on the issuer corporation?
A: It is because of the reality that the situs of the income
with respect to dividend income will depend on the issuer
corporation.
NOTE:
We are not referring to the shares of stocks. We are
referring to the declaration of dividend. We are referring to
the dividend income.
Q: If we talk about the dividend income, where is the situs
of the dividend if the issuer is a domestic corporation?
A: Within
Q: If the issuer is a non-resident foreign corporation, where
is the situs?
A: Outside
Q:Paano pag resident foreign corporation, where is the
situs?
A: It depends on the percentage of the ratio of the gross
income earned within the Philippines that bears over the
total worldwide income.
Q: Ano ulit ang percentage?
A: 50%
Q: Pag 50% or more eh within, ano to?
A: Pro-rate
Q: Pag less than 50% within, ano to ?
A: Outside
NOTE:
If we used old testaments, our old testaments is
based on an old ruling. There now exists a new ruling which
clarified the previously issued rulings which tell us that pag
50% or more within, less than 50%, pro-rate.
Dun sa ruling, hinarmonize lahat ng previously
issued rulings, ang sabi dun sa ruling na yun, eto lang ang
rule:
50% or more, pro rate; less than 50%, without.
Do not always rely on Old Testaments.
So, if the income earned from within the Philippines
is 60%, that means 60% of the dividend income is
considered as sourced from within.
If 60% of the income has been earned outside the
Philippines, then that means that the dividend income is
entirely sourced outside the Philippines.
Q: If 40% has been earned from within, where is the situs of
dividend income?
A: Outside
Q: If 70% has been earned from within, where is the situs of
the dividend income?
A: Pro-rate. That means, 70% of the dividend income is
considered as sourced from within; and 30% is considered
as sourced from without.
We will only apply that if the issuer corporation is a
resident foreign corporation.
 ISSUER: DOMESTIC CORPORATION
Q: If a domestic corporation issues dividend income to a
resident citizen or a non-resident citizen or a resident alien,
will we consider this as income sourced from within?
A: Yes.
Q: Will it be subject to tax?
A: Yes
Q: What type of tax?
A: 10% Final Withholding Tax
Q: If a non-resident alien engaged in trade or business
earned dividend income from a domestic corporation, is that
considered as income sourced from within?
A: Yes because the issuer corporation is a domestic
corporation.
Q: Will it be subject to tax?
A: Yes.
Q: What type of tax?
A: 20% final withholding tax
Q: If a non-resident alien not engaged in trade or business
earned dividend income from a domestic corporation, is that
considered an income sourced from within?
A: Yes.
Q: Is it subject to tax?
A: Yes
Q: What tax?
A: 25% Final Withholding Tax
NOTE:
Kailangan daw nating imemorize. Kasi sa Bar,
meron yung isang question, determine the tax implication
of the dividend income issued to the following taxpayers, A,
B,C,D,E.
Q: What if a domestic corporation issues dividend income to
another domestic corporation, what is the tax implication?
Page 69 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Exempt
Q: What’s the principle?
A: Intercorporate dividend principle.
Q: What is intercorporate dividend principle?
A: It states that if a domestic corporation issues dividend
income to another domestic corporation or a resident foreign
corporation, then the dividend income shall be exempt from
tax.
Q: If a domestic corporation issues dividend income to a
resident foreign corporation, will it be exempt from tax?
A: Yes. It is still covered by intercorporate dividend
principle.
Q: What if a domestic corporation issues dividend income to
a non-resident foreign corporation, will it be subject to tax?
A: Yes
Q: What type of tax?
A: 30% Final Withholding Tax
NOTE:
If we talk about the dividend income, the basis will
always be the gross amount of dividend income received. No
deductions allowed.
 ISSUER: NON-RESIDENT FOREIGN
CORPORATION
Q: If a resident citizen earned dividend income from a non-
resident foreign corporation, will it be subject to tax?
Q: Saan ang situs pag ang nag-issue ng dividend income ay
non-resident foreign corporation?
A: Outside
Q: Eh ang kumita?
A: Yung resident citizen.
Q: Will it be subject to tax?
A: Yes because a resident citizen is subject to tax for income
soured from within or outside of the Philippines.
Q: Will it be subject to final withholding tax?
A: No because the Philippine government cannot constitute
that non-resident foreign corporation as a withholding
agent. That will violate the principle of territoriality and
international comity.
Q: So ano yan?
A: It will form part of the gross income that is subject to
normal tax.
Q: What if a non-resident citizen earned dividend income
from a non-resident foreign corporation, will it be subject to
tax?
Q: Saan ulit ang source pag ang nagi-issue ay non-resident
foreign corporation?
A: Outside
Q: Sino ang kumita?
A: Non-resident citizen.
Q: Will he be subject to tax for income sourced from outside?
A: No. He will only be subject to tax if the income has been
sourced from within.
Q: Will the dividend income earned by a non-resident citizen
from a non-resident foreign corporation be subject to tax?
A: No because it’s an income sourced from outside. So,
exempt.
Q: Will the story be the same if we talk about a resident alie
and a non-resident alien?
A: Yes. Same.
Q: What if a domestic corporation earned dividend income
from a non-resident foreign corporation, will it be subject to
tax?
A: Yes.
Q: What type of tax?
A: Normal corporate income tax.
Q: Same story as that of a resident citizen?
A: Yes.
Q: What if a resident foreign corporation earns dividend
income from a non-resident foreign corporation, what is the
tax implication?
A: Exempt .It is not subject to tax.
Q: Why?
A: If the dividend income is issued by a non-resident foreign
corporation, the dividend income is considered as sourced
from outside.
In which case, we know that a resident foreign
corporation and a non-resident foreign corporation will only
be subject to tax if the income has been sourced from
within.
Hence, since the dividend income has been sourced
from outside, then it will not be subject to tax.
 ISSUER: RESIDENT FOREIGN CORPORATION
Q: What if a resident citizen earned dividend income from a
resident foreign corporation? e.g 100k.
 ILLUSTRATION:
Each stockholder earned dividend income of a 100k
from a resident foreign corporation.
Madali yan pag ang income niya ay more than 50%
outside. Kasi pag more than 50% outside, without na yan.
If the ratio of the gross income earned in the
Philippines that bears over the worldwide gross income
within the 3-year period prior to the declaration of the
dividend, ay more than 50
% outside, outside yan.
Pag 50% or more within, pro-rate.
If more than 50% outside na kinita nung resident
foreign corporation ay outside of the Philippines, yung
dividend income sourced from outside.
So kung entirely sourced from outside, no problem.
Ang magiging problema ay pag 50% or more of the gross
income of that resident foreign corporation has been
sourced from within.
Kasi, kung 50% or more, ipropro-rate yan.
Q: Paano kung 60% earned from within the Philippines;
40% of the gross income of this resident foreign corporation
has been earned from without.
Q: Saan ang source ng dividend income earned by the
stockholder?
A: Ipro-pro rate.
Q: Pag yung resident citizen, will the entire amount be
subject to tax?
Page 70 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yes. Kasi yung taxpayer ay resident citizen who will be
subject to tax whether the income has been earned from
within or without.
So actually, the entire amount of a 100k will form
part of the gross income of the resident citizen that is
subject to tax; so normal tax.
Q: What if we talk about non-resident citizen, will the
dividend income earned by the non-resident citizen be
subject to tax?
A: Yes. But only up to the extent of 60k .
Q: Why 60?
A: Because that is the only income that is considered as
sourced from within.
Q: Will the story be the same if we talk about resident alien
and non-resident alien?
A: Yes.
Q: What about the domestic corporation, how much of the
income shall be subject to tax if the domestic corporation
will receive dividend income from a resident foreign
corporation?
A: Yes. Normal tax definitely,
Q: How much?
A: Entire amount because a domestic corporation shall be
subject to tax whether the income has been earned within
or outside.
NOTE:
You cannot use intercorporate dividend principle,
kasi kung intercorporate dividend principle, ang nag-iissue
dapat, domestic. Pwedeng magbago yung recipient; either
domestic or resident. Dito, ang nagi-issue resident foreign.
Q: What if we talk about a resident foreign corporation and
a non-resident foreign corporation, how much of the 100k
shall be subject to tax?
A: 60k because that is the only amount that has been
sourced from within.
Q(King): If the dividend income received by resident citizen
from a resident foreign corporation, is it subject to normal
tax?
A: Yes. Normal tax because a final withholding tax will only
be imposed if the dividend income has been earned from a
domestic corporation.
If we take a look at the Tax Code, that 10% final
withholding tax or 20% final withholding tax will only be
imposed if the dividend income has been earned from a
domestic corporation.
So pag wala yun dun sa mga list ng final
withholding tax, ang bagsak is normal tax.
Pag wala sa Tax Code ang tax implication, ang balik
mo talaga normal tax.
4. SALE OF PERSONAL PROPERTY
If we talk about sale of personal property, the situs of
the income depends on whether the sale of personal
property involves a property that had been produced by the
taxpayer and sold by the taxpayer; or whether it involves a
personal property that has been purchased by the taxpayer
and sold by it.
So, tignan mo muna kung si taxpayer din ba ang
nagproduce. Kasi, pag si taxpayer din ang nagproduce,
apply Sec. 42.
Q: And what is that?
A: If the personal property has been produced by the
taxpayer in the Philippines, and has been sold by the
taxpayer outside the Philippines, then it will be considered
as sourced partly within and partly without.
If the personal property has been produced outside
the Philippines, and sold within the Philippines, then it will
be considered as sourced partly within and partly without.
Q: Bakit?
A: Kasi if we talk about sale of personal property produced
by the taxpayer, then we speak of two main activities
involving that transaction.
Q: What are the two main activities?
A: The production and the sale.
Hence, we need to consider where the product has
been produced and where the product has been sold.
Q: What if it has been produced and sold outside, where is
the situs?
A: Outside
Q:What if it has been produced and sold in the Philippines,
where is the situs?
A: Within
So, mangyayari lang yung partly within and partly
without kung magkaiba yung lugar ng production at tsaka
sale.
NOTE:
We will only apply that if it involves sale of goods
produced by the taxpayer because if it involves sale of goods
purchased by the taxpayer, then we will not apply that
particular rule.
We will apply the passage of title test.
Q: What is passage of title test?
A: Passage of title would mean that the situs of the income
will be based on the place where the ownership has been
transferred.
Likewise, we also apply the BOAC test which
involves sale of a personal property particularly the ticket.
Q: When will that occur?
A: It will occur if we talk about transaction that had
occurred in the Philippines.
So, the situs of the income will be in the Philippines.
Q: Kailan iaapply yung passage of title test?
A: Ang passage of title test iaapply yan kung ishiship yung
goods.
e.g Nasa ibang bansa yung goods.For example, in Hong
Kong. Tapos, ishiship yung goods dito sa Philippines. So
obviously, yung transaction could have occurred in Hong
Kong and in the Philippines, kasi nga dito naman idedeliver
yung goods sa Philippines.
Q: So anong iapply dun?
Kasi yung sa ticket walang problema kasi yung
conract nandito sa Philippines, yung delivery, nandito sa
Page 71 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Philippines. Ang mahirap, kung yung perfection, iba sa
lugar kung saan idedeliver.
A: So, ang iaapply ay passage of title test or where the
transfer of ownership has occurred.
So just check if it is FOB Destination or FOB
shipping point.
If it is FOB shipping point, where will the ownership
transfer?
A: At shipping point
Q: If it is FOB Destination, where will the ownership be
transferred?
A: At the point of destination.
 RECAP:
For sale of personal property, we need to check what
type of property is involved.
If it refers to a personal property that has been
produced by the taxpayer and sold by the taxpayer, then
apply this test under Sec. 42.
If it refers to a personal property that has been
purchased by the taxpayer and sold by the taxpayer, then
apply the passage of title test.
If it involves a situation where the place of delivery
is the same as the place of perfection of the contract, then
obviously, apply BOAC doctrine. The source of the income
is the activity that had produced the income.
Lastly, we need to determine whether it involves
sale of shares of stocks.
5. SALE OF SHARES OF STOCKS
If we talk about SALE OF SHARES OF STOCKS, the
situs will depend on the issuer corporation.
 ISSUER: DOMESTIC CORPORATION
Under Sec. 99 of the Tax Code, if the issuer
corporation is a domestic corporation, then the shares of
stocks are considered as sourced within.
Kaya nga pag nagdonate ka ng shares of stocks ng
isang domestic corporation, considered yan as property
located within.
 ISSUER: NON-RESIDENT FOREIGN
CORPORATION
Q: What about shares of stocks issued by a non-resident
foreign corporation, where are these shares located?
A: Outside
 ISSUER: RESIDENT FOREIGN CORPORATION
Q: What if it talks about shares of stocks issued by a
resident foreign corporation, where are these shares of
stocks located?
A: It depends.
If 85% or more of the operations of the resident
foreign corporation is in the Philippines, then the shares of
stocks are considered as located in the Philippines.
If less than 85% is located in the Philippines, then
the shares of stocks are considered as located outside.
NOTE:
Wag ipagmemerge ang dividend income at ang
shares of stocks.
Yung kaninang natuckle na 50% or more, ang
pinag-uusapan dun, dividend income.
This time, ang pinag-uusapan natin ay yung
location ng shares of stock.
So, if we talk about shares of stock, domestic
corporation within, non-resident foreign corporation
without. Easy, kasi ganyan din naman pag dividend
income.
If we talk about shares of stock issued by a resident
foreign corporation, then determine whether the operations
of this resident foreign corporation is in the Philippines.
If 85% or more of the operations are located in the
Philippines, then we consider the shares of stocks as located
from within.
If less than 85% of the operations of this resident
foreign corporation is located in the Philippines, then we
consider the shares of stocks as located outside the
Philippines.
 PROBLEM:
Mr. C, a resident citizen, bought ready to wear goods
from Ms. B, a non-resident citizen.
If the goods were produced from Ms B’s factory in the
Philippines, is Ms. B’s income from the sale to Mr. C taxable
in the Philippines?
Q: Who is the income earner?
A: Ms. B
Q: What is the status of the income earner?
A: Non-resident citizen
Since we already know that the income earner is a
non-resident citizen, then we can now conclude that she will
only be subject to tax if the income has been sourced from
within.
Q: In which case, do we need to determine the situs of the
income?
A: Yes.
For us to know the situs of the income, we will
remember concepts under Sec. 42.
So eto sale of personal property.
Pag sale of personal property, titignan mo muna
kung anong binebenta niya; binili ba niya o siya ang
gumawa.
Q: Siya ba ang gumawa?
A: Yes
Q: Importante ban a malaman mo rin kung saan binenta?
A: Yes.
Q: Saan binenta?
A: Philippines kasi si Mr. C ay isang resident citizen.
Q: Saan prinoduce?
A: Philippines
Q: Saan binenta?
A: Philippines
Q: Saan ang situs?
A: Philippines
Q: If Ms. B is an alien individual and the goods were
produced in her factory in China, is Ms. B’s income from the
Page 72 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
sale of goods to Mr. C taxable in the Philippines? Will the
analysis be changed?
A: No. She will only be subject to tax for income sourced
from within.
Q: Where is the situs?
A: Partly within and partly without.
Q: Will it be subject to tax in the Philippines?
A: Yes. Only with respect to the portion of the income
corresponding to that which has been sold in the
Philippines.
 PREVIOUS BAR Q:
Spouses Konstantino and Karina are Filipino citizens
and are principal shareholders of a restaurant chain,
Karina's, Inc. The restaurant's principal office is in Makati
City, Philippines.
Korina's became so popular as a Filipino restaurant that
the owners decided to expand its operations overseas.
During the period 2010-2015 alone, it opened ten (10) stores
throughout North America and five (5) stores in various
parts of Europe where there were large Filipino
communities. Each store abroad was in the name of a
corporation organized under the laws of the state or country
in which the store was located. All stores had identical
capital structures: 60% of the outstanding capital stock was
owned by Karina's, Inc., while the remaining 40% was
owned directly by the spouses Konstantino and Korina.
Beginning 2017, in light of the immigration policy
enunciated by US President Donald Trump, many Filipinos
have since returned to the Philippines and the number of
Filipino immigrants in the US dropped significantly. On
account of these developments, Konstantino and Karina
decided to sell their shares of stock in the five (5) US
corporations that were doing poorly in gross sales. The
spouses' lawyer-friend advised them that they will be taxed
5% on the first PhP100,000 net capital gain, and 10% on
the net capital gain in excess of PhP100,000.
Q: Is the lawyer correct? If not, how should the spouses
Konstantino and Karina be taxed on the sale of their shares?
(5%)
 Kung paano kwinento ni ma’am:
Si Korina tsaka yung asawa niya na si Mar nagtayo sila
ng restaurant dito sa Philippines. So, nagtayo sila ng isang
domestic corporation. Sila rin ang stockholders. Eh sumikat
daw ito. So nung sumikat siya, nagexpand sila sa iba-ibang
bansa so first state, second state, third state, fourth state
and fifth state. So lahat yun, ginawa nilang corporation.
So, sa bawat state, nagtayo sila ng different corporation.
So tama naman, kasi yung liability. Mas magandang
magtayo ng corporation to shield your personal assets from
liability. So yun ang ginawa nila.
And then, ang sabi dun, 60% of the shares of each of
the corporations are owned by Korina and the husband.
Tapos, nalugi siya. Nung nalugi siya, nagdecide daw si
Korina at tsaka yung asawa niya na ibenta na lang yung
shares nila dito sa mga corporation na to sa iba-ibang
bansa.
Pumunta daw sila sa isang abogado. At sabi nung
abogado, yang benta mo ng share mo, subject yan sa 5% net
capital gains tax for the first 100k net gain and 10% net
capital gains tax for the excess of a 100k net gain.
Q: Is the advice of the lawyer correct?
If we will observe, hindi sila nagtanong ng tax rate.
Pero yung problem would require us to know the right tax
rate.
Q: Sino ang kumita?
A: Si Korina at Mar
Q: Ano sila?
A: Resident Citizen. So, they will definitely be subject to tax
whether their income has been source from within or
outside the Philippines.
So, dito, hindi na natin aalamin kung saan yung
situs. Ang titignan na ngayon, yung type of tax earned para
malaman kung ano yung tax implication.
Q: Ano ulit yung transaction?
A: Sale of shares of stocks
Q: What is the tax implication again of sale of shares of
stocks?
Dito, obviously, hindi ordinary assets yung shares
of stocks kasi hindi naman broker ng shares of stocks si
Korina at Mar.
So, we will consider the shares of stocks as capital
assets.
Q: How will we consider the taxability of the shares of
stocks?
A: Pag ordinary asset, madali kasi normal tax.
Q: Pag hindi yan ordinary asset, ano ang tax implication?
Ang gagamitin ba natin is it depends on whether they are
listed or not listed?
A: No. Gagamitin lang yan pag shares of stocks siya ng isang
domestic corporation.
Pag listed yan, stock transaction tax of 6/10 of 1%.
Pag not listed, dati 5% for the first 100k; 10% for the excess.
But under the T.R.A.I.N Law, it has been changed to 15%.
Q: So, ang sagot ba natin dito ay 15% final withholding tax
because they are not listed in the stock exchange?
A: NO.
Q: Why not?
A: Because it does not involve sale of shares of stock of a
domestic corporation.
Q: Ano ang binebenta nila?
A: Shares of stock of resident foreign corporations. Hence,
we do not apply that tax treatment.
Q: But will it still be subject to tax?
A: Yes.
Q: Anong type of tax?
A: Normal tax. Yun yung sinasabi ni ma’am na kapag hindi
yan magfofall sa mga list ng withholding taxes, ang tax
treatment nean balik sa normal tax.
Q: Hindi ba considered yan as sale of shares of stocks
located outside, kasi non-resident foreign corporation yung
Page 73 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
mga nag-issue ng shares? Kasi diba yung limang
corporations located siya sa ibang bansa.
Q: Hindi ba sale yan ng shares of stocks issued by a non-
resident foreign corporation? So are these shares considered
as located outside?
A: Yes.
Q: So where is the situs pag located outside?
A: Outside kasi dun ang transfer of ownership eh. Outside
eh.
Q: Bakit subject pa rin sa normal tax?
A: Kasi resident citizen si Korina at si Mar eh.
Q: So, will they be subject to tax whether the income has
been earned within or outside of the Philippines?
A: Yes.
February 20, 2020
Interest Income derived by members of a credit
cooperative shall not be subject to tax. It would be tax-free.
If you are a member of BBCC, any interest income
that you earned from deposits with the cooperative will be
exempt from tax.
 DIVIDEND INCOME
We had discussed the tax rates and the circumstances
where dividend income will be exempt from tax.
You need to determine whether it involves a dividend
income or it involved sale of shares of stocks because if we
talk about dividend income and sale of shares of stocks,
these transactions shall be subject to different tax
treatments.
NOTE:
Stock dividends are generally not subject to tax.
Q: Why stock dividends are not subject to income tax?
 ILLUSTRATION:
There are 5 incorporators, A,B,C,D and E.
INCORPORATOR SHARES OF PERCENTAGE
STOCKS OF OWNERSHIP
A 1OK 10%
B 40K 40%
C 10K 10%
D 30K 30%
E 10K 10%
TOTAL 100K 100%
The corporation decided to distribute stock
dividends.
So pag nagdistribute ang corporation ng stock
dividend, assuming that the corporation will distribution
10k stock dividends. 10% of the 10k stock dividends will go
to A, 40% to B, 10% to C, 30% to D, 10% to E. for a total of
10,000 stock dividends.
After the declaration of stock dividends, A now owns
11k share, B now owns 44k shares, C now owns 11k shares,
D owns 33k shares, E owns 11k shares for a total of 110k
shares.
Q: Was there a flow of wealth on the part of A, B, C , D, E.
A: Meron pero hindi narealized kasi nadagdagan naman
siya ng share eh only that such gain has not been realized.
 CIR v. ANSCOR
Stock dividends are generally not subject to tax because
while it is true that there is an added shares received by the
stockholders, these shares are not realized and they are
considered as an unrealized gain.
And for an income to be considered as taxable, the gain
should have been realized.
Here, there was no change in the ownership. 11k
times 110k is equivalent still to 10%, as to B still 40%, and
so on up to E.
If we talk about realization of gain again, there’s no
gain realized because there’s no change in ownership.
Q: What are the exceptions to the general rule that stock
dividends are not subject to income tax?
A:
1. IF THE CORPORATION HAD GIVEN THE OPTION
TO THE STOCKHOLDERS TO CHOOSE EITHER
STOCK DIVIDEND OR CASH DIVIDEND AND
SOME OF THEM AVAILED OF CASH DIVIDEND.
Then obviously, there would be a change in the
ownership.
 ILLUSTRATION:
Si B ang pipilliln niya cash, si D din cash.
Q: Yung percentage of ownership ba ni A, C and E ay tataas?
A: Yes.
So if there’s a change in the ownership, then there
is a realized gain.
And that is the reason why, if we talk about a
situation where the corporation had granted the
stockholders the option to choose either stock or cash
dividend, and some of them exercise such option in
choosing cash dividend, obviously, there would be a change
in the percentage of ownership for those who had chosen
stock dividends. And hence, there would be a realized gain
which is subject to income tax.
2. REDEMPTION OF STOCK DIVIDENDS OR
DIVIDEND EQUIVALENCE RULE
Dividend equivalence rule happens when:
a. There is a redemption or cancellation of shares of
stocks
b. The shares cancelled or redeemed represents stock
dividends
c. The redemption or cancellation or distribution of
these stock dividends is essentially equivalent to a
taxable dividend.
NOTE:
The third element is a case to case basis. There’s no hard
and fast rule in order to determine that it is essentially
equivalent to a taxable dividend.
 CIR v. ANSCOR
Page 74 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Don Andres purchased 100 shares of stocks. Over time,
Don Andres accumulated stock dividends of 50k php. And
then, Don Andres redeemed the entire 150k shares.
Q: What do we mean when speak of redemption?
A: Babawiin na ni corporation.
Q: Is this a good scheme in order to evade payment of tax,
yung sa declaration of stock dividend?
A: Yes.
ILLUSTRATION:
Arce, Johan, Gee and Debs are the children of
ma’am. Kunwari, wala itong dividend equivalence rule.
Ang sasabihin lang ni ma’am. Magdeclare na lang
tayo ng stock dividends.
Q: Bakit siya magpapadeclare ng stock dividends?
A: Kasi not taxable. Exempt.
Ang sasabihin ni ma’am, kasi 90% siya,
magdedeclare sila ng stock dividends. Kanya yung 90% ng
stocks na idedeclare na stock dividends, tapos mga anak,
hati hati sila sa natitirang 10%.
Q: Paano yun icoconvert ni ma’am sa cash? Kasi
technically, stocks lang yun eh. So unrealized gain siya kasi
walang change dun sa percentage ng ownership nila tapos
wala din naman siyang nakuhang pera kasi stocks lang
siya. It represents capital in that particular corporation.
Q: Paano marerealize ni ma’am yung gain niya doon sa
stock dividends?
A: Ang gagawin niya, ibabalik niya sa corporation. Ang
tawag dun, redemption. Kasi yung shares na inissue sa
kanya ng corporation, ibabalik niya sa corporation which is
called redemption of shares.
Pag rinedeem ni corporation yung shares of stocks,
babayaran dapat ni corporation yung value nung shares na
yun.
So technically, yung stock dividends earlier issued,
pwedeng iconvert to cash through redemption. At ginagawa
yan ng close corporation nung wala pang dividend
equivalence rule.
Ang ginagawa nung wala pang dividend equivalence
rule, magdedeclare sila ng napakaraming stock dividends
over time. Tapos after 1 year or after 2 years, ipaparedeem
nila sa corporation para maconvert to cash yung stock
dividends.
Q: Yung declaration ba ng stock dividends taxable?
A: Exempt. Unrealized gain eh.
Q: Yung redemption ba of shares taxable?
A: No because it’s just a return of capital.
So ginamit nilang scheme yun. Na magdedeclare
sila ng stock dividends kasi non-taxable. Magreredeem sila
because that’s just a capital transaction since redemption
is merely a return of the capital.
So parang ang ginagawa lang ng corporation,
binabalik niya yung investment.
Q: Is that a return of capital or return on capital?
A: That’s still a return of capital if we talk about simple
redemption.
So sabi dati sa Anscor, ginagamit yan dati ng
corporations para tumakas sa kanilang liability.
And that’s the reason why Congress had included
this provision on dividend equivalence so that the
redemption and cancellation of shares which were
distributed as stock dividends will be treated as a taxable
dividend.
Balik sa Anscor
Q: Will we treat the 100k as a taxable dividend?
A: No kasi iapply lang ang dividend equivalence if we talk
about redemption or cancellation of shares of stocks which
were earlier distributed as stock dividends.
Q: Ano yung 100k?
A: Yung 100k hindi yan nadistribute as stock dividends.
Binili niya yan.
So binili niya sa corporation 100k worth of shares,
then binabalik niya ngayon sa corporation which is just a
return of capital.
Q: Will that be subject to tax?
A: No. That is a simple case of redemption. And since it is a
simple case of redemption, then it will not be subject to
income tax because it is a mere return of capital.
Q: Does it involve redemption of stock dividends?
A: Yes.
Q: Will we treat it as essentially equivalent to a taxable
dividend?
A: If the taxpayer cannot present a justification as to the
declaration of the stock dividends, not as to the redemption
of the stock dividends, then the redemption will be
essentially treated as a taxable dividend.
In this particular case of Anscor, they have argued
that the redemption of the shares of stocks were necessary
for the Philippinization program of the corporation.
But the SC held that, the reason for the redemption
is not material, what is material is the reason or the
justification for the issuance of the stock dividends.
And in this particular case, the taxpayers did not
present any justification for the issuance of the stock
dividends.
Hence, it will be essentially considered as a taxable
dividend.
 CIR v. GOODYEAR
Q: What is preferred shares?
A: Yan yung nagiinvest ka lang. Ayaw mong magvote, wala
kang voting right, gusto mo lang mag-invest simply because
the yield rate for preferred shares are higher compared to
the yield of common shares.
The taxpayer here, bought several preferred shares
of Goodyear. And then in a particular taxable period, the
taxpayer received a certain amount of money when the
taxpayer turned over the preferred shares to the
corporation.
BIR had learned about the receipt of such an
amount and the BIR treated the amount received by the
taxpayer as dividend income.
Page 75 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
It was argued by the taxpayer that it is not
considered as a dividend income; rather it is merely
considered as a redemption of preferred shares.
During that particular taxable period when the
taxpayer purchased the preferred shares up to the time that
the taxpayer turn-overed the preferred shares, there were
no unrestricted retained earnings.
Q: Will the receipt of the amount of money by the taxpayer
be subject to tax because it is considered as dividend
income?
A: NO
Q: Why?
A: A corporation cannot declare any dividend if it has no
unrestricted retained earnings.
If the corporation has no unrestricted retained
earnings, then it can never declare dividend income.
And that being sad, any amount received by the
taxpayer will be considered as merely a redemption price for
the return of the preferred shares to the corporation.
And hence, since it is merely considered as a
redemption, then it will be subject to no tax.
Kaya kailangan mong alamin kung ano ba yang
nareceived niya. Dividend income ba yan or return lang for
redemption.
Kasi kung return lang of the value of the shares by
reason of redemption, basta hindi redemption of stock
dividends, not taxable.
 RECAPITULATION:
Q: If we talk about simple redemption of shares whether
preferred share or common share, will it be subject to tax?
A: No because it is merely a return of capital.
Q: What if it involves redemption of stock dividends, will it
be subject to tax?
A: Yes if the redemption or cancellation is essentially
equivalent to a taxable dividend.
Q: If we consider it as a dividend income, will it be subject
to tax?
A: It depends on the type of dividend.
If the dividend is a stock dividend, and everyone
gets stock dividend, then it will not be subject to tax.
If it is in the nature of other types of dividends, then
it will be subject to tax.
 SALE OF REAL PROPERTY CLASSIFIED AS A
CAPITAL ASSET
Sec. 24d of the NIRC covers sale, barter, exchange
or other disposition of real property. It embraces forced sale,
conditional sale, but it will not include contract to sell.
Q: Why will it not include a contract to sell?
A: Because there’s no transfer of ownership for a sufficient
consideration in a contract to sell.
It will include pacto de retro sale, but it will not
include deed of reconveyance.
Q: Why?
A: Because in deed of reconveyance, there’s no
consideration in the transfer of the property.
 ILLUSTRATION:
Ma’am purchased a property but she asked Roan to
register the property under her name.
Roan executed a trust agreement stating therein
that ma’am is the real owner of the property.
Ma’am wants the property back and register it
under her name.
Roan needs to execute a deed of reconveyance.
When she executed a deed of reconveyance, she need to
register it with the BIR.
Q: Will the reconveyance be subject to tax?
A: No because it is not considered as sale, barter, exchange
or disposition for a sufficient consideration.
It is merely a return of the property to the real
owner. That is already subject of a ruling by the BIR.
Q: What is the rate?
A: 6%
Q: What is the taxable base?
A: The gross selling price or the fair market value in
accordance with Sec. 6 e whichever is higher.
Q: What is the definition again of market value under Sec.
6e of the Tax Code?
A: The higher amount between the value prescribed by the
CIR which is also called the zonal value or the value
prescribed by the city or provincial assessor which is also
called the assessed value.
The 6% capital gains tax will only be imposed if the
real property is a capital asset.
It is very important because the moment that you
had erroneously classified the asset as a capital asset, then
the answer is already wrong.
Under Revenue Regulations 7-2003, the Secretary
of Finance provided a guideline on how to classify a real
property, that is whether the real property is considered a
capital asset or an ordinary asset.
Q: How do we consider whether a real property is considered
a capital asset or an ordinary asset?
A: Depende sa business niya kasi yun yung una mong
titignan.
Kung ang negosyo ba niya ay real estate or hindi.
Q: Pag ang negosyo niya ay real estate, ano ang una nating
titignan?
A: Anong type. Kung considered ba siya as a real estate
broker, a real estate lessor or one who is habitually
enganged in business.
Q: If he is considered a real estate broker, what are the
ordinary assets of a real estate broker?
A: All the real properties acquired. And then, all the real
properties used in business.
Q: Paano kung real estate lessor?
Page 76 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: All the real properties being leased by the taxpayer and
all the properties being used by the taxpayer shall be
considered as ordinary asset.
Q: Eh yung habitually engaged?
A: This is a taxpayer who is not registered as a real estate
developer, and not even registered as a real estate lessor.
Q: Ano siya?
A: Not engaged in any business at all, only that, he had more
than six sales transactions involving a real property during
the same calendar year.
Q: So pag pito na ang benta niya na real property during the
calendar year, will he be considered as habitually engaged
in business?
A: Yes.
Q: Will the property be considered as ordinary asset?
A: Yes.
Q: What if the taxpayer is not engaged in realty business?
Will all the real properties acquired by the taxpayer be
classified as an ordinary asset?
A: No because we only apply that if the taxpayer is engaged
in realty business.
Q: When will we know whether the real property is
considered as an ordinary asset?
A: If the taxpayer uses it for his business.
Once the taxpayer used it in his business, then it
will be considered as an ordinary asset.
Under the same revenue regulations, if the owner,
director or any of the stockholders uses the property; it will
be considered as a property being used business.
 PREVIOUS BAR Qs:
1. A condominium developer sold a condo unit to
Jenny for 4.3 M.
a. Will the sale be subject to Capital Gains Tax or
regular corporate income tax?
Q: Anong unang phase ng analysis?
A: Business, kung engaged ba siya sa realty business o
hindi.
Q: Engaged ba siya sa realty business?
A: Yes. Condo developer eh.
Q: Since the taxpayer is a condo developer, will the condo
unit be considered as an ordinary asset or a capital asset?
A: Ordinary asset because it is an inventoriable property.
Q: Being an ordinary asset, will the sale be subject to CGT?
A: NO because it is not a capital asset. It will be subject to
regular corporate income tax because it involves a sale of
real property which is classified as an ordinary asset.
b. Will the sale be subject to VAT?
A: Yes because it involves a sale of an ordinary asset and
the sales transaction reached the threshold amount.
Q: How much is the threshold amount? Residential to diba?
A: Pag residential lot lang, 1.5. Pag residential house and
lot, 2.5.
Q: Magkano binenta?
A: 4.3 dun sa problem. More than the threshold amount so
it will be subject to VAT.
2. X Corporation is engaged in land transportation
business. X Corp got a property located at Quezon
City which is a condo unit.
This condo unit is not being used by the corporation in
its business operations, as in never been used. But, it is
being used by Atty. Crimson who happens to be a majority
stockholder of the corporation.
The corporation decided to change its business
location, and hence, it sold this property.
a. Is the sale subject to CGT or regular corporate
income tax?
Q: Ano ulit ang unang phase of analysis?
A: Anong business niya.
Q: Is it engaged in realty business?
A: No. Land transport.
Q: If the taxpayer is not engaged in realty business, what’s
the rule?
A: It will only be considered as an ordinary asset if the real
property is being used in business.
Q: Is the property being used in business?
A: No.
Q: But pursuant to the revenue regulations, will it be
deemed as being used in business?
A: Yes simply because the unit is being used by one of its
stockholders. Hindi nga kailangan majority eh.
Sa revenue regulations, basta ginamit ng owner,
director or stockholder kahit hindi pa yan majority
stockholder, the property will be deemed as being used in
business.
Q: In this case, is it being used by a stockholder?
A: Yes
Q: Will we classify it as an ordinary asset?
A: Yes.
Q: Will it be subject to CGT?
A: No, it will be subject to regular corporate income tax.
b. Will it be subject to VAT?
NOTE: The problem does not indicate any amount.
A: Yes. It will be subject to VAT provided that the gross
selling price exceeds 2.5 M php.
 ALTERNATIVE TAXATION
NOTE:
Alternative taxation applies only to sellers who are
individual taxpayers.
Alternative taxation will never apply to cases
involving corporate taxpayers.
Alternative taxation is one where an individual
taxpayer sold a real property classified as a capital asset to
the Republic of the Philippines, its political subdivisions or
instrumentalities.
Q: Kasama ba ang GOCC sa 24d?
Page 77 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Yes. Even sales being made to GOCCs can be subject to
alternative taxation.
So, the moment that an individual taxpayer sells a
property to the Government, its political subdivisions,
instrumentalities or GOCCs; then we apply alternative
taxation.
Individual taxpayers have the option to choose
between CGT under Sec. 24d or normal tax under Sec. 24a.
Q: Anong tawag na ulit pag nagbenta ka sa government ng
sapilitan?
A: Expropriation sale
NOTE:
Pag expropriation sale ang nasa problem, wag ka nang
makipagpilitan na hindi available ang alternative taxation.
Pag nakalagay sa problem expropriation sale, ibig
sabihin nean, sale yan to Government.
So pag individual taxpayer ang nagbebenta, iapply
na agad ang alternative taxation.
 SITUATION:
There’s a parcel of land with a tree which is
considered as a capital asset of the X Corporation. This
parcel of land was sold to DPWH by X Corporation.
X Corporation as a domestic corporation bought it
for 10M and the appraisal value of the Government is only
8 M. Fair market value is 15M. So it was sold for 8M through
an expropriations sale. Thus just compensation is 8 M.
Q: What is the tax implication?
A: 6% CGT.
 ILLUSTRATION:
Q: What if the taxpayer is Ms. A? What is the tax implication
of the transaction?
A: The tax implication can either be normal tax which is on
24a or CG which is on 24d.
Q: Which is more beneficial on the part of the taxpayer? 24a
or 24d?
A: Pag nag24d siya, ang tax implication is 6% based on 15
M kasi yun yung zonal value mas mataas.
Q: Pag pinili niya ang normal tax, ano ang tax implication?
A: Wala kasi ang selling price niya 8M minus cost of sales
na 10M; so may loss siya na 2M.
Q: So pagkapinili niya normal tax under 24a, meron ba
siyang income tax liability?
A: None.
Kaya sila naglagay ng alternative taxation because
they know the reality that most often than not in a
expropriation sale, the individual taxpayer will definitely
receive a lower amount compared to the amount for which
the property has been bought.
Q: In pacto de retro sales, how many CGT shall be imposed?
A: 2. Nung nagbenta siya tapos nung rinepurchase niya.
The sale is considered one transaction; the repurchase will
be considered as another sales transaction.
Q: Paano kung conditional sale? Ilang bentahan pag
conditional sale?
A: Isa lang kasi ifufulfill lang yung condition.
Q: Paano kung contract to sell?
A: Walang benta because there is a condition that there has
to be full payment of the selling price and then there has to
be an execution of a deed of absolute sale.
So, the CGT shall only be imposed upon the
execution of the deed of absolute sale.
Q: When should the CGT be paid?
A: Within 30 days from the date of sale.
CGT shall also apply in cases of forced sale. Forced
sale is also called as foreclosure sales.
Q: When will CGT be imposed in cases of foreclosure sales?
Pag nagforeclose ka ng property, extrajudicial
foreclosure, ibebenta sa public auction, then magi-issue ng
Certificate of Sale tapos yung Certificate of Sale dapat
approved by the Executive Judge, tapos hihintayin yung
redemption period.
Upon the expiration of the redemption period,
icoconsolidate.
Q: When will CGT be imposed, will it be upon the issuance
of certificate of sale after the auction sale?
A: No.
Q: When then?
A: Upon the lapse or expiration of the redemption period.
NOTE:
In foreclosure sales, CGT would be imposed only if
there is no redemption of the property within the redemption
period provided under the law. Meaning, the redemption
should have first elapsed before CGT shall accrue.
If the property has been redeemed within such
redemption period, then there would be no accrual of tax
liability.
Q: When will CGT be paid in cases of foreclosure sales?
A: It will be paid within 30 days after the expiration of the
redemption period.
Q: Bakit after?
A: Because CGT will only accrue upon the expiration of the
redemption period.
 SUPREME TRANSLINER v. BPI
The property has been redeemed within the
redemption period. And since the property was redeemed
during the redemption period, then no CGT shall accrue.
Q: Pero sino ang magbabayad? Si judgment debtor, si
judgment creditor or highest bidder?
Kasi sa BAR, may ganun na tanong. Si Hopeful
Bank ang nagforeclose ng property ni X Corporation. At ang
pinagbabayad ni BIR ng tax ay si Hopeful Bank.
Luckily, in that particular case, there was a
redemption within the redemption period. So madali lang
sabihin na, no, no tax shall accrue because the property has
been redeemed within the redemption period.
Q: Paano kung hindi naredeem? Ang isasagot ba dun eh
maling taxpayer ang kinokolektahan?
Q: Who shall be liable for CGT?
Page 78 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Seller.
Q: In this case, who is the seller?
A: X Corporation, not the bank. Kasi hindi naman si bank
ang nagbebenta eh, si bank ang highest bidder.
NOTE:
Under the General Banking Act, if the mortgagor is
a juridical entity and the mortgagee is a banking institution,
then the property must be redeemed within 3 months from
the date of approval or date of registration whichever is
earlier.
For tax purposes, in cases involving a juridical
entity as a mortgagor and a banking institution as
mortgagee, the redemption period is 3 months from the date
of approval of the Certificate of Sale by the Executive Judge.
The other redemption period is one wherein it does
not involve a mortgagor which is a juridical entity and
mortgagee which is a banking institution. If such is the case,
the redemption period will be 1 year from the date of
registration.
So, tignan mo na muna kung sino mortgagee. Pag
si mortgagee is a banking institution and si mortgagor is a
juridical entity, then apply the 3-month period.
If the mortgagor is not a juridical entity or the
mortgagee is not a banking institution, then apply the 1 year
period.
Q: Why is it important for you to know the right redemption
period?
It’s because of the fact that if the redemption period
is 3 months, and the redemption period had already
prescribed without the judgment debtor redeeming the
property, then capital gains tax or normal tax shall already
accrue.
Within 30 days from the expiration of the
redemption period, capital gains tax should be paid.
If we talk about normal tax, then within 10 days
after the close of the taxable month when the redemption
period had expired, then the creditable withholding tax
should be remitted to the Government.
If we talk about foreclosure sales, we need to take
note of the correct redemption period. We need to note if its
within 3 months or within 1 year.
Q: Why?
A: Because the tax will only accrue if the redemption period
had expired without the judgment debtor redeeming the
property.
Assuming that the redemption period is 1 year, and
the judgment debtor did not redeem the property within that
1 year period. So, we now have expiration of the redemption
period.
Q: Will tax accrue?
A: Yes.
Q: What type of tax shall accrue?
A: It depends on whether the property is an ordinary asset
or a capital asset.
If the property is a capital asset, then the tax
implication is capital gains tax. Hence, the capital gains tax
should be paid within 30 days after the expiration of the
redemption period.
Q: What if the asset is an ordinary asset? What is the tax
implication?
A: Normal tax. And when we speak of normal tax, merong
advance payment usually.
Q: Ano ang tawag sa advance payment ng normal tax?
A: Creditable Withholding tax.
And under existing regulations, creditable
withholding tax will be paid within 10 days after the close of
the month.
So pag ang pinag uusapan ay sahod, edi within 10
days after the close of the month when the salaries had been
received.
Q: Dito, ano yung income?
A: Yung income is yung sale.
Q: Kailan magkakaroon ng sale?
A: Pag nag-expire yung redemption period.
Hence, the creditable withholding tax should be
paid to the Government within 10 days after the close of the
taxable month when the redemption period expired.
 CIR v. UCPB
The mortgagee is a banking institution UCPB, the
mortgagors are juridical entities or they are corporate
taxpayers.
The corporate taxpayers are engaged in realty
business.
Q: What will we apply? The 1 year redemption period or the
3-month redemption period?
A: The 3-month redemption period because this is a
problem involving a mortgagor which is a juridical entity
and a mortgagee which is a banking institution.
And the 3-month period shall be counted from the
date of approval of the certificate of sale by the Executive
Judge.
Ang submission of the Certificate of Sale by the
Notary Public is January 15, 2019.
The judge had seen that there was an error in the
Certificate of Sale and in the report. So, the judge required
the revision of the Certificate of Sale and the report. So, it
was given back to the notary public and it was resubmitted
on March 30, 2019.
The judge approved it on April 4, 2019.
NOTE:
Ganito din daw sa UCPB. Napalitan lang date.
In this case of UCPB, the mortgagors failed to
redeem the property within the redemption period.
Q: When is the last day of the payment of the tax?
A: For we to answer this correctly, kailangan nating
malaman kung ano yung redemption period, kung 1 year ba
or 3 months.
Eh dito 3 months.
Page 79 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Kung 3 months, saan kinacount ang 3 months?
A: April kasi date of approval of the Certificate of Sale by the
Executive Judge.
So, July 3, 2019 ang last date of the redemption
period.
NOTE: 1 month is equivalent to 30 days.
Q: If the mortgagor didn’t redeem the property on July 3,
2019, will tax accrue?
A: Yes.
Q: What tax shall be paid?
A: Normal tax
Q: Why normal tax?
A: Because the mortgagor is engaged in realty business.
So, if we talk about normal tax, then there will be
an advance payment called creditable withholding tax.
And the creditable withholding tax will be paid
within 10 days after the close of the taxable month when the
redemption period had expired.
Q: Kailan nag-expire?
A: July 3.
Q: Kailan ang close ng taxable month ng July 3?
A: July 31, 2019.
Q: Kailan niya babayaran?
A: August 10, 2019
If the creditable withholding tax was not paid on or
before August 10, 2019, there will already be an imposition
of interest, penalties and surcharge for late payment.
Q: What if the property is a capital asset? Eh di ano dapat
ang tax na babayaran?
A: Capital gains tax
Q: Pag CGT, kailan nag accrue yung tax?
A: After the expiration of the redemption period kasi meron
siyang buong July 3, 2019 to redeem.
Q: So kailan lang mag accrue?
A: July 4 kasi pwede pa siyang magredeem ng buong July 3
eh kasi yan yung last day niya of the redemption period.
So, mag aaccrue yung liability July 4.
Q: Hanggang kailan pwedeng magbayad ng tax?
A: 30 days from the expiration of the redemption period.
Q: The 30-day period will be counted from what date?
A: July 4.
NOTE:
Basta ang batas, sinabi month, that’s equivalent to 30
days. Pag 1 year, dun ka lang magpla plus 1 dun sa taon
kasi 1 year under the Administrative Code is equivalent to
12 months. But under the same code, a month is equivalent
to 30 days.
So pag sinabi sa batas, 3 months, ang gagawin is 3
times 30 which is 90 days.
Q: Is there a way in order to avoid the payment of CGT?
A: Yes.
 WAYS IN ORDER TO AVOID THE PAYMENT OF
CAPITAL GAINS TAX
1. SALE OF PRINCIPAL RESIDENCE
If it involves a sale or principal residence, it may be
exempt from CGT if the following requisites are complied
with:
a. It must involve a sale of principal residence
b. The sale is for the purpose of acquiring or
constructing a new principal residence within 18
calendar months from the date of sale
c. It must availed of once in 10 years
d. There must be a notice to the Commissioner
regarding the intention to avail of the exemption
e. This notice of intention must be submitted to the
Commissioner within 30 days from the date of sale,
which is the same date for the filing of an estate tax
return.
f. The historical cost of the property must be carried
over to the cost of the new principal residence.
NOTE:
In order to avail of full exemption, the proceeds
derived from the sale of the principal residence must be fully
utilized for the acquisition or construction of the new
principal residence.
If the proceeds had not been fully utilized, then
there will be a partial tax exemption which would mean that
only the portion which has been utilized for the acquisition
or construction of the new principal residence will be
exempt from capital gains tax.
2. TAX-FREE EXCHANGE UNDER SEC. 40 C
If a real property is transferred to a corporation in
exchange for shares of stocks where the transferor either
alone or together with others but not exceeding four, will
obtain control over the transferee corporation, then it will be
exempt from capital gains tax.
3. SALE OF REAL PROPERTY OF AN INDIVIDUAL
TAXPAYER TO THE GOVERNMENT
- It is also called Alternative Taxation.
- The taxpayer chooses normal tax.
4. SALE OF REAL PROPERTIES CLASSIFIED AS
AGRICULTURAL LAND UNDER THE
COMPREHENSIVE AGRARIAN REFORM LAW.
Any transfer to the beneficiaries shall be exempt from
capital gains tax.
February 27, 2020
RECAP OF THE THINGS
DISCUSSED
Q: Where is the situs of sale of real property?
A: Where the property is located.
Q: Rentals and royalties?
Page 80 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: The place where the property being rented out is located
or where the right to use the subject of royalty shall be
exercised.
When we were discussing about the rules, maybe
we have reflected upon the reality that there are four types
of income under Section 32a of the Tax Code:
1. COMPENSATION INCOME
- Income earned from employer-employee
relationship.
So, if we talk about fringe benefit, that is an income
earned from employer-employee relationship. Hence, it is
classified as a compensation income.
If the income was not sourced from employer-employee
relationship, then we will classify it as income from
business, trade or profession.
2. INCOME FROM BUSINESS, TRADE OR
PROFESSION
3. PASSIVE INCOME
- Income earned where the taxpayer will not do
anything but sit down and relax.
NOTE:
Rental Income is not considered as passive income.
Rather, it is considered as income from business, trade or
profession because in cases of lease agreements, we had
learned under Civil Laws, that the lessor has an obligation
to the lessee. Hence, we cannot classify it as a passive
income; rather it is classified as an income from business,
trade or profession.
4. INCOME FROM CAPITAL DEALINGS
- This is the income sourced from capital assets.
Q: Why do we need to know all about these qualifications?
A: It is because of the reality that the type of income will
determine the tax implication.
1. COMPENSATION INCOME
Q: If we talk about compensation income, what’s the rule on
the tax treatment for compensation income?
A: Normal tax.
And then we need to classify what type of
compensation income has been earned by the taxpayer.
Because, if the compensation income earned by the
taxpayer is in the nature of fringe benefit, we need to
consider whether the fringe benefit is in the list of
HEVHIMTHEL or not.
If it is among the list of HEVHIMTHEL, then what
the taxpayer had received is considered as the monetary
value.
And if we talk about monetary value, that is the
value of the benefit that is already net of tax. Meaning, the
tax has already been removed from the amount. And hence,
we consider that amount received by the employee as net of
tax.
Q: If the fringe benefit does not fall within the list of benefits
enumerated under Sec. 33 or HEVHIMTHEL, what is the tax
implication?
A: It will be subject to the 90k parameter. And any excess
shall be subject to 35% fringe benefit tax. Because we need
to remember that the list of fringe benefit is not exclusive.
Meaning, all other benefits received by a managerial
or supervisory employee shall be treated as fringe benefit
subject to fringe benefit tax.
Q: If the category or the classification of the compensation
income is basic salary, meaning an addition of the basic
salary; what is the tax implication?
A: Normal tax
Q: What if the compensation income received by the
taxpayer is in the nature of other benefits?
A: Then we need to check whether the other benefits is
under de minimis or not. Because if it is under de minimis,
then we need to check the amount. And if it is under that
particular amount, then it falls under de minimis, then it
will be exempt from tax. Any excess shall be subject to the
90k parameter. And any excess shall be subject to tax.
2. PASSIVE INCOME
In passive income, we had discussed about stock
dividends.
I. DIVIDEND INCOME
Q: What’s the tax implication of stocks dividends?
A: GENERAL RULE: Exempt
EXCEPTIONS:
1. If the corporation declaring the dividend will grant
an option to choose between stock dividends and
other dividends. And, some of the stockholders
exercise such option, then the stock dividends will
be subject to tax.
Q: What about liquidating dividends, what’s the tax
implication of liquidating dividends?
Liquidating dividend is the amount that you receive
after the corporation had already dissolved its business
operations.
Q: Sino ang nakakatanggap nito?
A: Stockholders
Q: What’s the tax implication of liquidating dividends?
A: Exempt BUT only up to the extent that represents the
return of capital.
e.g Ma’am invested 100k in that particular corporation.
Bumili si ma’am ng shares of stocks worth a 100k.
Nagliquidate kasi nagdissolve ng business. Ang binalik kay
ma’am ay 200k.
Q: Will the entire 200k be exempt from tax?
A: No. We apply return of capital, return on capital rule. The
flow of wealth on that particular transaction is only up to
the extent of a 100k which represents return on capital.
So, if we talk about liquidating dividend, only that
portion which represents return of capital shall be exempt
from tax.
Q: For dividend equivalence, it represents what transaction?
A: Redemption or cancellation of stock dividends.
Kasi pag redemption or cancellation lang ng shares,
di return of capital lang yan. In which case, we will not apply
the principle of dividend equivalence.
We will only apply the principle of dividend
equivalence if it involves if it involves redemption or
Page 81 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
cancellation of stock dividends which is essentially a taxable
dividend.
 INTERCORPORATE DIVIDENCE PRINCIPLE
Q: When will this apply?
Q: If what type of corporation shall declare a dividend?
A: Domestic Corporation will declare a dividend, not
necessarily stock but all types of dividend, in favor of
another domestic corporation and resident foreign
corporation.
And we know that this dividend shall be exempt
from tax.
 TAX SPARING RULE
Tax Sparing Rule is applicable when a non-resident
foreign corporation receives dividend income.
We do not apply tax sparing rule in all other cases.
We will only apply it if a non-resident foreign
corporation RECEIVES dividend income.
Q: So, if a non-resident foreign corporation receives dividend
income, what is the tax implication?
A: 30% final withholding tax as long as the dividend income
has been sourced from within because a non-resident
foreign corporation will only be subject to tax if the dividend
income is sourced from within.
In which case, we do not apply tax sparing rule if a
non-resident foreign corporation received dividend income
from another non-resident foreign corporation because if a
non-resident foreign corporation declares dividend income,
that income is considered as sourced from outside.
Hence, it will not be subject to tax for those
taxpayers who will only be taxed for income sourced from
within.
Q: When will this happen?
A: We will apply tax sparing rule if a non-resident foreign
corporation receives dividend income from a domestic
corporation OR from a resident foreign corporation which
earned income in the Philippines for at least 50%.
Kasi kung less than 50% ang sourced from within,
sourced from outside, so, hindi na siya subject to tax.
 RECAP:
This Tax Sparing Rule will only be applicable if a
non-resident foreign corporation receives dividend income
from a domestic corporation or from a resident foreign
corporation whose gross income within the 3-year period
prior to the declaration of the dividend is at least 50%
sourced from within.
And in which case, we know, that this dividend
income shall be subject to tax particularly 30% final
withholding tax on the gross amount of dividend income.
Tax Sparing Rule is one where the 30% final
withholding tax shall be reduced to a rate of 15%. Meaning,
in this particular stance, the Philippine government shall
forego a 15% rate because instead of collecting 30%, this
corporation shall be subject to a lower rate of 15%.
Q: Magkano ang finorego ni Philippine government?
A: 15%
Q: When will this be applicable? When will the lower rate
apply?
A: The lower rate will apply if the domicillary country of the
non-resident foreign corporation grants a tax credit
equivalent to the tax foregone in the Philippines.
Tax Sparing Rule is a situation where a lower rate
of 15% shall be imposed on the dividend income earned by
a non-resident foreign corporation if the domicillary country
of the non-resident foreign corporation grants a tax credit
equivalent to the tax foregone in the Philippines.
 PROCTER AND GAMBLE PHILIPPINES
CASE
We have Procter and Gamble US and Procter and
Gambe Philippines.
Si Procter and Gamble Philippines is a subsidiary,
meaning it is a separate entity from that of Procter and
Gamble US.
Nagremit ng profits si Procter and Gamble Philippines
kay Procter and Gamble US.
Q: Will the remittance be subject to Branch Profit
Remittance Tax?
A: No. It is not a branch. It’s a subsidiary remitting the
amount of profits to the parent company.
So kahit ilagay sa Bar Exams remittance, niremit,
wag magpapagoyo.
Sinabi na dun, Procter and Gamble Philippines. Pag
ganun ang pangalan, wag nang isipin na branch yan.
Subsidiary yan kaya nga siya may sariling pangalan eh.
Otherwise, ang linagay jan Procter and Gamble US
Philippine Branch remits amount to Procter and Gamble US
Head Office.
Q: Since the amount is being remitted by a subsidiary to a
parent company, will we treat this as branch remittance?
A: No kasi nga separate entity.
Q: How do we treat the remittance?
A: It will be considered as dividend income.
Dividend Income earned by a non-resident foreign
corporation from a domestic corporation.
Q: Will we consider this as an income sourced from within?
A: Yes. Obviously.
Q: Sinong nagearn dun, US or Philippines?
A: US kasi dividend income.
Q: Will we consider the dividend income earned by Procter
and Gamble US as sourced from within?
A: Yes.
Q: Will it be subject to tax?
A: Yes.
Q:What rate?
A: 30% BUT the dividend income can be subject to a lower
rate.
Q: And what’s the lower rate again?
A: 15%
Q: And what’s the condition in order that the lower rate of
15% will be imposed?
A: We have to take a look at the laws of the US, kasi yun
yung domicillary country. Check whether that State or
Page 82 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
domicillary country grants a tax credit for that dividend
income in the US.
Q: Bakit ganun?
Q: Ano ang state of source?
A: Philippines
Q: Ano ang state of residence?
A: US
Q: Tinataxan ba yung dividend income both sa state of
source and sa state of residence?
A: Yes.
Q: So anong type of double taxation to?
A: International Double Taxation. So either mag-adopt sila
sa treaty ng exemption method or credit method. But
apparently, dito sa laws natin, ang inaadopt ay credit
method.
Q: Pag pinag-uusapan natin yun, sino ang laging naga-
adjust, state of source or state of residence?
A: Residence. Never maga-adjust yung state of source kasi
dun inearn yung income eh.
Q: So, under exemption method, sino dapat ang maggrant
ng exemption?
A: State of Residence
Q: Pag under credit method, sino dapat ang magbigay ng
tax credit?
A: State of Residence
Q: Ano ang reason kung bakit sa tax sparing rule ay
magragrant ng tax credit ang state of residence?
A: Para pantay sila.
Ang kokolektahin lang dito 15% US, pero dapat
ikaw din, magforego din ng certain amount.
So since nagforego ako ng 15% , dapat ikaw din US,
magforego para pantay tayo.
Kaya siya tinawag na tax sparing rule, kasi may
finoforego sila.
Ang state of source may finorego.
Q: Ano yun?
A: 15%, yun yung tax foregone.
Ang state of residence din dapat may iforego.
Q: Ano yung ifoforego niya?
A: Equivalent to the tax foregone in the State of Source.
So ibig sabihin, upon checking the laws of the
domicillary country, it must clearly appear that the
domicillary country should grant a tax credit, kasi
babawasan din nila yung kokolektahin nilang tax,
equivalent to the tax foregone in the Philippines.
Q: Magkano ang tax foregone sa State of Source?
A: 15%
So dapat at least 15% din ang tax credit sa US.
Q: Pag hindi at least 15% ang binigay sa US, which is the
tax being paid doon sa State of Residence, pwede bang
magbawas to a lower rate of 15%?
A: No.
Q: So kung ang tax credit sa US 10% lang, anong iapply na
rate sa Philippines, 30 or 15?
A: 30%.
Q: Kung ang binigay na tax credit ng US ay 20%, ano ang
rate na iimpose sa dividend income sa Philippines, 30 or 15?
A: 15 kasi yung binigay na tax credit sa US is at least the
tax foregone in the Philippines. That’s why we call it Tax
Sparing Rule because both States wills spare a little amount
of tax in favor of that taxpayer.
Q: Why is stock dividend considered as non-taxable?
A: Because even before or prior the declaration, the
percentage of ownership will remain the same.
The Government shall only impose 15% Branch
Profit Remittance Tax only if the amount being remitted is
being remitted by a branch office to the head company.
We do not apply 15% Branch Profit Remittance Tax
if we talk about remittance by a subsidiary to a parent
company.
Q: Why so?
A: Because if we talk about remittances by a subsidiary to
the parent company, it will be classified as dividend income
and not profit remittance.
And if we talk about profits being remitted by the
branch to the head office, it is not considered a dividend
income because it is the same entity; rather it will be
considered as profit remittance.
Q: If tax sparing rule is applicable, will the rate to be
imposed on either dividend income or profit remittance be
the same?
A: Yes.
Q: Pag dividend income yan, tapos applicable ang tax
sparing rule, ano ulit ang rate?
A: 15%
Q: Pag branch profit remittance siya, ano ulit ang rate?
A: 15% but the 15% Branch Profit Remittance Tax is
imposed on the actual remittance or the amount earmarked
for remittance. So, constructive, kasama.
Q: Ganun din ba sa dividend income may constructive?
A: Yes. So actually, the same siya.
NOTE:
Pag ang tanong sa Bar ay tax treatment, hindi
pwedeng it’s taxable or it’s not taxable because the phrase
tax treatment refers to tax implication.
 PREVIOUS BAR Q:
State the tax treatment of the cash dividends.
Q: So pag resident citizens, what’s the tax treatment?
A: 10% Final Withholding Tax
Q: Non-Resident Alien engaged in trade or business, what’s
the tax treatment?
A: 20% final withholding tax.
Q: Not engaged?
A: 25%.
NOTE:
Hindi lang dapat rate. Ilagay kung anong type ng
tax.
Q: Domestic Corporation?
Page 83 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: It is exempt. Pero kung gusto mong magpa-impress,
ilagay mo, it is exempt pursuant to intercorporate dividend
principle.
Q: Non-resident foreign corporation, what’s the tax
treatment?
A: 30% final withholding tax UNLESS Tax Sparing Rule is
applicable where the lower rate of 15% final withholding tax
shall apply.
II. ROYALTIES
Passive income for royalties shall be subject to 20%
final withholding tax as a GENERAL RULE.
EXCEPTION would be 10% if it applies to LBM
Q: What is LBM?
A: Literary Works, Books, Musical Compositions.
So, if it refers to LBM, a lower rate of 10% shall be
imposed.
NOTE:
We do not apply this 10% rate for literary works,
books, and musical compositions with respect to royalties
earned by corporations because this rate is applicable only
to individual taxpayers.
Q: So pag nag-earn ng royalty ang isang corporation, ano
ang tax rate niya?
A: 20% final withholding tax
III. INTEREST INCOME
For interest income, we need to check whether it
arose from a bank deposit or deposit substitute. So, it’s 20%
final withholding tax.
Other agreements shall be subject to normal tax.
If the bank deposit or deposit substitute is under
foreign currency deposit system, then the rate of 15% final
withholding tax shall be imposed EXCEPT if the taxpayer is
a non-resident because if the taxpayer is a non-resident, the
interest income shall be EXEMPT. Except also if it concerns
a resident foreign corporation because the T.R.A.I.N Law did
not amend the provision related to interest income earned
by resident foreign corporations.
So, for interest income earned by resident foreign
corporations from expanded foreign currency deposit
system, the rate of 7.5 % final withholding tax shall still
apply.
Ibig sabihin, all other taxpayers, 15% EXCEPT
siyempre non-resident dahil nga exempt.
But if we talk about resident foreign corporations,
taxable pa rin yan kasi nga resident but it will not be subject
to 15% final withholding tax because it has not been
amended under the T.R.A.I.N law; rather the interest income
shall be subject to 7.5% final withholding tax.
For long term deposits, it will be exempt.
Q: What’s the holding period for long term deposits?
A: At least 5 years.
Q: When will we consider the deposit as a deposit
substitute? Ilang lenders?
A: 20 or more. So if the number of lenders is 20 or more,
then the borrowing will be considered as a public borrowing.
Hence, it will be considered as a deposit substitute.
IV. PRIZES and WINNINGS
Q: For prizes, what’s the tax implication?
A: It depends on the amount.
10K or less shall be subject to normal tax; more
than 10k shall be subject to 20% final withholding tax.
Q: What about winnings?
A: 20% final withholding tax regardless of the amount.
3. INCOME FROM CAPITAL DEALINGS
Last meeting, we have discussed about the concept of
capital asset.
Q: What are capital assets?
A: Under the Tax Code, capital assets had been defined as:
Capital assets does not include SIS READ :
a. Stocks-in-trade
b. Inventoriable Property
c. Property held by the taxpayer primarily for sale or
properties primarily held for sale
d. Real Property used in business
e. Property used in business of a character which is
subject to allowance for depreciation or depreciable
property used in business.
It is very important for us to know whether the asset is
an ordinary asset or a capital asset because the tax
implication of a transaction will entirely depend on the type
of asset.
Q: If the asset is an ordinary asset, what is the tax
implication, assuming that it is a sale of real property?
A: Normal tax or creditable withholding tax
Q: If we talk about capital asset, what is the tax implication?
A: Capital gains tax.
Q: Will it be subject to VAT if the transaction involves an
ordinary asset?
A: Yes
Q: If the asset is a capital asset, will it be subject to VAT or
other business taxes?
A: No because business taxes will only be imposed if the sale
has been made in the ordinary course of business.
NOTE:
However, if the transaction involves a property
located outside the Philippines, the 6% capital gains tax will
not be imposed.
If the real property is located outside the
Philippines, 6% capital gains tax will not be imposed
notwithstanding the fact that the real property is classified
as a capital asset.
Q: Why is that so?
A: Because the Tax Code particularly Sec. 24d thereof, is
very explicit. Capital gains tax will only be imposed if it
involves sale, barter, exchange, or other disposition of real
property located in the Philippines.
Q: So pag hindi siya subject dito sa mga final taxes na to or
whatever tax, ano ang tax implication?
A: Normal tax.
Page 84 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: So if a real property classified as a capital asset was sold
outside of the Philippines because the real property was
located outside the Philippines, will it be subject to tax?
A: It depends on the taxpayer.
Kasi kung non-resident citizen yan, eh considered
na yan as sourced outside, eh di hindi na yan subject to tax.
Q: Eh paano kung resident citizen?
e.g Si ma’am own a real property located at US. She decided
to sell it simply because she will no longer use it. She is not
engaged in the business of buying and selling property.
Q: So, how do we classify this real property?
A: Capital asset.
Q: Where is the source?
A: Outside?
A: Will ma’am be subject to tax?
A: Yes because she is a resident citizen.
Q: Will it be subject to 6% capital gains tax?
Kasi baka ang conclusion mo, eh taxable yan kasi
resident citizen. At baka dahil ang conclusion mo capital
asset yan, baka iconclude na subject to capital gains tax.
BUT that’s a wrong conclusion because capital
gains tax will be imposed only if the real property is located
in the Philippines.
In that case, since we had already correctly
concluded that the transaction is subject to tax because the
taxpayer is a resident citizen who earned an income outside
the Philippines, then we can safely conclude that definitely;
the transaction is subject to tax.
Q: What’s the tax implication?
A: The real property is located outside of the Philippines, so
it will not be subject to 6% capital gains tax; rather it will be
subject to normal tax.
Q: Will it be subject to creditable withholding tax?
Sabi natin, basta subject to normal tax, masasubject to
creditable withholding tax.
A: No.
Q: Why? Sino ang magbabayad? Sino ang withholding
agent?
A: Yung bibili. Eh nasa ibang bansa yun.
Q: Can the Philippine government constitute another
individual located outside its territory as a withholding
agent?
A: No.
Q: So anong mangyayari dito?
A: Subject yan to normal tax; not subject to withholding tax.
Q: So anong gagawin?
A: Irereport nung taxpayer dun sa income tax return to be
subjected to normal tax.
Q: What’s the first thing that we need to consider?
A: The type of business. If the taxpayer is engaged in real
estate business or not.
The most important here is that, if the taxpayer is
not engaged in real estate business, and if the property was
used by the owner or any of its members or stockholders; it
will be considered as an ordinary asset.
Q: What if the real property is used by an exempt
corporation in its exempt operations such as those included
under Sec. 30, will it be considered as used in business or
not used in business?
A: Under the Revenue Regulations, if the real property is
used by an exempt corporation in an exempt operation such
as those enumerated under Sec. 30 of the Tax Code, it will
not be considered for business purposes.
Hence, it shall be classified as a capital asset.
e.g
Yung client ni ma’am gustong bumili ng real
property sa Tarlac. Yung real property is being owned by a
non-stock, non-profit educational institution. The real
property is being used for educational services.
Gustong bilhin nung client ni ma’am yung real
property ni educational institution.
Q: Will the sale by this educational institution be subject to
capital gains tax or normal tax?
Ang tanong nung client kay ma’am is ano ang tax
implication nung sale.
Q: Ano ang operation?
A: Educational
Q: non-stock, non-profit?
A: Yes
So, sa Sec. 30 may dalawang test.
Q: Anong pangalan nung dalawang test?
A: Organizational test and operational test
Q: Ano yung organizational test?
A: Basta dapat non-profit
Q: Ano ang operational test?
A: Dapat yung purposes niya, enumerated under Sec. 30.
Q: Non-profit?
A: Yes. So pasado siya dun sa organizational test.
Q: Ano ang operations niya?
A: Educational
Q: Eto educational ba, ang educational ba ay nandun sa
purposes under Sec. 30?
A: Yes
Q: So pasado siya sa operational test?
A: Yes.
Q: So isa ba siyang corporation under Section 30?
A: Yes.
Q: Yung property ba niya ay ginagamit for its exempt
operations?
A: Yes.
Q: Pag ginagamit siya for proprietary purposes, will it qualify
as exempt operations?
A: Hindi
Q: Dito, ginagamit ba siya for exempt operations?
A: Yes. Educational
Q: So how do we consider the asset, ordinary or capital?
A: Capital asset.
Page 85 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: Will the sale of that real property be subject to capital
gains tax or normal tax?
A: capital gains tax
Q: Will it be subject to VAT or other business tax?
A: No because it involves a sale of capital asset.
( NEVER BEEN ASKED IN THE BAR. Ang logic lang
naman nean ineexempt mo nga siya, so pag binenta mo,
bakit mo siya tataxan ng very huge amount of VAT eh
yung 12% VAT is based on the gross selling price. So
basically, it is for social benefit purposes)
 NOTE:
Once an ordinary asset, always an ordinary asset.
So, if the taxpayer will change its business from
Real Estate Business to non- real estate business, or if the
taxpayer originally registered to be Real Estate Business but
failed to subsequently operate as such or if the taxpayer
abandoned the real property or if the real properties had
become idle; it will ALWAYS be considered as an ordinary
asset. It will not be reclassified from an ordinary asset to a
capital asset.
I. SALE, EXCHANGE OR DISPOSITION OF
PRINCIPAL RESIDENCE
Last meeting, we had discussed about sale or
exchange or disposition of principal residence. We had
already enumerated the checklist of situations where the
sale of a principal residence will be considered as exempt
from tax.
If there is no full utilization of the proceeds of the
sale, exchange or disposition, then the unutilized portion
shall be subject to capital gains tax.
 PROBLEM:
Mr. H approaches you as a friend for advice if it is
possible for the sale of their house to be exempted from
capital gains tax and the conditions that they must comply
with to avail themselves of the said exemption.
Q: How will you respond?
A: As a friend of Mr. H, I will advise that it is possible that
the sale of their house will be exempted from capital gains
tax because it involves sale of principal residence in order
for them to acquire or construct a new principal residence.
However, in order for the transaction to be exempt
from tax, the following conditions must be comply with
namely: (enumerate mo na)
Hence, if the following requisites had been complied
with, then the sale of the principal residence of Mr. H shall
be exempt from tax.
 ALTERNATIVE TAXATION
Alternative taxation is not applicable to sales made
by corporate taxpayers, it is not applicable to sales made in
favor of entities other than the Government, it is not
applicable to sales involving personal assets, it is not
applicable to sales involving real properties classified as an
ordinary asset.
 TAX FREE EXCHANGE
The ways in order to avoid capital gains tax is
through alternative taxation, through exempt transactions,
through sale of principal residence and through tax free
exchange aside from sale of parcels of land under the
Comprehensive Agrarian Reform Law.
The important requirements in order for us to
properly define a tax free exchange are:
a. There must be a transfer or property to a
corporation
The law does not qualify what type of property is being
transferred.
Q: Can it be a personal property being transferred in
exchange for stocks?
A: Yes.
Q: Can it be a real property being transferred for shares
of stocks?
A: Yes.
Q: Can it be shares of stocks for shares of stocks?
A: Yes.
Q: Alin ang covered dito?
A: All types of properties
So, ang coverage ng transaction na to will be
personal property for shares of stocks, real property for
shares of stocks or shares of stocks for shares of stocks. It
can also include securities in exchange for shares of stocks.
BOTTOMLINE:
This transfer must be in exchange for shares of
stocks.
b. We must likewise state that as a result of the
exchange, the person transferring the property,
either alone or together with others not exceeding
four, will obtain control over the said corporation.
 CIR v. ,FILINVEST
The following requisites must be complied with in
order that there be a tax-free exchange.
And if we would take a look at the requirements in
order that there be a tax-free exchange, it will all go back to
the definition and that is:
a. The transferee is a corporation
b. The transferee exchanges its shares of stocks for
properties of the transferor
c. The transfer is made by a person, either acting
alone or together with others, but not exceeding
four
d. This person will gain control over the transferee
corporation.
If all the requirements are complied with, this
transaction is exempt from income tax and from business
tax.
Q: Hence, will the transaction be exempt from VAT?
A: Yes.
And that’s the reason why, under the T.R.A.I.N Law,
VAT exempt transactions now include tax-free exchanges
under Sec. 40c of the Tax Code.
But quite honestly, notwithstanding the fact that
the lawmakers, assuming that they didn’t include Sec. 40c,
it will still be considered as exempt from VAT.
Page 86 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
Q: So is that inclusion considered as superfluous?
A: Yes because whether they include it or not, it will not be
considered as a sale of ordinary asset.
Q: Paano kung yung trinatransfer ay ordinary asset in
exchange for shares of stocks? Exempt pa rin ba?
A: Yes basta Sec. 40c siya kahit ordinary asset pa yang
trinatransfer, it will be considered as a transaction exempt
from VAT.
Q: What is the definition of control?
A: Under CIR v. FILINVEST, control has been defined as
ownership of stocks in a corporation by possessing at least
51% of the total voting power of all classes of stocks entitled
to vote.
So sa quiz, si B. That’s a 2019 Bar Q.
Q: Is that considered a tax-free exchange?
A: Quite obviously because B acquired 51%.
Ang hahanapin actually na phrase dun ay yung
gain control. B gained control over the corporation because
he acquired 51% of the total voting power.
 2018 BAR Q:
Karlito, a Filipino businessman, is engaged in the
business of metal fabrication and repair of LPG cylinder
tanks. He conducts business under the name and style of
"Karlito's Enterprises," a single proprietorship. Started only
five (5) years ago, the business has grown so enormously
that Karlito decided to incorporate it by transferring all the
assets of the business, particularly the inventory of goods
on hand, machineries and equipment, supplies, parts, raw
materials, office furniture and furnishings, delivery trucks
and other vehicles, buildings, and tools to the new
corporation, Karlito's Enterprises, Inc., in exchange for
100% of the capital stock of the new corporation, the stock
subscription to which shall be deemed fully paid in the form
of the assets transferred to the corporation by Karlito.
As a result, Karlito's Enterprises, the sole
proprietorship, ceased to do business and applied for
cancellation of its BIR Certificate of Registration. The BIR,
however, assessed Karlito VAT on account of the cessation
of business based on the current market price of the assets
transferred to Karlito's Enterprises, Inc.
Q: Is it subject to VAT?
Pag cancellation, meron tayong transaction deemed
sale. And under transaction deemed sale, we have there
retirement from or cessation of business.
Q: Ano ang mangyayari pag retirement from or cessation of
business ang isang VAT-registered taxpayer?
A: Yung remaining inventory niya will be deemed sold.
So, it will be subject to VAT.
If we will read this problem, we might immediately
conclude that it will be subject to VAT because it involves a
transaction deemed sale because the cancellation of the VAT
registration is equivalent to cessation from business.
Q: But will we conclude in that manner?
A: No.
Q: Will it qualify as a tax-free exchange?
Q: May trinatransfer bang property in exchange for share of
stocks?
A: Yes.
Q: Ano yung trinatransfer na property?
A: All the assets of the business so personal property.
Q: Is the transferee a corporation?
A: Yes
Q: May trinatransfer ba na property in exchange for shares?
A: Yes.
Q: The transferee is made by a person either alone or
together with others, not exceeding four? So ibig sabihin
hanggang 5 lang sila. Hanggang 5 lang ba?
A: Yes. Mag-isa nga lang siya eh.
Q: Nag-obtain ba siya ng control?
A: Yes.
Q: Is it a tax-free exchange?
A: Yes
Q: Will it be exempt from VAT?
A: Yes.
Q: Is it exempt from income tax?
A: Yes because it qualifies as a tax-free exchange.
II. FORECLOSURE SALE
Last meeting, we had discussed about foreclosure
sale. And we know that the tax shall accrue only after the
expiration of the redemption period.
Redemption period can either be 1 year from the
date of registration of the sale or 3 months from the date of
approval by the Executive Judge of the Certificate of Sale.
NOTE:
3 months will only be applicable if the mortgagor is
a juridical entity and the mortgagee is a banking institution.
Accrual of liability is different from the payment of
the tax.
The tax shall accrue upon the expiration but the tax
shall be paid within the period provided by law.
Under the law, if we talk about a sale of a capital
asset, the tax shall be paid within 30 days from the date of
expiration of the redemption period.
And if we talk about an ordinary asset, it shall be
paid within 10 days from the close of the month when the
redemption period had expired.
 UCPB CASE
In the computation of the last day for the payment
of the creditable withholding tax, then we consider the 3-
month period in redeeming the property and the 10-day
period in paying the tax.
If the tax will be paid beyond the 10-day period,
then it will be considered as delayed payment which would
entitle the Government to collect interest, surcharge and
compromise penalty.
 BAR Q: (yung facts hindi ko nacopy sa ppt guys kasi
hindi talaga dapat ako ang magtratrans ng portion
na to pero yung facts nasa baba na rin)
Q: Is there a liability for capital gains tax?
A: None
Q: Why?
Page 87 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Because the tax will only accrue upon the expiration of
the redemption period without the mortgagor redeeming the
property.
Q: Eh dito naexercise ba yung right of redemption?
A: Yes
Q: So, may tax na magaaccrue?
A: None. That’s the rule in foreclosure sale.
So, dapat dun sa legal basis, nakalagay na na in
foreclosure sales, capital gains tax shall accrue upon the
expiration of the redemption period.
Q: Ang mortgagor ba ay isang juridical entity? Ang
mortgagee ba ay bank?
A: Yes.
Q: So ano ang redemption period?
A: 3 months
Q: Counted from what?
A: From the approval of the Certificate of Sale by the
Executive Judge
NOTE:
We should know when capital gains tax shall apply
or when normal tax shall apply.
If the problem indicates creditable withholding tax,
wag mabagabag at magpanic.
Kasi pag sinabing creditable withholding tax,
normal tax yan.
We should likewise know the business tax
implication.
If we talk about business tax implication, then it
talks about the imposition of either percentage tax or VAT.
We should know whether the transaction is exempt
from tax or will be subject to alternative taxation.
III. SALE OF PERSONAL PROPERTY
We should likewise consider whether the personal
property is an ordinary asset or a capital asset.
If the property is an ordinary asset, then the sale
thereof shall be subject to normal tax.
If the personal property is a capital asset, then the
sale shall be subject to normal tax.
We do not apply 6% capital gains tax with respect
to sale of personal property because that particular section
under Sec. 24d applies only to sale of real property.
NEVER EVER EVER TELL that the sale of a
personal property classified as a capital asset shall be
subject to 6% capital gains tax.
So, whether the personal property is a capital asset
or an ordinary asset, it will be subject to NORMAL TAX.
Q: Where lies the difference?
A: The difference will lie on the business tax implication.
If the sale involves an ordinary asset, it will be
subject to VAT or other percentage tax.
But, if it involves a sale of capital asset, then there
is no business tax implication.
If the sale of personal property will fall under Tax-
free exchange, then it will be exempt from both normal tax
and business tax.
IV. SALE OF SHARES OF STOCKS
Q: What is the tax implication of sale of shares of stocks?
A: It depends if the shares of stocks are ordinary assets or
capital asset.
If it is an ordinary asset, it will be subject to normal
tax.
If it is a capital asset, it will depend on whether the
shares are listed or not listed.
If the shares are listed in the stock exchange, then
it will be subject to a stock transaction tax of 6/10th of 1%.
NOTE:
If we have seen ½ of 1%. That is already outdated.
If the shares are enlisted, then it will be subject to
15% final tax.
NOTE:
If we have seen 5% for the first 100k net gain, that
is likewise outdated.
Under the T.R.A.I.N Law, if the shares are not listed
in the stock exchange, then it will be subject to 15% final
tax based on the net capital gain.
NOTE:
This 15% final tax will only apply if it involves sale
of shares of stocks from a DOMESTIC CORPORATION.
e.g
Yung mag-asawa. Yung si Korina at Mar na nagtayo ng
restaurant. Dahil gumanda ang operation, nag-expand sa
US.
Binenta nila yung shares of stocks nila doon sa mga
foreign corporations.
Q: Will that sale be subject to 15% final tax?
A: No because it does not involve sale of shares of stocks
issued by a domestic corporation. Shares of stocks nila yun
na inissue ng isang foreign corporation.
Hence, it will not be subject to 15% final tax.
Q: Will it be subject to tax?
A: Yes because they are resident citizens.
Q: What type of tax?
A: Normal tax
NOTE:
It will not cover original issuance of share.
Q: Paano madidifferentiate?
 ILLUSTRATION:
Si ma’am yung corporation Procter and Gamble
Philippines. Bumili sa kanya si Gee ng worth 50k. The
domestic corporation is not listed in the stocks exchange.
Q: Ano yan, sale or issuance?
A: Issuance kasi galing doon sa may-ari nung shares of
stocks which is yung domestic corporation.
Q: Will that be subject to tax?
A: No. Kasi original issuance yan ng share.
Q: Ano ang sale?
A: Ang sale eh pag nagsawa si Gee, binenta niya kay Debs.
Binili ngayon ni Debs.
Q: Ano yun, issuance or sale?
Page 88 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Sale
So, etong rule na to hindi maga-apply nung
nagbigay si ma’am ng shares of stocks kay Gee kasi
considered yan na issuance. Maga-apply yun dun sa
bentahan ni Gee at tsaka ni Debs.
Q: Nung bumili si Korina ng 60% worth of shares dun sa
mga foreign corporation, ano yun? Issuance or sale?
A: Issuance
Q: Nung binenta na nila yung shares nila doon sa
corporation, ano yun, sale or issuance?
A: Sale.
NOTE:
If we talk about original issuance of shares, this is
not subject to tax.
Q: Ano ang rationale behind it?
A: Kasi ang original issuance would mean nanghihingi lang
sila ng capital.
Q: So, sino ang nanghihingi ng capital?
A: Yung corporation.
Q: So, technically, investor ka ba doon?
A: Yes. So, nagbigay ka lang ng capital kaya ang original
issuance of share ay hindi subject to tax. That’s the logic
behind it.
 SITUATION: (hindi ko ulit nacopy facts guys for the
same reason)
Q: Is the transfer subject to capital gains tax?
Q: Ano yung capital gains tax na yan.
NOTE:
Ang pangalan din nung 15% sa ibang books ay
capital gains tax. Yun lang ang pinagkaiba, 15%.
Yung 6% applicable lang sa sale of real property.
Page tong 15% na capital gains tax na to, hindi siya based
on the gross selling price or market value whichever is
higher. Ang basis ng capital gains tax na to ay net capital
gain.
NOTE:
Pag nagtanong si ma’am ng capital gains tax sa
exam, ibig sabihin yung 15% daw.
Q: Is the transfer subject to CGT , yung 15%?
Q: When do we apply again the 15% final tax?
A: If it involves sale, barter or exchange of shares.
Q: Shares of what?
A: Shares of a domestic corporation.
Q: Dito ba merong sale, barter or exchange?
Q: Pag sinabing sale, barter or exchange, diba dapat merong
consideration? Dito ba may consideration?
A: None
Q: So will it be subject to the capital gains tax?
A: No
In this ruling, the CIR opined and ma’am think that
the SC will likewise rule in the same manner, it will not be
subject to capital gains tax under Sec. 24d(2) of the Tax
Code because it does not apply in this particular case.
Q: Why is that so?
A: Because the transfer is not made pursuant to a sale,
barter or exchange of shares contemplated under the said
provision.
The transfer is made pursuant to Court decision.
Kaya daw pag nagpapatransfer sila ma’am ng
property, nirerequest daw nila na ilagay dun sa dispositive
portion that the transfer is pursuant to a court mandate.
Para maexempt sa tax. Para may basis agad ang BIR na eto
eh, may mandate ng court eh.
4. INCOME FROM BUSINESS, TRADE OR
PROFESSION
- It talks about the tax implication of income from
business, trade or profession.
Q: What is the tax implication if the taxpayer earned income
from business, trade or profession?
A: The tax implication will entirely depend on the amount of
gross receipts earned by the taxpayer during the taxable
year.
And there’s only 1 type of taxable year if we talk
about individual taxpayer. And that is, calendar year.
If the gross sales or gross receipts of the taxpayer
during the calendar year does not exceed 3 M, which is
likewise the threshold amount for VAT purposes, then the
taxpayer has the option to choose either 8% tax based on
the gross sales or gross receipts in excess of 250k or
graduated income tax.
Q: When will the 8% tax apply?
A: Only if the taxpayer is earning income from business,
trade or profession and only if the gross receipts of this
taxpayer does not exceed 3 M.
That being said, the 8% tax WILL NEVER EVER
APPLY to compensation income because compensation
income is always subject to normal tax.
NOTE:
Ma’am had to emphasize the two important
requisites is because of the reality that we will never the 8%
tax on compensation income because compensation income
is not an income from business, trade or profession.
In computing the 3M threshold, we do not add up
the compensation income. We only consider the income
from business, trade or profession.
We likewise do not consider the income subject to
final tax.
Q: Why?
A: Because the income subject to final tax is not classified
as an income from business trade or profession; rather it is
classified as a passive income.
Under Revenue Regulation 8-2018, the 8% option
will not apply to VAT-registered taxpayers.
It will not apply to taxpayer who is subject to other
percentage tax such as common carriers and operators of
water and gas utilities.
It will not apply to partners of GPP by virtue of their
distributive share.
 PROBLEMS:
Page 89 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
1. A taxpayer earned income from his profession. The
total amount of gross receipts is 2M.
However, during the taxable year, he decided to register
under the VAT system.
Q: What is the income tax implication on this transaction?
Q: Ano munang titignan?
A: Kung anong type of income
Q: Anong type of income?
A: Income from business trade or profession.
Q: Ano yung second?
A: Gross receipts
Q: Magkano gross receipts niya?
A: 2M.
Technically, pwede sana siya.
Q: But what’s the third test?
A: It must not fall under the enumeration in order for the
taxpayer to qualify under 8%.
Q: Is the taxpayer VAT registered?
A: Yes
Q: Is he qualified to register under 8%?
A: No.
Q: So, kahit less than 3 M yan or kahit income from
business, trade or profession siya, can we avail of the 8%
option?
A: No because he is VAT registered
2. May law firm sina ma’am. Kumita sila ng 3M
distributable income. Ang kalaw firm ni ma’am, si
Debs at si Gee; tig 1M sila.
Q: Ano ang classification nung income?
A: Income from profession; hindi yan dividend income kasi
GPP nanggaling.
Q: Less than 3 M yung gross receipts?
A: Yes kasi tig1 M sila eh.
Q: Can they register under the 8% option?
A: No because they are disqualified under the Revenue
Regulation.
Q: Why?
A: Under the Revenue Regulation, if the taxpayer is a
partner of a GPP, and had earned income from that GPP,
then he is not qualified under the 8% option.
Q: So ano lang ang pwede nilang iavail na tax?
A: Normal tax
A common carrier, meaning if you are engaged in
the business of land transport, REGARDLESS of the
amount of gross receipt, the taxpayer shall be subject to 3%
other percentage tax.
An operator of water and gas utilities REGARDLESS
of the amount of gross receipts, shall be subject to 2% other
percentage tax.
So, there are taxpayers who, regardless of the
amount of gross receipts will be subject to other percentage
tax.
And if they will qualify as such, then they are not
qualified to avail of the 8% option.
3. Jeepney operators sila.
Honestly, maganda ang 8% pag nag aavail ka ng
OSD.
Etong operator na to, ayaw niyang magnormal tax
kasi pag nagnormal tax siya, magOOSD siya or maga-
itemize eh wala silang resibo.
Pag nag OSD sila, automatically, maiimposan na
ng tax yung 60%.
Q: Ano pa ang consequence?
A: Ang consequence pa pag nagnormal tax ka, you will be
held liable for percentage tax or VAT.
So dito, ang tanong ni operator pwede bang mag8%
na lang siya.
Kasi if you pay 8%, that is already in lieu of the
normal tax and the business tax. So, ang babayaran mo
lang, 8% lang.
Q: Pwede ba?
A: No. They are disqualified.
Q: Why?
A: Because they are automatically subjected to other
percentage tax REGARDLESS of the amount of gross
receipts.
Q: So sino lang ang pwedeng mag-avail ng 8%?
A: Yung hindi automatically subject to other percentage tax.
e.g
Q: If you are a lawyer and you are not under a GPP, are you
qualified to avail of the 8% option?
A: Yes.
When the T.R.A.I.N Law has been passed,
nagcompute si ma’am kung ano ang more beneficial sa lahat
ng taxpayers.
Dun sa study ni ma’am, pag yung taxpayer, nag
avail ng itemized deduction, better ang normal tax.
Q: Bakit?
A: Kasi possible na may net loss siya. So possible na wala
siyang babayaran at all. Kasi pag normal tax ka, ang taxable
base mo ay yung net income.
So, ibig sabihin, pag loss income less allowable
deductions, tapos ang dami mong allowable deductions,
wala kang babayaran na normal tax. Only that,
magbabayad ka ng other percentage tax because the other
percentage tax is based on the amount of gross receipts.
Pero kung 3% lang yun compared to 8% na based
din sa gross receipts in excess of 250, better na lang yung
3%.
If you are a taxpayer who will adopt the optional
standard deduction, and the net taxable income is more
than 400k, it will be better for the taxpayer to adopt 8%
option.
 EXAMPLE:
Si ma’am, ang income niya during the year from her
profession. Si ma’am ay isang compensation income earner
and she is also earning income from business, trade or
profession.
Q: Ano ang tawag kay ma’am?
A: Mixed Income Earner because she earn both income from
profession and compensation.
Page 90 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
For us to check whether ma’am is qualified for 8%.
Titignan natin ang compensation income ni ma’am from
SLU which is about 1.5 M Gross yun. Tapos kumita siya
from her profession ng 2M for the entire year. So, sumatotal,
ang gross niya would be 1.5M compensation, and then 2M
income from profesion.
Q: Is she qualified under 8%?
A: Yes because we will only consider the income from
business, trade, or profession.
She is qualified because she earned income from
business, trade or profession, and the amount of gross
receipts is not exceeding 3M.
Q: What is the effect?
A: If ma’am will choose the 8% option,…. TIME NA! ( pero
masasagot siya sa next discussion)
February 28, 2020
 INCOME FROM BUSINESS TRADE OR
PROFESSION
Consider the following:
1. The amount of total gross sales or gross receipts
It would only include the amount earned from business
trade or profession.
We will not include compensation income in the
threshold amount. We will not likewise include income
subject to final withholding tax or passive income as part of
the amount of gross sales or gross receipts.
If we talk about the threshold amount, it will be isolated
to those amounts that are related to the income earned from
business trade or profession.
2. The taxpayer in this particular case where he
earned income from business, trade or profession
where the gross sales do not exceed 3M, he has the
option to choose either normal tax or 8% tax.
If the taxpayer will choose the 8% tax, the 8% payment
of tax is already in lieu of the graduated income tax and the
business tax.
So, all that the taxpayer need to do is to pay the 8% tax.
On the other hand, if the taxpayer chooses the normal
tax, then the taxpayer will pay the normal tax based on the
graduated tax rates under Sec. 24a of the Tax Code and the
3% other percentage tax.
Q: Why other percentage tax?
A: It’s because of the fact that the taxpayer did not reach
the threshold amount of 3M, because the taxpayer will only
be mandated to pay VAT if the gross sales or gross receipts
would exceed 3 M.
NOTE:
This 8% option do not apply to:
a. Taxpayers who are VAT-registered
b. Taxpayers who are subject to other percentage tax
c. Taxpayers who are partners of a general
professional partnership with respect to their
distributive share in that partnership.
 MA’AM TIN’S CAREER PATH
When ma’am passed the Bar Exams, she tried to
engage in private practice for a month.
And then, she realized that private practice is really
that difficult because the flow of earning is not regular in
nature.
After a month of private practice, she decided to
apply for a position at the City Legal Office. She was lucky
that she was got hired immediately.
Then, she asked Sir Mel Rabanes whether or not
she can engage in private practice because she really do not
want to leave her tax and accounting practice because since
she passed the CPA Boards Exam, she already started
working as an accountant and even when she was taking up
Law School.
So, any amount that she earned from the City
Government is categorized as compensation income.
During the first time that she had been working
with the City Legal Office, she did not have any client
because she do not know anyone who would refer clients to
her. So, the only income that she earned for a year is only
the income that she earned from the City Government.
Q: How do we categorize her as a taxpayer during that 1 year
period?
A: Purely Compensation Income earner because she only
earn income from employer-employee relationship with the
City Government of Baguio.
So, if we would take a look of ma’am’s career path,
initially, she was just engaged in private practice for a
month.
Q: How do we categorize the income that ma’am earned for
that 1 month period?
A: Income from business, trade or profession.
After a year of stay with the City Government of
Baguio, she got hired as a professor in SLU and she also
had retained clients.
Q: How do we categorize her as a taxpayer?
A: Mixed Income Earner
Then, she resigned from the City Government of
Baguio. She retained her work at SLU but she is still engage
in private practice.
Q: How do we categorize her as a taxpayer?
A: Still mixed income earner because she earned both
compensation income and income from business, trade or
profession.
If we would observe the story, ma’am had
segregated her classification as purely compensation
income earner, purely self-employed and mixed.
Q: Why?
A: Because the tax treatment as to her amount of income
that she earned will vary depending on her classification as
a taxpayer, that is if we would apply the T.R.A.I.N Law.
Q: If she earned purely compensation income, what is the
tax implication of the compensation income that she earned
from the City Government of Baguio?
Page 91 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
A: Normal tax. And if we talk about normal tax, then this
would mean that it will be subject to creditable withholding
tax subject to the rules that we had learned under
compensation income.
During the one month of a particular calendar year
that she worked as a private practitioner, we had correctly
agreed that the income that she earned from the private
practice is considered as income from business, trade or
profession. And since she did not earned any amount from
any other sources, then she is considered as a purely self-
employed individual.
Under the T.R.A.I.N Law, if you are a purely self-
employed individual, you can choose 8% of the gross
receipts in excess of 250k which is already in lieu of normal
tax and business tax; and graduated income tax which
would mean normal tax plus 3% other percentage tax based
on the gross receipts.
Q: How much is normal tax?
A: It depends on the amount of taxable income, so we would
take a look at the tax table.
o Sec. 24a of the Tax Code
Tax Schedule Effective January 1, 2018 until
December 31, 2022:
Not over P250,000 0%
Over P250,000 but not 20% of the excess over
over P400,000 P250,000
Over P400,000 but not P30,000 plus 25% of the
over P800,00O excess over P400,000
Over P800,000 but not P130,000 plus 30% of the
over P2,000,000 excess over P800,000
Over P2,000,000 but not P490,000 plus 32% of the
over P5,000,000 excess over P2,000,000
Over P8,000,000 P2,410,000 plus 35% of
the excess over P8,000,000
Taking a look at the tax table, we would realize that
the first item in that particular table is a taxable income in
the amount of 250k or less.
Q: And if we take a look at the amount beside that bracket,
how much is the tax?
A: 0%. And that’s the reason why if we would take a look at
that table, if the income is subject to normal tax and if the
taxable income will fall within that first line or first income
bracket; then no amount of tax liability shall be imposed.
When the SOF had submitted a proposal in the
computation of the taxes under that particular table, the
second item already considers 250k as an exempt amount.
Technically, pag titignan mo yung bracket, every
bracket kahit nagi-increase pa yan, cinonsider na yung
250k as an exempt amount.
So pag tinignan ang tax table, ang tinataxan lang
jan sa tax table is yung excess of 250k.
And that’s the reason why, if the taxpayer is purely
self-employed individual and the taxpayer chooses 8% tax,
the 8% will be imposed on the amount of gross receipts in
excess of 250k.
Q: Why?
A: It is because of the fact that if the Congress will not allow
the deduction of 250k, there will be a violation of the equal
protection clause.
Q: Why?
A: Because if the taxpayer earns compensation income, the
taxpayer shall be allowed or shall be entitled to an
exemption of 250k by using the tax table.
If the taxpayer is purely self-employed individual,
and the 8% shall be based on gross receipts, then
technically, there is a violation of the equal protection clause
because a purely self-employed individual will now have no
privilege of being entitled to a 250k income exemption.
And that’s the reason why if the taxpayer is purely
self-employed individual, the 8% tax shall be based on the
amount of gross receipts in excess of 250k.
Q: Paano pag normal tax?
A: Eh di meron pa ring 250k kasi ang gagamitin pag normal
tax, eh yung tax table.
If the taxpayer is a mixed income earner, this would
mean that the taxpayer earns compensation income and
income from business, trade or profession.
Q: What is the tax treatment of the compensation income?
A: Laging normal tax.
Q: Eh yung income from business, trade or profession?
A: The taxpayer has the option to choose 8% based on the
amount of gross receipts or normal tax plus other
percentage tax.
That is only with respect to the income earned from
business, trade, or profession.
Q: Bakit hindi in excess of 250k?
A: Kasi yung compensation mo sa tax dun sa compensation
income, nafactor in na yung 250k.
Kaya pag mixed-income earner siya, the taxpayer is
no longer entitled to the 250k deduction. Otherwise, it will
result to a total of 500k exemption. And one individual
taxpayer shall be entitled only up to the extent of 250k.
That is the reason why if the taxpayer is a mixed
income earner, the computation of 8% is based on the
amount of gross receipts without the 250k deduction.
 THINGS TO REMEMBER WITH RESPECT TO
THE 8% OPTION:
1. If the taxpayer had already chosen an option, either
8% or normal tax, such option is irrevocable for that
taxable year.
The taxpayer can no longer change the option.
Q: When do the taxpayer manifest his option to choose
either 8% or normal tax?
A: The taxpayer can indicate in the first quarterly
percentage tax return his option to choose either 8% or
normal tax or prior to the year, the taxpayer can now update
the Certificate of Registration.
Page 92 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

For bar exam purposes, all that we need to RULES APPLIED TO OTHER SOURCES OF

remember is this: INCOME
That particular option to choose either normal tax 1. CANCELLATION OF INDEBTEDNESS or
or 8% tax is irrevocable for that taxable year. CONDONATION OF OBLIGATION
NOTE:
2. The threshold amount of 3M shall only pertain to
the income source from business trade or You need to know the reason behind the
profession. cancellation or condonation.
3. a. PURE GENEROSITY
Q: What if the taxpayer is a minimum wage earner and then Q: What is the tax implication?
the taxpayer did not utilize the entire 250k, can the taxpayer A: Donor’s tax
allowed to deduct up to 250K from the amount of gross Q: Is it subject to income tax?
receipts that is subject to 8% tax?
A: No because gifts, bequests and devise are excluded from
A: No. As long as a taxpayer is a mixed income earner, even the gross income.
if he is considered a minimum wage earner with respect to NOTE:
his compensation income; he is still not entitled to 250k
deduction. Do not argue or explain that it is not subject to
income tax because it is already subject to donor’s tax. That
NOTE: is an erroneous explanation simply because these two types
Ang kailangan lang isipin ay mixed income earner of taxes are being imposed on two different subject matters.
ba siya or purely self-employed. The reason why income tax is not being imposed on
Kasi pag purely self-employed siya, pwede siyang that particular transaction is because the transaction
magminus ng 250k dun sa gross receipts, pero pag mixed involves a gift, and gift is excluded from the gross income.
income earner siya kahit siya pa ay isang minimum wage Hence, exempt from income tax.
earner at kahit hindi pa niya naexhaust yung 250k
b. RENDITION OF SERVICE BY THE DEBTOR OR
exemption; he is still not entitled to the 250k deduction from
REMUNERATORY DONATION
the amount of gross sales or gross receipts.
Q: What is the tax implication?
4. If the taxpayer chooses the 8% option, the 8% is
A: Income tax on the part of the debtor because the debtor
already in lieu of income tax and other percentage
now would render service in order for the creditor to cancel
tax.
his obligation.
5. If the taxpayer avails of normal tax imposition, then
the taxpayer is entitled to deduction either itemized  ILLUSTRATION:
deduction or optional standard deduction. Mr. A borrowed money from Mr. B worth a 100k.
Q: Why? Mr. A can no longer pay his liability. Hence, Mr. B asked Mr.
A to just clean his house. And if Mr. A would clean the house
A: If we talk about normal tax, the taxable base is the
of Mr. B, Mr. B will cancel the indebtedness.
amount of net income.
Q: Is this considered a remuneratory donation?
Q: Eh ano ang net income?
A: Yes.
A: That’s gross income less deducions.
In this particular case, the 100k shall be subject to
Q: Kaya pa gang pinili niya eh normal tax, pwede ba siyang
tax but it will not arise from any tax liability.
magbawas ng amount of gross income through optional
standard deduction or itemized deductions? Q: Why?
A: Yes. A: Because the taxable income is less than 250k.
Q: If the taxpayer chooses 8% option, is the taxpayer entitled NOTE:
to deduct optional standard deduction or itemized You have to very wary about the amount. Pag may
deduction? amount sa Bar, hindi pwedeng nandun lang tayo sa general
A: No. phase of analysis na ay taxable. You oblivious of the fact
that you need to consider likewise the amount because you
Q: What if the taxpayer gross sales or gross receipts exceeds
know that if we will merge both principles, taxable income
3M? He is entitled to 8%?
in the amount of 250k or less for the entire taxable year
A: No more. Then, the taxpayer is liable for graduated shall not be subject to tax.
income tax plus 12% VAT, hindi other percentage tax
because the gross sales or gross receipts had already c. CANCELLATION OF INDEBTEDNESS OF A
exceeded the threshold amount of 3M. STOCKHOLDER BY A CORPORATION
#NOCHOICE, income tax plus VAT kaagad pag The obligation here is the obligation of the stockholder
more than 3M. and the corporation in this instance is the creditor.
So, the corporation will cancel the indebtedness of the
(Guys, expect daw ng question sa topic na to sa
stockholder being the debtor.
QUIZ 3.)

Page 93 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
In cases like this, such shall be considered as a
declaration of dividend. So, we apply now the rule under
declaration of dividend.
The tax implication will entirely depend on the issuer
corporation and the recipient.
But initially, you have to consider such transaction as
a declaration of dividend.
2. INCOME FROM LEASE AND LEASEHOLD
IMPROVEMENTS
If we talk about income from LEASE, this is considered
as an income from service. Hence, cash method can be
adopted.
 2 MODES OF RECOGNIZING INCOME:
a. CASH METHOD
- One where the income shall be recognized upon
collection whether the income had accrued or not.
b. ACCRUAL METHOD
- One where the income will be recognized upon the
accrual of the income whether or not such income
is collected.
Q: If we talk about income from lease, and the taxpayer
(lessor) received prepaid rents, will the prepaid rent be
considered an income on the part of the taxpayer?
A: Yes because income from lease can be subjected to cash
method. So, any amount received by the taxpayer will be
recognized as an income. That is if cash method is being
adopted.
Q: What about security deposit? Is security deposit
considered as an income?
- Security deposit is an amount that the lessor is
required to return at the end of the lease period.
Q: Is there a definite unconditional obligation to return?
A: Yes.
And it can only be considered as an income under
claim of right doctrine if there is absence of a definite
unconditional obligation to return.
Q: Since in cases of security deposit, where there is presence
of a definite unconditional obligation to return, do we
consider security deposit as an income?
A: No. It is not even an income.
For LEASEHOLD IMPROVEMENTS, the value of the
improvement shall be considered as an income.
Q: What type of income?
A: Rental Income
There are two modes in order to reflect the income
derived from a leasehold improvement:
1. OUTRIGHT METHOD
One whereby the lessor recognizes his income during
the year of completion and the taxable base is equivalent to
the fair market value of the improvement upon completion.
2. SPREAD-OUT METHOD
The lessor will recognize the value of the improvement
at the end of the lease term which will be spread out during
the entire period of the lease.
3. INCOME FROM LONG-TERM CONSTRUCTIONS
 2 METHODS IN RECOGNIZING THE INCOME
a. LUMP-SUM METHOD
One which recognizes income in the year when the
project has been completed.
The entire amount of income shall be reflected at the
time of completion.
NOTE:
This method will only be applicable if the
construction project shall be completed within a period of 1
year.
If the construction project will be completed for a
period more than 1 year, then the taxpayer can no longer
utilize lump sum method; rather the taxpayer shall now
utilize percentage of completion method.
b. PERCENTAGE OF COMPLETION METHOD
One which must be adopted when the project will not
be accomplished within one year.
The income shall be recognized based on the percentage
of the completion of the project.
4. INSTALLMENT TRANSACTIONS
 SEC. 49 of the Tax Code
(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 (1) of 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 (2) of 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.
As used in this Section, the term '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 under Subsection (B)
may pay the capital gains tax in installments under rules
and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
Page 94 of 97
TAXATION LAW REVIEW by Queddeng and Manginga
(D) Change from Accrual to Installment Basis. - If a taxpayer
entitled to the benefits of Subsection (A) elects for any
taxable year to report his taxable income on the installment
basis, then in computing his income for the year of change
or any subsequent year, amounts actually received during
any such year on account of sales or other dispositions of
property made in any prior year shall not be excluded.
So, we need to determine the type of property.
Q: Why?
A: Because the definition of installment transaction will
entirely depend on whether the property is a real property
or a personal property.
If the transaction involves a sale of real property,
then there has to be compliance with the 25% rule.
NOTE:
You are not allowed to just say 25% rule in the
answer.
25% rule states that if the initial payment do not
exceed 25% of the gross selling price, then the transaction
shall be treated as an installment sale or installment
transaction.
Q: What is the effect if the transaction is considered as
installment sale or transaction?
A: If it is considered as an installment transaction, then, the
tax will also be paid on installment because the income shall
be recognized on an installment basis.
On the other hand, if there is no compliance with
the 25% rule, and there are amortized portions that has to
be paid by the taxpayer, then we will classify the sale as a
deferred sale.
If it is a deferred sale, the entire amount of income
shall be recognized at the time of sale. Hence, the tax cannot
be paid on an installment basis.
 RECAP:
If we talk about sale of real property, the sale can
be considered as an installment sale if the initial payments
do not exceed 25% of the gross selling price.
If there is compliance with this rule, then the sale
shall be classified as an installment sale. And consequently,
the income shall be reported on an installment basis. And
hence, the tax shall be paid on installment basis.
However, if there is no compliance with the 25%
rule, such that the initial payments exceeded 25% of the
gross selling price and there are amortization payments that
needs to be paid by the taxpayer; then the sale shall be
classified as a deferred sale.
If the sale will be classified as a deferred sale, then
the entire amount of income earned from that sale shall be
recognized at the time of sale or at the year of sale.
If the sale occurred in 2018, then the entire amount
of income shall be reflected in that particular year.
If it is considered as installment sale, then not the
entire amount of income shall be reflected in 2018. Only the
percentage of collection shall be reported as an income for
that particular year.
If it involves sale of personal property, we need to
consider whether the transaction is a casual sale or a
regular sale.
If the taxpayer is engaged in the sale of personal
property being paid on installment basis on a REGULAR
BASIS, then automatically, we would consider their sale as
an installment sale. No other condition.
e.g parang yung mga nasa palengke, yung lay-away
If it is a CASUAL SALE, meaning the taxpayer is not
really engaged in the business of selling properties being
paid on installment basis, then the following are the
requisites:
a. The gross selling price must exceed 1k php.
b. There must be compliance with the 25% rule.
Q: What is the effect if it will be considered as an installment
sale?
A: The tax shall be paid on installment because the income
will be recognized on installment basis.
 ILLUSTRATION:
A real property has been sold for a million. 200k
was paid in the year of sale which is 2018. In the same year,
the parties executed a promissory note for the remaining
balance of 800k which is due in 2020; where under the
promissory note, the 800k plus interest shall be paid in 8
equal quarterly payments beginning January. 2019.
Q: Do we consider this as an installment sale?
The law states that it will be considered as an
installment sale if the initial payment do not exceed 25% of
the gross selling price, which in this problem is 250k.
 INITIAL PAYMENT
All payment received by the taxpayer other than promissory
notes or other certificates of indebtedness received during
the year of sale.
Q: Do we consider 200k as initial payment?
A: Yes.
Q: Do we consider 800k as initial payment?
A: No because we do not include promissory notes and
under Certificate of Indebtedness as part of initial payment.
Q: How much is the initial payment then in this case?
A: 200K.
Q: Is this an installment sale?
A: Yes it is.
Q: Will the tax be paid on installment?
A: Yes.
 BAÑAS v. CA(Same facts as the illustration above
pero iba lang ending)
Banas discounted the promissory note in the year
2018.
Page 95 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

Kung worth 900k yan kasi plus interest, ang Q: Did it 25% of the gross selling price?
kukunin lang ni Banas mga 820 or maybe more than that; A: Yes.
that’s discounting. Q: Do we have deferred sale or installment sale?
Q: Technically pag discounting, cinoconvert ba yung A: Deferred sale.
promissory note into cash?
Q: Being a deferred sale, when should the income be
So in 2018, Banas was able to successfully discount recognize?
the note.
A: The entire amount of income from this particular sale
Q: Did Banas convert the promissory note from being a shall be reported in the year 2018, which is the year of sale
promissory note to cash in 2018? because we do not have an installment sale, rather we have
A: Yes. a deferred sale.
Q: Hence, do we consider the sale as an installment sale?  SORIANO CASE
A: No more. HIGHLIGHTS:
Q: How do we describe the sale? Q: What is the rule when it comes to minimum wage earner?
A: It’s a cash sale. Not even a deferred sale, kasi pag sinabi A: Exempt.
mong deferred sale, dapat may amortizations payment pa
The compensation income of a minimum wage
siya.
earner shall be exempt from tax.
Q: Eh dito may amortization payments pa ba siya na
The exemption provided under R.A 9504 shall
kokolektahan?
extend likewise to:
A: Wala na so it’s a cash sale.
Q: When should the income be recognized? a. Overtime pay
b. Holiday pay
A: In 2018, which is the year of sale.
c. Hazard pay
 ILLUSTRATION: d. Night Shift Differential
The amount involved again is 1M. 100K was The exemption of a minimum wage earner under R.A
received in the month of June, 2018. December, 2018 9504 is not limited to the compensation income, meaning
another 200k is received. The remaining balance of 700k the basic salary but it likewise extends to overtime pay,
will be paid on installment beginning 2019. holiday pay, hazard pay and night shift differential.
Q: Is this installment sale or deferred sale?
Since the income of a minimum wage earner is exempt
A: Definitely not cash, kasi may amortization payment pa from tax, then obviously the income will likewise be exempt
siya eh. from withholding tax kasi wala siyang tax, so walang
NOTE: iwiwithhold.
The only thing that we should consider is that the  ILLUSTRATION:
initial payment does not exceed 25% of the gross selling The minimum wage of a particular taxpayer is 10k. And
price which is 250k in this cases. that if you add up overtime pay, holiday pay, hazard pay,
The moment that the initial payment exceeded and night shift differential, it would already amount to 20k
250k, then it can no longer be considered as an installment per month.
sale, rather it will be considered a deferred sale. Q: Is he still exempt from tax?
Q: What’s initial payment? A: Yes kasi nga included yung overtime pay and all sa
A: Any amount received by the taxpayer in the year of sale. exemption.
Q: Do we consider 100k as initial payment?  SITUATION:
A: Yes. Aside from the basic salary, overtime pay, holiday pay,
Q: Do we consider 200k as initial payment? hazard pay and night shift differential, the taxpayer as a
A: Yes because these are the amounts received in the year minimum wage earner also earns 13th month pay and other
of sale. benefits and it exceeded 90k.
So pag de minimis exempt pa rin, same rule. Yung first
We need to consider that initial payment is not the
90k exempt pa rin.
same as the concept of down payment under the law on
Sales. Q: Is the excess subject to tax?
So pag sinabing down payment, yung 100k lang yan A: No. Taxable na yung excess.
kasi yun yung unang binayad. Q: Why?
But if we talk about initial payment under Sec. 49 A: Kasi ang extension lang ng exemption will only be limited
of the Tax Code, it refers to all payments received in the year to overtime pay, holiday pay, hazard pay, and night shift
of sale. differential.
Q: In this particular case, how much is the initial payment?
A: 300K
Page 96 of 97
TAXATION LAW REVIEW by Queddeng and Manginga

So yung excess niya, subject to tax. But be very 173, 500 TOTAL OF
careful. It will only be subject to tax if the entire amount of OTHER
taxable income exceeds 250k. BENEFITS
So, pag yung taxable income does not exceed 250k, 90k threshold -90K Since 90K is not
exempt pa rin yan. sa 13TH month considered as a
Kaya actually, the T.R.A.I.N Law benefits the below pay and other taxable income.
middle income earner, yung within the range of 250k. benefits
MINIMUM WAGE EARNER EARNING INCOME FROM TAXABLE 83,500 After applying all
BUSINESS, TRADE OR PROFESSION INCOME the laws related
The compensation income shall be exempt. Same to exemption.
rule. But if we talk about the income from business, trade
or profession of this minimum wage earner, then it will be Q: Ano ang gagawin ngayon sa 83,500 na taxable income?
taxable because the exemption under R.A 9504 is limited A: Titignan na ngayon yung normal tax sa Sec. 24 a.
only to the compensation income. The exemption does not Under Sec. 24a, if the taxable income is 250k or
extend to the income earned from business, trade, or less, then the taxable income shall be exempt.
profession.
Q: So yung 83,500 ba na taxable income, exempt?
 ILLUSTRATION:
A: Yes.
Salary of 8500/month Exempt kasi
Minimum with Cost of minimum wage
Wage Earner Living Allowance earner siya
(COLA) or 102k
for the entire
year
Overtime pay 20k Exempt kasi
minimum wage
earner siya
NOTE:
For Bar purposes,
dapat sabihin,
under the law, a
minimum wage
earner shall be
exempt from tax
with respect to
his salaries which
are considered as
within the
minimum wage,
ot, hazard pay,
NSD, and holiday
pay.
Holiday pay 4k Same kasi
kasama sa
exemption
Christmas 20k 5K ay de minimis
Bonus Yung 15k other
benefits.
13th month 8500 Part siya ng other
pay benefits
Other benefits 150k
na hindi de 15k Yung excess ng
minimis xmas bonus na
hindi de minimis
8500 13th month pay

Page 97 of 97