Week 5
Tax 1
GROSS INCOME: INCLUSIONS AND EXCLUSIONS
• Income from Whatever Source
- Secs. 31-32, NIRC
- Sec. 61, Revenue Regulations No. 2
• Situs of Income
- Sec. 42, NIRC
- Secs. 152-165, Revenue Regulations No. 2
• From Sources Within the Philippines
- Sec. 42 (A,B), NIRC
- CIR v. BOAC, G.R. No. L-65773-74, April 30, 1987,
149 SCRA 395
"The source of an income is the property, activity or
service that produced the income. For such source to
be considered as coming from the Philippines, it is
sufficient that the income is derived from activity
within the Philippines."
FACTS: Petitioner CIR seeks a review of the CTA's
decision setting aside petitioner's assessment of
deficiency income taxes against respondent British
Overseas Airways Corporation (BOAC) for the fiscal
years 1959 to 1971. BOAC is a 100% British
Government-owned corporation organized and
existing under the laws of the United Kingdom, and is
engaged in the international airline business. During
the periods covered by the disputed assessments, it is
admitted that BOAC had no landing rights for traffic
purposes in the Philippines. Consequently, it did not
carry passengers and/or cargo to or from the
Philippines, although during the period covered by the
assessments, it maintained a general sales agent in
the Philippines — Wamer Barnes and Company, Ltd.,
and later Qantas Airways — which was responsible for
selling BOAC tickets covering passengers and cargoes.
The CTA sided with BOAC citing that the proceeds of
sales of BOAC tickets do not constitute BOAC income
from Philippine sources since no service of carriage of
passengers or freight was performed by BOAC within
the Philippines and, therefore, said income is not
subject to Philippine income tax. The CTA position was
that income from transportation is income from
services so that the place where services are rendered
determines the source.
ISSUE: Are the revenues derived by BOAC from sales
of ticket for air transportation, while having no
landing rights here, constitute income of BOAC from
Philippine sources, and accordingly, taxable?
HELD: Yes. The source of an income is the property,
activity or service that produced the income. For the
source of income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines. In BOAC's case,
the sale of tickets in the Philippines is the activity that
produces the income. The tickets exchanged hands
here and payments for fares were also made here in
Philippine currency. The site of the source of
payments is the Philippines. The flow of wealth
proceeded from, and occurred within, Philippine
territory, enjoying the protection accorded by the
Philippine government. In consideration of such
protection, the flow of wealth should share the
burden of supporting the government.
- NDC v. CIR, G.R. No. L-53961, June 30, 1987, 151
SCRA 472
The National Development Company (NDC) entered
into contracts with various Japanese shipbuilding
companies for the construction of 12 ocean-going
vessels. Upon the completion of the vessels, the NDC
remitted to the shipbuilders in Tokyo the total amount
of US$4,066,580.70 as interest on the balance of the
purchase price with zero tax withheld.
Subsequently, the CIR held the NDC liable on the tax
due. NDC refused to pay, arguing that it was merely
an administrator of the funds of the Republic of the
Philippines and that the interest payments were
obligations of the Republic. It also argued that the
promissory notes of the NDC were government
securities exempt from taxation under Section 29(b)
(4) of the Tax Code.
The CTA sustained the validity of CIR’s assessment.
RULING
The Supreme Court ruled in favor of CIR.
Under Sec. 37 of the Tax Code, the Japanese
shipbuilders were liable to pay for tax on the interest
remitted to them by NDC. Under the terms of the law,
the Government’s right to levy and collect income tax
on interest received by foreign corporations not
engaged in trade or business within the Philippines is
not planted upon the condition that the activity or
labor — and the sale from which the (interest) income
flowed – had its situs in the Philippines.
The law specifies: “Interest derived from sources
within the Philippines, and interest on bonds, notes,
or other interest-bearing obligations of residents,
corporate or otherwise.” By failing to withhold the
taxes due, NDC was remiss in the discharge of its
obligation as the withholding agent of the
government and so should be held liable for its
omission.
- CIR, petitioner v. Baier-Nickel, ,marina guzman,
respondent G.R. No. 165793, August 29, 2006
Source of income- property, activity, service that
produces the income
Facts:
CIR appeals the CA decision, which granted the tax
refund of respondent and reversed that of the CTA.
Juliane Baier-Nickel, a non-resident German, is the
president of Jubanitex, a domestic corporation
engaged in the manufacturing, marketing and selling
of embroidered textile products. Through Jubanitex’s
general manager, Marina Guzman, the company
appointed respondent as commission agent with 10%
sales commission on all sales actually concluded and
collected through her efforts.
In 1995, respondent received P1, 707, 772. 64 as sales
commission from w/c Jubanitex deducted the 10%
withholding tax of P170, 777.26 and remitted to BIR.
Respondent filed her income tax return but then
claimed a refund from BIR for the P170K, alleging this
was mistakenly withheld by Jubanitex and that her
sales commission income was compensation for
services rendered in Germany not Philippines and
thus not taxable here.
She filed a petition for review with CTA for alleged
non-action by BIR. CTA denied her claim but decision
was reversed by CA on appeal, holding that the
commission was received as sales agent not as
President and that the “source” of income arose from
marketing activities in Germany.
 
Issue: W/N respondent is entitled to refund
Held: No. Pursuant to Sec 25 of NIRC, non-resident
aliens, whether or not engaged in trade or business,
are subject to the Philippine income taxation on their
income received from all sources in the Philippines. In
determining the meaning of “source”, the Court
resorted to origin of Act 2833 (the first Philippine
income tax law), the US Revenue Law of 1916, as
amended in 1917.
US SC has said that income may be derived from three
possible sources only: (1) capital and/or (2) labor;
and/or (3) the sale of capital assets. If the income is
from labor, the place where the labor is done should
be decisive; if it is done in this country, the income
should be from “sources within the United States.” If
the income is from capital, the place where the capital
is employed should be decisive; if it is employed in
this country, the income should be from “sources
within the United States.” If the income is from the
sale of capital assets, the place where the sale is made
should be likewise decisive. “Source” is not a place, it
is an activity or property. As such, it has a situs or
location, and if that situs or location is within the
United States the resulting income is taxable to
nonresident aliens and foreign corporations.
The source of an income is the property, activity or
service that produced the income. For the source of
income to be considered as coming from the
Philippines, it is sufficient that the income is derived
from activity within the Philippines.
The settled rule is that tax refunds are in the nature
of tax exemptions and are to be
construed strictissimi juris  against the taxpayer. To
those therefore, who claim a refund rest the burden
of proving that the transaction subjected to tax is
actually exempt from taxation.
In the instant case, respondent failed to give
substantial evidence to prove that she performed the
incoming producing service in Germany, which would
have entitled her to a tax exemption for income from
sources outside the Philippines. Petition granted.
- Manila Electric v. Yatco, G.R. No. 45697, November
1, 1939 69 Phil 89
Substantial elements are present; will give the gov the
power to tax. Interest from the insurer will later on be
passed on to the insured, still was a transaction
occurred in the Philippines, therefore taxable. Source
is not the place but activity property or service
FACTS: In 1935, plaintiff Manila Electric Company’s
broker in New York City entered into insurance with
foreign insurance companies not licensed to do
business in the Philippines and having no agents
therein, the New York Insurance Company (NYIC) and
the United States Guaranty Company (USGC), certain
real and personal properties situated in the
Philippines. The policies contained provisions for the
settlement and payment of losses upon the
occurrence of any risk insured against, a sample of
which is policy No. 20 of NYIC. The Collector of
Internal Revenue (CIR) assessed and levied a tax of
opener centum on the paid premiums (P91,696)
under section 192 of act No. 2427, which plaintiff paid
under protest. The trial court dismissed the complaint.
ISSUE: WON plaintiff shall pay the subject exaction
even insured by foreign insurance company not
having license to do insurance business in the country.
RULING: Yes. Where the insured against within the
Philippines, the risk insured against also within the
Philippines, and certain incidents of the contract are
to be attended to in the Philippines, such as,
payment of dividends when received in cash, sending
of an unjuster into the Philippines in case of dispute,
or making of proof of loss, the Commonwealth of the
Philippines has the power to impose the tax upon
the insured, regardless of whether the contract is
executed in a foreign country and with a foreign
corporation. In this case, the insured plaintiff is a
corporation organized under the laws of the
Philippines, its principal office and place of business
being in the City of Manila. The NYIC and the USGC
may be said to be doing policies issued by them cover
risks on properties within the Philippines, which may
require adjustment and the activities of agents in the
Philippines with respect to the settlement of losses
arising thereunder. Plaintiff, by making and carrying
out policies covering risks located in this country
which might require adjustment or the making of
proof of loss therein, did business in the Philippines
and subjected itself to its jurisdiction.
- Phil. Guaranty v. CIR, G.R. No. L-22074, Apr. 30,
1965
Business: it shows the continuity of transaction
Activity: consist of only one transaction
Even it can undertake activities or a single activity ,
that activity will be taxed in the Philippines.
Source: not necessarily a place.
SUMMARY:
Local insurance company Philippine Guaranty did not
include in its income tax returns for 1953 and 1954
the amount ceded to its foreign reinsurance partners,
arguing that said amount is not subject to withholding
tax. Consequently, it was slapped with a tax
assessment by the CIR, which was later affirmed by
the CTA. The SC affirmed the CTA ruling, holding that
for foreign companies, what is controlling is not the
place of business but the place of activity that created
an income.
FACTS:
Sometime in the early '50s, local insurance company
The Philippine Guaranty Co., Inc., entered into
reinsurance contracts with several foreign insurance
companies not doing business in the Philippines,
namely: Imperio Compañia de Seguros, La Union y El
Fenix Español, Overseas Assurance Corp., Ltd.,
Socieded Anonima de Reaseguros Alianza, Tokio
Marino; Fire Insurance Co., Ltd., Union Assurance
Society Ltd., Swiss Reinsurance Company and Tariff
Reinsurance Limited.
Part of the contracts was the agreement that in
consideration of the assumption of liability of the
foreign insurance companies, Philippine Guaranty will
be ceding to these companies a portion of the
premiums on insurance it has originally underwritten
in the Philippines. The foreign insurers, on the other
hand, agreed to compensate Philippine Guaranty in an
amount equal to 5% of the reinsurance premiums in
consideration for managing or administering their
affairs in the
Philippines.
In 1953, Philippine Guaranty ceded P842,466.71 to
the foreign insurers. In 1954, the amount ceded was
P721,471.85. In its income tax returns for the said
years, Philippine Guaranty excluded the aforecited
amounts from its gross income, neither withholding
nor paying tax on them.
In 1959, following a tax assessment, the
Commissioner of Revenue ordered Philippine
Guaranty to pay up P230,673 and P234, 364
representing withholding tax and surcharges on the
ceded reinsurance premiums for the years 1953 and
1954,
respectively.
Philippine Guaranty protested the assessment on the
ground that reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines were
not subject to withholding tax. It maintained that the
reinsurance premiums in question did not constitute
income from sources within the Philippines because
the foreign reinsurers did not engage in business in
the Philippines, nor did they have office here.
Its protest was denied and it appealed to the Court of
Tax Appeals, which ultimately affirmed the order of
the Commissioner of Revenue but modified the sum
due to P375,345. Hence, the instant petition..
RULING:
CTA ruling affirmed.
Whether the reinsurance premiums ceded by
Philippine Guaranty to foreign reinsurers not doing
business in the Philippines are subject to withholding
tax. – YES.
The Tax Code subjects foreign corporations to tax on
their income from sources within the Philippines.
The word "sources" has been interpreted as the
activity, property or service giving rise to the income.
The reinsurance premiums were income created
from the undertaking of the foreign reinsurance
companies to reinsure Philippine Guaranty against
liability for loss under original insurances. Such
undertaking took place in the Philippines. These
insurance premiums, therefore, came from sources
within the Philippines and, hence, are subject to
corporate income tax.
The reinsurance contracts show that the transactions
or activities that constituted the undertaking to
reinsure Philippine Guaranty against losses arising
from the original insurances in the Philippines were
performed in the Philippines. The liability of the
foreign reinsurers commenced simultaneously with
the liability of Philippine Guaranty under the original
insurances. Philippine Guaranty kept in Manila a
register of the risks ceded to the foreign reinsurers.
Entries made in such register bound the foreign
reinsurers, localizing in the Philippines the actual
cession of the risks and premiums and assumption of
the reinsurance undertaking by the foreign reinsurers.
The foreign insurers' place of business should not be
confused with their place of activity. Business refers
to continuity and progression of transactions while
activity may consist of only a single transaction. An
activity may occur outside the place of business.
Section 24 of the Tax Code does not require a foreign
corporation to engage in business in the Philippines in
subjecting its income to tax. It suffices that the activity
creating the income is performed or done in the
Philippines. What is controlling, therefore, is not the
place of business but the place of activity that created
an income.
On whether relying on the rulings of the
Commissioner of Internal Revenue, although faulty,
is a valid excuse for non-payment of taxes. -- No. The
Government is not estopped from collecting taxes by
the mistakes or errors of its agents.
On whether withholding tax should be computed
from the amount actually remitted to the foreign
reinsurers instead of from the total amount ceded. –
No.
Sections 54 and 53(b) of the Tax Code allow no
deduction from the income therein enumerated in
determining the amount to be withheld. Accordingly,
in computing the withholding tax due on the
reinsurance premium in question, no deduction shall
be recognized.
DOCTRINE:
The power to tax is an attribute of sovereignty. It is a
power emanating from necessity. It is a necessary
burden to preserve the State's sovereignty and a
means to give the citizenry an army to resist an
aggression, a navy to defend its shores from invasion,
a corps of civil servants to serve, public improvement
designed for the enjoyment of the citizenry and those
which come within the State's territory, and facilities
and protection which a government is supposed to
provide.
• From Sources Without the Philippines
- Sec. 42(C), NIRC
• Partly Within/Without the Philippines
- Sec. 42(E), NIRC B. Compensation Income
- Sec. 32(A), NIRC –
Compensation income- compensation on services in
whatever form paid including fringe, wages,
commission and similar items.
Under NIRC, special treatment in fringe benefit. Sec
33 C.
Fringe benefit is non-taxable- Sec 33 C
If not included in 33c then taxable.
Who will pay the FB: Employer
Rep. Act No. 10963 (TRAIN Law), Dec. 19, 2017
- Revenue Regulations No. 11-2018, Jan. 31, 2018, as
amended by RR 14-18
- Revenue Memorandum Circular No. 050-18, May 11,
2018
- Sec. 2.78.1(A), Revenue Regulations No. 2-98
- Sec. 2.78.1(A), Revenue Regulations No. 2-98
- Sec. 2.83.5, Revenue Regulations No. 10-2008
- Sec. 2.83.6, Revenue Regulations No. 2-98 - Revenue
Memorandum Circular No. 34-2008
– Henderson v. Collector, 1 SCRA 649; Convenience
of the Employer Rule
-Residential expenses + allowances+ rentals for hotel
are not to part of the income of Henderson wc is to be
taxed. Bec expenses were paid by the employer
directly to the creditor and those allowances, did not
redounded to the benefit of his wife.
Subsistence allowance is not part in the salary of
Henderson and is not taxable
FACTS:
• Sps. Arthur Henderson and Marie Henderson filed
their annual income tax with the BIR. Arthur is
president of American International Underwriters for
the Philippines, Inc., which is a domestic corporation
engaged in the business of general non-life insurance,
and represents a group of American insurance
companies engaged in the business of general non-life
insurance.
• The BIR demanded payment for alleged deficiency
taxes. In their computation, the BIR included as part of
taxable income: 1) Arthur’s allowances for rental,
residential expenses, subsistence, water, electricity
and telephone expenses 2) entrance fee to the
Marikina Gun and Country Club which was paid by his
employer for his account and 3) travelling allowance
of his wife
• The taxpayers justifications are as follows:
1) as to allowances for rental and utilities, Arthur did
not receive money for the allowances. Instead, the
apartment is furnished and paid for by his employer-
corporation (the mother company of American
International), for the employer corporation’s
purposes. The spouses had no choice but to live in the
expensive apartment, since the company used it to
entertain guests, to accommodate officials, and to
entertain customers. According to taxpayers, only P
4,800 per year is the reasonable amount that the
spouses would be spending on rental if they were not
required to live in those apartments. Thus, it is the
amount they deem is subject to tax. The excess is to
be treated as expense of the company.
2) The entrance fee should not be considered income
since it is an expense of his employer, and
membership therein is merely incidental to his duties
of increasing and sustaining the business of his
employer.
3) His wife merely accompanied him to New York on a
business trip as his secretary, and at the employer-
corporation’s request, for the wife to look at details of
the plans of a building that his employer intended to
construct. Such must not be considered taxable
income.
• The Collector of Internal Revenue merely allowed
the entrance fee as nontaxable. The rent expense and
travel expenses were still held to be taxable. The
Court of Tax Appeals ruled in favor of the taxpayers,
that such expenses must not be considered part of
taxable income. Letters of the wife while in New York
concerning the proposed building were presented as
evidence.
ISSUE: Whether or not the rental allowances and
travel allowances furnished and given by the
employer-corporation are part of taxable income?
HELD: NO. Such claims are substantially supported by
evidence.
These claims are therefore NOT part of taxable
income. No part of the allowances in question
redounded to their personal benefit, nor were such
amounts retained by them. These bills were paid
directly by the employer-corporation to the creditors.
The rental expenses and subsistence allowances are
to be considered not subject to income tax. Arthur’s
high executive position and social standing,
demanded and compelled the couple to live in a more
spacious and expensive quarters. Such ‘subsistence
allowance’ was a SEPARATE account from the account
for salaries and wages of employees. The company did
not charge rentals as deductible from the salaries of
the employees. These expenses are COMPANY
EXPENSES, not income by employees which are
subject to tax.
- Polo v. CIR, G.R. No. L-78780, July 23, 1987
Nitafan vs. CIR Case Digest
The salary of the Chief Justice and of the Associate Justices of-the
courts shall be fixed by law. During their continuance in office, their salary shall not be decreased.
Art. VIII, 1987 Constitution)
Diminution of salaries was not the spirit of the law.
Salaries of judges and justices shall be sunbj to income
tax as well.
The court discarded its prev ruling
Facts:
The Chief Justice directed the Fiscal Management
and Budget Office of the Supreme Court to
discontinue the withholding of taxes from the salaries
of the Justices of the Supreme Court as well as from
the salaries of all other members of the judiciary. This
was affirmed by the Supreme Court en banc.
Judges Nitafan, Polo and Savellano from RTC Manila
filed a petition to prohibit and/or perpetually enjoin
the Commissioner of Internal Revenue and the
Financial Officer of the Supreme Court, from making
any deduction of withholding taxes from their
salaries. They submit that "any tax withheld from their
emoluments or compensation as judicial officers
constitutes a decrease or diminution of their salaries,
contrary to the provision of Section 10, Article VIII of
the 1987 Constitution mandating that during their
continuance in office, their salary shall not be
decreased," even as it is anathema to the Ideal of an
independent judiciary envisioned in and by said
Constitution."
Issue: Are the members of the Judiciary exempt from
income taxes?
Ruling: No. The Court held that the salaries of Justices
and Judges are properly subject to a general income
tax law applicable to all income earners and that the
payment of such income tax by Justices and Judges
does not fall within the constitutional protection
against decrease of their salaries during their
continuance in office and the ruling that "the
imposition of income tax upon the salary of judges is a
diminution thereof, and so violates the Constitution"
in Perfecto vs. Meer, as affirmed in Endencia vs. David
must be declared discarded. The framers of the
fundamental law, as the alter ego of the people, have
expressed in clear and unmistakable terms the
meaning and import of Section 10, Article VIII, of the
1987 Constitution that they have adopted.
INGSupreme Court,
Bank v CIR, G.R.and
No.of167679,
judges July
of lower
22, 2015
Facts:
ING Bank, "the Philippine branch of Internationale
Nederlanden Bank N.V., a foreign banking corporation
incorporated in the Netherlands[,] is duly authorized
by the Bangko Sentral ng Pilipinas to operate as a
branch with full banking authority in the
Philippines."[10]
Withholding tax on compensation
Petitioner ING Bank claims that it is not liable for
withholding taxes on bonuses accruing to its officers
and employees during taxable years 1996 and 1997.
[59] It maintains its position that the liability of the
employer to withhold the tax does not arise... until
such bonus is actually distributed. It cites Section 72
of the 1977 National Internal Revenue Code, which
states that "[e]very employer making payment of
wages shall deduct and withhold upon such wages a
tax," and BIR Ruling No. 555-88 (November 23, 1988)
declaring... that "[t]he withholding tax on the
bonuses should be deducted upon the distribution of
the same to the officers and employees[.]"[60]
( Since the supposed bonuses were not distributed to
the officers and employees in 1996 and 1997 but
were distributed in... the succeeding year when the
amounts of the bonuses were finally determined,
petitioner ING Bank asserts that its duty as employer
to withhold the tax during these taxable years did
not arise.
Withholding tax on compensation
Respondent Commissioner of Internal Revenue
contends that petitioner ING Bank's act of "claim[ing]
[the] subject bonuses as deductible expenses in its
taxable income although it has not yet withheld and
remitted the [corresponding withholding] tax"[65]
to... the Bureau of Internal Revenue contravened
Section 29(j) of the 1997 National Internal Revenue
Code, as amended.[66] Respondent Commissioner of
Internal Revenue claims that "subject bonuses should
also be disallowed as deductible expenses of...
petitioner."
Issues: WN ING Bank is liable form witholdinb taxes
from 1996-1997
Ruling: Yes
Reading together the two provisions, we hold that the
obligation of the payor/employer to deduct and
withhold the related withholding tax arises at the
time the income was paid or accrued or recorded as
an expense in the payor’s/employer’s books,
whichever comes first.
Petitioner ING Bank accrued or recorded the bonuses
as deductible expense in its books. Therefore, its
obligation to withhold the related withholding tax due
from the deductions for accrued bonuses arose at the
time of accrual and not at the time of actual payment.
In Filipinas Synthetic Fiber Corporation v. Court of
Appeals,99 the issue was raised on "whether the
liability to withhold tax at source on income payments
to non-resident foreign corporations arises upon
remittance of the amounts due to the foreign
creditors or upon accrual thereof."100 In resolving this
issue, this court considered the nature of the
accounting method employed by the withholding
agent, which was the accrual method, wherein it was
the right to receive income, and not the actual
receipt, that determined when to report the amount
as part of the taxpayer’s gross income.101 It upheld the
lower court’s finding that there was already a definite
liability on the part of petitioner at the maturity of the
loan contracts.102 Moreover, petitioner already
deducted as business expense the said amounts as
interests due to the foreign
corporation.103 Consequently, the taxpayer could not
claim that there was "no duty to withhold and remit
income taxes as yet because the loan contract was not
yet due and demandable."104 Petitioner, "[h]aving
‘written-off’ the amounts as business expense in its
books, . . . had taken advantage of the benefit
provided in the law allowing for deductions from gross
income."105
Here, petitioner ING Bank already recognized a
definite liability on its part considering that it had
deducted as business expense from its gross income
the accrued bonuses due to its employees.
Underlying its accrual of the bonus expense was a
reasonable expectation or probability that the bonus
would be achieved. In this sense, there was already a
constructive payment for income tax purposes as
these accrued bonuses were already allotted or made
available to its officers and employees.
Accrual Method and Cash Method
In Commissioner of Internal Revenue v. Isabela
Cultural Corporation,94 this court explained the accrual
method of accounting, as against the cash method:
Accounting methods for tax purposes comprise a set
of rules for determining when and how to report
income and deductions. . . .
Revenue Audit Memorandum Order No. 1-2000,
provides that under the accrual method of
accounting, expenses not being claimed as deductions
by a taxpayer in the current year when they are
incurred cannot be claimed as deduction from income
for the succeeding year. Thus, a taxpayer who is
authorized to deduct certain expenses and other
allowable deductions for the current year but failed to
do so cannot deduct the same for the next year.
The accrual method relies upon the taxpayer’s right to
receive amounts or its obligation to pay them, in
opposition to actual receipt or payment, which
characterizes the cash method of accounting.
Amounts of income accrue where the right to receive
them become fixed, where there is created an
enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without
regard to indeterminacy merely of time of payment.
For a taxpayer using the accrual method, the
determinative question is, when do the facts present
themselves in such a manner that the taxpayer must
recognize income or expense? The accrual of income
and expense is permitted when the all-events test
has been met. This test requires: (1) fixing of a right
to income or liability to pay; and (2) the availability
of the reasonable accurate determination of such
income or liability.
The all-events test requires the right to income or
liability be fixed, and the amount of such income or
liability be determined with reasonable
accuracy.1âwphi1 However, the test does not demand
that the amount of income or liability be known
absolutely, only that a taxpayer has at his disposal the
information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied
where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a
computation may be unknown, but is not as much as
unknowable, within the taxable year. The amount of
liability does not have to be determined exactly; it
must be determined with "reasonable accuracy.
"Accordingly, the term "reasonable accuracy" implies
something less than anex act or completely accurate
amount.95 (Emphasis supplied, citations omitted)
Thus, if the taxpayer is on cash basis, he expense is
deductible in the year it was paid, regardless of the
year it was incurred. If he is on the accrual method,
he can deduct the expense upon accrual thereof. An
item that is reasonably ascertained as to amount and
acknowledged to be due has "accrued"; actual
payment is not essential to constitute "expense."
• Fringe Benefits
- Revenue Regulations Nos. 3-98, 8-2000, 10-2000, 05-
2008, 05-2011
- Revenue Regulations No. 10-2002
- Revenue Memorandum Circular No. 88-2012,
December 27, 2012
• Exclusions:
• Compensation for Injuries or Sickness - Sec. 32(b)(4),
NIRC 13th Month Pay and Other benefits - Sec. 32 (7)
(b,e), NIRC
• Income Exempt Under Treaty - Sec. 28(b)(4), NIRC
• Exemption under special laws, e.g. Bayanihan II Act
(RA 11494) C. Pensions/Retirement
Benefits/Separation Pay - Sec. 32(A)(10), NIRC
• Exclusions: - Sec. 32(6)(a-f), NIRC
- Sec. 2.78.1(B)(1-12), Revenue Regulations No. 2-98
- RA 4917; RA 7641
Tax Treaties have the same force and effect as
statutes. Tax can be exempt through treaties
Retirement benefit shall be exempted from tax
provided that, The official on employer was in the
service in the same employer for at least 10 years and
not morethan 50 years old during the retirement; that
the benefit shall be availed by the employee only
once.
- CIR v. CA, G.R. No. 96016, October 17, 1991, 203
SCRA 72
Terminal leave pay: Accumulated leave credits, you
will be monetized at the time of your retirement
Monetary equivalent of theses unused leaves is not
subj to income tax. This is to provide the retiry to
sustain himself towards his senior years. Same with
pensions.
FACTS: Efren Castaneda retired from gov’t service as
Revenue Attache in the Philippine Embassy, London,
England. Upon retirement, he received benefits such
as the terminal leave pay. The Commissioner of
Internal Revenue withheld P12,557 allegedly
representing that it was tax income.
Castaneda filed for a refund, contending that the cash
equivalent of his terminal leave is exempt from
income tax.
The Solicitor General contends that the terminal leave
is based from an employer-employee relationship and
that as part of the services rendered by the employee,
the terminal leave pay is part of the gross income of
the recipient.
CTA -> ruled in favor of Castaneda and ordered the
refund.
CA -> affirmed decision of CTA. Hence, this petition for
review on certiorari.
ISSUE: Whether or not terminal leave pay (on
occasion of his compulsory retirement) is subject to
income tax.
HELD: NO. As explained in Borromeo v CSC, the
rationale of the court in holding that terminal leave
pays are subject to income tax is that:
. . commutation of leave credits, more commonly
known as terminal leave, is applied for by an officer
or employee who retires, resigns or is separated
from the service through no fault of his own. In the
exercise of sound personnel policy, the Government
encourages unused leaves to be accumulated. The
Government recognizes that for most public servants,
retirement pay is always less than generous if not
meager and scrimpy. A modest nest egg which the
senior citizen may look forward to is thus avoided.
Terminal leave payments are given not only at the
same time but also for the same policy considerations
governing retirement benefits.
A terminal leave pay is a retirement benefit which is
NOT subject to income tax.
- CIR v. GCI Retirement, G.R. No. 95022, March 23,
1992, 207 SCRA 487
FACTS:
Petitioner, seeks a reversal of the Decision of
respondent CA, dated Aug. 27, 1990, in CA-G.R. SP No.
20426, entitled “Commissioner of Internal Revenue
vs. GCL Retirement Plan, represented by its Trustee-
Director and the Court of Tax Appeals,” which
affirmed the Decision of the latter Court, dated 15
December 1986, in Case No. 3888, ordering a refund,
in the sum of P11,302.19, to the GCL Retirement Plan
representing the withholding tax on income from
money market placements and purchase of treasury
bills, imposed pursuant to Presidential Decree No.
1959.
There is no dispute with respect to the facts. Private
Respondent, GCL Retirement Plan (GCL, for brevity) is
an employees’ trust maintained by the employer, GCL
Inc., to provide retirement, pension, disability and
death benefits to its employees. The Plan as
submitted was approved and qualified as exempt
from income tax by Petitioner Commissioner of
Internal Revenue in accordance with Rep. Act No.
4917.
ISSUE:
Are school’s retained earnings tax-exempt?
RULING:
Yes. GCL Plan was qualified as exempt from income
tax by the CIR in accordance with Rep. Act. 4917. The
tax-exemption privilege of employees’ trusts, as
distinguished from any other kind of property held in
trust, springs from Section 56(b) (now 53[b]) of the
Tax Code, “The tax imposed by this Title shall not
apply to employee’s trust which forms part of a
pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his
employees . . .” And rightly so, by virtue of the  raison
de’etre behind the creation of employees’ trusts.
Employees’ trusts or benefit plans normally provide
economic assistance to employees upon the
occurrence of certain contingencies, particularly, old
age retirement, death, sickness, or disability. It
provides security against certain hazards to which
members of the Plan may be exposed. It is an
independent and additional source of protection for
the working group. What is more, it is established for
their exclusive benefit and for no other purpose.
It is evident that tax-exemption is likewise to be
enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in
a diminution accumulated income and reduce
whatever the trust beneficiaries would receive out of
the trust fund. This would run afoul of the very
intendment of the law. There can be no denying
either that the final withholding tax is collected
from income in respect of which employees’ trusts are
declared exempt (Sec. 56 [b], now 53 [b], Tax Code).
The application of the withholdings system to interest
on bank deposits or yield from deposit substitutes is
essentially to maximize and expedite the collection
of income taxes by requiring its payment at the
source. If an employees’ trust like the GCL enjoys a
tax-exempt status from income, we see no logic in
withholding a certain percentage of that income
which it is not supposed to pay in the first place.
D. Rentals/Leases
- Sec. 32(A5), NIRC
- Secs. 74, 49 and 58, Revenue Regulations No. 2
- Revenue Regulations 19-86 - BIR Ruling No. 009-07
E. Passive Income
1. Interest Income; deposit substitutes
- Sec. 32(A)(4), NIRC –
Revenue Regulations No. 10-98 - RR 14-2011; RMC
77-2012; RMC 81-2012
- BDO v. Republic, G.R. No. 198756, January 13, 2015
Gain from sale under 32 b 7, will not include interest
in exemptions.
FACTS: The case involves the proper tax treatment of
the discount or interest income arising from the ₱35
billion worth of 10-year zero-coupon treasury bonds
issued by the Bureau of Treasury on October 18, 2001
(denominated as the Poverty Eradication and
Alleviation Certificates or the PEA Ce Bonds by the
Caucus of Development NGO Networks).
On October 7, 2011, the Commissioner of Internal
Revenue issued BIR Ruling No. 370-2011 (2011 BIR
Ruling), declaring that the PEACe Bonds being deposit
substitutes are subject to the 20% final withholding
tax. Pursuant to this ruling, the Secretary of Finance
directed the Bureau of Treasury to withhold a 20%
final tax from the face value of the PEACe Bonds upon
their payment at maturity on October 18, 2011.
This is a petition for certiorari, prohibition and/or
mandamus filed by petitioners under Rule 65 of the
Rules of Court seeking to:
a. ANNUL Respondent BIR’s Ruling No. 370-2011
dated 7 October 2011 [and] other related rulings
issued by BIR of similar tenor and import, for being
unconstitutional and for having been issued without
jurisdiction or with grave abuse of discretion
amounting to lack or· excess of jurisdiction … ;
b. PROHIBIT Respondents, particularly the BTr; from
withholding or collecting the 20% FWT from the
payment of the face value of the Government Bonds
upon their maturity;
c. COMMAND Respondents, particularly the BTr, to
pay the full amount of the face value of the
Government Bonds upon maturity … ; and
d. SECURE a temporary restraining order (TRO), and
subsequently a writ of preliminary injunction,
enjoining Respondents, particularly the BIR and the
BTr, from withholding or collecting 20% FWT on the
Government Bonds and the respondent BIR from
enforcing the assailed 2011 BIR Ruling, as well asother
related rulings issued by the BIR of similar tenor and
import, pending the resolution by [the court] of the
merits of [the] Petition.
PETITIONER’S ARGUMENT: In sum, petitioners and
petitioners-intervenors, namely, RCBC, RCBC Capital,
and CODE-NGO argue that:
1. The 2011 BIR Ruling is ultra vires because it is
contrary to the 1997 National Internal Revenue Code
when it declared that all government debt
instruments are deposit substitutes regardless of the
20-lender rule; and
2. The 2011 BIR Ruling cannot be applied retroactively
because:
a) It will violate the contract clause;
● It constitutes a unilateral amendment of a material
term (tax exempt status) in the Bonds, represented by
the government as an inducement and important
consideration for the purchase of the Bonds;
b) It constitutes deprivation ofproperty without due
process because there was no prior notice to
bondholders and hearing and publication;
c) It violates the rule on non-retroactivity under the
1997 National Internal Revenue Code;
d) It violates the constitutional provision on
supporting activities of non-government organizations
and development of the capital market; and
e) The assessment had already prescribed.
RESPONDENT’S ARGUMENT: 
1) Respondent Commissioner of Internal Revenue did
not act with grave abuse of discretion in issuing the
challenged 2011 BIR Ruling:
a. The 2011 BIR Ruling, being an interpretative rule,
was issued by virtue of the Commissioner of Internal
Revenue’s power to interpret the provisions of the
1997 National Internal Revenue Code and other tax
laws;
b. Commissioner of Internal Revenue merely restates
and confirms the interpretations contained in
previously issued BIR Ruling Nos. 007-2004, DA-491-
04,and 008-05, which have already effectively
abandoned or revoked the 2001 BIR Rulings;
c. Commissioner of Internal Revenue is not bound by
his or her predecessor’s rulings especially when the
latter’s rulings are not in harmony with the law; and
d. The wrong construction of the law that the 2001
BIR Rulings have perpetrated cannot give rise to a
vested right. Therefore, the 2011 BIR Ruling can be
given retroactive effect.
2) Rule 65 can be resorted to only if there is no appeal
or any plain, speedy, and adequate remedy in the
ordinary course of law:
a. Petitioners had the basic remedy offiling a claim for
refund of the 20% final withholding tax they allege to
have been wrongfully collected; and
b. Non-observance of the doctrine of exhaustion of
administrative remedies and of hierarchy of courts.
ISSUES: 
A.) WON THE TERMS “20 OR MORE” REFERS ONLY TO
THE NUMBER OF LENDER/INVESTOR DURING INITIAL
ISSUANCE OF THE BOND.
B.) WON THE RESPONDENT SHOULD RELEASE THE
AMOUNT WITHHELD TO THE PETITIONERS PENDING
THE DETERMINATION OF THE NUMBER OF THE
SECONDARY LENDER/INVESTORS.
HELD:   usually through a broker or dealer; or
A.) NO. Under the 1997 National Internal Revenue
Code, Congress specifically defined “public” to mean
“twenty (20) or more individual or corporate lenders
at any one time.” Hence, the number of lenders is
determinative of whether a debt instrument should
be considered a deposit substitute and consequently
subject to the 20% final withholding tax.
20-lender rule
Petitioners contend that “there [is]only one (1) lender
(i.e. RCBC) to whom the BTr issued the Government
Bonds.”169 On the other hand, respondents theorize
that the word “any” “indicates that the period
contemplated is the entire term of the bond and not
merely the point of origination or issuance[,]” 170 such
that if the debt instruments “were subsequently sold
in secondary markets and so on, insuch a way that
twenty (20) or more buyers eventually own the
instruments, then it becomes indubitable that funds
would be obtained from the “public” as defined in
Section 22(Y) of the NIRC.”171 Indeed, in the context of
the financial market, the words “at any one time”
create an ambiguity.
The financial market, therefore, is an agglomeration of
financial transactions in securities performed by
market participants that works to transfer the funds
from the surplus units (or investors/lenders) to those
who need them (deficit units or borrowers).
Meaning of “at any one time”
Thus, from the point of view of the financial market,
the phrase “at any one time” for purposes of
determining the “20 or more lenders” would mean
every transaction executed in the primary or
secondary market in connection with the purchase or
sale of securities.
For example, where the financial assets involved are
government securities like bonds, the reckoning of
“20 or more lenders/investors” is made at any
transaction in connection with the purchase or sale of
the Government Bonds, such as:
1. Issuance by the Bureau of Treasury of the bonds to
GSEDs in the primary market;
2. Sale and distribution by GSEDs to various
lenders/investors in the secondary market;
3. Subsequent sale or trading by a bondholder to
another lender/investor in the secondary market
4. Sale by a financial intermediary-bondholder of its
participation interests in the bonds to individual or
corporate lenders in the secondary market.
When, through any of the foregoing transactions,
funds are simultaneously obtained from 20 or
morelenders/investors, there is deemed to be a public
borrowing and the bonds at that point intime are
deemed deposit substitutes. Consequently, the seller
is required to withhold the 20% final withholding tax
on the imputed interest income from the bonds.
B.) YES. The transactions executed for the sale of the
PEACe Bonds are:
1. The issuance of the 35 billion Bonds by the Bureau
of Treasury to RCBC/CODE-NGO at 10.2 billion; and
2. The sale and distribution by RCBC Capital
(underwriter) on behalf of CODE-NGO of the PEACe
Bonds to undisclosed investors at ₱11.996 billion.
It may seem that there was only one lender — RCBC
on behalf of CODE-NGO — to whom the PEACe Bonds
were issued at the time of origination. However, a
reading of the underwriting agreement and RCBC
term sheet reveals that the settlement dates for the
sale and distribution by RCBC Capital (as underwriter
for CODE-NGO) of the PEACe Bonds to various
undisclosed investors at a purchase price of
approximately ₱11.996 would fall on the same day,
October 18, 2001, when the PEACe Bonds were
supposedly issued to CODE-NGO/RCBC. In reality,
therefore, the entire ₱10.2 billion borrowing received
by the Bureau of Treasury in exchange for the ₱35
billion worth of PEACe Bonds was sourced directly
from the undisclosed number of investors to whom
RCBC Capital/CODE-NGO distributed the PEACe Bonds
— all at the time of origination or issuance. At this
point, however, we do not know as to how many
investors the PEACe Bonds were sold to by RCBC
Capital.
Should there have been a simultaneous sale to 20 or
more lenders/investors, the PEACe Bonds are deemed
deposit substitutes within the meaning of Section
22(Y) of the 1997 National Internal Revenue Code and
RCBC Capital/CODE-NGO would have been obliged to
pay the 20% final withholding tax on the interest or
discount from the PEACe Bonds. Further, the
obligation to withhold the 20% final tax on the
corresponding interest from the PEACe Bonds would
likewise be required of any lender/investor had the
latter turned around and sold said PEACe Bonds,
whether in whole or part, simultaneously to 20 or
more lenders or investors.
We note, however, that under Section 24 of the 1997
National Internal Revenue Code, interest income
received by individuals from longterm deposits or
investments with a holding period of not less than five
(5) years is exempt from the final tax.
Thus, should the PEACe Bonds be found to be within
the coverage of deposit substitutes, the proper
procedure was for the Bureau of Treasury to pay the
face value of the PEACe Bonds to the bondholders and
for the Bureau of Internal Revenue to collect the
unpaid final withholding tax directly from RCBC
Capital/CODE-NGO, orany lender or investor if such be
the case, as the withholding agents.
• Exclusions: -
Sec. 32(B)(7)(a), NIRC
- CIR v. Mitsubishi Metal, G.R. No. L-54908, January
22, 1990, 181 SCRA 214
Not included in 32 b exclusion. Bec the 15% is from
the loan of atlast.
Atlas Consolidated Mining and Dev Corp (Atlas)
entered into a loan and sales contract with Mitsubishi,
a Japanese corp licenses to engage in business in the
Phils., for purposes of the projected expansion of the
productive capacity of Atlas.
Mitsubishi agreed to extend a loan to Atlas for the
installation of a new concentrator for copper
production and Atlas to sell to Mitsubishi all the
copper concentrates produced for 15 years.
Mitsubishi applied for a loan with Export-Import Bank
of Japan (Eximbank) for purpose of its obligation
under said contract. Pursuant to the contract between
Atlas and Mitsubishi, interest payments were made by
Atlas to Mitsubishi for the years 1974-75.  The
corresponding 15% tax thereon in the amount of
P1,971,595.01 was withheld pursuant to sec. 24(b)(1)
and sec. 53 (b)(2) of NIRC, as amended by PD 131, and
duly remitted to the government.
Private respondent filed a claim for the tax credit
requesting the sum of P1,971,595.01 be applied
against their existing and future tax liabilities. It was
later noted by respondent CTA that Mitsubishi
executed a waiver and disclaimer of its interest in the
claim for tax credit in favor of Atlas.
Mitsubishi filed a petition for review with respondent
court on the ground that Mitsubishi was a mere agent
of Eximbank, which is a financing institution owned,
controlled and financed by the Japanese
Government.  Such government status of Eximbank, if
it may be so called, is the basis for private
respondents claim for exemption from paying the tax
on the interest payment on the loan. It was further
claimed that the interest payments on the loan from
the consortium of Japanese banks were likewise
exempt because loan supposedly came from or were
fniancé by Eximbank.  Relying on the provision of sec.
29(b)(7)(A) NIRC.
CTA promulgated its decision ordering petitioner to
grant a tax credit in favor of Atlas and the court
declared that all papers and documents pertaining to
the loan obtained by Mitsubishi from Eximbank shows
that this was the same amount given to Atlas. It also
observed that the money for the loan from the
consortium of private Japanese banks originated from
Eximbank.  From these, respondent court concluded
that the ultimate creditor of Atlas was
Eximbank.  Mitsubishi was acting as a mere “arranger
or conduit through which the loan flowed from the
creditor Eximbank to the debtor Atlas.
- The interest income of the loan paid by ATLAS to
MITSUBISHI is therefore entirely different from the
interest income paid by MITSUBISHI to EXIMBANK, of
Japan. What was the subject of the 15% withholding
tax is not the interest income paid by MITSUBISHI to
EXIMBANK, but the interest income earned by
MITSUBISHI from the loan to ATLAS
ISSUE: 1) WON the interest income from the loan
extended to Atlas by Mitsubishi is excludible from
gross income taxation pursuant to sec. 29(b)(7)(A),
NIRC and therefore, exempt from withholding tax.
       
            2) WON Mitsubishi is a mere conduit of
Eximbank which will then be considered as the
creditor whose investment in the Phils. On loans are
exempt from taxes.
HELD:
1)    NO
The signatories on the loans and sales contract were
Mitsubishi and Atlas, nowhere in the contract can it
be inferred that Mitsubishi acted for and behalf of
Eximbank of Japan nor of any entity, private or public,
for that matter.  When Mitsubishi obtained the loan of
USD 20M from Eximbank of Japan said amount ceased
to be the property of the bank and become property
of Mitsubishi. 
Mitsubishi and not Eximbank is the sole creditor of
Atlas, the former being the owner of the USD 20M
upon completion of its loan contract with Eximbank of
Japan.  The interest income of the loan paid by Atlas
to Mitsubishi is therefore entirely different from the
interest income paid by Mitsubishi to Eximbank of
Japan.  What was the subject of the 15% withholding
tax is not the interest income paid by Mitsubishi to
Eximbank, but the interest income earned by
Mitsubishi from the loan to Atlas.
It is too settled a rule in this jurisdiction, as to
dispense with the need for citations, that laws
granting exemption from tax are construed strictissimi
juris against the taxpayer and liberally in favor of the
taxing power. Taxation is the rule and exemption is
the exception. The burden of proof rests upon the
party claiming exemption to prove that it is in fact
covered by the exemption so claimed, which onus
petitioners have failed to discharge. Significantly,
private respondents are not even among the entities
which, under Section 29 (b) (7) (A) of the tax code, are
entitled to exemption and which should indispensably
be the party in interest in this case.
Definitely, the taxability of a party cannot be blandly
glossed over on the basis of a supposed "broad,
pragmatic analysis" alone without substantial
supportive evidence, lest governmental operations
suffer due to diminution of much needed funds. Nor
can we close this discussion without taking cognizance
of petitioner's warning, of pervasive relevance at this
time, that while international comity is invoked in this
case on the nebulous representation that the funds
involved in the loans are those of a foreign
government, scrupulous care must be taken to avoid
opening the floodgates to the violation of our tax
laws. Otherwise, the mere expedient of having a
Philippine corporation enter into a contract for loans
or other domestic securities with private foreign
entities, which in turn will negotiate independently
with their governments, could be availed of to take
advantage of the tax exemption law under discussion.
2)    NO
When Mitsubishi secured the loan, it was in its own
independent capacity as a private entity and not as a
conduit of the consortium of Japanese banks or the
Eximbank of Japan.  While loans were secured by
Mitsubishi primarily “as a loan to and in consideration
for importing copper concentrates from Atlas, the fact
remains that it was a loan by Eximbank of Japan to
Mitsubishi and not to Atlas.
- NDC v. CIR, G.R. No. L-53961, June 30, 1987
FACTS:
The National Development Company (NDC) entered
into contracts in Tokyo with several Japanese
shipbuilding companies for the construction of 12
ocean-going vessels. Initial payments were made in
cash and through irrevocable letters of credit. When
the vessels were completed and delivered to the NDC
in Tokyo, the latter remitted to the shipbuilders the
amount of US$ 4,066,580.70 as interest on the
balance of the purchase price. No tax was withheld.
The Commissioner then held the NDC liable on such
tax in the total sum of P5,115,234.74. Negotiations
followed but failed. NDC went to CTA. BIR was
sustained by CTA. BIR was sustained by CTA. Hence,
this petition for certiorari.
ISSUE:
Is NDC liable for the tax?
RULING:
Yes.
Although NDC is not the one taxed since it was the
Japanese shipbuilders who were liable on the interest
remitted to them under Section 37 of the Tax Code,
still, the imposition is valid.
The imposition of the deficiency taxes on NDC is a
penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by
Section 53c of the Tax Code. NDC was remiss in the
discharge of its obligation as the withholding agent of
the government and so should be liable for the
omission. 
3. Royalties
- Sec. 32(A)(6), NIRC
- CIR v. SC Johnson, G.R. No. 127105, June 25, 1999
DOCTRINE: Double taxation usually takes place when
a person is a resident of a contracting state and
derives income from, or owns capital in, the other
contracting state and both states impose tax on that
income or capital.
FACTS:
Respondent, S.C. Johnson and Son, Inc. is a domestic
corporation, entered into a license agreement with SC
Johnson and Son, USA, a non-resident foreign
corporation, pursuant to which, respondent was
granted the right to use the trademark, patents, and
technology owned by the latter.
Respondent was obliged to pay SC Johnson and Son,
USA royalties based on the percentage of net sales
and subjected the same to 25% withholding tax on
royalty payments which respondent paid. Respondent
subsequently filed a claim for refund of overpaid
withholding tax on royalties with the International Tax
Affairs Division (ITAD) of the Bureau of Internal
Revenue. He claims that the preferential tax rate of
10% should be applied to him.
The Commissioner did not act on such refund, hence
the private respondent filed a petition for review
before the Court of Tax Appeals (CTA). The CTA ruled
in favor of Private Respondent ordered the
commissioner to issue a tax credit certificate in favor
of said respondent.
The Commissioner filed a petition for review with the
Court of Appeals, which affirmed in toto the CTA
ruling.
ISSUE:
Whether respondent SC Johnson and Son, Inc. is
entitled to the 10% royalty under the most favored
nation clause as provided in the RP-US Tax Treaty in
relation to the RP-West Germany Tax Treaty.
HELD:
No. The most favored nation clause is intended to
establish the principle of equality of international
treatment by providing that the citizens or subjects of
the contracting nations may enjoy the privileges
accorded by either party to those of the most favored
nation. The similarity in the circumstances of payment
of taxes is a condition for the enjoyment of most
favored nation treatment precisely to underscore the
need for equality of treatment. Both the RP-US Tax
Treaty and the RP-West Germany Tax Treaty provide
for a tax on royalties for the use of trademark, patent,
and technology.
The RP-US Tax Treaty is just one of a number of
bilateral treaties which the Philippines has entered
into for the avoidance of double taxation. Tax
conventions are drafted with a view towards the
elimination of international juridical double taxation,
which is defined as the imposition of comparable
taxes in two or more states on the same taxpayer in
respect of the same subject matter and for identical
periods.
Double taxation usually takes place when a person is a
resident of a contracting state and derives income
from, or owns capital in the other contracting state
and both states impose a tax on that income or
capital.
Here, the state of source is the Philippines because
the royalties are paid for the right to use property or
rights, i.e. trademarks, patents, and technology,
located within the Philippines. The United States is the
state of residence since the taxpayer, S. C. Johnson
and Son, U.S.A., is based there. Under the RP-US Tax
Treaty, the state of residence and the state of source
are both permitted to tax the royalties, with a
restraint on the tax that may be collected by the state
of source. Furthermore, the method employed to give
relief from double taxation is the allowance of a tax
credit to citizens or residents of the United States (in
an appropriate amount based upon the taxes paid or
accrued to the Philippines) against the United States
tax, but such amount shall not exceed the limitations
provided by United States law for the taxable year.
Article 24 of the RP-Germany Tax Treaty allows
crediting against German income and corporation tax
of20% of the gross amount of royalties paid under the
law of the Philippines while Article 23 of the RP-US
Tax Treaty does not. Since the RP-US Tax Treaty does
not give a matching tax credit of 20 % for the taxes
paid to the Philippines on royalties as allowed under
the RP-West Germany Tax Treaty, private respondent
cannot be deemed entitled to the 10% rate granted
under the latter treaty for the reason that there is no
payment of taxes on royalties under similar
circumstances.
Note:
4. Dividends - Sec. 32(A)(7), NIRC
- Secs. 58 and 71, 250-253, Revenue Regulations No.
2
- Revenue Memorandum No. 31-90
- Sec. 73(C,D), NIRcC
- Wise v Meer, G.R. No. 48231. June 30, 1947
- CIR v. CA, G.R. No. 108576, Jan. 20, 1999 5.
Annuities and Insurance Proceeds

- Sec. 32(A)(8), NIRC

- Sec. 48, Revenue Regulations No. 2 • Exclusions: •

Proceeds from Life Insurance

- Sec. 32(B)(1), NIRC - Sec. 62, Revenue Regulations

No. 2

- El Oriente Fabrica v. Posadas, G.R. No. 34774,

September 21,1931 56 Phil 147

• Return of Premium Paid

- Sec. 32(B)(2), NIRC

- Sec. 48, Revenue Regulations No. 2

• Compensation for Injuries or Sickness

- Sec. 32(B)(4), NIRC - Sec. 63, Revenue Regulations

No. 2 6. Prizes and Winnings/Awards/Rewards

- Sec. 32(A)(9), NIRC - Sec. 282, NIRC - Revenue

Memorandum Order No. 12-93

- Revenue Regulations No. 016-10; Revenue

Memorandum Order No. 046-11

- CIR v. COA, G.R. No. 101976, Jan. 29, 1993 •

Exclusions:

- Sec. 24(B)(1), NIRC Sports Competition Prizes - Sec.

32(B)(7)(d), NIRC 7. Other Types of Passive Income -
Found Treasure

- Tax Refund - Recovery of Bad Debt Previously

Deducted; Sec. 50, Revenue Regulations No. 2

- Damages -BIR Ruling No. 1211-18 dated 28

September 2018

- BIR Ruling No. 26-2018 dated 18 January 2018

- Informer’s Reward

-Penid v. Virata, G.R. No. L-44004, March 25, 1983