TAXATION LAW 1
Morillo Notes
TAXATION LAW 1
MORILLO NOTES
Atty. Jon Ligon
PART ONE:
TAXATION IN GENERAL
Chapter 1:
GENERAL PRINCIPLES OF TAXATION
I. TAXATION
DEFINITION OF TAXATION:
- Taxation is defined as the power by which the
sovereign raises revenue to defray the necessary
expenses of government. (71 Am Jur. 2nd 342)
PHASES OF TAXATION:
1. Levying or Imposition of the Taxes:
- Constituted on the provisions of law which
determine or work out the determination of
the persons or property to be taxed, the
sum/s to be raised, the rate thereof, and the
time and manner of levying and receiving
and collecting the taxes.
2. Collection of the Taxes Levied:
- Constituted on the provisions of law which
prescribe the manner of enforcing the
obligation on the part of those taxes to pay
the demand thus created.
3. Payment by the Taxpayer
PURPOSE OF TAXATION:
a. To provide funds or property with which to promote
the general welfare and protection of its citizens;
b. For regulatory purposes, to attain non-revenue
objectives and pursue policy decisions.
NATURE OF THE INTERNAL REVENUE LAW (IRL):
1. It is inherent in Sovereignty;
2. It is Legislative in character;
3. It is subject to Constitutional and Inherent
Limitations;
4. It is not political in nature but civil, it’s penal
provisions are primarily intended to aid its
enforcement.
EMILIO HILADO vs. CIR
GR no. L-9408, October 31, 1956
FACTS:
Finance Secretary, through the CIR, issued Gen. Cir. V-123
interpreted Sec. 30, NIRC as losses sustained during WWII are
allowable as tax deductions only within the corresponding taxable
year. On this basis, Emilio Hilado filed his income tax return for
1951 with the treasurer of Bacolod City. He claimed P12,000.00 as
a deductible item from his gross income, pursuant to Gen. Cir. V-
123. He further declared the amount as a loss consisting in a
portion of his war damage claim which had been duly approved by
the PWDC under Phil. Rehabilitation Act but which was not paid
until the US Congress should make further appropriation pursuant
to a notice served upon him by the PWDC.
On the basis of said return, an assessment notice demanding
payment of P9,000.00 was sent to Hilado, who paid tax in monthly
installments, the last payment having been made on Jan. 1953.
Lateron, Finance Secretary, after consulting with the DOJ
Secretary, issued GC V-139 which revoked Gen. Cir. V-123. As a
consequence, the P12,000.00 was disallowed as deduction from
Hilado’s gross income for 1951 and CIR demanded payment of
P3,000.00 as deficiency income for that year.
ISSUES:
1. W/N there was no taxable year during the last war, as a
consequence of enemy occupation?
2. W/N Finance Secretary had power to pass upon the
validity of Gen. Cir. V-123?
RULING:
1. NO, Our internal revenue laws are not political in nature,
and as such were continued in force during the period of
enemy occupation and in effect were actually enforced
by the occupation government. Such tax laws are
deemed to be the laws of the occupied territory and not
of the occupying enemy. Law once established continues
until changed by some competent legislative power. It is
not changed merely by change of sovereignty.
2. YES, Finance Secretary is vested with authority to
revoke, repeal or abrogate the acts or previous rulings of
his predecessor because the construction of a statute by
those administering it is not binding on their successors if
thereafter the latter become satisfied that a different
construction should be given.
SCOPE OF TAXATION:
- The power to tax must rest upon justice.
- The power to tax is an imperious necessity of all
governments and is not to be restricted by mere legal
fiction.
- In the absence of Constitutional Restrictions, Will of
Legislative bodies, and the discretion of the
authorities exercising it, the power of taxation is
regarded as (a) Comprehensive; (b) Unlimited; (c)
Plenary; and (d) Supreme. (71 Am Jur. 2nd 394-395)
ANTERO SISON vs. RUBEN ANCHETTA
GR no. L-59431, July 25, 1984
FACTS:
Sison, as taxpayer, questioned the validity of Sec. 1, BP 135
which provides for tax rates on citizens or residents on the
following:
1. Taxable compensation income;
2. Taxable net income;
3. Royalties, prizes and other winnings;
4. Interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust
fund and similar arrangements;
5. Dividends and share of individual partner in the net
profits of taxable partnership;and
6. Adjusted gross income.
Sison characterized the law as arbitrary, amounting to class
legislation, oppressive and capricious. He invoked the Equal
Protection Clause and Due Process
ISSUE:
1. W/N the imposition of a higher tax rate on taxable net
income derived from business or profession than on
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 TAXATION LAW 1
Morillo Notes
compensation is constitutionally infirm?
RULING:
NO, Taxes is the lifeblood of the government, their prompt and
certain availability is of the essence. The power to tax is an attribute
of sovereignty. Adversely affecting as it does property rights, both
the due process and equal protection clauses may properly be
invoked to invalidate in appropriate cases a revenue measure.
According to CJ Marshall, “The power to tax involves the power
to destroy.”It is inherent in the power to tax that a state be free to
select the subjects of taxation, and that inequalities which result
from a singing out of one particular class for taxation or exemption
infringe no constitutional limitation. Tax operates with the same
force and effect in every place where the subject may be found.
This means that all taxable articles or kinds of property of the same
class be taxed at the same rate.
JOSE REYES vs. PEDRO ALMANZOR
GR nos. L-49839-46, April 26, 1991
FACTS:
Jose Reyes, et. al, are the owners of parcels of land in Tondo,
Manila which are leased and occupied as dwelling sites to tenants
for monthly rentals not exceeding P300.00. RA 6359 was enacted,
prohibiting for 1 year an increase in monthly rentals of dwelling
units whose rentals do not exceed P300.00, but allowing an
increase of 10% thereafter. It also disallowed the ejectment of
lessees when the lease expires.
Thereafter, PD 20 made the prohibition on increase of rentals
absolute and indefinitely disallowed ejectments. Manila City
Assessor then re-classified & reassessed the value of the subject
lands based on the schedule of market values. The revision led to
an increase in the corresponding tax rates, which prompted Reyes,
et. al, to file a Memorandum of Disagreement with the Board of Tax
Appeals.They claimed the assessments were excessive,
unwarranted and imposed upon the taxes which greatly exceeded
the annual income derived from the properties.
ISSUE:
1. W/N the Board erred in adopting the “comparable sales
approach” method in fixing the assessed value of the
properties rather than the “income approach” method.
RULING:
YES, The Board admits that the income approach is used in
some vicinities, when income is affected by some sort of price
control, the same is rejected in the consideration and study of land
values as in the case of properties affected by the Rent ControlLaw
for they do not project the true market value in the open market.
The rule of taxation must not only be uniform but must also be
equitable and progressive. (Art. VIII, Sec. 17(1), 1973 Constitution).
Uniformity is defined as that principle by which all taxable articles
or kinds of property of the same class shall be taxed at the same
rate. Taxation is said to be equitable when its burden falls on those
better able to pay. Taxation is progressive when its rate goes up
depending on the resources of the person affected.
The power to tax is “an attribute of sovereignty” and the
strongest of all powers of government, but such power is not
absolute. Both due process and equal protection clauses may
properly be invoked to invalidate a revenue measure. The due
process clause may be invoked if the tax statute is arbitrary that it
finds no support in the Constitution. The taxing power has the
authority to make a reasonable and natural classification for
purposes of taxation but the government’s act must not be
prompted by hostility or discrimination.
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NATURE OF TAXATION:
- The power of taxation is inherent in sovereignty as an
incident or attribute thereof, being essential to the
existence of independent government. (71 Am Jur
2nd 397-398)
- The right to tax exists apart from the Constitution and
without being expressly conferred by the people,
resides in the government as part of itself, and it is
coextensive with that to which it is an accident.
ART. VI, Sec. 28, 1987 CONSTITUTION:
1. The rule of taxation shall be uniform and equitable. The
Congress shall evolve a progressive system of taxation.
2. The Congress may, by law, authorize the President to fix within
specified limits, and subject to such limitations and restrictions
as it may impose, tariff rates, import and export quotas,
tonnage and wharfage dues, and other duties or imposts within
the framework of the national development program of the
Government.
3. Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all
lands, buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
4. No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
CIR vs. MANUEL PINEDA
GR no. L-22734, September 15, 1967
FACTS:
Anastasio Pineda died and was survived by his wife and 15
children. The Estate proceedings and the estate was divided in
1948, wherein Manuel Pineda (Anastasio’s Eldest) share amounted
to P2,500.00. BIR investigated the income tax liability of the estate
for 1945-1948 and found the corresponding tax returns and issued
an assessment. Manuel received the assessment and contested
the same, appealing to the CTA only his proportionate part
pertaining to him as one of the heirs.
CTA reversed the CIR on the ground that the right to assess
and collect the tax had prescribed. CIR appealed and the SC
declared the assessment for1947 prescribed but those of 1945 and
1946 had not.
ISSUE:
1. W/N Manuel may be required to pay the full amount
RULING:
YES, Manuel is liable for the assessment as an heir and as a
holder-transferee of property belonging to the estate. The reason is
that the government has a lien on the P2,500.00 received by him,
for unpaid income taxes for which said estate is liable. After
payment of the lien, Manuel will have a right of Contribution from
his co-heirs to achieve an adjustment of the proper share of each
heir in the distributable estate.
The government has 2 ways of collecting tax: (1) By going
after all the heirs and collecting proportionately from each one; and
(2) By subjecting the property held by an heir or transferee to the
payment of the tax due. The second remedy is the avenue that the
government took in this case. The BIR should be given the
necessary discretion to avail itself of the most expeditious way to
collect the tax, because taxes are the lifeblood of the government
and their prompt and certain availability is an impedious need. In
this case, the suit seeks for the payment of the tax.
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Morillo Notes
PHILIPPINE GUARANTY vs. CIR
GR no. L-22074, April 30, 1955
FACTS:
Philippine Guaranty Co., Inc., a domestic insurance company,
entered into reinsurance contracts, on various dates, with foreign
insurance companies not doing business in the Philippines. The
reinsurance contracts made the commencement of the reinsurers'
liability simultaneous with that of Philippine Guaranty Co., Inc.
under the original insurance. Philippine Guaranty Co., Inc. was
required to keep a register in Manila where the risks ceded to the
foreign reinsurers where entered, and entry therein was binding
upon the reinsurers. A proportionate amount of taxes on insurance
premiums not recovered from the original assured were to be paid
for by the foreign reinsurers. The foreign reinsurers further agreed,
in consideration for managing or administering their affairs in the
Philippines, to compensate the Philippine Guaranty Co., Inc., in an
amount equal to 5% of the reinsurance premiums. Conflicts and/or
differences between the parties under the reinsurance contracts
were to be arbitrated in Manila. Philippine Guaranty Co., Inc. and
Swiss Reinsurance Company stipulated that their contract shall be
construed by the laws of the Philippines.
Pursuant to the aforesaid reinsurance contracts, Philippine
Guaranty Co., Inc. ceded to the foreign reinsurers the premiums for
1973 and 1974. Said premiums were excluded by Philippine
Guaranty Co., Inc. from its gross income when it file its income tax
returns for 1953 and 1954. Furthermore, it did not withhold or pay
tax on them. Consequently, per letter dated April 13, 1959, the
Commissioner of Internal Revenue assessed against Philippine
Guaranty Co., Inc. withholding tax on the ceded reinsurance
premiums. Philippine Guaranty Co., Inc., protested the assessment
on the ground that reinsurance premiums ceded to foreign
reinsurers not doing business in the Philippines are not subject to
withholding tax. Its protest was denied and it appealed to the Court
of Tax Appeals.
ISSUE:
W/N reinsurance premiums ceded to foreign reinsurers not doing
business in the Philippines are subject to withholding tax under
Section 53 and 54 of the Tax Code.
RULING:
YES, The reinsurance premiums remitted by local insurance
companies to foreign re-insurance companies are subject to
withholding tax on income under Sections 53 and 54 of the
National Internal Revenue Code.
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. Considering that the reinsurance premiums in
question were afforded protection by the government and the
recipient foreign reinsurers exercised rights and privileges
guaranteed by our laws, such reinsurance premiums and reinsurers
should share the burden of maintaining the state.
CIR vs. YUSECO
GR no. L-12518, October 28, 1961
FACTS:
JC Yuseco did not file his income tax returns for 1945 and 1946.
Having come to the knowledge of revenue examiners in 1948, they
accordingly made income tax returns for him, assessed against and
demanded from him the sums of P134.14 and P7k. In 1948,
Yuseco wrote the CIR requesting to be informed of how the
assessments were arrived at. In reply, CIR furnished the information
and reiterated the demand for payment. Yuseco asked that he be
given opportunity to present his side of the matter but
reconsideration was denied and the demand once again made in
1949. In the same year, petitioner once more requested a
reinvestigation but was denied and the demand was repeated. In
1951, petitioner renewed the request and nothing was heard of the
matter for almost 3years thereafter.
In 1953, CIR issued a warrant of Distraint and Levy upon
petitioner’s properties which however was not executed. Petitioner
then sought the withdrawal or reconsideration of the warrant.
Meanwhile, CIR issued a revised assessment notice which reduced
the original assessment for 1946 to P2k. Yuseco then asked to be
informed of the action upon his previous petition for reinvestigation.
This was answered by once again demanding payment of the
revised assessment. In 1955, CIR again issued a warrant of
Distraint and Levy on the properties of Yuseco, this time to collect
the revised assessment. On appeal, the CTA held the warrant of
distraint and levy to be null and void and directed the CIR to return
to Yuseco the properties seized. The CTA also enjoined the CIR
from taking further proceedings to collect the tax due.
CIR now claims the Court of Tax Appeals has no jurisdiction to take
cognizance of Yuseco’s petition that seeks to enjoin the CIR from
collecting the taxes due by summary distraint of and levy upon the
taxpayer’s properties. CIR asserts that Yuseco cannot bring to the
CTA an independent special civil action for prohibition without
taking to said Court an appeal from the decision or ruling of the
CIR.
ISSUE:
W/N CTA may issue writs of prohibition & injunction pursuant to an
original jurisdiction, despite absence of an appeal of the CIR’s
ruling?
RULING:
NO, Secs. 7,9 and 11 of RA 1125 refer and limit only to appeals
from decisions or ruling of the CIR, Commissioner of Customs &
Provincial or City Boards of Assessment Appeals in the proper
cases. Nowhere does the law vest in the CTA original jurisdiction to
issue writs of prohibition or injunction independently of, and apart
from, an appealed case. The writ of prohibition or injunction that it
may issue to suspend the collection of taxes, is merely ancillary to
and in furtherance of its appellate jurisdiction. This fact is borne out
by the statements made during the proceedings of its enactment.
Taxes being the chief source of revenue for the gov’t to keep it
running, must be paid immediately & w/o delay. A taxpayer who
feels aggrieved by a decision of a revenue officer & appeals to the
CTA must pay the tax assessed, except if the CTA opines that
collection should be suspended and the amount should be
deposited or a bond be filed.
CIR vs. ALGUE, INC.
GR no. L-28896, February 17, 1988
FACTS:
Algue, Inc. is a domestic corporation engaged in engineering,
construction and other allied activities. The corporation was
appointed by the Philippine Sugar Estate Development
Company[PSEDC] as its agent, authorizing Algue to sell the latter’s
land, factories and oil manufacturing process.
Pursuant to such authority, Alberto Guevara and 4 others worked
for the formation of the Vegetable Oil Investment Corporation,
inducing other persons to invest in it. Ultimately, this new
corporation purchased the PSEDC properties. For this sale, Algue
received a commission of 125k and 75k as promotional fees were
paid to the 5 individuals led by Alberto Guevara.
As a necessary business expense, Algue claims the 75k was
deductible. On the other hand, CIR claimed that these payments
are fictitious because most of the payees [5 individuals] are
members of the same family in control of Algue. Petitioner suggests
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Morillo Notes
a tax dodge, an attempt to evade a legitimate assessment by
involving an imaginary deduction.
ISSUE:
W/N Collector of Internal Revenue correctly disallowed the
P75,000.00 deduction claimed by private respondent Algue as
legitimate business expenses in its income tax returns.
RULING:
NO, The petitioner CIR contends that the claimed deduction of
P75,000.00 was properly disallowed because it was not an ordinary
reasonable or necessary business expense. The Court of Tax
Appeals had seen it differently. Agreeing with Algue, it held that the
said amount had been legitimately paid by the private respondent,
Algue, for actual services rendered. The payment was in the form of
promotional fees. These were collected by the Payees for their
work in the creation of the Vegetable Oil Investment Corporation of
the Philippines and its subsequent purchase of the properties of
the Philippine Sugar Estate Development Company.
The petitioner CIR claims that these payments are fictitious
because most of the payees are members of the same family in
control of Algue. It is argued that no indication was made as to how
such payments were made, whether by check or in cash, and there
is not enough substantiation of such payments. In short, the
petitioner suggests a tax dodge, an attempt to evade a legitimate
assessment by involving an imaginary deduction.
SC find that these suspicions were adequately met by the private
respondent when its President, Alberto Guevara, and the
accountant, Cecilia V. de Jesus, testified that the payments were
not made in one lump sum but periodically and in different amounts
as each payee's need arose. It should be remembered that this was
a family corporation where strict business procedures were not
applied and immediate issuance of receipts was not required. Even
so, at the end of the year, when the books were to be closed, each
payee made an accounting of all of the fees received by him or her,
to make up the total of P75,000.00. Admittedly, everything seemed
to be informal. This arrangement was understandable, however, in
view of the close relationship among the persons in the family
corporation.
SC agree with the respondent court, CTA, that the amount of the
promotional fees was not excessive. The total commission paid by
the Philippine Sugar Estate Development Co. to the private
respondent was P125,000.00. After deducting the said fees, Algue
still had a balance of P50,000.00 as clear profit from the
transaction. The amount of P75,000.00 was 60% of the total
commission. This was a reasonable proportion, considering that it
was the payees who did practically everything, from the formation
of the Vegetable Oil Investment Corporation to the actual purchase
by it of the Sugar Estate properties.
ASPECT OF TAXATION: (71 Am Jur 2nd 342)
1. Levying or Imposition of the Taxes
2. Collection of the Taxes Levied
3. Taxpayer’s Actual Act of paying the taxes.
UNDERLYING THEORY AND BASIS OF TAXATION:
- The power of taxation proceeds upon the existence
of government is a necessity; that it cannot continue
without means to pay its expenses; and that for those
means it has the right to compel all citizens and
property within its limits to contribute.
- The State demands and received taxes so
that it may be enabled to carry its mandates
into effect and perform the functions of
government; and the citizen pays from his
property the portion demanded, in order that
he may, by means thereof, be secured in the
4 TAXATION LAW 1
enjoyment of the benefits of organized
society.
- For the contributions received, the government
renders no return or special benefit to any particular
property, but only secures to the citizen that general
benefit which results from protection to his person
and property and the promotion of those various
schemes which have for their object the welfare of all.
- The general levy of taxes is understood to
exact contributions in return for the general
benefits of government, and it promises
nothing to the person taxes beyond what
may be anticipated from an administration
of the laws for individual protection and the
general public good.
- Even though the duty or obligation to pay taxes by
the individual is founded in his participation in the
benefits arising from their expenditure, this does not
mean that a man’s property cannot be taxed unless
some benefit to him personally can be pointed out.
THEORY AND BASIS OF TAXATION:
A. LIFEBLOOD THEORY:
- The underlying basis of taxation is governmental
necessity, for without taxation, a government can neither
exist nor endure.
- Taxes are the lifeblood of the government and so should
be collected without unnecessary hindrance. It is said
that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the
motive power to activate and operate it. (CIR vs. Algue,
GR no. L-28896, February 17, 1988; CIR vs. Pineda, GR
no. L-22734, September 15, 1967)
B. NECESSITY THEORY:
- The power of taxation proceeds upon the theory that the
existence of the government is a necessity; that it cannot
continue without means to pay its expenses; and that for
those means it has the right to compel all citizens and
property within its limits to contribute.
- The power to tax is an attribute of sovereignty. It is a
power emanating from necessity. it is necessary burden
to preserve the State’s sovereignty and a means to give
the citizens:
(1) An army to resist an aggression;
(2) A navy to defend its shores from invasion;
(3) A corps of civil servants to serve;
(4) Public improvement designed for the
enjoyment of the citizen and those which come
within the State’s territory; and
(5) Facilities and protection which a government is
supposed to provide. (Phil. Guaranty vs. CIR,
GR no. L-22074, April 30, 1965)
- The obligation to pay taxes rests upon the necessity of
money for the support of the state. For this reason, no
one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed
out. (Lorenzo vs. Posadas, GR no. L-43082 (1937))
C. BENEFITS-PROTECTION THEORY (Symbiotic Relationship)
- This principle serves as the basis of taxation and is
founded on the reciprocal duties of protection and
support between the State and its inhabitants.
- Despite the natural reluctance to surrender part of one's
hard earned income to the taxing authorities, every
person who is able to, must contribute his share in the
running of the government. The government for its part is
expected to respond in the form of tangible and
intangible benefits intended to improve the lives of the
 TAXATION LAW 1
Morillo Notes
people and enhance their moral and material values. This Affected: or class of class of entities or an entity or
symbiotic relationship is the rationale of taxation and entities or individuals individual as
should dispel the erroneous notion that it is an arbitrary individuals the owner of
method of exaction by those in the seat of power. (CIR property
vs. Algue, Supra)
Effect: Becomes Restraint on the Transfer of
part of the injurious use of right to the
PRINCIPLES OF A SOUND TAX SYSTEM: public funds property property
1. FISCAL ADEQUACY:
- Requires that sources of revenue be Benefits Protection No direct or Market Value
adequate to meet government expenditures Received: and general immediate benefit of the
and their variations. benefits from but only such as property
2. EQUALITY OR THEORETICAL JUSTICE: the may arise from
- Involves the ability to pay principle that the government the maintenance
of a healthy
tax burden should be in proportion to the
economic
taxpayer’s ability to pay; taxation should be standard of
equitable and uniform. society.
3. ADMINISTRATIVE FEASIBILITY:
- Tax laws should be capable of convenient, Amount of Generally, Should not be No limit
just and effective administration. Imposition: No limit more than imposed, but
4. NEUTRALITY: sufficient to cover the amount
- Tax laws should not affect the decision of the cost of the should be
the taxpayers. license & based on the
necessary market value
expenses of of the
CHAVEZ vs. ONGPIN police property.
GR no. 76778, June 6, 1990 surveillance and
inspection,
FACTS: examination, or
Executive Order 73 (EO 73) was enacted which provides for the regulation as
collection of real property taxes based on the 1984 Real Property nearly as the
Values. Francisco Chavez, taxpayer and owner of 3 parcels of land, same can be
alleges that EO 73 is unconstitutional because it mandates an estimated
excessive in real property taxes by 100% to 400% on
improvements, and up to 100% on land. Relationship Subject to Relatively free Subject to
to the certain from certain
Constitution: constitutiona constitutional constitutional
ISSUE:
W/N EO 73 is unconstitutional? l limitations limitations limitations

RULING:
NO, SC agree with the observation of the Office of the Solicitor II. TAXES
General that without Executive Order No. 73, the basis for
collection of real property taxes win still be the 1978 revision of
property values. Certainly, to continue collecting real property taxes DEFINITION OF TAXES:
based on valuations arrived at several years ago, in disregard of the - Taxes are burden, charge, exaction, imposition or
increases in the value of real properties that have occurred since
contribution assessed in accordance with some
then, is not in consonance with a sound tax system. Fiscal
adequacy, which is one of the characteristics of a sound tax reasonable rule of apportionment by authority of the
system, requires that sources of revenues must be adequate to sovereign state upon the persons or property within
meet government expenditures and their variations. its jurisdiction, to provide public revenue for the
support of the government, the administration of the
law or the payment of public expenses. (71 Am Jur.
DISTINCTION; TAXATION, POLICE POWER AND EMINENT 2nd 343-346)
DOMAIN:
TAXATION POLICE EMINENT ESSENTIAL CHARACTERISTICS OF TAXES:
: POWER: DOMAIN: 1. Taxes are levied by the State which has jurisdiction
over persons or property:
Exercising Government Government; Government - Jurisdiction over the object to be taxed is
Authority: and Its Political and necessary in order that the tax can be
Its Political Subdivision; or Its Political enforced.
Subdivision May be granted to Subdivision - The taxing power stops at the state
Only public service Only boundary lines. It cannot reach over into
companies or another jurisdiction to seize upon persons or
Public Utilities
property for purposes of taxation.
2. Taxes are enforced contribution:
Purpose: For the Regulated, for Public use or
support of promoting the benefit, must - A tax is not a voluntary payment or
the general welfare be with just donation, and its imposition is not
government compensation dependent upon the will or assent of the
person taxed.
Persons Community Community or Operates on

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Morillo Notes
- The principle of representation is satisfied so
long as the taxpayers are adequately
represented in the legislative body which
votes the tax.
3. Taxes are levied by the Law-Making Body:
- The power to tax is a legislative power,
which under the Constitution, only Congress
can exercise through the enactment of tax
statutes. Accordingly, the obligation to tax is
statutory liability.
- The power to tax is also granted by the
Constitution to local governments, subject
to guidelines and limitations provided by
law.
4. Taxes are generally payable in money:
- Unless qualified by law, the term tax is
understood to be a pecuniary burden, which
should be discharged in the form of legal
tender alone.
5. Taxes are proportionate in character:
- A tax is laid by some rule of apportionment
according to which persons share the public
burden.
- It is ordinarily based on ability to pay.
6. Taxes are levied on persons or property:
- A tax may also be imposed on acts,
transactions, rights or privileges. In each
case, however, it is only a person who pays
the tax.
- The property is resorted to for the purpose
of ascertaining the amount to be paid and of
enforcing payment in case of default of the
taxpayer.
7. Taxes levied for public purpose:
- A tax constitutes a charge or burden
imposed to provide income for public
purposes - the support of the government,
the administration of the law, or the payment
of public expenses.
- Revenues derived from taxes cannot be
used purely for private purposes or for the
exclusive benefit of private persons.
TAXES DISTINGUISHED FROM DEBTS:
GENERAL RULE: Taxes are not subject to set-off.
EXCEPTION: If amounts are due and demandable and
liquidated, Tax be subject to Set-Off:
TAX DEBT
Based on Law Based on Contracts
Cannot be assigned Can be assign
Payable in Money Payable in Kind
Cannot be subject to Set-off or Can be subject to set-off or
compensation compensation
6 TAXATION LAW 1
Can be imprisoned for non- Cannot be imprisoned for non-
payment, except for poll tax fulfillment of obligation nor
payment
Governed by special Governed by the ordinary
prescriptive periods provided periods of prescription.
for in the Tax Code
Does not draw interest, except Draws interest when stipulated
by delinquent or when there is default.
Both are liabilities or obligations
ELEMENTS OF COMPENSATION:
1. Each one of the obligors/debtors be bound
principally, and that he be at the same time a
principal creditor of the other.
2. Both debts consist in a sum of money, or if the things
due are consumable, they are of the same kind, and
also of the same quality if the latter has been stated.
3. The two debts are due.
4. They are liquidated and demandable.
5. Neither of them are any retention or controversy,
commenced by third persons and communicated in
due time to the debtor. (Art. 1279, NCC)
CALTEX PHILIPPINES vs. COA
GR no. 92585, May 8, 1992
FACTS:
Section 8 of PD 1956, as Amended by EO 137, created the Oil
Price Stabilization Fund (OPSF) for the purpose of minimizing
frequent price changes brought about by exchange rate
adjustments and/or changes in world market prices of crude oil and
imported petroleum products. The OPSF shall be used, among
others, to reimburse the oil companies for possible cost under-
recovery incurred as a result of the reduction of domestic prices of
petroleum products. The magnitude of the under recovery, if any,
shall be determined by the Ministry of Finance. "Cost under
recovery" shall include the following, among others, “Other factors”
as may be determined by the Ministry of Finance to result in cost
under recovery.
COA sent a letter to Caltex Philippines, Inc. (CPI), directing the
latter to remit to the OPSF its collection, excluding that unremitted
for the years 1986 and 1988, of the additional tax on petroleum
products authorized under the aforesaid Section 8 of P.D. No. 1956
which, as of 31 December 1987, amounted to P335,037,649.00
and informed it that, pending such remittance, all of its claims for
reimbursement from the OPSF shall be held in abeyance.
By way of a reply, CPI (Caltex) submitted to the COA a
proposal for the payment of the collections and the recovery of
claims, which provides that For the retroactive period, Caltex will
deliver to OEA, P1.287 billion as payment to OPSF, similarly OEA
will deliver to Caltex the same amount in cash reimbursement from
OPSF.
COA Chairman issued a decision that no further objectionable
feature in the proposed arrangement, provided that 15% of
whatever amount is due from the Fund is retained by the Office of
Energy Affairs, the same to be answerable for suspensions or
disallowances, errors or discrepancies which may be noted in the
course of audit and surcharges for late remittances without
prejudice to similar future retentions to answer for any deficiency in
such surcharges, and provided further that no offsetting of
remittances and reimbursements for the current and ensuing years
shall be allowed.
 TAXATION LAW 1
Morillo Notes
RULING:
The SC found no merit in petitioner's contention that the OPSF
contributions are not for a public purpose because they go to a
special fund of the government. Taxation is no longer envisioned as
a measure merely to raise revenue to support the existence of the
government; taxes may be levied with a regulatory purpose to
provide means for the rehabilitation and stabilization of a
threatened industry which is affected with public interest as to be
within the police power of the state. There can be no doubt that the
oil industry is greatly imbued with public interest as it vitally affects
the general welfare. Any unregulated increase in oil prices could
hurt the lives of a majority of the people and cause economic crisis
of untold proportions. It would have a chain reaction in terms of,
among others, demands for wage increases and upward spiralling
of the cost of basic commodities. The stabilization then of oil prices
is of prime concern which the state, via its police power, may
properly address.
Also, P.D. No. 1956, as amended by E.O. No. 137, explicitly
provides that the source of OPSF is taxation. No amount of
semantical juggleries could dim this fact.
It is settled that a taxpayer may not offset taxes due from the
claims that he may have against the government. Taxes cannot be
the subject of compensation because the government and taxpayer
are not mutually creditors and debtors of each other and a claim for
taxes is not such a debt, demand, contract or judgment as is
allowed to be set-off.
ENGRACIO FRANCIA vs. IAC
GR no. L-67649, June 28, 1988
FACTS:
Engracio Francia is the registered owner of a residential lot and
a two-story house situated in Pasay, Metro Manila. A 125 square
meter portion of Francia's property was expropriated by the
Republic of the Philippines for the sum of P4,116.00 representing
the estimated amount equivalent to the assessed value of the
aforesaid portion. Since 1963 up to 1977 inclusive, Francia failed to
pay his real estate taxes. Thus, his property was sold at public
auction by the City Treasurer of Pasay City pursuant to Real
Property Tax Code in order to satisfy a tax delinquency of
P2,400.00. Ho Fernandez was the highest bidder for the property.
Francia filed a complaint to annul the auction sale contending
that his tax delinquency of P2,400.00 has been extinguished by
legal compensation. He claims that the government owed him
P4,116.00 when a portion of his land was expropriated on October
15, 1977. Hence, his tax obligation had been set-off by operation of
law as of October 15, 1977
ISSUE:
W/N Francia’s tax obligation had been set-off by cooperation
of law?
RULING:
NO, By legal compensation, obligations of persons, who in
their own right are reciprocally debtors and creditors of each other,
are extinguished (Art. 1278, Civil Code). This principal contention of
the Francia has no merit. The SC have consistently ruled that there
can be no off-setting of taxes against the claims that the taxpayer
may have against the government. A person cannot refuse to pay a
tax on the ground that the government owes him an amount equal
to or greater than the tax being collected. The collection of a tax
cannot await the results of a lawsuit against the government.
The SC stated that a taxpayer cannot refuse to pay his tax
when called upon by the collector because he has a claim against
the governmental body not included in the tax levy. This rule was
reiterated in the case of Corders v. Gonda (18 SCRA 331) where we
stated that: "... internal revenue taxes can not be the subject of
compensation: Reason: government and taxpayer are not mutually
creditors and debtors of each other' under Article 1278 of the Civil
Code and a "claim for taxes is not such a debt, demand, contract
or judgment as is allowed to be set-off."
REPUBLIC OF THE PHILIPPINES vs. SAMPAGUITA PICTURES
GR no. L-35238, April 21, 1989
FACTS:
The Philippine Government pursuant to R.A. No. 304, as amended
by R.A. No. 800 issued "back pay certificates". The Treasurer of the
Philippines was empowered to receive applications for back pay
and to issue in favor of the applicants certificates of indebtedness
redeemable by the Government within 10 years for the amounts
determined to be justly due them.
Sampaguita Pictures came to incur an obligation for percentage,
withholding and amusement taxes in the amount of P10,268.41 in
favor of the Republic of the Philippines. In satisfaction thereof
(together with another obligation of the same nature due from Vera-
Perez Corporation, Pictures, Inc.), Sampaguita tendered and
delivered to the Office of the Municipal Treasurer of Bocaue,
Bulacan sixteen back pay negotiable certificates of indebtedness in
the aggregate sum of P16,763.60. However, the Assistant Regional
Director of the BIR wrote to Vera-Perez Corporation advising that
the acceptance of the Negotiable Certificates of Indebtedness was
erroneous and the payment was invalid because said certificates
were not acceptable as payments in accordance with the
provisions of General Circular No. V-289. No one acted on the said
letter so the Solicitor General brought suit in behalf of the Republic
of the Philippines. The trial court dismissed both the complaint and
the counterclaim. Hence, this appeal filed by the Solicitor General.
ISSUE:
W/N the payment is void since Sampaguita is only a mere assignee
of the certificates.
RULING:
NO, Payment is not void. Sampaguita, as assignee of the
certificates of indebtedness, had "succeeded to the original rights
of the holders thereof," and was therefore authorized to demand
payment by the Republic of the indebtedness thereby represented.
Even if as the Solicitor General points out, "there is no certainty
when the certificates are actually redeemable" because the law say
"that they are redeemable .. within ten years from the date of
issuance ", there can be no question that after the lapse of ten (10)
years from the declared date of redeemability, payment of the
indebtedness was already eligible. The Trial Court was saying in
effect that while judgment should be rendered in favor of the
Republic against Sampaguita for unpaid taxes in the amount of
P10,268.41, judgment ought at the same time to issue for
Sampaguita commanding payment to it by the Republic of the
same sum, representing the face value of the certificates of
indebtedness assigned to it and for recovery of which it had
specifically prayed in its counterclaim.
MELENCIO DOMINGO vs. LORENZO CARLITOS
GR no. L-18994, June 29, 1963
FACTS:
It appears that in Melecio R. Domingo vs. Hon. Judge S. C.
Moscoso, G.R. No. L-14674, January 30, 1960, this Court declared
as final and executory the order for the payment by the estate of
the estate and inheritance taxes, charges and penalties, amounting
to P40,058.55, issued by the Court of First Instance of Leyte in,
special proceedings No. 14 entitled "In the matter of the Intestate
Estate of the Late Walter Scott Price." In order to enforce the
claims against the estate the fiscal presented a petition dated June
21, 1961, to the court below for the execution of the judgment. The
petition was, however, denied by the court which held that the
execution is not justifiable as the Government is indebted to the
estate under administration in the amount of P262,200. The orders
TAXATION LAW 1 7
 TAXATION LAW 1
Morillo Notes

of the court below dated August 20, 1960 and September 28, 1960, It is clear, therefore, that the petitioner has no clear right to execute
respectively, are as follows: the judgment for taxes against the estate of the deceased Walter
Atty. Benedicto submitted a copy of the contract Scott Price. Furthermore, the petition for certiorari and mandamus
between Mrs. Simeona K. Price, Administratrix of the is not the proper remedy for the petitioner. Appeal is the remedy.
estate of her late husband Walter Scott Price and
Director Zoilo Castrillo of the Bureau of Lands dated
September 19, 1956 and acknowledged before Notary
Public Salvador V. Esguerra, legal adviser in Malacañang
to Executive Secretary De Leon dated December 14, TAXES DISTINGUISHED FROM LICENSE FEES:
1956, the note of His Excellency, Pres. Carlos P. Garcia,
to Director Castrillo dated August 2, 1958, directing the
latter to pay to Mrs. Price the sum ofP368,140.00, and an
extract of page 765 of Republic Act No. 2700 PRELIMINARY NOTE:
appropriating the sum of P262.200.00 for the payment to - It is important to distinguish between the two terms
the Leyte Cadastral Survey, Inc., represented by the because license fees imposed under police power is
administratrix Simeona K. Price, as directed in the above not a tax and is not subject to any of the particular
note of the President. Considering these facts, the Court constitutional limitations which apply to the taxing
orders that the payment of inheritance taxes in the sum power.
of P40,058.55 due the Collector of Internal Revenue as
ordered paid by this Court on July 5, 1960 in accordance
with the order of the Supreme Court promulgated July TAX LICENSE FEES
30, 1960 in G.R. No. L-14674, be deducted from the
amount of P262,200.00 due and payable to the Enforced contribution assessed Legal compensation or reward
Administratrix Simeona K. Price, in this estate, the by the sovereign authority to of an officer for specific services
balance to be paid by the Government to her without defray public expenses.
further delay. (Order of August 20, 1960)
For Revenue Imposed for Regulation
The Court has nothing further to add to its order dated
August 20, 1960 and it orders that the payment of the
claim of the Collector of Internal Revenue be deferred Exercise of Taxing Power Exercise of Police Power
until the Government shall have paid its accounts to the
administratrix herein amounting to P262,200.00. It may Generally no limit on the amount Amount should be limited to the
not be amiss to repeat that it is only fair for the of tax that may be imposed. necessary expense of
Government, as a debtor, to its accounts to its citizens- inspection and regulation.
creditors before it can insist in the prompt payment of the
latter's account to it, specially taking into consideration Imposed on persons and Imposed on a right to exercise a
that the amount due to the Government draws interests property privilege
while the credit due to the present state does not accrue
any interest. (Order of September 28, 1960) Failure to pay does not make Failure to pay makes the act or
the business illegal. business illegal.
ISSUE:
W/N there can be a legal compensation?
PROGRESSIVE DEVELOPMENT CORP. vs. QUEZON CITY
RULING:
GR no. 36081, April 24, 1989
YES, The legal basis for such a procedure is the fact that in the
testate or intestate proceedings to settle the estate of a deceased
FACTS:
person, the properties belonging to the estate are under the
Quezon City Council adopted Ordinance no. 7997 (Market
jurisdiction of the court and such jurisdiction continues until said
Code of Quezon City) which provides that privately owned and
properties have been distributed among the heirs entitled thereto.
operated public markets in quezon city shall pay a supervision fee,
During the pendency of the proceedings all the estate is in custodia
which is 10% of the gross receipts from stall rentals. Petitioner
legis and the proper procedure is not to allow the sheriff, in case of
Progressive Development (PDC), owner and operator of Farmers
the court judgment, to seize the properties but to ask the court for
market & Shopping Center, filed a petition for prohibition against
an order to require the administrator to pay the amount due from
Quezon City before the CFI, contending that the supervision fee or
the estate and required to be paid.
license tax imposed is really a tax on income which Quezon City
may not impose because it is expressly prohibited by RA 2264.
Another ground for denying the petition of the provincial fiscal is
the fact that the court having jurisdiction of the estate had found
In its Answer, Quezon City contended that it had authority to
that the claim of the estate against the Government has been
enact the said ordinance because that tax on gross receipts is not
recognized and an amount of P262,200 has already been
a tax on income but for the enjoyment of the privilege to engage in
appropriated for the purpose by a corresponding law (Rep. Act No.
a particular trade or business.
2700). Under the above circumstances, both the claim of the
Government for inheritance taxes and the claim of the intestate for
ISSUE:
services rendered have already become overdue and demandable
W/N the tax imposed by Quezon City on gross receipts of stall
is well as fully liquidated. Compensation, therefore, takes place by
rentals is properly characterized as in the nature of an income tax,
operation of law, in accordance with the provisions of Articles 1279
or of a licensing fee.
and 1290 of the Civil Code, and both debts are extinguished to the
concurrent amount, thus:
RULING:
ART. 1200. When all the requisites mentioned in article
1279 are present, compensation takes effect by It is a LICENSING FEE. The term "tax" frequently applies to
all kinds of exactions of monies which become public funds. It is
operation of law, and extinguished both debts to the
often loosely used to include levies for revenue as well as levies for
concurrent amount, even though the creditors and
regulatory purposes such that license fees are frequently called
debtors are not aware of the compensation.
taxes although license fee is a legal concept distinguishable from

8 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
tax: the former is imposed in the exercise of police power primarily
for purposes of regulation, while the latter is imposed under the
taxing power primarily for purposes of raising revenues. Thus, if the
generating of revenue is the primary purpose and regulation is
merely incidental, the imposition is a tax; but if regulation is the
primary purpose, the fact that incidentally revenue is also obtained
does not make the imposition a tax.
To be considered a license fee, the imposition questioned
must relate to an occupation or activity that so engages the public
interest in health, morals, safety and development as to require
regulation for the protection and promotion of such public interest;
the imposition must also bear a reasonable relation to the probable
expenses of regulation, taking into account not only the costs of
direct regulation but also its incidental consequences as well. When
an activity, occupation or profession is of such a character that
inspection or supervision by public officials is reasonably necessary
for the safeguarding and furtherance of public health, morals and
safety, or the general welfare, the legislature may provide that such
inspection or supervision or other form of regulation shall be carried
out at the expense of the persons engaged in such occupation or
performing such activity, and that no one shall engage in the
occupation or carry out the activity until a fee or charge sufficient to
cover the cost of the inspection or supervision has been paid.
Accordingly, a charge of a fixed sum which bears no relation at all
to the cost of inspection and regulation may be held to be a tax
rather than an exercise of the police power.
In the case at bar, the "Farmers Market & Shopping Center"
was built by virtue of Resolution No. 7350 passed on 30 January
1967 by respondents's local legislative body authorizing petitioner
to establish and operate a market with a permit to sell fresh meat,
fish, poultry and other foodstuffs. The same resolution imposed
upon petitioner, as a condition for continuous operation, the
obligation to "abide by and comply with the ordinances, rules and
regulations prescribed for the establishment, operation and
maintenance of markets in Quezon City."
The "Farmers' Market and Shopping Center" being a public
market in the' sense of a market open to and inviting the patronage
of the general public, even though privately owned, petitioner's
operation thereof required a license issued by the respondent City,
the issuance of which, applying the standards set forth above, was
done principally in the exercise of the respondent's police power.
The operation of a privately owned market is, as correctly noted by
the Solicitor General, equivalent to or quite the same as the
operation of a government-owned market; both are established for
the rendition of service to the general public, which warrants close
supervision and control by the respondent City, for the protection
of the health of the public by insuring, e.g., the maintenance of
sanitary and hygienic conditions in the market, compliance of all
food stuffs sold therein with applicable food and drug and related
standards, for the prevention of fraud and imposition upon the
buying public, and so forth.
We believe and so hold that the five percent (5%) tax imposed
in Ordinance No. 9236 constitutes, not a tax on income, not a city
income tax (as distinguished from the national income tax imposed
by the National Internal Revenue Code) within the meaning of
Section 2 (g) of the Local Autonomy Act, but rather a license tax or
fee for the regulation of the business in which the petitioner is
engaged. While it is true that the amount imposed by the
questioned ordinances may be considered in determining whether
the exaction is really one for revenue or prohibition, instead of one
of regulation under the police power, it nevertheless will be
presumed to be reasonable.
PHILPPINE AIRLINES vs. EDU
GR no. L-41383, August 15, 1988
FACTS:
Philippine Airlines (PAL) is exempt from the payment of taxes,
as provided in its legislative franchise. On the strength of the
opinion of the Secretary of Justice, PAL has not been paying motor
vehicle registration fees since 1956. Subsequently, Commissioner
Elevate issued a regulation requiring all tax exempt entities,
including PAL, to pay motor vehicle registration fees. Despite PAL’s
protests, Commissioner Edu refused to register it’s motor vehicles
unless the amounts imposed under RA 4136 were paid.
PAL paid under protest and demanded refund, contending
that motor vehicle registration fees are really taxes from the
payment of which it is exempted by virtue of its legislative
franchise. On other hand, Edu denied such request and argued that
motor vehicle registration fees are regulatory exceptional, and not
revenue measures and, therefore, do not come within the
exemption granted to PAL under its franchise.
ISSUE:
What is the nature of motor vehicle registrations? Are they
taxes or regulatory fees?
RULING:
Motor vehicle registrations are in the nature of TAXES. If
the purpose is primarily revenue, or if revenue is, at least, one of
the real and substantial purposes, then the exaction is properly
called a tax (Umali, Id.) Such is the case of motor vehicle
registration fees. The conclusions become inescapable in view of
Section 70(b) of Rep. Act 587 quoted in the Calalang case. The
same provision appears as Section 591-593). in the Land
Transportation code. It is patent therefrom that the legislators had
in mind a regulatory tax as the law refers to the imposition on the
registration, operation or ownership of a motor vehicle as a "tax or
fee." Though nowhere in Rep. Act 4136 does the law specifically
state that the imposition is a tax, Section 591-593). speaks of
"taxes." or fees ... for the registration or operation or on the
ownership of any motor vehicle, or for the exercise of the
profession of chauffeur ..." making the intent to impose a tax more
apparent. Thus, even Rep. Act 5448 cited by the respondents,
speak of an "additional" tax," where the law could have referred to
an original tax and not one in addition to the tax already imposed
on the registration, operation, or ownership of a motor vehicle
under Rep. Act 41383. Simply put, if the exaction under Rep. Act
4136 were merely a regulatory fee, the imposition in Rep. Act 5448
need not be an "additional" tax. Rep. Act 4136 also speaks of other
"fees," such as the special permit fees for certain types of motor
vehicles (Sec. 10) and additional fees for change of registration
(Sec. 11). These are not to be understood as taxes because such
fees are very minimal to be revenue-raising. Thus, they are not
mentioned by Sec. 591-593). of the Code as taxes like the motor
vehicle registration fee and chauffers' license fee. Such fees are to
go into the expenditures of the Land Transportation Commission
as provided for in the last proviso of see. 61, aforequoted.
It is quite apparent that vehicle registration fees were originally
simple exceptional. intended only for rigidly purposes in the
exercise of the State's police powers. Over the years, however, as
vehicular traffic exploded in number and motor vehicles became
absolute necessities without which modem life as we know it
would stand still, Congress found the registration of vehicles a very
convenient way of raising much needed revenues. Without
changing the earlier deputy. of registration payments as "fees,"
their nature has become that of "taxes."
In view of the foregoing, the SC rule that motor vehicle
registration fees as at present exacted pursuant to the Land
Transportation and Traffic Code are actually taxes intended for
additional revenues. of government even if one fifth or less of the
amount collected is set aside for the operating expenses of the
agency administering the program.
ESSO STANDARD EASTERN, INC. vs. CIR
GR nos. L-28508-9, July 7, 1989
FACTS:
ESSO Standard deducted from its gross income for 1959 the
TAXATION LAW 1 9
 TAXATION LAW 1
Morillo Notes

amount it had spent for drilling and exploration of its petroleum The SC conclude then that the margin fee was imposed by the
concessions. This claim was disallowed by CIR on the ground that State in the exercise of its police power and not the power of
the expenses should be capitalized and might be written off as a taxation.
loss only when a”dry hole” should result. CR assessed ESSO a
deficiency income tax for the year 1960, in the amount of P300K,
plus 18% interest for the period April 18, 161 to 1964, totaling
P400k. The deficiency arose from the disallowance of the margin
fees of 1K paid by ESSO to the Central Bank on its profit TAXES DISTINGUISHED FROM SPECIAL
remittances to its New York head office. ASSESSMENTS:

ESSO settled this deficiency assessment on August 10, 1964, by

applying the tax credit of P221,033.00 representing its
overpayment on its income tax for 1959 and paying under protest
the additional amount of P213,201.92. On August 13, 1964, it
claimed the refund of P39,787.94 as overpayment on the interest
on its deficiency income tax. It argued that the 18% interest should
have been imposed not on the total deficiency of P367,944.00 but
only on the amount of P146,961.00, the difference between the
total deficiency and its tax credit of P221,033.00.
PRELIMINARY NOTE:
- Under the 1991 Local Government Code, special
assessments are now special levies)
- A charge imposed only on property owners benefited
is a special assessment rather than a tax
notwithstanding that the statute calls it a tax.

This claim was denied by the CIR, who insisted on charging the CHARACTERISTICS OF SPECIAL ASSESSMENTS:
18% interest on the entire amount of the deficiency tax. On May 1. It is levied on Land;
4,1965, the CIR also denied the claims of ESSO for refund of the 2. it is not a personal liability of the person assessed.
overpayment of its 1959 and 1960 income taxes, holding that the 3. It is based wholly on benefits;
margin fees paid to the Central Bank could not be considered taxes 4. It is exceptional both as to time and place.
or allowed as deductible business expenses.

ESSO appealed to the CTA and sought the refund of P102,246.00 TAXES SPECIAL ASSESSMENT
for 1959, contending that the margin fees were deductible from
gross income either as a tax or as an ordinary and necessary Levied not only on land Levied only on land
business expense. It also claimed an overpayment of its tax by
P434,232.92 in 1960, for the same reason. Additionally, ESSO
argued that even if the amount paid as margin fees were not legally Imposed regardless of Imposed because of an
deductible, there was still an overpayment by P39,787.94 for 1960, public improvements increase in value of land
representing excess interest. benefited by public
improvement
ISSUE:
W/N RA 2009, which authorize the Central Bank to establish a Contribution of taxpayer for Contribution of a person for
margin over banks’ selling rates of foreign exchange, is a Police
the support of the the construction of a public
Measure and not a revenue measure?
government improvement
RULING:
RA 2009 is a POLICE MEASURE, In a case, “a margin levy on It has general application Exceptional both as to time
foreign exchange is a form of exchange control or restriction both as to time and place and locality.
designed to discourage imports and encourage exports, and
ultimately, 'curtail any excessive demand upon the international
reserve' in order to stabilize the currency. Originally adopted to APOSTOLIC PREFECT vs. TREASURER OF BAGUIO
cope with balance of payment pressures, exchange restrictions GR no. L-47252, April 18, 1941
have come to serve various purposes, such as limiting non-
essential imports, protecting domestic industry and when FACTS:
combined with the use of multiple currency rates providing a Apostolic Prefect is a corporation of a religious nature, organized in
source of revenue to the government, and are in many developing accordance with the laws of the Philippines, with residence in
countries regarded as a more or less inevitable concomitant of their Baguio City and its land is dedicated to worship and education.
economic development programs. The different measures of The Treasurer of Baguio demanded and collected from Apostolic
exchange control or restriction cover different phases of foreign Prefect P1,000 pursuant to Ordinance no. 137. Payment was made
exchange transactions, i.e., in quantitative restriction, the control is by Apostolic Prefect under protest. Said ordinance list properties in
on the amount of foreign exchange allowable. In the case of the Baguio City and a “Special Assessment List” was made for the
margin levy, the immediate impact is on the rate of foreign construction of a drainage and sewage system.
exchange; in fact, its main function is to control the exchange rate
without changing the par value of the peso as fixed in the Bretton The construction of the sewage and drainage system has benefited
Woods Agreement Act. For a member nation is not supposed to and is benefiting directly and especially to all owners whose lots
alter its exchange rate (at par value) to correct a merely temporary and lands are included in the “special assessment list”. The system
disequilibrium in its balance of payments. By its nature, the margin of drainage and sewerage has promoted the cleanliness and
levy is part of the rate of exchange as fixed by the government.” sanitary condition of the lands of the aforementioned list.
As to the contention that the margin levy is a tax on the purchase of ISSUE:
foreign exchange and hence should not form part of the exchange
W/N the properties on which the special contribution is collected
rate, suffice it to state that We have already held the contrary for
are exempt from said payment.
the reason that a tax is levied to provide revenue for government
operations, while the proceeds of the margin fee are applied to
RULING:
strengthen our country's international reserves.
NO, It is a well established rule in tax matters that the special
contributions that are created and charged to amortize

10 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
extraordinary expenses that cause works, such as the drainage and
sewerage system, that benefit the inhabitants in a special way is
not a tax its sense legal.
The special contribution charged to the properties located in the
City of Baguio, was created to amortize the extraordinary expenses
caused by the sewage and drainage system that was built, a work
that especially benefits all owners.
Apostolic Prefect cannot successfully invoke the exemption
established by the Constitution because it has not been admitted
or proved that its properties that paid the special contribution were
used exclusively for religious purposes.
TAXES DISTINGUISHED FROM TOLLS:
Cannot be a subject to set Can be subject to set off or
off or compensation compensation. (Art. 1279,
NCC)
NATIONAL DEVELOPMENT CORP. vs. CIR
GR no. L-53961, June 30, 1987
FACTS:
NDC entered into a contract with Tokyo with several Japanese
shipbuilding companies for the construction of 12 ocean-going
vessels. The purchase price was to come from the proceeds of
bonds issued by the Central Bank. Initial payments were made in
cash and through irrevocable LCs. 14 PNs were signed for the
balance by the NDC and, as required by the shipbuilders,
guaranteed by the Republic of the Philippines. Pursuant thereto,
the remaining payments and the interests thereon were remitted in
due time by the NDC to Tokyo. The vessels were eventually
completed and delivered to the NDC in Tokyo.

The NDC remitted to the shipbuilders in Tokyo the total amount of

TAXES
Levied for the support of
government
Amount is regulated by
government’s necessities
A demand of sovereignty
May be imposed only by the
government
MEANING OF TOLLS:
- It is a sum of money for the use of something,
generally applied to the consideration paid for the
use of a road, bridge or the like, of a public nature.
(71 AM JUR 351)
TAXES DISTINGUISHED FROM PENALTIES:
TAXES
Violation of tax laws may
give rise to imposition of
penalty
TOLLS
Tolls are the compensation
for the use of another’s
property, or of
improvements made by him
Amount is determined by
the cost of the property, or
of the improvements, and a
consideration of the return
which such values or
expenditures should yield.
A demand of proprietorship
May be imposed by the
government or private
individuals or entities.
PENALTY
Any sanction imposed as a
punishment for violation of
law or acts deemed injurious
US$4M 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 P5M. Negotiations followed but failed. The
BIR thereupon served on the NDC a warrant of distraint and levy to
enforce collection of the claimed amount. The NDC went to the
CTA. The BIR was sustained by the CTA except for a slight
reduction of the tax deficiency in the sum of P900.00, representing
the compromise penalty. The NDC then came to this Court in a
petition for certiorari.
ISSUE:
W/N the NDC may be held liable to pay the taxes on the interest
remitted to the Japanese Shipbuilders in 1960, 1961, and 1962 on
the unpaid balance of the purchase price of the vessels.
RULING:
YES, The tax was due on the interests earned by the Japanese
shipbuilders. It was the income of these companies and not the
Republic of the Philippines that was subject to the tax the NDC did
not withhold.
In effect, therefore, the imposition of the deficiency taxes on the
NDC is a penalty for its failure to withhold the same from the
Japanese shipbuilders. Such liability is imposed by Section 53(c) of
the Tax Code, which provides that “Every person required to
deduct and withhold any tax under this section shall make return
thereof, in duplicate, on or before the fifteenth day of April of each
year, and, on or before the time fixed by law for the payment of the
tax, shall pay the amount withheld to the officer of the Government
of the Philippines authorized to receive it. Every such person is
made personally liable for such tax, and is indemnified against the
claims and demands of any person for the amount of any payments
made in accordance with the provisions of this section.”
In case of doubt, a withholding agent may always protect himself
by withholding the tax due, and promptly causing a query to be
addressed to the Commissioner of Internal Revenue for the
determination whether or not the income paid to an individual is not
subject to withholding. In case the Commissioner of Internal
Revenue decides that the income paid to an individual is not
subject to withholding, the withholding agent may thereupon remit
the amount of a tax withheld.

Primarily intended to raise Designed to regulate

revenue conduct TAXES DISTINGUISHED FROM CUSTOM POLICIES:

May be imposed only by the May be imposed by the

government government or private
individuals or entities MANDAMUS, et. al. vs. OCHOA
GR nos. 199802/208488, April 10, 2019

TAXATION LAW 1 11
 TAXATION LAW 1
Morillo Notes
Strictly speaking, customs duties are also taxes
because they are exactions whose proceeds become public
funds. According to Garcia v. Executive Secretary, customs
duties is the nomenclature given to taxes imposed on the
importation and exportation of commodities and merchandise
to or from a foreign country. Although customs duties have
either or both the generation of revenue and the regulation of
economic or social activity as their moving purposes, it is
often difficult to say which of the two is the principal objective
in a particular instance, for, verily, customs duties, much like
internal revenue taxes, are rarely designed to achieve only one
policy objective. We further note that Section 102 (oo) of R.A.
No. 10863 (Customs Modernization and Tariff Act) expressly
includes all fees and charges imposed under the Act under the
blanket term of taxes.
It is clear from the foregoing clarification that the
exclusion of other national taxes like customs duties from the
base for determining the just share of the LGUs contravened
the express constitutional edict in Section 6, Article X the 1987
Constitution.
III. CLASSIFICATION OF TAXES
1. AS TO OBJECT OR SUBJECT MATTER:
a. Personal, Poll or Capitation Tax:
- Tax of a fixed amount imposed on persons residing
within a specified territory, whether citizens or not,
without regard to their property or the occupation or
business in which they may be engaged
- (e.g. community (formerly residence) tax).
b. Property Tax:
- Tax imposed on property, real or personal, in
proportion to its value or in accordance with some
other reasonable method of apportionment (e.g., real
estate tax).
- The obligation to pay the tax is absolute and
unavoidable and is not based upon the voluntary
action of the person assessed.
c. Privilege/Excise Tax:
- It is said that an excise tax is a charge imposed upon:
(1) the performance of an act;
(2) the enjoyment of a privilege; or
(3) the engagement in an occupation,
profession, or business.
- The obligation to pay excise tax is based on the
voluntary action of the person taxed in performing the
act or engaging in the activity which is subject to the
excise. The term “excise tax” is synonymous with
“privilege tax” and the two are often used
interchangeably (e.g., income tax, value added tax,
estate tax, donor’s tax).
2. AS TO BURDEN OR INCIDENCE:
a. Direct Taxes:
- Taxes which are demanded from persons who also
shoulder them; taxes for which the taxpayer is directly
or primarily liable, or which he cannot shift to another.
The liability for the payment of the tax (incidence) and
12 TAXATION LAW 1
the burden (impact) of the tax falls on the same person
(e.g., income tax, estate tax, donor’s tax, community
tax)
b. Indirect Taxes:
- Taxes which are demanded from one person in the
expectation and intention that he shall indemnify
himself at the expense of another, falling finally upon
the ultimate purchaser or consumer; taxes levied upon
transactions or activities before the articles subject
matter thereof, reach the consumers who ultimately
pay for them not as taxes but as part of the purchase
price.
- Thus, the person who absorbs or bears the burden of
the tax is other than the one on whom it is imposed
and required by law to pay the tax. Practically all
business taxes are indirect (e.g., VAT, percentage tax,
excise taxes on specified goods, customs duties).
3. AS TO DETERMINATION OF AMOUNT (TAX RATES):
a. Specific Tax
- A tax of a fixed amount imposed by the head or
number or by some other standard of weight or
measurement. It requires no assessment (valuation)
other than the listing or classification of the objects to
be taxed (e.g., taxes on distilled spirits, wines, and
fermented liquors; cigars and cigarettes)
b. Ad Valorem Tax:
- A tax of a fixed proportion of the value of the
property with respect to which the tax is assessed. It
requires the intervention of assessors or appraisers
to estimate the value of such property before the
amount due from each taxpayer can be determined.
The phrase “ad valorem” means literally, “according
to value.” (e.g., real estate tax, excise tax on
automobiles, non-essential goods such as jewelry
and perfumes, customs duties.
c. Mixed:
- A tax that has both the characteristics of specific tax
and ad valorem tax.
4. AS TO PURPOSE:
a. General or Fiscal Tax:
- Levied for the general or ordinary purposes of the
Government, i.e., to raise revenue for governmental
needs (e.g., income tax, VAT, and almost all taxes).
b. Special/Regulatory/Sumptuary Tax:
- Levied for special purposes, i.e., to achieve some
social or economic ends irrespective of whether
revenue is actually raised or not (e.g., protective
tariffs or customs duties on imported goods to
enable similar products manufactured locally to
compete with such imports in the domestic market).
5. AS TO SCOPE:
a. National:
 TAXATION LAW 1
Morillo Notes
- Taxes imposed by the national government, through
Congress and administered by the Bureau of Internal
Revenue (BIR) or the Bureau of Customs (BOC) (e.g.,
national internal revenue taxes, customs duties, and
national taxes imposed by laws).
b. Municipal or Local:
- Taxes imposed by local governments, through their
respective Sanggunians, and administered by the
local executive through the local treasurer (e.g.,
business taxes that may be imposed under the Local
Government Code, professional tax).
6. AS TO GRADUATION:
a. Progressive - The rate of tax increases as the tax base or
bracket increases (eg., income tax, estate tax, donor’s tax)
b. Regressive - The rate of tax decreases as the tax base or
bracket increases. there is no regressive tax in the
Philippines.
c. Proportionate - The rate of tax is based on a fixed
percentage of the amount of the property, receipts or other
basis to be taxed, eg., real estate tax, Value-Added Tax,
and other percentage taxes.
d. Digressive - A fixed rate is imposed on a certain amount
and diminishes gradually on sums below it. The tax rate in
this case is arbitrary because the increase in tax rate is not
proportionate to the increase of tax base.
REGRESSIVE AND PROGRESSIVE SYSTEM OF TAXATION:
A regressive tax must not be confused with the regressive system
of taxation.
In a society where the majority of the people have low incomes, a
regressive taxation system exists when there are more indirect
taxes imposed than direct taxes. Since the low-income sector of
the population as a whole buys more consumption goods on which
the indirect taxes are collected, the burden of indirect taxes rests
more on them than on the more affluent groups.
A progressive tax is, therefore, also different from a progressive
system of taxation.
Regressivity is not a negative standard for courts to enforce. What
Congress is required by the Constitution to do is to “evolve a
progressive system of taxation.” These provisions are put in the
Constitution as moral incentives to legislation, not as judicially
enforceable rights. (Tolentino vs. Secretary of Finance, GR no.
115455, August 25, 1994)
Chapter 2:
LIMITATION UPON THE POWER OF TAXATION
I. INHERENT LIMITATIONS
WHAT ARE THE INHERENT LIMITATIONS:
1. Public purpose;
2. Inherent Limitations (Taxing power may not be
delegated);
3. Exemption of Government Agencies, Entities, and
Instrumentalities;
4. International Comity;
5. Territoriality or Situs of Taxation.
A. PUBLIC PURPOSE:
MEANING OF PUBLIC PURPOSE:
- The term public purpose is synonymous with
“governmental purpose.” It means a purpose
affecting the inhabitants of the state or taxing district
as a community and not merely as individuals.
- The proceeds of the tax must be used:
(a) For the support of the government; or
(b) For any of the recognized objects of
government; or
(c) To promote the welfare of the community.
TEST TO DETERMINE WHETHER THE TAX LAW IMPOSED
IS FOR PUBLIC PURPOSE:
- Whether the statute is designed to promote the
public interest, as opposed to the furtherance of the
advantage to individuals might incidentally serve the
public. (Pascual vs. Secretary of Public Works, GR
no. L-10405, December 29, 1960)
WALTER LUZ vs. ANTONIO ARANETA
GR no. L-7859, December 22, 1955
FACTS:
CA 567 (Sugar Adjustment Act), under Sec. 3 thereof, “levies on
owners or persons in control of lands devoted to the cultivation of
sugarcane and ceded to others for a consideration, a tax equivalent
to the difference between the money value of the rental or
consideration collected and the amount representing 12 per
centum of the assessed value of such land.”
Walter Luz seeks to recover from CIR the sum of P14,000.00 paid
by the estate as taxes (under Sec. 3, CA 567) for the crop year,
arguing that such tax is unconstitutional, being levied for the aid
and support of the sugar industry exclusively is not a public
purpose for a tax may constitutionally levied.
ISSUE:
W/N CA 567 is for public purpose?
RULING:
YES, This Court can take 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. Hence it was
competent for the legislature to find that the general welfare
demanded that the sugar industry should be stabilized in turn; and
in the wide field of its police power, the lawmaking body could
provide that the distribution of benefits therefrom be readjusted
among its components to enable it to resist the added strain of the
increase in taxes that it had to sustain.
The protection of a large industry constituting one of the great
sources of the state's wealth and therefore directly or indirectly
affecting the welfare of so great a portion of the population of the
State is affected to such an extent by public interests as to be
within the police power of the sovereign.
Once it is conceded, as it must, that the protection and promotion
of the sugar industry is a matter of public concern, it follows that
the Legislature may determine within reasonable bounds what is
necessary for its protection and expedient for its promotion. Here,
TAXATION LAW 1 13
 TAXATION LAW 1
Morillo Notes
the legislative discretion must be allowed fully play, subject only to
the test of reasonableness; and it is not contended that the means
provided in section 6 of the law (above quoted) bear no relation to
the objective pursued or are oppressive in character. If objective
and methods are alike constitutionally valid, no reason is seen why
the state may not levy taxes to raise funds for their prosecution and
attainment. Taxation may be made the implement of the state's
police power.
WENCESLAO PASCUAL vs. SECRETARY OF PUBLIC WORKS
GR no. L-10405, December 29, 1960
FACTS:
RA 920 (An Act Appropriating Funds for Public Work) provided for
the construction, reconstruction, repair, extension and
improvement of Pasig feeder road terminals. At the time of the
passage and approval of RA 920, the aforesaid feeder roads were
planned subdivision roads within the Antonio Subdivision and did
not connect any government property or any important premises to
the main highways. Antonio Subdivision was owned by Senator
Zulueta and therefore was a private property.
Wenceslao Pascual (Provincial Governor of Rizal) instituted an
action to declare RA 920 to be null and void for appropriating
public revenue for private use. He alleges that the construction of
the projected feeder roads in question with public funds would
increase the value of the subdivision aside from relieving Senator
Zulueta from the burden of constructing his subdivision streets or
roads at his own expense. Wenceslao Pascual claims that
inasmuch as the projected feeder roads were private property at
the time of the passage and approval of RA 920, the appropriation
of P85,000.00 for the feeder roads, was illegal and, therefore, void
ab initio.
Thereafter, Senator Zulueta sought to donate the properties to the
Municipal Council of pasig, with the condition that the Government
will use the land for street purposes only and for no other purposes
whatsoever and should the condition be violated, the Land Title will
ipso facto revert to him.
ISSUE:
W/N appropriation under RA 920 is considered to be in the nature
of public purpose?
RULING:
NO, It is a general rule that the legislature is without power to
appropriate public revenue for anything but a public purpose. . . . It
is the essential character of the direct object of the expenditure
which must determine its validity as justifying a tax, and not the
magnitude of the interest to be affected nor the degree to which the
general advantage of the community, and thus the public welfare,
may be ultimately benefited by their promotion. Incidental to the
public or to the state, which results from the promotion of private
interest and the prosperity of private enterprises or business, does
not justify their aid by the use public money.
The test of the constitutionality of a statute requiring the use of
public funds is whether the statute is designed to promote the
public interest, as opposed to the furtherance of the advantage of
individuals, although each advantage to individuals might
incidentally serve the public.
The validity of a statute depends upon the powers of Congress at
the time of its passage or approval, not upon events occurring, or
acts performed, subsequently thereto, unless the latter consists of
an amendment of the organic law, removing, with retrospective
operation, the constitutional limitation infringed by said statute.
Referring to the P85,000.00 appropriation for the projected feeder
roads in question, the legality thereof depended upon whether said
roads were public or private property when the bill, which, latter on,
became Republic Act 920, was passed by Congress, or, when said
14 TAXATION LAW 1
bill was approved by the President and the disbursement of said
sum became effective, or on June 20, 1953 (see section 13 of said
Act). Inasmuch as the land on which the projected feeder roads
were to be constructed belonged then to respondent Zulueta, the
result is that said appropriation sought a private purpose, and
hence, was null and void.
B. TAXING POWER MAY NOT BE DELEGATED
(INHERENT LIMITATIONS):
GENERAL RULE:
- Delegata potestas non potest delegari. (No delegated
powers can be further delegated)
- The power of taxation is purely legislative and
Congress may not delegate it to others. (People vs.
Vera, GR no. L-45685 (1937))
EXCEPTIONS:
a. Delegation to the President:
- For purposes of practicality and expediency,
the Constitution expressly allows Congress
to authorize the President to fix within
specified limits, Tariff rates, import or export
quotas, tonnage and wharfage dues and
other duties or imposts.
- Since the delegation is constitutionally
authorized there can be no legal objection.
The authorization is justified in the need for
speedy action on such matters.
Delegation to the President:
1. Tariff powers by Congress under the Flexible Tariff
Clause;
- “The Congress may, by law, authorize the
President to fix within specified limits, and
subject to such limitations and restrictions as it
may impose, tariff rates, import and export
quotas, tonnage and wharfage dues, and other
duties or imposts within the framework of the
national development program of the
Government.” (Sec. 28(2), Art. VI, 1987
Constitution)
2. Emergency Powers;
- In times of war or other national emergency, the
Congress may, by law, authorize the President,
for a limited period and subject to such
restrictions as it may prescribe, to exercise
powers necessary and proper to carry out a
declared national policy. Unless sooner
withdrawn by resolution of the Congress, such
powers shall cease upon the next adjournment
thereof. (Sec. 23(2), Art. VI, 1987 Constitution)
3. To enter into Executive Agreements; and
4. To Ratify Treaties which grant tax exemption subject
to Senate;
b. Delegation to Local Government:
- This exception is universally recognized for
so long a time that its existence has not
been disputed even if there is no express
grant by the Constitution. It is in line with the
principle that the power to create municipal
 TAXATION LAW 1
Morillo Notes
corporations for purposes of local self-
government carries with it the power to
confer the power to tax on such local
governments. This is logical for after all,
municipal corporations are merely
instrumentalities of the state for the better
administration of the government in respect
to matters of local concern. (Pepsi-Cola
Bottling Co. vs. Municipality of Tanauan, GR
no. L-31156 (1976))
- However, under the new Constitution, Local
Government Units are now expressly given
the power to create its own sources of
revenue and to levy taxes, fees and charges,
subject to such guidelines and limitations as
the Congress may provide which must be
consistent with the basic policy of local
autonomy. (See Sec. 5, Art. X, 1987
Constitution)
c. Delegation to Administrative Agencies:
- Limited to the administrative implementation
that calls for some degree of discretionary
powers under sufficient standards
expressed by law or implied from the policy
and purposes of the Act.
- There are certain aspects of the taxing
process that are not legislative and they
may, therefore, be vested in an
administrative body. The powers which are
not legislative include:
1. The power to value property for
purposes of taxation pursuant to
fixed rules;
2. The power to assess and collect
the taxes; and
3. The power to perform any of the
innumerable details of
computation, appraisement, and
adjustment, and the delegation of
such details.
NOTE: The exercise of the above powers is
really not an exception to the rule as not
delegation of the strictly legislative power to
tax is involved.
- The following powers are cannot be
delegated to administrative agencies:
- The determination of the subjects
to be taxed;
- The purpose of the tax, the amount
or rate of the tax;
- The manner, means, and agencies
of collection; and
- The prescribing of the necessary
rules with respect thereto.
Constitutional References:
“The Congress shall enact a local government code which shall
provide for a more responsive and accountable local government
structure instituted through a system of decentralization with
effective mechanisms of recall, initiative, and referendum, allocate
among the different local government units their powers,
responsibilities, and resources, and provide for the qualifications,
election, appointment and removal, term, salaries, powers and
functions, and duties of local officials, and all other matters relating
to the organization and operation of the local units.” (Sec. 3, Art. X,
1987 Constitution)
“Each local government unit shall have the power to create its
own sources of revenues and to levy taxes, fees, and charges
subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to the local
governments.” (Sec. 5, Art. X,1987 Constitution)
PHILCOMSAT vs. ALCUAZ
GR no. 84818, December 18, 1989
FACTS:
By virtue of RA 5514, PHILCOMSAT was granted a franchise to
establish, construct, maintain and operate in the Philippines, at
such places as the grantee may select, station or stations and
associated equipment and facilities for international satellite
communications. Under EO 196, PHILCOMSAT was placed under
the jurisdiction, control and regulation of NTC, including all its
facilities and services and the fixing of rates. In implementing EO
196, NTC required PHILCOMSAT to apply for a certificate of public
convenience and necessity covering its facilities and the services it
renders, as well as the corresponding authority to charge rates
therefor. PHILCOMSAT was then granted a provisional authority to
continue operating its existing facilities, to render the services it
was then offering, and to charge the rates it was then charging.
This authority was valid for 6 months from the date of said order.
When said provision authority expired on March 17,1988, it was
extended for another 6 months, or until Sept. 16, 1988.
NTC order further extended the provisional authority of
PHILCOMSAT for another 6 months but it directed the latter to
charge modified reduced rates through a reduction of 15% on the
present authorized rates. PHILCOMSAT now questions the validity
of such reduction of its rates.
ISSUE:
W/N EO 196 is a valid exercise of delegation of powers?
RULING:
YES, The fundamental rule is that delegation of legislative power
may be sustained only upon the ground that some standard for its
exercise is provided and that the legislature in making the
delegation has prescribed the manner of the exercise of the
delegated power. Therefore, when the administrative agency
concerned, respondent NTC in this case, establishes a rate, its act
must both be non- confiscatory and must have been established in
the manner prescribed by the legislature; otherwise, in the absence
of a fixed standard, the delegation of power becomes
unconstitutional. In case of a delegation of rate-fixing power, the
only standard which the legislature is required to prescribe for the
guidance of the administrative authority is that the rate be
reasonable and just. However, it has been held that even in the
absence of an express requirement as to reasonableness, this
standard may be implied.
Pursuant to Executive Orders Nos. 546 and 196, respondent NTC
is empowered, among others, to determine and prescribe rates
pertinent to the operation of public service communications which
necessarily include the power to promulgate rules and regulations
in connection therewith. And, under Section 15(g) of Executive
Order No. 546, respondent NTC should be guided by the
requirements of public safety, public interest and reasonable
feasibility of maintaining effective competition of private entities in
communications and broadcasting facilities. Likewise, in Section
6(d) thereof, which provides for the creation of the Ministry of
Transportation and Communications with control and supervision
over respondent NTC, it is specifically provided that the national
economic viability of the entire network or components of the
communications systems contemplated therein should be
maintained at reasonable rates. We need not go into an in-depth
TAXATION LAW 1 15
 TAXATION LAW 1
Morillo Notes
analysis of the pertinent provisions of the law in order to conclude
that respondent NTC, in the exercise of its rate-fixing power, is
limited by the requirements of public safety, public interest,
reasonable feasibility and reasonable rates, which conjointly more
than satisfy the requirements of a valid delegation of legislative
power.Pursuant to Executive Orders Nos. 546 and 196, respondent
NTC is empowered, among others, to determine and prescribe
rates pertinent to the operation of public service communications
which necessarily include the power to promulgate rules and
regulations in connection therewith. And, under Section 15(g) of
Executive Order No. 546, respondent NTC should be guided by the
requirements of public safety, public interest and reasonable
feasibility of maintaining effective competition of private entities in
communications and broadcasting facilities. Likewise, in Section
6(d) thereof, which provides for the creation of the Ministry of
Transportation and Communications with control and supervision
over respondent NTC, it is specifically provided that the national
economic viability of the entire network or components of the
communications systems contemplated therein should be
maintained at reasonable rates. We need not go into an in-depth
analysis of the pertinent provisions of the law in order to conclude
that respondent NTC, in the exercise of its rate-fixing power, is
limited by the requirements of public safety, public interest,
reasonable feasibility and reasonable rates, which conjointly more
than satisfy the requirements of a valid delegation of legislative
power.
MERALCO vs. PROVINCE OF LAGUNA
GR no. 131359, May 5, 1999
FACTS:
Certain municipalities of Laguna province granted franchises to
Meralco for the supply of electric light, heat and power. Under such
franchise, Meralco needs to pay franchise tax in lieu of all taxes and
assessments of whatever nature on its income. Subsequently, RA
7160 (Local Government Code) was enacted enjoining LGUs to
create their own sources of revenue and to levy taxes. Pursuant to
this, Laguna Province enacted Ordinance 1-92 imposing a tax on
businesses enjoying a franchise, at a rate of 50% of 1% of the
gross annual receipts. The tax imposed by Ordinance 1-92 includes
Meralco.
Meralco paid under protest and now claims refunds, asserting that
PD 551 already the franchise tax imposed by the ordinance.
ISSUE:
W/N the imposition of a franchise tax under Ordinance No. 01-92,
insofar as Meralco is concerned, is violative of the non-impairment
clause of the Constitution and PD 551.
RULING:
NO, Fundamental rule is that local governments do not have the
inherent power to tax except to the extent that such power might
be delegated to them either by the basic law or by statute.
Presently, under Article X of the 1987 Constitution, a general
delegation of that power has been given in favor of local
government units.
Under the now prevailing Constitution, where there is neither a
grant nor a prohibition by statute, the tax power must be deemed
to exist although Congress may provide statutory limitations and
guidelines. The basic rationale for the current rule is to safeguard
the viability and self-sufficiency of local government units by
directly granting them general and broad tax powers. Nevertheless,
the fundamental law did not intend the delegation to be absolute
and unconditional; the constitutional objective obviously is to
ensure that, while the local government units are being
strengthened and made more autonomous, the legislature must still
see to it that
a. the taxpayer will not be over-burdened or saddled with
multiple and unreasonable impositions;
16 TAXATION LAW 1
b. each local government unit will have its fair share of available
resources;
c. the resources of the national government will not be unduly
disturbed; and
d. local taxation will be fair, uniform, and just.
While the Court has referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the
inducement for carrying on the franchise, these exemptions,
nevertheless, are far from being strictly contractual in nature.
Contractual tax exemptions, in the real sense of the term and
where the non-impairment clause of the Constitution can rightly be
invoked, are those agreed to by the taxing authority in contracts,
such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity. Truly, tax
exemptions of this kind may not be revoked without impairing the
obligations of contracts. These contractual tax exemptions,
however, are not to be confused with tax exemptions granted
under franchises. A franchise partakes the nature of a grant which
is beyond the purview of the non-impairment clause of the
Constitution. Indeed, Article XII, Section 11, of the 1987
Constitution is explicit that no franchise for the operation of a
public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by
Congress as and when the common good so requires.
PEPSI-COLA COMPANY vs. CITY OF BUTUAN
GR no. L-22814, August 28, 1968
FACTS:
City of Butuan enacted Municipal Ordinance no. 110 which
imposes a tax on any person, association, etc.,of P 0.10 per case
of 24 bottles of Pepsi-Cola. Pepsi Cola Bottling Company is a
domestic corporation with offices and principal place of business in
Quezon City. Its warehouse in Butuan City serves as a storage for
its products the “Pepsi-Cola” soft drinks for sale to customers in
Butuan City.
Pepsi-Cola paid under protest the amount P4,926.63 from August
16 to December 31, 1960 and the amount of P9,250.40 from
January 1 to July 30, 1961. Subsequently, Pepsi-Cola filed a
complaint for the recovery of the total amount of P14,177.03 paid
under protest and those that if may later on pay until the
termination of this case on the ground that Ordinance No. 110 as
amended of the City of Butuan is illegal, that the tax imposed is
excessive and that it is unconstitutional.
ISSUE:
W/N Ordinance No. 110 is an invalid delegation of Legislative
Power to the Local Government, therefore unconstitutional?
RULING:
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.
It is noteworthy that the tax prescribed in section 3 of Ordinance
No. 110, as originally approved, was imposed upon dealers
"engaged in selling" soft drinks or carbonated drinks. Thus, it
would seem that the intent was then to levy a tax upon the sale of
said merchandise. As amended by Ordinance No. 122, the tax is,
however, imposed only upon "any agent and/or consignee of any
person, association, partnership, company or corporation engaged
in selling ... soft drinks or carbonated drinks." And, pursuant to
section 3-A, which was inserted by said Ordinance No. 122:
“Definition of the Term Consignee or Agent. — For purposes of this
Ordinance, a consignee of agent shall mean any person,
 TAXATION LAW 1
Morillo Notes
association, partnership, company or corporation who acts in the
place of another by authority from him or one entrusted with the
business of another or to whom is consigned or shipped no less
than 1,000 cases of hard liquors or soft drinks every month for
resale, either retail or wholesale.”
As a consequence, merchants engaged in the sale of soft drink or
carbonated drinks, are not subject to the tax, unless they are
agents and/or consignees of another dealer, who, in the very nature
of things, must be one engaged in business outside the City.
Besides, the tax would not be applicable to such agent and/or
consignee, if less than 1,000 cases of soft drinks are consigned or
shipped to him every month. When we consider, also, that the tax
"shall be based and computed from the cargo manifest or bill of
lading ... showing the number of cases" — not sold — but
"received" by the taxpayer, the intention to limit the application of
the ordinance to soft drinks and carbonated drinks brought into the
City from outside thereof becomes apparent. Viewed from this
angle, the tax partakes of the nature of an import duty, which is
beyond defendant's authority to impose by express provision of
law.
Even however, if the burden in question were regarded as a tax on
the sale of said beverages, it would still be invalid, as
discriminatory, and hence, violative of the uniformity required by
the Constitution and the law therefor, since only sales by "agents or
consignees" of outside dealers would be subject to the tax. Sales
by local dealers, not acting for or on behalf of other merchants,
regardless of the volume of their sales, and even if the same
exceeded those made by said agents or consignees of producers
or merchants established outside the City of Butuan, would be
exempt from the disputed tax.
It is true that the uniformity essential to the valid exercise of the
power of taxation does not require identity or equality under all
circumstances, or negate the authority to classify the objects of
taxation. The classification made in the exercise of this authority, to
be valid, must, however, be reasonable and this requirement is not
deemed satisfied unless: (1) it is based upon substantial
distinctions which make real differences; (2) these are germane to
the purpose of the legislation or ordinance; (3) the classification
applies, not only to present conditions, but, also, to future
conditions substantially identical to those of the present; and (4) the
classification applies equally all those who belong to the same
class. These conditions are not fully met by the ordinance in
question. Indeed, if its purpose were merely to levy a burden upon
the sale of soft drinks or carbonated beverages, there is no reason
why sales thereof by sealers other than agents or consignees of
producers or merchants established outside the City of Butuan
should be exempt from the tax.
SMITH BELL & CO vs. CIR
GR no. L-28271, July 25, 1975
FACTS:
Petitioner Smith Bell imported 119 cases of "Chatteau Gay" wine
which it declared as "still wine" under Section 134(b)of the Tax
Code and paid thereon the specific tax of P1.00 per liter of volume
capacity. To determine the correct amount of the specific tax due
on Smith Bell’s importation, the CIR ordered it tested and analyzed
in the Bureau of Internal Revenue Laboratory Center. The analyst
who conducted the laboratory test reported that Chatteau Gay "is a
delicate table wine, with an alcohol content of 9.5% by volume
(volume 745 cc @ 290C), characterized with explosion upon
opening and effervescence due to CO2 (residual)," and concluded
that it should be classified as "sparkling wine." On the basis of the
analyst's report and recommendation, the CIR, on October 11,
1965, assessed Smith Bell a deficiency specific tax on the 119
cases of imported Chatteau Gay in the sum of P11,713.90 under
Section 134(a) of the Tax Code which imposes a specific tax of
P12.00 per liter of volume capacity on sparkling wines.
Smith Bell dispute the CIR’s assessment, contending that the
assessment is unconstitutional because Section 134(a) of the Tax
Code under which it was issued lays down an insufficient and hazy
standard by which the policy and purpose of the law may be
ascertained and as well gives the Commissioner blanket authority
to decide what is or is not the meaning of "sparkling wines." The
argument is thus advanced that there is here an abdication of
legislative power violative of the established doctrine, delegata
potestas non potest delegate, and the due process clause of the
Constitution.
The CIR disagrees on the ground that Chapter I, Title IV of the Tax
Code in no uncertain terms specifies the articles subject to specific
taxes, among which are wines, and Section 134 does no more than
classify wines in several categories and prescribe the
corresponding amounts of tax to be paid.
ISSUE:
W/N Section 134 of the Tax Code is an undue delegation of power?
RULING:
NO, There can be no uncertainty that the purpose of the Sec. 134,
Tax Code is to impose a specific tax on wines and imitation wines.
The first clause of Section 134 (“Specific tax on wines. — On wines
and imitation wines there shall be collected, per liter of volume
capacity . . .”) states so in plain language. The sole object of the
sub-enumeration that follows is in turn unmistakably to prescribe
the amount of the tax specifically to be paid for each type of wine
and/or imitation wine so classified and described. The section
therefore clearly and indubitably discloses the legislative will,
leaving to the officers charged with implementation and execution
thereof no more than the administrative function of determining
whether a particular kind of wine or imitation wine falls in one class
or another. In the performance of this function, the internal revenue
officers are demonstrably guided by the sound established
practices and technology of the wine industry, an industry as aged
and widely dispersed as one can care to know.
In the case at bar, the CIR had Smith Bell's wine examined and
analyzed. The Smith Bell, on the other hand, does not appear to
have made a similar effort. On the bases of the test thus made and
the authoritative and published work on the subject of wines, the
CIR ordered the corresponding deficiency assessment to be
issued. Having chosen to engage in the wine trading business,
Smith Bell is duty bound to know the kinds of wine it deals in,
particularly insofar as such knowledge may be relevant to the
proper appreciation of its tax liabilities, and cannot take comfort in
its pretended ignorance of what sparkling wine is.
C. EXEMPTION OF GOVERNMENT AGENCIES,
ENTITIES, AND INSTRUMENTALITIES:
REASONS FOR THE EXEMPTION OF GOVERNMENT
AGENCIES, ENTITIES, AND INSTRUMENTALITIES:
a. To levy a tax upon public property would render
necessary new taxes on other public property for the
payment of the tax so laid and thus, the government
would be taxing itself to raise money to pay over for
itself.
b. This immunity also rests upon fundamental principles
of government, being necessary in order that the
functions of government shall not be unduly
impeded. [1 Cooley 263.]
c. The practical effect of an exemption running to the
benefit of the government is merely to reduce the
amount of money that has to be handled by the
government in the course of its operations: For these
reasons, provisions granting exemptions to
government agencies may be construed liberally
in favor of non-tax liability of such agencies.
[Maceda v. Macaraig, Jr., G.R. No. 88291 (1991)].
TAXATION LAW 1 17
 TAXATION LAW 1
Morillo Notes
EXCEPTION:
● The following Government Owned or Controlled
Corporations (GOCCs) are considered Tax Exempt:
a. Government Service Insurance System (GSIS);
b. Social Security System (SSS);
c. Philippine Health Insurance Corporation (PHIC).
(See Sec. 27(C), NIRC, as amended
● A Government educational institution shall be exempted
from income tax. (See Sec. 30(I), NIRC);
● Income derived from any public utility or from the
exercise of any essential governmental function accruing
to the Government of the Philippines or to any political
subdivision thereof, shall not be included in gross
income and shall be exempt from taxation. (Sec. 32 (B)
(7) (b), NIRC)
PHILIPPINE PORTS AUTHORITY vs. CITY OF ILOILO
GR no. 109791, July 14, 2003
FACTS:
Iloilo City filed an action for recovery of sum of money against
Philippine Ports Authority (PPA), a government corporation created
by PD 857, arising from real property taxes as well as business
taxes computed from the last quarter of 1984 until the fourth
quarter of 1988. Iloilo City alleges that PPA is engaged in the
business of arrastre and stevedoring services and the leasing of
real estate for which it should be obliged to pay business tax. It
further alleges that PPA is the declared and registered owner of a
warehouse which is used in the operation of its business and is
also thereby subject to real property taxes. It demands the
aggregate amount of P510,888.86 in realty and business taxes as
of December 1988 (real property tax – last quarter of 1984 to 1988;
business tax- 1984 to 1988) including its corresponding interests
and penalty charges. PPA filed a motion to dismiss arguing that as
a government-owned corporation, it is exempt from paying real
property taxes by virtue of its specific exemption in its charter, Sec.
40 of the Real Property Tax Code and EO 93. Subsequently, in the
memorandum it filed with the trial court, it omitted its earlier
argument and changed its theory by alleging that it is a government
instrumentality, which, according to applicable jurisprudence, may
not be taxed by the local government. After obtaining an adverse
decision from the trial court, it adopts yet another stance on appeal
before us, contesting the taxability of its warehouse. It argued for
the first time that since "ports constructed by the State" are
considered under the Civil Code as properties of public dominion,
its warehouse, which it insists to be part of its port, should be
treated likewise.
ISSUE:
W/N PPA is exempt from the payment of real property tax and
business tax.
RULING:
NO, PPA is not exempted from the payment of real property taxes
and business taxes.
1. As to Real Property Tax:
- It must be emphasized that the enumeration of properties
of public dominion under Article 420 of the Civil Code
specifically states "ports constructed by the State." Thus,
in order to consider the port in the case at bar as falling
under the said classification, the fact that the port was
constructed by the State must first be established by
sufficient evidence. Under Art. 420, canals constructed
by the State and devoted and devoted to public use are
of public ownership. Conversely, canals constructed by
private persons within private lands and devoted
exclusively for private use must be of private ownership.
18 TAXATION LAW 1
In the case at bar, no proof was adduced to establish
that the port was constructed by the State. PPA cannot
have us automatically conclude that its port qualified as
"property of public dominion." It would be unfair to Iloilo
City, which would be deprived of its opportunity to
present evidence to disprove the factual basis of the new
theory. It is thus clear that the Lianga exception cannot
apply in the case at bar.
2. As to Business Tax:
- SC affirmed the finding of the lower court on petitioner’s
liability for business taxes for the lease of its building to
private corporations. During the trial, PPA did not present
any evidence to refute Iloilo City proof of petitioner’s
income from the lease of its property. Neither did it
present any proof of exemption from business taxes.
Instead, it emphasized its charter provisions defining its
functions as governmental in nature. It averred that it
allowed port users to occupy certain premises within the
port area only to ensure order and convenience in
discharging its governmental functions. It hence claimed
that it is not engaged in business, as the act of leasing
out its property was not motivated by profit, but by its
duty to manage and control port operations.
The argument is unconvincing. As admitted by PPA, it
leases out its premises to private persons for
"convenience" and not necessarily as part of its
governmental function of administering port operations.
In fact, its charter classifies such act of leasing out port
facilities as one of PPA’s corporate powers. Any income
or profit generated by an entity, even of a corporation
organized without any intention of realizing profit in the
conduct of its activities, is subject to tax. What matters is
the established fact that it leased out its building to ten
private entities from which it regularly earned substantial
income. Thus, in the absence of any proof of exemption
therefrom, PPA is liable for the assessed business taxes.
MANILA INTERNATIONAL AIRPORT AUTHORITY vs. CA
GR no. 155650, July 20, 2006
Whether the Airport Lands and Buildings of MIAA are exempt from
real estate tax under existing laws. If so exempt, then the real
estate tax assessments issued by the City of Parañaque, and all
proceedings taken pursuant to such assessments, are void.
The SC rule that MIAA's Airport Lands and Buildings are exempt
from real estate tax imposed by local governments.
First, MIAA is not a government-owned or controlled corporation
but an instrumentality of the National Government and thus
exempt from local taxation. Second, the real properties of MIAA are
owned by the Republic of the Philippines and thus exempt from
real estate tax.
PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY vs. CA
GR no. 169836, July 31, 2007
FACTS:
PD 977 was issued, creating the Philippine Fisheries Development
Authority (PFDA) and placing it under the direct control and
supervision of the DENR Secretary. Upon the effectivity of the
Administrative Code (EO 292), PDFA became an attached agency
of the Dept. of Agriculture. In 1981, Ministry of Public Works
reclaimed from the sea a 21-hectare parcel of land in Iloilo City and
constructed thereon the IFPC, consisting of breakwater, a landing
quay, a refrigeration building, a market hall, a municipal shed, an
administration building, a water and fuel oil supply system and
 TAXATION LAW 1
Morillo Notes
other port related facilities and machineries. Upon its completion, public auction. This means that the City of Iloilo has to satisfy the
the Ministry of Public Works and Highways turned over IFPC to the tax delinquency through means other than the sale at public
PFDA, pursuant to Section 11 of PD 977, which places fishing port auction of the IFPC.
complexes and related facilities under the governance and
operation of the Authority. Notwithstanding said turn over, title to
the land and buildings of the IFPC remained with the Republic. The
D. INTERNATIONAL COMITY:
PFDA thereafter leased portions of IFPC to private firms and
individuals engaged in fishing related businesses.
CONCEPT OF COMITY:
Sometime in May 1988, the City of Iloilo assessed the entire IFPC
- Comity refers to the respect accorded by nations to
for real property taxes. The assessment remained unpaid until the
alleged total tax delinquency of the PFDA for the fiscal years 1988 each other because they are sovereign equals.
and 1989 amounted to P5,057,349.67, inclusive of penalties and
interests. To satisfy the tax delinquency, the City of Iloilo scheduled RULE ON INTERNATIONAL COMITY:
on August 30, 1990, the sale at public auction of the IFPC. The - Under international comity the property or income of
PFDA filed a claim for tax exemption with the Iloilo City Assessor’s a foreign state or government may not be the subject
Office. The latter, however, denied the claim for exemption. of taxation by another state.
ISSUE:
W/N PFDA is liable to pay real property tax to the City of Iloilo?
REASONS/RATIONALE:
a. “In Par In Parem Non Habet Imperium”. As between
RULING: equals there is no sovereign (Doctrine of Sovereign
PFDA liable to pay real property tax only to property leased to Equality among States under International Law). One
IFPC. The Court rules that the Authority (PFDA) is not a GOCC but state cannot exercise its sovereign powers over
an instrumentality of the national government which is generally another. (Dimaampao, Tax Principles and Remedies
exempt from payment of real property tax. However, said (2015)).
exemption does not apply to the portions of the IFPC which the b. In international law, a foreign government may not be
Authority leased to private entities. With respect to these
sued without its consent. Therefore, it is useless to
properties, the Authority is liable to pay real property tax.
Nonetheless, the IFPC, being a property of public dominion cannot impose a tax which could not be collected.
be sold at public auction to satisfy the tax delinquency. c. Usage among states that when a foreign sovereign
enters the territorial jurisdiction of another, there is an
For an entity to be considered as a GOCC, it must either be implied understanding that the former does not
organized as a stock or non-stock corporation. Two requisites must intend to degrade its dignity by placing itself under
concur before one may be classified as a stock corporation, the jurisdiction of the other.
namely:
1. that it has capital stock divided into shares, and
2. that it is authorized to distribute dividends and allotments E. TERRITORIALITY OR SITUS OF TAXATION:
of surplus and profits to its stockholders. If only one
requisite is present, it cannot be properly classified as a
stock corporation. As for non-stock corporations, they MEANING OF AND RULE ON TERRITORIALITY:
must have members and must not distribute any part of - A state may not tax property lying outside its borders
their income to said members. or lay an excise or privilege tax upon the exercise or
On the basis of the parameters set in the MIAA case, the Authority
enjoyment of a right or privilege derived from the
should be classified as an instrumentality of the national
government. As such, it is generally exempt from payment of real
laws of another state and therein exercise and
property tax, except those portions which have been leased to enjoyed. (51 AM JUR 87-88)
private entities. The Authority should be classified as an
instrumentality of the national government which is liable to pay RATIONALE:
taxes only with respect to the portions of the property, the a. Tax laws do not operate beyond a country’s territorial
beneficial use of which were vested in private entities. When local limits.
governments invoke the power to tax on national government b. Property which is wholly and exclusively within the
instrumentalities, such power is construed strictly against local
jurisdiction of another state receives none of the
governments. The rule is that a tax is never presumed and there
must be clear language in the law imposing the tax. Any doubt
protection for which a tax is supposed to be a
whether a person, article or activity is taxable is resolved against compensation.
taxation. This rule applies with greater force when local
governments seek to tax national government instrumentalities.
NOTE: Where privity of relationship exists. It does not mean,
however, that a person outside of state is no longer subject to its
Thus, the real property tax assessments issued by the City of Iloilo
taxing powers. The fundamental basis of the right to tax is the
should be upheld only with respect to the portions leased to private
capacity of the government to provide benefits and protection to
persons. In case the Authority fails to pay the real property taxes
the object of the tax. A person may be taxed where there is
due thereon, said portions cannot be sold at public auction to
between him and the taxing state, a privity of the relationship
satisfy the tax delinquency. In Chavez v. Public Estates Authority it
justifying the levy. Thus, the citizen’s income may be taxed even if
was held that reclaimed lands are lands of the public domain and
he resides abroad as the personal (as distinguished from territorial)
cannot, without Congressional fiat, be subject of a sale, public or
jurisdiction of his government over him remains. In this case, the
private.
basis of the power to tax is not dependent on the source of the
income nor upon the location of the property nor upon the
In sum, the Court finds that the Authority is an instrumentality of the
residence of the taxpayer but upon his relation as a citizen to the
national government, hence, it is liable to pay real property taxes
state. As such a citizen, he is entitled, wherever he may be,
assessed by the City of Iloilo on the IFPC only with respect to those
inside or outside of his country, to the protection of his
portions which are leased to private entities. Notwithstanding said
government.
tax delinquency on the leased portions of the IFPC, the latter or any
part thereof, being a property of public domain, cannot be sold at

TAXATION LAW 1 19
 TAXATION LAW 1
Morillo Notes

SITUS OF TAXATION:
Within Outside
Citizenship Residency
Phils. Phils.
Meaning - Situs of taxation literally means the place of
taxation:
Filipino Resident Taxable Taxable
● The state where the subject to be taxed has a situs
may rightfully levy and collect the tax; and
● The situs is necessarily in the state which has Filipino Non- Taxable Non-
jurisdiction or which exercises dominion over the Resident Taxable
subject in question. Within the territorial jurisdiction,
the taxing authority may determine the situs. Alien Resident Taxable Non-
Taxable
Factors that Determine Situs (Determination of Situs):
a. Depends on the Residence of Subject; Aline Non- Taxable Non-
b. Place of Taxation; and Resident Taxable
c. Source of Income
2. Real Property:
Situs of Subjects of Taxation: - Real estate is subject to taxation in the state in which
1. Persons - Secs. 157-158, Local Government Code) it is located whether the owner is a resident or non-
- Poll tax (Community tax) may properly be levied upon resident and is taxable only there. (Lex Rei Sitae or
persons who are inhabitants or residents of the state, Lex Situs Doctrine)
whether citizens or not.
SECTION 157. Individuals Liable to Community Tax. - 3. Personal Property:
Every inhabitant of the Philippines eighteen (18) years of a. Tangible Personal Property:
age or over who has been regularly employed on a wage - The modern rule is that it is taxable in the
or salary basis for at least thirty (30) consecutive working state where it has actual situs (where it is
days during any calendar year, or who is engaged in physically located) although the owner
business or occupation, or who owns real property with resides in another jurisdiction.
an aggregate assessed value of One thousand pesos - The Philippines has also adopted the rule of
(P1,000.00) or more, or who is required by law to file an
Lex Rei Sitae (or Lex Situs) for personal
income tax return shall pay an annual community tax of
Five pesos (P5.00) and an annual additional tax of One property.
peso (P1.00_ for every One thousand pesos (P1,000.00) - Real property as well as personal
of income regardless of whether from business, exercise property is subject to the law of the
of profession or from property which in no case shall country where it is stipulated. (Art.
exceed Five thousand pesos (P5,000.00). 16, NCC)

In the case of husband and wife, the additional tax herein b. Intangible Personal Property:
imposed shall be based upon the total property owned by
- Examples: credits, bills receivable, bank
them and the total gross receipts or earnings derived by
them. deposits, bonds, promissory notes,
corporate stocks, etc.
- General Rule: It do not admit of actual
SECTION 158. Juridical Persons Liable to Community location and the situs for purposes of
Tax. - Every corporation no matter how created or property taxation is at the domicile of the
organized, whether domestic or resident foreign, engaged owner (Principle of Mobilia Sequuntur
in or doing business in the Philippines shall pay an annual Personam)
community tax of Five hundred pesos (P500.00) and an - Exceptions:
annual additional tax, which, on no case, shall exceed (1) When property has acquired a
Ten thousand pesos (P10,000.00) in accordance with the business situs in another
following schedule:
jurisdiction; or
1. For every Five thousand pesos (P5,000.00) worth of
real property in the Philippines owned by it during
(2) When the law provides for the situs
the preceding year based on the valuation used for of the subject of tax (eg. Sec. 104,
the payment of the real property tax under existing NIRC)
laws, found in the assessment rolls of the city or
Intangible Property Situs
municipality where the real property is situated -
Two pesos (P2.00); and
2. For every Five thousand pesos (P5,000.00) of gross Franchise, Patents, The place of the
receipts or earnings derived by it from its business in Copyrights, country where
the Philippines during the preceding year - Two Trademark such intangibles
pesos (P2.00). The dividends received by a are exercised.
corporation from another corporation however shall,
for the purpose of the additional tax, be considered
Receivables Domicile or
as part of the gross receipts or earnings of said
corporation. residence of the
debtor

Bank deposits Location of the

TAXPAYER SOURCE OF INCOME
depository bank

20 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
4. Income:
- Income tax may properly be exacted from persons
who are residents or citizens in the taxing jurisdiction
and even from those who are neither residents nor
citizens provided the income is derived from sources
within the taxing state. (See Sec. 23, NIRC)
- Occupation → Where the occupation is
engaged in
- Transaction → Where the transaction took
place
5. Business, Occupation, Transaction:
- The general rule is that the power to levy an excise
tax depends upon the place where the business is
done, or the occupation is engaged in, or the
transaction took place.
KINDS OF BUSINESS TAX SITUS
Value-Added Tax (VAT) Where the transaction is
made
ie. Where the goods or
service is sold or
perform and consumed
Sale of Real Property Where the real property
is located
Sale of Personal Property Where the personal
property was sold
6. Transfer of Property by Death or Gift (Donor and
Estate Tax):
- Subject to taxation in the state where the
transferor/donor is a citizen or resident, or where the
property is located.
- Donor’s Tax - Situs is the location of
property; nationality or residence of donor.
- Estate Tax - Location of property;
nationality or residence of deceased.
Multiple Situs of Taxation:
● Effect:
○ due to the variance in the concept of
“domicile” for tax purposes, and considering
the multiple distinct relationships that may
arise with respect to intangible personalty
and the use to which the property may have
been devoted, all of which may receive the
protection of the laws of jurisdiction other
than the domicile of the owner thereto, the
same income or intangible may be subject
to taxation in several taxing jurisdictions.
● Remedy - to avoid this or at least to reduce the
consequent burden, the taxing jurisdiction may:
a. Provide for exemptions or allowance of
deduction or tax credit for foreign taxes.
b. Enter into treaties with other states [like the
former Phil-Am Military Bases Agreements
as to income tax]
MANILA GAS vs. CIR
GR no. L-42780, January 17, 1936
FACTS:
Manila Gas is a domestic corp. operating a gas plant in Manila,
furnishing gas service to the people of the metropolis by virtue of a
franchise granted to it by the Government. Associated with the
plaintiff are the Islands Gas & Electric Company domiciled in New
York and the General Finance Company domiciled in Switzerland.
Neither of these last 2 corps is resident in the Philippines. From
1930-1932, the following were paid by Manila Gas to Islands Gas in
US and the General Finance Company in Switzerland, upon which
withholding income taxes were paid to CIR: dividends in the
capacity as stockholders, interests on bonds and interest on other
indebtedness.
Manila Gas contends that, as the Islands Gas and Electric
Company and the General Finance Company are domiciled in the
US & Switzerland respectively, and as the interest on the bonds
and other indebtedness earned by said corporations has been paid
in their respective domiciles, this is not income from Philippine
sources within the meaning of the Philippine Income Tax Law.
ISSUE:
W/N the amount paid to the foreign companies may be considered
income from Philippine sources and, therefore, can be subject to
Philippine Tax.
RULING:
YES, As to the applicability of the local cases, the SC need only
observe that these cases announced good law, but that each must
be decided on its particular facts. In other words, in the opinion of
the majority of the court, the facts at bar and the facts in those
cases can be clearly differentiated. Also, in the case at bar there is
some uncertainty concerning the place of payment, which under
one view could be considered the Philippines and under another
view the United States and Switzerland, but which cannot be
definitely determined without the necessary documentary evidence
before us.
The approved doctrine is that no state may tax anything not within
its jurisdiction without violating the due process clause of the
constitution. The taxing power of a state does not extend beyond
its territorial limits, but within such it may tax persons, property,
income, or business. If an interest in property is taxed, the situs of
either the property or interest must be found within the state. If an
income is taxed, the recipient thereof must have a domicile within
the state or the property or business out of which the income
issues must be situated within the state so that the income may be
said to have a situs therein. Personal property may be separated
from its owner, and he may be taxed on its account at the place
where the property is although it is not the place of his own
domicile and even though he is not a citizen or resident of the state
which imposes the tax. But debts owing by corporations are
obligations of the debtors, and only possess value in the hands of
the creditors. These views concerning situs for taxation purposes
apply as well to an organized, unincorporated territory or to a
Commonwealth having the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits
taxation of interest on bonds and other indebtedness paid without
the Philippine Islands, the question is if the income was derived
from sources within the Philippine Islands. In the judgment of the
majority of the court, the question should be answered in the
affirmative. The Manila Gas Corporation operates its business
entirely within the Philippines. Its earnings, therefore come from
local sources. The place of material delivery of the interest to the
foreign corporations paid out of the revenue of the domestic
corporation is of no particular moment. The place of payment even
if conceded to be outside of tho country cannot alter the fact that
the income was derived from the Philippines. The word "source"
conveys only one idea, that of origin, and the origin of the income
was the Philippines.
VEGETABLE OIL CORP. vs. TRINIDAD
GR no. 21475, March 26, 1924
TAXATION LAW 1 21
 TAXATION LAW 1
Morillo Notes
FACTS:
Plaintiff Vegetable Oil Corp. is a foreign corporation, duly licensed
to transact business in the Philippines and having its principal place
of business in Manila. It is engaged in the purchase of copra in the
Philippines and the shipment of such copra to its mills in the US for
manufacture into vegetable oil. Plaintiff during said period has
been, and is now, engaged in no other business in the Philippine
Islands. The cocoanut oil manufactured by is sold in the US.
Trinidad, as Collector of the CIR, under the alleged authority of
sec1459 of Act No. 2711, demanded of plaintiff a tax of 1% of the
value of the shipments of copra, or the sum a total of P19k.
Vegetable Oil Corp, to avoid penalties and forfeitures for
nonpayment, paid to defendant the sum under written protest,
which protest defendant overruled.
This action was brought to recover back merchants' percentage
taxes to the amount of P19,975.70 levied on consignments under
section 1459 of Act No. 2711 and paid by the plaintiff under
protest.
ISSUE:
W/N Plaintiff Vegetable Oil may recover the amounts paid?
RULING:
NO, In the present case it is not disputed that the plaintiff
corporation was the consignor of the merchandise, but it is
strenuously argued that inasmuch as it is not "engaged in the sale,
barter, or exchange of personal property" in the Philippine. Islands,
it is not a merchant within the statutory definition of the term and
therefore cannot be required to pay the consignment tax. Just upon
what ground this assumption rests is not quite clear; so far no
adequate explanation has been vouchsafed us. The statute itself
does not provide that the sale, barter, or exchange must take place
in the Philippine Islands in order to make a person engaged in such
business a merchant.
But, presumably, the idea is the result of a misconception of the
nature of the tax on consignments, confusing it with the tax on
sales. That the consignment tax is not a sales tax is, however, too
obvious for argument; the fact that it is provided for in the same
section as the sales tax does not necessarily make it so. There is all
the difference in the world between a consignment and a sale. As
stated by counsel for the appellee, the tax on consignments is "a
privilege tax pure and simple;" it is a tax on the business of
consigning commodities abroad from these Islands. The definition
of the word "merchant" as a person who is engaged in the sale,
barter, or exchange of personal property is merely descriptive of
the persons who are required to pay the tax and does not mean
that, in order to exact from them the payment of the consignment
tax, the Government must also be in position to impose taxes on
their sales, barter, or exchange.
If the tax were one on sales, we would readily agree that the sales,
in order to be taxable in the Philippine Islands, must be
consummated there; the Philippine Government cannot, of course,
collect privilege taxes on sales taking place in foreign countries no
matter whether the vendor is a Philippine merchant or whether he is
a foreign one. Neither can the Government impose such taxes on
consignments from one foreign port to another. But, with the
approval of Congress, it may legally levy taxes on consignments
from Philippine ports. That is what has been done in the present
instance. It has imposed the tax on local transactions; it does not
seek to tax transactions carried out abroad. But when a foreign
merchant, as the word "merchant" is defined in our statutes,
comes. to our shores and enters into transactions upon which a tax
is laid, the Government can, and does, place him on an equality
with domestic merchants and requires him to pay the same
privilege taxes. As we have seen, section 1459 provides that "All
merchants not herein specifically exempted shall pay a tax of one
per centum on the gross value in money of the commodities,
goods, wares, and merchandise consigned abroad by them." It
22 TAXATION LAW 1
defines the word "merchant" as a person who is engaged in the
sale, barter, or exchange of personal property, but does not say
that he must be so engaged in the Philippine Islands In order to be
considered a merchant. As far as may be gathered from the plain
language of the statute, he may do his selling, bartering or
exchanging wherever he pleases, but if he consigns merchandise
abroad from the Philippine Islands he must pay the tax on his
consignments. Had it been the intention of the Legislature to
require only the local merchant to pay the tax, the definition of the
word "merchant" in section 1459 would have read: "'Merchant' as
here used means a person engaged in the sale, barter or exchange
of personal property of whatever character in the Philippine
Islands." But it does not so read.
To hold that only persons who engage in sales, barter or exchange
in the Philippine Islands are to pay the tax on consignments would
place the local merchants at a serious disadvantage in competition
with the foreign merchants, and would defeat the very evident
purpose of the tax. The language of the statute is perfectly clear
and places the burden of the tax on all merchants alike. Are we
then justified in exempting some of the merchants by reading non-
existent provisions into the statute which would defeat its
unmistakable intent and seriously handicap the local merchants, in
some cases, perhaps, driving them out, of business? We submit
that to do so would violate every canon of statutory construction
and would clearly amount to unwarranted judicial legislation.
WELLS FARGO vs. CIR
GR no. L-46720, June 28, 1940
FACTS:
Birdie Lillian Eye died on September 16, 1932 at Los Angeles,
California, the place of her alleged last residence and domicile.
Among the properties she left was her 1⁄2 conjugal shares of stock
in the Benguet Consolidated Mining Co., an anonymous
partnership, organized under the laws of the Philippines. She left a
will duly admitted to probate in California where her estate was
administered and settled. Wells Fargo was the duly appointed
trustee. The Federal and California State’s inheritance taxes due
thereon have been duly paid. The Collector of Internal Revenue in
the Philippines, however, sought to subject the shares of stock to
inheritance tax, to which Wells Fargo objected.
ISSUE:
W/N the shares of stock are subject to Philippine inheritance tax
RULING:
YES, Originally, the settled law in the United States is that
intangibles have only one situs for the purpose of inheritance tax,
and such situs is in the domicile of the decedent at the time of his
or her death. But the rule has been relaxed.
The maxim “mobilia sequuntur personam” up which the rule rests,
has been decried as a mere fiction of law having its origin in
considerations of general convenience and public policy and
cannot be applied to limit or control the right of the state to tax
properly within its jurisdiction and must yield to established fact of
legal ownership, actual presence and control elsewhere, and
cannot be applied if to do so would result in inescapable and
patent injustice.
This rests on either of two fundamental considerations:
(1) Upon the recognition of the inherent power of each
government to tax persons, properties and rights within
its jurisdiction
and enjoying, thus, the protect of its laws; and
(2) Upon the principle that as to intangibles, a single location
in space is hardly possible, considering the multiple,
distinct
relationships which may be entered into with respect
thereto.
 TAXATION LAW 1
Morillo Notes
● Arbitrary or oppressive methods are used in
Herein, the actual situs of the shares of stock is in the Philippines,
the corporation being domiciled therein. Accordingly the jurisdiction assessing and collecting taxes.
of the Philippine government to tax must be upheld.
COMMISSIONER OF CUSTOMS vs. CTA & CAMPOS RUEDA
CO.
II. CONSTITUTIONAL LIMITATIONS: GR no. 70648, July 31, 1987

FACTS:
CONSTITUTIONAL PROVISIONS AFFECTING TAXATION: Campos Rueda Corporation (CRC) ordered Tungsol flashers from
a. Due Process Clause; the US. One shipment arrived in Manila in 1973 and another one in
b. Equal Protection Clause; 1974. The invoice and declared unit price was $0.66 for the two
c. Uniform and Equitable rule of Taxation; importations. However, the Bureau of Customs re-appraised the
two shipments at the rate of $1.08 per piece based on an “Alert
d. Non-Impairment of Contracts;
Notice” sent by abroad. Hence, CDC paid under protest and filed a
e. Non-Imprisonment for non-payment of poll tax; claim for refund thereafter but the Commissioner of Customs
f. Prohibition against Taxation of Religious and denied the protest.
Charitable Entities;
g. Prohibition against Taxation of Non-Stock, Non-Profit CDC elevated the case to the CTA which the latter ruled that the
Educational Institutions; Commissioner of Customs had violated Sec. 201, Tariff Code
h. Freedom of Religious Professional and Worship; because CDC did not filed a refund before the Commissioner of
i. Passage of tax bill/Granting of tax exemption; Internal Revenue, hence, CDC is entitled for refund.
j. Veto power of the President;
ISSUE:
k. Non-Impairment of SC Jurisdiction W/N CTA committed an error when it ruled that the Commissioner
of Customs violated Sec. 204 of the Tariff Code, making CDC
entitled for refund?
I. DUE PROCESS CLAUSE:
RULING:
YES, While it is true that appraisers of the Bureau of Customs are
Sec. 1, Art. III, 1987 Constitution: given ample leeway in determining the correct customs duties
No person shall be deprived of life, liberty, or property without due under Section 1405 of the Tariff and Customs Code, Section 201 of
process of law x x x the same Code, which prescribes the criteria for the determination
of the dutiable values of imported articles, has not been complied
with. What is more, administrative proceedings are not exempt
SUBSTANTIVE PROCEDURAL from the operation of due process requirements one of which is
that a finding by an administrative tribunal should be supported by
DUE PROCESS DUE PROCESS
substantial evidence presented at the hearing or at least contained
in the records or disclosed to the parties affected. In this case the
An act is done under the An act is done after "Alert Notices" on which the Commissioner of Customs based its
authority of a valid law or compliance with fair and re-appraisal were not disclosed during the proceedings before the
the Constitution itself. reasonable methods or Bureau of Customs nor presented in evidence before respondent
procedures prescribed by CTA. The re-appraisal made by the Commission of Customs,
law. therefore, can be faulted with arbitrariness in disregard of the
standard of due process to which all governmental action should
conform to impress upon it the stamp of validity.
DUE PROCESS IN TAXATION REQUIREMENTS:
1. Public purpose;
2. Imposed within taxing authority’s territorial PHILIPPINE BANK OF COMMUNICATIONS vs. CIR
jurisdiction; GR no. 112024, January 28, 1999
3. Assessment or collection is not arbitrary or
oppressive. Due process of law under the Constitution does not require judicial
proceedings in tax cases. This must necessarily be so because it is
upon taxation that the government chiefly relies to obtain the
The due process clause may be invoked where a taxing statute is so means to carry on its operations and it is of utmost importance that
arbitrary that it finds no support in the Constitution, as where it can the modes adopted to enforce the collection of taxes levied should
be shown to amount to the confiscation of property. (Sison vs. be summary and interfered with as little as possible.
Ancheta, 130 SCRA 654)
From the same perspective, claims for refund or tax credit should
be exercised within the time fixed by law because the BIR being an
INSTANCES OF VIOLATIONS OF THE DUE PROCESS administrative body enforced to collect taxes, its functions should
CLAUSE: not be unduly delayed or hampered by incidental matters.
● if the tax amounts to confiscation of property;
● If the subject of confiscation is outside the
jurisdiction of the taxing authority; SISON vs. ANCHETA
● If the tax is imposed for a purpose other than a public GR no. L-59431, July 25, 1984
purpose;
● If the law which is applied retroactively imposes just FACTS:
and oppressive taxes; Sison, as taxpayer, questioned the validity of Sec. 1, BP 135
● If the law violates the inherent limitations on taxation; which provides for tax rates on citizens or residents on the
following:
● The tax imposed is for private, as distinguished from
1. Taxable compensation income;
public, purposes; 2. Taxable net income;
● A tax is imposed on property outside the State; or

TAXATION LAW 1 23
 TAXATION LAW 1
Morillo Notes
3. Royalties, prizes and other winnings;
4. Interest from bank deposits and yield or any other
monetary benefit from deposit substitutes and from trust
fund and similar arrangements;
5. Dividends and share of individual partner in the net
profits of taxable partnership;and
6. Adjusted gross income.
Sison characterized the law as arbitrary, amounting to class
legislation, oppressive and capricious. He invoked the Equal
Protection Clause and Due Process
ISSUE:
W/N Sec, 1, BP 135 violates the Due Process Clause of the
Constitution.
RULING:
NO, Considering that petitioner Sison here would condemn such a
provision as void or its face, he has not made out a case. This is
merely to adhere to the authoritative doctrine that were the due
process and equal protection clauses are invoked, considering that
they arc not fixed rules but rather broad standards, there is a need
for of such persuasive character as would lead to such a
conclusion. Absent such a showing, the presumption of validity
must prevail.
It is undoubted that the due process clause may be invoked where
a taxing statute is so arbitrary that it finds no support in the
Constitution. An obvious example is where it can be shown to
amount to the confiscation of property. That would be a clear
abuse of power. It then becomes the duty of this Court to say that
such an arbitrary act amounted to the exercise of an authority not
conferred. That properly calls for the application of the Holmes
dictum. It has also been held that where the assailed tax measure
is beyond the jurisdiction of the state, or is not for a public purpose,
or, in case of a retroactive statute is so harsh and unreasonable, it
is subject to attack on due process grounds.
II. EQUAL PROTECTION CLAUSE:
Sec. 1, Art. III, 1987 Constitution:
No person shall be denied of the equal protection of the laws.
EQUAL PROTECTION OF THE LAWS:
- All persons subject to legislation shall be treated alike
under like circumstances and conditions both in the
privileges conferred and liabilities imposed.
- What the Constitution prohibits is class legislation
which discriminates against some and favors others.
As long as there are rational or reasonable grounds
for so doing, Congress may, therefore, group the
persons or properties to be taxed and it is sufficient
“if all of the same class are subject to the same rate
and the tax is administered impartially upon them.” (1
Cooley 608)
- The equal protection clause is subject to reasonable
classification.
ORMOC SUGAR CO. vs. TREASURER OF ORMOC CITY
GR no. L-23794, February 17, 1968
FACTS:
Municipal Board of Ormoc City passed Ordinance No. 4, imposing
“on any and all productions of centrifugal sugar milled at the Ormoc
Sugar Company, Inc., in Ormoc City a municipal tax equivalent to
1% per export sale to the USA and other foreign countries.” Ormoc
24 TAXATION LAW 1
Sugar paid under protest and, subsequently, filed a complaint
against the City of Ormoc alleging Ordinance no. 4 is
unconstitutional for being violative of the equal protection clause. In
its defense, The City of Ormoc asserted that the said ordinance
was within its city’s power to enact under the Local Autonomy Act
and it did not violate the equal protection clause.
ISSUE:
W/N Ordinance No. 4 violates the Equal Protection Clause.
RULING:
YES, The Constitution in the bill of rights provides: ". . . nor shall
any person be denied the equal protection of the laws." (Sec. 1 [1],
Art. III) In Felwa vs. Salas, We ruled that the equal protection clause
applies only to persons or things identically situated and does not
bar a reasonable classification of the subject of legislation, and a
classification is reasonable where (1) it is based on substantial
distinctions which make real differences; (2) these are germane to
the purpose of the law; (3) the classification applies not only to
present conditions but also to future conditions which are
substantially identical to those of the present; (4) the classification
applies only to those who belong to the same class.
A perusal of the requisites instantly shows that the questioned
ordinance does not meet them, for it taxes only centrifugal sugar
produced and exported by the Ormoc Sugar Company, Inc. and
none other. At the time of the taxing ordinance's enactment, Ormoc
Sugar Company, Inc., it is true, was the only sugar central in the
city of Ormoc. Still, the classification, to be reasonable, should be
in terms applicable to future conditions as well. The taxing
ordinance should not be singular and exclusive as to 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 cannot be subject to the tax because
the ordinance expressly points only to Ormoc City Sugar Company,
Inc. as the entity to be levied upon.
VILLEGAS vs. HSUI CHIONG TSUI
GR no.L-29646, November 10, 1978
FACTS:
Mayor Villegas signed Ordinance no. 6537 which prohibits aliens
from being employed or to engage or participate in any position or
occupation or business enumerated therein (whether permanent,
temporary or casual) without first securing an employment permit
from the Mayor of Manila and paying the permit fee of P50.00,
violations of this ordinance is punishable by imprisonment. Hiu
Chiong Tsui who was employed in Manila, filed a petition before the
CFI Manila praying for Ordinance no. 6537 to be null and void for
being arbitrary and oppressive because it violates the equal
protection clause of the Constitution.
ISSUE:
W/N Ordinance No. 6537 is void for being violative of the Equal
Protection Clause?
RULING:
YES, Ordinance No. 6537 is void because it does not contain or
suggest any standard or criterion to guide the mayor in the exercise
of the power which has been granted to him by the ordinance.
The ordinance in question violates the due process of law and
equal protection rule of the Constitution.
Requiring a person before he can be employed to get a permit from
the City Mayor of Manila who may withhold or refuse it at will is
tantamount to denying him the basic right of the people in the
Philippines to engage in a means of livelihood. While it is true that
the Philippines as a State is not obliged to admit aliens within its
territory, once an alien is admitted, he cannot be deprived of life
without due process of law. This guarantee includes the means of
 TAXATION LAW 1
Morillo Notes
livelihood. The shelter of protection under the due process and
equal protection clause is given to all persons, both aliens and
citizens.
SHELL COMPANY vs. VANO
GR no. L-6093, February 24, 1954
FACTS:
The municipal council of Cordova, Cebu adopted Ordinance 10
(1946) imposing an annual tax of P150 on occupation or the
exercise of the privilege of installation manager; Ordinance 9 (1947)
imposing an annual tax of P40 for local deposits in drums of
combustible and inflammable materials and an annual tax of P200
for tin can factories; and Ordinance 11 (1948) imposing an annual
tax of P150 on tin can factories having a maximum annual output
capacity of 30,000 tin cans. Shell Co., a foreign corporation, filed
suit for the refund of the taxes paid by it, on the ground that the
ordinances imposing such taxes are ultra vires.
ISSUE:
W/N Ordinance 10 is discriminatory and hostile because there is no
other person in the locality who exercise such designation or
occupation.
RULING:
NO, The contention that the ordinance is discriminatory and hostile
because there is no other person in the locality who exercises such
"designation" or occupation is also without merit, because the fact
that there is no other person in the locality who exercises such a
"designation" or calling does not make the ordinance
discriminatory and hostile, inasmuch as it is and will be applicable
to any person or firm who exercises such calling or occupation
named or designated as "installation manager.
The municipal council, in the exercise of its regulative authority,
may require any person engaged in any business or occupation to
obtain a permit for which a reasonable fee, in no case to exceed
P10 per annum, may be charged, and Commonwealth Act No. 472
authorizes municipal councils and municipal district councils to
impose municipal license taxes upon such persons.
TIU vs. CA
GR no. 127410, January 20, 1999
FACTS:
On March 13, 1992, Congress, with the approval of the President,
passed into law RA 7227. This was for the conversion of former
military bases into industrial and commercial uses. Subic was one
of these areas. It was made into a special economic zone. In the
zone, there were no exchange controls. Such were liberalized.
There was also tax incentives and duty free importation policies
under this law.
On June 10, 1993, then President Fidel V. Ramos issued Executive
Order No. 97 (EO 97), clarifying the application of the tax and duty
incentives. It said that “On Import Taxes and Duties. — Tax and
duty-free importations shall apply only to raw materials, capital
goods and equipment brought in by business enterprises into the
SSEZ; and,vOn All Other Taxes. — In lieu of all local and national
taxes (except import taxes and duties), all business enterprises in
the SSEZ shall be required to pay the tax specified in Section 12(c)
of R.A. No. 7227.”
Nine days after, on June 19, 1993, the President issued Executive
Order No. 97-A (EO 97-A), specifying the area within which the tax-
and-duty-free privilege was operative. “Section 1.1. The
Secured Area consisting of the presently fenced-in former Subic
Naval Base shall be the only completely tax and duty-free area in
the SSEFPZ. Business enterprises and individuals (Filipinos and
foreigners) residing within the Secured Area are free to import raw
materials, capital goods, equipment, and consumer items tax and
duty-free.”
Petitioners Tiu, et.al., challenged the constitutionality of EO 97-A for
allegedly being violative of their right to equal protection of the
laws. This was due to the limitation of tax incentives to Subic and
not to the entire area of Olongapo. The case was referred to the
Court of Appeals. The appellate court concluded that such being
the case, petitioners could not claim that EO 97-A is
unconstitutional, while at the same time maintaining the validity of
RA 7227. The court a quo also explained that the intention of
Congress was to confine the coverage of the SSEZ to the "secured
area" and not to include the "entire Olongapo City and other areas
mentioned in Section 12 of the law.
ISSUE:
W/N EO 97-A violates the equal protection clause of the
Constitution in confining the application of R.A. 7227 within the
secured area.
RULING:
NO, Said Order is not violative of the equal protection clause;
neither is it discriminatory. Rather, than we find real and
substantive distinctions between the circumstances obtaining
inside and those outside the Subic Naval Base, thereby justifying a
valid and reasonable classification. The fundamental right of equal
protection of the laws is not absolute, but is subject to reasonable
classification. If the groupings are characterized by substantial
distinctions that make real differences, one class may be treated
and regulated differently from another. The classification must also
be germane to the purpose of the law and must apply to all those
belonging to the same class. The equal protection of the law clause
is against undue favor and individual or class privilege, as well as
hostile discrimination or the oppression of inequality. It is not
intended to prohibit legislation which is limited either by the object
to which it is directed or by the territory within which it is to
operate. It does not demand absolute equality among residents; it
merely requires that all persons shall be treated alike, under like
circumstances and conditions both as to privileges conferred and
liabilities enforced. The equal protection clause is not infringed by
legislation which applies only to those persons falling within a
specified class, if it applies alike to all persons within such class,
and reasonable. grounds exist for making a distinction between
those who fall within such class and those who do not.
Classification, to be valid, must: (1) rest on substantial distinctions;
(2) be germane to the purpose of the law; (3) not be limited to
existing conditions only; and (4) apply equally to all members of the
same class.
It is well-settled that the equal-protection guarantee does not
require territorial uniformity of laws. As long as there are actual and
material differences between territories, there is no violation of the
constitutional clause. And of course, anyone, including the
petitioners, possessing the requisite investment capital can always
avail of the same benefits by channeling his or her resources or
business operations into the fenced-off free port zone. That the
classification set forth by the executive issuance does not apply
merely to existing conditions. As laid down in RA 7227, the
objective is to establish a “self-sustaining, industrial, commercial,
financial and investment center” in the area. There will, therefore,
be a long-term difference between such investment center and the
areas outside it.
Lastly, the classification applies equally to all the resident
individuals and businesses within the “secured area.” The
residents, being in like circumstances or contributing directly to the
achievement of the end purpose of the law, are not categorized
further. Instead, they are all similarly treated, both in privileges
granted and in obligations required. The Court holds that no undue
favor or privilege was extended. The classification occasioned by
EO 97-A was not unreasonable, capricious or unfounded. To
repeat, it was based, rather, on fair and substantive considerations
that were germane to the legislative purpose.
TAXATION LAW 1 25
 TAXATION LAW 1
Morillo Notes

III. RULE OF TAXATION SHALL BE As a consequence, merchants engaged in the sale of soft drink or
UNIFORM AND EQUITABLE: carbonated drinks, are not subject to the tax, unless they are
agents and/or consignees of another dealer, who, in the very nature
of things, must be one engaged in business outside the City.
Besides, the tax would not be applicable to such agent and/or
Sec. 28(1), Art. VI, 1987 Constitution: consignee, if less than 1,000 cases of soft drinks are consigned or
The rule of taxation shall be uniform and equitable. The Congress shipped to him every month. When we consider, also, that the tax
shall evolve a progressive system of taxation. "shall be based and computed from the cargo manifest or bill of
lading ... showing the number of cases" — not sold — but
"received" by the taxpayer, the intention to limit the application of
EQUALITY AND UNIFORMITY DISTINGUISHED: the ordinance to soft drinks and carbonated drinks brought into the
EQUALITY: UNIFORMITY: City from outside thereof becomes apparent. Viewed from this
angle, the tax partakes of the nature of an import duty, which is
beyond defendant's authority to impose by express provision of
Accomplished when the All taxable articles or kinds law.
burden of the tax falls of property of the same
equally and impartially upon class shall be taxed at the Even however, if the burden in question were regarded as a tax on
all the persons and property same rate. A tax is uniform the sale of said beverages, it would still be invalid, as
subject to it. when it operates with the discriminatory, and hence, violative of the uniformity required by
same force and effect in the Constitution and the law therefor, since only sales by "agents or
every place where the consignees" of outside dealers would be subject to the tax. Sales
by local dealers, not acting for or on behalf of other merchants,
subject of it is found.
regardless of the volume of their sales, and even if the same
exceeded those made by said agents or consignees of producers
REQUIREMENTS OF VALID CLASSIFICATION (Exception or merchants established outside the City of Butuan, would be
exempt from the disputed tax.
to the Rule of Uniformity):
a. The classification is based upon substantial It is true that the uniformity essential to the valid exercise of the
distinctions which make real differences; power of taxation does not require identity or equality under all
b. The classification are germane to the purpose of the circumstances, or negate the authority to classify the objects of
legislation or ordinance; taxation. The classification made in the exercise of this authority, to
c. The classification applies not only to present be valid, must, however, be reasonable and this requirement is not
conditions but also to future conditions substantially deemed satisfied unless: (1) it is based upon substantial
identical to those of the present; and distinctions which make real differences; (2) these are germane to
the purpose of the legislation or ordinance; (3) the classification
d. The classification applies equally to all those who applies, not only to present conditions, but, also, to future
belong to the same class. (Pepsi-Cola vs. Butuan conditions substantially identical to those of the present; and (4) the
City, GR no. L-22814, 1968) classification applies equally all those who belong to the same
class.
PEPSI-COLA vs. BUTUAN CITY These conditions are not fully met by the ordinance in question.
GR no. L-22814, August 28, 1968 Indeed, if its purpose were merely to levy a burden upon the sale of
soft drinks or carbonated beverages, there is no reason why sales
FACTS: thereof by sealers other than agents or consignees of producers or
Pepsi Cola Bottling Co. owns a warehouse in Butuan City to serve merchants established outside the City of Butuan should be
as a storage for its products the “Pepsi-Cola” soft drinks for sale to exempt from the tax.
customer in Butuan City and all the municipalities in the Agusan
province. These Pepsi-Cola soft drinks are bottled in Cebu City and
shipped to the Butuan City warehouse of Pepsi Company for
distribution and sale in Butuan City and all municipalities of MANILA RACE HORSE vs. DELA FUENTE
Agusan. GR no.L-2947, January 11, 1951

It seeks to recover the sums it paid to City of Butuan pursuant to its
Municipal Ordinance no. 110 which imposes a tax on any person,
association, etc., of P0.10 per case of 24 bottles of Pepsi-Cola.
Pepsi Company paid under protest from 1960 and 1961.
Subsequently, Pepsi Company assails the nullity of Ordinance no.
110 for because the tax imposed is discriminatory and
unconstitutional.
ISSUE:
W/N Ordinance no. 110 is unconstitutional for being discriminatory.
RULING:
YES, Note that the tax prescribed in section 3 of Ordinance No.
110, as originally approved, was imposed upon dealers "engaged
in selling" soft drinks or carbonated drinks. Thus, it would seem
that the intent was then to levy a tax upon the sale of said
merchandise. As amended by Ordinance No. 122, the tax is,
however, imposed only upon "any agent and/or consignee of any
person, association, partnership, company or corporation engaged
in selling ... soft drinks or carbonated drinks.
FACTS:
Manila Race Horse Trainers Assoc., Inc., a non-stock Philippine
corporation, instituted an action against Manila Mayor Dela Fuente
and the City of Manila, praying Ordinance no. 3065 be declared
invalid for being violative of the Philippine Constitution.
They alleged that they are the owners of boarding stables for race
horses and that their rights as such are affected by Ordinance no.
3065. They also maintained that said ordinance is a tax on race
horses as distinct from boarding stables. They argued that by
Section 2 the basis of the license fees "is the number of race
horses kept or maintained in the boarding stables to be paid by the
maintainers at the rate of P10.00 a year for each race horse;" that
"the fee is increased correspondingly P10 for each additional race
horse maintained or fed in the stable;" and that "by the same token,
an empty stable for race horse pays no license fee at all."
ISSUE:
W/N Ordinance no. 3065 is invalid for being unjust and
discriminatory.

26 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
RULING:
NO, The tax is assessed not on the owners of the horses but on the
owners of the stables, as counsel admit in their brief, although
there is nothing, of course, to stop stable owners from shifting the
tax to the horse owners in the form of increased rents or fees,
which is generally the case.
SC do not share Manila Race Horse opinion that the ordinance in
question is discriminatory and savors of class legislation. In taxing
only boarding stables for race horses, we do not believe that the
ordinance, makes arbitrary classification. In the case of Eastern
Theatrical Co. Inc., vs. Alfonso, it was said there is equality and
uniformity in taxation if all articles or kinds of property of the same
class are taxed at the same rate. Thus, it was held in that case, that
"the fact that some places of amusement are not taxed while
others, such as cinematographs, theaters, vaudeville companies,
theatrical shows, and boxing exhibitions and other kinds of
amusements or places of amusement are taxed, is not argument at
all against the equality and uniformity of tax imposition." Applying
this criterion to the present case, there would be discrimination if
some boarding stables of the same class used for the same
number of horses were not taxed or were made to pay less or more
than others.
SISON vs. ANCHETA
GR no. L-59431, July 25, 1984
According to the Constitution: "The rule of taxation shall be uniform
and equitable." This requirement is met according to Justice Laurel
in Philippine Trust Company v. Yatco, decided in 1940, when the
tax "operates with the same force and effect in every place where
the subject may be found. " He likewise added: "The rule of
uniformity does not call for perfect uniformity or perfect equality,
because this is hardly attainable." The problem of classification did
not present itself in that case. It did not arise until nine years later,
when the Supreme Court held: "Equality and uniformity in taxation
means that all taxable articles or kinds of property of the same
class shall be taxed at the same rate. The taxing power has the
authority to make reasonable and natural classifications for
purposes of taxation, ... . As clarified by Justice Tuason, where "the
differentiation" complained of "conforms to the practical dictates of
justice and equity" it "is not discriminatory within the meaning of
this clause and is therefore uniform." There is quite a similarity then
to the standard of equal protection for all that is required is that the
tax "applies equally to all persons, firms and corporations placed in
similar situations.
TOLENTINO vs. SECRETARY OF FINANCE
GR no. 115455, October 30, 1995
It is contended, for the reasons already noted, that R.A. No. 7716
also violates Art. VI, §28(1) which provides that "The rule of taxation
shall be uniform and equitable. The Congress shall evolve a
progressive system of taxation."
Equality and uniformity of taxation means that all taxable articles or
kinds of property of the same class be taxed at the same rate. The
taxing power has the authority to make reasonable and natural
classifications for purposes of taxation. To satisfy this requirement
it is enough that the statute or ordinance applies equally to all
persons, forms and corporations placed in similar situation. Indeed,
the VAT was already provided in E.O. No. 273 long before R.A. No.
7716 was enacted. R.A. No. 7716 merely expands the base of the
tax. The validity of the original VAT Law was questioned in
Kapatiran ng Naglilingkod sa Pamahalaan ng Pilipinas, Inc. v. Tan,
163 SCRA 383 (1988) on grounds similar to those made in these
cases, namely, that the law was "oppressive, discriminatory, unjust
and regressive in violation of Art. VI, §28(1) of the Constitution."
Rejecting the challenge to the law, this Court held: “As the Court
sees it, EO 273 satisfies all the requirements of a valid tax. It is
uniform. . . . The sales tax adopted in EO 273 is applied similarly on
all goods and services sold to the public, which are not exempt, at
the constant rate of 0% or 10%. The disputed sales tax is also
equitable. It is imposed only on sales of goods or services by
persons engaged in business with an aggregate gross annual sales
exceeding P200,000.00. Small corner sari-sari stores are
consequently exempt from its application. Likewise exempt from
the tax are sales of farm and marine products, so that the costs of
basic food and other necessities, spared as they are from the
incidence of the VAT, are expected to be relatively lower and within
the reach of the general public.”
The CREBA claims that the VAT is regressive. A similar claim is
made by the Cooperative Union of the Philippines, Inc. (CUP), while
petitioner Juan T. David argues that the law contravenes the
mandate of Congress to provide for a progressive system of
taxation because the law imposes a flat rate of 10% and thus
places the tax burden on all taxpayers without regard to their ability
to pay.
The Constitution does not really prohibit the imposition of indirect
taxes which, like the VAT, are regressive. What it simply provides is
that Congress shall "evolve a progressive system of taxation." The
constitutional provision has been interpreted to mean simply that
"direct taxes are . . . to be preferred [and] as much as possible,
indirect taxes should be minimized."Indeed, the mandate to
Congress is not to prescribe, but to evolve, a progressive tax
system. Otherwise, sales taxes, which perhaps are the oldest form
of indirect taxes, would have been prohibited with the proclamation
of Art. VIII, §17(1) of the 1973 Constitution from which the present
Art. VI, §28(1) was taken. Sales taxes are also regressive.
Resort to indirect taxes should be minimized but not avoided
entirely because it is difficult, if not impossible, to avoid them by
imposing such taxes according to the taxpayers' ability to pay. In
the case of the VAT, the law minimizes the regressive effects of this
imposition by providing for zero rating of certain transactions (R.A.
No. 7716, §3, amending §102 (b) of the NIRC), while granting
exemptions to other transactions. (R.A. No. 7716, §4, amending
§103 of the NIRC).
IV. NON-IMPAIRMENT OF CONTRACTS:
Sec. 10, Art. III, 1987 Constitution:
No law impairing the obligation of contracts shall be passed.
IMPAIRMENT OF CONTRACT:
- The obligation of a contract is impaired when its
terms or conditions are changed by law or by a party
without the consent of the other, thereby weakening
the position or rights of the latter.
CIR vs. LINGAYEN GULF ELECTRIC CO.
GR no. L-23771, August 4, 1988
FACTS:
Lingayen Gulf Electric Power Co., Inc. (Lingayan Gulf) operates an
electric power plant along the municipalities of Lingayen and
Binmaley, Pangasinan, pursuant to the Municipal Ordinance
franchise granted to it. Sec. 10 thereof provides that Lingayan Gulf
shall pay a quarterly “1% of the gross earnings it obtained thru this
privilege during the first 20 years and 2% during the remaining 15
years of the life of said franchise to the Provincial Treasury of
Pangasinan.”
BIR assessed against and demanded Lingayen Gulf deficiency
franchise taxes and surcharges for 1946 to 1954 applying the
franchise tax rate of 5% on gross receipts in accordance with Sec.
259, Tax Code, instead of the lower rates as provided under the
TAXATION LAW 1 27
 TAXATION LAW 1
Morillo Notes
municipal franchise. Lingayen Gulf protested the assessment and
requested to settle the liability amicably but the BIR denied such
request.
While the case was pending before the CTA, RA 3843 was passed,
granting Lingayen Gulf a legislative franchise for the operation of
the electric light, heat, and power system in the same municipalities
of Pangasinan. Thereafter, CTA ruled that RA 3843 should apply
and dismissed the claim of the CIR for payment of the liability from
Lingayen Gulf.
ISSUE:
W/N Lingayen Gulf is liable to pay the 5% franchise tax prescribed
in Sec. 259, Tax Code instead of the 2% municipal franchise tax
rate?
RULING:
NO, R.A. No. 3843 granted the Lingayen Gulf a legislative franchise
in June, 1963, amending, altering, or even repealing the original
municipal franchises, and providing that Lingayen Gulf should pay
only a 2% franchise tax on its gross receipts, "in lieu of any and all
taxes and/or licenses of any kind, nature or description levied,
established, or collected by any authority whatsoever, municipal,
provincial, or national, now or in the future ... and effective further
upon the date the original franchise was granted, no other tax
and/or licenses other than the franchise tax of two per centum on
the gross receipts ... shall be collected, any provision of law to the
contrary notwithstanding." Thus, by virtue of R.A- No. 3843, the
Lingayen Gulf was liable to pay only the 2% franchise tax, effective
from the date the original municipal franchise was granted.
MISAMIS ORIENTAL vs. CEPALCO
GR no. L-45355, January 12, 1990
FACTS:
In 1963, CEPALCO was granted a franchise under RA 3570 to
install, operate and maintain an electric light, heat and power
system in the city of Cagayan De Oro and its municipalities. Under
RA 3570, “In consideration of the franchise, the grantee shall pay a
franchise tax equal to 3% of the gross earnings for electric current
sold under this franchise, shall be paid to the aforesaid provincial
and municipal treasury. Provided, that the said franchise of 3% of
the gross earning shall be in lieu of all taxes and assessments of
whatever authority upon privileges earning, income, franchise, and
poles, wires, transformers, and insulators of the grantee from which
taxes and assessments the grantee is hereby expressly exempted.”
In 1973, the Local Tax code was promulgated which provides that
“any provision of special laws to the contrary notwithstanding the
province may impose a tax on business enjoying franchise …”
Pursuant thereof, the Province of Misamis Oriental enacted
Revenue Ordinance 18 which impose a franchise tax of one-healf
of 1% of the gross annual receipts n business in the province of
Misamis Oriental. Subsequently, Provincial Treasurer of Misamis
Oriental demanded payment of the provincial tax from CEPALCO.
CEPALCO refused to pay, alleging that it is exempt from all taxes
except franchise tax, but, nevertheless, CEPALCO paid under
protest.
ISSUE:
W/N is liable to pay the franchise tax under Revenue Ordinance
imposed by the Province of Misamis Oriental.
RULING:
NO, Republic Acts Nos. 3247, 3570 and 6020 are special laws
applicable only to CEPALCO, while P.D. No. 231 is a general tax
law. The presumption is that the special statutes are exceptions to
the general law (P.D. No. 231) because they pertain to a special
charter granted to meet a particular set of conditions and
circumstances.
28 TAXATION LAW 1
The franchise of respondent CEPALCO expressly exempts it from
payment of "all taxes of whatever authority" except the three per
centum (3%) tax on its gross earnings
Those magic words: "shall be in lieu of all taxes" also excused the
Cotabato Light and Ice Plant Company from the payment of the tax
imposed by Ordinance No. 7 of the City of Cotabato (Cotabato
Light and Power Co. vs. City of Cotabato, 32 SCRA 231).
So was the exemption upheld in favor of the Carcar Electric and Ice
Plant Company when it was required to pay the corporate franchise
tax under Section 259 of the Internal Revenue Code, as amended
by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal
Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that such
exemption is part of the inducement for the acceptance of the
franchise and the rendition of public service by the grantee. As a
charter is in the nature of a private contract, the imposition of
another franchise tax on the corporation by the local authority
would constitute an impairment of the contract between the
government and the corporation.
MERALCO vs. PROVINCE OF LAGUNA
GR no. 131359, May 5, 1999
FACTS:
Certain municipalities of the Province of Laguna by virtue of
existing laws then in effect, issued resolutions through their
respective municipal councils granting franchise in favor of
petitioner for the supply of electric light, heat and power within their
concerned areas. In 1991, RA 7160, otherwise known as the “Local
Government Code of 1991,” was enacted to take effect on 01
January 1992 enjoining local government units to create their own
sources of revenue and to levy taxes, fees and charges, subject to
the limitations expressed therein, consistent with the basic policy of
local autonomy. Pursuant to the provisions of the Code,
respondent enacted an Ordinance imposing a tax on businesses
enjoying a franchise. Petitioner paid the tax under protest. A formal
claim for refund was thereafter sent by the petitioner to the
Provincial Treasurer claiming that the franchise tax it had paid and
continued to pay to the National Government. Petitioner contended
that the imposition of a franchise tax under the said Ordinance
contravened the provisions of P.D. 551. In 1995, the claim for
refund of petitioner was denied. In 1996, petitioner filed with the
RTC a complaint for refund, with a prayer for the issuance of a writ
of preliminary injunction and/or TRO, against the Respondent. The
trial court dismissed the complaint. Hence this petition.
ISSUE:
W/N the imposition of a franchise tax under Provincial Ordinance
authorized by RA 7160, otherwise known Local Government Code
of 1991, insofar as petitioner is concerned, is violative of the non-
impairment clause of the Constitution.
RULING:
NO, The local governments do not have the inherent power to tax
except to the extent that such power might be delegated to them
either by the basic law or by statute. Presently, under Article X of
the 1987 Constitution, a general delegation of that power has been
given in favor of local government units. Under the now prevailing
Constitution, where there is neither a grant nor a prohibition by
statute, the tax power must be deemed to exist although Congress
may provide statutory limitations and guidelines. The basic
rationale for the current rule is to safeguard the viability and self-
sufficiency of local government units by directly granting them
general and broad tax powers. Nevertheless, the fundamental law
did not intend the delegation to be absolute and unconditional; the
constitutional objective obviously is to ensure that, while the local
government units are being strengthened and made more
autonomous, the legislature must still see to it that (a) the taxpayer
will not be over-burdened or saddled with multiple and
unreasonable impositions; (b) each local government unit will have
 TAXATION LAW 1
Morillo Notes
its fair share of available resources; (c) the resources of the national
government will not be unduly disturbed; and (d) local taxation will
be fair, uniform, and just. The Local Government Code of 1991 has
incorporated and adopted, by and large, the provisions of the now
repealed Local Tax Code. The Local Government Code explicitly
authorizes provincial governments, notwithstanding “any
exemption granted by any law or other special law, . . . (to) impose
a tax on businesses enjoying a franchise.” Indicative of the
legislative intent to carry out the Constitutional mandate of vesting
broad tax powers to local government units, the Local Government
Code has effectively withdrawn under Section 193 thereof, tax
exemptions or incentives theretofore enjoyed by certain entities.
The Code, in addition, contains a general repealing which all
general and special laws, acts, city charters, decrees, executive
orders, proclamations and administrative regulations, or part or
parts thereof which are inconsistent with any of the provisions of
this Code are hereby repealed or modified accordingly. These
policy considerations are consistent with the State policy to ensure
autonomy to local governments and the objective of the LGC that
they enjoy genuine and meaningful local autonomy to enable them
to attain their fullest development as self-reliant communities and
make them effective partners in the attainment of national goals.
The power to tax is the most effective instrument to raise needed
revenues to finance and support myriad activities if local
government units for the delivery of basic services essential to the
promotion of the general welfare and the enhancement of peace,
progress, and prosperity of the people. It may also be relevant to
recall that the original reasons for the withdrawal of tax exemption
privileges granted to government-owned and controlled
corporations and all other units of government were that such
privilege resulted in serious tax base erosion and distortions in the
tax treatment of similarity situated enterprises, and there was a
need for these entities to share in the requirements of development,
fiscal or otherwise, by paying the taxes and other charges due from
them.
While the Court has, not too infrequently, referred to tax
exemptions contained in special franchises as being in the nature
of contracts and a part of the inducement for carrying on the
franchise, these exemptions, nevertheless, are far from being
strictly contractual in nature. Contractual tax exemptions, in the real
sense of the term and where the non-impairment clause of the
Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in
government bonds or debentures, lawfully entered into by them
under enabling laws in which the government, acting in its private
capacity, sheds its cloak of authority and waives its governmental
immunity. Truly, tax exemptions of this kind may not be revoked
without impairing the obligations of contracts. 14 These contractual
tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the
nature of a grant which is beyond the purview of the non-
impairment clause of the Constitution.15 Indeed, Article XII, Section
11, of the 1987 Constitution, like its precursor provisions in the
1935 and the 1973 Constitutions, is explicit that no franchise for the
operation of a public utility shall be granted except under the
condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so
requires.
V. NON-IMPRISONMENT FOR
NON-PAYMENT OF POLL TAX:
Sec. 20, Art. III, 1987 Constitution:
No person shall be imprisoned for debt or non-payment of a poll
tax.
CAPITATION OR POLL TAXES:
- These are taxes of a fixed amount upon all persons,
or upon all the persons of a certain class, resident
within a specified territory, without regard to their
property or the occupations in which they may be
engaged. (51 Am. Jur. 66-67)
- Taxes of a specified amount upon each person
performing a certain act or engaging in a certain
business or profession are not, however, poll taxes.
(Supra)
VI. PROHIBITION AGAINST TAXATION OF
RELIGIOUS & CHARITABLE ENTITIES:
Sec. 28(3), Art. VI, 1987 Constitution:
Charitable institutions, churches and personages or convents
appurtenant thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and exclusively
used for religious, charitable, or educational purposes shall be
exempt from taxation.
REQUIREMENTS FOR TAX EXEMPTION OF THE
RELIGIOUS AND CHARITABLE INSTITUTIONS:
1. It is a charitable institution;
2. Its real properties are actually, directly, and
exclusively used for charitable purposes.
Revenue or income from trade, business or other activity, the
conduct of which is not related to the exercise or performance of
religious, educational and charitable purposes or functions shall be
subject to internal revenue taxes when the same is not actually,
directly or exclusively used for the intended purposes. [BIR Ruling
046-2000]
Test of Exemption - The use of the property and not
ownership. Thus property leased exclusively for religious
purposes os exempt from property tax but the owner os
subject to income tax on rents received.
Nature of Use - To be exempt, the property must be actually,
directly and exclusively used for the purposes mentioned.
“Exclusively” means “primarily” rather than solely.
Scope of Exemption - Exemption is not limited to property
actually indispensable for religious, charitable or educational
purposes. It extends to facilities which are incidental to or
reasonably necessary for the accomplishment of such
purposes.
LLADOC vs. CIR
GR no. L-19201, June 16, 1965
FACTS:
MB Estate, Inc. donated P10,000 in cash to Fr. Ruiz for the
construction of a new Catholic Church in Victorias, Negros
Occidental. Subsequently, MB Estate filed the donor’s gift tax
return and CIR issued an assessment for donee’s gift tax against
the Catholic Parish of Victorias, which Fr. Lladoc was the parish
priest, amounting to P1,300. Fr. Lladoc lodged a protest, claiming
that the assessment of the gift tax would not be valid because it
would be a clear violation of the provisions of the Constitution.
ISSUES:
1. W/N Fr. Lladoc should be liable for the assess donee’s gift tax
on the P10,000 donated for the construction of the Victorias
Parish Church.
2. W/N the assessment made by the BIR is a clear violation of the
Constitutional provision.
TAXATION LAW 1 29
 TAXATION LAW 1
Morillo Notes
RULING:
1. NO - SC ruled that Fr. Laldoc is not personally liable for the
said gift tax but it should be the head of the Diocese should pay
the said gift tax because at the time of the donation he was not
the priest of Victorias.
2. NO - The assessment made by the BIR does not violate the
Constitution. Section 22 (3), Art. VI of the Constitution of the
Philippines, exempts from taxation cemeteries, churches and
parsonages or convents, appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious
purposes. The exemption is only from the payment of taxes
assessed on such properties enumerated, as property taxes, as
contra distinguished from excise taxes. In the present case,
what the Collector assessed was a donee's gift tax; the
assessment was not on the properties themselves. It did not
rest upon general ownership; it was an excise upon the use
made of the properties, upon the exercise of the privilege of
receiving the properties. Manifestly, gift tax is not within the
exempting provisions of the section just mentioned. A gift tax is
not a property tax, but an excise tax imposed on the transfer of
property by way of gift inter vivos, the imposition of which on
property used exclusively for religious purposes, does not
constitute an impairment of the Constitution. As well observed
by the learned CTA, the phrase "exempt from taxation," as
employed in the Constitution should not be interpreted to mean
exemption from all kinds of taxes. And there being no clear,
positive or express grant of such privilege by law, in favor of Fr.
Lladoc, the exemption herein must be denied.
PROVINCE OF ABRA vs. HERNANDO
GR no. L-49336, aUGUST 31, 1981
FACTS:
Judge Harold Hernando decided in favour of Roman Catholic
Bishop of Bangued who filed declaratory relief from real estate tax
after being assessed by the Provincial Assessor of Abra. Judge
Hernando granted the exemption without hearing the side of the
petitioner.
ISSUE:
W/N the real properties owned by RA Bangued was exempt from
tax?
RULING:
NO, Under the 1935 Constitution: “Cemeteries, churches, and
parsonages or convents appurtenant thereto, and all lands,
buildings, and improvements used exclusively for religious,
charitable, or educational purposes shall be exempt from taxation.”
The present Constitution added “charitable institutions, mosques,
and non-profit cemeteries” and required that for the exemption of
“:lands, buildings, and improvements,” they should not only be
“exclusively” but also “actually and “directly” used for religious or
charitable purposes. The Constitution is worded differently. The
change should not be ignored. It must be duly taken into
consideration. Reliance on past decisions would have sufficed were
the words “actually” as well as “directly” not added. There must be
proof therefore of the actual and direct use of the lands, buildings,
and improvements for religious or charitable purposes to be
exempt from taxation.
LUNG CENTER vs. QUEZON CITY
GR no. 144104, June 29, 2004
FACTS:
Lung Center of the Philippines is a non-stock and non-profit entity
established by virtue of PD 1823. It is the registered owner of a
parcel of land in Quezon Ave., QC. Erected in the middle of the
subject lot is a hospital, a big space at the ground floor is being
30 TAXATION LAW 1
leased to private parties, for canteen and small store spaces, and
to medical or professional practitioners who use the same as their
private clinic for their patients. On the other hand, the right side is
being leased for commercial purposes to private enterprises. Lung
Center accepts paying and non-paying patients and also renders
medical services to out-patients (both paying and non-paying).
Aside from its income from paying patients, Lung Center receives
annual subsidies from the government.
City Assessor of QC assessed the land and hospital of Lung
XCenter for real property taxes and a Tax Declarations were issued
thereof. Lung Center filed a Claim for Exemption from real property
taxes with the City Assessor, predicated on its claim that it is a
charitable institution but it was denied by the QC-Central Board of
Assessment because it was not a charitable institution and that its
real properties were not actually, directly and exclusively used for
charitable purposes.
ISSUES:
1. W/N Lung Center of the Philippines is a charitable institution?
2. W/N the real properties of Lung Center are exempt from real
property taxes.
RULING:
1. YES, Lung Center is a charitable institution. Under P.D. No.
1823, the Lung Center is a non-profit and non-stock corporation
which, subject to the provisions of the decree, is to be
administered by the Office of the President of the Philippines
with the Ministry of Health and the Ministry of Human
Settlements. It was organized for the welfare and benefit of the
Filipino people principally to help combat the high incidence of
lung and pulmonary diseases in the Philippines.
Hence, the medical services of the Lung Center are to be
rendered to the public in general in any and all walks of life
including those who are poor and the needy without
discrimination. After all, any person, the rich as well as the poor,
may fall sick or be injured or wounded and become a subject of
charity. As a general principle, a charitable institution does not
lose its character as such and its exemption from taxes simply
because it derives income from paying patients, whether out-
patient, or confined in the hospital, or receives subsidies from
the government, so long as the money received is devoted or
used altogether to the charitable object which it is intended to
achieve; and no money inures to the private benefit of the
persons managing or operating the institution.
2. IT DEPENDS, the portions of the land leased to private entities
and those parts of the hospital leased to private individuals are
not exempt from real property taxes. On the other hand, the
portions of the land occupied by the hospital and portions of the
hospital used for its patients (whether paying or non-paying) are
exempt from property taxes. The settled rule in this jurisdiction
is 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 effect of an exemption is equivalent to an
appropriation. Hence, a claim for exemption from tax payments
must be clearly shown and based on language in the law too
plain to be mistaken. Sec. 2, PD 1823 states “ …. the Lung
Center, shall be exempt from income and gift taxes, the same
further deductible in full for the purpose of determining the
maximum deductible amount under Section 30, paragraph (h),
of the National Internal Revenue Code, as amended. The Lung
Center of the Philippines shall be exempt from the payment of
taxes, charges and fees imposed by the Government or any
political subdivision or instrumentality thereof with respect to
equipment purchases made by, or for the Lung Center.” Under
the decree, the petitioner does not enjoy any property tax
exemption privileges for its real properties as well as the
building constructed thereon.
 TAXATION LAW 1
Morillo Notes
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160
in order to be entitled to the exemption, the petitioner is
burdened to prove, by clear and unequivocal proof, that (a) it is
a charitable institution; and (b) its real properties are
ACTUALLY, DIRECTLY and EXCLUSIVELY used for charitable
purposes. What is meant by actual, direct and exclusive use of
the property for charitable purposes is the direct and immediate
and actual application of the property itself to the purposes for
which the charitable institution is organized. It is not the use of
the income from the real property that is determinative of
whether the property is used for tax-exempt purposes.
The Lung Center failed to discharge its burden to prove that the
entirety of its real property is actually, directly and exclusively
used for charitable purposes. While portions of the hospital are
used for the treatment of patients and the dispensation of
medical services to them, whether paying or non-paying, other
portions thereof are being leased to private individuals for their
clinics and a canteen. Further, a portion of the land is being
leased to a private individual for her business enterprise under
the business name "Elliptical Orchids and Garden Center."
Indeed, the petitioner’s evidence shows that it collected
₱1,136,483.45 as rentals in 1991 and ₱1,679,999.28 for 1992
from the said lessees.
VII. PROHIBITION AGAINST TAXATION OF
NON-STOCK, NON-PROFIT
EDUCATIONAL INSTITUTIONS:
Sec. 4(3-4), Art. XIV, 1987 Constitution:
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.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively
for educational purposes shall be exempt from tax.
Sec. 30(H), NIRC. Exemptions from Tax on Corporations:
The following organizations shall not be taxed under this Title (Title
II-Tax on Income) in respect to income received by them, among
others, a nonstock and nonprofit educational institution.
COVERAGE:
- The exemption covers income, property, and donor’s
taxes, custom duties, and other taxes imposed by
either or both the national government or political
subdivisions on all revenues, assets, property or
donations, used actually, directly and exclusively for
educational purposes. (In the case of religious and
charitable entities and non-profit cemeteries, the
exemption is limited to property tax.)
- Lands, buildings and improvements actually, directly
and exclusively used for educational purposes are
exempt from property tax, whether the educational
institution is proprietary or non-profit.
NON-COVERAGE:
- Revenues derived from assets used in the operation
of cafeterias, canteens, and bookstores are also
exempt if they are owned and operated by the
educational institution as ancillary activities and the
same are located within the school premises [RMC
No. 76-2003]
CIR vs. CA & YMCA
GR No 124043, October 14, 1998
FACTS:
Private respondent YMCA is a non-stock, non-profit institution,
which conducts various programs and activities that are beneficial
to the public, especially the young people, pursuant to its religious,
educational and charitable objectives. YMCA earned an income
from leasing out a portion of its premises to small shop owners and
from parking fees collected from non-members. The Commissioner
of Internal Revenue (CIR) issued an assessment for deficiency
income tax, deficiency expanded withholding taxes on rentals and
professional fees and deficiency withholding tax on wages. YMCA
protested the assessment.
ISSUE:
W/N the income of private respondent YMCA from rentals of small
shops and parking fees is exempt from taxation
RULING:
YMCA argues that Art. VI, Sec. 28(3) of the Constitution exempts
charitable institutions from the payment not only of property taxes
but also of income tax from any source. The Court is not
persuaded. The debates, interpellations and expressions of opinion
of the framers of the Constitution reveal their intent. Justice Hilario
Davide Jr., a former constitutional commissioner, stressed during
the Concom debate that what is exempted is not the institution
itself; those exempted from real estate taxes are lands, buildings
and improvements actually, directly and exclusively used for
religious, charitable or educational purposes. Fr. Joaquin Bernas,
an eminent authority on the Constitution and also a member of the
Concom, adhered to the same view that the exemption created by
said provision pertained only to property taxes. In his treatise on
taxation, Justice Jose Vitug concurs, stating that the tax exemption
covers property taxes only. Indeed, the income tax exemption
claimed by YMCA finds no basis in Art. VI, Sec. 28(3) of the
Constitution.
YMCA also invokes Art. XIV, Sec. 4(3) of the Constitution claiming
that YMCA is a non-stock, non-profit educational institution whose
revenues and assets are used actually, directly and exclusively for
educational purposes so it is exempt from taxes on its properties
and income. The Court reiterates that YMCA is exempt from the
payment of property tax, but not income tax on the rentals from its
property. The bare allegation alone that it is a non-stock, non-profit
educational institution is insufficient to justify its exemption from
the payment of income tax. Laws allowing tax exemption are
construed strictissimi juris. Hence, for the YMCA to be granted the
exemption it claims under the aforecited provision, it must prove
with substantial evidence that: 1. it falls under the classification
non-stock, non-profit educational institution; and 2. the income it
seeks to be exempted from taxation is used actually, directly and
exclusively for educational purposes. However, the Court notes
that not a scintilla of evidence was submitted by YMCA to prove
that it met the said requisites.
YMCA is not an educational institution within the purview of Art.
XIV, Sec. 4(3) of the Constitution. The term “educational institution,”
when used in laws granting tax exemptions, refers to a school,
seminary, college or educational establishment. Therefore, YMCA
cannot be deemed one of the educational institutions covered by
the said constitutional provision. Moreover, the Court notes that
YMCA did not submit proof of the proportionate amount of the
subject income that was actually, directly and exclusively used for
educational purposes.
TAXATION LAW 1 31
 TAXATION LAW 1
Morillo Notes
VIII. FREEDOM OF RELIGIOUS
PROFESSIONAL AND WORSHIP:
Sec. 5, Art. III, 1987 Constitution:
No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and
enjoyment of religious profession and worship, without
discrimination or preference, shall forever be allowed. No religious
test shall be required for the exercise of civil or political rights.
AMERICAN BIBLE SOCIETY vs. MANILA
GR no. L-9637, April 30, 1957
FACTS:
In the course of its ministry, Petitioner’s Philippine agency has been
distributing and selling bibles and/or gospel portions thereof
(except during the Japanese occupation) throughout the Philippines
and translating the same into several Philippine dialects.
Respondent informed Petitioner that it was conducting the
business of general merchandise since November, 1945, without
providing itself with the necessary Mayor’s permit and municipal
license, in violation of the City Ordinances, and required plaintiff to
secure, within three days, the corresponding permit and license
fees. Plaintiff protested against this requirement, but the City
Treasurer demanded that plaintiff deposit and pay under protest.
To avoid the closing of its, paid the defendant under protest the
said permit and license fees. In its complaint plaintiff prays that
judgment be rendered declaring the said Municipal Ordinances
illegal and unconstitutional, and that the defendant be ordered to
refund to the plaintiff paid under protest, together with legal interest
thereon, and the costs, plaintiff further praying for such other relief
and remedy as the court may deem just equitable. CFI Dismissed
the Petition for lack of merit, which the petitioner raised the issue to
the CA which certified the case to SC for the reason that the errors
assigned to the lower Court involved only questions of law. A
ISSUE:
W/N the Selling activity of the Petitioner is exempted from Taxation.
RULING:
YES, It may be true that in this said case, the price asked for the
bibles and other religious pamphlets was in some instances a little
bit higher than the actual cost of the same but this cannot mean
that appellant was engaged in the business or occupation of selling
said “merchandise” for profit. For the reason that the provisions of
City of Manila Ordinance No. 2529, as amended, cannot be applied
to appellant, for in doing so it would impair its free exercise and
enjoyment of its religious profession and worship as well as its
rights of dissemination of religious beliefs.
Moreover, the Mandatory obtention of the Mayor’s permit before
any person can engage in any of the businesses, trades or
occupations enumerated therein do not imposes any charge upon
the enjoyment of a right granted by the Constitution, nor tax the
exercise of religious practices. That Ordinance No. 3000 cannot be
considered unconstitutional, even if applied to plaintiff Society.
IX. PASSAGE OF TAX BILL/GRANTING
OF TAX EXEMPTION:
Sec. 24, Art. VI, 1987 Constitution:
All appropriation, revenue or tariff bills, bills authorizing increase of
the public debt, bills of local application, and private bills, shall
originate exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
32 TAXATION LAW 1
Sec. 28(4), Art. VI, 1987 Constitution:
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the Members of the Congress.
TOLENTINO vs. SECRETARY OF FINANCE
(Supra)
Petitioner's contention has no merit. In the first place, it is not true
that P.D. No. 1955 singled out cooperatives by withdrawing their
exemption from income and sales taxes under P.D. No. 175, §5.
What P.D. No. 1955, §1 did was to withdraw the exemptions and
preferential treatments theretofore granted to private business
enterprises in general, in view of the economic crisis which then
beset the nation. It is true that after P.D. No. 2008, §2 had restored
the tax exemptions of cooperatives in 1986, the exemption was
again repealed by E.O. No. 93, §1, but then again cooperatives
were not the only ones whose exemptions were withdrawn. The
withdrawal of tax incentives applied to all, including government
and private entities. In the second place, the Constitution does not
really require that cooperatives be granted tax exemptions in order
to promote their growth and viability. Hence, there is no basis for
petitioner's assertion that the government's policy toward
cooperatives had been one of vacillation, as far as the grant of tax
privileges was concerned, and that it was to put an end to this
indecision that the constitutional provisions cited were adopted.
Perhaps as a matter of policy cooperatives should be granted tax
exemptions, but that is left to the discretion of Congress. If
Congress does not grant exemption and there is no discrimination
to cooperatives, no violation of any constitutional policy can be
charged.
Indeed, petitioner's theory amounts to saying that under the
Constitution cooperatives are exempt from taxation. Such theory is
contrary to the Constitution under which only the following are
exempt from taxation: charitable institutions, churches and
parsonages, by reason of Art. VI, §28 (3), and non-stock, non-profit
educational institutions by reason of Art. XIV, §4 (3).
CUP's further ground for seeking the invalidation of R.A. No. 7716
is that it denies cooperatives the equal protection of the law
because electric cooperatives are exempted from the VAT. The
classification between electric and other cooperatives (farmers
cooperatives, producers cooperatives, marketing cooperatives,
etc.) apparently rests on a congressional determination that there is
greater need to provide cheaper electric power to as many people
as possible, especially those living in the rural areas, than there is
to provide them with other necessities in life. We cannot say that
such classification is unreasonable.
We have carefully read the various arguments raised against the
constitutional validity of R.A. No. 7716. We have in fact taken the
extraordinary step of enjoining its enforcement pending resolution
of these cases. We have now come to the conclusion that the law
suffers from none of the infirmities attributed to it by petitioners and
that its enactment by the other branches of the government does
not constitute a grave abuse of discretion. Any question as to its
necessity, desirability or expediency must be addressed to
Congress as the body which is electorally responsible,
remembering that, as Justice Holmes has said, "legislators are the
ultimate guardians of the liberties and welfare of the people in quite
as great a degree as are the courts." (Missouri, Kansas & Texas Ry.
Co. v. May, 194 U.S. 267, 270, 48 L. Ed. 971, 973 (1904)). It is not
right, as petitioner in G.R. No. 115543 does in arguing that we
should enforce the public accountability of legislators, that those
who took part in passing the law in question by voting for it in
Congress should later thrust to the courts the burden of reviewing
measures in the flush of enactment. This Court does not sit as a
third branch of the legislature, much less exercise a veto power
over legislation.
 TAXATION LAW 1
Morillo Notes
X. VETO POWER OF THE PRESIDENT:
Sec. 27(2), Art. VI, 1987 Constitution:
The President shall have the power to veto any particular item or
items in an appropriation, revenue, or tariff bill, but the veto shall
not affect the item or items to which he does not object.
XI. NON-IMPAIRMENT OF SC JURISDICTION:
Section 5(2)(b), Art. VIII, 1987 Constitution:
The Supreme Court shall have the power to review, revise, reverse,
modify, or affirm on appeal or certiorari, as the law or the Rules of
Court may provide, final judgments and orders of lower courts in all
cases involving the legality of any tax, impost, assessment, or toll,
or any penalty imposed in relation thereto.”
SCOPE OF JUDICIAL REVIEW IN TAXATION
- Judicial review in taxation is limited only to the
interpretation and application of taxes law. Its power
does not include inquiry into the policy of legislation.
Neither can it legitimately question or refuse to
sanction the provisions of any law consistent with the
Constitution. (CIR vs. Bisaya Land Transportation,
105 Phil. 338)
III. DOUBLE TAXATION:
DEFINITION OF DOUBLE TAXATION:
- Double taxation means taxing the same person or
property twice when it should be taxed only once;
that is, “taxing the same person twice by the same
jurisdiction for the same thing.” (Swedish Match
Phils., Inc. vs. Treasurer, GR no. 181277 (2013))
CONSTITUTIONALITY OF DOUBLE TAXATION:
- There is no constitutional prohibition against double
taxation in the Philippines. It is something not
favored, but is permissible, provided some other
constitutional requirement is not thereby violated.
[Villanueva v. City of Iloilo, G.R. No. L-26521 (1968)]
- If the tax law follows the constitutional rule on
uniformity, there can be no valid objection to taxing
the same income, business or property twice. [China
Banking Corp. v. CA, G.R. No. 146749 (2003)]
- Double taxation in its narrow sense is undoubtedly
unconstitutional but in the broader sense is not
necessarily so. [DE LEON, citing 26 R.C.L 264-265].
Where double taxation (in its narrow sense) occurs,
the taxpayer may seek relief under the uniformity rule
or the equal protection guarantee. [DE LEON, citing
84 C.J.S.138].
PROCTOR & GAMBLE PHILS vs. MUNICIPALITY OF JAGNA
GR no. L-24265, December 28, 1979
FACTS:
The Municipality of Jagna, Bohol, enacted Municipal Ordinance
No. 4 which imposed storage fees of all exportable copra
deposited in the bodega within the jurisdiction of the Municipality of
Jagna. On the other hand, Proctor & Gamble (P&G) is a domestic
corporation engaged in the manufacture of soap, edible oil,
margarine and other similar products, and maintains a bodega in
Municipality of Jagna, Bohol, where it stores copra purchased in
the municipality and therefrom ships the same for its manufacturing
and other operations.
For a period of 6 years, P&G paid Jagna Municipality storage fees
under protest. Subsequently, P&G filed a suit before the CFI Manila
praying that Ordinance no. 4 to be void. It avers the said Ordinance
is inapplicable to it because it is not engaged in the business or
occupation of buying or selling of copra but is only storing copra in
connection with its main business of manufacturing soap, and to be
compelled to pay the storage fees would amount to double
taxation.
ISSUE:
W/N Ordinance no. 4 is a form of Double Taxation?
RULING:
NO, It can be said that P&G’s payment of storage fees imposed by
the Ordinance in question does not amount to double taxation. For
double taxation to exist, the same property must be taxed twice,
when it should be taxed but once. Double taxation has also been
defined as taxing the same person twice by the same jurisdiction
for the same thing. Surely, a tax on P&G’s products is different
from a tax on the privilege of storing copra in a bodega situated
within the territorial boundary of Jagna Municipality.
When the Ordinance itself speaks of “exportable” copra, the
meaning conveyed is not exclusively export to a foreign country but
shipment out of the municipality. The storage fee impugned is not a
tax on export because it imposed not only upon copra to be
exported but also upon copra sold and to be used for domestic
purposes if stored in any warehouse in the Municipality and the
weight thereof is 100 kilos or more.
VERONICA SANCHEZ vs. CIR
GR no. L-7521, October 18, 1955
FACTS:
Veronica Sanchez is the owner of a two-story known as
"accessoria" building in Pasay City, which she constructed in 1947.
While she lives in one of the apartments, she rents the rest to other
persons. Sanchez also runs a small dry goods store in the Pasay
market. In the early part of 1951, the CIR made demand upon
Sanchez for the payment of income tax for the year 1950, and real
estate dealer's tax for the years 1946 to 1950. Appellant paid the
taxes demanded under protest. Sanchez then filed action against
the CIR for the refund of the taxes paid, claiming that she is not a
real estate dealer. The lower Court found her to be such a dealer,
as defined by section 194(s) of the NIRC, as amended by RAs 42 &
588, and declared the collection of the taxes in question legal and
in accordance with said provision.
ISSUE:
W/N Veronica Sanchez was liable for the payment as real estate
dealer tax?
RULING:
YES, The law applicable to this case is section 194 (s) of the Tax
Code before it was amended by Republic Act No. 588, which
defines real estate dealers as all persons who for their own account
are engaged in the sale of lands, buildings or interests therein or in
leasing real estate.
The court held that Sanchez falls within the definition. The kind and
nature of the building constructed by her-which is a four-door
"accessoria"-shows that it was from the beginning intended for
lease as a source of income or profit to the owner; and while
appellant resides in one of the apartments, it appears that she
always rented the other apartments to other persons from the time
the building was constructed up to the time of the filing of this
case. Considering, therefore, that appellant constructed her four-
door "accessoria" purposely for rent or profit; that she has been
TAXATION LAW 1 33
 TAXATION LAW 1
Morillo Notes
continuously leasing the same to third persons since its
construction in 1947; that she manages her property herself; and
that said leased holding appears to be her main source of
livelihood, we conclude that appellant is engaged in the leasing of
real estate, and is a real estate dealer as defined by section 194 (s)
of the Internal Revenue Code, as amended by RA42.
Appellant Veronica Sanchez argues that she is already paying real
estate taxes on her property, as well as income tax on the income
derive therefrom, so that to further subject its rentals to the "real
estate dealers' tax" amounts to double taxation. This argument was
rejected by the Court holding that it is a well settled rule that license
tax may be levied upon a business or occupation although the land
or property used therein is subject to property tax, and that the
state may collect an ad valorem tax on property used in a calling,
and at the same time impose a license tax on the pursuit of that
calling, the imposition of the latter kind of tax being in no sense a
double tax. The evidence shows, however, that the apartment
house in question was constructed only in 1947, while the real
estate dealer's tax demanded of and paid by appellant was for the
years 1946 to 1950. Wherefore, appellant is entitled to a refund of
the tax paid for the year 1946, amounting to P37.50.
SILVESTER PUNZALAN vs. MUNICIPAL BOARD OF MANILA
GR no. L-4817, May 26, 1954
FACTS: Ordinance 3398, enacted by the municipal board of
Manila, imposes a municipal corporation tax on persons exercising
various professions in the city of Manila and penalizes non-
payment thereof. Punzalan, et. al, are lawyers, doctors,
accountants, commenced a suit before the CFI of Manila for the
annulment of Ordinance 3398. That having already paid their
occupation tax under Sec. 201, NIRC, Punzalan, et. al, upon being
required to pay the additional tax prescribed in Ordinance 3398,
paid the same under protest.
ISSUE: Is Ordinance 3398 valid?
RULING: YES, SC Punzalan, et. al, contention is that while the law
has authorized the City of Manila to impose the said tax, it has
withheld that authority from other chartered cities, not to mention
municipalities. The SC do not think it is for the courts to judge what
particular cities or municipalities should be empowered to impose
occupation taxes in addition to those imposed by the National
Government at matter is peculiarly within the domain of the political
departments and the courts would do well not to encroach upon it.
Moreover, as the seat of the National Government and with a
population and volume of trade many times that of any other
Philippine city or municipality, Manila, no doubt, offers a more
lucrative field for the practice of the professions, so that it is but fair
that the professionals in Manila be made to pay a higher
occupation tax than their brethren in the provinces.
Punzalan, et. al, brand the ordinance unjust and oppressive
because they say that it creates discrimination within a class in that
while professionals with offices in Manila have to pay the tax,
outsiders who have no offices in the city but practice their
profession therein are not subject to the tax. Plaintiffs make a
distinction that is not found in the ordinance. The ordinance
imposes the tax upon every person "exercising" or "pursuing" — in
the City of Manila naturally — any one of the occupations named,
but does not say that such person must have his office in Manila.
What constitutes exercise or pursuit of a profession in the city is a
matter of judicial determination. The argument against double
taxation may not be invoked where one tax is imposed by the state
and the other is imposed by the city,it being widely recognized that
there is nothing inherently obnoxious in the requirement that license
fees or taxes be exacted with respect to the same occupation,
calling or activity by both the state and the political subdivisions
thereof. (51 Am. Jur., 341.)
34 TAXATION LAW 1
Dissenting, CJ Paras:
My position is that a professional who has paid the occupation tax
under the National Internal Revenue Code should be allowed to
practice in Manila even without paying the similar tax imposed by
Ordinance No. 3398. The City cannot give what said professional
already has. I would not say that this Ordinance, enacted by the
Municipal Board pursuant to paragraph 1 of section 18 of the
Revised Charter of Manila, as amended by Republic Act No. 409,
empowering the Board to impose a municipal occupation tax not to
exceed P50 per annum, is invalid; but that only one tax, either
under the Internal Revenue Code or under Ordinance No. 3398,
should be imposed upon a practitioner in Manila.
METHODS OF AVOIDING THE OCCURRENCE OF DOUBLE
TAXATION:
Exemption Method: Credit Method:
The income or capital which Tax paid in the state of
is taxable in the state of source is credited against
source or situs is exempted the tax levied in the state of
in the state of residence. residence.
Focus on the income or Focus on the tax.
capital itself
CIR vs. SC JOHNSON & SONS
GR no. 127105, June 25, 1999
FACTS:
SC Johnson [Phils] is a domestic corporation organized and
operating under the Philippine laws, entered into a license
agreement with SC Johnson and Son USA, a non-resident foreign
corporation based in the U.S.A. pursuant to which SC Johnson
Phils was granted the right to use the trademark, patents and
technology owned by the latter including the right to manufacture,
package and distribute the products covered by the Agreement
and secure assistance in management, marketing and production
from SC Johnson and Son, USA. For the use of the trademark or
technology, respondent was obliged to pay SC Johnson and Son,
USA royalties based on a percentage of net sales and subjected
the same to 25% withholding tax on royalty payments.
Respondent then filed with the International Tax Affairs Division
(ITAD) of the BIR a claim for refund of overpaid withholding tax on
royalties arguing that royalties paid by the respondent to SC
Johnson and Son, USA is only subject to 10% withholding tax
pursuant to the most- favored nation clause of the RP-US Tax
Treaty in relation to the RP-West Germany Tax Treaty. The
Commissioner did not act on said claim for refund. Private
respondent then filed a petition for review before the CTA, which
rendered its decision in favor of S.C. Johnson and ordered the CIR
to issue a tax credit certificate representing overpaid withholding
tax on royalty payments.
ISSUE:
W/N SC Johnson USA is entitled to the “Most Favored Nation” tax
rate of 10% on royalties as provided in the RP-US Tax Treaty in
relation to the RP-West Germany Tax Treaty?
RULING:
NO, The court held the petitioner’s contentions to be meritorious,
when it asserted that under the RP-US Tax Treaty, which is known
as the "most favored nation" clause, the lowest rate of the
Philippine tax at 10% may be imposed on royalties derived by a
resident of the United States from sources within the Philippines
only if the circumstances of the resident of the United States are
similar to those of the resident of West Germany. Since the RP-US
Tax Treaty contains no "matching credit" provision as that provided
 TAXATION LAW 1
Morillo Notes
under Article 24 of the RP-West Germany Tax Treaty, the tax on
royalties under the RP-US Tax Treaty is not paid under similar
circumstances as those obtaining in the RP-West Germany Tax
Treaty. 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.
Double taxation usually takes place when a person is 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. In order to eliminate double taxation, a tax treaty resorts
to several methods. First, it sets out the respective rights to tax of
the state of source or situs and of the state of residence with regard
to certain classes of income or capital. In some cases, an exclusive
right to tax is conferred on one of the contracting states; however,
for other items of income or capital, both states are given the right
to tax, although the amount of tax that may be imposed by the state
of source is limited. The second method for the elimination of
double taxation applies whenever the state of source is given a full
or limited right to tax together with the state of residence. In this
case, the treaties make it incumbent upon the state of residence to
allow relief in order to avoid double taxation.
There are two methods of relief- the exemption method and the
credit method. In the exemption method, the income or capital
which is taxable in the state of source or situs is exempted in the
state of residence, although in some instances it may be taken into
account in determining the rate of tax applicable to the taxpayer's
remaining income or capital. On the other hand, in the credit
method, although the income or capital which is taxed in the state
of source is still taxable in the state of residence, the tax paid in the
former is credited against the tax levied in the latter. The basic
difference between the 2 methods is that in the exemption method,
the focus is on the income or capital itself, whereas the credit
method focuses upon the tax.
Given the purpose underlying tax treaties and the rationale for the
most favored nation clause, the concessional tax rate of 10 percent
provided for in the RP-Germany Tax Treaty should apply only if the
taxes imposed upon royalties in the RP-US Tax Treaty and in the
RP-Germany Tax Treaty are paid under similar circumstances.
However, the court held that the RP-US and the RP-West Germany
Tax Treaties do not contain similar provisions on tax crediting.
It bears stress that tax refunds are in the nature of tax exemptions.
As such they are regarded as in derogation of sovereign authority
and to be construed strictissimi juris against the person or entity
claiming the exemption. The burden of proof is upon him who
claims the exemption in his favor and he must be able to justify his
claim by the clearest grant of organic or statute law. Private
respondent is claiming for a refund of the alleged overpayment of
tax on royalties; however, there is nothing on record to support a
claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-
West Germany Tax Treaty.
Chapter 3:
EXEMPTIONS FROM TAXATION
NATURE OF THE POWER TO GRANT TAX EXEMPTION:
a. National Government:
- The power to exempt is an attribute of sovereignty. It
is inherent in the exercise of the power to tax that the
sovereign state be free to select the subjects of
taxation and to grant exemptions therefrom. Unless
restricted by the Constitution, the legislative power to
exempt is as broad as its power to tax.
b. Local Governments:
- Municipal corporations are not clothed with the
inherent power to tax. Hence they also have no
inherent power to exempt. But the moment the
power to impose is granted, they also have the power
to exempt. The legislature may delegate its power to
exempt to the same extent that it exercises the
power to exempt.
I. TAX EXEMPTION IN GENERAL
Taxation is the rule; exemption is the exception. He who
claims exemption must be able to justify his claim or right thereto,
by a grant expressed in terms “too plain to be mistaken and too
categorical to be misinterpreted.” If not expressly mentioned in the
law, it must at least be within its purview by clear legislative intent.
[Jaka Investments Corp. v. CIR, G.R. No. 147629 (2010)]
MEANING OF TAX EXEMPTION:
- The grant of immunity to particular persons or corporations
or to persons or corporations of a particular class from a tax
which persons and corporations generally within the same
state or taxing district are obliged to pay.
- It is an immunity or privilege; it is freedom from
a financial charge or burden to which others are
subjected. It is strictly construed against the
taxpayer.
- It is a waiver of the government's right to collect the
amounts that would have been collectible under our tax
laws. Thus, when the law speaks of a tax exemption, it
should be understood as freedom from the imposition and
payment of a particular tax. [Secretary of Finance v. Lazatin,
G.R. No. 210588 (2016)]
KINDS OF TAX EXEMPTION:
a. Express or Affirmative:
- Tax is exempted, entirely entirely or partly, expressly
provided by the provisions of the Constitution,
statutes, treaties, ordinances, franchises, or
contracts.
b. Implied or Exemption by Omission:
- When a tax is levied on certain classes without
mentioning the other classes. Every tax statute, in a
very real sense, makes exemptions since all those
not mentioned are deemed exempted. The omission
may be either accidental or intentional.
- Exemptions are not presumed, but when public
property is involved, exemption is the rule, and
taxation is the exception.
c. Contractual:
- The legislature of a State may, in the absence of
special restrictions in its constitution, make a valid
contract with a corporation in respect to taxation,
and that such contract can be enforced against the
State at the instance of the corporation. [Casanovas
v. Hord, G.R. No. 3473 (1907)]
- In the real sense of the term and where the non-
impairment clause of the Constitution can rightly be
invoked, this includes those agreed to by the taxing
authority in contracts, such as those contained in
government bonds or debentures, lawfully entered
into by them under enabling laws in which the
government, acting in its private capacity, sheds its
cloak of authority and waives its governmental
immunity.
- These contractual tax exemptions, however, are not
to be confused with tax exemptions granted under
franchises. A franchise partakes the nature of a grant
TAXATION LAW 1 35
 TAXATION LAW 1
Morillo Notes
which is beyond the purview of the non-impairment
clause of the Constitution. [Manila Electric Company
v. Province of Laguna, G.R. No. 131359 (1999)]
RATIONALE OF TAX EXEMPTION:
- Such exemption will benefit the body of the people
and not particular individuals or private interest and
that the public benefit is sufficient to offset the
monetary loss entailed in the grant of the exemption.
GROUNDS FOR TAX EXEMPTION:
1. It may be based on a contract;
2. It may be based on some ground of public policy;
3. It may be created in a treaty on grounds of
reciprocity or to lessen the rigors of international or
multiple taxation.
Note: There is no tax exemption solely on the ground of equity.
While equity cannot be used as a basis or justification for tax
exemption, a law may validly authorize the condonation of taxes on
equitable considerations. (Davao Gulf Lumber Corp. vs. CIR, GR
no. 117359 (1998))
PRINCIPLES OF TAX EXEMPTION:
1. As the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed
and any reduction or diminution thereof with respect
to its mode or its rate, must be strictly construed, and
the same must be couched in clear and unmistakable
terms in order that it may be applied. [Floro Cement
v. Gorospe, G.R. No. L-46787 (1991)
2. b. When granted, they are strictly construed against
the taxpayer [Luzon Stevedoring Co. v. CTA, G.R.
No. L-30232 (1988)]
3. c. T ax exemptions are strictly construed against the
taxpayer, they being highly disfavored and may
almost be said “to be odious to the law.” [Manila
Electric Company v. Vera, supra]
REVOCATION OF TAX EXEMPTION
● Gen. Rule: Revocable by the government
● Exception: Contractual tax exemptions may not be
unilaterally so revoked by the taxing authority without
thereby violating the non-impairment clause of the
Constitution.
CIR vs. BOTELHO SHIPPING CORP.
GR no. L-21633-34, June 29, 1967
FACTS:
In August 1960, Reparations Commissions of the Philippines (RCP)
and Botelho Shipping Corp. entered into a “Contract of Conditional
Purchase and Sale of Reparations Goods,” whereby RCP agreed to
sell to Botelho the vessel “M/S Maria Rosello” procured by RCP
pursuant to Philippine-Japanese Reparations agreement. In
September 1960, RCP signed a similar contract with General
Shipping for the sale thereto of “M/S General Lim”.
Upon arrival at the port of Manila, Botelho and General Shipping
filed the corresponding applications for registration of the vessels
but the Bureau of Customs placed the same under custody and
refused to give due course to said applications, unless the
compensating taxes on the vessels were paid by the aforesaid
buyers. Simultaneously, Botelho and General Shipping filed with
the CTA a moition for the suspension of the collection of the said
compensating taxes. While the case is pending, RA 3079 amended
36 TAXATION LAW 1
the Original Reparation Act which exempts buyers of reparations
goods acquired from RCP, from liability for the compensating tax.
Invoking section 20, RA 3079, Botelho and General Shipping
applied for the renovation of their utilizations contract with RCP.
Hence, CTA ruled that Botelho and General Shipping are exempt
from the payment of compensating taxes.
ISSUE:
W/N Botelho and General Shipping are exempted from paying
compensating taxes for the vessels they purchased from RCP?
RULING:
YES, It is true that Republic Act No. 3079 does not explicitly
declare that those who purchased reparations goods prior to June
17, 1961, are exempt from the compensating tax. It does not say
so, because they do not really enjoy such exemption, unless they
comply with the proviso in Section 20 of said Act, by applying for
the renovation of their respective utilization contracts, "in order to
avail of any provision of the Amendatory Act which is more
favorable" to the applicant. In other words, it is manifest, from the
language of said section 20, that the same intended to give such
buyers the opportunity to be treated "in like manner and to the
same extent as an end-user filing his application after this approval
of this Amendatory Act." Like the "most-favored-nation-clause" in
international agreements, the aforementioned section 20 thus
seeks, not to discriminate or to create an exemption or exception,
but to abolish the discrimination, exemption or exception that
would otherwise result, in favor of the end-user who bought after
June 17, 1961 and against one who bought prior thereto. Indeed, it
is difficult to find a substantial justification for the distinction
between the one and the other. As correctly held by the Tax Court
in Philippine Ace Lines, Inc. v. Commissioner of Internal Revenue
and reiterated in the cases under consideration:
“x x x In providing that the favorable provision of Republic Act No.
3079 shall be available to applicants for renovation of their
utilization contracts, on condition that said applicants shall
voluntarily assume all the new obligations provided in the new law,
the law intends to place persons who acquired reparations goods
before the enactment of the amendatory Act on the same footing
as those who acquire reparations goods after its enactment. This is
so because of the provision that once an application for renovation
of a utilization contract has been approved, the favorable
provisions of said Act shall be available to the applicant "in like
manner and to the same extent, as an end-user filing his
application alter the approval of this amendatory Act." To deny
exemption from compensating tax to one whose utilization contract
has been renovated, while granting the exemption to one who files
an application for acquisition of reparations goods after the
approval of the new law, would be contrary to the express mandate
of the new law, that they both be subject to the same privileges in
like manner and to the same extent. It would be manifest distortion
of the literal meaning and purpose of the new law.”
CIR vs. GCL RETIREMENT PLAN
GR no. 95022, March 22, 1992
FACTS:
GCL Retirement Plan 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 RA4917.
Respondent GCL then made investments and earned therefrom
interest income from which was withheld the 15% final withholding
tax imposed by PD1959. GCL then filed with Petitioner a claim for
refund of the amounts withheld by Anscor Capital and Investment
Corp., and by Commercial Bank of Manila. Respondent GCL
elevated the matter to CTA which ruled in favor of GCL, holding
that employees' trusts are exempt from the 15% final withholding
 TAXATION LAW 1
Morillo Notes
tax on interest income and ordering a refund of the tax withheld.
Upon appeal to the Court of Appeals, the latter upheld the CTA
Decision.
ISSUE:
W/N the GCL Plan is exempt from the final withholding tax on
interest income from money placements and purchase of treasury
bills required by PD 1959.
RULING:
YES, The GCL Plan was qualified as exempt from income tax by
the Commissioner of Internal Revenue in accordance with Rep. Act
No. 4917. This law specifically provided that “Any provision of law
to the contrary notwithstanding, the retirement benefits received by
officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private benefit plan
maintained by the employer shall be exempt from all taxes and shall
not be liable to attachment, levy or seizure by or under any legal or
equitable process whatsoever except to pay a debt of the official or
employee concerned to the private benefit plan or that arising from
liability imposed in a criminal action.” This provision should be
taken in consideration with RA 1983 which specifically exempted
employee's trusts from income tax.
The tax-exemption privilege of employees' trusts, as distinguished
from any other kind of property held in trust, springs from the
foregoing provision. It is unambiguous. Manifest therefrom is that
the tax law has singled out employees' trusts for tax exemption.
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.
PHIL. ACETYLENE vs. CIR
GR no. L-19707, August 17, 1967
FACTS:
Philippine Acetylene Co. Inc. is engaged in the manufacture and
sale of oxygen and acetylene gases. It sold its products to the
National Power Corporation (Napocor), an agency of the Philippine
Government, and the Voice of America (VOA), an agency of the
United States Government. When the commissioner assessed
deficiency sales tax and surcharges against the company, the
company denied liability for the payment of tax on the ground that
both Napocor and VOA are exempt from taxes.
ISSUE:
W/N Philippine Acetylene Co. is liable for tax
RULING:
YES, Sales tax are paid by the manufacturer or producer who must
make a true and complete return of the amount of his, her or its
gross monthly sales, receipts or earnings or gross value of output
actually removed from the factory or mill, warehouse and to pay the
tax due thereon. The tax imposed by Section 186 of the Tax Code
is a tax on the manufacturer or producer and not a tax on the
purchaser except probably in a very remote and inconsequential
sense. Accordingly, its levy on the sales made to tax- exempt
entities like the Napocor is permissible.
On the other hand, there is nothing in the language of the Military
Bases Agreement to warrant the general exemption granted by
General Circular V-41 (1947). Thus, the expansive construction of
the tax exemption is void; and the sales to the VOA are subject to
the payment of percentage taxes under Section 186 of the Tax
Code. Therefore, tax exemption is strictly construed and exemption
will not be held to conferred unless the terms under which it is
granted clearly and distinctly show that such was the intention.
MACEDA vs. MACARAIG
GR no. 88291, May 31, 1991
FACTS:
Senator Ernesto Maceda sought to nullify certain decisions, orders,
rulings, and resolutions of respondents Executive Secretary,
Secretary of Finance, Commissioner of Internal Revenue,
Commissioner of Customs and the Fiscal Incentives Review Board
FIRB for exempting the National Power Corporation (NPC) from
indirect tax and duties. RA 358, RA 6395 and PD 380 expressly
grant NPC exemptions from all taxes whether direct or indirect. In
1984, however, PD 1931 and EO 93 withdrew all tax exemptions
granted to all GOCCs including the NPC but granted the President
and/or the Secretary of Finance by recommendation of the FIRB
the power to restore certain tax exemptions. Pursuant to the latter
law, FIRB issued a resolution restoring the tax and duty exemption
privileges of the NPC. The actions of the respondents were thus
questioned by the petitioner by this petition for certiorari,
prohibition and mandamus with prayer for a writ of preliminary
injunction and/or restraining order. To which public respondents
argued, among others, that petitioner does not have the standing to
challenge the questioned orders and resolution because he was not
in any way affected by such grant of tax exemptions.
ISSUE:
W/N NPC has ceased to enjoy indirect tax and duty exemption with
the enactment of P.D. No. 938 on May 27, 1976 which amended
P.D. No. 380, issued on January 11, 1974.
RULING:
NO, It is noted that in the earlier law, R.A. No. 358 the exemption
was worded in general terms, as to cover "all taxes, duties, fees,
imposts, charges, etc. . . ." However, the amendment under
Republic Act No. 6395 enumerated the details covered by the
exemption. Subsequently, P.D. No. 380, made even more specific
the details of the exemption of NPC to cover, among others, both
direct and indirect taxes on all petroleum products used in its
operation. Presidential Decree No. 938 amended the tax exemption
by simplifying the same law in general terms. It succinctly exempts
NPC from "all forms of taxes, duties, fees, imposts, as well as costs
and service fees including filing fees, appeal bonds, supersedeas
bonds, in any court or administrative proceedings."
The use of the phrase "all forms" of taxes demonstrate the intention
of the law to give NPC all the tax exemptions it has been enjoying
before. The rationale for this exemption is that being non-profit the
NPC "shall devote all its returns from its capital investment as well
as excess revenues from its operation, for expansion.
Petitioner Maceda cannot invoke the rule on strictissimi juris with
respect to the interpretation of statutes granting tax exemptions to
NPC.
Moreover, it is a recognized principle that the rule on strict
interpretation does not apply in the case of exemptions in favor of a
TAXATION LAW 1 37
 TAXATION LAW 1
Morillo Notes
government political subdivision or instrumentality.
SEA-LAND SERVICES vs. CA
GR no. L-57828, June 14, 1993
FACTS:
Sea-Land Service Inc. was an American international shipping
company licensed by the SEC to do business in the Philippines. It
entered into a contract with the US government to transport military
household goods and effects of US military personnel assigned to
the Subic Naval Base. The income acquired by Sea-Land from
such contract was assessed by the BIR for Corporate Income Tax,
which the former paid. However, it later on claimed that the
payment was made by mistake because of the tax exemption
provided under Art12 par4 of the RP-US Military Bases Agreement.
Hence, a claim for refund was filed by Sea-Land. CTA denied the
refund and the CA affirmed.
ISSUE:
W/N Sea-Land Service is exempted from payment of income tax.
RULING:
NO, 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 law does
not look with favor on tax exemptions and that he who would seek
to be thus privileged must justify it by words too plain to be
mistaken and too categorical to be misinterpreted.
Under Art12 par4 of the RP-US Military bases Agreement, the
Philippine government agreed to exempt from payment of
Philippine income tax nationals of the US, corporations organized
under US laws, residents in the US in respect of any profit derived
under a contract made in the US with the US government in
connection with the construction, maintenance, operation and
defense of the bases. It is obvious that the transport or shipment of
household goods and effects of US military personnel is not
included in the term “construction, maintenance, operation and
defense of the bases.” Neither could the performance of this
service to the US government be interpreted as directly related to
the defense and security of the Philippine territories.
When the law speaks in clear and categorical language, there is no
reason for interpretation or construction, but only for application.
Any interpretation that would give it an expansive construction to
encompass petitioner’s exemption from taxation would be
unwarranted.
CIR vs. JP MORGAN CHASE BANK
GR no. 210528, November 2, 2018
FACTS:
JP Morgan-Philippines is the Philippine branch of JP Morgan-US, it
is registered with SEC to engage in call center business process
services, information technology, information technology-enabled
services, and customer care service. JP Morgan-Phils entered into
a Master Service Provider Agreement with PeopleSupport, Phils.,
Inc., a PEZA registered Economic Zone IT. Under the Agreement,
PeopleSupport would provide and lease transmission facilities to
JP Morgan-Phils for a fee.
From May to July 2007, JP Morgan-Phils paid PeopleSupport
P56M and withheld tax amounting to P2M. In August 2007, JP
Morgan-Phils filed its Monthly Remittance Return of Creditable
Income Taxes Withheld for July and paid P3M, including the P2M
withheld tax from PeopleSupport. However, In August 2007, JP
Morgan-Phils reimbursed PeopleSupport P2M after having realized
that it had erroneously withheld taxes on its payments to
PeopleSupport, as the latter enjoys the income tax holiday.
38 TAXATION LAW 1
JP Morgan-phils filed before the bir an application for refund of
P2M. However, due to the latter’s inaction, JP Morgan-Phils filed a
petition before the CTA. CTA denied JP Morgan-Phils claim for
refund because the lease of its transmission facilities was outside
of PeopleSupport’s registered activities with PEZA. The income
from the lease was subject to the regular income tax, and thus, the
tax was correctly withheld.
ISSUE:
W/N JP Morgan-Phils’ lease of physical plant space, infrastructure,
and other transmission facilities is related to the PEZA-registered
activities of PeopleSupport, and, thus, exempt from withholding
tax.
RULING:
NO, JP Morgan-Phils’ lease of the physical plant space,
infrastructure, and other transmission facilities of PeopleSupport
(Philippines), Inc., a Philippine Economic Zone Authority (PEZA)-
registered Export Enterprise, is not covered within its registered
activities. Thus, income derived from it is subject to the regular
corporate income tax.
Under Section 23 of Republic Act No. 7916, or the Special
Economic Zone Act of 1995, as amended, business enterprises
operating within economic zones are entitled to fiscal incentives.
Article 39(a)(1), Book VI of Executive Order No. 226, as amended,
enumerates the fiscal incentives granted to a registered enterprise,
which include income tax holiday from four (4) to six (6) years,
depending on whether the enterprise is registered as a pioneer or
non-pioneer firm. It reads: “Art. 39. Incentives to Registered
Enterprises. — All registered enterprises shall be granted the
following incentives to the extent engaged in a preferred area
of investment; (a) Income Tax Holiday”.
However, Rule XIII, Section 5 of the Implementing Rules and
Regulations of Republic Act No. 7916 specifies that PEZA-granted
incentives shall apply only to registered operations of the Ecozone
Enterprise and only during its registration with PEZA. In other
words, tax incentives to which an Ecozone Enterprise is entitled do
not necessarily include all kinds of income received during the
period of entitlement. Only income actually gained or received by
the Ecozone Enterprise related to the conduct of its registered
business activity are covered by fiscal incentives.
PEZA issued Memorandum Circular No. 2005-032, which provided
that “The tax treatment of foreign exchange (forex) gains shall
depend on the activities from which these arise. Thus, if the forex
gain is attributed to an activity with income tax incentive (Income
Tax Holiday or 5% Gross Income Tax), said forex gain shall be
covered by the same income tax incentive. On the other hand, if
the forex gain is attributed to an activity without income tax
incentive, said forex gain shall likewise be without income tax
incentive, i.e., therefore, subject to normal corporate income tax.”
Following the rulings and the PEZA Memorandum Circular, it is
clear that the registration of an activity with PEZA is an essential
requirement to enjoy tax incentives under the law, and only income
arising from or directly related to the conduct of the Ecozone
Enterprises' registered activities are covered by tax incentives
under the Philippine Economic Zone Act of 1995.
Hence, to qualify for the income tax holiday incentive, JP Morgan-
Phils must satisfactorily show that its transaction with
PeopleSupport is a registered activity or embraced within the
latter's registered activities with the PEZA.
TAX EXEMPTION vs. TAX AMNESTY
 TAXATION LAW 1
Morillo Notes
TAX EXEMPTION TAX AMNESTY No Yes

Benefit: Purpose:

Immunity from civil liability (relief Immunity from civil, criminal, Merely minimize payment of Entirely escape payment of
from paying taxes) administrative liability arising taxes (tax savings) taxes
from non-payment of taxes
Example:
Coverage:

A person refrains from Deliberate failure to report a

Future Tax Liability Past Tax Liability
engaging in some activity or taxable income or property;
enjoying some privilege in Deliberate reduction of
Actual Revenue Loss:
order to avoid the incidental income that has been
taxation or to lower his tax received, overstatement of
None Yes bracket for a taxable year expenses.

A tax amnesty partakes of an absolute forgiveness or TAX AVOIDANCE (Tax Minimization):

waiver by the Government of its right to collect what
otherwise would be due it, and in this sense, prejudicial
thereto, particularly to give tax evaders, who wish to relent
and are willing to reform a chance to do so and become a part
of the new society with a clean slate. [Republic v. IAC, G.R.
No. L-69344 (1991)]
A tax amnesty, much like a tax exemption, is never favored
nor presumed in law. If granted, the terms of the amnesty, like
that of a tax exemption, must be construed strictly against
the taxpayer and liberally in favor of the taxing authority.
He who claims an exemption (or an amnesty) from the
common burden must justify his claim by the clearest grant of
organic or state law. It cannot be allowed to exist upon a
vague implication. If a doubt arises as to the intent of the
legislature, that doubt must be resolved in favor of the state.
[CIR v. Marubeni Corp., G.R. No. 137377 (2001)].
Amnesty distinguished from tax exemption Tax amnesty is
immunity from all criminal and civil obligations arising from
non-payment of taxes. It is a general pardon given to all taxpayers.
It applies to past tax periods, hence of retroactive application. [People
v. Castañeda, G.R. No. L-46881 (1988)]
Tax exemption is immunity from all civil liability only. It is an
immunity or privilege, a freedom from a charge or burden of
which others are subjected. [Greenfield v. Meer, C.A., No. 156
(1946)]. It is generally prospective in application [Dimaampao,
2005, p. 111].
TAX EVASION vs. TAX AVOIDANCE
TAX AVOIDANCE TAX EVASION
(Tax Minimization) (Tax Dodging)
Means:
Legal Illegal
Outing of tax planning Outcome of tax fraud
Punishable?
- The exploitation by the taxpayer of legally permissible
alternative tax rates or methods of assessing taxable
property or income in order to avoid or reduce tax
liability. It is not punishable by law.
- Example: RA 9480
TAX EVASION (Tax Dodging):
- It is the use by the taxpayer of illegal or fraudulent
means to defeat or lessen the payment of a tax.
- This is punishable by law.
FACTORS THAT CONSTITUTE TAX EVASION (ELEMENTS
OF TAX EVASION):
1. The end to be achieved, i.e., the payment of less than
that known by the taxpayer to be legally due, or the
non-payment of tax when it is shown that a tax is
due;
2. An accompanying state of mind which is described
as being "evil," in "bad faith," "willfull," or "deliberate
and not accidental"; and
3. A course of action or failure of action which is
unlawful. (CIR vs. Estate of Benigno Toda, GR no.
147188, September 14, 2004)
CIR vs. ESTATE OF BENIGNO TODA
GR no. 147188, September 14, 2004
FACTS:
CIC authorized Benigno P. Toda, Jr., President and owner of
99.991% of its issued and outstanding capital stock, to sell a 16-
storey commercial building known as Cibeles Building and the two
parcels of land on which the building stands for an amount of not
less than P90 million. Six months later, Toda purportedly sold the
property for P100 million to Rafael A. Altonaga, who, in turn, sold
the same property on the same day to Royal Match Inc. (RMI) for
P200 million. These two transactions were evidenced by Deeds of
Absolute Sale notarized on the same day by the same notary
public. For the sale of the property to RMI, Altonaga paid capital
gains tax in the amount of P10 million.
When CIC filed for corporate annual income tax return for the year
1989, it declared its gain from the sale of real property in the
amount of P75,728.021. After crediting withholding taxes of
P254,497.00, it paid P26,341,2078 for its net taxable income of
P75,987,725. On 12 July 1990, Toda sold his entire shares of
stocks in CIC to Le Hun T. Choa for P12.5 million, as evidenced by
a Deed of Sale of Shares of Stocks.Three and a half years later,
Toda died.

TAXATION LAW 1 39
 TAXATION LAW 1
Morillo Notes
ISSUE:
W/N the Tax Planning Scheme adopted by CIC constitutes as tax
evasion
RULING:
YES, Tax evasion is a scheme not sanctioned by law and when it is
availed of, it subjects the taxpayer to further or additional civil or
criminal liabilities. Tax evasion connotes the integration of three
factors:
(1) the end to be achieved, i.e., the payment of less than that
known by the taxpayer to be legally due, or the non-
payment of tax when it is shown that a tax is due;
(2) an accompanying state of mind which is described as
being “evil,” in “bad faith,” “willfull,” or “deliberate and
not accidental”; and
(3) a course of action or failure of action which is unlawful.
All these factors are present in the instant case. It was proven that
the real buyer of the properties was RMI, and not the intermediary
Altonaga. The scheme resorted to by CIC in making it appear that
there were two sales of the subject properties, i.e., from CIC to
Altonaga, and then from Altonaga to RMI, thereby reducing the tax
from 35% to 5%, cannot be considered a legitimate tax planning
because it is tainted with fraud.
II. CONSTRUCTION OF STATUTORY EXEMPTIONS
GENERAL RULE: - In the construction of Tax Laws, tax
exemptions are not in favor and are constructed strictissimi
juris against the taxpayer. (Republic Flour Mills vs. CIR, 31
SCRA 148)
EXCEPTIONS:
1. When the law itself expressly provides for a liberal
construction which, in case of doubt, it shall be
resolved in favor of the exemption;
2. When the exemption is in favor if the government
itself or its agencies, or religious, charitable, and
educational institutions because the general rule is
that they are exempt from tax;
3. When the exemption is granted under special
circumstances to special classes of persons;
4. If there is an express mention or if the taxpayer falls
within the purview of the exemption by clear
legislative intent, the rile on strict construction does
not apply. (CIR vs. Arnoldus Carpentry Shop, GR no.
71122, (1988))
CASES: DOCTRINE:
Rodriguez vs. CIR Exemption from taxation is not favored and is
28 SCRA 119 never presumed. An exempting provision in a
legislative enactment should be construed in
strictissimi juris against the taxpayer and
liberally in favor of the taxing authority.
RA 333 which grants exemption on bonds
issued for purposes of inducement to private
land owners within the new capital site of the
Philippines to part away with their properties
in favor of the Government other than for
cash cannot be taken to mean that said
property owners need not pay income tax on
their income derived from the sale of such
properties.
40 TAXATION LAW 1
Wonder Tax exemption must be clearly expressed
Mechanical and cannot be established by implication.
Engineering vs. Exemption from a common burden cannot be
CTA permitted to exist upon vague implication.
64 SCRA 555
Wonder Mechanical was granted tax
exemption in the manufacture and sale “of
machines” for making cigarette papers, pails
and lead washer BUT certainly NOT for the
manufacture and sale of articles produced by
those machines.
Luzon In order that the importations in question may
Stevedoring Corp be declared exempt from the compensating
vs. CTA tax, it is indispensable that the requirements
163 SRA 647 of the amendatory law be complied with,
namely: (1) the engines and spare parts must
be used by the importer himself as a
passenger and/or cargo, vessel; and (2) the
said passenger and/or cargo vessel must be
used in coastwise or oceangoing navigation.
As pointed out by the Court of Tax Appeals,
the amendatory provisions of Republic Act
No. 3176 limit tax exemption from the
compensating tax to imported items to be
used by the importer himself as operator of
passenger and/or cargo vessel. A tugboat is
a diesel or steam power vessel designed
primarily for moving large ships to and from
piers for towing barges and lighters in
harbors, rivers and canals.
No evidence was adduced by Luzon
Stevedoring that tugboats are passenger
and/or cargo vessels used in the shipping
industry as an independent business. On the
contrary, Luzon Stevedoring's own evidence
supports the view that it is engaged as a
stevedore, that is, the work of unloading and
loading of a vessel in port; and towing of
barges containing cargoes is a part of
petitioner's undertaking as a stevedore. In
fact, even its trade name is indicative that its
sole and principal business is stevedoring
and lighterage, taxed under Section 191 of
the National Internal Revenue Code as a
contractor, and not an entity which
transports passengers or freight for hire
which is taxed under Section 192 of the
same Code as a common carrier by water
Floro Cement vs. Claims for an exemption must be able to
Gorospe point out some provision of law creating the
200 SCRA 480 right, and cannot be allowed to exist upon a
mere vague implication or inference.
Resins, Inc. vs. Urea formaldehyde' is clearly a finished
Auditor Gen. product, which is patently distinct and
25 SCRA 754 different from 'urea' and 'formaldehyde', as
separate articles used in the manufacture of
the synthetic resins known as 'urea
formaldehyde'.
It is well settled that the enrolled bill — which
uses the term 'urea formaldehyde' instead of
'urea and formaldehyde' — is conclusive
upon the courts as regards the tenor of the
measure passed by Congress and approved
by the President ... If there has been any
mistake in the printing of the bill before it was
certified by the officers of Congress and
approved by the Executive — on which we
 TAXATION LAW 1
Morillo Notes
cannot speculate, without jeopardizing the
principle of separation of powers and
undermining one of the cornerstones of our
democratic system — the remedy is by
amendment or curative legislation, not by
judicial decree."
whatever may be said of the statutory
language found in Republic Act 2609, it
would be going too far to assert that there
was such a clear and manifest intention of
legislative will as to compel such a refund.
Chapter 4:
SOURCES AND CONSTRUCTION OF TAX LAWS
SOURCES OF TAX LAWS:
A. EXISTING STATUTES
1. National Laws:
a. National Internal Revenue Code of 1997
b. Tariff and Customs Code
2. Local Law:
a. Book II, 1991 Local Government Code
B. REVENUE REGULATIONS:
- These are issuances signed by the Secretary of
Finance, upon recommendation of the Commissioner
of Internal Revenue, that specify, prescribe or define
rules and regulations for the effective enforcement of
the provisions of the National Internal Revenue Code
(NIRC) and related statutes.
Authority to Promulgate:
- The Secretary of Finance, upon recommendation of
the Commissioner, shall promulgate all needful rules
and regulations for the effective enforcement of the
provisions of this Code. (Sec. 244, NIRC)
Specific Provisions to be contained in the Rules and
Regulations:
(a) The time and manner in which Revenue Regional
Directors shall canvass their respective Revenue
Regions for the purpose of discovering persons and
property liable to national internal revenue taxes, and
the manner in which their lists and records of taxable
persons and taxable objects shall be made and kept;
(b) The forms of labels, brands or marks to be required
on goods subject to an excise tax, and the manner in
which the labelling, branding or marking shall be
effected;
(c) The conditions under which and the manner in which
goods intended for export, which if not exported
would be subject to an excise tax, shall be labelled,
branded or marked;
(d) The conditions to be observed by revenue officers
respecting the institutions and conduct of legal
actions and proceedings;
(e) The conditions under which goods intended for
storage in bonded warehouses shall be conveyed
thither, their manner of storage and the method of
keeping the entries and records in connection
therewith, also the books to be kept by Revenue
Inspectors and the reports to be made by them in
connection with their supervision of such houses;
(f) The conditions under which denatured alcohol may
be removed and dealt in, the character and quantity
of the denaturing material to be used, the manner in
which the process of denaturing shall be effected, so
as to render the alcohol suitably denatured and unfit
for oral intake, the bonds to be given, the books and
records to be kept, the entries to be made therein,
the reports to be made to the Commissioner, and the
signs to be displayed in the business or by the
person for whom such denaturing is done or by
whom, such alcohol is dealt in;
(g) The manner in which revenue shall be collected and
paid, the instrument, document or object to which
revenue stamps shall be affixed, the mode of
cancellation of the same, the manner in which the
proper books, records, invoices and other papers
shall be kept and entries therein made by the person
subject to the tax, as well as the manner in which
licenses and stamps shall be gathered up and
returned after serving their purposes;
(h) The conditions to be observed by revenue officers
respecting the enforcement of Title III imposing a tax
on estate of a decedent, and other transfers mortis
causa, as well as on gifts and such other rules and
regulations which the Commissioner may consider
suitable for the enforcement of the said Title III;
(i) The manner in which tax returns, information and
reports shall be prepared and reported and the tax
collected and paid, as well as the conditions under
which evidence of payment shall be furnished the
taxpayer, and the preparation and publication of tax
statistics;
(j) The manner in which internal revenue taxes, such as
income tax, including withholding tax, estate and
donor's taxes, value-added tax, other percentage
taxes, excise taxes and documentary stamp taxes
shall be paid through the collection officers of the
Bureau of Internal Revenue or through duly
authorized agent banks which are hereby deputized
to receive payments of such taxes and the returns,
papers and statements that may be filed by the
taxpayers in connection with the payment of the tax:
Provided, however, That notwithstanding the other
provisions of this Code prescribing the place of filing
of returns and payment of taxes, the Commissioner
may, by rules and regulations, require that the tax
returns, papers and statements that may be filed by
the taxpayers in connection with the payment of the
tax. Provided, however, That notwithstanding the
other provisions of this Code prescribing the place of
filing of returns and payment of taxes, the
Commissioner may, by rules and regulations require
that the tax returns, papers and statements and taxes
of large taxpayers be filed and paid, respectively,
through collection officers or through duly authorized
agent banks: Provided, further, That the
Commissioner can exercise this power within six (6)
years from the approval of Republic Act No. 7646 or
the completion of its comprehensive computerization
program, whichever comes earlier: Provided, finally,
That separate venues for the Luzon, Visayas and
Mindanao areas may be designated for the filing of
tax returns and payment of taxes by said large
taxpayers. (Sec. 245, NIRC)
TAXATION LAW 1 41
 TAXATION LAW 1
Morillo Notes
What is the force and effect of the Revenue Regulations:
- Laws are repealed only by subsequent ones, and
their violation or non-observance shall not be
excused by disuse, or custom or practice to the
contrary.
- When the courts declared a law to be inconsistent
with the Constitution, the former shall be void and the
latter shall govern.
- Administrative or executive acts, orders and
regulations shall be valid only when they are not
contrary to the laws or the Constitution. (Art. 7, NCC)
ASTURIAS SUGAR CENTRAL vs. CIR
GR no. L-19337, September 30, 1969
FACTS:
Asturias Sugar Central is engaged in the production and milling of
centrifugal sugar for export. The sugar so produced were placed in
containers known as jute bags. Asturias made 2 importations of
jute bags [1] 44,800 jute bags declared under entry 48, entered free
of customs duties and special import tax upon the condition that
the bags should be exported within 1year from the date of
importation, and [2] 75,200 jute bags declared under entry 243
under the same conditions. Out of the total number of imported jute
bags, only 33,647 bags were exported within the 1 year period.
Asturias, through its agent, Theo Davies and Company, requested
the Commissioner of Customs for a 1week extension of the period
for exportation.
Asturias claimed that typhoons and severe floods, picketing at the
railroad which hampered its operations, and delay in the arrival of
the vessel aboard which petitioner was to ship its sugar, all
contributed to its failure to ship the sugar. The request for
extension was denied by the Commissioner, and due to its failure
to show proof of the exportation of the balance within the 1year
period, the Collector of Customs required Asturias to pay the
customs duties and special import tax due thereon, which amount
it paid under protest. Asturias demanded a refund of the amount on
the ground that its failure to export was due to a fortuitous event. It
claimed that the period should have been extended and therefore
the duties should not have been imposed upon it. Collector of
customs denied the refund, Commissioner of customs and then
CTA affirmed.
ISSUE:
W/N Commissioner of Custom has the discretion to extend the 1-
Year period?
RULING:
NO, Under the Philippine Tariff Act of 1909, the then applicable
law, the Commissioner of Customs has no discretion to extend the
period of 1year provided for in sec23 of the Act. Sec23 was
amended by Customs Administrative Order 389 and later on by
Customs Administrative Order 66, which provided that the said
period was non-extendible. These cured the silence of sec23 as to
whether the period may be extended.
The Doctrine of Judicial Respect for Administrative Construction is
applicable only where the court of last resort has not previously
interpreted the statute. The formal or informal interpretation or
practical consideration of an ambiguous or uncertain statute or law
by the executive department or other agency charged with its
administration or enforcement is entitled to consideration and the
highest respect from the courts, and must be accorded appropriate
weight in determining the meaning of the law. The correctness of
an interpretation given a statute by the agency charged with
administering its provision is indicated where it appears that
Congress, with full knowledge of the agency’s interpretation, has
made significant additions to the statute without amending it to
depart from the agency’s view.
42 TAXATION LAW 1
In this case, considering that the Bureau of Customs is the office
charged with implementing and enforcing the provisions of our
Tariff and custom code, the construction placed by it thereon
should be given controlling weight.
C. REVENUE MEMORANDUM CIRCULARS OR ORDERS:
- BIR MEMORANDUM ORDERS (RMOs) are issuances
that provide directives or instructions; prescribe
guidelines; and outline processes, operations,
activities, workflows, methods and procedures
necessary in the implementation of stated policies,
goals, objectives, plans and programs of the Bureau
in all areas of operations, except auditing.
- BIR MEMORANDUM CIRCULARS (RMCs) are
issuances that publish pertinent and applicable
portions, as well as amplifications, of laws, rules,
regulations and precedents issued by the BIR and
other agencies/offices.
D. BIR RULINGS:
- The less general interpretations of tax laws at the
administrative level are called “Rulings” which are
issued by tax officials in the performance of their
assessment functions. They are usually rendered by
the Commissioner of Internal Revenue on request of
taxpayers to clarify certain provisions of a tax law.
(BIR Revenue Administrative Orders No. 2-2001)
- These rulings may be revoked by the Secretary of
Finance if the latter finds them not in accordance with
the law.
- Commissioner of Internal Revenue cannot delegate
to any of his subordinate officials the power to issue
rulings of first impressions (which are new or
important questions), or to reverse, revoke or modify
any existing ruling of the BIR. (BIR Revenue
Administrative Orders No. 2-2001)
Power of the CIR to Interpret Tax Laws:
- The power to interpret the provisions of this Code
and other tax laws shall be under the exclusive and
original jurisdiction of the Commissioner, subject to
review by the Secretary of Finance.
- The power to decide disputed assessments, refunds
of internal revenue taxes, fees or other charges,
penalties imposed in relation thereto, or other matters
arising under this Code or other laws or portions
thereof administered by the Bureau of Internal
Revenue is vested in the Commissioner, subject to
the exclusive appellate jurisdiction of the Court of Tax
Appeals. (Sec. 4, NIRC)
Non-Retroactivity of Rulings:
- Any revocation, modification or reversal of any of the
rules and regulations promulgated in accordance
with the preceding Sections or any of the rulings or
circulars promulgated by the Commissioner shall not
be given retroactive application if the revocation,
modification or reversal will be prejudicial to the
taxpayers, except in the following cases:
(a) Where the taxpayer deliberately misstates or
omits material facts from his return or any
document required of him by the Bureau of
Internal Revenue;
(b) Where the facts subsequently gathered by
the Bureau of Internal Revenue are
 TAXATION LAW 1
Morillo Notes
materially different from the facts on which
the ruling is based; or
(c) Where the taxpayer acted in bad faith. (Sec.
246, NIRC)
CIR vs. BURROUGHS, LTD.
GR no. 66653, June 19, 1986
FACTS:
Burroughs Limited is a foreign corporation authorized to engage in
trade or business in the Philippines through a branch office located
at De la Rosa corner Esteban Streets, Legaspi Village, Makati,
Metro Manila. Claiming that the 15% profit remittance tax should
have been computed on the basis of the amount actually remitted
(P6,499,999.30) and not on the amount before profit remittance tax
(P7,647,058.00), private respondent filed on December 24, 1980, a
written claim for the refund or tax credit of the amount of
P172,058.90 representing alleged overpaid branch profit remittance
tax.
ISSUES:
W/N Memorandum Circular No. 8-82 should be given a retroactive
effect?
RULING:
NO, What is applicable in the case at bar is still the Revenue Ruling
of January 21, 1980 because private respondent Burroughs Limited
paid the branch profit remittance tax in question on March 14,
1979. Memorandum Circular No. 8-82 dated March 17, 1982
cannot be given retroactive effect in the light of Section 327 of the
National Internal Revenue Code which provides ”Non-retroactivity
of rulings. Any revocation, modification, or reversal of any of the
rules and regulations promulgated in accordance with the
preceding section or any of the rulings or circulars promulgated by
the Commissioner shag not be given retroactive application if the
revocation, modification, or reversal will be prejudicial to the
taxpayer except in the following cases (a) where the taxpayer
deliberately misstates or omits material facts from his return or in
any document required of him by the Bureau of Internal Revenue;
(b) where the facts subsequently gathered by the Bureau of Internal
Revenue are materially different from the facts on which the ruling
is based, or (c) where the taxpayer acted in bad faith.” (ABS-CBN
Broadcasting Corp. v. CTA, 108 SCRA 151-152)
The prejudice that would result to private respondent Burroughs
Limited by a retroactive application of Memorandum Circular No. 8-
82 is beyond question for it would be deprived of the substantial
amount of P172,058.90. And, insofar as the enumerated exceptions
are concerned, admittedly, Burroughs Limited does not fall under
any of them.
Exceptions to the Non-Retroactivity of Rulings:
1. Where the taxpayer deliberately misstates or omits
material facts from his return or any document
required of him by the Bureau of Internal Revenue;
2. Where the facts subsequently gathered by the
Bureau of Internal Revenue are materially different
from the facts on which the ruling is based; or
3. Where the taxpayer acted in bad faith.
PBCOM vs. CIR
302 SCRA 241
Art. 8 of the Civil Code recognizes judicial decisions, applying or
interpreting statutes as part of the legal system of the country. But
administrative decisions do not enjoy that level of recognition. A
memorandum-circular of a bureau head could not operate to vest a
taxpayer with shield against judicial action. For there are no vested
rights to speak of respecting a wrong construction of the law by the
administrative officials and such wrong interpretation could not
place the Government in estoppel to correct or overrule the same.
Moreover, the non-retroactivity of rulings by the Commissioner of
Internal Revenue is not applicable in this case because the nullity of
RMC No. 7-85 was declared by respondent courts and not by the
Commissioner of Internal Revenue. Lastly, it must be noted that, as
repeatedly held by this Court, a claim for refund is in the nature of a
claim for exemption and should be construed in strictissimi juris
against the taxpayer.
E. OPINIONS OF THE SECRETARY OF JUSTICE:
- The Secretary of justice is the chief legal officer of the
government. His opinions takes on the character of
substantive rules are generally binding and effective if
not otherwise contrary to the law or Constitution.
- His opinion are sought when there is conflict between
the interpretation given by the BIR and Dept. of
Finance, and such, carry weight.
F. LEGISLATIVE MATERIALS:
- Refers to the Minutes of Deliberation of either
Houses; Senate or House of Representatives.
G. COURT DECISION:
- Judicial decisions applying or interpreting the laws or
the Constitution shall form a part of the legal system
of the Philippines.(Art. 8, NCC)
- The Supreme Court is the tribunal of last resort. Its
decisions applying or interpreting existing tax laws
are binding on all subordinate courts and have the
force and effect of law.
CONSTRUCTION OF TAX LAWS:
GENERAL RULES OF CONSTRUCTION OF TAX LAWS:
- Tax laws are construed strictly against the
government and liberally in favor of the taxpayer.
(Manila Railroad Co. vs. Collector of Customs, GR
no. L-30264, (1929))
- If the question presented in the interpretation of a
tariff law is one of doubt, the doubt would be
resolved in favor of the importer, as duties are never
imposed upon citizens upon vague and doubtful
interpretation. (Stevedoring vs. Trinidad, 43 Phil. 803)
- Tax statues offering rewards are liberally construed in
favor of informers. (Penid vs. Virata, GR no. L-44004
(1983))
Exceptions:
1. The rule of strict construction as against the
government is not applicable where the language of
the statute is plain and there is no doubt as to the
legislative intent [see 51 Am. Jur. 368]. E.g. Word
“individual” was changed by the law to “person”. This
clearly indicates that the tax applies to both natural
and juridical persons, unless otherwise expressly
provided.
2. The rule does not apply where the taxpayer claims
exemption from the tax.
Tax statutes are to receive a reasonable construction or
interpretation with a view to carrying out their purpose and
intent. They should not be construed as to permit the taxpayer
easily to evade the payment of tax. [Carbon Steel Co. v.
Lewellyn, 251 U.S. 201]. Thus, the good faith of the taxpayer
is not a sufficient justification for exemption from the payment
TAXATION LAW 1 43
 TAXATION LAW 1
Morillo Notes

of surcharges imposed by the law for failing to pay tax within

the period required by law.

MANDATORY AND DIRECTORY PROVISIONS:

MANDATORY DIRECTORY

Those provisions intended Those provisions designed

for security of the citizens or
which are designed to insure
equality of taxation or
certainty as to the nature
and amount of each
person’s tax.
merely for the information or
direction of officers to
secure methodical and
systematic modes of
proceedings.

NOTE: The distinction of mandatory and directory provisions

is important because the omission to follow mandatory
provisions renders the act or proceedings to which it relates to
be invalid. On the other had, omission to follow directory
provisions does not involve such consequences.

SERAFICO vs. TREASURER OF ORMOC CITY

GR no. L-24813, April 28, 1969

FACTS:
Plaintiff, Dr. Hermenegildo Serafica, seeks a declaration of nullity of
Ordinance No.13 of Ormoc City, imposing a tax of P5 for every
1,000 board feet of lumber sold at Ormoc City by any person,
partnership, firm, association, corporation, or entities. Pursuant to
such ordinance, the City Treasurer levied on and collected from
Serafica, as owner of the Serafica Sawmill, the aggregate sum of
P1,837.84, as tax on 367, 568 board feet of lumber sold in said
City. After appropriate proceedings, the lower court rendered
judgment upholding the validity of said ordinance and denying the
relief prayed for by Dr. Serafica. Hence, this appeal by the latter.

ISSUE:
W/N Ordinance no. 13 is valid.

RULING:
YES, Plaintiff assails this ordinance as null and void, among other
grounds, that the public was not heard and given a chance to air its
views thereon. This objection is based upon Provincial Circular 24
of the Department of Finance, suggesting that, "in the enactment of
tax ordinances under the Local Autonomy Act, where practicable,
public hearings be held wherein the views of the public may be
heard." This is, however, a mere suggestion, compliance with which
is not obligatory, so that failure to act in accordance therewith can
not and does not affect the validity of the tax ordinance.

Indeed, since local governments are subject, not to the control, but
merely to the general supervision of the President, it is, to say the
least, doubtful that the latter could have made compliance with said
circular obligatory.

PENAL PROVISIONS OF TAX LAWS:

- Penal provisions of tax laws must be strictly
construed. It is not legitimate to stretch the language
of arule, however beneficent its intention, beyond the
fair and ordinary meaning of its language.
- A penal statute should be construed strictly against
the State and in favor of the accused. The reason for
this principle is the tenderness of the law for the
rights of individuals and the object is to establish a
certain rule by conformity to which mankind would be
safe, and the discretion of the court limited. (People
vs. Purisima, GR no. L-42050-66 (1978)).

44 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
exemptions, if any, are reported in one income tax
return, and one set of tax rates are applied on the
PART TWO: tax base.
INCOME TAXATION - A global tax system is one where the tax treatment
views indifferently the tax base and generally treats
in common all categories of taxable income of the
taxpayer. [Tan v. Del Rosario, Jr., G.R. No. 109289
Chapter 1: (1994)]
GENERAL PRINCIPLES
b. Schedular System of Taxation:
- Under a schedular tax system, different types of
income are subject to different sets of graduated
FEATURES OF PHILIPPINE INCOME TAXATION or flat income tax rates. The applicable tax rate(s)
will depend on the classification of the taxable
income and the basis could be gross income or
TAX SITUS: net income. Separate income tax returns (or other
- Literally means the “place of taxation”, or the country types of return applicable) are filed by the recipient
that has jurisdiction to levy a particular tax on of income for the particular types of income
persons, property, rights or business. received. [MAMALATEO]
- The basis of tax situs is the symbiotic relationship - - A schedular approach in taxation is one where the
the state or unit that gives protection has the right to income tax treatment varies and is made to
demand support. depend on the kind or category of taxable income
of the taxpayer. [Tan v. Del Rosario, Jr., supra]
SITUS OF PERSONS IN INCOME TAXATION:
a. Nationality Theory - a citizen of the Philippines is
subject to Philippines income tax on his worldwide income, GLOBAL SYSTEM SCHEDULAR SYSTEM
if he resides in the Philippines; or only on his income from
sources within the Philippines if he qualifies as a non- A personal tax based on the A tax on income-producing
resident – hence, his income from sources outside the income of the taxpayer activities
Philippines shall be exempt from Philippine Income Tax.
b. Resilience/Domiciliary Theory - legal residence; an Emphasizes the burden Emphasizes revenue and
alien is subject to Philippine income tax because of his allocation aspects administrative aspects
residence in the Philippines
c. Source - place where the income is derived (based Most equitable system yet Because of its multiple rates,
on activity). An alien is subject to Philippine Income developed for distributing tax the tax burden of a person does
burden. not correspond to his income
Tax because he derives income from sources within
but rather falls fortuitously on
the Phils. Thus, a non-resident alien is liable to pay The burden of an individual is the type of his income.
Philippine income tax on his income from sources closely related to his resources
within the Philippines, such as divided, interest, rent, and his ability to pay. It is fixed and final.
or royalty, despite the fact that he has not set foot in
the Phils. It serves as a means for This function is alien to
redistributing income and schedular system where in
PROGRESSIVE vs. REGRESSIVE SYSTEM OF TAXATION: wealth. times of plenty or in times of
need, people pay the same
PROGRESSIVE OR REGRESSIVE SYSTEM OF Big income earners are subject fixed tax on their income.
GRADUATED SYSTEM TAXATION to higher taxes than small
income earners.
Tax rate of which increases Tax rate of which decreases
as the tax base increases. as the tax base increases Administration is not quite as The administration is simple,
easy as schedular because one being confined to each
(ex. Income tax, estate tax
has to consider all income from transaction or activity.
and donor’s tax) whatever source.
- There is no regressive tax system in the Philippines. - In the Philippines, our Individual Tax System is
- Philippine income tax is progressive, since the tax Schedular while the Corporate Tax System is Global.
base increases as the tax rate increases. Itis founded
on the ability to pay principle and is consistent with SEMI-SCHEDULAR OR SEMI-GLOBAL TAX SYSTEM:
the Constitutional provision that “Congress shall - The Philippines follows the semi-schedular or semi-
evolve a progressive system of taxation.” (Sec. 28(1), global system of income taxation, although certain
Art. VI, 1987 Constitution) passive investment incomes and capital gains from
sale of capital assets (namely: (a) shares of stock of
GLOBAL vs. SCHEDULAR SYSTEM OF TAXATION: domestic corporations, and (b) real property) are
a. Global System of Taxation: subject to final taxes at preferential tax rates
- Under a global tax system, it does not matter [MAMALATEO].
whether the income received by the taxpayer is
classified as compensation income, business or
professional income, passive investment income, GENERAL PRINCIPLES OF INCOME TAXATION
capital gain, or other income. All items of gross
income, deductions, and personal and additional

TAXATION LAW 1 45
 TAXATION LAW 1
Morillo Notes
GENERAL PRINCIPLES OF INCOME TAXATION IN THE
PHILIPPINES:
(A) A citizen of the Philippines residing therein is taxable
on all income derived from sources within and
without the Philippines;
(B) A nonresident citizen is taxable only on income
derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working
and deriving income from abroad as an overseas
contract worker is taxable only on income derived
from sources within the Philippines: Provided, That a
seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad
as a member of the complement of a vessel engaged
exclusively in international trade shall be treated as
an overseas contract worker;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from
sources within the Philippines;
(E) A domestic corporation is taxable on all income
derived from sources within and without the
Philippines; and
(F) A foreign corporation, whether engaged or not in
trade or business in the Philippines, is taxable only on
income derived from sources within the Philippines.
(Sec. 23, NIRC)
SCOPE OF INCOME TAXATION
NATIONAL INTERNAL REVENUE CODE
SEC. 22. Definitions. - When used in this Title:
(A) The term 'person’ means an individual, a trust, estate
or corporation.
(B) The term 'corporation' shall include partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion),
association, or insurance companies, but does not
include general professional partnerships and a joint
venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium
agreement under a service contract with the
Government. 'General professional partnerships’ are
partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the
income of which is derived from engaging in any trade
or business.
(C) The term 'domestic, when applied to a corporation,
means created or organized in the Philippines or under
its laws.
(D) The term 'foreign’, when applied to a corporation,
means a corporation which is not domestic
(E) The term 'nonresident citizen' means;
(a) 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.
(b) 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.
(c) A citizen of the Philippines who works and
46 TAXATION LAW 1
derives income from abroad and whose
employment thereat requires him to be
physically present abroad most of the time
during the taxable year.
(d) A citizen who has been previously considered
as nonresident 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 nonresident 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.
(e) 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.
(F) The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a
citizen thereof.
(G) The term 'nonresident alien' means an individual
whose residence is not within the Philippines and who
is not a citizen thereof.
(H) The term 'resident foreign corporation' applies to a
foreign corporation engaged in trade or business within
the Philippines.
(I) The term 'nonresident foreign corporation' applies to
a foreign corporation not engaged in trade or business
within the Philippines.
(J) The term 'fiduciary' means a guardian, trustee,
executor, administrator, receiver, conservator or any
person acting in any fiduciary capacity for any person.
(K) The term 'withholding agent' means any person
required to deduct and withhold any tax under the
provisions of Section 57.
(L) The term 'shares of stock' shall include shares of
stock of a corporation, warrants and/or options to
purchase shares of stock, as well as units of
participation in a partnership (except general
professional partnerships), joint stock companies, joint
accounts, joint ventures taxable as corporations,
associations and recreation or amusement clubs (such
as golf, polo or similar clubs), and mutual fund
certificates.
(M) The term 'shareholder' shall include holders of a
share/s of stock, warrant/s and/or option/s to purchase
shares of stock of a corporation, as well as a holder of
a unit of participation in a partnership (except general
professional partnerships) in a joint stock company, a
joint account, a taxable joint venture, a member of an
association, recreation or amusement club (such as
golf, polo or similar clubs) and a holder of a mutual fund
certificate, a member in an association, joint-stock
company, or insurance company.
(N) The term 'taxpayer’ means any person subject to tax
imposed by this Title.
(O) The terms 'including’ and 'includes', when used in a
definition contained in this Title, shall not be deemed to
exclude other things otherwise within the meaning of
the term defined.
(P) The term 'taxable year' means the calendar year, or
the fiscal year ending during such calendar year, upon
the basis of which the net income is computed under
this Title. 'Taxable year' includes, in the case of a
 TAXATION LAW 1
Morillo Notes
return made for a fractional part of a year under the
provisions of this Title or under rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the commissioner, the period for
which such return is made.
(Q) The term 'fiscal year' means an accounting period of
twelve (12) months ending on the last day of any month
other than December.
(R) The terms 'paid or incurred' and 'paid or accrued'
shall be construed according to the method of
accounting upon the basis of which the net income is
computed under this Title.
(S) The term 'trade or business' includes the performance
of the functions of a public office.
(T) The term 'securities' means shares of stock in a
corporation and rights to subscribe for or to receive
such shares. The term includes bonds, debentures,
notes or certificates, or other evidence or indebtedness,
issued by any corporation, including those issued by a
government or political subdivision thereof, with interest
coupons or in registered form.
(U) The term 'dealer in securities' means a merchant of
stocks or securities, whether an individual, partnership
or corporation, with an established place of business,
regularly engaged in the purchase of securities and the
resale thereof to customers; that is, one who, as a
merchant, buys securities and re-sells them to
customers with a view to the gains and profits that may
be derived therefrom.
(V) The term 'bank' means every banking institution, as
defined in Section 2 of Republic Act No. 337, as [7]
amended, otherwise known as the “General banking
Act.” A bank may either be a commercial bank, a thrift
bank, a development bank, a rural bank or specialized
government bank.
(W) The term 'non-bank financial intermediary' means a
financial intermediary, as defined in Section 2(D)(C) of
Republic Act No. 337, as amended, otherwise known
[8]
as the “General Banking Act,” authorized by the
Bangko Sentral ng Pilipinas (BSP) to perform quasi-
banking activities.
(X) The term 'quasi-banking activities' means borrowing
funds from twenty (20) or more personal or corporate
lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any
kind other than deposits for the borrower's own
account, or through the issuance of certificates of
assignment or similar instruments, with recourse, or of
repurchase agreements for purposes of relending or
purchasing receivables and other similar obligations:
Provided, however, That commercial, industrial and
other non-financial companies, which borrow funds
through any of these means for the limited purpose of
financing their own needs or the needs of their agents
or dealers, shall not be considered as performing quasi-
banking functions.
(Y) The term 'deposit substitutes' shall mean an
alternative from of obtaining funds from the public (the
term 'public' means borrowing from twenty (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 Bangko Sentral ng Pilipinas (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 five
(5) days to cover deficiency in reserves against deposit
liabilities, including those between or among banks and
quasi-banks, shall not be considered as deposit
substitute debt instruments.
(Z) The term 'ordinary income' includes any gain from the
sale or exchange of property which is not a capital
asset or property described in Section 39(A)(1). Any
gain from the sale or exchange of property which is
treated or considered, under other provisions of this
Title, as 'ordinary income' shall be treated as gain
from the sale or exchange of property which is not a
capital asset as defined in Section 39(A)(1). The term
'ordinary loss' includes any loss from the sale or
exchange of property which is not a capital asset. Any
loss from the sale or exchange of property which is
treated or considered, under other provisions of this
Title, as 'ordinary loss' shall be treated as loss from the
sale or exchange of property which is not a capital
asset.
(AA) The term 'rank and file employees' shall mean all
employees who are holding neither managerial nor
supervisory position as defined under existing
provisions of the Labor Code of the Philippines, as
amended.
(BB) The term 'mutual fund company' shall mean an open-
end and close-end investment company as defined
under the Investment Company Act.
(CC) The term 'trade, business or profession' shall not
include performance of services by the taxpayer as an
employee.
(DD) The term 'regional or area headquarters' shall mean a
branch established in the Philippines by multinational
companies and which headquarters do not earn or
derive income from the Philippines and which act as
supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
(EE) The term 'regional operating headquarters' shall
mean a branch established in the Philippines by
multinational companies which are engaged in any of
the following services: general administration and
planning; business planning and coordination; sourcing
and procurement of raw materials and components;
corporate finance advisory services; marketing control
and sales promotion; training and personnel
management; logistic services; research and
development services and product development;
technical support and maintenance; data processing
and communications; and business development.
(FF) The term 'long-term deposit or investment
certificate' shall refer to certificate of time deposit or
investment in the form of savings, common or individual
trust funds, deposit substitutes, investment
management accounts and other investments with a
maturity period of not less than five (5) years, the form
of which shall be prescribed by the Bangko Sentral ng
Pilipinas (BSP) and issued by banks only (not by non-
bank financial intermediaries and finance companies) to
individuals in denominations of Ten thousand pesos
(P10,000) and other denominations as may be
TAXATION LAW 1 47
 TAXATION LAW 1
Morillo Notes
prescribed by the BSP.
(GG) The term ‘statutory minimum wage’ shall refer to
the rate fixed by the Regional Tripartite Wage and
Productivity Board, as defined by the Bureau of Labor
and Employment Statistics (BLES) of the Department of
Labor and Employment (DOLE).
(HH) The term “minimum wage earner” shall refer to a
worker in the private sector paid the statutory minimum
wage or to an employee in the public sector with
compensation income of not more than the statutory
minimum wage in the non-agricultural sector where
he/she is assigned.
CIR vs. PROCTOR & GAMBLE
GR no. L-66838, December 2, 1991
FACTS:
For the taxable year 1974 ending on 30 June 1974, and the taxable
year 1975 ending 30 June 1975, P&G-Phils. declared dividends
payable to its parent company and sole stockholder, P&G-US,
amounting to P24m, from which dividends the amount of P8m
representing 35% withholding tax at source was deducted. P&G-
Phil. filed with CIR a claim for refund or tax credit, claiming, among
other things, that pursuant to Section 24 (b) (1) of the NIRC, the
applicable rate of withholding tax on the dividends remitted was
only 15% (and not 35%) of the dividends.
Having no responsive action on the part of the CIR, P&G-Phil., filed
a petition for review with CTA, which later rendered a decision
ordering CIR to refund or grant the tax credit. On appeal by the
CIR, the CTA Second Division reversed the decision of the CTA and
held that, among other; (1) there is nothing in Sec. 902 or other
provisions of the US Tax Code that allows a credit against the US
tax due from P&G-USA of taxes deemed to have been paid in the
Philippines equivalent to 20% which represents the difference
between the regular tax of 35% on corporations and the tax of 15%
on dividends; and (2) P&G-Phil. failed to meet certain conditions
necessary in order that "the dividends received by its non-resident
parent company in the US (P&G-USA) may be subject to the
preferential tax rate of 15% instead of 35%."
ISSUE:
W/N the withholding agent P&G-Phils is entitled to Tax Refund?
RULING:
YES, The submission of the CIR that P&G-Phil. is but a withholding
agent of the government and therefore cannot claim reimbursement
of the alleged over paid taxes, is completely meritorious.
The real party in interest being the mother corporation in the United
States, it follows that American entity is the real party in interest,
and should have been the claimant in this case.
Closely intertwined with the first assignment of error is the issue of
whether or not PMC- U.S.A. is a non-resident foreign corporation
under Section 24(b)(1) of the Tax Code (the subsidiary of an
American) a domestic corporation domiciled in the United States, is
entitled under the U.S. Tax Code to a United States Foreign Tax
Credit equivalent to at least the 20 percentage paid portion (of the
35% dividend tax) spared or waived as otherwise considered or
deemed paid by the government. The law pertinent to the issue is
Section 902 of the U.S. Internal Revenue Code, as amended by
Public Law 87-834, the law governing tax credits granted to U.S.
corporations on dividends received from foreign corporations,
which to the extent applicable reads:
SEC. 902 - CREDIT FOR CORPORATE STOCKHOLDERS
IN FOREIGN CORPORATION.
(a) Treatment of Taxes Paid by Foreign Corporation - For
purposes of this subject, a domestic corporation which
owns at least 10 percent of the voting stock of a foreign
48 TAXATION LAW 1
corporation from which it receives dividends in any
taxable year shall:
(1) to the extent such dividends are paid by such
foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (a)] of a year for
which such foreign corporation is not a less
developed country corporation, be deemed to
have paid the same proportion of any income,
war profits, or excess profits taxes paid or
deemed to be paid by such foreign corporation
to any foreign country or to any possession of
the United States on or with respect to such
accumulated profits, which the amount of such
dividends (determined without regard to
Section 78) bears to the amount of such
accumulated profits in excess of such income,
war profits, and excess profits taxes (other
than those deemed paid); and
(2) to the extent such dividends are paid by such
foreign corporation out of accumulated profits
[as defined in subsection (c) (1) (b)] of a year for
which such foreign corporation is a less-
developed country corporation, be deemed to
have paid the same proportion of any income,
war profits, or excess profits taxes paid or
deemed to be paid by such foreign
Revenue Regulation 1-2011
Issued on February 24, 2011 defines the tax treatment of
income earnings and money remittance of an Overseas
Contract Worker (OCW) or Overseas Filipino Worker (OFW).
An OCW or OFC’s income arising out of his overseas
employment is exempt from Income Tax. However, if an OCW
or OFW has income earnings from business activities or
properties within the Philippines, such income earnings are
subject to Philippine Income Tax.
Chapter 2:
CLASSIFICATION OF INCOME TAXPAYER
PRIMARY
CLASSIFICATION
SUB-CLASSFICATIONS
Resident Citizen
Citizens of the
Philippines
Non-Resident Citizen
Residents
Individual
Engaged in
Trade or
Business in
Aliens
the Phils.
Non-
Residents
Not engaged
in Trade or
Business in
the Phils.
 TAXATION LAW 1
Morillo Notes
Special
Minimum Wage Earners
Classes
Domestic Corporations
Corporations Resident Corporations
Foreign
Corporations
Non-Resident Corporations
Estates
none
and Trusts
General Partnership
Partnerships
General Professional Partnership
I. INDIVIDUALS:
CITIZENS:
a. Resident Citizens:
Section 1. The following are citizens of the Philippines:
1. Those who are citizens of the Philippines at the time of
the adoption of this Constitution;
2. Those whose fathers or mothers are citizens of the
Philippines;
3. Those born before January 17, 1973, of Filipino mothers,
who elect Philippine Citizenship upon reaching the age of
majority; and
4. Those who are naturalized in accordance with law. (Art.
IV, 1987 Constitution)
Section 2. Natural-born citizens are those who are citizens of the
Philippines from birth without having to perform any act to acquire
or perfect their Philippine citizenship. Those who elect Philippine
citizenship in accordance with paragraph (3), Section 1 hereof shall
be deemed natural-born citizens. (Art. IV, 1987 Constitution)
b. Non-Resident Citizens:
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
nonresident 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 nonresident
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. (Sec. 22(E), NIRC)
ALIEN:
Resident Alien:
- The term 'resident alien' means an individual whose
residence is within the Philippines and who is not a citizen
thereof. (Sec. 22(F), NIRC)
Sec. 5, Last Paragraph, Revenue Regulations No. 2:
“An alien actually present in the Philippines who is not a mere
transient or a sojourner is a resident of the Philippines for purposes
of income tax. Whether he is a transient or not is determined by his
intentions with regard to the length and nature of his stay. A mere
floating intention indefinite as to time, to return to another country is
not sufficient to constitute him a transient. If he lives in the
Philippines and has not definite intention as to his stay, he is a
resident. One who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished is a transient.
But if his purpose is of such nature that an extended stay may be
necessary for its accomplishment, and to that end the alien makes
his home temporarily in the Philippines, he becomes a resident,
though it may be his intention at all times to return to his domicile
abroad when the purpose for which he came has been
consummated or abandoned.”
Non-Resident Alien:
- The term 'nonresident alien' means an individual
whose residence is not within the Philippines and
who is not a citizen thereof. (Sec. 22(G), NIRC)
1. Engaged in Trade or Business:
- If the aggregate period of his stay in the Philippines is
more than 180 days during any calendar year. (Sec.
25(A)(1), NIRC)
2. Not engaged in Trade or Business:
- If the aggregate period of his stay in the Philippines
does not exceed 180 days.
GENERAL PROFESSIONAL PARTNERSHIP:
- General professional partnerships’ are
partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the
income of which is derived from engaging in any
trade or business. (Sec. 22(B), NIRC)
TAN vs. CIR
GR no. L-109289, October 3, 1994
There is, then and now, no distinction in income tax liability
between a person who practices his profession alone or individually
and one who does it through partnership (whether registered or not)
with others in the exercise of a common profession. Indeed,
outside of the gross compensation income tax and the final tax on
passive investment income, under the present income tax system
all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common
set of rules.
We can well appreciate the concern taken by petitioners if
perhaps we were to consider Republic Act No. 7496 as an entirely
independent, not merely as an amendatory, piece of legislation.
The view can easily become myopic, however, when the law is
understood, as it should be, as only forming part of, and subject to,
the whole income tax concept and precepts long obtaining under
the National Internal Revenue Code. To elaborate a little, the phrase
"income taxpayers" is an all embracing term used in the Tax Code,
and it practically covers all persons who derive taxable income. The
law, in levying the tax, adopts the most comprehensive tax situs of
TAXATION LAW 1 49
 TAXATION LAW 1
Morillo Notes
nationality and residence of the taxpayer (that renders citizens,
regardless of residence, and resident aliens subject to income tax
liability on their income from all sources) and of the generally
accepted and internationally recognized income taxable base (that
can subject non-resident aliens and foreign corporations to income
tax on their income from Philippine sources). In the process, the
Code classifies taxpayers into four main groups, namely: (1)
Individuals, (2) Corporations, (3) Estates under Judicial Settlement
and (4) Irrevocable Trusts (irrevocable both as to corpus and as to
income).
Partnerships are, under the Code, either "taxable partnerships"
or "exempt partnerships." Ordinarily, partnerships, no matter how
created or organized, are subject to income tax (and thus alluded
to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of,
and so legally contemplated as, corporations. Except for few
variances, such as in the application of the "constructive receipt
rule" in the derivation of income, the income tax approach is alike
to both juridical persons. Obviously, SNIT is not intended or
envisioned, as so correctly pointed out in the discussions in
Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are
independently subject to the payment of income tax.
"Exempt partnerships," upon the other hand, are not similarly
identified as corporations nor even considered as independent
taxable entities for income tax purposes. A general professional
partnership is such an example. 4 Here, the partners themselves,
not the partnership (although it is still obligated to file an income tax
return [mainly for administration and data]), are liable for the
payment of income tax in their individual, capacity computed their
respective and distributive shares of profits. In the determination of
the tax liability, a partner does so as an individual, and there is no
choice on the matter. In fine, under the Tax Code on income
taxation, the general professional partnership is deemed to be no
more than a mere mechanism or a flow-through entity in the
generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.
Section 6 of Revenue Regulation No. 2-93 did not alter, but
merely confirmed, the above standing rule as now so modified by
Republic Act No. 7496 on basically the extent of allowable
deductions applicable to all individual income taxpayers on their
non-compensation income. There is no evident intention of the law,
either before or after the amendatory legislation, to place in an
unequal footing or in significant variance the income tax treatment
of professionals who practice their respective professions
individually and of those who do it through a general professional
partnership.
II. ESTATES & TRUSTS:
ESTATE:
- Refers to all the property, rights and obligations of a
person which are not extinguished by his death and
those which have accrued thereto since the opening
of the succession. [DE LEON citing Arts. 776 and 781
NCC]
TRUSTS:
- An arrangement created by will or an agreement
under which legal title to property is passed to
another for conservation or investment with the
income therefrom and ultimately the corpus
(principal) to be distributed in accordance with the
directions of the creator as expressed in the
governing instrument. [DE LEON]
50 TAXATION LAW 1
CIR vs. VISAYAS ELECTRIC
GR no. L-22611, May 27, 1968
FACTS:
Visayas Electric Company (VEC) is the holder of a legislative
franchise, Act 3499 of the Philippine Legislature, to operate and
maintain an electric light, heat, and power system in the City of
Cebu, certain municipalities in the Province of Cebu, and other
surrounding places.
In a board of directors' meeting, VEC established a pension fund,
known as the "Employees' Reserve for Pensions." Said fund is for
the benefit of its "present and future" employees, in the event of
retirement, accident or disability. Every month thereafter an amount
has been set aside for this purpose. It is taken from the gross
operating receipts of the company. This reserve fund was later
invested by the company in stocks of San Miguel Brewery, Inc., for
which dividends have been regularly received. But these dividends
were not declared for tax purposes.
It was in a letter dated August 9, 1957 that the Auditor General
gave notice that as the company has retained full control of the
fund, therefore, the dividends are not tax exempt; but that such
dividends may be excluded from gross receipts for franchise tax
purposes, provided the same are declared for income tax
purposes.
ISSUE:
W/N the dividends are subject to tax?
RULING:
NO, What is envisioned in the statute granting exemption, so far as
is pertinent to this case, is the last underscored portion thereof
which speaks of its receipts, revenues and profits, "from which
taxes the grantee is hereby expressly exempted." The heavy accent
is on the word its. Plain import of this word, taken in context, is that
the receipts, revenues and profits, which could be tax-exempt
under the statute, must be the company's — not somebody else's.
No doubt this provision should not be broadened so as to include
situations which by fail intendment are excluded therefrom. To do
so is to take too loose a view of the statute.
The disputed income are not receipts, revenues or profits of the
company. They do not go to the general fund of the company. They
are dividends from the San Miguel Brewery, Inc. investment which
form part of and are added to the reserve pension fund which is
solely for the benefit of the employees, "to be distributed among
the employees.”
Not escaping notice is that by the resolution of respondent
company's board and the setting aside of monthly amounts from
its gross operating receipts for that fund, said company was merely
acting, with respect to such fund, as trustee for its employees. For,
indeed, the intention to establish a trust in favor of the employees is
clear. A valid express trust has thus been created. And, for tax
purposes, the employees' reserve fund is a separate taxable entity.
VEC then, while retaining legal title and custody over the property,
holds it in trust for the beneficiaries mentioned in the resolution
creating the trust, in the absence of any condition therein which
would, in effect, destroy the intention to create a trust.
Given the fact that the dividends are returns of the trust estate and
not of the grantor company, we must say that CIR misconceived
the import of the law when he assessed said dividends as part of
the income of the company. Similarly, the tax court should not have
considered them at all as the company's "receipts, revenues and
profits" which are exempt from income tax.
CIR vs. CTA & GCL RETIREMENT PLAN
GR no. 95022, March 23, 1992
 TAXATION LAW 1
Morillo Notes
agreement under a service contract with the
FACTS:
GCL Retirement Plan is an employees' trust maintained by the
Government. (Sec. 22(B), NIRC)
employer, GCL Inc., to provide retirement, pension, disability and
death benefits to its employees. The Plan as submitted was DOMESTIC CORPORATION:
approved and qualified as exempt from income tax by CIR in - The term 'domestic, when applied to a corporation,
accordance with Rep. Act No. 4917. In 1984, GCL made means created or organized in the Philippines or
investments and earned therefrom interest income from which was under its laws. (Sec. 22(C), NIRC)
withheld the 15% final withholding tax imposed by Pres. Decree
No. 1959. GCL filed with Petitioner a claim for refund in the
Co-Ownership - There is co-ownership whenever the
amounts of P1,312.66 withheld by Anscor Capital and Investment
Corp., and P2,064.15 by Commercial Bank of Manila. ownership of an undivided thing or right belongs to different
persons. In default of contracts, or of special provisions, co-
The refund requested having been denied, GCL elevated the matter ownership shall be governed by the provisions of this Title.
to CTA. The latter ruled in favor of GCL, holding that employees' (Art. 484, NCC)
trusts are exempt from the 15% final withholding tax on interest
income and ordering a refund of the tax withheld. Upon appeal, CA FOREIGN CORPORATION:
upheld the CTA Decision. Before us now, CIR assails that
- The term 'foreign’, when applied to a corporation,
disposition.
means a corporation which is not domestic. (Sec.
ISSUE: 22(D), NIRC)
W/N the GCL Plan is exempt from the final withholding tax on
interest income from money placements and purchase of treasury 1. Resident Foreign Corporation:
bills required by Pres. Decree No. 1959. - The term 'resident foreign corporation'
applies to a foreign corporation engaged in
RULING: trade or business within the Philippines.
YES, To begin with, it is significant to note that the GCL Plan was
(Sec. 22(H), NIRC)
qualified as exempt from income tax by the Commissioner of
Internal Revenue in accordance with Rep. Act No. 4917. In so far as
employees' trusts are concerned, the foregoing provision should be 2. Non-Resident Corporation:
taken in relation to then Section 56(b) (now 53[b]) of the Tax Code, - The term 'nonresident foreign
as amended by Rep. Act No. 1983, supra, This provision corporation' applies to a foreign
specifically exempted employee's trusts from income tax. corporation not engaged in trade or
business within the Philippines. (Sec. 22(I),
The tax-exemption privilege of employees' trusts, as distinguished NIRC)
from any other kind of property held in trust, springs from the
foregoing provision. It is unambiguous. Manifest therefrom is that
the tax law has singled out employees' trusts for tax exemption. WHAT CONSTITUTE AS “DOING BUSINESS”:
- it implies a continuity of commercial dealings and
And rightly so, by virtue of the raison de'etre behind the creation of arrangements, and contemplates, to that extent, the
employees' trusts. Employees' trusts or benefit plans normally performance of acts or works or the exercise of some
provide economic assistance to employees upon the occurrence of of the functions normally incident to, and in
certain contingencies, particularly, old age retirement, death, progressive prosecution of commercial gain or for the
sickness, or disability. It provides security against certain hazards purpose and object of the business organization.
to which members of the Plan may be exposed. It is an
[CIR v. BOAC, G.R. No. L-65773 (1987)]
independent and additional source of protection for the working
group. What is more, it is established for their exclusive benefit and Includes: Excludes:
for no other purpose.
1. Soliciting orders, service 1. Mere investment as a
The tax advantage in Rep. Act No. 1983, Section 56(b), was contracts; shareholder in domestic
conceived in order to encourage the formation and establishment 2. Opening offices, whether corporations, and/or the
of such private Plans for the benefit of laborers and employees called "liaison" offices or exercise of rights as such
outside of the Social Security Act. branches; investor;
3. Appointing representatives 2. Having a nominee director
or distributors domiciled in or officer to represent its
It is evident that tax-exemption is likewise to be enjoyed by the
the Philippines or who in interests in such
income of the pension trust. Otherwise, taxation of those earnings any calendar year stay in corporation
would result in a diminution accumulated income and reduce the country for a period 3. Appointing a
whatever the trust beneficiaries would receive out of the trust fund. totaling 180 days or more; representative or
This would run afoul of the very intention of the law. 4. Participating in the distributor domiciled in the
management, supervision Philippines which
or control of any domestic transacts business in its
business, firm, entity or own name and for its own
corporation in the account. [RA 7042,
III. CORPORATIONS: Philippines. Foreign Investments Act]
DEFINITION:
- The term 'corporation' shall include partnerships, no
matter how created or organized, joint-stock
companies, joint accounts (cuentas en participacion), LORENZO ONA vs. CIR
association, or insurance companies, but does not GR no. L-19342, May 25, 1972
include general professional partnerships and a joint
venture or consortium formed for the purpose of FACTS:
undertaking construction projects or engaging in Julia Buñales died leaving as heirs her surviving spouse, Lorenzo Oña and
petroleum, coal, geothermal and other energy her five children. A civil case was instituted for the settlement of her state,
in which Oña was appointed administrator and later on the guardian of the
operations pursuant to an operating consortium
three heirs who were still minors when the project for partition was

TAXATION LAW 1 51
 TAXATION LAW 1
Morillo Notes
approved. This shows that the heirs have undivided 1⁄2 interest in
10 parcels of land, 6 houses and money from the War Damage
Commission.
Although the project of partition was approved by the Court, no
attempt was made to divide the properties and they remained under the
management of Oña who used said properties in business by leasing or
selling them and investing the income derived therefrom and the
proceeds from the sales thereof in real properties and securities. As
a result, petitioners’ properties and investments gradually increased.
Petitioners returned for income tax purposes their shares in the net income
but they did not actually receive their shares because this left with Oña
who invested them.
Based on these facts, CIR decided that petitioners formed an
unregistered partnership and therefore, subject to the corporate
income tax, particularly for years 1955 and 1956. Petitioners asked
for reconsideration, which was denied hence this petition for review
from CTA’s decision.
ISSUES:
1. W/N there is an existence of an unregistered partnership,
and not co-ownership.
2. W/N Petitioners Ona, et. al. are liable for the deficiency
corporate income tax?
RULINGS:
1. YES - There exists an Unregistered Partnership:
- The Tax Court found that instead of actually distributing
the estate of the deceased among themselves pursuant
to the project of partition approved in 1949, "the
properties remained under the management of Lorenzo
T. Oña who used said properties in business by leasing
or selling them and investing the income derived
therefrom and the proceed from the sales thereof in real
properties and securities," as a result of which said
properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building
account" in 1949 to P175,028.68 in "investment
account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these
became possible because, admittedly, petitioners never
actually received any share of the income or profits from
Lorenzo T. Oña and instead, they allowed him to
continue using said shares as part of the common fund
for their ventures, even as they paid the corresponding
income taxes on the basis of their respective shares of
the profits of their common business as reported by the
said Lorenzo T. Oña.
2. YES - Petitioners are liable for the deficient corporate
income tax
- For tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered
partnership the moment the said common properties
and/or the incomes derived therefrom are used as a
common fund with intent to produce profits for the heirs
in proportion to their respective shares in the inheritance
as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in
the corresponding testate or intestate proceeding. The
reason for this is simple. From the moment of such
partition, the heirs are entitled already to their respective
definite shares of the estate and the incomes thereof, for
each of them to manage and dispose of as exclusively
his own without the intervention of the other heirs, and,
accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his
share to be held in common with his co-heirs under a
single management to be used with the intent of making
profit thereby in proportion to his share, there can be no
doubt that, even if no document or instrument were
52 TAXATION LAW 1
executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
EVANGELISTA vs. CIR
GR no. L-9996, October 15, 1957
FACTS:
Petitioners borrowed sum of money from their father and together
with their own personal funds they used said money to buy several
real properties. They then appointed their brother (Simeon) as
manager of the said real properties with powers and authority to
sell, lease or rent out said properties to third persons. They realized
rental income from the said properties for the period 1945-1949.
On September 24, 1954 respondent Collector of Internal Revenue
demanded the payment of income tax on corporations, real estate
dealer's fixed tax and corporation residence tax for the years 1945-
1949. The letter of demand and corresponding assessments were
delivered to petitioners on December 3, 1954, whereupon they
instituted the present case in the Court of Tax Appeals, with a
prayer that "the decision of the respondent contained in his letter of
demand dated September 24, 1954" be reversed, and that they be
absolved from the payment of the taxes in question. CTA denied
their petition and subsequent MR and New Trials were denied.
Hence this petition.
ISSUE:
W/N Petitioners are subject to the tax on corporations provided for
in section 24 of Commonwealth Act. No. 466, otherwise known as
the National Internal Revenue Code, as well as to the residence tax
for corporations and the real estate dealers fixed tax.
RULING:
YES, The essential elements of a partnership are two, namely: (a)
an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the
contracting parties. The first element is undoubtedly present in
the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Upon
consideration of all the facts and circumstances surrounding the
case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same
among themselves, because of the following observations, among
others: (1) Said common fund was not something they found
already in existence; (2) They invested the same, not merely in one
transaction, but in a series of transactions; (3) The aforesaid lots
were not devoted to residential purposes, or to other personal
uses, of petitioners herein.
Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein.
For purposes of the tax on corporations, our National Internal
Revenue Code, includes these partnerships — with the exception
only of duly registered general copartnerships — within the purview
of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is
concerned and are subject to the income tax for corporations.
PASCUAL vs. CIR
GR no. 78133, October 18, 1988
FACTS:
In 1965, Mariano Pascual and Renato Dragon bought 2 parcels of
land from Santiago Bernardino, et al. Later on, they bought another
3 parcels from Juan Roque. In 1968, the first 2 parcels of land were
 TAXATION LAW 1
Morillo Notes
then sold by petitioners to Marenir Development Corporation, while
in 1970, the 3 parcels were sold to Erlinda Reyes and Maria
Samson. Petitioners realized a net profit in the 1st sale in the
amount of P165k, while they realized a net profit of P60k in the 2nd
sale. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years. However, then Acting BIR Commissioner
Efren I. Plana, assessed and required petitioners to pay deficiency
corporate income taxes. Petitioners protested the assessment,
asserting that they had availed of tax amnesties way back in 1974.
CIR informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an
unregistered partnership or joint venture taxable as a corporation
under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the NIRC, that the
unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them
which is subject to individual income tax; and that the availment of
tax amnesty under PD23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not relieve
them from the tax liability of the unregistered partnership. Hence,
petitioners were required to pay the deficiency income tax
assessed.
ISSUE:
W/N Petitioners are subject to corporate income tax?
RULING:
NO, In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide the
profits among themselves. Respondent commissioner and/ or his
representative just assumed these conditions to be present on the
basis of the fact that petitioners purchased certain parcels of land
and became co-owners thereof.
In Evangelista case, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of the
common fund or even the properties acquired by them. The
character of habituality peculiar to business transactions engaged in
for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in
1965. They did not sell the same nor make any improvements
thereon. In 1966, they bought another three (3) parcels of land from
one seller. It was only 1968 when they sold the two (2) parcels of
land after which they did not make any additional or new purchase.
The remaining three (3) parcels were sold by them in 1970. The
transactions were isolated. The character of habituality peculiar to
business transactions for the purpose of gain was not present.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to support the
proposition that they thereby formed an unregistered partnership.
The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make
them partners. They shared in the gross profits as co- owners and
paid their capital gains taxes on their net profits and availed of the
tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is
thereby liable for corporate income tax, as the respondent
commissioner proposes.
AFISCO INSURANCE vs. CIR
GR no. 112675, January 25, 1999
FACTS:
Petitioners are 41 non-life insurance corporations, organized and
existing under the laws of the Philippines. Upon issuance by them
of Erection, Machinery Breakdown, Boiler Explosion and
Contractors’ All Risk insurance policies, the petitioners entered into
a Quota Share Reinsurance Treaty and a Surplus Reinsurance
Treaty with the Munchener (called Munich), a non-resident foreign
insurance corporation. The reinsurance treaties required petitioners
to form a pool. Accordingly, a pool composed of the petitioners
was formed on the same day.
In 1976, the pool of machinery insurers submitted a financial
statement and filed an "Information Return of Organization Exempt
from Income Tax" for the year ending in 1975, on the basis of
which it was assessed by the CIR deficiency corporate taxes in the
amount of P1,843,273.60, and withholding taxes in the amount of
P1,768,799.39 and P89,438.68 on dividends paid to Munich and to
the petitioners, respectively. These assessments were protested by
the petitioners through its auditors Sycip, Gorres, Velayo and Co. In
1986, the Commissioner of Internal Revenue denied the protest and
ordered the petitioners, assessed as "Pool of Machinery Insurers,"
to pay deficiency income tax.
The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latter’s collection
of premiums on behalf of its members, the ceding companies, was
taxable income. It added that prescription did not bar the Bureau of
Internal Revenue (BIR) from collecting the taxes due, because "the
taxpayer cannot be located at the address given in the information
return filed.
ISSUE:
W/N the Clearing House, acting as a mere agent and performing
strictly administrative functions, and which did not insure or
assume any risk in its own name, was a partnership or association
subject to tax as a corporation. If affirmative, whether the
remittance of the Pool Arrangement is subject to corporate income
tax
RULING:
YES, In the case before us, the ceding companies entered into a
Pool Agreement or an association that would handle all the
insurance businesses covered under their quota-share reinsurance
treaty and surplus reinsurance treaty with Munich. The following
unmistakably indicates a partnership or an association covered by
Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and
other valuables that are deposited in the name and credit
of the pool. This common fund pays for the
administration and operation expenses of the pool.
(2) The pool functions through an executive board, which
resembles the board of directors of a corporation,
composed of one representative for each of the ceding
companies.
(3) True, the pool itself is not a reinsurer and does not issue
any insurance policy; however, its work is indispensable,
beneficial and economically useful to the business of the
ceding companies and Munich, because without it they
would not have received their premiums. The ceding
companies share "in the business ceded to the pool" and
in the "expenses" according to a "Rules of Distribution"
annexed to the Pool Agreement. Profit motive or
business is, therefore, the primordial reason for the
pool’s formation.
Section 24 (b) (1) pertains to tax on foreign corporations; hence, it
cannot be claimed by the ceding companies which are domestic
corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code, because
the same subsection specifically taxes dividends, the type of
remittances forwarded to it by the pool. Although not a signatory to
the Pool Agreement, Munich is patently an associate of the ceding
companies in the entity formed, pursuant to their reinsurance
treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies, Munich
shared in their income and loss. This is manifest from a reading of
Articles 3 and 10 of the Quota-Share Reinsurance Treaty and
Articles 3 and 10 of the Surplus Reinsurance Treaty. The foregoing
TAXATION LAW 1 53
 TAXATION LAW 1
Morillo Notes
interpretation of Section 24 (b) (1) is in line with the doctrine that a
tax exemption must be construed strictissimi juris, and the
statutory exemption claimed must be expressed in a language too
plain to be mistaken.
Finally, the petitioners’ claim that Munich is tax-exempt based on
the RP-West German Tax Treaty is likewise unpersuasive, because
the internal revenue commissioner assessed the pool for corporate
taxes on the basis of the information return it had submitted for the
year ending 1975, a taxable year when said treaty was not yet in
effect.
Chapter 3:
INCOME:
INCOME IN GENERAL (DEFINITION):
- Income is the consumption and saving opportunity
gained by an entity within a specified timeframe,
which is generally expressed in monetary terms.
(Wikipedia, 2020)
- Haig-Simmons Definition of Income:
- This is an income measure used by public
finance economists to analyze economic
well-being which defines income as
consumption plus change in net worth.
It is represented by the mathematical formula:
I = C + ΔNW
“Where C = consumption and ΔNW = change
in net worth.”
- Consumption refers to the money spent on
goods and services of any kind. From a
perfect theory view, consumption does not
include capital expenditures and the full
spending would be amortized. (Wikipedia,
2020)
DEFINITION OF TAXATION INCOME:
- Taxable income means the pertinent items of gross
income specified in this Code, less the deductions, if
any, authorized for such types of income by this
Code or other special laws. (Sec. 31, NIRC)
- Formula: (Gross Income less Allowable Deductions =
Taxable Income)
WHAT ARE GROSS INCOMES?
1. Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items;
2. Gross income derived from the conduct of trade or
business or the exercise of a profession;
3. Gains derived from dealings in property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and winnings;
10. Pensions; and
54 TAXATION LAW 1
11. Partner's distributive share from the net income of
the general professional partnership.
ITEMS NOT DEDUCTIBLE (Sec. 36, NIRC):
● Gen. Rule: In computing net income, no deduction shall
in any case be allowed in respect to:
1. Personal, living or family expenses;
2. Any amount paid out for new buildings or for
permanent improvements, or betterments made to
increase the value of any property or estate.
This Subsection shall not apply to intangible drilling
and development costs incurred in petroleum
operations which are deductible under Subsection (G)
(1) of Sec. 34 of this Code.
3. Any amount expended in restoring property or in
making good the exhaustion thereof for which an
allowance is or has been made; or
4. Premiums paid on any life insurance policy
covering the life of any officer or employee, or of
any person financially interested in any trade or
business carried on by the taxpayer, individual or
corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy. (Sec.
36(A), NIRC)
● Exception (Losses from Sales or Exchange of
Property): In computing net income, no deduction shall in
any case be allowed in respect of losses from sales or
exchanges of property directly or indirectly:
1. Between members of a family. For purposes of this
paragraph, the family of an individual shall include
only his brother and sisters (whether by the whole
or half-blood), spouse, ancestors, and lineal
descendants; or
2. Except in the case of distributions in liquidation,
between an individual and a corporation more
thang 50% in value of the outstanding stock of
which is owned, directly or indirectly, by or for
such individual; or
3. Except in the case of distributions in liquidation,
between two corporations more than 50% in value
of the outstanding stock of each of which is
owned, directly or indirectly, by or for the same
individual, if either one of such corporations, with
respect to the taxable year of the corporation
preceding the date of the sale or exchange was,
under the law applicable to such taxable year, a
personal holding company or a foreign personal
holding company; or
4. Between the grantor and a fiduciary of any trust; or
5. Between the fiduciary of a trust and the fiduciary of
another trust if the same person is a grantor with
respect to each trist; or
6. Between a fiduciary of a trust and beneficiary of
such trust. (Sec. 36(B), NIRC)
SPECIAL PROVISIONS REGARDING INCOME AND
DEDUCTIONS OF INSURANCE COMPANIES, WHETHER
DOMESTIC OR FOREIGN:
(A) Special Deduction Allowed to Insurance
Companies. - In the case of insurance companies,
whether domestic or foreign doing business in the
Philippines, the net additions, if any, required by law to
be made within the year to reserve funds and the sums
other than dividends paid within the year on policy and
 TAXATION LAW 1
Morillo Notes
annuity contracts may be deducted from their gross
income: Provided, however, That the released reserve be
treated as income for the year of release.
(B) Mutual Insurance Companies. - In the case of
mutual fire and mutual employers' liability and mutual
workmen's compensation and mutual casualty insurance
companies requiring their members to make premium
deposits to provide for losses and expenses, said
companies shall not return as income any portion of the
premium deposits returned to their policyholders, but
shall return as taxable income all income received by
them from all other sources plus such portion of the
premium deposits as are retained by the companies for
purposes other than the payment of losses and
expenses and reinsurance reserves.
(C) Mutual Marine Insurance Companies. - Mutual
marine insurance companies shall include in their return
of gross income, gross premiums collected and received
by them less amounts paid to policyholders on account
of premiums previously paid by them and interest paid
upon those amounts between the ascertainment and
payment thereof.
(D) Assessment Insurance Companies. - Assessment
insurance companies, whether domestic or foreign, may
deduct from their gross income the actual deposit of
sums with the officers of the Government of the
Philippines pursuant to law, as additions to guarantee or
reserve funds. (Sec. 37, NIRC)
LOSSES FROM WASH SALES OF STOCK OR SECURITIES:
(A) In the case of any loss claimed to have been
sustained from any sale or other disposition of shares
of stock or securities where it appears that within a
period beginning thirty (30) days before the date of
such sale or disposition and ending thirty (30) days
after such date, the taxpayer has acquired (by
purchase or by exchange upon which the entire
amount of gain or loss was recognized by law), or
has entered into a contact or option so to acquire,
substantially identical stock or securities, then no
deduction for the loss shall be allowed under Section
34 unless the claim is made by a dealer in stock or
securities and with respect to a transaction made in
the ordinary course of the business of such dealer.
(B) If the amount of stock or securities acquired (or
covered by the contract or option to acquire) is less
than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of
stock or securities, the loss form the sale or other
disposition of which is not deductible, shall be
determined under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of
the Commissioner.
(C) If the amount of stock or securities acquired (or
covered by the contract or option to acquire which)
resulted in the non-deductibility of the loss, shall be
determined under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of
the Commissioner. (Sec. 38, NIRC)
time.
Wealth itself Service of wealth
Return of capital is not Subject to tax
subject to tax
Tree Fruit
MADRIGAL vs. RAFFERTY
GR no. L-12287, August 7, 1918
FACTS:
Vicente and Susana were legally married under conjugal
partnerships. Vicenta filed a sword declaration with the CIR,
showing his total net income for the year 1914 (sum of
P296,302.00). Subsequently Vicente submitted the claim that
P296,302.00 did not represent his income for the year 1914, but
was the income of the conjugal partnership existing between
himself and his wife Susana, and that in computing and assessing
the additional income tax provided by the Act of Congress. And
that the income declared by Vicente should be divided equally
between him and Susana. CIR denied and Vicente filed under
protest.
ISSUE:
W/N the P296,302.00 income filed by Vicente should be divided
equally between him and his wife, Susana.
RULING:
NO, Income as contrasted with capital or property is to be the test.
The essential difference between capital and income is that capital
is a fund, income is a flow. A fund of property existing at an instant
of time is called a capital. A flow of services rendered by that
capital by the payment of money from it or any other benefit
rendered by a fund of capital in relation to such fund through a
period of time is called an income. Capital is wealth, while income
is the service of wealth.
Susana Paterno, wife of Vicente Madrigal, has an inchoate right in
the property of her husband Vicente Madrigal during the life of the
conjugal partnership. She has an interest in the ultimate property
rights and in the ultimate ownership of property acquired as income
after such income has become capital. Susana Paterno has no
absolute right to one-half the income of the conjugal partnership.
Not being seized of a separate estate, Susana Paterno cannot
make a separate return in order to receive the benefit of the
exemption which would arise by reason of the additional tax. As
she has no estate and income, actually and legally vested in her
and entirely distinct from her husband's property, the income
cannot properly be considered the separate income of the wife for
the purposes of the additional tax. Moreover, the Income Tax Law
does not look on the spouses as individual partners in an ordinary
partnership. The husband and wife are only entitled to the
exemption of P8,000 specifically granted by the law.
REQUISITES FOR INCOME TO BE TAXABLE: (impt!)
1. There must be gain or profit;
2. That the gain or profit is realized or received, actually
or constructively; and
3. It is not exempted by law or treaty from income tax.
(CIR vs. Agrinurture, Inc., CTA Case no. 1054,
January 13, 2015)

DIFFERENCE BETWEEN CAPITAL AND INCOME: CIR vs. AGRINURTURE

CAPITAL
Fund or property existing at
one distinct point in time.
INCOME
Denotes a flow of wealth
during a definite period of
CTA EB Case no. 1854
FACTS:
Agrinurture, Inc. received from CIR a preliminary assessment notice
which assessed the Agrinurture, Inc. for deficiency income tax and

TAXATION LAW 1 55
 TAXATION LAW 1
Morillo Notes
VAT for taxable year 2007. Agrinurture, Inc. filed its protest on the
assessment stating that the assessment for alleged deficiency
income tax and VAT, predicated solely on the undeclared
purchase transaction has no basis. On the other hand, CIR argued
that the assessments were issued in accordance with the Tax Laws
which covered the income and VAT liabilities of individual and
corporate taxpayers.
ISSUE:
W/N Agrinurture, Inc. is required to pay the deficient income tax
and VAT.
RULING:
NO, The three elements for the imposition of income tax are: (1)
there must be gain or profit; (2) that the gain or profit is realized or
received, actually or constructively; and (3) it is not exempted by
law or treaty from income law. Income tax is assessed on income
received from any property, activity or service.
In the imposition or assessment of income tax, it is not when there
is an undeclared purchase, but only when there was an income,
and such income was received or realized by the taxpayer. In this
case, said elements are not present. The CIR merely imposed
income tax on Agrinurture, Inc., simply because there was “under-
declaration on purchase”, and nothing more.
TEST IN DETERMINING INCOME:
I. REALIZATION TEST:
CONCEPT:
- No taxable income until there is a separation from
capital of something of exchangeable value, thereby
supplying the realization of transmutation which
would result in the recepti of income. (Eisner vs.
Macomber, 252 US 189 (1920)).
- Income is recognized when both of the following
conditions are met:
a. The earning is complete or virtual complete;
and
b. An exchange has taken place. (Ingles,
Taxing Made Less Stress)
EISNER vs. MACOMBER
252 US 189 (1920)
FACTS:
Standard oil Company of California, out of an authorized capital
stock of $100,000.00, had shares of stock outstanding amounting
to $50,000.00. In order to readjust the capitalization, its board of
directors decided to issue additional share sufficient to constitute a
stock dividend of 5-% of the outstanding stock, and to transfer
from surplus account to capital stock account an amount
equivalent to such issue.
Defendant Macomber (owner of 2,200 shares of the old stock)
received certificates for 1,100 additional shares, and was called
upon to pay a tax imposed under Revenue Act 1916 (which
declared stock dividend shall be considered income, to the amount
of its cash value) based upon a supposed income of $10,877
because of the new shares. Defendant Macomber paid under
protest and brought an action against the Collector (of internal
Revenue) to recover the tax. She alleged that the tax imposed
under Revenue Act of 1916 violates certain constitutional
provisions contending that the stock dividend was not income
within the meaning of the 16th Amendment.
56 TAXATION LAW 1
ISSUE:
W/N The Congress has the power to tax, as income of the
stockholder and without apportionment, a stock dividend made
lawfully and in good faith against profits accumulated by the
corporation.
RULING:
NO, Congress was not empowered by the 16th Amendment to tax,
as income of the stockholder, without apportionment, a stock
dividend made lawfully and in good against profits accumulated by
the corporation.
What is or not “income” within the meaning of the Amendment
must be determined in each case according to truth and
substance, without regard to form.
Income may be defined as the gain derived from capital, from
labor, or from both combined, including profit gained through sale
or conversion of capital. Mere growth or increment of value in a
capital investment is not income.
A stock dividend, evincing merely a transfer of an accumulated
surplus to the capital account of the corporation, takes nothing
from the property of the corporation and adds nothing to that of the
shareholder. A tax on such dividends is a tax on capital increase,
and not on income, and, to be a valid under the Constitution, such
taxes must be apportioned according to population in several
states.
RAYTHEON PRODUCTION vs. CIR
144 f.2D 110 (July 28, 1944)
FACTS:
Raytheon Production corporation brought suit alleging that the
government conspired to destroy its established business, and
large and valuable good will in interstate commerce, which were
totally destroyed. The antitrust suit and a counterclaim for non-
payment of royalties were settled for a cash payment in favor of the
corporation, but the amount paid was not allocated between patent
license rights and settlement of the suit. The corporation treated
most of the settlement as a non-taxable return of capital, but the
government determined the entire settlement sum was taxable
income.
ISSUE:
Is the entire amount received by the taxpayer in a compromise
settlement of a suit for damages under the Federal Anti-Trust Laws
a non-taxable return of capital?
RULING:
NO, The court found the recovery for destruction of the business
and good will represented a return of capital. However, the court
also found that the corporation's conversion of property into cash
meant that compensation for loss of good will in excess of its cost
basis would be gross income to the corporation. The corporation
was the result of a series of tax-free reorganizations; there was no
evidence of its original predecessor's basis in good will. Since the
amount of any nontaxable capital recovery could not be
ascertained, the entire settlement amount was taxable income.
In a suit to recover damages for the destruction of the business and
good will, the recovery represents a return of capital. The fact that
the suit ended in a compromise settlement does not change the
nature of the recovery. However, the conversion thereby of
property into cash is a realization of any gain made over the cost or
other basis of the good will prior to the illegal interference.
BIR RULING NO. 091-99; JULY 8, 1999:
 TAXATION LAW 1
Morillo Notes
CAPITAL GAINS TAX; Pacto de retro - The terms of the
agreement between CB-BOL and TMBC calling for the transfer of
its assets, although denominated as Deed of Assignment with Right
to Repurchase, is in reality an equitable mortgage created over the
said properties. Instruments covering a sale with right to
repurchase may be captioned or labeled as such. However, when
any or more of the circumstances enumerated under Article 1602,
Civil Code, obtain in the agreement, the contract shall be presumed
as an equitable mortgage. (BIR Ruling No. 217-81 dated November
6, 1981). This is relevant in determining whether or not the
transaction had is subject to the corresponding taxes, i.e. capital
gains tax documentary stamp tax.
Insofar as corporations are concerned, its liability to the capital
gains tax imposed on the presumed gains realized from the sale,
exchange or disposition of lands and/or buildings is governed by
Section 27(D)(5) of the Tax Code of 1997. Thus, for a corporation to
be liable to the tax, a true sale, exchange or disposition of capital
assets must have transpired. Unlike in transactions made by
individuals under Section 24(D)(1) of the Code, where all sales of
real property classified as capital assets, including pacto de retro or
other forms of conditional sales are subject to the capital gains tax,
no similar qualifications exist for capital asset transaction of a
corporation. Hence, the latter is subject to such tax only upon a
close and completed transaction in which income is realized.
Accordingly, this Office holds that only upon the executing of the
final or absolute deed of sale covering the properties of the bank
subject of the pacto de retro, will the payment of the 6% capital
gains tax apply. By the same token, since no actual conveyance of
real property is to be made, the stamp tax on deeds of sale and
conveyances of real property imposed under Section 196 shall not
apply. However, since the transaction is in the nature of an
equitable mortgage and made primarily as a security for the
payment of a pre-existing loan, the same is subject instead to the
rate of documentary stamp tax imposed under Section 195. (BIR
Ruling No. 091-99 dated July 8, 1999)
II. CLAIM OF RIGHT DOCTRINE:
CLAIM OF RIGHT DOCTRINE:
- In the tax law of the United States the claim of right
doctrine causes a taxpayer to recognize income if
they receive the income even though they do not
have a fixed right to the income.
- For the income to qualify as being received there
must be a receipt of cash or property that ordinarily
constitutes income rather than loans or gifts or
deposits that are returnable, the taxpayer needs
unlimited control on the use or disposition of the
funds, and the taxpayer must hold and treat the
income as its own.
- This law is largely created by the courts, but some
aspects have been codified into the Internal Revenue
Code. (Wikipedia)
CIR vs. TOURS SPECIALISTS, INC.
GR no. L-66416, March 21, 1990
FACTS:
The Commissioner of Internal Revenue filed a petition to review on
certiorari to the CTA decision which ruled that the money entrusted
to private respondent Tours Specialist (TS), earmarked and paid for
hotel room charges of tourists, travellers and/or foreign travel
agencies do not form part of its gross receipt subject to 3%
independent contractor’s tax.
Tours Specialist derived income from its activities and services as a
travel agency, which included booking tourists in local hotels. To
supply such service, TS and its counterpart tourist agencies abroad
have agreed to offer a package fee for the tourists (payment of
hotel room accommodations, food and other personal expenses).
By arrangement, the foreign tour agency entrusts to TS the fund for
hotel room accommodation, which in turn paid by the latter to the
local hotel when billed. Despite this arrangement, CIR assessed
private respondent for deficiency 3% contractor’s tax as
independent contractor including the entrusted hotel room charges
in its gross receipts from services for years 1974-1976 plus
compromise penalty.
During cross-examination, TS General Manager stated that the
payment through them “is only an act of accommodation on (its)
part” and “the agent abroad instead of sending several telexes and
saving on bank charges they take the option to send the money to
(TS) to be held in trust to be endorsed to the hotel.”’ Nevertheless,
CIR caused the issuance of a warrant of distraint and levy, and had
TS’ bank deposits garnished.
ISSUE:
W/N DC
amounts received by a local tourist and travel agency included in a
package fee from tourists or foreign tour agencies, intended or
earmarked for hotel accommodations form part of gross receipts
subject to 3% contractor’s tax
RULING:
NO, Gross receipts subject to tax under the Tax Code do not
include monies or receipts entrusted to the taxpayer which do not
belong to them and do not redound to the taxpayer’s benefit; and it
is not necessary that there must be a law or regulation which would
exempt such monies or receipts within the meaning of gross
receipts under the Tax Code. Parenthetically, the room charges
entrusted by the foreign travel agencies to the private respondents
do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent.
The private respondent never benefited from their payment to the
local hotels. This arrangement was only to accommodate the
foreign travel agencies.
CIR vs. JAVIER
GR no. 78953, July 31, 1991
FACTS:
In 1977, Victoria Javier, wife of Javier-respondent, received $999k
from Prudential Bank remitted by her sister Dolores through Mellon
Bank in US. Around 3 weeks after, Mellon Bank filed a complaint
with CFI Rizal against Javier claiming that its remittance of $1M
was a clerical error and should have been $1k only and praying that
the excess be returned on the ground that the Javiers are just
trustees of an implied trust for the benefit of Mellon Bank. CFI
charged Javier with estafa alleging that they misappropriated and
converted it to their own personal use
A year after, Javier filed his Income Tax Return for 1977 and stating
in the footnote that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to
be an error and is now subject of litigation.” The Commissioner of
Internal Revenue wrote a letter to Javier demanding him to pay
taxes for the deficiency, due to the remittance. Javier replied to the
Commissioner and said that he will pay the deficiency but denied
that he had any undeclared income for 1977 and requested that the
assessment of 1977 be made to await final court decision on the
case filed against him for filing an allegedly fraudulent return.
Commissioner replied that “the amount of Mellon Bank’s erroneous
remittance which you were able to dispose is definitely taxable”
and the Commissioner imposed a 50% fraud penalty on Javier.
ISSUE:
W/N Javier is liable for the 50% penalty.
RULING:
TAXATION LAW 1 57
 TAXATION LAW 1
Morillo Notes
NO, The court held that there was no actual and intentional fraud
through willful and deliberate misleading of the BIR in the case.
Javier even noted that “the taxpayer was recipient of some money
received abroad which he presumed to be a gift but turned out to
be an error and is now subject of litigation”
Note: “Claim of right doctrine” refers to a taxable gain is
conditioned upon the presence of a claim of right to the alleged
gain and the absence of a definite and unconditional obligation to
return or repay.
In this case, the remittance was not a taxable gain, since it is still
under litigation and there is a chance that Javier might have the
obligation to return it. It will only become taxable once the case has
been settled because by then whatever amount that will be
rewarded, Javier has a claim of right over it.
BIR vs. FIRST E-BANK TOWER CONDO
GR no. 215801, January 15, 2020
Condominium association dues, fees, and other charges are not
subject to income tax, VAT, and withholding tax. It held that RMC
No. 65-2012, which was issued by the BIR to collect these taxes, is
invalid.
The SC decision made the following important points:
(1) A condominium corporation is not engaged in trade or
business. A condominium corporation is not designed to
engage in activities that generate income or profit. Under the
Condominium Act, the corporate purpose of a condominium is
limited to holding the common areas, management of the
project, and such other necessary, incidental, or convenient
purposes. It is allowed under the same Act to collect
association dues, fees, and other charges purely for the benefit
of the condominium owners. It is necessary to effectively
oversee, maintain, or even improve the common areas of the
condominium as well as its governance.
(2) Association dues, fees, and other charges do not constitute
profit or gain. The expenditures incurred by the condominium
corporation on behalf of the condominium owners are not
intended to generate revenue nor equate to the cost of doing
business. The association dues, fees, and other charges are
collected purely for the benefit of the condominium owners and
are incidental to condominium corporation’s responsibility to
oversee, maintain, or even improve the common areas of the
condominium as well as its governance.
(3) Association dues, fees, and other charges do not arise from
performance of trade or business. When a condominium
corporation manages, maintains, and preserves the common
areas of the building, it only does so for the benefit of the
condominium owners. It cannot be said to be engaged in trade
or business. In collecting such fees, the condominium
corporation is not selling its service to the condominium owners
nor are the condominium owners buying goods and/or services
from the condominium corporation when the dues are paid.
Hence, there is no economic or commercial activity to speak of.
(4) If there is no income tax, withholding tax cannot be collected.
Only income, be it active or passive, earned by a payor-
corporation can be subject to withholding tax.
For almost a decade, the BIR has been imposing an invalid tax.
What can you do to recover your erroneous payments? You can file
a claim for refund. 702. BM No Tax on Condo Dues GPP Advances
Next ICN 06.23.2020 1But the Tax Code provides that a taxpayer
must file a claim for refund within two (2) years from the erroneous
payment, regardless of any supervening event. In other words, the
condominium or village associations can only recover from the BIR,
up to 2 years of the illegally collected VAT and income tax on the
association dues. So, illegally collected payments that were made
before that are lost.
58 TAXATION LAW 1
If the SC invalidated the imposition of tax on condominium dues, it
may also strike down issuances that are of similar nature. One of
them is tax on deposits and cash advances received from a client
by a general professional partnership (GPP), like accounting firms
and law firms under RMC 89-2012 and RMC 16-2013.
These circulars provide that when a GPP or other taxpayer receives
a deposit or advance from a client, it must issue an Official Receipt
(OR). The deposit or cash advance must be recorded as income
and shall be subject to VAT. The client who made the cash advance
or deposit may deduct the same as an expense, provided an OR
was issued in the client’s name.
Although a GPP is engaged in business, unlike a condominium
association, cash advances or deposits made by a GPP’s client is
not an income of a GPP as association dues are not income of a
condominium association. They do not constitute profit or gain.
Deposits are usually used to pay for necessary expenses, like filing
and registration fees. GPPs also pay in advance the necessary
expenses in behalf of client, like transportation expense of its
personnel in processing documents. They secure reimbursement
from clients to recover these out of pocket expenses later on.
Following the SC ruling on condominium dues, it can be argued
that RMC 89-2012 and RMC 16-2013 must be invalidated next. But
until these issuances are questioned and declared void by the SC,
GPPs have no choice but to continue recording deposits and
advances as income and impose VAT on them, to its detriment, but
of course to the benefit of the government.
In the claim-of-right doctrine, if a taxpayer receives money or
other property and treats it as its own under the claim of right
that the payments are made absolutely and not contingently,
such amounts are included in the taxpayer's income, even
though the right to the income has not been perfected at that
time. It does not matter that the taxpayer's title to the property
is in dispute and that the property may later be recovered from
the taxpayer. [CIR v. Meralco, C.T .A. EB No. 773 (2012)]
III. INCOME FROM WHATEVER SOURCE:
Using the severance test of income, in order that income may
exist, it is necessary that there be a separation from capital of
something of exchangeable value. The income requires a
realization of gain.
Hence, the increase in value of an asset is not income as it
has not yet been exchanged or transferred for something else.
Once the asset is exchanged, then a severance of the gain
from its original value takes place, resulting into taxable
income. [Ingles]
SEC.50 REGULATIONS NO.2:
Sec. 50. Forgiveness of Indebtedness – The cancellation and
forgiveness of indebtedness may amount to a payment of income,
to a gift, or to a capital transaction, dependent upon the
circumstances. If, for example, an individual performs services for a
creditor, who, in consideration thereof cancels the debt, income to
that amount is realized by the debtor as compensation for his
service. If, however, a creditor merely desires to benefit a debtor
and without any consideration therefore cancels the debt, the
amount of the debt is a gift from the creditor to the debtor and
need not be included in the latter’s gross income. If a corporation
to which a stockholder is indebted forgives the debt, the
transaction has the effect of the payment of a dividend.
 TAXATION LAW 1
Morillo Notes
GUTIERREZ vs. CIR
101 Phil. 713
EXPROPRIATION; INCOME FROM SOURCES WITHIN THE
PHILIPPINES, WHERE TAXABLE. — The compensation or
income derived from the expropriation of property located in the
Philippines is an income from sources within the Philippines and
subject to the taxing jurisdiction of the place.
ID.; ID.; TRANSFER OF PROPERTY EQUIVALENT TO SALE;
PROCEEDS SUBJECT TO INCOME TAX AS CAPITAL GAIN. —
The acquisition by the Government of private properties through
the exercise of the power of eminent domain, said properties being
justly compensated, is embraced within the meaning of the term
"sale" or "disposition of property," and the proceeds derived
therefrom is subject to income tax as capital gain pursuant to the
provisions of Section 37-(a)-(5) in relation to Section 29-(a) of the
Tax Code.
ID.; ID.; ID.; ID.; INCOME NOT INCLUDED IN THE TAX
EXEMPTIONS SPECIFIED IN THE MILITARY BASES
AGREEMENT. — The taxpayers maintain that since, at the request
of the U. S. Government, the proceeding to expropriate the land in
question necessary for the expansion of the Clark Field Air Base
was instituted by the Philippine Government as part of its obligation
under the Military Bases Agreement, the compensation accruing
therefrom must necessarily fall under the exemption provided for by
Section 29-(b)-6 of the Tax Code. This stand is untenable because
while the condemnation or expropriation of properties wad
provided for in the Agreement, the exemption from tax of the
compensation to be paid for the expropriation of privately owned
lands located in the Philippines was not given any attention, and
the internal revenue exemptions specifically taken care of by said
agreement applies only to members of the U. S. Armed Forces
serving in the Philippines and U. S. nationals working in these
Islands in connection with the construction, maintenance, operation
and defense of said bases.
ID.; TRANSFER OF OWNERSHIP; WHEN TITLE PASSES TO
EXPROPRIATOR. — In condemnation proceedings, title to the
land does not pass to the plaintiff until the indemnity is paid (Calvo
v. Zandueta, 49 Phil. 605), and notwithstanding possession
acquired by the expropriator, title does not actually pass to him
until payment of the amount adjudged by the Court and the
registration of the judgment with the Register of Deeds (See
Visayan Refining Company v. Camus Et. Al., 40 Phil. 550;
Metropolitan Water District v. De los Angeles, 55 Phil. 783).
ID.; GAIN OR LOSS FROM SALE, HOW DETERMINED. — The
property in question was adjudicated to the owner by court order
on March 23, 1929, and in accordance with Section 35 (b) of the
Tax Code, only the fair market price or value of the property as of
the date of the acquisition thereof should be considered in
determining the gain or loss sustained by the property owner when
the property was disposed, without taking into account the
purchasing power of the currency used in the transaction. The
value of the property at the time of its acquisition by the owner was
P28,291.78 and the same was compensated with P94,305.75 when
it was expropriated. The resulting difference is not merely nominal
but a capital gain and should be correspondingly taxed.
TAXATION; ASSESSMENT MADE WITHIN THE PRESCRIPTIVE
PERIOD, HOW ENFORCED. — When the assessment for
deficiency income tax was made by the Collector of Internal
Revenue within the 3-year prescriptive period provided for by
Section 51-d of the Tax Code, the same could be collected either
by the administrative methods of distraint and levy or by judicial
action.
COURT OF TAX APPEALS; REVIEW OF DECISIONS OF; ONLY
QUESTIONS OF LAW MAY BE CONSIDERED. — The question of
fraud is a question of fact which is for the Court of Tax Appeals to
determine. It is already settled in this jurisdiction that in passing
upon petitions to review decisions of the Court of Tax Appeals, only
questions of law may be considered.
CIR vs. GLENSHAW GLASS
348 US 426
FACTS:
The Glenshaw Glass Company, a Pennsylvania corporation,
manufactures glass bottles and containers.It was engaged in
protracted litigation with the Hartford-Empire Company, which
manufactures machinery of a character used by Glenshaw. Among
the claims advanced by Glenshaw were demands for exemplary
damages for fraud and treble damages for injury to its business by
reason of Hartford's violation of the federal antitrust laws. In
December, 1947, the parties concluded a settlement of all pending
litigation, by which Hartford paid Glenshaw approximately $
800,000. Through a method of allocation which was approved by
the Tax Court, 18 T. C. 860, 870-872, and which is no longer in
issue, it was ultimately determined that, of the total settlement, $
324,529.94 represented payment of punitive damages for fraud and
antitrust violations. Glenshaw did not report this portion of the
settlement as income for the tax year involved. The Commissioner
determined a deficiency claiming as taxable the entire sum less
only deductible legal fees. As previously noted, the Tax Court and
the Court of Appeals upheld the taxpayer.
ISSUE:
Are punitive damages taxable as gross income?
RULING:
YES, The Court held that recovery of punitive damages was taxable
income under § 22, which determined what was taxable gross
income and which was given a broad and liberal construction. The
intention of Congress was to tax all gains of income except those
specifically exempted. In reversing the judgment, the Court held
that it was anomalous to conclude that recovery of actual damages
was taxable, but not the additional amount extracted as
punishment for the same conduct that caused the injury. Punitive
damages were not gifts, could not be considered a restoration of
capital for taxation purposes, and did not fit under any exemption
provision of the Internal Revenue Code.
Certainly punitive damages cannot reasonably be classified as
gifts, nor do they come under any other exemption provision in the
Internal Revenue Code. The United States Supreme Court would
do violence to the plain meaning of the statute and restrict a clear
legislative attempt to bring the taxing power to bear upon all
receipts constitutionally taxable were the Court to say that
payments in the form of punitive damages are not gross income.
IV. ECONOMIC BENEFIT TEST:
Any economic benefit to the employee that increases his net
worth, whatever may have been the mode by which it is
effected, is taxable. Thus, in stock options, the difference
between the fair market value of the shares at the time the
option is exercised and the option price constitutes additional
compensation income to the employee at the time of exercise
(not upon the grant or vesting of the right).
Anything that benefits a person materially or economically in
whatever way is taxable. However, note that a mere increase
in the value of property without actual realization is not
taxable. [INGLES]
US vs. KIRBY LUMBER CO.
284 US 1
FACTS:
TAXATION LAW 1 59
 TAXATION LAW 1
Morillo Notes
Kirby Lumber Company (Kirby), issued its own bonds for
$12,126,800 for which it received their par value. Later in the same
year, it purchased in the open market some of the same bonds at
less than par, the difference of price being $137,521.30. The
question is whether this difference is a taxable gain or income of
the plaintiff for the year 1923. The trial court held that Kirby did not
realize a taxable gain from the purchase of its own bonds on the
open market at less than their par value, which it had received
when it issued them. The United States sought review in the United
States Supreme Court.
ISSUE:
Did Kirby realize a taxable gain from the purchase of its own bonds
on the open market at less than their par value, which it had
received when it issued them?
RULING:
YES, United States Supreme Court reviewed § 213(a) of the
Revenue Act of November 23, 1921, and held that gross income
included gains or profits and income derived from any source
whatever. By the Treasury Regulations authorized by statute, if a
corporation purchased and retired any such bonds at a price less
than the issuing price or face value, the excess of the issuing price
or face value over the purchase price was income for the taxable
year. The Court found no reason to disregard the regulations. There
was no shrinkage of assets, and Kirby made a clear gain. As a
result of its dealings, Kirby realized a certain sum previously offset
by the obligation of bonds. Therefore, Kirby realized taxable
income.
By the Treasury Regulations authorized by the Revenue Act of
1921, that have been in force through repeated reenactments, if the
corporation purchases and retires any of such bonds at a price less
than the issuing price or face value, the excess of the issuing price
or face value over the purchase price is gain or income for the
taxable year. Treas. Reg. § 62, art. 545(1)(c) under Revenue Act of
1921; Treas. Reg. § 45, art. 544(1)(c) under Revenue Act of 1918;
Treas. Reg. § 65, art. 545(1)(c) under Revenue Act of 1924; Treas.
Reg. § 69, art. 545(1)(c) under Revenue Act of 1926; Treas. Reg. §
74, art. 68(1)(c) under Revenue Act of 1928. Therefore, there is no
reason why the regulations should not be accepted as a correct
statement of the law.
BRADFORD vs. CIR
233 F2nd 935
FACTS:
In 1938 the petitioner's husband owed a Nashville bank
approximately $305,000. The husband had a debt which had grown
out of investment banking ventures he had engaged in prior to the
depression. Fearing that disclosure of so much indebtedness might
impair the position of his brokerage firm with the NY Stock
Exchange, he persuaded the bank to substitute the note of his wife,
the petitioner, for a portion of his indebtedness. Accordingly, the
petitioner executed her note to the bank for $205,000 without
receiving any consideration in return. Her husband remained the
obligor on two notes to the bank for $100,000 and so reported to
the New York Stock Exchange.
About two years later the petitioner at the bank's request executed
two notes to replace her $205,000 note, one for $105,000, on
which all the collateral was pledged, and another for $100,000
which was unsecured. In 1943 a bank examiner required the bank
to write off $50,000 of the petitioner's $100,000 unsecured note. In
1946 the bank advised petitioner that it was willing to sell the
$100,000 note for $50,000, its then value on the bank's books. The
petitioner's husband accordingly persuaded his half-brother, a Mr.
Duval, to purchase the note from the bank for $50,000 with funds
furnished by the petitioner and her husband. The Tax Court found
that this transaction "was, in essence, a discharge of Mrs.
Bradford's indebtedness for $50,000." And Upon these facts the
60 TAXATION LAW 1
Tax Court concluded that the petitioner had realized unreported
ordinary income of $50,000 in 1946 and upheld the
Commissioner's determination of deficiency in accordance with
that conclusion.
The petitioner asks us to reverse the Tax Court's decision upon two
separate grounds: (1) that the cancellation of her $100,000 note for
$50,000 was a "gratuitous forgiveness" upon the part of the bank
and therefore a gift within the meaning of § 22(b) (3) of the Internal
Revenue Code of 1939,2 and (2) that because she received nothing
when the original note was executed by her in 1938, she did not
realize income in 1946 when the note was cancelled for less than
its face amount, even if the cancellation was not a gift.
ISSUE:
W/N the petitioner realized $50,000 income in 1946 when her
liability upon a note for $100,000 was discharged for $50,000.
RULING:
NO, The fact is that by any realistic standard the petitioner never
realized any income at all from the transaction in issue. In 1938
"without receiving any consideration in return," she promised to
pay a prior debt of her husband's. In a later year she paid part of
that debt for less than its face value. Had she paid $50,000 in 1938
to discharge $100,000 of her husband's indebtedness, the
Commissioner could hardly contend that she thereby realized
income. Yet the net effect of what she did do was precisely the
same.
To prove their conclusion, they cited analogous cases: In Bowers v.
Kerbaugh-Empire Co., 1926, 271 U.S. 170, 46 S.Ct. 449, 451, 70
L.Ed. 886, the corporate taxpayer had borrowed money from a
bank in Germany repayable in marks. The marks were immediately
converted into dollars, and the money was lost in the performance
of construction contracts by a subsidiary company over a period of
years. In a subsequent year, the taxpayer repaid the loan with
greatly devalued marks. The question for decision was "Whether
the difference between the value of marks measured by dollars at
the time of payment * * * and the value when the loans were made
was income." The Court decided that it was not, saying that "The
loss was less than it would have been if marks had not declined in
value; but the diminution of loss is not gain, profit, or income.
In Commissioner of Internal Revenue v. Rail Joint Co., 2 Cir., 1932,
61 F.2d 751, a corporate taxpayer, after a reappraisal of its assets,
distributed a dividend consisting of its own debenture bonds. In a
subsequent year the corporation purchased some of these bonds
at less than their face amounts, retired them, and credited the
difference to surplus. The court rejected the Commissioner's claim
that the corporation thereby realized income in the year the bonds
were retired. Stripped of superficial distinctions, the Rail Joint Co.
case is identical in principle with the present case. In that case, as
in this, the taxpayer received nothing of value when the
indebtedness was assumed. Although the indebtedness was
discharged at less than its face value, the taxpayer was in fact
poorer by virtue of the entire transaction.
NOTE: The tax court found the cancellation not as a gift as it failed
the the factual test of the Jacobson case. They were unable to find
an intent by the creditor to release an unpaid balance "for nothing",
Denman Tire & Rubber Co. v. Commissioner. SC agreed.
GROSS INCOME:
DEFINITION OF GROSS INCOME:
- Except when otherwise provided in this Title, gross
income means all income derived from whatever
source, including (but not limited to) the following
items:
 TAXATION LAW 1
Morillo Notes
(1) Compensation for services in whatever form
paid, including, but not limited to fees,
salaries, wages, commissions, and similar
items:
(2) Gross income derived from the conduct of
trade or business or the exercise of a
profession;
(3) Gains derived from dealings in property;
(4) Interests;
(5) Rents;
(6) Royalties;
(7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner’s distributive share from the net
income of the general professional
partnership. (Sec. 32 (A), NIRC)
DIFFERENCE: GROSS INCOME, NET INCOME AND
TAXABLE INCOME:
Gross Income: The total income of a taxpayer subject to
tax. It includes the gains, profits, and
income derived from whatever source,
whether legal or illegal. [Sec. 32(A), NIRC]
It does not include income excluded by law,
or which are exempt from income tax. [Sec.
32(B), NIRC].
Net Income: Means gross income less statutory
deductions and exemptions. [Sec. 31, NIRC]
Taxable Income: Means the pertinent items of gross income
specified in the Tax Code, less the
deductions and/or personal and additional
exemptions, if any, authorized for such
types of income by the Tax Code or other
special laws [Sec. 31, NIRC ].
It is synonymous to the term “net income.”
COMPENSATION:
COMPENSATION UNDER NIRC:
- Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and similar items. (Sec. 32 (A (1), NIRC)
DEFINITION OF COMPENSATION INCOME:
- In general, it means all remuneration for services
performed by an employee for his employer under an
employer-employee relationship, unless specifically
excluded by the NIRC. (Sec. 2.78.1(A) BIR RR 2-98)
WHAT CONSTITUTE COMPENSATION INCOME?
- Salaries, wages, emoluments and honoraria,
allowances, commissions (eg. transportation,
representation, entertainment and the like), fees
including director’s fees, if the director is, at the same
time, an employee of the employer/corporation,
taxable bonus and fringe benefits (except those
which are subject to the fringe benefits tax under
Sec. 33, NIRC), table pensions and retirement pay,
and other income of similar nature constitute
compensation income.
General Rule: Compensation income including overtime pay,
holiday pay, night shift differential pay, and hazard pay, earned by
MINIMUM WAGE EARNERS (MWE) who has no other returnable
income are NOT taxable and not subject to withholding tax on
wages [RA 9504];
Exception: If he receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the
allowable statutory amount of P90,000 [RA 10963], taxable
allowance, and other taxable income other than the statutory
minimum wage (SMW), holiday pay, overtime pay, hazard pay and
night shift differential pay.
“REMUNERATION FOR DOMESTIC SERVICES”;
MEANING:
- Refers to the remuneration paid for services of a
household nature performed by an employee in or
about the private home of the person whom he is
employed. The services of the household personnel
furnished to an employee (except rank and file
employees) by an employer shall be subject to the
fringe benefits tax pursuant to Sec. 33, NIRC.
BIR REVENUE REGULATION no. 2-98:
SECTION 2.78.1. Withholding of Income Tax on Compensation
Income:
Compensation Income Defined — In general, the term
"compensation" means all remuneration for services performed by
an employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code.
The name by which the remuneration for services is designated is
immaterial. Thus, salaries, wages, emoluments and honoraria,
allowances, commissions (e.g. transportation, representation,
entertainment and the like); fees including director's fees, if the
director is, at the same time, an employee of the
employer/corporation; taxable bonuses and fringe benefits except
those which are subject to the fringe benefits tax under Sec. 33 of
the Code; taxable pensions and retirement pay; and other income
of a similar nature constitute compensation income.
The basis upon which the remuneration is paid is immaterial in
determining whether the remuneration constitutes compensation.
Thus, it may be paid on the basis of piece-work, or a percentage of
profits; and may be paid hourly, daily, weekly, monthly or annually.
Remuneration for services constitutes compensation even if the
relationship of employer and employee does not exist any longer at
the time when payment is made between the person in whose
employ the services had been performed and the individual who
performed them.
Compensation paid in kind. — Compensation may be paid in
money or in some medium other than money, as for example,
stocks, bonds or other forms of property. If services are paid for in
a medium other than money, the fair market value of the thing
taken in payment is the amount to be included as compensation
subject to withholding. If the services are rendered at a stipulated
price, in the absence of evidence to the contrary, such price will be
presumed to be the fair market value of the remuneration received.
If a corporation transfers to its employees its own stock as
remuneration for services rendered by the employee, the amount of
such remuneration is the fair market value of the stock at the time
the services were rendered.
Living quarters or meals. — If a person receives a salary as
remuneration for services rendered, and in addition thereto, living
quarters or meals are provided, the value to such person of the
quarters and meals so furnished shall be added to the
remuneration paid for the purpose of determining the amount of
TAXATION LAW 1 61
 TAXATION LAW 1
Morillo Notes
compensation subject to withholding. However, if living quarters or
meals are furnished to an employee for the convenience of the
employer, the value thereof need not be included as part of
compensation income.
Facilities and privileges of a relatively small value. — Ordinarily,
facilities and privileges (such as entertainment, medical services, or
so called "courtesy" discounts on purchases), furnished or offered
by an employer to his employees generally, are not considered as
compensation subject to income tax if such facilities or privileges
are of relatively small value and are offered or furnished by the
employer merely as a means of promoting the health, goodwill,
contentment, or efficiency of his employees. (Amended by BIR RR
10-2008)
Tips and gratuities. — Tips or gratuities paid directly to an
employee by a customer of the employer which are not accounted
for by the employee to the employer are considered as taxable
income but not subject to withholding.
(5) Pensions, retirement and separation pay. — Pensions,
retirement and separation pay constitute compensation subject to
withholding, except those provided under Subsection B of this
section.
Fixed or variable transportation, representation and other
allowances:
IN GENERAL: fixed or variable transportation, representation and
other allowances which are received by a public officer or
employee or officer or employee of a private entity, in addition to
the regular compensation fixed for his position or office, is
compensation subject to withholding.
Any amount paid specifically, either as advances or
reimbursements for travelling, representation and other bonafide
ordinary and necessary expenses incurred or reasonably expected
to be incurred by the employee in the performance of his duties are
not compensation subject to withholding, if the following conditions
are satisfied:
1. It is for ordinary and necessary travelling and representation or
entertainment expenses paid or incurred by the employee in the
pursuit of the trade, business or profession; and
2. The employee is required to account/liquidate for the foregoing
expenses in accordance with the specific requirements of
substantiation for each category of expenses pursuant to Sec.
34 of the Code. The excess of actual expenses over advances
made shall constitute taxable income if such amount is not
returned to the employer. Reasonable amounts of
reimbursements/ advances for travelling and entertainment
expenses which are pre-computed on a daily basis and are
paid to an employee while he is on an assignment or duty need
not be subject to the requirement of substantiation and to
withholding.
Vacation and sick leave allowances. — Amounts of "vacation
allowances or sick leave credits" which are paid to an employee
constitute compensation. Thus, the salary of an employee on
vacation or on sick leave, which are paid notwithstanding his
absence from work, constitutes compensation. However, the
monetized value of unutilized vacation leave credits of ten (10) days
or less which were paid to the employee during the year are not
subject to income tax and to the withholding tax.
Deductions made by employer from compensation of
employee. — Any amount which is required by law to be deducted
by the employer from the compensation of an employee including
the withheld tax is considered as part of the employee's
compensation and is deemed to be paid to the employee as
compensation at the time the deduction is made.
Remuneration for services as employee of a nonresident alien
individual or foreign entity. — The term "compensation" includes
remuneration for services performed by an employee of a
62 TAXATION LAW 1
nonresident alien individual, foreign partnership or foreign
corporation, whether or not such alien individual or foreign entity is
engaged in trade or business within the Philippines. Any person
paying compensation on behalf of a non-resident alien individual,
foreign partnership, or foreign corporation which is not engaged in
trade or business within the Philippines is subject to all provisions
of law and regulations applicable to an employer.
Compensation for services performed outside the Philippines.
— Remuneration for services performed outside the Philippines by
a resident citizen for a domestic or a resident foreign corporation or
partnership, or for a non-resident corporation or partnership, or for
a non-resident individual not engaged in trade or business in the
Philippines shall be treated as compensation which is subject to
tax.
A non-resident citizen as defined in these regulations is taxable
only on income derived from sources within the Philippines. In
general, the situs of the income whether within or without the
Philippines, is determined by the place where the service is
rendered.
OLD COLONY TRUST CO. vs. COMMISSIONER
279 US 716
FACTS:
Old Colony Trust Company (“Old Colony”) paid the federal income
taxes owed on salaries for some of its executives. The
Commissioner of Internal Revenue assessed a deficiency against
the employees, arguing that petitioner's payment of their taxes
constituted additional salaries, which was taxable. Old Colony
challenged the decision of the U.S. Circuit Court of Appeals for the
First Circuit, which held that payment by the employer of the
income taxes assessable against the employee constituted
additional taxable income to such employee.
ISSUE:
Does the payment by the employer of the income taxes assessable
against the employee constitute additional taxable income to such
employee?
RULING:
YES, The Supreme Court of the United States first determined that
the circuit court of appeals and itself had jurisdiction over appeals
from the tax appeals board, finding that there was a live case or
controversy. The Court also determined that, by Old Colony paying
its executives' income taxes, that in itself was a form of taxable
compensation, whereupon additional tax was due. The Court
upheld the Commissioner’s deficiency determination and ordered
that additional taxes must be paid.
The Revenue Act of 1926 gave a direct judicial review of the United
States Board of Tax Appeal's decisions. The Act also enlarged the
original jurisdiction of the Board to consider deficiencies beyond
those shown in the Commissioner of Internal Revenue's notice, if
the Commissioner made such a claim at or before the hearing, §
274(e) of the Act, and also to determine that the taxpayer not only
did not owe the tax but had overpaid. § 284(e). The chief change
made by the Act was the provision for direct judicial review of the
Board's decisions by the filing by the Commissioner or the taxpayer
of a petition for review in a circuit court of appeals or the Court of
Appeals of the District of Columbia under rules adopted by such
courts.
The payment of a tax by the employers in consideration of the
services rendered by the employee for his labor constitutes income
to the employee.
DEFINITION OF FRINGE BENEFITS:
 TAXATION LAW 1
Morillo Notes
- Fringe benefit means any goods, services, or other
benefit furnished or granted in cash or in kind, in
addition to basic salaries, to an individual employee,
except a rank and file employee [RR No. 03-98, Sec
2.23b]
WHAT INCLUDES AS FRINGE BENEFITS?
1. Housing;
2. Expense account;
3. Vehicle of any kind;
4. Household personnel, such as maid, driver and
others;
5. Interest on loan at less than market rate to the extent
of the difference between the market rate and actual
rate granted;
6. Membership fees, dues and other expenses borne by
the employer for the employee in social and athletic
clubs or other similar organizations;
7. Expenses for foreign travel;
8. Holiday and vacation expenses;
9. Educational assistance to the employee or his
dependents; and
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the
law allows. (Sec. 33(B), NIRC)
FRINGE BENEFITS NOT SUBJECT TO TAX:
1. Fringe benefits which are authorized and exempted
from tax under special laws;
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization
benefit plans;\
3. Benefits given to the rank and file employees,
whether granted under a collective bargaining
agreement or not; and
4. De minimis benefits as defined in the rules and
regulations to be promulgated by the Secretary of
Finance, upon recommendation of the
Commissioner. (Sec. 33(C), NIRC)
The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, such rules and
regulations as are necessary to carry out efficiently and fairly
the provisions of this Section, taking into account the peculiar
nature and special need of the trade, business or profession of
the employer. (Sec. 33(C), NIRC)
BENAGLIA vs. COMMISSIONER
36 BTA 838
FACTS:
Petitioners husband and wife were residing in Honolulu, Hawaii,
where they filed joint income tax returns for 1933 and 1934.
Petitioner husband was employed as the manager in full charge of
the several hotels in Honolulu. Petitioner was constantly on duty,
and, for the proper performance of his duties and entirely for the
convenience of his employer, he and his wife occupied a suite of
rooms in the Royal Hawaiian Hotel and received their meals at and
from the hotel. Neither petitioner nor his employer ever regarded
the meals and lodging as part of his compensation or accounted
for them. The Commissioner has added $7,845 each year to the
petitioner's gross income as "compensation received from
Hawaiian Hotels, Ltd.", holding that this was "the fair market value
of rooms and meals furnished by the employer." Consequently, the
Commissioner determined a deficiency in the petitioners’ joint
income tax. Petitioner argued that the value of the rooms and
meals should not be included as part of his taxable income.
ISSUE:
Should the value of the rooms and meals provided by the employer
to the petitioner be included in petitioner’s taxable income?
RULING:
NO, The Court held that based on the evidence, the petitioner’s
residence at the hotel was not by way of compensation for his
services, not for his personal convenience, comfort or pleasure, but
solely because he could not otherwise perform the services
required of him. According to the Court, under such circumstances,
the value of meals and lodging was not income to the employee,
even though it may relieve him of an expense which he would
otherwise bear. The advantage to him was merely an incident of the
performance of his duty, but its character for tax purposes was
controlled by the dominant fact that the occupation of the premises
was imposed upon him for the convenience of the employer.
The value of meals and lodging is not income to the employee,
even though it may relieve him of an expense which he would
otherwise bear.
CIR vs. HENDERSON
GR no. L-12954, February 28, 1961
FACTS:
Arthur Henderson was employed as president of the American
International Underwriters of the Philippines, Inc. The spouses
Arthur Henderson and Marie B. Henderson then filed with the BIR
returns of annual net income for the years 1948 to 1952, inclusive,
where the net incomes, personal exemptions and amounts subject
to tax appear. BIR assessed and demanded payment of deficiency
taxes with respect to those due for the years 1.948, 1949, 1950 and
1952. In the foregoing assessments, the BIR considered as part of
their taxable income the taxpayer- husband's allowances for rental,
residential expenses, subsistence, water, electricity and telephone;
bonus paid to him; withholding tax and entrance fee to the Marikina
Gun and Country Club paid by his employer for his account; and
traveling allowance of his wife.
The spouses claim that as regards the husband-taxpayer's
allowances for rental and utilities such as water, electricity and
telephone, he did not receive the money for said allowances, but
that they lived in the apartment furnished and paid for by his
employer for its convenience; that they had no choice but live in the
said apartment furnished by his employer, otherwise they would
have lived in a less expensive one, that as regards his allowances
for rental, only the amount of P3,900 for each year, which is the
amount they would have spent for rental of an apartment including
utilities, should be taxed; that as regards the amount of P200
representing entrance fee to the Marikina Gun and Country Club
paid for him by his employer in 1948, the same should not be
considered as part of their income for it was an expense of his
employer and his membership therein was merely incidental to his
duties of increasing and sustaining the business of his employer.
They also claim that as regards the wife-taxpayer's traveling
allowance in 1952, it should not be considered as part of their
income because she merely accompanied him in his business trip
to New York as his secretary' and, at the behest of her husband's
employer, to study and look into the details of the plans and
decorations of the building intended to be constructed by his
employer in its property at Dewey Boulevard.
ISSUE:
W/N the allowances for rental of the apartment furnished by the
husband- taxpayer's employer-corporation, including utilities and
the allowance for travel expenses given by his employer-
corporation to his wife in 1952 part of taxable income?
RULING:
NO, The evidence presented at the hearing of the case
substantially supports the findings of the Court of Tax Appeals. The
TAXATION LAW 1 63
 TAXATION LAW 1
Morillo Notes

taxpayers are childless and are the only two in the family. The
quarters, therefore, that they occupied at the Embassy Apartments
consisting of a large sala, three bedrooms, dining room, two
bathrooms, kitchen and a large porch, and at the Rosaria
Apartments consisting of a kitchen, sala, dining room, two
bedrooms and a bathroom, exceeded their personal Deeds. But the
exigencies of the husband-Taxpayer's high executive position, not
to mention social standing, demanded and compelled them to live
in a more spacious and pretentious quarters like the ones they had
occupied. Although entertaining and putting up houseguests and
guests of the husband-taxpayer's employer-corporation were not
his predominant occupation as president, yet he and his wife had to
entertain and put up houseguests in their apartments. That is why
his employer-corporation had to grant him allowances for rental and
utilities in addition to his annual basic salary to take care of those
extra expenses for rentals and utilities in excess of their personal
needs.
Hence, the fact that the taxpayers had to live or did not have to live
in the apartments chosen by the husband- taxpayer's employer-
corporation is of no moment, for no part of the allowances in
question redounded to their personal benefit or was retained by
them. Their bills for rental and utilities were paid directly by the
employer-corporation to the creditors. Nevertheless, as correctly
held by the Court of Tax Appeals, the taxpayers are entitled only to
a ratable value of the allowances in question, and only the amount
of P4,800 annually, the reasonable amount they would have spent
for house rental and utilities such as light, water, telephone, etc.
should be the amount subject to tax, and the excess considered as
expenses of the corporation.
Likewise, the findings of the Court of Tax Appeals that the wife-
taxpayer had to make a trip to New York at the behest of her
husband's employer-corporation to help in drawing up the plans
and specifications of a proposed building, is also supported by the
evidence. No part of the allowance for traveling expenses
redounded to the benefit of the taxpayers. Neither was a part
thereof retained by them. The fact that she had herself operated on
for tumors while in New York was but incidental to her stay there
and she must Lave merely taken advantage of her presence in that
city to undergo the operation.
Appeals. Hence, the present recourse by the Commissioner of
Internal Revenue.
ISSUE:
W/N terminal leave pay received by a government official or
employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.
RULING:
NO, The Solicitor General, acting on behalf of the Commissioner of
Internal Revenue, contends that the terminal leave pay is income
derived from employer- employee relationship, citing in support of
his stand Section 28 of the National Internal Revenue Code; that as
part of the compensation for services rendered, terminal leave pay
is actually part of gross income of the recipient. Thus "terminal
leave pay cannot be viewed as salary for purposes which would
reduce it. There can thus be no 'commutation of salary' when a
government retiree applies for terminal leave because he is not
receiving it as salary. What he applies for is a 'commutation of
leave credits.' It is an accumulation of credits intended for old age
or separation from service."
The Court has already ruled that the terminal leave pay received by
a government official or employee is not subject to withholding
(income) tax. In the recent case of Jesus N. Borromeo vs. The Hon.
Civil Service Commission, et al., the Court explained the rationale
behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
"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.' In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal
leave pay is not subject to income tax.

CIR vs. CASTANEDA

HOUSING:
GR no. 96016, October 17, 1991
Fringe Benefit Tax Base
FACTS: Housing Privilege
(Monetary Value)
Efren P. Castaneda retired from the government service as
Revenue Attache in the Philippine Embassy in London, England, on
Lease of Residential 50% of lease payments = MV
10 December 1982 under the provisions of Section 12 (c) of
Commonwealth Act 186, as amended. Upon retirement, he property for the
residential use of Where MV (Monetary Value) of the
received, among other benefits, terminal leave pay from which
Fringe Benefits
petitioner Commissioner of Internal Revenue withheld P12,557.12 employees
allegedly representing income tax thereon.
Assignment of Residential [5% (FMV or ZV, whichever is
Castaneda filed a formal written claim with petitioner for a refund of property owned by higher) x 50%] = MV
the P12,557.13, contending that the cash equivalent of his terminal
employer for use of
leave is exempt from income tax. To comply with the two-year FMV = Fair Market Value;
prescriptive period within which claims for refund may be filed, employees
ZV = Zonal Value
Castaneda filed on 16 July 1984 with the Court of Tax Appeals a
Petition for Review, seeking the refund of income tax withheld from Purchase of Residential [5% x (acquisition cost of exclusive
his terminal leave pay. The Court of Tax Appeals found for private of interest) x 50%] = MV
respondent Castaneda and ordered the Commissioner of Internal
property in Installment
Revenue to refund Castaneda the sum of P12,557.13 withheld as Basis for the use of the
income tax. (Annex "C", petition). employee

Petitioner appealed the above-mentioned Court of Tax Appeals Purchase of Residential MV = FMV or ZV (whichever is
decision to this Court, which was docketed as G.R. No. 80320. In property and ownership is higher)
turn, we referred the case to the Court of Appeals for resolution. transferred in the name of
The case was docketed in the Court of Appeals as CA-G.R. SP No. FMV = Fair Market Value as
the employee
20482. On 26 September 1990, the Court of Appeals dismissed the determined by the Commissioner
petition for review and affirmed the decision of the Court of Tax of internal Revenue

64 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
Exempt Exempt Exempt
ZV = Zonal Value which is the
value of the land or improvement, Other Benefit in Excess of P90,000
as declared in the Real Property
Declaration Form (Tax Declaration)
Taxable Taxable
N/A (with caveat)
Non-taxable Housing Fringe Benefit: Compensation Compensation
a. Housing privilege of the Armed Forces of the
Philippines (AFP) official (ie. those of the Philippine Fringe Benefit:
Army, Philippine Navy, or Philppine Air force)
b. A housing unit, which is situated inside or adjacent to
the premises of a business or factory (maximum of 50 Taxable Subject to Fringe
meters from perimeter of the business premises) Compensation Benefit Tax
c. Temporary Housing for an Employee who stays in N/A
housing unit for 3 months or less. Tax shouldered Tax shouldered
by the employee by the employer
MOTOR VEHICLE:
De Minimis Benefit:
Fringe Benefit Tax Base
Motor Vehicle
(Monetary Value)
Exempt Exempt Exempt
Purchased in the name of Acquisition Cost shall be
the employee Monetary Value

Cash given to employee to Cash received by employee INCOME FROM BUSINESS OR

purchase in his own name shall be Monetary Value EXERCISE OF PROFESSION:

Purchase on installment, in Acquisition cost exclusive of

the name of the employee
Employee shoulders part of
the purchase price,
ownership in the name of
employee
interest shall be Monetary Any income derived from doing business.
Value
Doing business: The term implies a continuity of
commercial dealings and arrangements, and
The amount shouldered by
contemplates, to that extent, the performance of acts or
the employer shall be works or the exercise of some of the functions normally
Monetary Value incident to, and in progressive prosecution of, the
purpose and object of its organization.

Employer owns and (Acquisition Cost / 5) x 50%

maintains a fleet of motor = Monetary Value GROSS INCOME FROM BUSINESS:
vehicles for use of the - In the case of a manufacturing, merchandising, or
business and of employees mining business, “gross income” means the total
sales, less the cost of goods sold, plus any income
Employer leases and 50% of the Rental Payment from investments and from incidental or outside
maintains a fleet for the use shall be the Monetary Value operations or sources. In determining the gross
of the business and of income, subtractions should not be made for
employees depreciation, depletion, selling expenses or losses, or
for items not ordinarily used in computing the cost of
goods sold. (Sec. 43, Regulations no. 2)
Pure Compensation Earner:
LONG-TERM CONTRACTS:
Minimum Wage Managerial or
Rank-and-File - Income from long-term contracts is taxable for the
Earner Supervisory
period in which the income is determined, such
determination depending upon the nature and terms
Basic Compensation:
of the particular contract.
- As used herein the term “long-term” contracts means
Exempt Taxable Taxable building, installation or construction contracts
Compensation Compensation covering a period in excess of one year.
- Persons whose income is derived in whole or in part
Holiday Pay, Overtime Pay, Nightshift Pay, Hazard Pay: from such contracts may, as to such income, prepare
their returns upon the following bases:
(a) Gross income derived from such contracts may
Exempt Taxable Taxable be reported upon the basis of percentage of
Compensation Compensation completion. In such case there should
accompany the return certificate of architects, or
13th Month Pay up to P90,000 engineers showing the percentage of completion
during the taxable year of the entire work
performed under contract. There should be
deducted from such gross income all

TAXATION LAW 1 65
 TAXATION LAW 1
Morillo Notes
expenditures made during the taxable year on
account of the contract, account being taken of
material and supplies period for use in
connection with the work under the contract but
not yet so applied. If upon completion of a
contract, it is found that the taxable net income
arising thereunder has not been clearly reflected
for any year or years, the Commissioner of
Internal Revenue may permit or require and
amended return.
(b) Gross income may be reported in the taxable
year in which the contract is finally completed
and accepted if the taxpayer elects as a
consistent practice to so treat such income,
provided such method clearly reflects the net
income. If this method is adopted there should
be deducted from gross income all expenditures
during the life of the contract which are properly
allocated thereto, taking into consideration any
material and supplies charged to the work under
the contract but remaining on hand at the time of
the completion. (Sec. 44, BIR Revenue
Regulation no. 2)
Where a taxpayer has filed his return in accordance with the
method of accounting regularly employed by him in keeping
his books and such method clearly reflects the income, he will
not be required to change to either of the methods above set
forth. If a taxpayer desires to change his method of
accounting in accordance with paragraphs (a) and (b) above, a
statement showing the composition of all items appearing
upon his balance sheet and used in connection with the
method of accounting formerly employed by him, should
accompany his return. (Sec. 44, BIR Revenue Regulation no.
2)
GROSS INCOME OF FARMERS:
- A farmer reporting on the basis of receipts and
disbursements (in which no inventory to determine
profits is used) shall include in his gross income for
the taxable year.
1. The amount of cash or the value of
merchandise or other property received
from the sale of live stock and produced
which were raised during the taxable year or
prior years;
2. The profits from the sale of any live stock or
other items which were purchased; and
3. Gross income from all other sources.
- The profit from the sale of live stock or other items
which were purchased is to be ascertained by
deducting the cost from the sale price in the year in
which the sale occurs, except that in the case of the
sale of animals purchased as draft or work animals,
or solely for breeding or dairy purposes and not for
resale, the profit shall be the amount of any excess of
the sales price over the amount representing the
difference between the cost and the depreciation
theretofore sustained and allowed as a deduction in
computing net income.
- In the case of a farmer reporting on the accrual basis
(in which an inventory is used to determine profits),
his gross profits are ascertained by adding to the
inventory value of live stock and products on hand at
the end of the year the amount received from the sale
66 TAXATION LAW 1
of live stock products, and ... cost of the live stock
and products purchased during the year. In such
cases all live stock raised or purchased for sale shall
be included in the inventory at their proper valuation
determined in accordance with the method
authorized and adopted for the purpose. Also, live
stock acquired for drafts, breeding or dairy purposes
and not for sale may be included in the inventory,
instead of being treated as capital assets subject to
depreciation, provided such practice is followed
consistently by the taxpayer. In the case of the sale
of any live stock included in an inventory their cost
must not be taken as an additional deduction in the
return of income, as such deduction will be reflected
in the inventory.
- In every case of the sale of machinery, farm
equipment, or other capital assets (which are not to
be included in an inventory if one is used to
determine profits) any excess over the cost thereof
less the amount of depreciation theretofore sustained
and allowed as a deduction in computing net income,
shall be included as gross income. Where farm
produce is exchanged for merchandise, groceries, or
the like, the market value of the article received in
exchange is to be included in gross income.
- Rents received in crop shares shall be returned as of
the year in which the crop shares are reduced to
money or a money equivalent. Proceeds of
insurance, such as fire and typhoon insurance on
growing crops, should be included in gross income if
the amount received in cash or its equivalent for the
crop injured or destroyed. If a farmer is engaged in
producing crops which take more than a year from
the time of planting to the time of gathering and
disposing, the income therefrom may be computed
upon the crop basis; but in any such cases the entire
cost of producing the crop must be taken as a
deduction in the year in which the gross income from
the crop is realized.
- As herein used the term “farm” embraces the farm in
the ordinarily accepted sense, and includes stock,
dairy, poultry, fruit and truck farms, also plantations,
ranches, and all land used for farming operations. All
individuals, partnerships, or corporations that
cultivate, operate or manage farms for gain or profit
either as owners, or tenants, are designated farmers.
A person cultivating or operating a farm for recreation
or pleasure, the result of which is a continual loss
from year to year, is not regarded as a farmer. (Sec.
45, BIR Revenue Regulation No. 2)
SALE OF PATENTS AND COPYRIGHTS:
- A taxpayer disposing of patents or copyrights by sale
should determine the profit or loss arising therefrom
by computing the difference between the selling price
and the cost. The taxable income in the case of
patents or copyrights acquired prior to March 1,
1913, should be ascertained in accordance with the
provisions of Sec136 of these regulations. The profits
or loss thus ascertained should be increased or
decreased, as the case may be, by the amounts
deducted on account of depreciation of such patent
or copyrights since Mar 1, 1913, or since the date of
acquisition if subsequent thereto. (Sec. 46,
Regulations No. 2)
 TAXATION LAW 1
Morillo Notes
SALE OF GOODWILL:
- Gain or loss from a sale of goodwill results only when
the business, or a part of it, to which the goodwill
attaches is sold, in which case the gain or loss will be
determined by comparing the sale price with the cost
or other basis of the assets, including goodwill. If
specific payment was not made for goodwill acquired
after March 1, 1913, there can be no deductible loss
with respect thereto, but gain may be realized from
the sale of goodwill built up through expenditures
which have been currently deducted. It is immaterial
that goodwill may never have been carried on the
books as an asset, but the burden of proof is on the
taxpayer to establish the cost or fair market value on
March 1, 1913, of the goodwill sold. (Sec. 47,
Regulations no. 2)
GAINS DERIVED FROM DEALINGS IN PROPERTY:
- It includes any gain from the sale or exchange of
property which is not a capital asset or property
described in Sec. 39(A)(1). (Sec. 22(Z), NIRC)
- Any gain from the sale or exchange of property which
is treated or considered, under other provisions of
this Title, as “ordinary income” shall be treated as
gain from the sale or exchange of property which is
not a capital asset as defined in Section 39(A)(1).
(Sec. 22(Z), NIRC)
b. Ordinary Loss:
- Includes any loss from the sale or exchange of
property which is not a capital asset.
- Any loss from the sale or exchange of property which
is treated or considered, under other provisions of
this Title, as “ordinary loss” shall be treated as loss
from the sale or exchange of property which is not a
capital asset. (Sec. 22(Z), NIRC)
CAPITAL GAINS AND LOSSES:

INCOME FROM DEALINGS IN PROPERTY: Capital Assets:

- Dealings in property such as sales or exchanges - The term ‘capital assets’ means property held by the
may result in gain or loss. The kind of property taxpayer (whether or not connected with his trade or
involved (ie.Whether the property is a capital asset or business), but does not include stock in trade of the
an ordinary asset) determines the tax implication and taxpayer or other property of a kind which would
income tax treatment, as follows: properly be included in the inventory of the taxpayer
if on hand at the close of the taxable year or property
Net Capital
held by the taxpayer primarily for sale to customers in
Gains (other Taxable
Ordinary Net the ordinary course of his trade or business, or
than those + = Net property used in the trade or business, of a character
Income
subject to Income
which is subject to the allowance for depreciation
final CGT)
provided in Subsection (F) of Section 34; or real
property used in trade or business of the taxpayer.
(Sec. 39(A)(1), NIRC)
ORDINARY ASSET CAPITAL ASSET
Net Capital Gain:
Gain from sale, exchange or other disposition: - It means the excess of the gains from sales or
exchanges of capital assets over the losses from
such sales or exchanges. (Sec. 39(A)(2),NIRC)
Ordinary Gain (part of the Capital Gain
Gross Income)
Net Capital Loss:
- It means the excess of the losses from sales or
Loss from sale, exchange, or other disposition:
exchanges of capital assets over the gains from such
sales or exchanges. (Sec. 39(A)(3), NIRC)
Ordinary Loss (part of the Capital Loss
Allowable Deductions from Holding Period:
Gross Income) - In the case of a taxpayer, other than a corporation,
only the following percentages of the gain or loss
Excess of Gains over Losses: recognized upon the sale or exchange of a capital
asset shall be taken into account in computing net
capital gain, net capital loss, and net income.
Part of the Gross Income Net Capital Gain (1) One hundred percent (100%) if the capital
asset has been held for not more than
Excess of Losses over Gains: twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has
been held for more than twelve (12) months.
Part of the Allowable Capital Loss (Sec. 39(B), NIRC)
Deductions from Gross
Income Limitation on Capital Losses:
Source: Sec. 39(F), NIRC General Rule:
- Losses from sales or exchange capital assets shall
ORDINARY GAINS AND LOSSES: be allowed only to the extent of the gains from such
sales or exchanges. (Sec. 39(C), NIRC)
a. Ordinary Income:
Exception for Banks and Trust Companies:

TAXATION LAW 1 67
 TAXATION LAW 1
Morillo Notes
- If a bank or trust company incorporated under the
laws of the Philippines, a substantial part of whose
business is the receipt of deposits, sells any bond,
debenture, note, or certificate or other evidence of
indebtedness issued by any corporation (including
one issued by a government or political subdivision
thereof), with interest coupons or in registered form,
any loss resulting from such sale shall not be subject
to the foregoing limitation and shall not be included in
determining the applicability of such limitation to
other losses. (Sec. 39(C), NIRC)
Net Capital Loss Carry Over:
- If any taxpayer, other than a corporation, sustains in
any taxable year a net capital loss, such loss (in an
amount not in excess of the net income for such
year) shall be treated in the succeeding taxable year
as a loss from the sale or exchange of a capital asset
held for not more than twelve (12) months. (Sec.
39(D), NIRC)
REAL PROPERTY: ORDINARY vs. CAPITAL ASSETS:
Capital Assets:
- Property held by the taxpayer, whether or not
connected with his trade or business which is not an
ordinary asset. (BIR RR 7-2003)
Ordinary Assets:
1. Stock in trade of the taxpayer/other property of a
kind which properly be included in the inventory of
the taxpayer if on hand at the close of the taxable
year.
2. Property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business.
3. Property used in the trade or business of a character
which is subject to the allowance for depreciation; or
4. Real property used in the trade or business of the
taxpayer, including property held for rent. (BIR RR 7-
2003)
NOTE: In ordinary assets, that the list is EXCLUSIVE. The actual use
determines whether a property is an ordinary asset or a capital
asset. [BIR Ruling No. DA 212-07, April 3, 2007].
RECOGNITION OF GAINS & LOSSES
(Determination of Amount & Recognition of Gain or Loss):
Computation of Gain or Loss (Sec. 40(A), NIRC):
a. How to Compute the Amount Realized:
Sum of money Fair Market Value
received from the (FMV) of the
Amount
sale or other + property (other =
Realized
disposition of the than money)
property received
b. How to Compute the Gain:
= NET GAIN
EXCESS of the Amount Realized
___________________________________
68 TAXATION LAW 1
Basis or Adjusted basis for determining gain
c. How to compute for the Loss:
EXCESS of the Basis or Adjusted basis for
determining gain
= NET LOSS
___________________________________
Amount Realized
Basis for Determining Gain or Loss from Sale or
Disposition of Property:
1. The cost thereof in the case of property acquired on
or after March 1, 1913, if such property was acquired
by purchase; or
2. The fair market price or value as of the date of
acquisition, if the same was acquired by inheritance;
or
3. If the property was acquired by gift, the basis shall be
the same as if it would be in the hands of the donor
or the last preceding owner by whom it was not
acquired by gift, except that if such basis is greater
than the fair market value of the property at the time
of the gift then, for the purpose of determining loss,
the basis shall be such fair market value; or
4. If the property was acquired for less than an
adequate consideration in money or money's worth,
the basis of such property is the amount paid by the
transferee for the property; or
5. The basis as defined in paragraph (C)(5) of this
Section, if the property was acquired in a transaction
where gain or loss is not recognized under paragraph
(C)(2) of this Section. (Sec.40(B), NIRC)
Exchange of Property:
General Rule:
- Upon the sale or exchange or property, the entire
amount of the gain or loss, as the case may be, shall
be recognized. (Sec. 40(C)(1), NIRC)
Exception: Merger or Consolidation -
a. A corporation, which is a party to a merger or
consolidation, exchanges property solely for stock in
a corporation, which is a party to the merger or
consolidation; or
b. A shareholder exchanges stock in a corporation,
which is a party to the merger or consolidation, solely
for the stock of another corporation also a party to
the merger or consolidation; or
c. A security holder of a corporation, which is a party to
the merger or consolidation, exchanges his securities
in such corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation. (Sec. 40(C)(2), NIRC)
No gain or loss shall also be recognized if property is transferred
to a corporation by a person in exchange for stock or unit of
participation in such a corporation of which as a result of such
exchange said person, alone or together with others, not exceeding
four (4) persons, gains control of said corporation: Provided, That
stocks issued for services shall not be considered as issued in
 TAXATION LAW 1
Morillo Notes
return for property. (Sec. 40(C)(2, last paragraph), NIRC)
Definition of Merger or Consolidation:
- It shall be understood to mean: (i) the ordinary merger
or consolidation, or (ii) the acquisition by one
corporation of all or substantially all the properties of
another corporation solely for stock: Provided, That
for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it
must be undertaken for a bona fide business purpose
and not solely for the purpose of escaping the burden
of taxation: Provided, further, That in determining
whether a bona fide business purpose exists, each
and every step of the transaction shall be considered
and the whole transaction or series of transaction
shall be treated as a single unit: Provided, finally, That
in determining whether the property transferred
constitutes a substantial portion of the property of
the transferor, the term “property” shall be taken to
include the cash assets of the transferor. (Sec.
40(C)(6)(b), NIRC)
Rule When Exchange is Not Solely in Kind:
a. If an individual, a shareholder, a security holder or a
corporation receives not only stock or securities permitted
to be received without the recognition of gain or loss, but
also money and/or property:
- The gain, if any, but not the loss, shall be recognized
but in an amount not in excess of the sum of the
money and fair market value of such other property
received: Provided, That as to the shareholder, if the
money and/or other property received has the effect
of a distribution of a taxable dividend, there shall be
taxed as dividend to the shareholder an amount of
the gain recognized not in excess of his
proportionate share of the undistributed earnings and
profits of the corporation; the remainder, if any, of the
gain recognized shall be treated as a capital gain.
(Sec. 40(C)(3), NIRC)
b. If the transferor corporation receives not only stock
permitted to be received without the recognition of gain or
loss but also money and/or other property:
i. If the corporation receiving such money and/or
other property distributes it in pursuance of the
plan of merger or consolidation → no gain to the
corporation shall be recognized from the
exchange.
ii. If the corporation receiving such other property
and/or money does not distribute it in pursuance
of the plan of merger or consolidation → the gain,
if any, but not the loss to the corporation shall be
recognized but in an amount not in excess of the
sum of such money and the fair market value of
such other property so received, which is not
distributed. (Sec. 40(C)(3), NIRC)
NOTE: In both (a) and (b), it must be in connection with an
exchange described in the Exceptions mentioned above.
Assumption of Liability:
(a) If the taxpayer, in connection with the exchanges
described in the foregoing exceptions, receives stock or
securities which would be permitted to be received
without the recognition of the gain if it were the sole
consideration, and as part of the consideration, another
party to the exchange assumes a liability of the taxpayer,
or acquires from the taxpayer property, subject to a
liability, then such assumption or acquisition shall not be
treated as money and/or other property, and shall not
prevent the exchange from being within the exceptions.
(b) If the amount of the liabilities assumed plus the amount
of the liabilities to which the property is subject exceed
the total of the adjusted basis of the property transferred
pursuant to such exchange, then such excess shall be
considered as a gain from the sale or exchange of a
capital asset or of property which is not a capital asset,
as the case may be. (Sec. 40(C)(4), NIRC)
Basis:
(a) The basis of the stock or securities received by the
transferor upon the exchange specified in the above
exception shall be the same as the basis of the
property, stock or securities exchanged, decreased by
(1) the money received, and (2) the fair market value of
the other property received, and increased by (a) the
amount treated as dividend of the shareholder and (b)
the amount of any gain that was recognized on the
exchange: Provided, That the property received as
'boot' shall have as basis its fair market value:
Provided, further, That if as part of the consideration to
the transferor, the transferee of property assumes a
liability of the transferor or acquires form the latter
property subject to a liability, such assumption or
acquisition (in the amount of the liability) shall, for
purposes of this paragraph, be treated as money
received by the transferor on the exchange: Provided,
finally, That if the transferor receives several kinds of
stock or securities, the Commissioner is hereby
authorized to allocate the basis among the several
classes of stocks or securities.
(b) The basis of the property transferred in the hands of the
transferee shall be the same as it would be in the hands
of the transferor increased by the amount of the gain
recognized to the transferor on the transfer. (Sec.
40(C)(5), NIRC)
DIVIDENDS:
DEFINITION OF DIVIDENDS:
- it means any distribution made by a corporation to its
shareholders out of its earnings or profits and
payable to its shareholders, whether in money or in
other property. Where a corporation distributes all of
its assets in complete liquidation or dissolution, the
gain realized or loss sustained by the stockholder,
whether individual or corporate, is a taxable income
or a deductible loss, as the case may be. (Sec. 73(A),
NIRC)
STOCK DIVIDEND:
- A stock dividend representing the transfer of surplus
to capital account shall not be subject to tax.
However, if a corporation cancels or redeems stock
issued as a dividend at such time and in such manner
as to make the distribution and cancellation or
redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount
so distributed in redemption or cancellation of the
stock shall be considered as taxable income to the
TAXATION LAW 1 69
 TAXATION LAW 1
Morillo Notes
extent that it represents a distribution of earnings or
profits. (Sec. 73(B), NIRC)
DIVIDENDS DISTRIBUTED ARE DEEMED MADE FROM
MOST RECENTLY ACCUMULATED PROFITS:
- Any distribution made to the shareholders or
members of a corporation shall be deemed to have
been made from the most recently accumulated
profits or surplus, and shall constitute a part of the
annual income of the distributee for the year in which
received. (Sec. 73(C), NIRC)
NET INCOME OF A PARTNERSHIP DEEMED
CONSTRUCTIVELY RECEIVED BY PARTNERS:
- The taxable income declared by a partnership for a
taxable year which is subject to tax under Section 27
(A) of this Code, after deducting the corporate
income tax imposed therein, shall be deemed to have
been actually or constructively received by the
partners in the same taxable year and shall be taxed
to them in their individual capacity, whether actually
distributed or not. (Sec. 73(D), NIRC)
CIR vs. CA, CTA & ANSCOR
GR no. 108576, January 30, 1999
FACTS:
Don Andres Soriano, a citizen and resident of the United States,
formed the corporation "A. Soriano Y Cia", predecessor of
ANSCOR, with a P1,000,000.00 capitalization divided into 10,000
common shares at a par value of P100/share. ANSCOR is wholly
owned and controlled by the family of Don Andres, who are all
nonresident aliens. In 1937, Don Andres subscribed to 4,963
shares of the 5,000 shares originally issued. In 1945, ANSCOR's
authorized capital stock was increased to P2,500,000.00 divided
into 25,000 common shares with the same par value. Don Andres'
increased his subscription to 14,963 common shares. A month
later, Don Andres transferred 1,250 shares each to his two sons,
Jose and Andres, Jr., as their initial investments in ANSCOR. Both
sons are foreigners. From 1947-1963, ANSCOR declared stock
dividends. On December 30, 1964 Don Andres died. As of that
date, the records revealed that he has a total shareholdings of
185,154 shares. Correspondingly, one-half of that shareholdings or
92,577 shares were transferred to his wife, Doña Carmen Soriano,
as her conjugal share. The other half formed part of his estate.
A day after Don Andres died, ANSCOR increased its capital stock
to P20M and in 1966 further increased it to P30M. Stock dividends
worth 46,290 and 46,287 shares were respectively received by the
Don Andres estate and Doña Carmen from ANSCOR. Hence,
increasing their accumulated shareholdings to 138,867 and
138,864 common shares each. On June 30, 1968, pursuant to a
Board Resolution, ANSCOR redeemed 28,000 common shares
from the Don Andres' estate. By November 1968, the Board further
increased ANSCOR's capital stock to P75M. About a year later,
ANSCOR again redeemed 80,000 common shares from the Don
Andres' estate. As stated in the Board Resolutions, ANSCOR's
business purpose for both redemptions of stocks is to partially
retire said stocks as treasury shares in order to reduce the
company's foreign exchange remittances in case cash dividends
are declared.
In 1973, after examining ANSCOR's books of account and records,
Revenue examiners issued a report proposing that ANSCOR be
assessed for deficiency withholding tax-at-source, pursuant to
Sections 53 and 54 of the 1939 Revenue Code for the year 1968
and the second quarter of 1969 based on the transactions of
exchange and redemption of stocks.
70 TAXATION LAW 1
ISSUE:
W/N ANSCOR's redemption of stocks from its stockholder as well
as the exchange of common with preferred shares can be
considered as "essentially equivalent to the distribution of taxable
dividend" making the proceeds thereof taxable.
RULING:
YES, Sec. 83. Distribution of dividends or assets by corporations.
— (b) Stock dividends — A stock dividend representing the transfer
of surplus to capital account shall not be subject to tax. However, if
a corporation cancels or redeems stock issued as a dividend at
such time and in such manner as to make the distribution and
cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be
considered as taxable income to the extent it represents a
distribution of earnings or profits accumulated after March first,
nineteen hundred and thirteen. Sec. 83(b) of the 1939 NIRC was
taken from the Section 115(g)(1) of the U.S. Revenue Code of 1928.
It laid down the general rule known as the proportionate test
wherein stock dividends once issued form part of the capital and,
thus, subject to income tax. Specifically, the general rule states
that: A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax.
Stock dividends, strictly speaking, represent capital and do not
constitute income to its recipient. So that the mere issuance thereof
is not yet subject to income tax as they are nothing but an
"enrichment through increase in value of capital investment." The
exception provides that the redemption or cancellation of stock
dividends, depending on the "time" and "manner" it was made, is
essentially equivalent to a distribution of taxable dividends,"
making the proceeds thereof "taxable income" "to the extent it
represents profits". The exception was designed to prevent the
issuance and cancellation or redemption of stock dividends, which
is fundamentally not taxable, from being made use of as a device
for the actual distribution of cash dividends, which is taxable.
Simply put, depending on the circumstances, the proceeds of
redemption of stock dividends are essentially distribution of cash
dividends, which when paid becomes the absolute property of the
stockholder. Thereafter, the latter becomes the exclusive owner
thereof and can exercise the freedom of choice. Having realized
gain from that redemption, the income earner cannot escape
income tax. For the exempting clause of Section, 83(b) to apply, it
is indispensable that: (a) there is redemption or cancellation; (b) the
transaction involves stock dividends and (c) the "time and manner"
of the transaction makes it "essentially equivalent to a distribution
of taxable dividends."
Redemption is repurchase, a reacquisition of stock by a
corporation which issued the stock 89 in exchange for property,
whether or not the acquired stock is cancelled, retired or held in the
treasury. 90 Essentially, the corporation gets back some of its
stock, distributes cash or property to the shareholder in payment
for the stock, and continues in business as before. In the case,
ANSCOR redeemed shares twice. But where did the shares
redeemed come from? If its source is the original capital
subscriptions upon establishment of the corporation or from initial
capital investment in an existing enterprise, its redemption to the
concurrent value of acquisition may not invite the application of
Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere
return of capital. On the contrary, if the redeemed shares are from
stock dividend declarations other than as initial capital investment,
the proceeds of the redemption is additional wealth, for it is not
merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that
may be deemed as taxable dividends. At the time of the last
redemption, the original common shares owned by the estate were
only 25,247.5 91 This means that from the total of 108,000 shares
redeemed from the estate, the balance of 82,752.5 (108,000 less
25,247.5) must have come from stock dividends. In the absence of
 TAXATION LAW 1
Morillo Notes
evidence to the contrary, the Tax Code presumes that every
distribution of corporate property, in whole or in part, is made out
of corporate profits such as stock dividends. The capital cannot be
distributed in the form of redemption of stock dividends without
violating the trust fund doctrine.
The test of taxability under the exempting clause of Section 83(b)
is, whether income was realized through the redemption of stock
dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently,
the stockholder's separate property. Profits derived from the capital
invested cannot escape income tax. As realized income, the
proceeds of the redeemed stock dividends can be reached by
income taxation regardless of the existence of any business
purpose for the redemption. Otherwise, to rule that the said
proceeds are exempt from income tax when the redemption is
supported by legitimate business reasons would defeat the very
purpose of imposing tax on income.
The issuance and the redemption of stocks are two different
transactions. Although the existence of legitimate corporate
purposes may justify a corporation's acquisition of its own shares
under Section 41 of the Corporation Code, such purposes cannot
excuse the stockholder from the effects of taxation arising from the
redemption. ven if the said purposes support the redemption and
justify the issuance of stock dividends, the same has no bearing
whatsoever on the imposition of the tax herein assessed because
the proceeds of the redemption are deemed taxable dividends
since it was shown that income was generated therefrom. The
proceeds thereof are essentially considered equivalent to a
distribution of taxable dividends. As "taxable dividend" under
Section 83(b), it is part of the "entire income" subject to tax under
Section 22 in relation to Section 21 120 of the 1939 Code.
Moreover, under Section 29(a) of said Code, dividends are included
in "gross income". As income, it is subject to income tax which is
required to be withheld at source.
EISNER vs. MACOMBER
252 US 89
FACTS:
Plaintiff stockholder received certificates for additional shares
issued by the corporation as stock dividends. Defendant United
States treated those shares as income, and plaintiff paid a tax
under protest on the same. Plaintiff brought an action against
defendant to recover the tax contending that in imposing such a
tax, the Revenue Act of September 8, 191 violated Article 1 of the
Constitution, which required direct taxes to be apportioned
according to population. The district court held in favor of plaintiff
and defendant sought the court's review.
ISSUE:
Was the contested taxation without apportionment of plaintiff's
stock dividend violative of Article 1 of the United States
Constitution?
RULING:
YES, The Court held that by treating the dividends as income,
defendant failed to appraise correctly the force of the term
"income" as the mere issue of a stock dividend made plaintiff no
richer than before. Therefore, Congress did not have the power to
tax without apportionment a stock dividend made lawfully and in
good faith, as income of the stockholder, and the Act failed as a
contravention of Article 1 of the Constitution.
Income may be defined as the gain derived from capital, from
labor, or from both combined, provided it be understood to include
profit gained through a sale conversion of capital assets.
PARTNER’S DISTRIBUTIVE SHARE IN A GENERAL
PROFESSIONAL PARTNERSHIP:
SEC. 26. Tax Liability of Members of General Professional
Partnerships. - A general professional partnership as such
shall not be subject to the income tax imposed under this
Chapter. Persons engaging in business as partners in a
general professional partnership shall be liable for income tax
only in their separate and individual capacities.
For purposes of computing the distributive share of the
partners, the net income of the partnership shall be computed
in the same manner as a corporation.
Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of
the partnership.
EXCLUSION FROM GROSS INCOME:
EXCLUSIONS FROM GROSS INCOME:
1. Life Insurance:
- The proceeds of life insurance policies paid to the
heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, but if such
amounts are held by the insurer under an agreement
to pay interest thereon, the interest payments shall
be included in gross income. (Sec. 32(B)(1), NIRC)
2. Amount Received by Insured as Return of Premium:
- The amount received by the insured, as a return of
premiums paid by him under life insurance,
endowment, or annuity contracts, either during the
term or at the maturity of the term mentioned in the
contract or upon surrender of the contract. (Sec.
32(B)(2), NIRC)
3. Gifts, Bequests and Devises:
- The value of property acquired by gift, bequest,
devise, or descent: Provided, however, That income
from such property, as well as gift, bequest, devise or
descent of income from any property, in cases of
transfers of divided interest, shall be included in
gross income. (Sec. 25(B)(3), NIRC)
4. Compensation for Injuries or Sickness:
- The amounts received, through Accident or Health
Insurance or under Workmen's Compensation Acts,
as compensation for personal injuries or sickness,
plus the amounts of any damages received, whether
by suit or agreement, on account of such injuries or
sickness. (Sec. 32(B)(4), NIRC)
5. Income Exempt Under Treaty:
- Income of any kind, to the extent required by any
treaty obligation binding upon the Government of the
Philippines (Sec. 32(B)(5), NIRC)
6. Retirement Benefits, Pensions, Gratuities, Etc:
- Retirement benefits received under Republic Act No.
7641 and those received by officials and employees
of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan
maintained by the employer: Provided, That the
retiring official or employee has been in the service of
the same employer for at least ten (10) years and is
not less than fifty (50) years of age at the time of his
retirement: Provided, further, That the benefits
TAXATION LAW 1 71
 TAXATION LAW 1
Morillo Notes
granted under this subparagraph shall be availed of
by an official or employee only once. (Sec. 32(B)(6)(a),
NIRC)
- “Reasonable private benefit plan” - means a
pension, gratuity, stock bonus or profit-
sharing plan maintained by an employer for
the benefit of some or all of his officials or
employees, wherein contributions are made
by such employer for the officials or
employees, or both, for the purpose of
distributing to such officials and employees
the earnings and principal of the fund thus
accumulated, and wherein its is provided in
said plan that at no time shall any part of the
corpus or income of the fund be used for, or
be diverted to, any purpose other than for
the exclusive benefit of the said officials and
employees. (Supra)
- Any amount received by an official or employee or by
his heirs from the employer as a consequence of
separation of such official or employee from the
service of the employer because of death sickness or
other physical disability or for any cause beyond the
control of the said official or employee. (Sec.
32(B)(6)(b), NIRC).
- The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits
received by resident or nonresident citizens of the
Philippines or aliens who come to reside permanently
in the Philippines from foreign government agencies
and other institutions, private or public. (Sec.
32(B)(6)(c), NIRC)
- Payments of benefits due or to become due to any
person residing in the Philippines under the laws of
the United States administered by the United States
Veterans Administration. (Sec. 32(B)(6)(d), NIRC)
- Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of
Republic Act No. 8282. (Sec. 32(B)(6)(e), NIRC)
- Benefits received from the GSIS under Republic Act
No. 8291, including retirement gratuity received by
government officials and employees. (Sec. 32(B)(6)(f),
NIRC)
7. Miscellaneous Items:
a. Income Derived by Foreign Government - Income
derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by (i)
foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial
institutions established by foreign governments. (Sec.
32(B)(7)(a), NIRC)
b. Income Derived by the Government or its Political
Subdivisions - Income derived from any public utility or
from the exercise of any essential governmental
function accruing to the Government of the Philippines
or to any political subdivision thereof. (Sec. 32(B)(7)(b),
NIRC)
c. Prizes and Awards - Prizes and awards made primarily
in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but
only if:
72 TAXATION LAW 1
i. The recipient was selected without any action
on his part to enter the contest or proceeding;
and
ii. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award. (Sec. 32(B)(7)(c),
NIRC)
d. Prizes and Awards in Sports Competition - All prizes
and awards granted to athletes in local and
international sports competitions and tournaments
whether held in the Philippines or abroad and
sanctioned by their national sports associations. (Sec.
32(B)(7)(d), NIRC)
e. 13th Month Pay and Other Benefits - Gross benefits
received by officials and employees of public and
private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed
Ninety thousand pesos (P90,000) which shall cover:
i. Benefits received by officials and employees of
the national and local government pursuant to
Republic Act No. 6686;
ii. Benefits received by employees pursuant to
Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13,
1986;
iii. Benefits received by officials and employees not
covered by Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated
August 13, 1986; and
iv. Other benefits such as productivity incentives
and Christmas bonus. (Sec. 32(B)(7)(e), NIRC)
DE MINIMIS BENEFITS
- These are facilities and privileges furnished or offered
by an employer to his employees that are relatively
small value and are offered or furnished by the
employer merely as means of promoting health,
goodwill, contentment, and efficiency of his
employees. (Sec. 2.23c, BIR RR no. 3-98)
The following De Minimis Benefits are exempt from income tax
and withholding tax on compensation income of BOTH
managerial and rank and file EEs [as provided by R.R. No. 11-
2018/ R.R. No. 5-2011 / R.R. No. 8-2012 and R.R. No. 1-2015
]:
(1) Monetized unused vacation leave credits of PRIVATE
employees not exceeding ten (10) days during the
year. Note that the monetization of unused VL credits
in excess of 10 days and monetization of SL even if
not exceeding 10 days are subject to tax; [RR No. 5-
2011]
(2) Monetized value of vacation and sick leave credits
paid to GOVERNMENT officials and employees. Note
that there is no limit as to the number of credits; [RR
No. 5- 2011]
(3) Medical cash allowance to dependents of
employees, not exceeding P1,500 per employee per
semester or P250 per month; [RR No. 11-2018]
(4) Rice subsidy of P2,000 or one (1) sack of 50 kg. rice
per month amounting to not more than P2,000; [RR
No. 11-2018]
(5) Uniform and Clothing allowance not exceeding
P6,000 per annum; [RR No. 11- 2018]
(6) Actual medical assistance, e.g. medical allowance to
cover medical and healthcare needs, annual
 TAXATION LAW 1
Morillo Notes
medical/executive check- up, maternity assistance,
and routine consultations, not exceeding P10,000.00
per annum; [RR No. 5-2011]
(7) Laundry allowance not exceeding P300 per month;
[RR No. 5-2011]
(8) Employees achievement awards, e.g., for length of
service or safety achievement, which must be in the
form of a tangible personal property other than cash
or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under
an established written plan which does not
discriminate in favor of highly paid employees; [RR
No. 5-2011]
(9) Gifts given during Christmas and major anniversary
celebrations not exceeding P5,000 per employee per
annum; [RR No. 5-2011]
(10) Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per
region basis; [RR No. 3-98]
(11) Benefits received by an employee by virtue of a
collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total
monetary value received from both CBA and
productivity incentive schemes combined do not
exceed P10,000.00 per employee per taxable year.
(BIR RR no. 1-2015)
All other benefits given by employers which are not included in
the above enumeration shall NOT be considered as "de
minimis" benefits and hence, shall be subject to withholding
tax on compensation (rank and file employees) and FBT
(managerial/supervisory employees).
CIR vs. CA % CASTANEDA
GR no. 96016, October 17, 1991
FACTS:
Efren P. Castaneda retired from the government service as
Revenue Attache in the Philippine Embassy in London, England, on
10 December 1982 under the provisions of Section 12 (c) of
Commonwealth Act 186, as amended. Upon retirement, he
received, among other benefits, terminal leave pay from which
petitioner Commissioner of Internal Revenue withheld P12,557.12
allegedly representing income tax thereon.
Castaneda filed a formal written claim with CIR for a refund of the
P12,557.13, contending that the cash equivalent of his terminal
leave is exempt from income tax. To comply with the two-year
prescriptive period within which claims for refund may be filed,
Castaneda filed on 16 July 1984 with the Court of Tax Appeals a
Petition for Review, seeking the refund of income tax withheld from
his terminal leave pay. The Court of Tax Appeals found for private
respondent Castaneda and ordered the Commissioner of Internal
Revenue to refund Castaneda the sum of P12,557.13 withheld as
income tax. (Annex "C", petition).
ISSUE:
W/N terminal leave pay received by a government official or
employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.
RULING:
NO, The Solicitor General, acting on behalf of the Commissioner of
Internal Revenue, contends that the terminal leave pay is income
derived from employer- employee relationship, citing in support of
his stand Section 28 of the National Internal Revenue Code; that as
part of the compensation for services rendered, terminal leave pay
is actually part of gross income of the recipient. Thus "terminal
leave pay cannot be viewed as salary for purposes which would
reduce it. There can thus be no 'commutation of salary' when a
government retiree applies for terminal leave because he is not
receiving it as salary. What he applies for is a 'commutation of
leave credits.' It is an accumulation of credits intended for old age
or separation from service."
The Court has already ruled that the terminal leave pay received by
a government official or employee is not subject to withholding
(income) tax. In the recent case of Jesus N. Borromeo vs. The Hon.
Civil Service Commission, et al., the Court explained the rationale
behind the employee's entitlement to an exemption from
withholding (income) tax on his terminal leave pay as follows:
"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.'
In fine, not being part of the gross salary or income of a
government official or employee but a retirement benefit, terminal
leave pay is not subject to income tax.
INCOME FROM SOURCES WITHIN
AND WITHOUT THE PHILIPPINES:
A. INCOME FROM SOURCES
WITHIN THE PHILIPPINES:
GROSS INCOME FROM SOURCES WITHIN THE
PHILIPPINES: the following items of gross income shall be
treated as gross income from sources within the Philippines:
1. Interests - Interests derived from sources within the
Philippines, and interests on bonds, notes or other
interest-bearing obligation of residents, corporate or
otherwise;
2. Dividends. - The amount received as dividends:
a. From a domestic corporation; and
b. From a foreign corporation, unless less than
fifty percent (50%) of the gross income of
such foreign corporation for the three-year
period ending with the close of its taxable
year preceding the declaration of such
dividends or for such part of such period as
the corporation has been in existence) was
derived from sources within the Philippines
as determined under the provisions of this
Section; but only in an amount which bears
the same ratio to such dividends as the
gross income of the corporation for such
period derived from sources within the
Philippines bears to its gross income from
all sources;
3. Services. - Compensation for labor or personal
services performed in the Philippines;
4. Rentals and Royalties. - Rentals and royalties from
property located in the Philippines or from any
interest in such property, including rentals or royalties
for;
a. The use of or the right or privilege to use in
the Philippines any copyright, patent, design
or model, plan, secret formula or process,
TAXATION LAW 1 73
 TAXATION LAW 1
Morillo Notes
goodwill, trademark, trade brand or other
like property or right;
b. The use of, or the right to use in the
Philippines any industrial, commercial or
scientific equipment;
c. The supply of scientific, technical, industrial
or commercial knowledge or information;
d. The supply of any assistance that is ancillary
and subsidiary to, and is furnished as a
means of enabling the application or
enjoyment of, any such property or right as
is mentioned in paragraph (a), any such
equipment as is mentioned in paragraph (b)
or any such knowledge or information as is
mentioned in paragraph (c);
e. The supply of services by a nonresident
person or his employee in connection with
the use of property or rights belonging to, or
the installation or operation of any brand,
machinery or other apparatus purchased
from such nonresident person;
f. Technical advice, assistance or services
rendered in connection with technical
management or administration of any
scientific, industrial or commercial
undertaking, venture, project or scheme;
and
g. The use of or the right to use:
i. Motion picture films;
ii. Films or video tapes for use in
connection with television; and
iii. Tapes for use in connection with
radio broadcasting.
5. Sale of Real Property. - Gains, profits and income
from the sale of real property located in the
Philippines; and
6. Sale of Personal Property. - Gains; profits and
income from the sale of personal property, as
determined in Subsection (E) of this Section. (Sec.
42(A), NIRC)
TAXABLE INCOME FROM SOURCES WITHIN THE
PHILIPPINES:
● General Rule: From the items of gross income specified
in Subsection (A) of this Section, there shall be deducted
the expenses, losses and other deductions properly
allocated thereto and a ratable part of expenses,
interests, losses and other deductions effectively
connected with the business or trade conducted
exclusively within the Philippines which cannot definitely
be allocated to some items or class of gross income:
Provided, That such items of deductions shall be allowed
only if fully substantiated by all the information necessary
for its calculation. The remainder, if any, shall be treated
in full as taxable income from sources within the
Philippines.
● Exception: No deductions for interest paid or incurred
abroad shall be allowed from the item of gross income
specified in subsection (A) unless indebtedness was
actually incurred to provide funds for use in connection
with the conduct or operation of trade or business in the
Philippines. (Sec. 42(B), NIRC)
74 TAXATION LAW 1
B. INCOME FROM SOURCES
WITHOUT THE PHILIPPINES:
GROSS INCOME FROM SOURCES WITHOUT THE
PHILIPPINES: The following items of gross income shall be
treated as income from sources without the Philippines:
1. Interests other than those derived from sources
within the Philippines as provided in paragraph (1) of
Subsection (A) of this Section;
2. Dividends other than those derived from sources
within the Philippines as provided in paragraph (2) of
Subsection (A) of this Section;
3. Compensation for labor or personal services
performed without the Philippines;
4. Rentals or royalties from property located without the
Philippines or from any interest in such property
including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents,
copyrights, secret processes and formulas, goodwill,
trademarks, trade brands, franchises and other like
properties; and
5. Gains, profits and income from the sale of real
property located without the Philippines. (Sec. 42(C),
NIRC)
TAXABLE INCOME FROM SOURCES WITHOUT THE
PHILIPPINES:
- From the items of gross income specified in
Subsection (C) of this Section, there shall be
deducted the expenses, losses, and other deductions
properly apportioned or allocated thereto and a
ratable part of any expense, loss or other deduction
which cannot definitely be allocated to some items or
classes of gross income. The remainder, if any, shall
be treated in full as taxable income from sources
without the Philippines. (Sec. 42(D), NIRC)
C. INCOME FROM SOURCES PARTLY WITHIN
AND WITHOUT THE PHILIPPINES:
INCOME FROM SOURCES PARTLY WITHIN AND PARTLY
WITHOUT THE PHILIPPINES:
- Items of gross income, expenses, losses and
deductions, other than those specified in Subsections (A)
and (C) of this Section, shall be allocated or apportioned
to sources within or without the Philippines, under the
rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
Where items of gross income are separately allocated to
sources within the Philippines, there shall be deducted
(for the purpose of computing the taxable income
therefrom) the expenses, losses and other deductions
properly apportioned or allocated thereto and a ratable
part of other expenses, losses or other deductions which
cannot definitely be allocated to some items or classes
of gross income. The remainder, if any, shall be included
in full as taxable income from sources within the
Philippines. In the case of gross income derived from
sources partly within and partly without the Philippines,
the taxable income may first be computed by deducting
the expenses, losses or other deductions apportioned or
allocated thereto and a ratable part of any expense, loss
or other deduction which cannot definitely be allocated
 TAXATION LAW 1
Morillo Notes
to some items or classes of gross income; and the
portion of such taxable income attributable to sources
within the Philippines may be determined by processes
or formulas of general apportionment prescribed by the
Secretary of Finance. Gains, profits and income from the
sale of personal property produced (in whole or in part)
by the taxpayer within and sold without the Philippines,
or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as
derived partly from sources within and partly from
sources without the Philippines.
Gains, profits and income derived from the purchase of
personal property within and its sale without the
Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be
treated as derived entirely form sources within the
country in which sold: Provided, however, That gain from
the sale of shares of stock in a domestic corporation
shall be treated as derived entirely form sources within
the Philippines regardless of where the said shares are
sold. The transfer by a nonresident alien or a foreign
corporation to anyone of any share of stock issued by a
domestic corporation shall not be effected or made in its
book unless: (1) the transferor has filed with the
Commissioner a bond conditioned upon the future
payment by him of any income tax that may be due on
the gains derived from such transfer, or (2) the
Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from
such sale or transfer have been paid. It shall be the duty
of the transferor and the corporation the shares of which
are sold or transferred, to advise the transferee of this
requirement. (Sec. 34(E), NIRC)
Chapter 4:
DEDUCTIONS FROM GROSS INCOME
DEDUCTIONS FROM GROSS INCOME:
- Deductions are items or amounts authorized by law
to be subtracted from the pertinent items of gross
income to arrive at taxable income.
- Deductions from income tax purposes partake of the
nature of tax exemptions, hence, if tax exemptions
are to be strictly construed, then it follows that
deductions must also strictly construct. (CIR vs.
Isabela Cultural, GR no. 172231 (2007))
- However, if there is an express mention in the law or
if the taxpayer falls within the purview of the
exemption by clear legislative intent, the rule on strict
construction will not apply. (CIR vs. Anoldus
Carpentry Shop, GR no. 71122, (1988))
TYPES OF DEDUCTIONS FROM GROSS INCOME:
(a) Expenses;
(b) Interest;
(c) Taxes;
(d) Losses;
(e) Bad Debts;
(f) Depreciation;
(g) Depletion of Oil and Gas Wells and Mines;
(h) Charitable and Other contributions;
(i) Research and Development;
(j) Pension Trusts
(k) Additional Requirements for Deductibility of Certain
Payments;
(l) Optional Standard Deduction (OSD);
ORDINARY AND NECESSARY TRADE,
BUSINESS OR PROFESSIONAL EXPENSES:
In General. - There shall be allowed as deduction from gross
income all the ordinary and necessary expenses paid or incurred
during the taxable year in carrying on or which are directly
attributable to, the development, management, operation and/or
conduct of the trade, business or exercise of a profession,
including:
a. A reasonable allowance for salaries, wages, and other
forms of compensation for personal services actually
rendered, including the grossed-up monetary value of
fringe benefit furnished or granted by the employer to the
employee: Provided, That the final tax imposed under
Section 33 hereof has been paid;
b. A reasonable allowance for travel expenses, here and
abroad, while away from home in the pursuit of trade,
business or profession;
c. A reasonable allowance for rentals and/or other payments
which are required as a condition for the continued use or
possession, for purposes of the trade, business or
profession, of property to which the taxpayer has not
taken or is not taking title or in which he has no equity
other than that of a lessee, user or possessor;
d. A reasonable allowance for entertainment, amusement
and recreation expenses during the taxable year, that are
directly connected to the development, management and
operation of the trade, business or profession of the
taxpayer, or that are directly related to or in furtherance of
the conduct of his or its trade, business or exercise of a
profession not to exceed such ceilings as the Secretary of
Finance may, by rules and regulations prescribe, upon
recommendation of the Commissioner, taking into
account the needs as well as the special circumstances,
nature and character of the industry, trade, business, or
profession of the taxpayer: Provided, That any expense
incurred for entertainment, amusement or recreation that
is contrary to law, morals public policy or public order
shall in no case be allowed as a deduction. (Sec.
34(A)(1)(a), NIRC)
REQUISITES FOR DEDUCTIBILITY OF EXPENSES:
1. The expense must be ordinary and necessary;
Ordinary Expense: Necessary Expense:
When it connotes a Where the expenditure is
payment, which is normal appropriate or helpful in
in relation to the business the development of the
of the taxpayer and the taxpayer’s business or that
surrounding the same is proper for the
circumstances. purpose of realizing a profit
or minimizing a loss.
2. It must be paid or incurred during the taxable year;
3. It must be paid or incurred in carrying on or which are
directly attributable to the development,
management, operation and /or conduct of trade,
business or exercise of profession;
4. It must be supported by adequate invoices or
receipts;
5. It is not contrary to law, public policy, or morals;
6. The tax required to be withheld on the expense paid
or payable is shown to have been remitted to the
BIR.
TAXATION LAW 1 75
 TAXATION LAW 1
Morillo Notes
NOTE: The expenses allowable to a non- resident alien or a foreign
corporation consist of only such expenses as are incurred in
carrying on any business or trade conducted within the Philippines
exclusively. [Sec. 77 RR 2]
TEST OF DEDUCTIBILITY:
- In order to be deductible as a business expense, the
following conditions are imposed:
1. The expense must be ordinary and
necessary;
2. It must be paid within the taxable year; and
3. it must be ordinary and and carrying one a
trade or business; and
4. The taxpayer must substantially prove by
evidence or records the deductions claimed
under the law. (Esso Standard vs. CIR, GR
no. L-28508-9, July 7, 1989)
ESSO STANDARD EASTERN vs. CIR
GR nos. L-28508-9, July 7, 1989
FACTS:
ESSO Standard deducted from its gross income for 1959 the
amount it had spent for drilling and exploration of its petroleum
concessions as part of its ordinary and necessary business
expenses. CIR disallowed its claim on the ground that the
expenses should be capitalized and might be written off as a loss
only when a “dry hole” should result. Thereafter, ESSO Standard
filed an amended return where it asked for the refund of P300K by
reason of its abandonment as “dry holes” of several of its oil wells.
Also, ESSO Standard claimed as ordinary expenses in the same
return the amount of P340K representing margin fees it had paid to
the Central bank on its profit remittances to its New York Head
office.
CIR assessed ESSO STANDARD, a deficiency income which arose
from the disallowance of the margin fees paid by ESSO Standard to
the Central Bank on its profit remittances to its New York Head
Office. ESSO Standard paid under protest and file a claim of refund
for overpayment. The claim was denied by CIR, holding that the
margin fees paid to the Central Bank could not be taxes allowed as
deductible business expenses.
ESSO appealed to the CTA, contending that the margin fees were
deductible from gross income as ordinary and necessary business
expense. CTA DENIED ESSO STANDRARD’S CLAIM.
ISSUE:
W/N the margin fees should be considered as necessary and
ordinary business expenses and, therefore, still deductible from its
gross income.
RULING:
NO, The statutory test of deductibility where it is axiomatic that to
be deductible as a business expense, three conditions are
imposed, namely: (1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and (3) it
must be paid or incurred in carrying on a trade or business. In
addition, not only must the taxpayer meet the business test, he
must substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed.
Ordinarily, an expense will be considered 'necessary' where the
expenditure is appropriate and helpful in the development of the
taxpayer's business. It is 'ordinary' when it connotes a payment
which is normal in relation to the business of the taxpayer and the
surrounding circumstances. The right to a deduction depends in
each case on the particular facts and the relation of the payment to
the type of business in which the taxpayer is engaged. The
intention of the taxpayer often may be the controlling fact in making
76 TAXATION LAW 1
the determination. Assuming that the expenditure is ordinary and
necessary in the operation of the taxpayer's business, the answer
to the question as to whether the expenditure is an allowable
deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the extent
and permanency of the work accomplished by the expenditure.
Since the margin fees in question were incurred for the remittance
of funds to ESSO Standard’s Head Office in New York, which is a
separate and distinct income taxpayer from the branch in the
Philippines, for its disposal abroad, it can never be said therefore
that the margin fees were appropriate and helpful in the
development of ESSO Standard’s business in the Philippines
exclusively or were incurred for purposes proper to the conduct of
the affairs of ESSO Standard’s branch in the Philippines exclusively
or for the purpose of realizing a profit or of minimizing a loss in the
Philippines exclusively. If at all, the margin fees were incurred for
purposes proper to the conduct of the corporate affairs of Standard
Vacuum Oil Company in New York, but certainly not in the
Philippines. ESSO has not shown that the remittance to the head
office of part of its profits was made in furtherance of its own trade
or business. The petitioner merely presumed that all corporate
expenses are necessary and appropriate in the absence of a
showing that they are illegal or ultra vires. This is error.
MARIANO ZAMORA vs. CIR
GR no. L-15290, May 31, 1963
FACTS:
Mariano Zamora (owner of the Bay View Hotel & Farmacia Zamora,
Manila) filed his income tax returns for 1951-1952. CIR found that
he failed to file his return of the capital gains derived from the same
of certain real property and claim deductions which were not
allowed. The CIR required him to pay deficiency income. On appeal
to CTA by ZAMORA, the CTA only reduced the amount.
Hence, Zamora filed this petition to the SC alleging that CTA erred
in disallowing P10,478.50 as promotion expenses incurred by his
wife for the promotion of the Bay View Hotel and Farmacia Zamora.
He contends that the whole amount of P20,957.00 as promotion
expenses in his 1951 income tax returns, should be allowed and
not merely one-half of it or P10,478.50, on the ground that, while
not all the itemized expenses are supported by receipts, the
absence of some supporting receipts has been sufficiently and
satisfactorily established. For, as alleged, the said amount of
P20,957.00 was spent by Mrs. Esperanza A. Zamora (wife of
Mariano), during her travel to Japan and the United States to
purchase machinery for a new Tiki-Tiki plant, and to observe hotel
management in modern hotels. The CTA, however, found that for
said trip Mrs. Zamora obtained only the sum of P5,000.00 from the
Central Bank and that in her application for dollar allocation, she
stated that she was going abroad on a combined medical and
business trip, which facts were not denied by Mariano Zamora. No
evidence had been submitted as to where Mariano had obtained
the amount in excess of P5,000.00 given to his wife which she
spent abroad. No explanation had been made either that the
statement contained in Mrs. Zamora's application for dollar
allocation that she was going abroad on a combined medical and
business trip, was not correct. The alleged expenses were not
supported by receipts. Mrs. Zamora could not even remember how
much money she had when she left abroad in 1951, and how the
alleged amount of P20,957.00 was spent.
ISSUE:
W/N the P10K, as promotion expenses incurred by Zamora’s
deceased wife for the promotion of the Bay View Hotel and
Farmacia Zamora, should be considered as business expenses,
therefore, deductible.
RULING:
NO, Sec. 30 of the Tax Code, provides that in computing net
 TAXATION LAW 1
Morillo Notes
income, there shall be allowed as deductions all the ordinary and
necessary expenses paid or incurred during the taxable year, in
carrying on any trade or business. Since the promotion expenses
constitute one of the deductions in conducting a business, the
same must testify these requirements, the claim thereof must be
supported by record showing in detail the amount and nature of the
expenses incurred.
Considering, as heretofore stated, that the application of Mrs.
Zamora for dollar allocation shows that she went abroad on a
combined medical and business trip, not all of her expenses came
under the category of ordinary and necessary expenses; part
thereof constituted her personal expenses. There having been no
means by which to ascertain which expense was incurred by her in
connection with the business of Mariano Zamora and which was
incurred for her personal benefit, the Collector and the CTA in their
decisions, considered 50% of the said amount of P20,957.00 as
business expenses and the other 50%, as her personal expenses.
We hold that said allocation is very fair to Mariano Zamora, there
having been no receipt whatsoever, submitted to explain the
alleged business expenses, or proof of the connection which said
expenses had to the business or the reasonableness of the said
amount of P20,957.00. While in situations like the present, absolute
certainty is usually no possible, the CTA should make as close an
approximation as it can, bearing heavily, if it chooses, upon the
taxpayer whose inexactness is of his own making. In view hereof,
We are of the opinion that the CTA, did not commit error in allowing
as promotion expenses of Mrs. Zamora claimed in Mariano
Zamora's 1951 income tax returns, merely one-half or P10,478.50.
PEVSNER vs. COMMISSIONER
628 F.2d 467
FACTS:
Since June 1973, Sandra Pevsner, taxpayer, has been employed as
the manager of the Sakowitz Yves St. Laurent Boutique in Dallas,
Texas. Although the boutique sells clothing that is ready to wear
(RTW), the clothes were highly fashionable and expensively priced.
As manager of the boutique, the she is expected by her employer
to wear Yves Boutique clothes while at work. During 1975, Pevsner
bought (at an employee discount) several apparels for a total of
$1,381.00. In addition, the sum of $240.00 was expended for
maintenance of these items. On her joint federal income tax return
for 1975, Pevsner deducted $990.00 as an ordinary and necessary
business expense with respect to her purchase of the Yves
Boutique clothing and accessories. Thereafter, CIR assessed a
deficiency for the deduction that was taken.
The tax court determined that Pevsner was entitled to deduct the
expenses for both the purchase and maintenance of the clothing
items, holding that the apparel was not suitable to the private
lifestyle maintained by the taxpayer. CIR appealed, alleging that a
deduction should be denied because the Yves Boutique clothes
purchased by Pevsner were adaptable for general usage as
ordinary clothing and she was not prohibited from using them as
such.
ISSUE:
W/N Pevsner is entitled to deduct as an ordinary and necessary
business expense the cost of purchasing and maintaining the Yves
Boutique clothes worn by her in her employment as the manager of
the boutique.
RULING:
NO, The generally accepted rule in governing the deductibility of
clothing expenses is that the cost of clothing is deductible as
business expense only if: (1) the clothing is of a type of specifically
required as a condition of employment; (2) it is not adaptable to
general usage as ordinary clothing; and (3) it is not so worn.
The SC held that even though Pevsner did not wear the expensive
clothes away from work because of her simple lifestyle, that
because the clothes were adaptable to wear away from work, she
was not entitled to deduct the cost of the clothes as an ordinary
and necessary business expense. In denying the deduction, the SC
applied an objective test of adaptability. Under the objective test,
no reference is made to the individual taxpayer’s lifestyle or
personal taste. instead, adaptability for personal or general use
depends upon what is generally accepted for ordinary street wear.
DRUCKER vs. CIR
715 f.2D 67
FACTS:
Drucker, Rogers and Cherry are concert musicians employed by
the Metropolitan Opera Associations, Inc. (METRO). Each of them
lived in a New York City Apartment in which one room or a portion
of a room was set aside and used exclusively for musical study and
practice, in which they spent 30-32 hours per week studying and
practicing for music. On their tax returns, the Drucker, Rogers, and
Cherry deducted from their gross income the rent, electricity, and
maintenance costs allocable to the practice area. CIR disallowed
these deductions and assessed deficiency on each of them.
ISSUE:
W/N Drucker, Rogers, and Cherry are entitled for deduction from
gross income on their rent, electricity and maintenance costs
allocated to their practice area.
RULING:
YES, Section 280A(a) of the Internal Revenue Code of 1954, as
amended, 26 U.S.C. § 280A(a) (1976 & Supp. V 1981), generally
disallows any deduction for individuals "with respect to the use of a
dwelling unit which is used by the taxpayer during the taxable year
as a residence." Section 280A(c)(1)(A), however, permits the
deduction of the expenses "allocable to a portion of the dwelling
unit which is exclusively used on a regular basis" as the "principal
place of business for any trade or business of the taxpayer." In the
case of an employee, the deduction is available "only if the
exclusive use ... is for the convenience of his employer." Section
280A(c)(5) contains the further limitation that any deductions must
be limited to the excess of gross income derived from such use for
the taxable year over those deductions allocable to such use, such
as mortgage interest, which are permitted by the tax laws without
reference to the business use concerned.
We believe that appellant musicians' "principal place[s] of
business" were their home practice studios. In so holding, we see
no need to disturb the Tax Court's ruling that the taxpayers are in
the business of being employees of the Met. Rather, we find this
the rare situation in which an employee's principal place of
business is not that of his employer. Both in time and in
importance, home practice was the "focal point" of the appellant
musicians' employment-related activities. The place of
performance was immaterial so long as the musicians were
prepared, and most of the preparation occurred at home. The
home practice areas were appellants' principal places of business
within the meaning of section 280A. Because the Met provided
appellants with no space for the essential task of private practice,
the maintenance of residential space exclusively for such purpose
was an expense almost entirely additional to nondeductible
personal living expenses. The appellant musicians' use of home
studios "was not 'purely a matter of personal convenience,
comfort, or economy.' Rather, it was a business necessity."
CIR vs. SOLIMAN
506 US 168
FACTS:
During the 1983 tax year, respondent Soliman, an anesthesiologist,
spent 30 to 35 hours per week administering anesthesia and
postoperative care in three hospitals, none of which provided him
with an office. He also spent two to three hours per day in a room
in his home that he used exclusively as an office, where he did not
TAXATION LAW 1 77
 TAXATION LAW 1
Morillo Notes
meet patients but did perform a variety of tasks related to his
medical practice. His claimed federal income tax deduction for the
portion of his household expenses attributable to the home office
was disallowed by petitioner Commissioner, who determined that
the office was not Soliman's "principal place of business" under 26
U. S. C. § 280A(c)(1)(A). The Tax Court disagreed and allowed the
deduction. In affirming, the Court of Appeals adopted the test used
in the Tax Court, under which a home office may qualify as the
"principal place of business" if (1) the office is essential to the
taxpayer's business; (2) the taxpayer spends a substantial amount
of time there; and (3) there is no other location available for
performance of the business' office functions.
ISSUE:
W/N Soliman was entitled to a deduction for home office
expenses?
RULING:
NO, Soliman was not entitled to a deduction for home office
expenses. The test used by the Court of Appeals is rejected
because it fails to undertake a comparative analysis of the
taxpayer's various business locations. This Court looks to words'
"ordinary, everyday senses" in interpreting a revenue statute's
meaning. E. g., Malat v. Riddell, 383 U. S. 569, 571. Section
280A(c)(1)(A) refers to the "principal place of business," and both
the commonsense and dictionary meanings of "principal"
demonstrate that this constitutes the most important or significant
place for the business, as determined through a comparison of all
of the places where business is transacted. Contrary to the Court of
Appeals' suggestion, the statute does not allow for a deduction
whenever a home office may be characterized as legitimate.
Although no one test is always determinative and each case turns
upon its particular facts, there are two primary considerations in
deciding whether a home office is the principal place of business.
First, the relative importance of the functions performed at each
business location must be analyzed. This requires, as a preliminary
step, an objective description of the particular characteristics of the
business in question. If the nature of that business requires the
taxpayer to meet or confer with a client or patient or to deliver
goods or services to a customer, the place where that contact
occurs, though not conclusive, must be given great weight.
Moreover, if the nature of the business requires that its services are
rendered or its goods are delivered at a facility with unique or
special characteristics, this is a further and weighty consideration.
Contrary to the Court of Appeals' ruling, the essentiality of the
functions performed at home, while relevant, is not controlling,
whereas the availability of alternative office space is irrelevant.
Second-and particularly if the foregoing analysis yields no definitive
answer-the decisionmaker should compare the amount of time
spent at the home with the time spent in each of the other places
where the business is transacted. If the comparative analysis
required by the statute reveals that there is no principal place of
business, the courts and the Commissioner should not strain to
conclude that a home office qualifies by default.
Application of these principles demonstrates that Soliman's home
office was not his principal place of business. His home office
activities, from an objective standpoint, must be regarded as less
important to his business than the tasks he performed at the
hospitals. The actual treatment of patients at these facilities having
special characteristics was the essence of the professional service
he provided and was therefore the most significant event in the
professional transaction. Moreover, the hours he spent in the home
office, when compared to the time he spent at the hospitals, are
insufficient to render the home office the principal place of business
in light of all of the circumstances of this case.
TEST OF REASONABLENESS:
General Rule - Bonus to employees made in good faith and
as additional compensation for the services actually rendered
by the employees are deductible, provided such payments,
78 TAXATION LAW 1
when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered. (CM
Hoskins, GR no. L-24059, November 28, 1969)
CONDITIONS PRECEDENT TO THE DEDUCTION OF
BONUSES TO EMPLOYEES:
1. The payment of the bonuses is in fact compensation;
2. It must be for personal services actually rendered;
and
3. The bonuses, when added to the salaries, are
“Reasonable when measured by the amount and
quality of the services performed with relation to the
business of the particular taxpayer. (CM Hoskins,
Supra)
CM HOSKINS & CO vs. CIR
GR no. L-24059, November 28, 1969
FACTS:
CM Hoskins is a domestic corporation engaged in the real estate
business as brokers, managing agents and administrators. It filed
its income tax return showing a net income of 92K and a tax liability
of 18K, which it paid. Upon verification, CIR disallowed 4 items of
deduction in CM Hoskins’ tax returns and assessed an income
deficiency against it. On appeal to the CTA, It upheld CIR’s
disallowance of the principal item of CM Hoskin’s having paid to
Mr. Hoskins (the founder and controlling stockholder of petitioner
corporation) the amount of 99K representing 50% of the
supervision fees earned by it.
ISSUE:
W/N Petitioner CM Hoskins payment to its controlling stockholder
(Mr. Hoskins) of 50% of its supervision fees is not a deductible
ordinary and necessary expense and should be treated as a
distribution of earning and profits of the taxpayer?
RULING:
NO, Considering that in addition to being Chairman of the board of
directors of petitioner corporation, which bears his name, Hoskins,
who owned 99.6% of its total authorized capital stock while the
four other officers-stockholders of the firm owned a total of four-
tenths of 1%, or one-tenth of 1% each, with their respective
nominal shareholdings of one share each was also salesman-
broker for his company, receiving a 50% share of the sales
commissions earned by petitioner, besides his monthly salary of
P3,750.00 amounting to an annual compensation of P45,000.00
and an annual salary bonus of P40,000.00, plus free use of the
company car and receipt of other similar allowances and benefits,
the Tax Court correctly ruled that the payment by petitioner to
Hoskins of the additional sum of P99,977.91 as his equal or 50%
share of the 8% supervision fees received by petitioner as
managing agents of the real estate, subdivision projects of
Paradise Farms, Inc. and Realty Investments, Inc. was inordinately
large and could not be accorded the treatment of ordinary and
necessary expenses allowed as deductible items within the purview
of Section 30 (a) (i) of the Tax Code.
The fact that such payment was authorized by a standing
resolution of petitioner's board of directors, since "Hoskins had
personally conceived and planned the project" cannot change the
picture. There could be no question that as Chairman of the board
and practically an absolutely controlling stockholder of petitioner,
holding 99.6% of its stock, Hoskins wielded tremendous power
and influence in the formulation and making of the company's
policies and decisions. Even just as board chairman, going by
petitioner's own enumeration of the powers of the office, Hoskins,
could exercise great power and influence within the corporation,
such as directing the policy of the corporation, delegating powers
to the president and advising the corporation in determining
executive salaries, bonus plans and pensions, dividend policies,
 TAXATION LAW 1
Morillo Notes
etc.
SUBSTANTIVE REQUIREMENTS:
- No deduction from gross income shall be allowed
under Subsection (A) hereof unless the taxpayer shall
substantiate with sufficient evidence, such as official
receipts or other adequate records: (i) the amount of
the expense being deducted, and (ii) the direct
connection or relation of the expense being deducted
to the development, management, operation and/or
conduct of the trade, business or profession of the
taxpayer. (Sec. 34(A)(1)(b), NIRC)
- Any amount paid or payable which is otherwise
deductible from, or taken into account in computing
gross income or for which depreciation or
amortization may be allowed under this Section, shall
be allowed as a deduction only if it is shown that the
tax required to be deducted and withheld therefrom
has been paid to the Bureau of Internal Revenue in
accordance with this Section 58 and 81 of this Code.
(Sec. 34(K), NIRC)
Section 160. Apportionment of deductions. - “...The ratable part is
based upon the ration of gross income from sources within the
Philippines to the total gross income.”
From the foregoing provisions, it is manifest that where an expense
is clearly related to the production of Philippine-derived income or
to Phil operations (e.g., salaries of Phil personnel, rental of office
building in the Phils), that expense can be deducted from the gross
income acquired in the Phils without resorting to apportionment.
The overhead expenses incurred by the parent company in
connection with finance, administration, and research and
development, all of which direct benefit its branches all over the
world, including the Phils, fall under a different category however.
There are items which cannot be definitely allocated or identified
with the operations of the Phil branch. For 1971, the parent
company of Smith Kline spent $1,077,739. Under Sec. 37, Smith
Kline can claim as its deductible share a ratable part of such
expenses based upon the ration of the local branch’s gross income
to the total gross income, worldwide, of the multinational
corporation. Smith Kline also presented ample evidence to support
its claim for refund. We hold that Smith Kline’s amended 1971
return is in conformity with the law and regulations. The Tax Court
correctly held that the refund or credit of the resulting overpayment
is in order.

CIR vs. CTA & SMITH KLINE

GR no. L-54108, January 17, 1984
GANCAYCO vs. CR
GR no. L-13325, April 20, 1961
FACTS:
Smith Kline and French Overseas Company, a multinational firm
FACTS:
domiciled in Pennsylvania, is licensed to do business in the Phils. It
Santiago Gancayco filed his ITR for 1949. Two days later, CIR
is engaged in the importation, manufacture, and sale of
issued a notice, advising Gancayco that his income tax liability for
pharmaceutical drugs and chemicals. In its original incomes tax
that year amounted to P9,000, Gancayco paid it. A year later, CIR
return in 1971, Smith Kline declared a net taxable income of
wrote to Gancayco again, informing him that he was still due for an
P1,489,277 and paid P511,247 as tax due. Among the deductions
efficiency income tax for 1949 in the amount of P29,000. Gancayco
claimed from gross income was P501,040 as its share of the head
sought reconsideration but CIR partially granted it and informed
office overhead expenses.
Gancayco that his income tax efficiency for 1949 amounted to
P16,000. Subsequently, CIR issued a warrant to levy Gancayco’s
However, in its amended return in 1973, there was an overpayment
properties to satisfy his deficiency income tax liability. On the other
of P324,255 “arising from under deduction of home office
hand, Gancayco filed petition before the CTA to cancel and the
overhead.” It made a formal claim for refund of the alleged
latter granted it. Gancayco maintains that the right to collect the
overpayment because it appears that sometime in October 1972,
deficiency income in question is barred by the statute of limitations.
Smith Kline received from its international independent auditors an
authenticated certification to the effect that the Philippine share in
CIR claimed that the P29,000 efficiency income tax came from
the unallocated overhead expenses of the main office for the year
Gancayco’s farming expenses, amounting to P27,000, which was
ended December 1971 was actually P1,427,484, and that the
spent exclusively for clearing and developing the farm which were
allocation was made on the basis of the percentage of gross
necessary to place it in a productive state. Therefore, it is not an
income in the Philippines to gross income of the corporation as a
ordinary expense but a capital expenditure, Hence it is not
whole. By reason of the new adjustment, Smith Kline’s tax liability
deductible. On the other hand, Gancayco claimed that the said
was greatly reduced from P511,247 to P186,992, resulting in an
“farming expenses” were spect for the development and cultivation
overpayment of P324,255.
of his property.
The CTA rendered a decision in 1980 ordering the Commissioner to
ISSUE:
refund the overpayment or grant a tax credit to Smith Kline. The
W/N the sum of P16,000 is due from Gancayco as deficiency
Commissioner appealed.
income tax from 1949 hinges on the validity of his claim for
deduction of farming expenses.
ISSUE:
W/N Smith Kline’s share of the head office overhead expenses
RULING:
incurred outside the Philippines deductible?
NO, Expenses incident to the acquisition of property follow the
same rule as applied to payments made as direct consideration for
RULING:
the property. The cost of farm machinery, equipment and farm
YES, Smith Kline’s share of the head officer overhead expenses
building represents a capital investment and is not an allowable
incurred outside the Philippines is deductible.
deduction as an item of expense. Amounts expended in the
development of farms, orchards, and ranches prior to the time
Section 37 of the old NIRC. Net Income from sources in the
when the productive state is reached may be regarded as
Philippines. - “From the items of gross income specified in
investments of capital. Expenses for clearing off and grading lots
subsection (a) of this section, there shall be deducted the
acquired is a capital expenditure, representing part of the cost of
expenses, losses, and other deductions properly apportioned or
the land and was not deductible as an expense.
allocated thereto and a ratable part of any expenses, losses, or
other deductions which cannot definitely be allocated to some item
An item of expenditure, in order to be deductible under this section
or class of gross income. The remained, if any, shall be included in
of the statute providing for the deduction of ordinary and necessary
full as net income from sources within the Philippines.”
business expenses, must fall squarely within the language of the
statutory provision. This section is intended primarily although not

TAXATION LAW 1 79
 TAXATION LAW 1
Morillo Notes
always necessarily, to cover expenditures of a recurring nature
where the benefit derived from the payment is realized and
exhausted within the taxable year. Accordingly, if the result of the
expenditure is the acquisition of an asset which has an
economically useful life beyond the taxable year, no deduction of
such payment may be obtained under the provisions of the statute.
In such cases, to the extent that a deduction is allowable, it must
be obtained under the provisions of the statute which permit
deductions for amortization, depreciation, depletion or loss.
Gancayco’s claim for representation expenses aggregated
P31,753.97, of which P22,820.52 was allowed, and P8,933.45
disallowed. Such disallowance is justified by the record, for, apart
from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they were
incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited
by Gancayco is not in point, because in that case there was
evidence on the amounts spent and the persons entertained and
the necessity of entertaining them, although there were not receipts
and vouchers of the expenditures involved therein. Such is not the
case of Gancayco herein.
INTEREST:
GENERAL RULE:
- The amount of interest paid or incurred within a
taxable year on indebtedness in connection with the
taxpayer’s profession, trade or business shall be
allowed as deduction from gross income.
- The taxpayer’s allowable deduction for interest
expense shall be reduced by (effective January 1,
2009) 33% of the interest income subjected to final
tax. (Sec. 34(B), as amended by RA 9337
EXCEPTION: No deduction shall be allowed in respect of
interest under the following:
a. If within the taxable year an individual taxpayer
reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
through discount or otherwise: Provided, That such
interest shall be allowed as a deduction in the year
the indebtedness is paid: Provided, further, That if the
indebtedness is payable in periodic amortizations,
the amount of interest which corresponds to the
amount of the principal amortized or paid during the
year shall be allowed as deduction in such taxable
year;
b. If both the taxpayer and the person to whom the
payment has been made or is to be made are
persons specified under Section 36 (B); or
- Items not Deductible under Sec. 36:
a. Personal, living or family expenses;
b. Any amount paid out for new
buildings or for permanent
improvements, or betterments
made to increase the value of any
property or estate.
c. If the indebtedness is incurred to finance petroleum
exploration. (Sec. 34(B)(2), NIRC)
ITEMS NOT DEDUCTIBLE; LOSSES FROM
SALES OR EXCHANGES OF PROPERTY:
In computing net income, no deduction shall in any case be
80 TAXATION LAW 1
allowed in respect of losses from sales or exchanges of property
directly or indirectly;
(1) Between members of a family. For purposes of this paragraph,
the family of an individual shall include only his brothers and
sisters (whether by the whole or half-blood), spouse,
ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two
corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by
or for the same individual if either one of such corporations,
with respect to the taxable year of the corporation preceding
the date of the sale of exchange was under the law applicable
to such taxable year, a personal holding company or a foreign
personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor with
respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
(Sec. 36(B), NIRC)
OPTIONAL TREATMENT OF INTEREST EXPENSE:
- At the option of the taxpayer, interest incurred to
acquire property used in trade business or exercise
of a profession may be allowed as a deduction or
treated as a capital expenditure. (Sec. 34(B)(3), NIRC)
OLD COLONY R. CO. vs. CIR
284 US 552
FACTS:
In making a return for 1921, Old Colony Railroad Co. (Old Colony)
deducted from its gross income the full amount during the year as
interest to holders of its bonds. These bonds had been issued at
various dates between 1895 and 1904, and the subscribers had
taken them at prices in excess of par. The total of the premiums
thus paid by the company was almost $200K. At the dates of
issuance of the bonds until 1914, Old Colony kept its accounts on
a cash basis and credited the sums received in an account
designated as “Premium on Bonds.” In 1914, ICC ordered that Old
Colony should be amortized over the period of the lives of the
bonds. Old Colony compiled under protest and reported to the ICC
as income for 1921 was $7K but Old Colony did not include this in
its tax return as gross income or deduct it from the amount of
interest paid in its bond. CIR made no adjustment in his audit on
the item of interest paid but he added the sum of $7K to the
company’s gross income for 1921 and found a deficiency therein.
Old Colony filed a petition for redetermination before the Board of
Tax Appeals which the latter held that the CIR erred in treating the
$7K amount as taxable income of 1921. CIR asked reconsideration,
asserting that the mere fore form of the calculation by which he
arrived at the redetermination was immaterial and the result was
correct since the 1921’s proportion of amortization of bond
premiums was in reality a deduction from the stipulated interest
paid the bondholders. The Board of tax Appeals denied CIR’s
reconsideration. On appeal to the Circuit CA, the latter reversed the
decisions of the board and adapted the view of the CIR.
ISSUE:
W/N the Yearly Pro Rata amortization of bond premiums (Premium
on Bonds) are considered income to which it is applicable, thereby
operates as to reduce interest paid on bonded indebted?
RULING:
NO, Revenue Act of 1921 defines gross income as “including gains,
 TAXATION LAW 1
Morillo Notes
profits, and income derived by the taxpayer from any source
whatever, and provides that, in computing net income of a
corporation, “all interest paid or accrued within the taxable year on
its indebtedness” is deductible from such gross income. Treasury
regulations promulgated under authority of the statute state that, if
bonds are issued by a corporation at a premium, the net amount of
such premium is gain or income which should be amortized over
the life of the bonds.”
the fact that bonds of a corporation were issued at a premium does
not operate to reduce the amount deductible as interest on
indebtedness under Rev. Act 1921.
In the present case, as with corporate obligations generally, the
bond has a par value, and each coupon stipulates that, on a date
therein mentioned the company will pay a named sum as interest
on the bond. Until the present contention was put forward, no one
supposed that the taxpayer was not entitled to deduct the entire
amount specified in the coupon and actually paid during the
taxable year as interest. The person who receives this sum certainly
considers it interest, and so, apparently, does the government,
which requires him to return it all as such, and does not permit him,
if he or his predecessor holder paid more than par for the bond, to
treat part of the sum received as a return of capital loaned, and the
remainder as interest received.
PALANCA vs. CIR
GR no. L-16626, October 29, 1966
FACTS:
The late Don Carlos Palanca, Sr. donated in favor of his son, Carlos
Palanca, Jr. shares of stock in La Tondeña Inc.
amounting to 12,500 shares. Later, the BIR considered the
donation as transfer in contemplation of death; consequently, the
BIR assessed against the respondent, Palanca Jr., the sum of
P191,591.62 as estate and inheritance taxes on the transfer of said
12,500 shares of stock, including therein interest for delinquency of
P60,581.80. The respondent then filed an amended income tax
return, claiming an additional deduction in the amount P60,581.80;
hence, his new income tax due is only P428. He attached a letter
requesting the refund of P20,624.01. However, the said request for
refund was denied by the BIR. Court of tax appeals ordered the
refund. Hence, this petition.
ISSUE:
W/N the interest on the delinquent estate and inheritance tax is
deductible from the gross income.
RULING:
YES, the interest is deductible. The rule is settled that although
taxes already due have not, strictly speaking, the same
concept as debts, they are, however, obligations that may be
considered as such. In CIR v Prieto, the Court explicitly announced
that while the distinction between “taxes” and “debts” was
recognized in this jurisdiction, the variance in their legal conception
does not extend to the interests paid on them.
CIR vs. PRIETO
109 Phil. 592
FACTS:
The case was submitted for decision in the court below upon a
stipulation of facts, which for brevity is summarized as follows: On
December 4, 1945, the respondent conveyed by way of gifts to her
four children, namely, Antonio, Benito, Carmen and Mauro, all
surnamed Prieto, real property with a total assessed value of
P892,497.50. After the filing of the gift tax returns on or about
February 1, 1954, the petitioner Commissioner of Internal Revenue
appraised the real property donated for gift tax purposes at
P1,231,268.00, and assessed the total sum of P117,706.50 as
donor's gift tax, interest and compromises due thereon. Of the total
sum of P117,706.50 paid by respondent on April 29, 1954, the sum
of P55,978.65 represents the total interest on account of
deliquency. This sum of P55,978.65 was claimed as deduction,
among others, by respondent in her 1954 income tax return.
Petitioner, however, disallowed the claim and as a consequence of
such disallowance assessed respondent for 1954 the total sum of
P21,410.38 as deficiency income tax due on the aforesaid
P55,978.65, including interest up to March 31, 1957, surcharge and
compromise for the late payment.
ISSUE:
W/N such interest was paid upon an indebtedness within the
contemplation of section 30 (b) (1) of the Tax Code
RULING:
The term "indebtedness" as used in the Tax Code of the United
States containing similar provisions as in the above-quoted section
has been defined as an unconditional and legally enforceable
obligation for the payment of money. Within the meaning of that
definition, it is apparent that a tax may be considered an
indebtedness. It follows that the interest paid by herein respondent
for the late payment of her donor's tax is deductible from her gross
income under section 30(b) of the Tax Code. Thus, under sec. 23(b)
of the Internal Revenue Code of 1939, as amended, which contains
similarly worded provisions as sec. 30(b) of our Tax Code, the
uniform ruling is that interest on taxes is interest on indebtedness
and is deductible. The rule applies even though the tax is
nondeductible.
In conclusion, we are of the opinion and so hold that although
interest payment for delinquent taxes is not deductible as tax under
Section 30(c) of the Tax Code and section 80 of the Income Tax
Regulations, the taxpayer is not precluded thereby from claiming
said interest payment as deduction under section 30(b) of the same
Code.
TAXES:
GENERAL RULE:
- Taxes paid or incurred within the taxable year in
connection with the taxpayer’s profession, trade or
business, shall be allowed as deduction. (Sec.
34(C)(1), NIRC)
EXCEPTION:
(a) Income tax provided for under this Title;
(b) Income taxes imposed by authority of any any foreign
country;
- This deduction shall be allowed in the case
of a taxpayer who does not signify in his
return his desire to have to any extent the
benefits of Sec. 36(C)(3), NIRC (relating to
credits for taxes of foreign countries).
(c) Estate and donor’s taxes; and
(d) Taxes assessed against local benefits of a kind
tending to increase the value of the property
assessed. (Sec. 34(C)(1), NIRC)
NOTE: The taxes allowed under this Subsection, when refunded or
credited, shall be included as part of gross income in the year of
receipt to the extent of the income tax benefit of said deduction.
(Sec. 34(C)(1, last paragraph), NIRC)
THE FOLLOWING TAXES ARE DEDUCTIBLE:
1. Import duties;
2. Business tax;
3. Professional/Occupational tax;
4. Privilege and Excise tax;
TAXATION LAW 1 81
 TAXATION LAW 1
Morillo Notes

5. Documentary Stamp Tax (DST); An alien individual and a corporation shall not be
6. Motor vehicle registration fees; allowed the credits against the tax for the taxes of foreign
7. Real Property Tax (RPT); countries allowed under this paragraph. (Sec. 34(C)(3), NIRC)
8. electric energy/ Consumption Tax; and
9. Interest on Delinquent taxes LIMITATIONS ON CREDIT:
a. The amount of the credit in respect to the tax paid or
NON-DEDUCTIBLE TAXES: incurred to any country shall not exceed the same
a. Philippine income tax, except Fringe Benefit Taxes; proportion of the tax against which such credit is
b. Income tax imposed by authority of any foreign taken, which the taxpayer's taxable income from
country, if taxpayer avails of the Foreign Tax Credit sources within such country under this Title bears to
(FTC) his entire taxable income for the same taxable year;
and
However, when the taxpayer does not signify his desire to avail of
the tax credit for taxes of foreign countries, the amount may be b. The total amount of the credit shall not exceed the
allowed as a deduction from gross income of citizens and domestic same proportion of the tax against which such credit
corporations subject to the limitations set forth by law. is taken, which the taxpayer's taxable income from
sources without the Philippines taxable under this
Title bears to his entire taxable income for the same
TAX CREDIT VS. TAX DEDUCTION: taxable year. (Sec. 34(C)(4), NIRC)
TAX CREDIT TAX DEDUCTION
ADJUSTMENTS ON PAYMENT OF INCURRED TAXES:
Concept: Taxes are deductible Taxes are deductible - If accrued taxes when paid differ from the amounts
from the Philippine from gross income in claimed as credits by the taxpayer, or if any tax paid
income tax itself. computing the is refunded in whole or in part, the taxpayer shall
taxable income. notify the Commissioner; who shall re-determine the
amount of the tax for the year or years affected, and
Effect: Reduces Philippine Reduces taxable the amount of tax due upon such re-determination, if
Income Tax Liability income upon which any, shall be paid by the taxpayer upon notice and
the tax liability is demand by the Commissioner, or the amount of tax
calculated. overpaid, if any, shall be credited or refunded to the
taxpayer. In the case of such a tax incurred but not
Sources: Only foreign income Deductible taxes (eg. paid, the Commissioner as a condition precedent to
taxes may be business tax, excise the allowance of this credit may require the taxpayer
claimed as credits tax) to give a bond with sureties satisfactory to and to be
against Philippine approved by the Commissioner in such sum as he
Income Tax. may require, conditioned upon the payment by the
taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed
LIMITATIONS ON DEDUCTIONS: shall contain such further conditions as the
- In the case of a non-resident alien individual engaged Commissioner may require. (Sec. 34(C)(5), NIRC)
in trade or business in the Philippines and a resident
foreign corporation, the deductions for taxes shall be YEAR IN WHICH CREDIT TAKEN:
allowed only if and to the extent that they are - The credits provided for in Subsection (C)(3) of this
connected with income from sources within the Section may, at the option of the taxpayer and
Philippines. (Sec. 34(C)(2), NIRC) irrespective of the method of accounting employed in
keeping his books, be taken in the year which the
CREDIT AGAINST TAX FOR TAXES OF FOREIGN taxes of the foreign country were incurred, subject,
COUNTRIES - If the taxpayer signifies in his return hhs desire however, to the conditions prescribed in Subsection
to have the benefits of this paragraph, the tax imposed by this (C)(5) of this Section. If the taxpayer elects to take
Title shall be credited with: such credits in the year in which the taxes of the
(a) Citizen and Domestic Corporation - In the case of a foreign country accrued, the credits for all
citizen of the Philippines and of a domestic subsequent years shall be taken upon the same basis
corporation, the amount of income taxes paid or and no portion of any such taxes shall be allowed as
incurred during the taxable year to any foreign a deduction in the same or any succeeding year.
country; and (Sec. 34(C)(6), NIRC)
(b) Partnership and Estates - In the case of any such
individual who is a member of a general professional PROOF OF CREDITS:
partnership or a beneficiary of an estate or trust, his a. The total amount of income derived from sources
proportionate share of such taxes of the general without the Philippines;
professional partnership or the estate or trust paid or b. The amount of income derived from each country,
incurred during the taxable year to a foreign country, the tax paid or incurred to which is claimed as a
if his distributive share of the income of such credit under said paragraph, such amount to be
partnership or trust is reported for taxation under this determined under rules and regulations prescribed by
Title. the Secretary of Finance; and

82 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
c. All other information necessary for the verification
and computation of such credits. (Sec. 34(C)(7),
NIRC)
CIR vs. LEDNICKY
GR no. L-18169, July 31, 1964
FACTS:
Spouses are both American citizens residing in the Philippines and
have derived all their income from Philippine sources for taxable
years in question.
On March, 1957, filed their ITR for 1956, reporting gross income of
P1,017,287.65 and a net income of P 733,809.44. On March 1959,
file an amended claimed deduction of P 205,939.24 paid in 1956
to the United States government as federal income tax of 1956.
ISSUE:
W/N a citizen of the United States residing in the Philippines, who
derives wholly from sources within the Philippines, may deduct his
gross income from the income taxes he has paid to the United
States government for the said taxable year?
RULING:
An alien resident who derives income wholly from sources within
the Philippines may not deduct from gross income the income
taxes he paid to his home country for the taxable year. The right to
deduct foreign income taxes paid given only where alternative
right to tax credit exists. Section 30 of the NIRC, Gross Income
“Par. C (3): Credits against tax per taxes of foreign countries. If the
taxpayer signifies in his return his desire to have the benefits of
this paragraph, the tax imposed by this shall be credited with:
Paragraph (B), Alien resident of the Philippines; and, Paragraph C
(4), Limitation on credit.”
An alien resident not entitled to tax credit for foreign income taxes
paid when his income is derived wholly from sources within the
Philippines.
Double taxation becomes obnoxious only where the taxpayer is
taxed twice for the benefit of the same governmental entity. In the
present case, although the taxpayer would have to pay two taxes
on the same income but the Philippine government only receives
the proceeds of one tax, there is no obnoxious double taxation.
LOSSES:
GENERAL RULE - Losses actually sustained during the
taxable year shall be allowed as deduction:
(a) If incurred in trade, profession or business;
(b) Of property connected with the trade, business or
profession, if the loss arises from fires, storms,
shipwreck, or other casualties, or from robbery, theft
or embezzlement. (Sec. 34(D)(1)(a)(b), NIRC)
EXCEPTION:
- The loss must not be compensated for by insurance
or other forms of indemnity (Sec. 34(D)(1), NIRC)
- No loss shall be allowed as a deduction if at the time
of the filing of the return, such loss has been claimed
as a deduction for estate tax purposes in the estate
tax return (Sec. 34(D)(1)(c), NIRC
The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and
regulations prescribing, among other things, the time and manner
by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the
taxable year: Provided, however, That the time limit to be so
prescribed in the rules and regulations shall not be less than thirty
(30) days nor more than ninety (90) days from the date of discovery
of the casualty or robbery, theft or embezzlement giving rise to the
loss. (Sec. 34(D)(1)(b, 2nd paragraph), NIRC)
PROOF OF LOSS:
- In the case of a non-resident alien individual or
foreign corporation, the losses deductible shall be
those actually sustained during the year incurred in
business, trade or exercise of a profession
conducted within the Philippines, when such losses
are not compensated for by insurance or other forms
of indemnity.
- The Secretary of Finance, upon recommendation of
the Commissioner, is hereby authorized to
promulgate rules and regulations prescribing, among
other things, the time and manner by which the
taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement
during the taxable year: Provided, that the time to be
so prescribed in the rules and regulations shall not be
less than thirty (30) days nor more than ninety (90)
days from the date of discovery of the casualty or
robbery, theft or embezzlement giving rise to the
loss. (Sec.34(C)(2), NIRC)
NET OPERATING LOSS CARRY OVER (NOLCO):
“The net operating loss of the business or enterprise
for any taxable year immediately preceding the current
taxable year, which had not been previously offset as
deduction from gross income shall be carried over as a
deduction from gross income for the next three (3)
consecutive taxable years immediately following the year
of such loss: Provided, however, That any net loss incurred
in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction under
this Subsection: Provided, further, That a net operating
loss carry-over shall be allowed only if there has been no
substantial change in the ownership of the business or
enterprise in that -
1. Not less than seventy-five percent (75%) in
nominal value of outstanding issued shares., if
the business is in the name of a corporation, is
held by or on behalf of the same persons; or
2. Not less than seventy-five percent (75%) of the
paid up capital of the corporation, if the
business is in the name of a corporation, is held
by or on behalf of the same persons.
For purposes of this subsection, the term 'net
operating loss' shall mean the excess of allowable
deduction over gross income of the business in a taxable
year.
Provided, That for mines other than oil and gas wells, a
net operating loss without the benefit of incentives
provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of
1987, incurred in any of the first ten (10) years of operation
may be carried over as a deduction from taxable income
for the next five (5) years immediately following the year of
such loss. The entire amount of the loss shall be carried
over to the first of the five (5) taxable years following the
loss, and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in like
manner form the taxable income of the next remaining four
TAXATION LAW 1 83
 TAXATION LAW 1
Morillo Notes
(4) years.
Net Operating Loss; Meaning:
- Means that excess of allowable deduction over gross
income of the business in a taxable year. (Sec.
34(D)(3), NIRC; Sec. 3.3, BIR RR 14-2001)
Entitlement to NOLCO:
- In general, only net operating losses incurred by a
qualified taxpayer for the period beginning January 1,
1998 may be carried over to the next 3 immediately
succeeding taxable years following the year of such
loss for purposes of the NOLCO deduction.
- For mines other oil and gas wells, a net operating
loss without the benefit of incentives provided under
EO 226 (Omnibus Election Code), incurred in any of
the first 10 years of operation may be carried over as
a deduction from taxable income for the next 5 years
immediately following the year of such loss.
- Further, the entire amount of loss shall be carried
over to the first of the 5 taxable years following the
loss, and any portion of such loss which exceeds the
taxable income of such first year shall be deducted in
like manner from taxable income of the next
remaining 4 years. (Sec. 6.1, BIR RR 14-2001)
General Principles and Policies:
1. The allowance for deduction of NOLCO shall be
limited only to net operating losses accumulated
beginning January 1, 1998;
2. In general, NOLCO shall be allowed as a deduction
from the gross income of the same taxpayer who
sustained and accumulated the net operating losses
regardless of the change in its ownership. This rule
shall apply in the case of a merger where the
taxpayer is the surviving entity;
3. NOLCO of the taxpayer shall not be transferred or
assigned to another person, whether directly or
indirectly, such as, but not limited to, the transfer or
assignment thereof through a merger, consolidation
or any form of business combination of such
taxpayer with another person;
4. NOLCO shall also be allowed if there has been no
substantial change in the ownership of the business
or enterprise in that not less than 75% in nominal
value of outstanding issued shares or not less than
75% of the paid up capital of the corporation, if the
business is in the name of the corporation, is held by
or on behalf of the same persons;
5. An individual (including estate or trust) engaged in
trade or business or in the exercise of profession, or
a domestic or resident foreign corporation may be
allowed to claim deduction of his/its corresponding
NOLCO; Provided, however, than an individual who
claims the 10% optional standard deduction shall not
simultaneously claim deduction of the NOLCO;
Provided, further, that the three-year reglementary
period shall continue to run notwithstanding the fact
that the aforesaid individual availed of the 10%
optional standard deduction during said period;
6. The three-year reglementary period on the carry-over
of NOLCO shall continue to run notwithstanding the
fact that the corporation paid its income tax under
the “Minimum Corporate Income Tax” computation;
84 TAXATION LAW 1
7. NOLCO shall be availed of on a “first-in, first-out”
basis;
8. The net operating loss incurred by a taxpayer in the
year in which a substantial change in ownership in
such taxpayer occurs shall not be affected by such
change in ownership, notwithstanding items no. 3 & 4
above. (Sec. 2, BIR RR 14-2001)
OTHER TYPES OF LOSSES:
1. Capital Losses:
- Limitations: Loss from sales or Exchanges of capital
assets shall be allowed only to the extent provided in
Section 39. (Sec. 34(D)(4)(a), NIRC)
- Securities Becoming Worthless: If securities as
defined in Section 22 (T) become worthless during
the taxable year and are capital assets, the loss
resulting therefrom shall, for purposes of this Title, be
considered as a loss from the sale or exchange, on
the last day of such taxable year, of capital assets.
(Sec. 34(D)(4(b), NIRC)
- Securities means shares of stock in a
corporation and rights to subscribe for or to
receive such shares. The term includes
bonds, debentures, notes or certificates, or
other evidence of indebtedness, issued by
any corporation, including those issued by a
government or political subdivision thereof,
with interest coupons or in registered form.
(Sec. 22(T), NIRC)
2. Losses from Wash Sales:
- Losses from 'wash sales' of stock or securities as
provided in Section 38. (Sec. 34(D)(5), NIRC)
LOSSES FROM WASH SALES OF STOCK OR
SECURITIES:
(A) In the case of any loss claimed to have been sustained
from any sale or other disposition of shares of stock or
securities where it appears that within a period beginning
thirty (30) days before the date of such sale or disposition
and ending thirty (30) days after such date, the taxpayer
has acquired (by purchase or by exchange upon which
the entire amount of gain or loss was recognized by law),
or has entered into a contact or option so to acquire,
substantially identical stock or securities, then no
deduction for the loss shall be allowed under Section 34
unless the claim is made by a dealer in stock or securities
and with respect to a transaction made in the ordinary
course of the business of such dealer.
(B) If the amount of stock or securities acquired (or covered
by the contract or option to acquire) is less than the
amount of stock or securities sold or otherwise disposed
of, then the particular shares of stock or securities, the
loss from the sale or other disposition of which is not
deductible, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.
(C) If the amount of stock or securities acquired (or covered
by the contract or option to acquire which) is not less than
the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or
securities, the acquisition of which (or the contract or
option to acquire which) resulted in the non-deductibility
of the loss shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon
 TAXATION LAW 1
Morillo Notes
recommendation of the Commissioner. (Sec. 38, NIRC)
3. Wagering Losses:
- Losses from wagering transactions shall be allowed
only to the extent of the gains from such
transactions.(Sec. 34(D)(6), NIRC)
4. Abandonment Losses:
(a) In the event a contract area where petroleum
operations are undertaken is partially or wholly
abandoned, all accumulated exploration and
development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated
expenditures incurred in that area prior to January 1,
1979 shall be allowed as a deduction only from any
income derived from the same contract area. In all
cases, notices of abandonment shall be filed with the
Commissioner. (Sec. 34(D)(7)(a), NIRC)
(b) In case a producing well is subsequently abandoned,
the un-amortized costs thereof, as well as the un-
depreciated costs of equipment directly used therein
, shall be allowed as a deduction in the year such
well, equipment or facility is abandoned by the
contractor: Provided, That if such abandoned well is
re-entered and production is resumed, or if such
equipment or facility is restored into service, the said
costs shall be included as part of gross income in the
year of resumption or restoration and shall be
amortized or depreciated, as the case may be. (Sec.
34(D)(7)(b), NIRC)
PLARIDEL SURETY & INSURANCE CO. vs. CIR
21 SCRA 1187
FACTS:
Petitioner Plaridel Surety & Insurance Co., is a domestic
corporation engaged in the bonding business. On November 9,
1950, petitioner, as surety, and Constancio San Jose, as principal,
solidarily executed a performance bond in the penal sum of
P30,600.00 in favor of the P. L. Galang Machinery Co., Inc., to
secure the performance of San Jose's contractual obligation to
produce and supply logs to the latter.
To afford itself adequate protection against loss or damage on the
performance bond, petitioner required San Jose and one Ramon
Cuervo to execute an indemnity agreement obligating themselves,
solidarily, to indemnify petitioner for whatever liability it may incur
by reason of said performance bond. Accordingly, San Jose
constituted a chattel mortgage on logging machineries and other
movables in petitioner's favor1 while Ramon Cuervo executed a
real estate mortgage.
San Jose later failed to deliver the logs to Galang Machinery3 and
the latter sued on the performance bond. On October 1, 1952, the
Court of First Instance adjudged San Jose and petitioner liable; it
also directed San Jose and Cuervo to reimburse petitioner for
whatever amount it would pay Galang Machinery. The Court of
Appeals, on June 17, 1955, affirmed the judgment of the lower
court. The same judgment was likewise affirmed by this Court4 on
January 11, 1957 except for a slight modification apropos the
award of attorney's fees.
In its income tax return for the year 1957, petitioner claimed the
said amount of P44,490.00 as deductible loss from its gross
income and, accordingly, paid the amount of P136.00 as its income
tax for 1957.
The Commissioner of Internal Revenue disallowed the claimed
deduction of P44,490.00 and assessed against petitioner the sum
of P8,898.00, plus interest, as deficiency income tax for the year
1957. Petitioner filed its protest which was denied. Whereupon,
appeal was taken to the Tax Court, petitioner insisting that the
P44,490.00 which it paid to Galang Machinery was a deductible
loss.
ISSUE:
W/N the amount Plaridel paid to Galang Machinery is a deductible
loss
RULING:
NO. There is no question that the year in which the petitioner
Insurance Co. effected payment to Galang Machinery pursuant to a
final decision occurred in 1957. However, under the same court
decision, San Jose and Cuervo were obligated to reimburse
petitioner for whatever payments it would make to Galang
Machinery. Clearly, petitioner's loss is compensable otherwise
(than by insurance). It should follow, then, that the loss deduction
can not be claimed in 1957.
Now, petitioner's submission is that its case is an exception. Citing
Cu Unjieng Sons, Inc. v. Board of Tax Appeals, 6 and American
cases also, petitioner argues that even if there is a right to
compensation by insurance or otherwise, the deduction can be
taken in the year of actual loss where the possibility of recovery is
remote. The pronouncement, however to this effect in the Cu
Unjieng case is not as authoritative as petitioner would have it since
it was there found that the taxpayer had no legal right to
compensation either by insurance or otherwise. 7 And the
American cases cited8 are not in point. None of them involved a
taxpayer who had, as in the present case, obtained a final
judgment against third persons for reimbursement of payments
made. In those cases, there was either no legally enforceable right
at all or such claimed right was still to be, or being, litigated.
On the other hand, the rule is that loss deduction will be denied if
there is a measurable right to compensation for the loss, with
ultimate collection reasonably clear. So where there is reasonable
ground for reimbursement, the taxpayer must seek his redress and
may not secure a loss deduction until he establishes that no
recovery may be had. 9 In other words, as the Tax Court put it, the
taxpayer (petitioner) must exhaust his remedies first to recover or
reduce his loss.
But assuming that there was no reasonable expectation of
recovery, still no loss deduction can be had. Sec. 30 (d) (2) of the
Tax Code requires a charge-off as one of the conditions for loss
deduction:
In the case of a corporation, all losses actually sustained
and charged-off within the taxable year and not compensated for
by insurance or otherwise. (Emphasis supplied) Mertens states only
four (4) requisites because the United States Internal Revenue
Code of 193913 has no charge-off requirement. Sec. 23(f) thereof
provides merely:
In the case of a corporation, losses sustained during the taxable
year and not compensated for by insurance or otherwise.
Petitioner, who had the burden of proof14 failed to adduce
evidence that there was a charge-off in connection with the
P44,490.00—or P30,600.00 — which it paid to Galang Machinery
FERNANDEZ HERMANOS, INC. vs. CIR
29 SCRA 553
Allowance of losses in Hacienda Dalupiri (1957). — The Tax Court
cited its previous decision overruling the Commissioner's
disallowance of losses suffered by the taxpayer in the operation of
its Hacienda Dalupiri, since it was convinced that the hacienda was
operated for business and not for pleasure. And in this appeal, the
Commissioner cites his arguments in his appellant's brief in Case
No. L-21557. The Tax Court, in setting aside the Commissioner's
principal objections, which were directed to the accounting method
TAXATION LAW 1 85
 TAXATION LAW 1
Morillo Notes
used by the taxpayer found that:
It is true that petitioner followed the cash basis method of reporting
income and expenses in the operation of the Hacienda Dalupiri and
used the accrual method with respect to its mine operations. This
method of accounting, otherwise known as the hybrid method,
followed by petitioner is not without justification.
... A taxpayer may not, ordinarily, combine the cash and accrual
bases. The 1954 Code provisions permit, however, the use of a
hybrid method of accounting, combining a cash and accrual
method, under circumstances and requirements to be set out in
Regulations to be issued. Also, if a taxpayer is engaged in more
than one trade or business he may use a different method of
accounting for each trade or business. And a taxpayer may report
income from a business on accrual basis and his personal income
on the cash basis.'
The Tax Court, having satisfied itself with the adequacy of the
taxpayer's accounting method and procedure as properly reflecting
the taxpayer's income or losses, and the Commissioner having
failed to show the contrary, we reiterate our ruling [supra,
paragraph 1 (d) and (e)] that we find no compelling reason to
disturb its findings.
CHINA BANK CORP. vs. CA, CIR, CTA
336 SCRA 178
FACTS:
Petitioners made a 53% equity investment in First CBC Capital
(Asia) Limited to the amount of P16,227,851.80 consisting of
106,000 shares with par value of P100 per share. Subsequently,
First CBC was found to be insolvent. Petitioners, with the approval
of the BSP, wrote off as worthless its investment in the company
and treated it as a bad debt or ordinary loss deductible from its
gross income.
The Commissioner of Internal Revenue disallowed the deduction
saying that the investment could not be considered "worthless"
since First CBC could still exercise its financing and investment
activities even if it was no longer licensed as a depository. Even
assuming that the securities had become worthless, it still cannot
be considered as a "bad debt" or expense since there is no
indebtedness between petitioner and First CBC. It should be
classified as a "capital loss."
RULING:
The SC found in favor of respondents.
1. Not an indebtedness. An equity investment in shares of
stock cannot be considered as an indebtedness of First
CBC Capital to China Bank. The former has no obligation
to repay the latter the amount invested. The amount
China Bank invested in First CBC is, in fact, an asset.
2. Capital asset, not ordinary. Capital assets are defined in
the negative by Sec 33(1) of the NIRC as property held by
the TP exclusive of items primarily for the sale to
customers in the ordinary course of business, or property
used in trade or business. Hence, securities, such as
equity holdings, are ordinary assets only in the hands of a
dealer, or a person actively engaged in trading in the
same for his own account.
3. Section 29(d)(4)(B) of the NIRC treats the worthlessness
of the securities held as capital assets as a loss resulting
from the sale or exchange of capital assets. Strictly
speaking, no sale occurs when securities held as capital
assets become worthless. Nonetheless, the law treats it
as a loss from a sale just the same.
4. Section 33 of the NIRC provides that the capital loss
sustained can only be deducted from any capital gain
derived within the taxable year. The same provision
enumerates assets which are not subject to the said
86 TAXATION LAW 1
limitation but equity holdings are not one of them.
BAD DEBTS:
In General. - Debts due to the taxpayer actually
ascertained to be worthless and charged off within the
taxable year except those not connected with
profession, trade or business and those sustained in a
transaction entered into between parties mentioned
under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction
in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of
the income tax benefit of said deduction. (Sec. 34(D)(1),
NIRC)
WHAT ARE BAD DEBTS?
- Debts due to the taxpayer actually ascertained to be
worthless and charged off within the taxable year.
(Sec. 34(E)(1), NIRC)
- A debt is worthless when after taking reasonable
steps to collect it, there is no likelihood of recovery at
any time in the future.
General Rule: Taxpayer must ascertain and demonstrate with
reasonable certainty the uncollectibility of debt.
The taxpayer must show that the debt is indeed uncollectible even
in the future. He must prove that he exerted diligent efforts to
collect:
a. Sending of statement of accounts;
b. Collection letters;
c. Giving the account to a lawyer for collection;
d. Filing the case in court. (Phil. Refining Corp. vs. CA, GR
no. 118794 (1996))
Exceptions:
(a) Banks as creditors - BSP Monetary Board shall ascertain
the worthlessness and uncollectibility of the debt and
shall approve the writing off.
(b) Receivables from an insurance or surety company (as
debtor) may be written off as bad debts only when such
company is declared closed due to insolvency or similar
reason.
BIR RR 5-1999:
“Actually ascertained to be worthless” – Determination of
worthlessness must depend upon the particular facts and
circumstances of the case. A taxpayer may not postpone a bad
debt deduction on the basis of a mere hope of ultimate collection
or because of a continuance of attempts to collect, where there is
no showing that the surrounding circumstances differ from those
relating to other notes which were charged off in a prior year.
Accounts receivable may be written off as bad debts even without
conclusive evidence that they had definitely become worthless
when:
a. the amount is insignificant; and
b. collection through court action may be more costly to the
taxpayer.
“Actually charged off from the taxpayer’s book of accounts” –
Receivable which has actually become worthless at the end of the
taxable year has been cancelled and written off. Mere recording in
the books of account of estimated uncollectible accounts does not
 TAXATION LAW 1
Morillo Notes
constitute a write-off.
REQUISITES FOR VALID DEDUCTION OF BAD DEBTS
FROM GROSS INCOME:
1. There must be an existing indebtedness due to the
taxpayer which must be valid and legally
demandable;
2. The same must be counted with the taxpayer’s trade,
business or practice of profession;
3. The same must not be sustained in a transaction
entered into between related parties enumerated
under Sec. 36(B), NIRC);
4. The same must be actually charged off the books of
accounts of the taxpayer as of the hend of the
taxable year; and
5. The same must be actually ascertained to be
worthless and uncollectible as of the end of the
taxable year. (Sec. 2, BIR RR 25-2002)
Before a taxpayer may charge off and deduct a debt,
he must ascertain and be able to demonstrate with reasonable
degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider all pertinent
evidence, including the value of the collateral, if any, securing
the debt and the financial condition of the debtor in
determining whether a debt is worthless, or the assigning of
the case for collection to an independent collection lawyer
who is not under the employ of the taxpayer and who shall
report on the legal obstacle and the virtual impossibility of
collecting the same from the debtor and who shall issue a
statement under oath showing the propriety of the deductions
thereon made for alleged bad debts. Thus, where the
surrounding circumstances indicate that a debt is worthless
and uncollectible and that legal action to enforce payment
would in all probability not result in the satisfaction of
execution on a judgment, a showing of those facts will be
sufficient evidence of the worthlessness of the debt for the
purpose of deduction.
In the case of banks, the Commissioner of Internal
Revenue shall determine whether or not bad debts are
worthless and uncollectible in the manner provided in the
immediately preceding paragraph. Without prejudice to the
Commissioner’s determination of the worthlessness and
uncollectibility of debts, the taxpayer shall submit a Bangko
Sentral ng Pilipinas/Monetary Board written approval of the
writing off of the indebtedness from the banks’ books of
accounts at the end of the taxable year.
Also, in no case may a receivable from an insurance
or surety company be written-off from the taxpayer’s books
and claimed as bad debts deduction unless such company
has been declared closed due to insolvency or for any such
similar reason by the Insurance Commissioner. (Sec. 2, BIR
RR 25-2002)
NOTE: BIR RR 25-2002 amended Revenue Regulations No. 5-99
thereby further implementing the provisions of Section 34(E) of the
same Code on the requirements for deductibility of bad debts from
the gross income of a corporation, including banks and insurance
companies, or an individual, estate and trust that is engaged in
trade or business or a professional engaged in the practice of his
profession. (Sec. 1, bir rr 25-2002)
CIR vs. GOODRICH INTERNATIONAL RUBBER CO.
21 SCRA 1336
FACTS:
In 1951 and 1952, respondent Goodrich filed it ITR in which it
claimed an aggregate amount (consisting of 18 individual accounts)
of P50,455.41 as deductible for being bad debts. The Collector of
Internal Revenue disallowed the deductions and accordingly
assessed Goodrich accordingly.
Goodrich protested the assessment and subsequently filed an
appeal with the CTA which allowed the deductions for bad debts.
Hence, this appeal by the Government
RULING:
Petition is partially meritorious. Some of the items claimed by
Goodrich can rightfully be written off as bad debts.
The SC rejected the claim for deduction of 10 items because
Goodrich failed to establish that that the debts were actually
worthless or that it had reasonable grounds to believe them to be
so in 1951. The law permits the deduction of debts “actually
ascertained to be worthless within the taxable year,” obviously to
prevent arbitrary action by the TP to unduly avoid tax liability.
Good faith on the part of the TP is not enough. He must
furthermore show that he had reasonably investigated the relevant
facts and had drawn a reasonable inference from the information
thus obtained by him. At any rate, respondent failed to prove that
the debts were indeed worthless and that the debtors had no ability
to pay them. On the contrary, of these 10 accounts some payments
were actually made (some in full) after they had been characterized
as bad debts and written off.
The Court however ruled that 8 of the 18 claimed bad debts can be
allowed as deductions. Common among these 8 was the action of
Goodrich in persistently demanding payment from its debtors; it's
endorsement of the accounts to counsel for collection; the pursuit
of legal remedies for the collection on these debts; and the
continuing failure/clear inability of the debtors to pay off their
obligations.
FERNANDEZ HERMANOS, INC. CIR
29 SCRA 553
Disallowance of losses in or bad debts of Palawan Manganese
Mines, Inc. (1951). — The taxpayer appeals from the Tax Court's
disallowance of its writing off in 1951 as a loss or bad debt the sum
of P353,134.25, which it had advanced or loaned to Palawan
Manganese Mines, Inc. The Tax Court's findings on this item follow:
”Sometime in 1945, Palawan Manganese Mines, Inc., the
controlling stockholders of which are also the controlling
stockholders of petitioner corporation, requested financial help
from petitioner to enable it to resume it mining operations in Coron,
Palawan. The request for financial assistance was readily and
unanimously approved by the Board of Directors of petitioner, and
thereafter a memorandum agreement was executed on August 12,
1945, embodying the terms and conditions under which the
financial assistance was to be extended.” Pursuant to the
agreement mentioned, petitioner gave to Palawan Manganese
Mines, Inc. yearly advances starting from 1945, which advances
amounted to P587,308.07 by the end of 1951. Despite these
advances and the resumption of operations by Palawan
Manganese Mines, Inc., it continued to suffer losses. By 1951,
petitioner became convinced that those advances could no longer
be recovered. While it continued to give advances, it decided to
write off as worthless the sum of P353,134.25. This amount "was
arrived at on the basis of the total of advances made from 1945 to
1949 in the sum of P438,981.39, from which amount the sum of
P85,647.14 had to be deducted, the latter sum representing its pre-
war assets. Petitioner decided to maintain the advances given in
1950 and 1951 in the hope that it might be able to recover the
same, as in fact it continued to give advances up to 1952. From
TAXATION LAW 1 87
 TAXATION LAW 1
Morillo Notes
these facts, and as admitted by petitioner itself, Palawan
Manganese Mines, Inc., was still in operation when the advances
corresponding to the years 1945 to 1949 were written off the books
of petitioner. Under the circumstances, was the sum of
P353,134.25 properly claimed by petitioner as deduction in its
income tax return for 1951, either as losses or bad debts?
It will be noted that in giving advances to Palawan Manganese
Mine Inc., petitioner did not expect to be repaid. It is true that some
testimonial evidence was presented to show that there was some
agreement that the advances would be repaid, but no documentary
evidence was presented to this effect. The memorandum
agreement signed by the parties appears to be very clear that the
consideration for the advances made by petitioner was 15% of the
net profits of Palawan Manganese Mines, Inc. In other words, if
there were no earnings or profits, there was no obligation to repay
those advances. It has been held that the voluntary advances made
without expectation of repayment do not result in deductible
losses.
Is the said amount deductible as a bad debt? As already stated,
petitioner gave advances to Palawan Manganese Mines, Inc.,
without expectation of repayment. Petitioner could not sue for
recovery under the memorandum agreement because the
obligation of Palawan Manganese Mines, Inc. was to pay petitioner
15% of its net profits, not the advances. No bad debt could arise
where there is no valid and subsisting debt.
Again, assuming that in this case there was a valid and subsisting
debt and that the debtor was incapable of paying the debt in 1951,
when petitioner wrote off the advances and deducted the amount
in its return for said year, yet the debt is not deductible in 1951 as a
worthless debt. It appears that the debtor was still in operation in
1951 and 1952, as petitioner continued to give advances in those
years. It has been held that if the debtor corporation, although
losing money or insolvent, was still operating at the end of the
taxable year, the debt is not considered worthless and therefore
not deductible. The Tax Court's disallowance of the write-off was
proper. The Solicitor General has rightly pointed out that the
taxpayer has taken an "ambiguous position " and "has not
definitely taken a stand on whether the amount involved is claimed
as losses or as bad debts but insists that it is either a loss or a bad
debt.” We sustain the government's position that the advances
made by the taxpayer to its 100% subsidiary, Palawan Manganese
Mines, Inc. amounting to P587,308,07 as of 1951 were investments
and not loans. The evidence on record shows that the board of
directors of the two companies since August, 1945, were identical
and that the only capital of Palawan Manganese Mines, Inc. is the
amount of P100,000.00 entered in the taxpayer's balance sheet as
its investment in its subsidiary company. This fact explains the
liberality with which the taxpayer made such large advances to the
subsidiary, despite the latter's admittedly poor financial condition.
The taxpayer's contention that its advances were loans to its
subsidiary as against the Tax Court's finding that under their
memorandum agreement, the taxpayer did not expect to be repaid,
since if the subsidiary had no earnings, there was no obligation to
repay those advances, becomes immaterial, in the light of our
resolution of the question. The Tax Court correctly held that the
subsidiary company was still in operation in 1951 and 1952 and the
taxpayer continued to give it advances in those years, and,
therefore, the alleged debt or investment could not properly be
considered worthless and deductible in 1951, as claimed by the
taxpayer. Furthermore, neither under Section 30 (d) (2) of our Tax
Code providing for deduction by corporations of losses actually
sustained and charged off during the taxable year nor under
Section 30 (e) (1) thereof providing for deduction of bad debts
actually ascertained to be worthless and charged off within the
taxable year, can there be a partial writing off of a loss or bad debt,
as was sought to be done here by the taxpayer. For such losses or
bad debts must be ascertained to be so and written off during the
taxable year, are therefore deductible in full or not at all, in the
88 TAXATION LAW 1
absence of any express provision in the Tax Code authorizing
partial deductions.
The Tax Court held that the taxpayer's loss of its investment in its
subsidiary could not be deducted for the year 1951, as the
subsidiary was still in operation in 1951 and 1952. The taxpayer, on
the other hand, claims that its advances were irretrievably lost
because of the staggering losses suffered by its subsidiary in 1951
and that its advances after 1949 were "only limited to the purpose
of salvaging whatever ore was already available, and for the
purpose of paying the wages of the laborers who needed help.”
The correctness of the Tax Court's ruling in sustaining the
disallowance of the write-off in 1951 of the taxpayer's claimed
losses is borne out by subsequent events shown in Cases L-24972
and L-24978 involving the taxpayer's 1957 income tax liability. It
will there be seen that by 1956, the obligation of the taxpayer's
subsidiary to it had been reduced from P587,398.97 in 1951 to
P442,885.23 in 1956, and that it was only on January 1, 1956 that
the subsidiary decided to cease operations
DEPRECIATION:
GENERAL RULE: There shall be allowed as a depreciation
deduction a reasonable allowance for the exhaustion, wear and tear
(including reasonable allowance for obsolescence) of property used
in the trade or business. In the case of property held by one person
for life with remainder to another person, the deduction shall be
computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of
property held in trust, the allowable deduction shall be apportioned
between the income beneficiaries and the trustees in accordance
with the pertinent provisions of the instrument creating the trust, or
in the absence of such provisions, on the basis of the trust income
allowable to each. (Sec. 34(F)(1), NIRC)
REQUISITES FOR DEPRECIATION TO BE DEDUCTED:
1. It must be reasonable;
2. It must be charged off during the year;
3. The asset must be used in profession, trade or
business;
4. The asset must have a limited useful life.
No depreciation shall be allowed for yachts, helicopters,
airplanes and/or aircrafts, and land vehicles which exceed
the threshold amount of P2,400,000, unless the taxpayer’s
main line of business is transport operations or lease of
transportation equipment and the vehicles purchased are
used in the operations. (RR no. 12-2012)
METHODS OF DEPRECIATION:
1. Straight Line Method:
- The straight-line method determines the estimated
salvage value (scrap value) of an asset at the end of
its life and then subtracts that value from its original
cost. The difference is the value that is lost over time
during the asset’s productive use. That difference is
also the total amount of depreciation that must be
expensed.
ILLUSTRATION:
FORMULA:
(Cost of an Asset - Salvage Value) / Useful Life of an Asset =
 TAXATION LAW 1
Morillo Notes
Annual Depreciation Expense Where:
● Cost of the Asset = P100,000
Where: ● Salvage Value = P10,000
● Cost of the asset is purchase price or historical cost ● Useful Life of the Asset = 5 years
● Salvage value is value of the asset remaining after its useful ● Depreciation Rate = 40%
life
● (Cost of an asset - salvage Value) = Depreciable Value
● Useful life of the asset is the number of years for which an DEPRECIATION EXPENSE: 2nd Year
asset is expected to be used by the business.
(P100,000 - P40,000) x 40% = P24,000

ANNUAL DEPRECIATION EXPENSE: Where:

● Cost of the Asset = P100,000
(P100,000 - P10,000) / 5 Years = P18,000 ● Accumulated Depreciation = P40,000
● Salvage Value = P10,000
Where: ● Useful Life of the Asset = 5 years
● Cost of the Asset = P100,000 ● Depreciation Rate = 40%
● Salvage Value = P10,000
● Useful Life of the Asset = 5 years
ANNUAL DEPRECIATION EXPENSE:

ACCUMULATED DEPRECIATION:
Yr Book Value, beg - Rate Depreciati Accumulated Book
. Salvage Value on Depreciation Value, end
Cost of Asset:
P100,000 1 100,000 40% 40,000 40,000 60,000

Less (-): Accumulated Depreciation 2 60,000 40% 24,000 64,000 36,000

[18,000 X 2 Years] -P36,000
3 36,000 40% 14,400 78,400 21,600
Book Value of Asset:
P64,000 4 21,600 40% 8,640 87,040 12,960

5 12,960 - 10,000 = - 2,960 90,000 10,000

Accumulated depreciation is the cumulative depreciation of an 2,960
asset up to a single point in its life.

2. Declining Balance Method:

- With the declining balance method, management
expenses depreciate at an accelerated rate rather
than evenly over a scheduled number of years. This
method is often used if an asset is expected to have
greater utility in its earlier years.
- This method also helps to create a larger realized
gain when the asset is actually sold. Typically, the
percentages used are 200% and 150%
ILLUSTRATION:
FORMULA:
Book Value x Depreciation Rate = Depreciation Expense
3. Sum of the Years Digit Method:
- The “Sum-of-the-years’-digits method offers a
depreciation rate that accelerates more than the
straight-line method but less than the declining
balance method. Annual depreciation is separated
into fractions using the number of years of the
business asset’s useful life.
ILLUSTRATION:
SUM OF THE YEARS DIGIT FORMULA:
(Cost of Asset - Salvage Value) x (Remaining Useful Life of the
Asset / Sum of Years’ Digits) = Depreciation Expense

Where: SUM OF YEARS’ DIGITS:

● Cost of Asset - Accumulated Depreciation = Book Value 5 years useful life:
● (1 / useful Life) x Accelerator = Depreciation Rate 1 + 2 + 3 + 4 +5 = 15SYD

10 years useful life:

1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9 + 10 = 55SYD
DEPRECIATION RATE:
SUM OF YEARS’ DIGITS:
(1 / 5) x 200% = 40%
Sum of years’ digits = (n (n+1) / 2
Where:
● Useful Life → 5 = (5 (5+1) / 2
● Accelerator → 200%
= 15 years

DEPRECIATION EXPENSE: 1st Year Where:

● n = Useful Life of an Asset
P100,000 x 40% = P40,000

TAXATION LAW 1 89
 TAXATION LAW 1
Morillo Notes
DEPRECIATION EXPENSE: 1st Year
(P100,000 - P10,000) x (5 / 15) = P30,000
Where:
● Cost of the Asset = P100,000
● Salvage Value = P10,000
● Useful Life of the Asset = 5 years
● Sum of Years’ Digits = 15 years
DEPRECIATION EXPENSE: 2nd Year
(P100,000 - P10,000) x (4 / 15) = P24,000
Where:
● Cost of the Asset = P100,000
● Salvage Value = P10,000
● Useful Life of the Asset = 4 years
● Sum of Years’ Digits = 15 years
SPECIAL RULES ON DEPRECIATION:
1. Private Education Institutions - A private educational
institution may at its option elect either:
(a) To deduct expenditures otherwise considered as
capital outlays of depreciable assets incurred during
the taxable year for the expansion of school facilities;
or
(b) To deduct allowance for depreciation thereof under
Sec. 34(f). (Sec. 34(A)(2), NIRC)
2. Petroleum Operations - An allowance for depreciation in
respect of al properties directly related to production of
petroleum initially laced in service in a taxable year shall be
allowed under the straight-line or declining-balance method
of depreciation at the option of the service contractor
However, if the service contractor initially elects the
declining-balance method, it may at any subsequent date,
shift to the straight-line method.
The useful life of properties used in or related to production
of petroleum shall be 10 years or such shorter life as may
be permitted by the Commissioner.
Properties not used directly to the production of petroleum
shall be depreciated under the straight-line method on the
basis of an estimated useful life of 5 years. (Sec.34(F)(4),
NIRC)
3. Mining Operations - An allowance for depreciation in
respect of all properties used in mining operations other
than petroleum operations, shall be computed as follows:
(a) At the normal rate of depreciation if the expected life
is 10 years or less; or
(b) Depreciated over any number of years between 5
years and the expected life if the latter is more than
10 years, and the depreciation thereon allowed as
deduction from taxable income: Provided, that the
contractor notifies the Commissioner at the
beginning of the depreciation period which
depreciation rate allowed by this Section will be
used. (Sec. 34(F)(5), NIRC)
4. For Non-Resident Aliens Engaged in Trade or Business
or Resident Foreign Corporation - In the case of a
90 TAXATION LAW 1
nonresident alien individual engaged in trade or business or
resident foreign corporation, a reasonable allowance for the
deterioration of Property arising out of its use or
employment or its non-use in the business trade or
profession shall be permitted only when such property is
located in the Philippines. (Sec. 34,(F)(6), NIRC)
BASILAN ESTATE, INC. vs. CIR
GR no. L-22492, September 5, 1967
FACTS:
Basilan Estates, Inc. claimed deductions for the depreciation of its
assets on the basis of their acquisition cost. As of January 1, 1950
it changed the depreciable value of said assets by increasing it to
conform with the increase in cost for their replacement.
Accordingly, from 1950 to 1953 it deducted from gross income the
value of depreciation computed on the reappraised value. CIR
disallowed the deductions claimed by petitioner, consequently
assessing the latter of deficiency income taxes.
ISSUE:
W/N the depreciation shall be determined on the acquisition cost
rather than the reappraised value of the assets.
RULING:
YES, The following tax law provision allows a deduction from gross
income for depreciation but limits the recovery to the capital
invested in the asset being depreciated:
In general. — A reasonable allowance for deterioration of
property arising out of its use or employment in the
business or trade, or out of its not being used: Provided,
That when the allowance authorized under this
subsection shall equal the capital invested by the
taxpayer . . . no further allowance shall be made. . .
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above
such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges, not matters of right.
They are not created by implication but upon clear expression in
the law [Gutierrez v. Collector of Internal Revenue, L-19537, May
20, 1965].
Depreciation is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescense. It
commences with the acquisition of the property and its owner is
not bound to see his property gradually waste, without making
provision out of earnings for its replacement.
The recovery, free of income tax, of an amount more than the
invested capital in an asset will transgress the underlying purpose
of a depreciation allowance. For then what the taxpayer would
recover will be, not only the acquisition cost, but also some profit.
Recovery in due time thru depreciation of investment made is the
philosophy behind depreciation allowance; the idea of profit on the
investment made has never been the underlying reason for the
allowance of a deduction for depreciation.
The income tax law does not authorize the depreciation of an asset
beyond its acquisition cost. Hence, a deduction over and above
such cost cannot be claimed and allowed. The reason is that
deductions from gross income are privileges, not matters of right.
They are not created by implication but upon clear expression in the
law.
US vs. LUDLEY
247 US 295
Under the income and excess profits provision of Revenue Act
 TAXATION LAW 1
Morillo Notes
1917, in determining the existence and amount of profit realized
from a sale of oil mining properties (land, leases, and equipment)
the cost of the property sold is the original cost to the taxpayer (if
purchased aster March 1, 1913, or its value on that date if acquired
earlier for less) diminished by deductions for depreciation and
depletion occurring between the dates of purchase (or March 1,
1913) and sale.
The depreciation charge permitted as a deduction from the gross
income in determining the taxable income of a business for any
year represents the reduction, during the year, of the capital assets
through wear and tear of the plant used.
When a plant is disposed of after years of use, the thing then sold
is not the whole thing originally acquired. The amount of the
depreciation must be deducted from the original cost of the whole
in order to determine the cost of that disposed of in the final sale of
properties. This rule applies to mining as well as to mercantile
business.
The depletion charge permitted as a deduction from the gross
income in determining the taxable income of mines for any year
represents the reduction in the mineral contents of the reserves
from which the product is taken. Because the quantity originally in
the reserve is not actually known, the percentage of the whole
withdrawn in any year, and hence, the appropriate depletion
charge, is necessarily a rough estimate.
The amounts of depreciation and depletion to be deducted from
cost to ascertain gain on a sale of oil properties are equal to the
aggregates of depreciation and depletion which the taxpayer was
entitled to deduct from gross income in his income tax returns for
earlier years; but are not dependent on the amounts which he
actually so claimed.
FERNANDEZ HERMANOS, INC. vs. CIR
GR no. L-21551, September 30, 1969
Disallowance of excessive depreciation of buildings (1950-1954). —
During the years 1950 to 1954, the taxpayer claimed a depreciation
allowance for its buildings at the annual rate of 10%. The
Commissioner claimed that the reasonable depreciation rate is only
3% per annum, and, hence, disallowed as excessive the amount
claimed as depreciation allowance in excess of 3% annually. We
sustain the Tax Court's finding that the taxpayer did not submit
adequate proof of the correctness of the taxpayer's claim that the
depreciable assets or buildings in question had a useful life only of
10 years so as to justify its 10% depreciation per annum claim,
such finding being supported by the record. The taxpayer's
contention that it has many zero or one-peso assets, representing
very old and fully depreciated assets serves but to support the
Commissioner's position that a 10% annual depreciation rate was
excessive.
DEPLETION OF OIL AND GAS WELLS AND MINES:
GENERAL RULE:
- In the case of oil and gas wells or mines, a
reasonable allowance for depletion or amortization
computed in accordance with the cost-depletion
method shall be granted under rules and regulations
to be prescribed by the Secretary of finance, upon
recommendation of the Commissioner. Provided,
That when the allowance for depletion shall equal the
capital invested no further allowance shall be
granted: Provided, further, That after production in
commercial quantities has commenced, certain
intangible exploration and development drilling costs:
(a) shall be deductible in the year incurred if such
expenditures are incurred for non-producing wells
and/or mines, or (b) shall be deductible in full in the
year paid or incurred or at the election of the
taxpayer, may be capitalized and amortized if such
expenditures incurred are for producing wells and/or
mines in the same contract area. (Sec. 34(G)(1),
NIRC)
INTANGIBLE COSTS IN PETROLEUM OPERATIONS;
DEFINITION:
- Any cost incurred in petroleum operations which in
itself has no salvage value and which is incidental to
and necessary for the drilling of wells and preparation
of wells for the production of petroleum: Provided,
That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the
allowance for depreciation except that the
allowances for depreciation on such property shall be
deductible under this Subsection. (Sec. 34(G)(1),
NIRC)
Exclusion:
Any intangible exploration, drilling and development
expenses allowed as a deduction in computing
taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis
for the purpose of computing allowable cost
depletion. (Sec.34(G)(1), NIRC)
ELECTION TO DEDUCT EXPLORATION AND
DEVELOPMENT EXPENDITURES:
- In computing taxable income from mining operations,
the taxpayer may at his option, deduct exploration
and development expenditures accumulated as cost
or adjusted basis for cost depletion as of date of
prospecting, as well as exploration and development
expenditures paid or incurred during the taxable year:
Provided, That the amount deductible for exploration
and development expenditures shall not exceed
twenty-five percent (25%) of the net income from
mining operations computed without the benefit of
any tax incentives under existing laws. The actual
exploration and development expenditures minus
twenty-five percent (25%) of the net income from
mining shall be carried forward to the succeeding
years until fully deducted. (Sec. 34(G)(2), NIRC)
- The election by the taxpayer to deduct the
exploration and development expenditures is
irrevocable and shall be binding in succeeding
taxable years. (Sec. 34(G)(2), NIRC)
NET INCOME FROM MINING OPERATIONS; DEFINITION:
- This shall mean gross income from operations less
'allowable deductions' which are necessary or related
to mining operations. (Sec. 34(G)(2), NIRC)
ALLOWABLE DEDUCTIONS:
- It shall include mining, milling and marketing
expenses, and depreciation of properties directly
used in the mining operations. This paragraph shall
not apply to expenditures for the acquisition or
improvement of property of a character which is
subject to the allowance for depreciation. (Sec.
34(G)(2), NIRC)
Exclusion:
TAXATION LAW 1 91
 TAXATION LAW 1
Morillo Notes

In no case shall this paragraph apply with respect to

aggregates of depreciation and depletion which the taxpayer was
amounts paid or incurred for the exploration and entitled to deduct from gross income in his income tax returns for
development of oil and gas.(Sec. 34(G)(2), NIRC) earlier years; but are not dependent on the amounts which he
actually so claimed.
EXPLORATION EXPENDITURES:
- Means expenditures paid or incurred for the purpose
of ascertaining the existence, location, extent or CHARITABLE AND OTHER CONTRIBUTIONS:
quality of any deposit of ore or other mineral, and
paid or incurred before the beginning of the
development stage of the mine or deposit. (Sec. REQUISITES FOR CHARITABLE (AND OTHER
34(G)(2), NIRC) CONTRIBUTIONS) TO BE DEDUCTED:
1. The contributions must be actually paid or made to
DEVELOPMENT EXPENDITURES: the entities or institutions specified by law;
- Means expenditures paid or incurred during the 2. It must be made within the taxable year;
development stage of the mine or other natural 3. It must be evidenced by adequate receipts or
deposits. records;
- The development stage of a mine or other natural 4. As to the Contributions Other than Money - The
deposit shall begin at the time when deposits of ore amount shall be based on the acquisition cost of the
or other minerals are shown to exist in sufficient property (not the fair market value at the time of the
commercial quantity and quality and shall end upon contributions);
commencement of actual commercial extraction. 5. As to the Contributions subject to the Statutory
(Sec. 34(G)(2), NIRC) Limitations - It must not exceed 10% (for individual)
or 5% (for corporation) of the taxpayer’s taxable
DEPLETION OF OIL AND GAS WELLS AND MINES income before charitable contributions.
DEDUCTIBLE BY A NON-RESIDENT ALIEN INDIVIDUAL
OR FOREIGN CORPORATION: CONTRIBUTIONS SUBJECT TO STATUTORY
- In the case of a nonresident alien individual engaged LIMITATIONS:
in trade or business in the Philippines or a resident - Contributions made to the following:
foreign corporation, allowance for depletion of oil and a. Government of the Philippines or any of its
gas wells or mines under paragraph (1) of this agencies or any political subdivision thereof
Subsection shall be authorized only in respect to oil exclusively for public purposes;
and gas wells or mines located within the Philippines. b. Accredited domestic corporations or
(Sec. 34(G)(3), NIRC) associations organized and operated exclusively
for the following:
i. Religious;
US vs. LUDLEY ii. Charitable;
247 US 295
iii. Scientific;
Under the income and excess profits provision of Revenue Act iv. Youth and Sports Development;
1917, in determining the existence and amount of profit realized v. Cultural or Educational purposes;
from a sale of oil mining properties (land, leases, and equipment) vi. Rehabilitation of Veterans;
the cost of the property sold is the original cost to the taxpayer (if vii. Social Welfare institutions; or
purchased aster March 1, 1913, or its value on that date if acquired viii. Non-Government Organizations. (Sec.
earlier for less) diminished by deductions for depreciation and 34(H)(1), NIRC)
depletion occurring between the dates of purchase (or March 1,
1913) and sale.
NOTE: The contributions or grafts actually paid or made within the
The depreciation charge permitted as a deduction from the gross taxable year to, or for the use of the above entities shall form no
income in determining the taxable income of a business for any part of the net income of which inures in an amount not in excess
year represents the reduction, during the year, of the capital assets of 10% (in case of an individual), and 5% (in case of a corporation)
through wear and tear of the plant used. of the taxpayer’s taxable income derived from trade, business or
profession as computed without the benefit of this provision. (Sec.
When a plant is disposed of after years of use, the thing then sold 34(H)(1), NIRC)
is not the whole thing originally acquired. The amount of the
depreciation must be deducted from the original cost of the whole
in order to determine the cost of that disposed of in the final sale of CONTRIBUTIONS DEDUCTIBLE IN FULL:
properties. This rule applies to mining as well as to mercantile 1. Donations to the Government:
business. a. Government of the Philippines or any of its political
subdivisions; and
The depletion charge permitted as a deduction from the gross b. Fully-owned governed corporations exclusively to
income in determining the taxable income of mines for any year
represents the reduction in the mineral contents of the reserves
finance, or provide, or used in undertaking priority
from which the product is taken. Because the quantity originally in activities in the following:
the reserve is not actually known, the percentage of the whole i. Education;
withdrawn in any year, and hence, the appropriate depletion ii. Health;
charge, is necessarily a rough estimate. iii. Youth and Sports Development;
iv. Human Settlements;
The amounts of depreciation and depletion to be deducted from v. Science and Culture; and
cost to ascertain gain on a sale of oil properties are equal to the

92 TAXATION LAW 1
 TAXATION LAW 1
Morillo Notes
vi. Economic Development according to a
National Priority plan determined by NEDA.
(Sec. 34(H)(2)(a), NIRC)
NOTE: Any donation which is made to the Government or to
any of its agencies or political subdivisions not in
accordance with the said annual priority plan shall be
subject to the limitations prescribed in Sec. 34(H)(1)
2. Donations to Certain Forign Institutions or
International Organizations:
- Donations to foreign institutions or international
organizations which are fully deductible in pursuance
of or in compliance with agreements, treaties, or
commitments entered into by the government of the
Philippines and the foreign institutions or international
organizations or in pursuance of special laws. (Sec.
34(H)(2)(b), NIRC)
3. Donations to Accredited Non-Government
Organizations:
- The term “Non-Government Organization” means a
non-profit domestic corporation:
1. Organized and operated exclusively for scientific,
research, educational, character-building and
youth and sports development, health, social
welfare, cultural or charitable purposes, or a
combination thereof, no part of the net income of
which inures to the benefit of any private
individual;
2. Which, not later than the 15th day of the third
month after the close of the accredited non-
government organizations taxable year in which
contributions are received, makes utilization
directly for the active conduct of the activities
constituting the purpose or function for which it
is organized and operated, unless an extended
period is granted by the Secretary of Finance in
accordance with the rules and regulations to be
promulgated, upon recommendation of the
Commissioner;
3. The level of administrative expense of which
shall, on an annual basis, conform with the rules
and regulations to be prescribed by the
Secretary of Finance, upon recommendation of
the Commissioner, but in no case to exceed
thirty percent (30%) of the total expenses; and
4. The assets of which, in the event of dissolution,
would be distributed to another non-profit
domestic corporation organized for similar
purpose or purposes, or to the state for public
purpose, or would be distributed by a court to
another organization to be used in such manner
as in the judgment of said court shall best
accomplish the general purpose for which the
dissolved organization was organized. (Sec.
34(H)(2)(c), NIRC)
BIR Revenue Regulation no. 13-98:
Non-government Organization (NGO)- shall refer to a non-stock,
non-profit domestic corporation or organization as defined under
Section 34 (H)(2)(c) of the Tax Code organized and operated
exclusively for scientific, research, educational, character-building
and youth and sports development, health, social welfare, cultural
or charitable purposes, or a combination thereof, no part of the net
income of which inures to the benefit of any private individual.
1. Which, not later than the fifteenth (15th) day of the third
month after the close of the NGO's taxable year in which
contributions are received, makes utilization directly for
the active conduct of the activities constituting the
purpose or function for which it is organized and
operated, unless an extended period is granted by the
Secretary of Finance, upon recommendation of the
Commissioner;
2. The level of administrative expenses of which shall, on an
annual basis, not exceed thirty percent (30%) of the total
expenses for the taxable year; and
3. The assets of which, in the event of dissolution, would be
distributed to another accredited NGO organized for
similar purpose or purposes, or to the State for public
purpose, or purposes, or to the state for public purpose,
or would be distributed by a competent court of justice to
another accredited NGO to be used in such manner as in
the judgment of said court shall best accomplish the
general purpose for which the dissolved organization was
organized.
MEANING OF UTILIZATION:
1. Any amount in cash or in kind (including
administrative expenses) paid or utilized to
accomplish one or more purposes for which the
accredited non-government organization was created
or organized.
2. Any amount paid to acquire an asset used (or held for
use) directly in carrying out one or more purposes for
which the accredited non-government organization
was created or organized. (Sec. 34(H)(2)(c)(4), NIRC)
An amount set aside for a specific project which comes within one
or more purposes of the accredited non-government organization
may be treated as a utilization, but only if at the time such amount
is set aside, the accredited non-government organization has
established to the satisfaction of the Commissioner that the
amount will be paid for the specific project within a period to be
prescribed in rules and regulations to be promulgated by the
Secretary of Finance, upon recommendation of the Commissioner,
but not to exceed five (5) years, and the project is one which can
be better accomplished by setting aside such amount than by
immediate payment of funds. (Sec. 34(H)(2)(c)(4), NIRC)
VALUATION:
- the amount of any charitable contribution of property
other than money shall be based on the acquisition
cost of said property. (Sec. 34(H)(3), NIRC)
PROOF OF DEDUCTION:
- Contributions or gifts shall be allowable as deduction
only if verified unde the rules and regulations
prescribed by the Secretary of Finance, upon
recommendation of the BIR Commissioner. (Sec.
34(H)(4), NIRC)
ROXAS vs. CTA
GR no. L-25043, april 26, 1968
Roxas y Cia. (the partnership formed by the children of the late
spouses Son Pedro and Dona Carmen Roxas) deducted from its
gross income the amount of P40.00 for tickets to a banquet given
in honor of Sergio Osmena and P28.00 for San Miguel beer given
as gifts to various persons. The deduction were claimed as
representation expenses. Representation expenses are deductible
from gross income as expenditures incurred in carrying on a trade
or business under Section 30(a) of the Tax Code provided the
TAXATION LAW 1 93
 TAXATION LAW 1
Morillo Notes
taxpayer proves that they are reasonable in amount, ordinary and
necessary, and incurred in connection with his business. In the
case at bar, the evidence does not show such link between the
expenses and the business of Roxas y Cia. The findings of the
Court of Tax Appeals must therefore be sustained.
The petitioners also claim deductions for contributions to the Pasay
City Police, Pasay City Firemen, and Baguio City Police Christmas
funds, Manila Police Trust Fund, Philippines Herald's fund for
Manila's neediest families and Our Lady of Fatima chapel at Far
Eastern University.
The contributions to the Christmas funds of the Pasay City Police,
Pasay City Firemen and Baguio City Police are not deductible for
the reason that the Christmas funds were not spent for public
purposes but as Christmas gifts to the families of the members of
said entities. Under Section 39(h), a contribution to a government
entity is deductible when used exclusively for public purposes. For
this reason, the disallowance must be sustained. On the other
hand, the contribution to the Manila Police trust fund is an
allowable deduction for said trust fund belongs to the Manila
Police, a government entity, intended to be used exclusively for its
public functions.
The contributions to the Philippines Herald's fund for Manila's
neediest families were disallowed on the ground that the
Philippines Herald is not a corporation or an association
contemplated in Section 30 (h) of the Tax Code. It should be noted
however that the contributions were not made to the Philippines
Herald but to a group of civic spirited citizens organized by the
Philippines Herald solely for charitable purposes. There is no
question that the members of this group of citizens do not receive
profits, for all the funds they raised were for Manila's neediest
families. Such a group of citizens may be classified as an
association organized exclusively for charitable purposes
mentioned in Section 30(h) of the Tax Code.
Rightly, the Commissioner of Internal Revenue disallowed the
contribution to Our Lady of Fatima chapel at the Far Eastern
University on the ground that the said university gives dividends to
its stockholders. Located within the premises of the university, the
chapel in question has not been shown to belong to the Catholic
Church or any religious organization. On the other hand, the lower
court found that it belongs to the Far Eastern University,
contributions to which are not deductible under Section 30(h) of the
Tax Code for the reason that the net income of said university
injures to the benefit of its stockholders. The disallowance should
be sustained.
RESEARCH AND DEVELOPMENT:
GENERAL RULE:
- A taxpayer may treat research or development
expenditures which are paid or incurred by him
during the taxable year in connection with his trade,
business or profession as ordinary and necessary
expenses which are not chargeable to capital
account.
- The expenditures so treated shall be allowed as
deduction during the taxable year when paid or
incurred. (Sec. 34(I)(1), NIRC)
LIMITATIONS ON DEDUCTION:
a. Any expenditure for the acquisition or improvement
of land, or for the improvement of property to be
used in connection with research and development of
a character which is subject to depreciation and
depletion; and
94 TAXATION LAW 1
b. Any expenditure paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality
of any deposit of ore or other mineral, including oil or
gas. (Sec. 34(H)(I)(3), NIRC)
AMORTIZATION OF CERTAIN RESEARCH AND
DEVELOPMENT EXPENDITURES:
Amortization of Certain Research and Development
Expenditures. - At the election of the taxpayer and in accordance
with the rules and regulations to be prescribed by the Secretary of
Finance, upon recommendation of the Commissioner, the following
research and development expenditures may be treated as
deferred expenses:
(a) Paid or incurred by the taxpayer in connection with his
trade, business or profession;
(b) Not treated as expenses under paragraph (1) hereof; and
(c) Chargeable to capital account but not chargeable to
property of a character which is subject to depreciation
or depletion.
In computing taxable income, such deferred expenses shall be
allowed as deduction ratably distributed over a period of not less
than sixty (60) months as may be elected by the taxpayer
(beginning with the month in which the taxpayer first realizes
benefits from such expenditures).
The election provided by paragraph (2) hereof may be made for any
taxable year beginning after the effectivity of this Code, but only if
made not later than the time prescribed by law for filing the return
for such taxable year. The method so elected, and the period
selected by the taxpayer, shall be adhered to in computing taxable
income for the taxable year for which the election is made and for
all subsequent taxable years unless with the approval of the
Commissioner, a change to a different method is authorized with
respect to a part or all of such expenditures. The election shall not
apply to any expenditure paid or incurred during any taxable year
for which the taxpayer makes the election.
PENSION TRUSTS:
GENERAL RULE: An employer establishing or maintaining a
pension trust to provide for the payment of reasonable
pensions to his employees shall be allowed as a deduction (in
addition to the contributions to such trust during the taxable
year to cover the pension liability accruing during the year,
allowed as a deduction under Subsection (A)(1) of this Section)
a reasonable amount transferred or paid into such trust during
the taxable year in excess of such contributions. (Sec. 34(J),
NIRC)
EXCEPTION: But only if such amount (1)has not theretofore
been allowed as a deduction, and (2) is apportioned in equal
parts over a period of ten (10) consecutive years beginning
with the year in which the transfer or payment is made. (Sec.
34(J), NIRC)
OPTIONAL STANDARD DEDUCTION (OSD):
In lieu of the deductions allowed under the preceding Subsections,
an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not
exceeding forty percent (40%) of his gross sales or gross receipts,
as the case maybe. In the case of a corporation subject to tax under
Sections 27(A) and 28 (A)(1), it may elect a standard deduction in an
amount not exceeding forty percent (40%) of its gross income as
 TAXATION LAW 1
Morillo Notes
OSD for corporations are applicable to geneal co-
defined in Section 32 of this Code. Unless the taxpayer signifies in
his return his intention to elect the optional standard deduction, he partnerships.
shall be considered as having availed himself of the deductions
allowed in the preceding Subsections. Such election when made in
ITEMS NOT DEDUCTIBLE:
the return shall be irrevocable for the taxable year for which the
return is made: Provided, That an individual who is entitled to and
claimed for the optional standard deduction shall not be required to NO DEDUCTIONS:
submit with his tax return such financial statements otherwise
- In computing net income, no deduction shall be allowed
required under this Code: Provided, further, That a general
professional partnership and the partners comprising such in respect to the following:
partnership may avail of the optional standard deduction only once, a. Personal, living or family expenses;
either by the general professional partnership or the partners b. Any amount paid out for new buildings or for
comprising the partnership: Provided, finally, That except when the permanent improvements, or betterments made to
Commissioner otherwise permits, the said individual shall keep such increase the value of any property or estate;
records pertaining to his gross sales or gross receipts, or the said - This shall not apply to intangible drilling and
corporation shall keep such records pertaining to his gross income development costs incurred in petroleum
as defined in Section 32 of this Code during the taxable year, as
operations which are deductible under Sec.
may be required by the rules and regulations promulgated by the
Secretary of Finance, upon, recommendation of the Commissioner.
34(G)(1), NIRC.
c. Any amount expended in restoring property or in
Notwithstanding the provision of the preceding Subsections, The making good the exhaustion thereof for which an
Secretary of Finance, upon recommendation of the Commissioner, allowance is or has been made; or
after a public hearing shall have been held for this purpose, may d. Premiums paid on any life insurance policy covering
prescribe by rules and regulations, limitations or ceilings for any of the life of any officer or employee, or of any person
the itemized deductions under Subsections (A) to (J) of this Section: financially interested in any trade or business carried
Provided, That for purposes of determining such ceilings or
on by the taxpayer, individual or corporate, when the
limitations, the Secretary of Finance shall consider the following
factors: (1) adequacy of the prescribed limits on the actual
taxpayer is directly or indirectly a beneficiary under
expenditure requirements of each particular industry; and (2)effects such policy. (Sec. 36A), NIRC)
of inflation on expenditure levels: Provided, further, That no ceilings e. Bribes, Kickbacks and Other Similar Payment made
shall further be imposed on items of expense already subject to (directly or indirectly) to an official or employee of the
ceilings under present law. (Sec. 34(L), NIRC) national government, or any local government unit, or
GOCC, or an official or employee or representative of
a foreign government, or to a private corporation,
REQUISITES FOR OPTION STANDARD DEDUCTION:
general partnership, or a similar entity. (Sec.
1. Taxpayer is a citizen or resident alien;
34(A)(1)(c), NIRC)
2. Taxpayer’s income is not entirely from compensation;
3. Taxpayer signifies in his return his intention to elect
CASES WHERE NO DEDUCTION SHALL BE ALLOWED
this deduction, otherwise, he is considered as having
FOR LOSSES FROM SALES OR EXCHANGE OF
availed of the itemized deductions;
PROPERTY:
4. Election is revocable for the year in which made,
1. Between members of a family. For purposes of this
however, he can change to itemized deductions in
paragraph, the family of an individual shall include
succeeding years.
only his brothers and sisters (whether by the whole or
half-blood), spouse, ancestors, and lineal
OPTIONAL STANDARD DEDUCTION FOR INDIVIDUALS
descendants; or
(Except Non-Resident Aliens):
2. Between an individual and corporation more than fifty
- May be taken by an individual in lieu of itemized
percent (50%) in value of the outstanding stock of
deductions except those earning purely
which is owned, directly or indirectly, by or for such
compensation income.
individual, Except in the case of distributions in
- If an individual opted to use Optional Standard
liquidation; or
Deduction (OSD), He is no longer allowed to deduct
3. Between two corporations more than fifty percent
cost of sales or cost of services.
(50%) in value of the outstanding stock of which is
- Amount: 40% of gross sales or gross receipts (under
owned, directly or indirectly, by or for the same
RA 9504, effective July 6, 2008)
individual if either one of such corporations, with
respect to the taxable year of the corporation
OPTIONAL STANDARD DEDUCTION FOR
preceding the date of the sale of exchange was
CORPORATIONS (Except Non-Resident Foreign
under the law applicable to such taxable year, a
Corporations): personal holding company or a foreign personal
- The option to elect OSD, is not granted to holding company, Except in the case of distributions
corporations by virtue of RA 9504. The OSD is 40%
in liquidation;
of its gross income.
4. Between the grantor and a fiduciary of any trust; or
- Corporation availing of OSD are still required to 5. Between the fiduciary of and the fiduciary of a trust
submit their financial statements when they file their and the fiduciary of another trust if the same person
annual ITR and to keep such records pertaining to its
is a grantor with respect to each trust; or
gross income. (BIR RR 2-2010)
6. Between a fiduciary of a trust and beneficiary of such
trust. (Sec. 36(B), NIRC)
PARTNERSHIPS:
- For purposes of taxation, the NIRC considers general
co-partnerships as corporations. Hence, rules on GANCAYCO vs. CIR
GR no. L-13325, April 20, 1961

TAXATION LAW 1 95
 TAXATION LAW 1
Morillo Notes
Expenses incident to the acquisition of property follow the same
rule as applied to payments made as direct consideration for the
property. For example, a commission paid in acquiring property are
considered as representing part of the cost of the property
acquired. The same treatment is to be accorded to amounts
expended for maps, abstracts, legal opinions on titles, recording
fees and surveys. Other non-deductible expenses include amounts
paid in connection with geological explorations, development and
subdividing of real estate; clearing and grading; restoration of soil,
drilling wells, architect’s fees and similar types of expenditures.
The cost of farm machinery, equipment and farm building
represents a capital investment and is not an allowable deduction
as an item of expense. Amounts expended in the development of
farms, orchards, and ranches prior to the time when the productive
state is reached may be regarded as investments of capital.
Expenses for clearing off and grading lots acquired is a capital
expenditure, representing part of the cost of the land and was not
deductible as an expense.
An item of expenditure, in order to be deductible under this section
of the statute providing for the deduction of ordinary and necessary
business expenses, must fall squarely within the language of the
statutory provision. This section is intended primarily although not
always necessarily, to cover expenditures of a recurring nature
where the benefit derived from the payment is realized and
exhausted within the taxable year. Accordingly, if the result of the
expenditure is the acquisition of an asset which has an
economically useful life beyond the taxable year, no deduction of
such payment may be obtained under the provisions of the statute.
In such cases, to the extent that a deduction is allowable, it must
be obtained under the provisions of the statute which permit
deductions for amortization, depreciation, depletion or loss.
Gancayco’s claim for representation expenses aggregated
P31,753.97, of which P22,820.52 was allowed, and P8,933.45
disallowed. Such disallowance is justified by the record, for, apart
from the absence of receipts, invoices or vouchers of the
expenditures in question, petitioner could not specify the items
constituting the same, or when or on whom or on what they were
incurred. The case of Cohan v. Commissioner, 39 F (2d) 540, cited
by petitioner is not in point, because in that case there was
evidence on the amounts spent and the persons entertained and
the necessity of entertaining them, although there were not receipts
and vouchers of the expenditures involved therein. Such is not the
case of Gancayco herein.
Chapter 5:
TAX BASE & TAX RATE
A. INDIVIDUALS
I. RESIDENT CITIZENS & RESIDENT ALIENS:
II. NON-RESIDENT ALIENS:
NON-RESIDENT ALIENS ENGAGED IN TRADE OR
BUSINESS:
1. Taxable Income:
96 TAXATION LAW 1
- A nonresident alien individual engaged in trade or
business in the Philippines shall be subject to an
income tax in the same manner as an individual
citizen and a resident alien individual, on taxable
income received from all sources within the
Philippines. A nonresident alien individual who shall
come to the Philippines and stay therein for an
aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed
a 'nonresident alien doing business in the
Philippines'. Section 22 (G) of this Code
notwithstanding. (sec. 25(A)(1), NIRC)
2. Passive income:
- Cash and/or property dividends from a domestic
corporation, or from a joint stock company, or from
an insurance or mutual fund company or from a
regional operating headquarter of multinational
company, or the share of a nonresident alien
individual in the distributable net income after tax of a
partnership (except a general professional
partnership) of which he is a partner, or the share of a
nonresident alien individual in the net income after
tax of an association, a joint account, or a joint
venture taxable as a corporation of which he is a
member or a co-venturer; interests; royalties (in any
form); and prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be
subject to tax under Subsection (B)(1) of Section 24)
and other winnings (except Philippine Charity
Sweepstakes and Lotto winnings); shall be subject to
an income tax of twenty percent (20%) on the total
amount thereof: Provided, however, that royalties on
books as well as other literary works, and royalties on
musical compositions shall be subject to a final tax of
ten percent (10%) on the total amount thereof:
Provided, further, That cinematographic films and
similar works shall be subject to the tax provided
under Section 28 of this Code: Provided, furthermore,
That interest income from long-term deposit or
investment in the form of savings, common or
individual trust funds, deposit substitutes, investment
management accounts and other investments
evidenced by certificates in such form prescribed by
the Bangko Sentral ng Pilipinas (BSP) shall be
exempt from the tax imposed under this Subsection:
Provided, finally, that should the holder of the
certificate pre-terminate the deposit or investment
before the fifth (5th) year, a final tax shall be imposed
on the entire income and shall be deducted and
withheld by the depository bank from the proceeds of
the long-term deposit or investment certificate based
on the remaining maturity thereof:
- Four (4) years to less than five (5) years - 5%;
- Three (3) years to less than four (4) years -
12%; and
- Less than three (3) years - 20%.
3. Capital Gains:
- Capital gains realized from sale, barter or exchange
of shares of stock in domestic corporations not
traded through the local stock exchange, and real
properties shall be subject to the tax prescribed
under Subsections (C) and (D) of Section 24. (Sec.
25(A)(3), NIRC)
 TAXATION LAW 1
Morillo Notes
fifteen percent (15%) of the salaries, wages,
NON-RESIDENT ALIENS NOT ENGAGED IN TRADE OR annuities, compensation, remuneration and other
BUSINESS: emoluments, such as honoraria and allowances,
- There shall be levied, collected and paid for each received from such contractor or subcontractor:
taxable year upon the entire income received from all Provided, however, That the same tax treatment shall
sources within the Philippines by every nonresident apply to a Filipino employed and occupying the same
alien individual not engaged in trade or business position as an alien employed by petroleum service
within the Philippines as interest, cash and/or contractor and subcontractor. (Sec. 25(E), NIRC)
property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments,
III. MEMBERS OF GENERAL PROFESSIONAL
or other fixed or determinable annual or periodic or
PARTNERSHIP:
casual gains, profits, and income, and capital gains, a
tax equal to twenty-five percent (25%) of such
income. Capital gains realized by a nonresident alien TAX LIABILITY OF MEMBERS OF GENERAL
individual not engaged in trade or business in the PROFESSIONAL PARTNERSHIP:
Philippines from the sale of shares of stock in any - A general professional partnership as such shall not
domestic corporation and real property shall be be subject to the income tax imposed under this
subject to the income tax prescribed under Chapter. Persons engaging in business as partners in
Subsections (C) and (D) of Section 24. (Sec. 25 (B), a general professional partnership shall be liable for
NIRC) income tax only in their separate and individual
capacities.
SPECIAL ALIENS: - For purposes of computing the distributive share of
1. Alien Individual Employed by Regional or Area the partners, the net income of the partnership shall
Headquarters and Regional Operating Headquarters of be computed in the same manner as a corporation.
Multinational Companies: - Each partner shall report as gross income his
- There shall be levied, collected and paid for each distributive share, actually or constructively received,
taxable year upon the gross income received by in the net income of the partnership. (Sec. 26, NIRC)
every alien individual employed by regional or area
headquarters and regional operating headquarters
established in the Philippines by multinational B. CORPORATIONS
companies as salaries, wages, annuities,
compensation, remuneration and other emoluments,
such as honoraria and allowances, from such I. DOMESTIC CORPORATIONS:
regional or area headquarters and regional operating
headquarters, a tax equal to fifteen percent (15%) of
MEANING OF CORPORATION:
such gross income: Provided, however, That the
- This refers to partnerships, no matter how created or
same tax treatment shall apply to Filipinos employed
organized, joint-stock companies, joint accounts,
and occupying the same position as those of aliens
associations or insurance companies. (Sec. 22 (B),
employed by these multinational companies. (Sec. 25
NIRC)
(C), NIRC)
- For purposes of this Chapter, the term 'multinational
Meaning of Domestic Corporation:
company' means a foreign firm or entity engaged in
- Refers to any corporation created or organized in the
international trade with affiliates or subsidiaries or
Philippines or under its laws. (Sec. 22(C), NIRC)
branch offices in the Asia-Pacific Region and other
foreign markets. (Sec. 25 (C), NIRC)
RATE OF INCOME TAX ON DOMESTIC CORPORATIONS:
- Effective on January 1, 2009 - A 30% income tax
2. Alien Individual Employed by Offshore Banking Units:
derived, during each taxable year, from all sources
- There shall be levied, collected and paid for each
within and without the Philippines. (Sec. 27(A), NIRC)
taxable year upon the gross income received by
- In the case of corporations adopting the fiscal year
every alien individual employed by offshore banking
accounting period, the taxable income shall be
units established in the Philippines as salaries,
computed without regard to the specific date when
wages, annuities, compensation, remuneration and
specific sales, purchases and other transactions
other emoluments, such as honoraria and
occur. Their income and expenses for the fiscal year
allowances, from such off-shore banking units, a tax
shall be deemed to have been earned and spent
equal to fifteen percent (15%) of such gross income:
equally for each month of the period. (Sec. 27(A), par.
Provided, however, That the same tax treatment shall
2, NIRC).
apply to Filipinos employed and occupying the same
positions as those of aliens employed by these
offshore banking units. (Sec. 25(D), NIRC) NOTE: The corporate income tax rate shall be applied on the
amount computed by multiplying the number of months covered by
3. Alien Individual Employed by Petroleum Service the new rate within the fiscal year by the taxable income of the
Contractor and Subcontractor: corporation for the period, divided by twelve. (Sec. 27(A), par. 3,
NIRC)
- An Alien individual who is a permanent resident of a
foreign country but who is employed and assigned in
the Philippines by a foreign service contractor or by a OPTIONAL GROSS INCOME TAX FOR DOMESTIC
foreign service subcontractor engaged in petroleum CORPORATION:
operations in the Philippines shall be liable to a tax of

TAXATION LAW 1 97
 TAXATION LAW 1
Morillo Notes
- The President may allow corporations the option to
be taxed at 15% of gross income (Sec. 27(A), par. 4,
NIRC)
- This option shall be available only to firms whose
ratio of cost of sales to gross sales or receipts from
all sources does not exceed 55%. (Sec. 27(A), par. 5,
NIRC)
Conditions for Optional Gross Income Tax:
(1) A tax effort ratio of 20% of Gross National Product
(GNP);
(2) A ratio of 40% of income tax collection to total tax
revenues;
(3) A VAT tax effort of 4% of GNP; and
(4) A 0.9% ratio of Consolidated Public Sector Financial
Position (CPSFP) to GNP.
Irrevocability of Optional Gross Income Tax
- The election of the gross income tax option by the
corporation shall be irrevocable for 3 consecutive
taxable years during which the corporation is
qualified under the scheme.
Meaning of Gross Income:
- Income derived from business shall be equivalent to
gross sales less sales returns, discounts and
allowances and cost of goods.
Gross Sales
minus (-)
(Sales returns + discounts + allowances + cost of goods)
Gross Income
COST OF GOODS SOLD:
In General: Includes all business expenses directly
incurred to produce the merchandise to
bring them to their present location and
use.
Trading or Includes the invoice cost of the goods
Merchandising: sold, plus import duties, freight in
transporting the goods to the place where
the goods are actually sold, including
insurance while the goods are in transit.
Manufacturing: Includes all costs of production of
finished goods, such as raw materials
used, direct labor and manufacturing
overhead, freight cost, insurance
premiums and other costs incurred to
bring the raw materials to the factory or
warehouse.
Sales of Service: In case of taxpayers engaged in the sale
of service, “gross income” means gross
receipts less sales returns, allowances
and discounts.
SPECIAL CORPORATIONS:
a. Proprietary Educational Institutions & Hospitals:
- Proprietary educational institutions and hospitals
which are non-profit shall pay a tax of 10% on their
taxable income, except those governed by
Subsection D hereof (Passive Income tax). (Sec.
27(B), NIRC)
98 TAXATION LAW 1
- If the gross income from unrelated trade, business or
other activities exceeds 50% of the total gross
income derived by such educational institutions or
hospitals from all sources, a 30% tax rate shall be
imposed on the entire taxable income. (Supra)
Definition of Unrelated Trade, Business, or Other
Activities:
- Any trade, business or other activity, the conduct of
which is not substantially related to the exercise or
performance by such educational institution or
hospital of its primary purpose or function. (Sec.
27(B), NIRC)
Meaning of Proprietary Educational Institution:
- Any private school maintained and administered by
private individuals or groups with an issued permit to
operated from DepED, CHED, or TESDA, as the case
may be, in accordance with existing laws and
regulations. (Sec. 27(B), NIRC).
b. Government-Owned or Controlled Corporations, Agencies
or Instrumentalities:
- General Rule: All corporations, agencies, or
instrumentalities owned or controlled by the
Government are subject to 30% tax.
- Exception:
1. GSIS,
2. SSS,
3. PHIC, and
4. Local water districts
General Rule: The government is exempt from tax.
Exception: When the government chooses to tax itself. Nothing
can prevent Congress from decreeing that even instrumentalities or
agencies of the government performing governmental functions
may be subject to tax. Where it is done precisely to fulfill a
constitutional mandate and national policy, no one can doubt its
wisdom. (Mactan Airport Cebu vs. Marcos, GR no. 120082,
September 11, 1996)
PASSIVE INCOME TAX RATES:
1. Interest & Royalties:
- A final tax rate of 20% is imposed on the interest on
currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from
trust funds and similar arrangements received by
domestic corporations, and royalties, derived from
sources within the Philippines. (Sec. 27(D)(1), NIRC)
- Interest income derived by a domestic corporation
from a depository bank under the expanded foreign
currency deposit systems shall be subject to a final
income tax rate of 15% of such interest income.
(Sec. 27(D)(1), NIRC).
- Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with non-residents,
offshore banking units in the Philippines, local
commercial banks, including branches of foreign
banks that my be authorized by BSP to transact
business with foreign currency deposit system units
and other depository banks under the expanded
foreign currency deposit system SHALL BE EXEMPT
FROM ALL TAXES.
 TAXATION LAW 1
Morillo Notes
- NOTE: Net income from those transactions
are not included exempted
- Interest income from foreign currency loans granted
by such depository banks under said expanded
foreign system to residents other than offshore
banking units in the Philippines or other depository
banks under the expanded systems, shall be subject
to a final tax rate of 10%. (Sec. 27(D)(3), NIRC)
- Any income of non-residents, whether individuals or
corporations, from transactions with depository
banks under the expanded system shall be exempt
from income tax. (Sec. 27(D)(3), NIRC, as amended
by RA 9294)
2. Dividends:
- Dividends received by a domestic corporation from
another domestic corporation shall not be subject TO
tax. (Sec. 27(D)(4), NIRC)
3. Capital Gains:
- A 15% final tax rate shall be imposed on net capital
gains realized during the taxable year from the sale,
exchange or other disposition of shares of stock in a
domestic corporation, except shares sold or
disposed of through the stock exchange. (Sec.
27(D)(2), NIRC)
- A 6% Final tax rate imposed on the gain presumed to
have been realized on the sale, exchange or
disposition of lands and.or buildings which are not
actually used in the business of a corporation and are
treated as capital assets, based on the gross selling
price or fair market value (FMV) as determined by
either; (a) BIR Commissioner, or (b) Provincial or city
Assessors; whichever is higher, of such lands and/or
buildings. (Sec. 27(D)(5), NIRC)
II. RESIDENT FOREIGN CORPORATIONS:
TAX ON RESIDENT FOREIGN CORPORATION:
- Effective on January 1, 2009, A 30% income tax rate
shall be imposed on all corporations organized,
authorized, or existing under the laws of any foreign
country, engaged in trade or business within the
Philippines. (Sec. 28(A)(1), NIRC
- In case of a corporation adopting the fiscal-year
accounting period → the taxable income shall be
computed without regard to the specific date when
sales, purchases and other transactions occur. Their
income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for
each month of the period.
NOTE: the corporate income tax rates shall be applied on the
amount computed by multiplying the number of months covered by
the new rate within the fiscal year by the taxable income of the
corporation for the period, divided by twelve. (Sec. 28(A)(1), NIRC)
NV REEDERIJ “AMSTERDAM” vs. CIR
GR no. L-46029, June 23, 1988
FACTS:
NB Reederij Amsterdam (Amsterdam) called on the Philippine ports
to load cargoes for foreign destinations. The freight fees for these
transactions were paid abroad. On the other hand, Royal
Interocean Lines acted as husbanding agent for a fee or
commission on the 2 vessels owned by Amsterdam. No income tax
appears to have been paid by Amsterdam on the freight receipts.
The CIR filed the income tax return of Amsterdam and assessed it
with deficiency amounting to P190,000 and P260,000 as deficiency
income tax for 1963 to 1964 as a non-resident foreign corporation
not engaged in trade or business in the Philippines under the Tax
Code.
Royal Interocean Lines filed an income tax return of Amsterdam’s
two vessels and paid the aforesaid deficiency tax under protest
against the assessment made by CIR but the said protest was
denied.
ISSUE:
W/N NB Reederij Amsterdam, not having any office or place in the
philippines, should be taxed as a non-resident foreign corporation?
RULING:
NO, NB Reederij Amsterdam is a foreign corporation not
authorized or licensed to do business in the Philippines. It does
nnot have a branch office in the Philippines and it made only two
calls in the Philippine ports (1963 and 1964). In order that a foreign
corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business
activity in the Philippines by a foreign corporation, just like this
case, does not amount to engaging in trade or business in the
Philippines for income tax purposes.
OPTIONAL GROSS INCOME TAX FOR RESIDENT
FOREIGN CORPORATIONS:
- A resident foreign corporation shall be granted the
option to be taxed at 15% on gross income under the
same condition as those provided on domestic
corporation. (Sec. 28(A)(1), NIRC)
SPECIAL FOREIGN CORPORATIONS:
1. International Carriers:
- An international carrier doing business in the
Philippines shall pay a 2½% tax on its Gross
Philippine Billings. (Sec. 28(A)(3), NIRC)
- This refers to a foreign airline corporation doing
business in the Philippine having been granted
landing rights in any Philippine port to perform
international air transportation services/activities or
flight operations anywhere in the world. (Sec. 2(a),
BIR RR 15-2002)
Definition of Gross Philippine Billings:
As to International Refers to the amount of gross revenue
derived from carriage of persons, excess
Air Carrier
baggage cargo and mail originating from
the Philippines in a continuous and
uninterrupted flight, irrespective of the
place of sale or issue and the place of
payment of the ticket or passage
document.
Tickets revalidated, exchanged and/or
indorsed to another international airline
form part of the Gross Philippine Billings
if the passenger boards a plane in a port
or point in the philippines.
For a flight which originates from the
Philippines, but transshipment of
passenger takes place at any port outside
the Philippines on another airline, only the
aliquot portion of the cost of the ticket
corresponding to the leg flown from the
Philippines to the point of transshipment
TAXATION LAW 1 99
 TAXATION LAW 1
Morillo Notes

authorized by the BSP to transact business with

shall form part of Gross Philippine
Billings. offshore banking units, shall be subject only to a 10%
final tax rate. (Sec. 28(A)(4), NIRC)
As to International Means the gross revenue whether for
Shipping passenger, cargo or mail originating from - Any income of non-residents (individuals or
the Philippines up to final destination, corporations) from transactions with said offshore
regardless of the place of sale or banking units shall be exempt from income tax. (Sec.
payments of the passage or freight 28(A)(4), NIRC, as amended by RA 9294)
documents.

International carriers doing business in
the Philippines may avail of a preferential
rate or exemption from the tax herein
imposed on their gross revenue derived
from the carriage of persons and their
excess baggage on the basis of an
applicable tax treaty or international
agreement to which the Philippines is a
signatory or on the basis of reciprocity
such that an international carrier, whose
home country grants income tax
exemption to Philippine carriers, shall
likewise be exempt from the tax imposed
under this provision.
DETERMINATION OF GROSS PHILIPPINE BILLINGS:
- DSCDCDSCS
BIR REVENUE REGULATIONS NO. 10-98 (issued September 2,
1998) prescribes the regulations to implement RA No. 8424 relative
to the imposition of income taxes on income derived under the
Foreign Currency Deposit and Offshore Banking Systems.
Specifically, interest income which is actually or constructively
received by a resident citizen of the Philippines or by a resident
alien individual from a foreign currency bank deposit will be subject
to a final withholding tax of 7.5%. The depository bank will withhold
and remit the tax. If a bank account is jointly in the name of a non-
resident citizen, 50% of the interest income from such bank deposit
will be treated as exempt while the other 50% will be subject to a
final withholding tax of 7.5%. The Regulations will apply on taxable
income derived beginning January 1, 1998 pursuant to the
provisions of Section 8 of RA 8424. In case of deposits which were
made in 1997, only that portion of interest which was actually or
constructively received by a depositor starting January 1, 1998 is
taxable.

On-Line vs. Off-Line Carrier and Flights: 3. Regional or Area Headquarters and Regional Operating
Headquarters:
On-Line Off-Line - Regional or area headquarters defined in Sec. 22(DD)
shall not be subject to income tax.
Carrier International air carrier International air carrier - Under Sec. 22(DD), the terms “regional or
having or maintaining having no flight area headquarters” shall mean a branch
flight operations to and operations to and from established in the Philippines by
from the Philippines the Philippines
multinational companies and which
headquarters do not earn or derive income
Flights Flight operations Flight operations carried
carried out or out or maintained by an
from the Philippines and which act as
maintained by an international air carrier supervisory, communications and
international air carrier between port or points in coordinating center for their affiliates,
between ports outside the territorial jurisdiction subsidiaries, or branches in the Asia-Pacific
the territorial jurisdiction of the Philippines and any Region and other foreign markets.
of the Philippines, port or point outside the - Regional operating headquarters defined in Sec.
without touching a Philippines 22(EE) shall pay 10% income tax.
points situated in the
- Under Sec. 22(EE), the term “regional
Philippines except
when in distress or due operating headquarters” shall mean a
to force majeure branch established in the Philippines which
are engaged in any of the following services:
Source: BIR RR 15-2002 - general administrations and
planning;
2. Offshore Banking Units: - business planning and
- Gen. Rule: Income derived by offshore banking units coordination;
authorized by BSP from foreign currency transactions - sourcing and procurement of raw
with non-residents, other offshore banking units, materials and components;
local commercial banks, including branches of - corporate finance advisory
foreign banks that may be authorized by BSP to services;
transact business with offshore banking units SHALL - marketing control and sales
BE EXEMPT FROM ALL TAXES. promotion;
- training and personnel
Exception: Net income from those transactions as management;
may be specified by the Sec. of Finance. (Sec. - logistics services;
28(A)(4), NIRC) - research and development services
and product development;
- Any interest income derived from foreign currency - technical support and
loans granted to residents, other than offshore maintenance;
banking units or local commercial banks, including - data processing and
local branches of foreign banks that may be communication; and

100 TAXATION LAW 1

 TAXATION LAW 1
Morillo Notes
- business development.
BRANCH PROFIT REMITTANCE TAX:
- Any profit remitted by a branch to its head office shall
be subject to a tax of 15% which shall be based on
the total profits applied or earmarked for remittance
without any deduction for the tax component thereof
(except those activities which are registered with the
Philippine Economic Zone Authority).
- The tax shall be collected and paid in the same
manner as provided in Sections 57 and 58 of this
Code:
- Interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages
premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits,
income and capital gains received by a foreign
corporation during each taxable year from all sources
within the Philippines shall not be treated as branch
profits unless the same are effectively connected with
the conduct of its trade or business in the Philippines.
(Sec. 28(A)(5), NIRC)
MARUBENI CORPORATION vs. CIR
GR no,76573, September 14, 1989
FACTS:
Marubeni is a foreign corporation duly organized and existing under
the laws of Japan and it is duly licensed to engage in business
under Philippine laws, and it has a branch office at Intramuros,
Manila. It has equity investment with Atlantic Gulf Manila (AG&P).
AG&P declared and paid cash dividend for the first quarter of 1981
to Marubeni and withheld a 10% final dividend tax thereon. On the
third quarter, AG&P declared and paid cash dividends to Marubeni
and withheld 10% final dividend tax thereon.
AG&P directly remitted the cash dividends to Marubeni’s head
office in Tokyo, Japan not only the 10% final dividend tax in the
first and third quarters of 1981, but also it remitted the 15% profit
remittance tax based on the remittable amount after deducting the
final withholding tax of 10%. the 10% final dividend tax and 15%
branch profit remittance tax for the first & third quarters of 1981
were paid to BIR by AG&P.
Marubeni wrote a letter to BIR asking whether the dividends that
they received from AG&P are connected with its conduct or
business in the Philippines to be considered as branch profits
which is subject to 15% profit remittance tax imposed under the
Tax Code. The CIR replied that the dividends received by Marubeni
from AG&P are not income arising from the business activity in
which Marubeni is engaged. Consequently, Marubeni filed with the
CIR a claim for the refund or issuance of a tax credit because it
overpaid but the CIR denied it.
ISSUE:
W/N the dividends Marubeni Corporation received from Atlantic
Gulf and Pacific Co. are effectively connected with its conduct or
business in the Philippines as to be considered branch profits
subject to 15% profit remittance tax imposed under Section
24(b)(2) of the National Internal Revenue Code.
RULING:
NO, Pursuant to Section 24(b)(2) of the Tax Code, as amended,
only profits remitted abroad by a branch office to its head office
which are effectively connected with its trade or business in the
Philippines are subject to the 15% profit remittance tax. The
dividends received by Marubeni Corporation from Atlantic Gulf and
Pacific Co. are not income arising from the business activity in
which Marubeni Corporation is engaged. Accordingly, said
dividends if remitted abroad are not considered branch profits for
purposes of the 15% profit remittance tax imposed by Section
24(b)(2) of the Tax Code, as amended.
PASSIVE INCOME:
1. Interest:
- Interest from any currency bank deposit and yield or
any other monetary benefit from deposit substitutes
and from trust funds and similar arrangements and
royalties derived from sources within the Philippines
shall be subject to a final income tax at the rate of
twenty percent (20%) of such interest: Provided,
however, That interest income derived by a resident
foreign corporation from a depository bank under the
expanded foreign currency deposit system shall be
subject to a final income tax at the rate of seven and
one-half percent (7 1/2%) of such interest income.
(Sec. 28(A)(7)(a), NIRC)
- Income derived by a depository bank under the
expanded foreign currency deposit system from
foreign currency transactions with nonresidents,
offshore banking units in the Philippines, local
commercial banks including branches of foreign
banks that may be authorized by the Bangko Sentral
ng Pilipinas (BSP) to transact business with foreign
currency deposit system units, and other depository
banks under the expanded foreign currency deposit
system shall be exempt from all taxes, except net
income from such transactions as may be specified
by the Secretary of Finance, upon recommendation
by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however,
That interest income from foreign currency loans
granted by such depository banks under said
expanded system to residents other than offshore
banking units in the Philippines or other depository
banks under the expanded system shall be subject to
a final tax at the rate of ten percent (10%). (Sec.
28(A)(7)(b), NIRC)
- Any income of non-residents (individuals or
corporations) from transactions with depository
banks under the expanded system shall be exempt
from income tax. (Sec. 28(A)(7)(b), NIRC, as amended
by RA 9294)
2. Dividends:
- Dividends received by a resident foreign corporation
from a domestic corporation liable to tax under this
Code shall not be subject to tax under this Title. (Sec.
28(A)(7)(d), NIRC)
3. Capital Gains:
- A final tax at the rates prescribed below is hereby
imposed upon the net capital gains realized during
the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic
corporation except shares sold or disposed of
through the stock exchange:
- Not over P100,000 - 5%
- On any amount in excess of P100,000 -
10%
SUBSIDIARY vs. BRANCH OF A FOREIGN CORPORATION:
SUBSIDIARY BRANCH
Subject to income tax on Subject to income tax only on
worldwide income Philippine source income.
TAXATION LAW 1 101
 TAXATION LAW 1
Morillo Notes

- 20% final withholding tax is imposed on the interest

Dividends paid by a Philippine
Subsidiary to Non-Resident
shareholders is subject to 30%
in general or 15% subject to
certain conditions or preferential
tax treaty rates.
A subsidiary is liable to pay DST
on the original issuance of
shares of stock at the rate of
P2.00 for every P200.00 or
fractional part of the par value
of the shares of the outstanding
shares of stock.
The Philippine subsidiary is not
entitled to the allocation of
overhead expenses of its parent
company.
A Subsidiary is liable to pay the
10% improperly accumulated
earnings tax.
Profits remitted by the branch to
its head office are subject to
branch profit remittance tax of
15% or 10% depending on
certain tax treaties; however, if
located in a special economic
zone then they are tax exempt.
A branch office is not subject to
Documentary Stamp Tax (DST)
because it does not issue
shares of stock.
Subject to certain conditions,
overhead expenses of the Head
Office may be allocated to the
Philippine branch office.
A Branch is not liable to pay the
10% improperly accumulated
earnings tax.
on foreign loans contracted. (Sec. 28(B)(5)(a), NIRC)
2. Dividends:
- 15% final withholding tax on the cash and/or
property dividends received from a domestic
corporation, which shall be collected and paid as
provided in Sec. 57(A), NIRC, subject to the condition
that the country in which the non-resident foreign
corporation is domiciled, shall allow a credit against
the tax due from the non-resident foreign corporation
taxes deemed to have been paid in the Philippines
equivalent to 20%, which represents the difference
between the regular income tax of 35% and the 15%
tax on dividends. (Sec. 28(B)(5)(b), NIRC)
- Effective January 1, 2009, the credit against tax due
shall be equivalent to 15%, which represents the
difference between the regular income tax of 30%
and the 15% tax on dividends. (Sec. 28(B)(5)(b),
NIRC, as amended by RA 9337)
CIR vs. PROCTER & GAMBLE
GR no. L-66838, April 15, 1988

III. NON-RESIDENT FOREIGN CORPORATION:
TAX ON NONRESIDENT FOREIGN CORPORATION:
- Effective January 1, 2009, a foreign corporation not
engaged in trade or business in the Philippines shall
pay a tax equal to 30% of the gross income received
during each taxable year from all sources within the
Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance
premiums), annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains
subject to tax under Sec. 28(B(5)(c) (Capital Gains
from Sale of Shares of Stock not Traded in the Stock
Exchange). (Sec. 28(B)(1), NIRC)
FACTS:
Procter and Gamble Phils. (P&G-Phils) is engaged in business in
the Philippines and is a wholly owned subsidiary of Procter and
Gamble USA (P&G-US), a non-resident foreign corporation not
engaged in trade and business in the Philippines. P&G-US owns
100% voting stock of P&G-Phils and is entitled to receive income
from P&G-Phils in the form of dividends, if not rents or royalties.
For the taxable year of 1974, P&G-Phils realized a taxable net
income of P58,000,000 and paid the corresponding income tax
thereon equivalent to 25%-35% or P19,000,000 under Sec. 24 of
the Tax Code. After taxation, P&G-Phil net profit was P38,000,000,
it declared a dividend in favor of P&G-US the sum of P17,000,000
which was subjected to Philippine taxation of 25% or P6,000,000
under Sec. 24, NIRC.
For the taxable year of 1975, P&G-Phil. realized a taxable net
income of P8,000,000 subject to Phil. tax of 25%-35% or
P2,000,000. In the 2nd Quarter, P&G-Phil again declared a dividend
in favor of P&G-US at the tax rate of 35% or P6,000,000.

SPECIAL NON-RESIDENT FOREIGN CORPORATIONS:
1. Non-resident Cinematographic Film Owner, Lessor or
Distributor:
- Cinematographic film owner, lessor, or distributor
shall pay 25% of its gross income from all sources
within the Philippines. (Sec. 28(B)(2), NIRC)
2. Non-resident Owner or Lessor of Vessels chartered by
Philippine Nationals:
- Non-resident owners or lessors of vessels shall be
subject to a 4 ½% tax on gross rentals, lease or
charter fees from leases or charters to Filipino
citizens or corporation, as approved by the Maritime
Industry Authority. (Sec. 28(B)(3), NIRC)
3. Non-resident Owner or Lessor of Aircraft, Machineries and
Other Equipment:
- Rentals, charters and other fees derived by a non-
resident lessor of aircraft, machineries and other
equipment shall be subject to 7 ½% tax on its gross
rentals or fees. (Sec. 28(B)(4), NIRC)
PASSIVE INCOME:
1. Interest:
invoking the tax-credit under Sec. 24, Tax Code and as the
withholding agent of the Philippine government with respect to the
dividend taxes paid by P&G-US, P&G-Phil. filed a claim with CIR for
the refund of the 20% portion of the 35% of the whole tax paid
arising from the overpaid withholding tax at source or overpaid
withholding tax amounting to P4,000,000. Since the BIR has no
action, P&G-Phil sought the intervention of CTA praying that it be
entitled to the refund. CTA ruled in favor of P&G-Phil. and ruled that
it is entitled to refund or tax credit representing the overpaid
withholdiing tax at source.
ISSUE:
W/N P&G-Phils is entitled to the preferential 15% tax rate on
dividends declared and remitted to its parent corporation, P&G-US
RULING:
NO, the P&G-Phil. is a withholding agent of the Philippine
government and, therefore, cannot claim reimbursement of the
overpaid withholding taxes because the real party in interest is the
parent corporation, P&G-US.
ON MOTION FOR RECONSIDERATION:
YES, the SC reversed its previous ruling and now conclude that
P&G-Phil is entitled to the tax refund or tax credit which it seeks.
More simply put, Section 24 (b) (1), NIRC, seeks to promote the in-
flow of foreign equity investment in the Philippines by reducing the

102 TAXATION LAW 1

 TAXATION LAW 1
Morillo Notes
tax cost of earning profits here and thereby increasing the net
dividends remittable to the investor. The foreign investor, however,
would not benefit from the reduction of the Philippine dividend tax
rate unless its home country gives it some relief from double
taxation (i.e., second-tier taxation) (the home country would simply
have more "post-R.P. tax" income to subject to its own taxing
power) by allowing the investor additional tax credits which would
be applicable against the tax payable to such home country.
Accordingly, Section 24 (b) (1), NIRC, requires the home or
domiciliary country to give the investor corporation a "deemed
paid" tax credit at least equal in amount to the twenty (20)
percentage points of dividend tax foregone by the Philippines, in
the assumption that a positive incentive effect would thereby be felt
by the investor.
It will be seen that the "deemed paid" tax credit allowed by Section
902, US Tax Code, could offset the US corporate income tax
payable on the dividends remitted by P&G-Phil. The result, in fine,
could be that P&G-USA would after US tax credits, still wind up
with P55.25, the full amount of the dividends remitted to P&G-USA
net of Philippine taxes. In the calculation of the Philippine
Government, this should encourage additional investment or re-
investment in the Philippines by P&G-USA.
The Tax Convention, at the same time, established a treaty
obligation on the part of the United States that it "shall allow" to a
US parent corporation receiving dividends from its Philippine
subsidiary "a [tax] credit for the appropriate amount of taxes paid
or accrued to the Philippines by the Philippine [subsidiary] —. This
is, of course, precisely the "deemed paid" tax credit provided for in
Section 902, US Tax Code, discussed above. Clearly, there is here
on the part of the Philippines a deliberate undertaking to reduce the
regular dividend tax rate of twenty percent (20%) is a maximum
rate, there is still a differential or additional reduction of five (5)
percentage points which compliance of US law (Section 902) with
the requirements of Section 24 (b) (1), NIRC, makes available in
respect of dividends from a Philippine subsidiary.
CIR vs. WANDER PHILIPPINES, INC
GR no. L-68375, April 15, 1988
FACTS:
Wander Philippines is wholly-owned subsidiary of the Glaro SA
Ltd., a Swiss corporation not engaged in trade or business in the
Philippines. In 1975, Wander filed its withholding tax return for the
2nd quarter of 1975 and remitted to its parent company (Claro)
dividends amounting to P222,000, which 35% withholding tax
thereof was withheld and paid to the BIR. The following year (1976),
Wander filed a withholding tax return for the 2nd quarter of 1976
on the dividends it remitted to Claro amounting to P355,000, which
35% thereof was withheld and paid to the BIR.
Wander filed with CIR a claim for refund and/or tax credit
amounting to P115,000, contending that it is liable yo 15%
withholding tax in accordance with Sec. 24, Tax Code, and not on
the basis of 35% which was withheld and paid to and collected by
the government. Having failed to act on the claim, Wander filed a
petition with the CTA which rendered a decision, granting the tax
refund and/or credit to Wander representing the overpaid
withholding tax on dividends it remitted to Claro.
ISSUE:
W/N Wander Phil. is entitled to the preferential rate of 15%
withholding tax on dividends declared and remitted to its parent
corporation, Claro, Ltd.
RULING:
YES, In any event, the submission of the CIR that Wander is but a
withholding agent of the government and therefore cannot claim
reimbursement of the alleged overpaid taxes, is untenable. It will be
recalled, that said corporation is first and foremost a wholly owned
subsidiary of Glaro. The fact that it became a withholding agent of
the government which was not by choice but by compulsion under
Section 53 (b) of the Tax Code, cannot by any stretch of the
imagination be considered as an abdication of its responsibility to
its mother company. Thus, this Court construing Section 53 (b) of
the Internal Revenue Code held that "the obligation imposed
thereunder upon the withholding agent is compulsory." It is a
device to insure the collection by the Philippine Government of
taxes on incomes, derived from sources in the Philippines, by
aliens who are outside the taxing jurisdiction of this Court. In fact,
Wander may be assessed for deficiency withholding tax at source,
plus penalties consisting of surcharge and interest (Section 54,
NLRC). Therefore, as the Philippine counterpart, Wander is the
proper entity who should for the refund or credit of overpaid
withholding tax on dividends paid or remitted by Glaro.
Under Sec. 24, Tax Code, the dividends received from a domestic
corporation liable to tax, the tax shall be 15% of the dividends
received, subject to the condition that the country in which the non-
resident foreign corporation is domiciled shall allow a credit against
the tax due from the non-resident foreign corporation taxes
deemed to have been paid in the Philippines equivalent to 20%
which represents the difference between the regular tax (35%) on
corporations and the tax (15%) dividends.
In the instant case, Switzerland did not impose any tax on the
dividends received by Glaro. Accordingly, Wander claims that full
credit is granted and not merely credit equivalent to 20%. CIR, on
the other hand, avers the tax sparing credit is applicable only if the
country of the parent corporation allows a foreign tax credit not
only for the 15 percentage-point portion actually paid but also for
the equivalent twenty percentage point portion spared, waived or
otherwise deemed as if paid in the Philippines; that private
respondent does not cite anywhere a Swiss law to the effect that in
case where a foreign tax, such as the Philippine 35% dividend tax,
is spared waived or otherwise considered as if paid in whole or in
part by the foreign country, a Swiss foreign-tax credit would be
allowed for the whole or for the part, as the case may be, of the
foreign tax so spared or waived or considered as if paid by the
foreign country.
MARUBENI vs. CIR
GR no. 76573, September 14, 1989
FACTS:
Marubeni Corporation, a foreign corporation duly organized and
existing under the laws of Japan and duly licensed to engage in
business under Philippines laws. It has equity investments in
Atlantic Gulf Manila. For the first quarter of 1981 Atlantic Gulf
declared and paid cash dividend to Marubeni and withheld 10%
final dividend tax thereon. In the third quarter, Atlantic Gulf
declared and paid P800,000 cash dividends to Marubeni and
withheld 10% final dividend tax thereon. Atlantic Gulf directly
remitted cash dividend to Marubeni’s Head office in Tokyo, Japan,
not only 10% final dividend tax but also it withheld 15% profit
remittance tax based on the remittable amount after deducting the
final withholding 10% tax. The 10% final dividend tax and 15%
branch profit remittance tax for the first and third quarter of 1981
were paid to the BIR by Atlantic Gulf.
Marubeni sought a ruling from the BIR on whether or not the
dividends it received from Atlantic Gulf Manila are connected with
its conduct or business in the Philippines as to be considered
branch profits subject to the 15% profit remittance tax imposed
under Sec. 24, NIRC. In reply, CIR ruled that the dividends received
by Marubeni from Atlantic Gulf are not income arising from the
business activity in which Marubeni is engaged. Said dividends if
remitted abroad are not considered branch profits for purposes of
the 15% profit remittance tax imposed by Sec. 24, NIRC.
Subsequently, Marubeni filed with CIR a claim for the refund or
issuance of tax credit representing profit remittance erroneously
paid on the dividends remitted by Atlantic Gulf Manila to its head
office in Tokyo, Japan but the CIR denied Marubeni’s claim.
TAXATION LAW 1 103
 TAXATION LAW 1
Morillo Notes

quarterly MCIT, excess MCIT from the previous

ISSUE:
W/N Marubeni is entitled to 15% profit remittance tax under Sec.
taxable year/s shall not be allowed to be credited.
24, NIRC. Expanded withholding tax, quarterly corporate
income tax payments under the normal income tax,
RULING: and the MCIT paid in the previous taxable quarter/s
YES, Marubeni Corporation, being a nn-resident foreign are allowed to be applied against the quarterly MCIT
corporation with respect to the transaction in question, the due. (Sec. 2, BIR RR 12-2007)
applicable provision is Sec. 24, NIRC in conjunction with the
Philippine-Japan Treaty of 1980. As a general rule, Marubeni is
Illustration:
taxed 35% of its gross income from all sources within the
Philippines being a non-resident foreign corporation. However, a
Panday Corporation’s computed normal income tax and
discounted rate of 15% is given to Marubeni on dividends received MCIT, and creditable income taxes withheld from 1st to 4th
from a domestic corporation, Atlantic Gulf Manila, on the quarters including excess MCIT and excess withholding taxes
contribution that its domicile state (Japan) extends in favor of from prior year/s are as follows:
Marubeni, a tax credit of not less than 20% of the dividends
Excess
received. This 20% represents the difference between the regular MCIT
Excess
tax of 35% on non-resident foreign corporations which Marubeni Normal Taxes Withheld
Qrtr: MCIT Taxes
would have ordinarily paid, and the 15% special rate on dividends Income Tax WIthheld Tax Prior
Prior
Year
received from a domestic corporation. Year

It is readily apparent that the 15% tax rate imposed on the 1st 100,000 80,000 20,000 P30,000 10,000
dividends received by a foreign non-resident stockholder from a
domestic corporation under Section 24 (b) (1) (iii) is easily within the 2nd 120,000 250,000 30,000
maximum ceiling of 25% of the gross amount of the dividends as
decreed in Article 10 (2) (b) of the Tax Treaty. 3rd 250,000 100,000 40,000

4th 200,000 100,000 35,000

3. Capital Gains From Sale of Shares of Stock Not Traded in
the Stock Exchange:
- The rates prescribed below is imposed on the net For the 1st Quarter - the quarterly income tax payable by
capital gains realized during the taxable year from the Panday Corporation shall be computed as follows:
sale, barter, exchange or other disposition of shares Quarterly Corporate Income tax due
of stock in a domestic corporation, except shares (higher amount between normal income
tax and MCIT) - Normal income tax P100,00
sold, or disposed of through the stock exchange.
(Sec. 28(B)(5)(c), NIRC): Less: Taxes Withheld - Prior Year
10,000
Not over P100,000 5%
Taxes Withheld - 1st Qtr.
Any amount in excess of P100,000 10% 20,000

Excess MCIT Prior Year

30,000 60,000
IV. MINIMUM CORPORATE INCOME TAX (MCIT):
Net Income Tax Due, 1st Qtr - normal
income tax P40,000
MCIT ON DOMESTIC CORPORATION:
- A minimum corporate income tax of 2% of the gross
income as of the end of the taxable year is imposed For the 2nd Quarter - the quarterly income tax payable to
on a corporation beginning on the 4th taxable year Panday Corporation shall be computed as follows:
immediately following the year in which such
Excess
corporation commenced its business operations. Excess
MCIT
(Sec. 27(E), NIRC) Normal Taxes Withheld
Qrtr: MCIT Taxes
Income Tax WIthheld Tax Prior
- The MCIT shall be imposed whenever such Prior
Year
corporation has zero or negative taxable income or Year
whenever the amount of minimum corporate income
1st 100,000 80,000 20,000 P30,000 10,000
tax is greater than the normal income tax due from
such corporation. (Sec. 2, BIR RR 12-2007)
2nd 120,000 250,000 30,000

Computation of MCIT on Domestic Corporation: Total: 220,000 330,000 50,000

- The computation and the payment of MCIT shall
apply at the time of filing the quarterly corporate
income tax as prescribed under Sec. 75 and 77 of Quarterly Corporate Income tax due
(higher amount between normal income
NIRC. (Sec. 2, BIR RR 12-2007) tax and MCIT) - MCIT P330,00
- In the computation of the tax due for the taxable
quarter, if the computed quarterly MCIT is higher Less: Taxes Withheld - Prior Year
than the quarterly normal income tax, the tax due to 10,000
be paid for such taxable quarter at the time of filing
Taxes Withheld - 1st Qtr.
the quarterly corporate income tax return shall be the
20,000 100,000
MCIT which is 2% of the gross income as of the end
of the taxable quarter. In the payment of said

104 TAXATION LAW 1

 TAXATION LAW 1
Morillo Notes
Taxes Withheld - 1st Qtr. Quarterly Corporate Income tax due
30,000 (higher amount between normal income
tax and MCIT) - Normal income tax P470,000
Net income tax payment - 1st Q.
Less: Taxes Withheld - Prior Year
40,000
10,000
Net Income Tax Due, 2nd Qtr - MCIT
Taxes Withheld - 1st Qtr.
P230,000
20,000

Taxes Withheld - 2nd Qtr.

For the 3rd Quarter - the quarterly income tax payable by
30,000
Panday Corporations shall be computed as follows:
Excess Taxes Withheld - 3rd Qtr
Excess 40,000
MCIT
Normal Taxes Withheld
Qrtr: MCIT Taxes
Income Tax WIthheld Tax Prior
Prior Taxes Withheld - 4th Qtr.
Year
Year 35,000

1st 100,000 80,000 20,000 P30,000 10,000 Net income tax payment - 1st Q.
40,000
2nd 120,000 250,000 30,000
Net income tax payment - 3rd Q
3rd 250,000 100,000 40,000 70,000

Total: 470,000 430,000 90,000 MCIT paid in the 2nd quarter

230,000

Excess MCIT Prior Year

Quarterly Corporate Income tax due
(higher amount between normal income 30,000 505,000
tax and MCIT) - Normal income tax P470,000
Net Income Tax Due, 3rd Qtr - normal
Less: Taxes Withheld - Prior Year income tax P165,000
10,000

Taxes Withheld - 1st Qtr. In the above illustrative computation, quarterly MCIT
20,000 paid on the Quarterly Income Tax Return shall be credited
against the normal income tax at year end if in the preparation
Taxes Withheld - 2nd Qtr.
and the filing of the annual income tax return and in the final
30,000
computation of the annual income tax due, it appears that the
Taxes Withheld - 3rd Qtr normal income tax due is higher than the computed annual
40,000 MCIT. Moreover, in addition to the quarterly MCIT paid and
quarterly normal income tax payments in the taxable quarters
Net income tax payment - 1st Q. of the same taxable year, excess MCIT in the prior year/s
40,000 (subject to the prescriptive period allowed for its credibility),
expanded withholding taxes in the current year and excess
MCIT paid in the 2nd quarter
230,000
expanded withholding taxes in the prior year shall be allowed
to be credited against the annual income tax computed under
Excess MCIT Prior Year the normal income tax rules.
30,000 400,000
However, if in the computation of the annual income
Net Income Tax Due, 3rd Qtr - normal
income tax
tax due, the computed annual MCIT due appears to be higher
P70,000
than the annual MCIT due appears to be higher than the
annual normal income tax due, what may be credited against
At Year End - the computation of the annual income tax the annual MCIT due shall only be the quarterly MCIT
payable by Panday Corporation shall be computed as follows: payments of the current taxable quarters, the quarterly normal
income tax payments in the quarters of the current taxable
Excess
MCIT
Excess year, the expanded withholding taxes in the current year and
Normal Taxes Withheld
Qrtr: MCIT Taxes excess expanded withholding taxes in the prior year. Excess
Income Tax WIthheld Tax Prior
Prior
Year MCIT from the previous taxable year/s shall not be allowed to
Year
be credited therefrom as the same can only be applied against
normal income tax.
1st 100,000 80,000 20,000 P30,000 10,000

2nd 120,000 250,000 30,000 Suppose, in the above illustration, the MCIT at year end is
higher than the normal income tax, then computation of the
3rd 250,000 100,000 40,000 income tax liability of Panday Corporation shall be as follows:
Excess
4th 200,000 100,000 35,000 Excess
MCIT
Normal Taxes Withheld
Qrtr: MCIT Taxes
Total: 670,000 530,000 125,000 Income Tax WIthheld Tax Prior
Prior
Year
Year

TAXATION LAW 1 105

 TAXATION LAW 1
Morillo Notes

1st 100,000 80,000 20,000 P30,000 10,000 Amount of tax payable

P100,000
2nd 120,000 250,000 30,000
Less: 1998 excess MCIT
3rd 250,000 100,000 40,000 (25,000)

4th 50,000 120,000 35,000 1999 excess MCIT

Total: 520,000 550,000
Quarterly Corporate Income tax due
(higher amount between normal income
tax and MCIT) - Normal income tax
Less: Taxes Withheld - Prior Year
Taxes Withheld - 1st Qtr.
Taxes Withheld - 2nd Qtr.
Taxes Withheld - 3rd Qtr
Taxes Withheld - 4th Qtr.
(40,000) P65,000
125,000
Net Amount of tax payable:
P35,000
P470,000
The taxpayer shall pay the MCIT whenever it is
greater than the regular or normal corporate income tax which
10,000 is imposed under Sec. 27(A) and Sec. 28(A)(1) of NIRC. The
final comparison between the normal income tax payable by
the corporation and the MCIT shall be made at the end of the
20,000
taxable year and the payable or excess payment in the Annual
Income Tax Return shall be computed taking into
30,000 consideration corporate income tax payment made at the time
of filing of quarterly corporate income tax return whether this
be MCIT or normal income tax. Thus, in the above illustration,
40,000 the taxpayer should have paid the MCIT of the P75,000 since
this amount is greater than the normal income tax of P50,000
in 1998.
35,000

Net income tax payment - 1st Q.
Net income tax payment - 3rd Q
MCIT paid in the 2nd quarter
230,000
Net Income Tax Due - MCIT
Meaning of :Normal Income Tax” - the income tax rates
prescribed under Sec. 27(A), and Sec. 28(A)(1) of the NIRC,
which is 30%.
CARRY FORWARD OF EXCESS OF MINIMUM TAX:
- Any excess of the MCIT over the normal income tax
as computed, shall be carried forward and credited
against the normal income tac for the 3 immediately
succeeding taxable years. (Sec. 27(E)(2), NIRC)
Illustration:
Normal
Year
Income Tax
1998 P50,000
RELIEF FROM THE MCIT UNDER CERTAIN CONDITIONS:
40,000 - Sec. of Finance is authorized to suspend the
imposition of the MCIT on any corporation which
suffers losses on account of prolonged labor dispute,
70,000 or because of force majeure, or because of legitimate
business reverses. (Sec. 27(E)(3), NIRC)
475,000
V. IMPROPERLY ACCUMULATED EARNINGS TAX:
P75,000
IMPOSITION OF IMPROPERLY ACCUMULATED
EARNINGS TAX:
- In addition to other taxes on income, there is an
imposition on the improperly accumulated taxable
income of each corporation subject to Improperly
Accumulated Earnings Tax (IAET), an improperly
accumulated earnings tax equal to 10% of the
improperly accumulated taxable income. (Sec. 29(A),
NIRC)
Rationale - If the earnings and profits were distributed, the
shareholders would then be liable to income tax thereon,
whereas if the distribution were not made to them, they would
Excess of
MCIT Over the incur no tax in respect to the undistributed earning and profits
MCIT
Normal of the corporation. The touchstone of the liability is the
Income Tax
purpose behind the accumulation of the income and not the
P75,000 P25,000
consequences of the accumulation. (Sec. 2, BIR RR 2-2001)

1998 amount of tax P75,000 MEANING OF IAET:

payable - It means taxable income adjusted by:
(1) Income exempt from tax;
1999 P60,000 P100,000 P40,000 (2) Income excluded from gross income;
(3) Income subject to final tax; and
1999 amount of tax P100,000
payable (4) The amount of net operating loss carryover
deducted;
2000 P100,000 P60,000
And reduced b y the sum of:
(1) Dividend actually or constructively paid; and
Computation of Net Amount of Tax Payable in 2000:

106 TAXATION LAW 1

 TAXATION LAW 1
Morillo Notes
(2) Income tax paid for the taxable year. (Sec.
29(D), NIRC)
APPLICATION OF IAET:
- Gen. Rule: The IAET shall apply to every corporation
formed or availed for the purpose of avoiding the
income tax with respect to its shareholders or the
shareholders of any other corporation, by permitting
earnings and profits to accumulate instead of being
divided or distributed. (Sec. 29(B), NIRC)
- Exception: The IAET shall not apply to the following:
1. Publicly-held corporation;
2. Banks and other non-bank financial
intermediaries;
3. Insurance companies
4. Taxable partnerships;
5. General Professional Partnerships;
6. Non-taxable joint ventures; and
7. Enterprises duly registered with the
Philippine Economic Zone Authority (PEZA)
under RA 7916, and enterprises registered
pursuant to the Bases Conversion and
Development Act of 1992 (RA 7227), as well
as other enterprises duly registered under
special economic zones declared by law
which enjoy payment of special tax rate on
their registered operations or activities in lieu
of other taxes, national or local. (Sec. 4, BIR
RR 2-2001)
REASONABLE NEEDS OF BUSINESS:
a. Allowance for the increase in the accumulation of
earnings up to 100% of the paid-up capital of the
corporation as of Balance Sheet date, inclusive of
accumulations taken from other years;
b. Earning reserved for definite corporate expansion
projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
equivalent body;
c. Earnings reserved for building, plants or equipment
acquisition as approved by the Board of Directors or
equivalent body;
d. Earning reserved for compliance with any loan
covenant or pre-existing obligation established under
a legitimate business agreement;
e. Earnings required by law or applicable regulations to
be retained by the corporation or in respect of which
there is legal prohibition against its distribution;
f. In the case of subsidiaries of foreign corporations in
the Philippines, all undistributed earnings intended or
reserved for investments within the Philippines as can
be proven by corporate records and/or relevant
documentary evidence. (Sec. 3, BIR RR 2-2001)
IMMEDIACY TEST:
- The words “reasonable needs of the business” to
mean the immediate needs of the business, and it
was generally held of the corporation did not prove
an immediate need for the accumulation of the
earnings and profits, the accumulation was not for
the reasonable needs of the business, and the
penalty tax would apply. (Manila Wine Merchants,
inc. vs. CIR, GR no. L-26145, February 20, 1984)
CIR vs. TUASON, INC.
GR no. 85749, May 15, 1989
FACTS:
CTA set aside petitioner’s revenue commissioner’s assessment of
1.1 M as the 25% surtax on private respondent’s unreasonable
accumulation of surplus for the year 1975-1978. Private respondent
protested the assessment on the ground that the accumulation of
surplus profits during the years in question was solely for the
purpose of expanding its business operations as a real estate
broker. Private respondent filed a petition that pending
determination of the case, an order be issued restraining the
commissioner and/or his reps from enforcing the warrants of
distraint and levy. Writ of injunction was issued by tax court. Due to
the reversal of CTA of the commissioner’s decision, CIR appeals to
the SC.
ISSUE:
W/N Tuason Inc. is liable for the 25% surtax on undue
accumulation of surplus for 75-78
RULING:
Yes to all. Antionio is liable for the 25% surtax assessed. Sec. 25.
Additional tax on corporation improperly accumulating profits or
surplus, “If any corporation, except banks, insurance companies, or
personal holding companies, whether domestic or foreign, is
formed or availed of for the purpose of preventing the imposition of
the tax upon its shareholders or members or the shareholders or
members of another corporation, through the medium of permitting
its gains and profits to accumulate instead of being divided or
distributed, there is levied and assessed against such corporation,
for each taxable year, a tax equal to twenty-five per centum of the
undistributed portion of its accumulated profits or surplus which
shall be in addition to the tax imposed by section twentyfour, and
shall be computed, collected and paid in the same manner and
subject to the same provisions of law, including penalties, as that
tax.”
In this case, Tuason Inc, a mere holding company for the
corporation did not involve itself in the development of subdivisions
but merely subdivided its own lots and sold them for bigger profits.
It derived its income mostly from interest, dividends, and rentals
realized from the sale of realty.
Tuason Inc is also owned by Antonio himself. While these profits
were actually made, the commissioner points out that the corp. did
not use up its surplus profits. Antonio claims that he spent the
money to build an apartment in urdaneta but there’s a large
discrepancy bet. The market value and the alleged investment cost.
The importance of liability is the purpose behind the accumulation
of the income and not the consequences of the accumulation.
Thus, if the failure to pay dividends were for the purpose of using
the undistributed earnings & profits for the reasonable needs of the
business, that purpose would not fall to overcome the presumption
and correctness of CIR.
CYANAMID PHILIPPINES, INC.
GR no. 108067, January 20, 2000
FACTS:
Petitioner, Cyanamid Philippines, Inc., a corporation organized
under Philippine laws, is a wholly owned subsidiary of American
Cyanamid Co. based in Maine, USA. It is engaged in the
manufacture of pharmaceutical products and chemicals, a
wholesaler of imported finished goods, and an importer/indenter.
February 7, 1985, the CIR sent an assessment letter to petitioner
and demanded the payment of deficiency in come tax of P119,817
for taxable year 1981 which the petitioner on March 4, 1985,
protested particularly (1) 25% surtax assessment of P3,774,867.50;
(2) 1981 deficiency income tax assessment of P119,817; (3) 1981
deficiency percentage assessment of P3,346.72. CIR refused to
allow the cancellation of the assessment notices.
TAXATION LAW 1 107
 TAXATION LAW 1
Morillo Notes
During the pendency of the case on appeal to the CTA, both parties
agreed to compromise the 1981 deficiency income assessment of
P119,817 and reduced to P26,577 as compromise settlement. But
the surtax on improperly accumulated profits remained unresolved.
Petitioner claimed that the assessment representing the 25%
surtax had no legal basis for the following reasons: (a) petitioner
accumulated its earnings and profits for reasonable business
requirements to meet working capital needs and retirement of
indebtedness, (b) petitioner is wholly owned subsidiary of American
Cyanamid Co., a corporation organized under the laws of the State
of Maine, in the USA, whose shares of stock are listed and traded
in New York Stock Exchange. This being the case, no individual
shareholder of petitioner could have evaded or prevented the
imposition of individual income taxes by petitioner’s accumulation
of earnings and profits, instead contribution of the same.
ISSUE:
W/N petitioner is liable for the accumulated earnings tax for the
year 1981.
RULING:
The amendatory provision of Sec. 25 of the 1977 NIRC, which was
PD1739, enumerated the corporations exempt from the imposition
of improperly accumulated tax: (a) banks, (b) non-bank financial
intermediaries; (c) insurance companies; and (d) corporations
organized primarily and authorized by the Central Bank to hold
shares of stocks of banks. Petitioner does not fall among those
exempt classes. Besides, the laws granting exemption form 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 the
exemption to prove that it is, in fact, covered by the exemption so
claimed; a burden which petitioner here has failed to discharge.
Unless rebutted, all presumptions generally are indulged in favor of
the correctness of the CIR’s assessment against the taxpayer. With
petitioner’s failure to prove the CIR incorrect, clearly and
conclusively, this court is constrained to uphold the correctness of
tax court’s ruling as affirmed by the CA.
VI. EXEMPTION FROM TAX ON CORPORATION:
The following organization shall not be taxed in respect to
income received by them:
(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
108 TAXATION LAW 1
asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person;
(f) Business league chamber of commerce, or board of
trade, not organized for profit and no part of the net
income of which inures to the benefit of any private
stock-holder, or individual;
(g) Civic league or organization not organized for profit
but operated exclusively for the promotion of social
welfare;
(h) A nonstock and nonprofit educational institution;
(i) Government educational institution;
(j) Farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual
or cooperative telephone company, or like
organization of a purely local character, the income
of which consists solely of assessments, dues, and
fees collected from members for the sole purpose of
meeting its expenses; and
(k) Farmers', fruit growers', or like association organized
and operated as a sales agent for the purpose of
marketing the products of its members and turning
back to them the proceeds of sales, less the
necessary selling expenses on the basis of the
quantity of produce finished by them;
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. (Sec. 30, NIRC)
C. ESTATE & TRUST
IMPOSITION OF TAX ON ESTATES OR TRUST:
- Gen. Rule: Tax shall apply to the income of estates
or of any kind of property held in trust, including the
following:
(1) Income accumulated in trust for the benefit
of unborn or unascertained person or
persons with contingent interests, and
income accumulated or held for future
distribution under the terms of the will or
trust;
(2) Income which is to be distributed currently
by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant
which is to be held or distributed as the
court may direct;
(3) Income received by estates of deceased
persons during the period of administration
or settlement of the estate; and
(4) Income which, in the discretion of the
fiduciary, may be either distributed to the
beneficiaries or accumulated. (Sec. (60)(A),
NIRC)
- Exception: 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 (1) if contributions are made to the trust
by such employer, or employees, or both for the
purpose of distributing to such employees the
earnings and principal of the fund accumulated by
 TAXATION LAW 1
Morillo Notes
the trust in accordance with such plan, and (2) if
under the trust instrument it is impossible, at any time
prior to the satisfaction of all liabilities with respect to
employees under the trust, for any part of the corpus
or income to be (within the taxable year or thereafter)
used for, or diverted to, purposes other than for the
exclusive benefit of his employees: Provided, That
any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which
so distributed to the extent that it exceeds the
amount contributed by such employee or distributee.
(Sec. 60(B), NIRC)
COMPUTATION AND PAYMENT:
- Gen. Rule: The tax shall be computed upon the
taxable income of the estate or trust and shall be
paid by the fiduciary.
- Exception:
- Under Sec. 63, NIRC - Revocable trust
- Under Sec. 64 - Income for the benefit of
the grantor
- Under 60(C)(2) - Consolidation of Income of
two or more Trusts.
Consolidation of Where, in the case of two or more trusts,
the creator of the trust in each instance is
Income of Two or
the same person, and the beneficiary in
More Trusts
each instance is the same, the taxable
income of all the trusts shall be
consolidated and the tax provided in this
Section computed on such consolidated
income, and such proportion of said tax
shall be assessed and collected from
each trustee which the taxable income of
the trust administered by him bears to the
consolidated income of the several trusts.
Revocable Trusts Where at any time the power to revest in
the grantor title to any part of the corpus
of the trust is vested (1) in the grantor
either alone or in conjunction with any
person not having a substantial adverse
interest in the disposition of such part of
the corpus or the income therefrom, or (2)
in any person not having a substantial
adverse interest in the disposition of such
part of the corpus or the income
therefrom, the income of such part of the
trust shall be included in computing the
taxable income of the grantor.
Income for Benefit Where any part of the income of a trust
of Grantor (1) is, or in the discretion of the grantor or
of any person not having a substantial
adverse interest in the disposition of such
part of the income may be held or
accumulated for future distribution to the
grantor, or (2) may, or in the discretion of
the grantor or of any person not having a
substantial adverse interest in the
disposition of such part of the income, be
distributed to the grantor, or (3) is, or in
the discretion of the grantor or of any
person not having a substantial adverse
interest in the disposition of such part of
the income may be applied to the
payment of premiums upon policies of
insurance on the life of the grantor, such
part of the income of the trust shall be
included in computing the taxable income
of the grantor.
“In the Discretion of the Grantor” - means in the discretion
of the grantor, either alone or in conjunction with any person
not having a substantial adverse interest in the disposition of
the part of the income in question. (Sec. 64(B), NIRC)
TAXABLE INCOME:
- Gen. Rule: The taxable income of the estate or trust
shall be computed in the same manner and on the
same basis as in the case of an individual. (Sec. 61,
NIRC)
- Exception:
(A) There shall be allowed as a deduction in
computing the taxable income of the estate
or trust the amount of the income of the
estate or trust for the taxable year which is
to be distributed currently by the fiduciary to
the beneficiaries, and the amount of the
income collected by a guardian of an infant
which is to be held or distributed as the
court may direct, but the amount so allowed
as a deduction shall be included in
computing the taxable income of the
beneficiaries, whether distributed to them or
not. Any amount allowed as a deduction
under this Subsection shall not be allowed
as a deduction under Subsection (B) of this
Section in the same or any succeeding
taxable year.
(B) In the case of income received by estates of
deceased persons during the period of
administration or settlement of the estate,
and in the case of income which, in the
discretion of the fiduciary, may be either
distributed to the beneficiary or
accumulated, there shall be allowed as an
additional deduction in computing the
taxable income of the estate or trust the
amount of the income of the estate or trust
for its taxable year, which is properly paid or
credited during such year to any legatee,
heir or beneficiary but the amount so
allowed as a deduction shall be included in
computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered in a
foreign country, the deductions mentioned
in Subsections (A) and (B) of this Section
shall not be allowed: Provided, That the
amount of any income included in the return
of said trust shall not be included in
computing the income of the beneficiaries.
(Sec. 61, NIRC)
FIDUCIARY RETURNS:
- Guardians, trustees, executors, administrators,
receivers, conservators and all persons or
corporations, acting in any fiduciary capacity, shall
render, in duplicate, a return of the income of the
person, trust or estate for whom or which they act,
and be subject to all the provisions of this Title, which
apply to individuals in case such person, estate or
trust has a gross income of Twenty thousand pesos
(P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall
take oath that he has sufficient knowledge of the
affairs of such person, trust or estate to enable him to
TAXATION LAW 1 109
 TAXATION LAW 1
Morillo Notes
make such return and that the same is, to the best of
his knowledge and belief, true and correct, and be
subject to all the provisions of this Title which apply
to individuals: Provided, That a return made by or for
one or two or more joint fiduciaries filed in the
province where such fiduciaries reside; under such
rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall
prescribe, shall be a sufficient compliance with the
requirements of this Section. (Sec. 65, NIRC)
FIDUCIARIES INDEMNIFIED AGAINST CLAIMS FOR
TAXES PAID:
- Trustees, executors, administrators and other
fiduciaries are indemnified against the claims or
demands of every beneficiary for all payments of
taxes which they shall be required to make under the
provisions of this Title, and they shall have credit for
the amount of such payments against the beneficiary
or principal in any accounting which they make as
such trustees or other fiduciaries. (Sec. 66, NIRC)
Chapter 6:
ACCOUNTING PERIODS AND
METHODS OF ACCOUNTING:
ACCOUNTING PERIODS:
Calendar Year Taxable Year Fiscal Year
Regular year Means the calendar An accounting
composed of 12 year, or the fiscal period of 12 months
months and 365 year ending during ending on the last
days. such calendar year, day of any month
upon the basis of other than
which the net December.
income is (Sec. 22(Q), NIRC)
computed.
(Sec. 22(P), NIRC(
GENERAL RULE:
- The taxable income shall be computed upon the
basis of the taxpayer's annual accounting period
(fiscal year or calendar year, as the case may be) in
accordance with the method of accounting regularly
employed in keeping the books of such taxpayer, but
if no such method of accounting has been so
employed, or if the method employed does not
clearly reflect the income, the computation shall be
made in accordance with such method as in the
opinion of the Commissioner clearly reflects the
income. (Sec. 43, NIRC)
- If the taxpayer's annual accounting period is other
than a fiscal year, as defined in Section 22(Q), or if
the taxpayer has no annual accounting period, or
does not keep books, or if the taxpayer is an
individual, the taxable income shall be computed on
the basis of the calendar year. (Sec. 43, NIRC)
PERIOD IN WHICH ITEMS OF GROSS INCOME INCLUDED:
110 TAXATION LAW 1
- The amount of all items of gross income shall be
included in the gross income for the taxable year in
which received by the taxpayer, unless, under
methods of accounting permitted under Section 43,
any such amounts are to be properly accounted for
as of a different period. In the case of the death of a
taxpayer, there shall be included in computing
taxable income for the taxable period in which falls
the date of his death, amounts accrued up to the
date of his death if not otherwise properly includible
in respect of such period or a prior period. (Sec. 44,
NIRC)
PERIOD FOR WHICH DEDUCTIONS AND CREDITS
TAKEN:
- The deductions provided for in this Title shall be
taken for the taxable year in which 'paid or accrued'
or 'paid or incurred', dependent upon the method of
accounting upon the basis of which the net income is
computed, unless in order to clearly reflect the
income, the deductions should be taken as of a
different period. In the case of the death of a
taxpayer, there shall be allowed as deductions for the
taxable period in which falls the date of his death,
amounts accrued up to the date of his death if not
otherwise properly allowable in respect of such
period or a prior period. (Sec. 45, NIRC)
CHANGE OF ACCOUNTING PERIOD:
- If a taxpayer, other than an individual, changes his
accounting period from fiscal year to calendar year,
from calendar year to fiscal year, or from one fiscal
year to another, the net income shall, with the
approval of the Commissioner, be computed on the
basis of such new accounting period, subject to the
provisions of Section 47. (Sec. 46, NIRC)
FINAL OR ADJUSTMENT RETURNS FOR A PERIOD OF
LESS THAN 12 MONTHS:
A. Returns for Short Period Resulting from Change of
Accounting Period:
- If a taxpayer, other than an individual, with the
approval of the Commissioner, changes the basis of
computing net income from fiscal year to calendar
year, a separate final or adjustment return shall be
made for the period between the close of the last
fiscal year for which return was made and the
following December 31. If the change is from
calendar year to fiscal year, a separate final or
adjustment return shall be made for the period
between the close of the last calendar year for which
return was made and the date designated as the
close of the fiscal year. If the change is from one
fiscal year to another fiscal year, a separate final or
adjustment return shall be made for the period
between the close of the former fiscal year and the
date designated as the close of the new fiscal year.
(Sec. 47(A), NIRC)
B. Income Computed on Basis of Short Period:
- Where a separate final or adjustment return is made
under Subsection (A) on account of a change in the
accounting period, and in all other cases where a
separate final or adjustment return is required or
permitted by rules and regulations prescribed by the
 TAXATION LAW 1
Morillo Notes
Secretary of Finance, upon recommendation of the
Commissioner, to be made for a fractional part of a
year, then the income shall be computed on the basis
of the period for which separate final or adjustment
return is made. (Sec. 47(B), NIRC)
ACCOUNTING METHODS:
A. CASH BASIS:
- income, profits and gains earned are not included in
gross income until received, and expenses are not
deducted until paid.
- “Received” here includes actual and constructive
receipt.
B. ACCRUAL BASIS:
- income, profits and gains are included in gross
income when earned, whether received or not, and
expenses are allowed as deductions when incurred,
although not yet paid. It is the right to receive and not
the actual receipt that determines the inclusion of the
amount in gross income.
FILIPINAS SYNTHETIC FIBER CORP. vs CA
GR no. 118498, October 12, 1999
Under the accrual basis method of accounting, income is
reportable when all the events have occurred that fix the
taxpayer's right to receive the income, and the amount can be
determined with reasonable accuracy. Thus, it is the right to
receive income, and not the actual receipt, that determines
when to include the amount in gross income." Gleanable from
this notion are the following requisites of accrual method of
accounting, to wit: "(1) that the right to receive the amount
must be valid, unconditional and enforceable, i.e., not
contingent upon future time; (2) the amount must be
reasonably susceptible of accurate estimate; and (3) there
must be a reasonable expectation that the amount will be paid
in due course."
C. LONG-TERM BASIS:
- Persons whose gross income is derived in whole or in
part from such contracts shall report such income
upon the basis of percentage of completion. The
return should be accompanied by a return certificate
of architects or engineers showing the percentage of
completion during the taxable year of the entire work
performed under contract. There should be deducted
from such gross income all expenditures made
during the taxable year on account of the contract,
account being taken of the material and supplies on
hand at the beginning and end of the taxable period
for use in connection with the work under the
contract but not yet so applied. If upon completion of
a contract, it is found that the taxable [net] income
arising thereunder has not been clearly reflected for
any year or years, the Commissioner may permit or
require an amended return. (Sec. 49, NIRC)
Meaning of “Long-terms Contracts”:
- Means building, installation or construction contracts
covering a period in excess of 1 year.
D. INSTALLMENT BASIS:
Sales of Dealers Under rules and regulations prescribed by
in Personal the Secretary of Finance, upon
recommendation of the Commissioner, a
Property
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.
Sales of Realty In the case (1) of a casual sale or other
and Casual Sales casual disposition of personal property
of Personality (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.
Sales of Real An individual who sells or disposes of real
Property property, considered as capital asset, and is
Considered as otherwise qualified to report the gain
therefrom under Subsection (B) may pay the
Capital Asset by
capital gains tax in installments under rules
Individual and regulations to be promulgated by the
Secretary of Finance, upon recommendation
of the Commissioner.
Change from If a taxpayer entitled to the benefits of
Accrual to Subsection (A) elects for any taxable year to
Installment Basis 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.
Chapter 7:
RETURNS AND PAYMENT OF TAX
A. INDIVIDUALS
INDIVIDUALS NOT REQUIRED TO FILE AN INCOME TAX
RETURN:
1. An individual whose taxable income does not exceed
Two hundred fifty thousand pesos (P250,000) under
Section 24(A)(2)(a): Provided, That a citizen of the
Philippines and any alien individual engaged in
business or practice of profession within the
Philippine shall file an income tax return, regardless
of the amount of gross income;
TAXATION LAW 1 111
 TAXATION LAW 1
Morillo Notes
2. An individual with respect to pure compensation
income, as defined in Section 32 (A)(1), derived from
sources within the Philippines, the income tax on
which has been correctly withheld under the
provisions of Section 79 of this Code: Provided, That
an individual deriving compensation concurrently
from two or more employers at any time during the
taxable year shall file an income tax return.
3. An individual whose sole income has been subjected
to final withholding tax pursuant to Section 57(A) of
this Code; and
4. A minimum wage earner as defined in section 22 (HH)
of this Code or an individual who is exempt from
income tax pursuant to the provisions of this Code
and other laws, general or special. (Sec. 51(A)(2),
NIRC)
INDIVIDUALS REQUIRED TO FILE AN INCOME TAX
RETURN:
1. Every Filipino citizen residing in the Philippines;
2. Every Filipino citizen residing outside the Philippines,
on his income from sources within the Philippines;
3. Every alien residing in the Philippines, on income
derived from sources within the Philippines; and
4. Every nonresident alien engaged in trade or business
or in the exercise of profession in the Philippines.
(Sec. 51(A)(1), NIRC)
NOTE: Any individual not required to file an income tax return may
nevertheless be required to file an information return pursuant to rules and
regulations prescribed by the Secretary of Finance, upon recommendation of
the Commissioner. (Sec. 51(A)(3), NIRC)
REQUIREMENTS:
A. The income tax return shall be filed in duplicate by
the following persons:
a. A resident citizen - on his income from all
sources;
b. A nonresident citizen - on his income
derived from sources within the Philippines;
c. A resident alien - on his income derived from
sources within the Philippines; and
d. A nonresident alien engaged in trade or
business in the Philippines - on his income
derived from sources within the Philippines.
B. The income tax return (ITR) shall consist of a
maximum of four (4) pages in paper form or
electronic form, and shall only contain the following
information:
a. Personal profile and information;
b. Total gross sales, receipts or income from
compensation for services rendered,
conduct of trade or business or the exercise
of profession, except income subject to final
tax as provided under this Code;
c. Allowable deductions under this Code;
d. Taxable income as defined in Section 31 of
this Code; and
e. Income tax due and payable. (Sec. 51(A)(5),
NIRC)
WHERE TO FILE:
- Except in cases where the Commissioner otherwise
permits, the return shall be filed with an authorized
112 TAXATION LAW 1
agent bank, Revenue District Officer, Collection
Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal
residence or principal place of business in the
Philippines, or if there be no legal residence or place
of business in the Philippines, with the Office of the
Commissioner. (Sec. 51(B), NIRC)
WHEN TO FILE:
(1) The return of any individual specified above shall be
filed on or before the fifteenth (15th) day of April of
each year covering income for the preceding taxable
year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock
not traded thru a local stock exchange as
prescribed under Section 24(C)shall file a
return within thirty (30) days after each
transaction and a final consolidated return on
or before April 15 of each year covering all
stock transactions of the preceding taxable
year; and
(b) From the sale or disposition of real property
under Section 24(D) shall file a return within
thirty (30) days following each sale or other
disposition. (Sec. 51(C), NIRC)
HUSBAND AND WIFE:
- Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely
from compensation, shall file a return for the taxable
year to include the income of both spouses, but
where it is impracticable for the spouses to file one
return, each spouse may file a separate return of
income but the returns so filed shall be consolidated
by the Bureau for purposes of verification for the
taxable year. (Sec. 51(D), NIRC)
RETURN OF PARENT TO INCLUDE INCOME OF
CHILDREN:
- The income of unmarried minors derived from
properly received from a living parent shall be
included in the return of the parent, except (1) when
the donor's tax has been paid on such property, or
(2) when the transfer of such property is exempt from
donor's tax. (Sec. 51(E), NIRC(
PERSONS UNDER DISABILITY:
- If the taxpayer is unable to make his own return, the
return may be made by his duly authorized agent or
representative or by the guardian or other person
charged with the care of his person or property, the
principal and his representative or guardian assuming
the responsibility of making the return and incurring
penalties provided for erroneous, false or fraudulent
returns. (Sec. 5(F), NIRC)
SIGNATURE PRESUMED CORRECT:
- The fact that an individual's name is signed to a filed
return shall be prima facie evidence for all purposes
that the return was actually signed by him. (Sec.
51(G), NIRC)
 TAXATION LAW 1
Morillo Notes
SUBSTITUTED FILING OF INCOME TAX RETURNS BY
EMPLOYEES RECEIVING PURELY COMPENSATION
INCOME:
- Individual taxpayers receiving purely compensation
income, regardless of amount, from only one
employer in the Philippines for the calendar year, the
income tax of which has been withheld correctly by
the said employer (tax due equals tax withheld) shall
not be required to file an annual income tax return.
The certificate of withholding filed by the respective
employers, duly stamped ‘received’ by the BIR, shall
be tantamount to the substituted filing of income tax
returns by said employees. (Sec. 51-A, NIRC)
PAYMENT AND ASSESSMENT OF INCOME TAX FOR
INDIVIDUALS:
- Gen. Rule: The total amount of tax imposed on
income shall be paid by the person subject thereto at
the time the return is filed. (Sec. 56(A)(1), NIRC)
INSTALLMENT OF PAYMENT:
- When a tax due is in excess of P2,000, the taxpayer
other than a corporation, may elect to pay the tax in 2
equal installments, in which case, the first installment
shall be paid at the time the return is filed, and the
Second installment on or before Oct. 15 following the
close of the calendar year. (Sec. 56 (A)(2), NIRC)
- If any installment is not paid on or before the date
fixed for its payment, the whole amount of the tax
unpaid becomes due and payable together with the
delinquency penalties. (Supra)
PAYMENT OF CAPITAL GAINS TAX:
- The total amount of tax imposed and prescribed
under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of
exemption of capital gains under existing special
laws, no such payments shall be required: Provided,
further, That in case of failure to qualify for exemption
under such special laws and implementing rules and
regulations, the tax due on the gains realized from
the original transaction shall immediately become
due and payable, subject to the penalties prescribed
under applicable provisions of this Code: Provided,
finally, That if the seller, having paid the tax, submits
such proof of intent within six (6) months from the
registration of the document transferring the real
property, he shall be entitled to a refund of such tax
upon verification of his compliance with the
requirements for such exemption.
- In case the taxpayer elects and is qualified to report
the gain by installments under Section 49 of this
Code, the tax due from each installment payment
shall be paid within (30) days from the receipt of such
payments.
- No registration of any document transferring real
property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized
representative has certified that such transfer has
been reported, and the tax herein imposed, if any,
has been paid. (Sec. 56(A)(3), NIRC)
ASSESSMENT AND PAYMENT OF DEFICIENCY TAX:
- After the return is filed, the Commissioner shall
examine it and assess the correct amount of the tax.
The tax or deficiency income tax so discovered shall
be paid upon notice and demand from the
Commissioner. (Sec. 56(B), NIRC)
Meaning of Deficiency:
(1) The amount by which the tax imposed by this Title
exceeds the amount shown as the tax by the
taxpayer upon his return; but the amount so shown
on the return shall be increased by the amounts
previously assessed (or collected without
assessment) as a deficiency, and decreased by the
amount previously abated, credited, returned or
otherwise repaid in respect of such tax; or
(2) If no amount is shown as the tax by the taxpayer
upon this return, or if no return is made by the
taxpayer, then the amount by which the tax exceeds
the amounts previously assessed (or collected
without assessment) as a deficiency; but such
amounts previously assessed or collected without
assessment shall first be decreased by the amounts
previously abated, credited returned or otherwise
repaid in respect of such tax. (Sec. 51(B), NIRC)
DECLARATION OF INCOME TAX FOR INDIVIDUALS:
- Every individual subject to income tax under Sections
24 and 25(A) of this Title, who is receiving self-
employment income, whether it constitutes the sole
source of his income or in combination with salaries,
wages and other fixed or determinable income, shall
make and file a declaration of his estimated income
for the current taxable year on or before May 15 of
the same taxable year.
- In general, ‘self-employment income’ consists of the
earnings derived by the individual from the practice
of profession or conduct of trade or business carried
on by him as a sole proprietor or by a partnership of
which he is a member.
- Nonresident Filipino citizens, with respect to income
from without the Philippines, and nonresident aliens
not engaged in trade or business in the Philippines,
are not required to render a declaration of estimated
income tax.
- The declaration shall contain such pertinent
information as the Secretary of Finance, upon
recommendation of the Commissioner, may, by rules
and regulations prescribe.
- An individual may make amendments of a declaration
filed during the taxable year under the rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner. (Sec.
74(A), NIRC)
RETURN AND PAYMENT OF ESTIMATED INCOME TAX BY
INDIVIDUALS:
- the amount of estimated income tax in respect with
the above declaration shall be paid in 4 installments:
- First Installment: Shall be paid at the time of
declaration;
- Second Installment: Shall be paid on August
15 of the current year.
- Third Installment: Shall be paid on November
15 of the current year.
- Fourth Installment: Shall be paid on or before
May 15 of the following calendar year when the
TAXATION LAW 1 113
 TAXATION LAW 1
Morillo Notes
final adjusted income tax return is due to be
filled. (Sec. 74(B), NIRC)
DEFINITION OF ESTIMATED TAX:
- It means the amount which the individual declared as
income tax in his final adjusted and annual income
tax return for the preceding taxable year minus the
sum of the credits allowed under this Title against the
said tax. If, during the current taxable year, the
taxpayer reasonable expects to pay a bigger income
tax, he shall file an amended declaration during any
interval of installment payment dates. (Sec. 74(C),
NIRC)
B. CORPORATIONS
REQUIREMENTS FOR CORPORATE TAX RETURNS:
- Every corporation subject to the tax herein imposed,
except foreign corporations not engaged in trade or
business in the Philippines, shall render, in duplicate,
a true and accurate quarterly income tax return and
final or adjustment return in accordance with the
provisions of Chapter XII of this Title.
- The income tax return shall consist of a maximum of
four (4) pages in paper form or electronic form, be
filed by the president, vice-president or other
principal officer, and shall be sworn to by such officer
and by the treasurer or assistant treasurer, and shall
only contain the following information:
(1) Corporate profile and information;
(2) Gross sales, receipts or income from
services rendered, conduct of trade or
business, except income subject to final tax
as provided under this Code,
(3) Allowable deductions under this Code;
(4) Taxable income as defined in Section 31 of
this Code; and
(5) Income tax due and payable. (Sec. 52(A),
NIRC)
NOTE: The foregoing provisions shall not affect the implementation of
Republic Act 10708 or TIMTA. (Sec. 52(A), NIRC; amended by RA 10963)
TAXABLE YEAR OF CORPORATION:
- A corporation may employ either calendar year or
fiscal year as a basis for filing its annual income tax
return: Provided, That the corporation shall not
change the accounting period employed without prior
approval from the Commissioner in accordance with
the provisions of Section 47 of NIRC. (Sec. 52(B),
NIRC)
RETURN OF CORPORATION CONTEMPLATING
DISSOLUTION OR REORGANIZATION:
- Every corporation shall, within thirty (30) days after
the adoption by the corporation of a resolution or
plan for its dissolution, or for the liquidation of the
whole or any part of its capital stock, including a
corporation which has been notified of possible
involuntary dissolution by the Securities and
Exchange Commission, or for its reorganization,
render a correct return to the Commissioner, verified
under oath, setting forth the terms of such resolution
114 TAXATION LAW 1
or plan and such other information as the Secretary
of Finance, upon recommendation of the
commissioner, shall, by rules and regulations,
prescribe.
- The dissolving or reorganizing corporation shall, prior
to the issuance by the Securities and Exchange
Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and
regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, secure
a certificate of tax clearance from the Bureau of
Internal Revenue which certificate shall be submitted
to the Securities and Exchange Commission. (Sec.
52(C), NIRC)
RETURN ON CAPITAL GAINS REALIZED FROM SALE OF
SHARES OF STOCK NOT TRADED IN THE LOCAL STOCK
EXCHANGE:
- Every corporation deriving capital gains from the sale
or exchange of shares of stock not traded thru a local
stock exchange as prescribed under Sections 24(C),
25(A)(3), 27(E)(2), 28(A)(8)(c) and 28 (B)(5)(c) shall file a
return within thirty (30) days after each transactions
and a final consolidated return of all transactions
during the taxable year on or before the fifteenth
(15th) day of the fourth (4th) month following the
close of the taxable year. (Sec. 51(D), NIRC)
PAYMENT AND ASSESSMENT OF INCOME TAX FOR
CORPORATION:
- In the case of tramp vessels, the shipping agents
and/or the husbanding agents, and in their absence,
the captains thereof are required to file the return
herein provided and pay the tax due thereon before
their departure. Upon failure of the said agents or
captains to file the return and pay the tax, the Bureau
of Customs is hereby authorized to hold the vessel
and prevent its departure until proof of payment of
the tax is presented or a sufficient bond is filed to
answer for the tax due. (Sec. 56(A)(1), NIRC)
PAYMENT OF CAPITAL GAINS TAX:
- The total amount of tax imposed and prescribed
under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and
28(B)(5)(c) shall be paid on the date the return
prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of
his intention to avail himself of the benefit of
exemption of capital gains under existing special
laws, no such payments shall be required: Provided,
further, That in case of failure to qualify for exemption
under such special laws and implementing rules and
regulations, the tax due on the gains realized from
the original transaction shall immediately become
due and payable, subject to the penalties prescribed
under applicable provisions of this Code: Provided,
finally, That if the seller, having paid the tax, submits
such proof of intent within six (6) months from the
registration of the document transferring the real
property, he shall be entitled to a refund of such tax
upon verification of his compliance with the
requirements for such exemption.
- In case the taxpayer elects and is qualified to report
the gain by installments under Section 49 of this
Code, the tax due from each installment payment
 TAXATION LAW 1
Morillo Notes
shall be paid within (30) days from the receipt of such
payments.
- No registration of any document transferring real
property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized
representative has certified that such transfer has
been reported, and the tax herein imposed, if any,
has been paid. (Sec. 56(A)(3), NIRC)
ASSESSMENT AND PAYMENT OF DEFICIENCY TAX:
- After the return is filed, the Commissioner shall
examine it and assess the correct amount of the tax.
The tax or deficiency income tax so discovered shall
be paid upon notice and demand from the
Commissioner. (Sec. 56(B), NIRC)
DECLARATION OF QUARTERLY CORPORATE INCOME
TAX:
- Every corporation shall file in duplicate a quarterly
summary declaration of its gross income and
deductions on a cumulative basis for the preceding
quarter or quarters upon which the income tax, as
provided in Title II of this Code, shall be levied,
collected and paid. The tax so computed shall be
decreased by the amount of tax previously paid or
assessed during the preceding quarters and shall be
paid not later than sixty (60) days from the close of
each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year. (Sec. 75, NIRC)
FISCAL ADJUSTMENT RETURN:
- Every corporation liable to tax under Section 27 shall
file a final adjustment return covering the total taxable
income for the preceding calendar or fiscal year.
- If the sum of the quarterly tax payments made during
the said taxable year is not equal to the total tax due
on the entire taxable income of that year, the
corporation shall either:
(a) Pay the balance of tax still due; or
(b) Carry-over the excess credit; or
(c) Be credited or refunded with the excess
amount paid, as the case may be.
- In case the corporation is entitled to a tax credit or
refund of the excess estimated quarterly income
taxes paid, the excess amount shown on its final
adjustment return may be carried over and credited
against the estimated quarterly income tax liabilities
for the taxable quarters of the suceeding taxable
years. Once the option to carry-over and apply the
excess quarterly income tax against income tax due
for the taxable quarters of the succeeding taxable
years has been made, such option shall be
considered irrevocable for that taxable period and no
application for cash refund or issuance of a tax credit
certificate shall be allowed therefor. (Sec. 76, NIRC)
PLACE OF FILING AND PAYMENT OF QUARTERLY
CORPORATE INCOME TAX:
- Except as the Commissioner otherwise permits, the
quarterly income tax declaration required in Section
75 and the final adjustment return required in Section
76 shall be filed with the authorized agent banks or
Revenue District Officer or Collection Agent or duly
authorized Treasurer of the city or municipality having
jurisdiction over the location of the principal office of
the corporation filing the return or place where its
main books of accounts and other data from which
the return is prepared are kept. (Sec. 77(A), NIRC)
TIME OF FILING THE INCOME TAX RETURN:
- The corporate quarterly declaration shall be filed
within sixty (60) days following the close of each of
the first three (3) quarters of the taxable year. The
final adjustment return shall be filed on or before the
fifteenth (15th) day of April, or on or before the
fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be. (Sec.
77(B), NIRC)
TIME OF PAYMENT OF THE INCOME TAX:
- The income tax due on the corporate quarterly
returns and the final adjustment income tax returns
computed in accordance with Sections 75 and 76
shall be paid at the time the declaration or return is
filed in a manner prescribed by the Commissioner.
(Sec. 77(C), NIRC)
C. PARTNERSHIP
RETURNS OF GENERAL PROFESSIONAL PARTNERSHIPS:
- Every general professional partnership shall file, in
duplicate, a return of its income, except income
exempt under Section 32(B) of this Title, setting forth
the items of gross income and of deductions allowed
by this Title, and the names, Taxpayer Identification
Numbers (TIN), addresses and shares of each of the
partners. (Sec. 55, NIRC)
D. ESTATE & TRUST
FIDUCIARY RETURNS:
- Guardians, trustees, executors, administrators,
receivers, conservators and all persons or
corporations, acting in any fiduciary capacity, shall
render, in duplicate, a return of the income of the
person, trust or estate for whom or which they act,
and be subject to all the provisions of this Title, which
apply to individuals in case such person, estate or
trust has a gross income of Twenty thousand pesos
(P20,000) or over during the taxable year. Such
fiduciary or person filing the return for him or it, shall
take oath that he has sufficient knowledge of the
affairs of such person, trust or estate to enable him to
make such return and that the same is, to the best of
his knowledge and belief, true and correct, and be
subject to all the provisions of this Title which apply
to individuals: Provided, That a return made by or for
one or two or more joint fiduciaries filed in the
province where such fiduciaries reside; under such
rules and regulations as the Secretary of Finance,
upon recommendation of the Commissioner, shall
prescribe, shall be a sufficient compliance with the
requirements of this Section. (Sec. 65, NIRC)
Chapter 8:
WITHHOLDING TAXES
TAXATION LAW 1 115
 TAXATION LAW 1
Morillo Notes
CONCEPT OF WITHHOLDING TAX:
- Withholding tax is a method of collecting income tax
in advance from the taxable income of the recipient
of income.
- The duty to withhold is different from the duty to pay
income tax. The revenue officers generally disallow
the expenses claimed as deduction from gross
income, if no withholding of tax as required by law or
the regulations was withheld and remitted to the BIR
within the prescribed dates. (Mamalateo, Reviewer
on Taxation)
PARTIES TO A WITHHOLDING TAX:
- In the operation of the withholding tax system, the
payee is the taxpayer - the person on whom the tax
is imposed; On the other hand, the payor, a separate
entity - acts no more than an agent of the
government for the collection of the tax in order to
ensure its payments. (Supra)
I. WITHHOLDING ON WAGES
DEFINITION OF WAGES:
- Gen. Rule: Wages means all remuneration (other
than fees paid to a public official) for services
performed by an employee for his employer,
including the cash value of all remuneration paid in
any medium other than cash. (Sec. 78(A), NIRC)
- Exception: Remuneration paid for the following:
(1) Agricultural Labor paid entirely in products
of the farm where the labor is performed;
(2) Domestic service in a private home;
(3) Casual labor not in the course of the
employer’s trade or business; or
(4) Services by a citizen or resident of the
Philippines for a foreign government or an
international organization. (Sec. 78(A), NIRC)
WAGE PAID FOR SERVICES DURING PAYROLL PERIOD:
- If the remuneration paid by an employee to an
employee for services performed during ½ or more of
any payroll period of not more than 31 consecutive
days constitutes wages, all the remuneration paid by
such employer to such employee for such period
shall be deemed to be wages. (Sec. 78(A), NIRC)
- If the remuneration paid by an employer to an
employee for services performed during more than ½
of any such payroll period does not constitute wages,
then none of the remuneration paid by such employer
to such employee fors uch period shall be deemed to
be wages. (Supra)
Payroll Period - It means a period for which payment of
wages is ordinarily made to the employee by his employer.
(Sec. 78(B), NIRC)
Miscellaneous Payroll Period - A payroll period other than, a
daily, weekly, biweekly, semi-monthly, monthly, quarterly,
semi-annual, or annual period. (Sec. 78(B), NIRC)
EMPLOYEE:
- Refers to any individual who is the recipient of wages
and includes an officer, employee or elected official
of the Government of the Philippines or any political
116 TAXATION LAW 1
subdivision, agency or instrumentality thereof. (Sec.
78(C), NIRC)
- It includes an officer of a corporation.
EMPLOYER:
- Gen. Rule: A person for whom an individual performs
or performed any services, of whatever nature, as the
employee of such person. (Sec. 78 (D), NIRC)
- Exception:
(1) If the person for whom the individual
performs or performed any service does not
have control of the payment of the wages
for such services, the term 'employer'
(except for the purpose of Subsection(A)
means the person having control of the
payment of such wages; and
(2) In the case of a person paying wages on
behalf of a nonresident alien individual,
foreign partnership or foreign corporation
not engaged in trade or business within the
Philippines, the term 'employer' (except for
the purpose of Subsection(A) means such
person. (Sec. 78(D), NIRC)
REQUIREMENT OF WITHHOLDING ON WAGES:
- Gen Rule: Every employer making payment of wages
shall deduct and withhold upon such wages a tax
determined in accordance with the rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner. (Sec.79(A), NIRC)
- Exception: Minimum Wage Earners.
Minimum Wage Earners - Refers to a worker in the private
sector paid the statutory minimum wage or to an employee in
the public sector with compensation income of not more than
the statutory minimum wage in the non-agricultural sector
where he/she is assigned. (Sec. 22(HH), NIRC)
TAX PAID BY RECIPIENT:
- If the employer, in violation of the provisions of this
Chapter, fails to deduct and withhold the tax as
required under this Chapter, and thereafter the tax
against which such tax may be credited is paid, the
tax so required to be deducted and withheld shall not
be collected from the employer; but this Subsection
shall in no case relieve the employer from liability for
any penalty or addition to the tax otherwise
applicable in respect of such failure to deduct and
withhold. (Sec. 79(B), NIRC)
REFUNDS OR CREDITS:
Employer When there has been an overpayment of tax under
this Section, refund or credit shall be made to the
employer only to the extent that the amount of such
overpayment was not deducted and withheld
hereunder by the employer. (Sec. 79(c), NIRC)
Employee The amount deducted and withheld under this
Chapter during any calendar year shall be allowed
as a credit to the recipient of such income against
the tax imposed under Section 24(A) of this Title.
Refunds and credits in cases of excessive
withholding shall be granted under rules and
regulations promulgated by the Secretary of
Finance, upon recommendation of the
 TAXATION LAW 1
Morillo Notes
Commissioner. (Sec. 79(C), NIRC)
- Any excess of the taxes withheld over the tax due
from the taxpayer shall be returned or credited within
three (3) months from the fifteenth (15th) day of April.
Refunds or credits made after such time shall earn
interest at the rate of six percent (6%) per annum,
starting after the lapse of the three-month period to
the date the refund of credit is made.
- Refunds shall be made upon warrants drawn by the
Commissioner or by his duly authorized
representative without the necessity of counter-
signature by the Chairman, Commission on Audit or
the latter's duly authorized representative as an
exception to the requirement prescribed by Section
49, Chapter 8, Subtitle B, Title 1 of Book V of
Executive Order No. 292, otherwise known as the
Administrative Code of 1987.
WITHHOLDING ON BASIS OF AVERAGE WAGES: The
Commissioner may, under rules and regulations promulgated
by the Finance Secretary, authorize employers to:
(1) Estimate the wages which will be paid to an
employee in any quarter of the calendar year;
(2) Determine the amount to be deducted and withheld
upon each payment of wages to such employee
during such quarter as if the appropriate average of
the wages so estimated constituted the actual wages
paid; and
(3) Deduct and withhold upon any payment of wages to
such employee during such quarter such amount as
may be required to be deducted and withheld during
such quarter without regard to this Subsection. (Sec.
79(D), NIRC)
YEAR-END ADJUSTMENT:
- On or before the end of the calendar year but prior to
the payment of the compensation for the last payroll
period, the employer shall determine the tax due from
each employee on taxable compensation income for
the entire taxable year in accordance with Section
24(A).
- The difference between the tax due from the
employee for the entire year and the sum of taxes
withheld from January to November shall either be
withheld from his salary in December of the current
calendar year or refunded to the employee not later
than January 25 of the succeeding year. (Sec. 79(F),
NIRC)
LIABILITY FOR TAX:
Employer The employer shall be liable for the withholding and
remittance of the correct amount of tax required to
be deducted and withheld under this Chapter.
If the employer fails to withhold and remit the
correct amount of tax as required to be withheld
under the provision of this Chapter, such tax shall
be collected from the employer together with the
penalties or additions to the tax otherwise
applicable in respect to such failure to withhold and
remit.
Employee Where an employee fails or refuses to file the
withholding exemption certificate or wilfully
supplies false or inaccurate information thereunder,
the tax otherwise required to be withheld by the
employer shall be collected from him including
penalties or additions to the tax from the due date
of remittance until the date of payment.
On the other hand, excess taxes withheld made by
the employer due to:
1. Failure or refusal to file the withholding
exemption certificate; or
2. False and inaccurate information shall not
be refunded to the employee but shall be
forfeited in favor of the Government.
FILING OF RETURN AND PAYMENT OF TAXES
WITHHELD:
- Except as the Commissioner otherwise permits,
taxes deducted and withheld by the employer on
wages of employees shall be covered by a return and
paid to an authorized agent bank; Collection Agent,
or the duly authorized Treasurer of the city or
municipality where the employer has his legal
residence or principal place of business, or in case
the employer is a corporation, where the principal
office is located.
The return shall be filed and the payment made within
twenty-five (25) days from the close of each calendar
quarter: Provided, however, That the Commissioner
may, with the approval of the Secretary of Finance,
require the employers to pay or deposit the taxes
deducted and withheld at more frequent intervals, in
cases where such requirement is deemed necessary
to protect the interest of the Government.
The taxes deducted and withheld by employers shall
be held in a special fund in trust for the Government
until the same are paid to the said collecting officers.
(Sec. 81, NIRC)
RETURN AND PAYMENT IN CASE OF GOVERNMENT
EMPLOYEES:
- If the employer is the Government of the Philippines
or any political subdivision, agency or instrumentality
thereof, the return of the amount deducted and
withheld upon any wage shall be made by the officer
or employee having control of the payment of such
wage, or by any officer or employee duly designated
for the purpose. (Sec. 82, NIRC)
REQUIREMENTS FOR STATEMENTS AND RETURNS:
- Every employer required to deduct and withhold a tax
shall furnish to each such employee in respect of his
employment during the calendar year, on or before
January thirty-first (31st) of the succeeding year, or if
his employment is terminated before the close of
such calendar year, on the same day of which the
last payment of wages is made, a written statement
confirming the wages paid by the employer to such
employee during the calendar year, and the amount
of tax deducted and withheld under this Chapter in
respect of such wages. The statement required to be
furnished by this Section in respect of any wage shall
contain such other information, and shall be
furnished at such other time and in such form as the
Secretary of Finance, upon the recommendation of
the Commissioner, may, by rules and regulation,
prescribe. (Sec. 83 (A), NIRC)
TAXATION LAW 1 117
 TAXATION LAW 1
Morillo Notes
ANNUAL INFORMATION RETURNS:
- Every employer required to deduct and withhold the
taxes in respect of the wages of his employees shall,
on or before January thirty-first (31st) of the
succeeding year, submit to the Commissioner an
annual information return containing a list of
employees, the total amount of compensation
income of each employee, the total amount of taxes
withheld therefrom during the year, accompanied by
copies of the statement referred to in the preceding
paragraph, and such other information as may be
deemed necessary. This return, if made and filed in
accordance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation
of the Commissioner, shall be sufficient compliance
with the requirements of Section 68 of this Title in
respect of such wages. (Sec. 83(B), NIRC)
EXTENSION OF TIME:
- The Commissioner, under such rules and regulations
as may be promulgated by the Secretary of Finance,
may grant to any employer a reasonable extension of
time to furnish and submit the statements and returns
required under this Section. (Sec. 83(C), NIRC)
II. WITHHOLDING TAX ON SOURCE:
FINAL WITHHOLDING TAXES:
- Subject to rules and regulations the Secretary of
Finance may promulgate, upon the recommendation
of the Commissioner, requiring the filing of income
tax return by certain income payees, the tax imposed
or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E),
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5), 28 (A)(4), 28(A)(5),
28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c), 28(B)(1), 28(B)(2),
28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of
income shall be withheld by payor-corporation and/or
person and paid in the same manner and subject to
the same conditions as provided in Section 58 of this
Code. (Sec. 57(A), NIRC)
- The amount of income tax withheld by the
withholding agent is constituted as a full and final
payment of the income tax due from the payee on the
said income.
- The liability for payment of the tax rests primarily on
the payor as withholding agent. Thus, in case of his
failure to withhold the tax or in case of under
withholding, the deficiency tax shall be collected from
the payor/withholding agent. The payee is not
required to file an income tax return for the particular
income.
CREDITABLE WITHHOLDING TAXES (OR EXPANDED
WITHHOLDING TAX):
- The Secretary of Finance may, upon the
recommendation of the Commissioner, require the
withholding of a tax on the items of income payable
to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as
provided for by law, at the rate of not less than one
percent (1%) but not more than thirty-two percent
118 TAXATION LAW 1
(32%) thereof, which shall be credited against the
income tax liability of the taxpayer for the taxable
year: Provided, That, beginning January 1, 2019, the
rate of withholding shall not be less than one percent
(1%) but not more than fifteen percent (15%) of the
income payment. (Sec. 57(B), NIRC)
- Under the creditable withholding tax system, taxes
withheld on certain income payments are intended to
equal or at least approximate the tax due of the
payee on said income.
- The income recipient is still required to file an income
tax return, to report the income and/or pay the
difference between the tax withheld and the tax due
on the income. Taxes withheld on income payments
covered by the expanded withholding tax and
compensation income are creditable in nature.
III. RETURNS & PAYMENTS:
QUARTERLY RETURNS AND PAYMENTS OF TAXES
WITHHELD:
- Taxes deducted and withheld under Section 57 by
withholding agents shall be covered by a return and
paid to, except in cases where the Commissioner
otherwise permits, an authorized agent bank,
Revenue District Officer, Collection Agent, or duly
authorized Treasurer of the city or municipality where
the withholding agent has his legal residence or
principal place of business, or where the withholding
agent is a corporation, where the principal office is
located.
The taxes deducted and withheld by the withholding
agent shall be held as a special fund in trust for the
government until paid to the collecting officers.
The return for final and creditable withholding taxes
shall be filed and the payment made not later than
the last day of the month following the close of the
quarter during which withholding was made. (Sec.
58(A), NIRC)
STATEMENT OF INCOME PAYMENTS MADE AND TAXES
WITHHELD:
- Every withholding agent required to deduct and
withhold taxes under Section 57 shall furnish each
recipient, in respect to his or its receipts during the
calendar quarter or year, a written statement showing
the income or other payments made by the
withholding agent during such quarter or year, and
the amount of the tax deducted and withheld
therefrom, simultaneously upon payment at the
request of the payee, but not later than the twentieth
(20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of
the following year in the case of individual payee for
creditable withholding taxes. For final withholding
taxes, the statement should be given to the payee on
or before January 31 of the succeeding year. (Sec.
58(B), NIRC)
ANNUAL INFORMATION RETURN:
- Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the
 TAXATION LAW 1
Morillo Notes
Commissioner an annual information return
containing the list of payees and income payments,
amount of taxes withheld from each payee and such
other pertinent information as may be required by the
Commissioner. In the case of final withholding taxes,
the return shall be filed on or before January 31 of the
succeeding year, and for creditable withholding
taxes, not later than March 1 of the year following the
year for which the annual report is being submitted. Tatapusin nako ng Tax!
This return, if made and filed in accordance with the
rules and regulations approved by the Secretary of
Finance, upon recommendation of the
Commissioner, shall be sufficient compliance with
the requirements of Section 68 of this Title in respect
to the income payments. The Commissioner may, by
rules and regulations, grant to any withholding agent
a reasonable extension of time to furnish and submit
the return required in this Subsection. (Sec. 58(C),
NIRC)

INCOME OF RECIPIENT:
- Income upon which any creditable tax is required to
be withheld at source under Section 57 shall be
included in the return of its recipient but the excess
of the amount of tax so withheld over the tax due on
his return shall be refunded to him subject to the
provisions of Section 204; if the income tax collected
at source is less than the tax due on his return, the
difference shall be paid in accordance with the
provisions of Section 56. (Sec. 58(D), NIRC)
- All taxes withheld pursuant to the provisions of this
Code and its implementing rules and regulations are
hereby considered trust funds and shall be
maintained in a separate account and not
commingled with any other funds of the withholding
agent. (Sec. 58(D), NIRC)

REGISTRATION WITH REGISTER OF DEEDS:

- No registration of any document transferring real
property shall be effected by the Register of Deeds
unless the Commissioner or his duly authorized
representative has certified that such transfer has
been reported, and the capital gains or creditable
withholding tax, if any, has been paid: Provided,
however, That the information as may be required by
rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of
Deeds in the Transfer Certificate of Title or
Condominium Certificate of Title: Provided, further,
That in cases of transfer of property to a corporation,
pursuant to a merger, consolidation or
reorganization, and where the law allows deferred
recognition of income in accordance with Section 40,
the information as may be required by rules and
regulations to be prescribed by the Secretary of
Finance, upon recommendation of the
Commissioner, shall be annotated by the Register of
Deeds at the back of the Transfer Certificate of Title
or Condominium Certificate of Title of the real
property involved: Provided, finally, That any violation
of this provision by the Register of Deeds shall be
subject to the penalties imposed under Section 269
of this Code. (Sec. 58(E), NIRC)

TAXATION LAW 1 119