Taxation Problems 2020

TAXATION PROBLEMS 2020
ATTY ARANAS
EH 306
I.
Peter is the Vice-President for Sales of Golden Dragon Realty Conglomerate, Inc. (Golden
Dragon). A group of five (5) foreign investors visited the country for possible investment in the
condominium units and subdivision lots of Golden Dragon. After a tour of the properties for sale,
the investors were wined and dined by Peter at the posh Conrad's Hotel at the cost of P150,000.00.
Afterward, the investors were brought to a party in a videoke club which cost the company
P200,000.00 for food and drinks, and the amount of P80,000.00 as tips for business promotion
officers. Expenses at Conrad's Hotel and the videoke club were receipted and submitted to
support the deduction for representation and entertainment expenses.
The following day, he met with the Regional Director of the Housing and Land Use Regulatory
Board (HLURB) to lunch at the Marco Polo Hotel in Cebu City to discuss the approval of the
company’s application for a development permit in connection with its subdivision development
project in Cebu City. The lunch expenses were duly supported by official receipts issued in his
name. at month’s end, he requested the reimbursement of his expenses, and Golden Dragon
granted his request.
As its retained lawyer, the Finance department called upon you to ascertain whether the
foregoing expenses may be claimed by Golden Dragon. (2016 Bar)
Background Information:
As can be inferred from the facts submitted, Golden Dragon Realty Conglomerate, Inc. is a
domestic corporation which primarily deals on the sale of immovable properties. Accordingly, a group of
five (5) foreign investors visited the country for a possible investment on condominium units and subdivision
lots of Golden Dragon Conglomerate, Inc. After a tour of the properties for sale, the investors were wined
and dined at the posh Conrad’s Hotel at the cost of P150,000.00. Afterward, the investors were brought to
a party in a videoke club which cost the company P200,000.00 for food and drinks, and the amount of
P80,000.00 as tips for business promotion officers. Those expenses were received and submitted to
support the deduction for representation expenses.
The following day, you met with the Regional Director of the Housing and Land Use Regulatory
Board (HLURB) to lunch at the Marco Polo Hotel in Cebu City to discuss the approval of the Golden
Dragon’s application for a development permit in connection with its subdivision development project in
Cebu City. The lunch expenses were duly supported by official receipts issued in your name which were
thereafter reimbursed by the Golden Dragon Realty Conglomerate, Inc.
The corporation’s Finance Department has requested for our legal opinion on the tax treatment of
these expenses and whether Golden Dragon can claim these as deductions from its Gross Income.
Issues:
1. Whether the expenses incurred during the dinner at Conrad’s Hotel, the party at the videoke club
and the tip given to the promotion officers are deductibles and may be claimed as Entertainment,
Amusement, and Representation (EAR) expenses of Golden Dragon.
2. Whether the expenses incurred at the lunch with the Regional Director of the Housing and Land
Use Regulatory Board (HLURB) at the Marco Polo Hotel in Cebu City are deductible as EAR
Expenses.
Discussion & Analysis:
ON DEDUCTIBILITY OF THE DINNER, PARTY AND TIP EXPENSES AS EAR EXPENSE
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As to the dinner expenses at Conrad’s
The Php150, 000 dinner expense incurred by Golden Dragon in accommodating its foreign
investors at Conrad’s Hotel is a representation expense, thus deductible as an EAR expense from its Gross
Income.
Under Section 34 of the National Internal Revenue Code, as a necessary expense, “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 trade, business or exercise of
a profession not to exceed such ceilings as the Secretary of Finance,” may be deducted from the gross
income. The terms EAR expenses include representation expenses and/or depreciation or rental expense
relating to entertainment facilities. Representation expense refer to expenses incurred by a taxpayer in
connection with the conduct of his trade, business or exercise of profession, in entertaining, providing
amusement and recreation to, or meeting with, a guest or guests, at a dining place, place of amusement,
country club, theater, concert, play sporting event, and similar events or places. Correspondingly, guests
refer to persons or entities with which the taxpayer has direct business relations, such as but not limited to,
clients/customers or prospective clients/customers. In the case of Golden Dragon, the dinner expenses
incurred in favor of the five (5) foreign investors, who have an interest in the properties for sale, were clearly
to entertain and provide amusement to said guests, with the ultimate goal of furthering their business
relations.
Furthermore, the expense is subject to a ceiling imposed by the Secretary of Finance under Section
5 of the Revenue Regulation No. 10-2002 which states that, “there shall be allowed a deduction from gross
income for entertainment, amusement and recreation expense in an amount equivalent to the actual
entertainment, amusement and recreation expense paid or incurred within the taxable year by the taxpayer,
but in no case shall such deduction exceed 0.50 percent of net sales for taxpayers engaged in sale of goods
or properties”. Thus, the actual dining cost of Php 150, 000 made by the corporation as a representation
expense or the allowable limit of 0.50 percent of the corporation’s net sales, whichever is lower, may be
claimed.
As to party expenses at the videoke club
Similar to the meal expense at Conrad’s Hotel, the Php 200,000 expense at the videoke club can
also be claimed as a deductible as the same is considered an EAR expense so long as it does not exceed
0.50 percent of the corporation’s net sales.
Applying further laws and jurisprudence, it can be said that the activity was done to entertain and
attract foreign investors who were looking to invest in condominium and subdivision lots, an industry Golden
Dragon is primarily engaged in. Thus, the expenses at the videoke club were done in furtherance of the
conduct of the realty conglomerate’s trade. The expenses were made to facilitate the development of the
realty conglomerate. In that sense, it is deductible as an EAR expense under the Tax Code. However, as
stated above, an EAR expense is subject to a ceiling under Section 5 of the Revenue Regulation No. 10-
200. It should not hence exceed 0.50 percent of the corporation’s net sales.
Therefore, the actual payment of Php 200,000 made at the videoke club or the allowable limit of
0.50 percent of the corporation’s net sales, whichever is lower, may be claimed as a deduction.
As to the tip given to business promotion officers
The Php 80, 000 tip given to business promotion officers is not an EAR expense but a deductible
expense under compensation for personal services, hence said expense can be deducted in its entirety
without being subjected to a ceiling.
The National Internal Revenue Code of 1997 as amended by TRAIN Law, specifically Section
34(A)(i) thereof, provides that a reasonable allowance for salaries, wages, and other forms of compensation
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for personal services actually rendered, including the grossed-up monetary value of fringe benefit furnished
or granted by the employer to the employee can be deducted from its gross income. It is a general rule that
bonuses to employees made in good faith and as additional compensation for the services actually
rendered by the employees are deductible, provided such payments, when added to the stipulated salaries,
do not exceed a reasonable compensation for the services rendered. The Supreme Court, in Kuenzle &
Streiff, Inc. v. CIR, had the occasion to enumerate the conditions precedent to the deduction of bonuses to
employees are: (1) the payment of the bonuses is in fact compensation; (2) it must be for personal services
actually rendered; and (3) 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. In this
case, the expense given to the officers as a tip complies with all these requisites. The amount was given to
them by the corporation in view of the personal services they have rendered to promote their condominium
units and subdivision lots to investors. It must also be noted that the supposed reasonableness of the
compensation arises from the fact that Golden Dragon is a conglomerate with an extensive line of business
engaged in realty development. It is thus apt to state that the corporation is more than financially capacitated
to produce such an amount as compensation to its employees. Furthermore, the transaction presupposed
by the problem required Golden Dragon to zero in closing a deal with foreign investors. In such a case, the
nature of the work done by the business promotion officers is charged with primacy, in that the latter became
the forefront in advancing the causes of engagement of the said corporation.
Clearly therefore, Golden Dragon may claim the entire Php 80, 000 as deductible expenses if paid
in good faith as additional compensation for services rendered.
ON DEDUCTIBILITY OF THE LUNCH EXPENSES WITH HLURB REGIONAL DIRECTOR
As to the lunch expenses with the HLURB Regional Director incurred at the Marco Polo Hotel,
Golden Dragon cannot claim as deductions the reimbursements since the expense constitutes direct
bribery. The Revised Penal Code of the Philippines penalizes any public officer who shall accept gifts
offered to him by reason of his office. The Anti-Graft and Corrupt Practices Act, in further refining indirect
bribery, declared unlawful the act of directly or indirectly requesting or receiving any gift, present, share,
percentage, or benefit, for himself or for any other person, in connection with any contract or transaction
between the Government and any other party, wherein the public officer in his official capacity has to
intervene. In this case, Golden Dragon, whom Peter represents, has a pending application for development
permit with the HLURB and it is no other than the Regional Director himself, in his official capacity, who will
either approve or disapprove of the same. officer who shall accept gifts offered to him by reason of his
office.
Moreover, Section 4 of Revenue Regulations No. 10-2002 provides for requisites before an EAR
expense may be deducted from Gross Income. One of the requisites enumerated in said regulation is that
the EAR expense must not be contrary to law, morals, good customs, public policy or public order. As
established above, the lunch expense with the HLURB Regional Director is contrary to Section 3(b) of the
Anti-Graft and Corrupt Practices Act. Also, the Tax Code expressly provides that no deduction from Gross
Income shall be allowed for any payment made, directly or indirectly, to an officer or employee of the
national government, or to an official or employee of any local government unit, if the payment constitutes
a bribe or a kickback. All things considered, said lunch expense is non-deductible as an expense.
Conclusion:
In consolidation of the expenses accumulated, it can be concluded that the payment for the meal
at Conrad’s Hotel, videoke club and tip for the business promotion officers are valid deductible expenses.
On the other hand, the lunch enjoyed with the Regional Director of the Housing and Land Use Regulatory
Board is a non-deductible expense.
Firstly, the meal at Conrad’s Hotel and the party at the videoke club with the foreign investors are
considered an entertainment, amusement, and recreation expense as they are directly connected with the
operation or are in furtherance of the business. As such, the actual expense of Php 350, 000 incurred at
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the meal and videoke club or the allowable limit of 0.50 percent of the corporation’s net sales, whichever is
lower, may be claimed as a deduction.
Secondly, the tip of Php 80, 000 given to business promotion officers, rather than being an
entertainment, amusement and recreation expense, is a deductible expense under compensation for
personal services, and may be deducted in its entirety without limitation.
Thirdly, the lunch with the Regional Director of the Housing and Land Use Regulatory Board at
Marco Polo, shouldered by Golden Dragon, is non-deductible as it is contrary to law. Although an EAR
expense in nature, the law prohibits public officers from receiving gifts or benefits from another party, where
the officer may intervene in his official capacity. Seeing as the Golden Dragon engages in the sale of
property, lunch with the Regional Director of the HLURB can be seen as an illicit act.
Recommendation:
Having stated the foregoing premises, it is recommended that Golden Dragon use in its financial
statements and income tax return the account title “entertainment, amusement and recreation expense”, or
in the alternative, to disclose in the notes to financial statements the corresponding thereto when recording
expenses paid or incurred of the nature which should be reported in the income tax return as a separate
expense item with regards to expenses incurred for the dinner at Conrad’s Hotel as well as those payments
made in the videoke club as required under Section 6 of the above-cited BIR regulation.It is important that
the corporation ensures that these EAR expenses do not exceed the limit set by law. To reiterate, the
corporation may claim its actual EAR expense or the allowable limit, whichever is lower.
It is also recommended that Golden Record keep proper records for these expenses incurred at
Conrad’s Hotel and the videoke club as well as for the tip granted to the promotion officers so as to comply
with the substantiation rule required by law. The substantiation is considered proper when it is composed
of official receipts and other official records. And so whenever assessed by the BIR, the agency will have
no reason not to allow these expenses as deductions.
Lastly, to ensure the deductibility of the above-discussed expenses, the corporation must
sufficiently show that the tax required to be deducted and withheld therefrom has been paid to the Bureau
of Internal Revenue as required under the Tax Code. Since the tax withheld and remitted are considered
advance payments, the Golden Dragon may claim them as tax credit.
II.
CMI School Inc, a non-stock, non-profit corporation, is contemplating of donating its three
parcels of idle land situated in the municipality of Minglanilla Cebu to the following potential
donees: (i) SLC University, another non-stock, non-profit corporation, in recognition of the
latter’s contribution to and participation in the spiritual and educational development of the
former, (ii) to Metro Supermarket, Inc. a stock corporation, (iii) Municipality of Minglanilla. CMI
now asks your opinion as to the possible tax exposures under this proposed action.
RE: An opinion on the possible tax implications or exposures of CMI School, Inc. on the proposed donations
to SLC University, Metro Supermarket, Inc. and to the Municipality of Minglanilla, Cebu.
To the Finance Department:
This is in response to your query sent through email on June 26, 2020 asking for an opinion on the
possible tax exposures of CMI School Inc. in connection with their donations. As can be inferred from the
facts submitted, CMI School, Inc. is a non-stock, non-profit corporation. It is contemplating of donating its
three parcels of idle land situated in the Municipality of Minglanilla, Cebu to the following potential donees:
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(i) SLC University, a non-stock, non-profit corporation, in recognition of their contribution to and
participation in the spiritual and educational development of CMI;
(ii) Metro Supermarket, Inc. a stock corporation; and
(iii) Municipality of Minglanilla.
Issue
The possible tax exposures of CMI School, Inc. for the proposed donations.
Discussion and Analysis
The tax liability of CMI School, Inc. differs with each donee. It is therefore prudent to differentiate
each donee in order to determine whether CMI School, Inc. will be liable in all three transactions.
Tax on donation to SLC University
The donation of a parcel of idle land to SLC University by CMI School, Inc. shall be exempt from
donor’s tax if not more than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes and it devotes all its income, whether students' fees or gifts, donation, subsidies or other forms
of philanthropy, to the accomplishment and promotion of the purposes enumerated in its Articles of
Incorporation. The Tax Code of the Philippines states:
SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be
exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident.
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(3) Gifts in favor of an educational and/or charitable, religious, cultural or social welfare
corporation, institution, accredited non-government organization, trust or philanthropic
organization or research institution or organization: Provided, however, That not more
than thirty percent (30%) of said gifts shall be used by such donee for administration
purposes. For the purpose of this exemption, a 'non-profit educational and/or
charitable corporation, institution, accredited non-government organization, trust or
philanthropic organization and/or research institution or organization' is a school,
college or university and/or charitable corporation, accredited non-government
organization, trust or philanthropic organization and/or research institution or
organization, incorporated as a non-stock entity, paying no dividends, governed by
trustees who receive no compensation, and devoting all its income, whether students'
fees or gifts, donation, subsidies or other forms of philanthropy, to the accomplishment
and promotion of the purposes enumerated in its Articles of Incorporation.
SLC University is a non-stock, non-profit corporation, falling under the purview of the provision
stated above. If the property donated by CMI will be used for the promotion and accomplishment of SLC’s
purposes as stated in its Articles of incorporation or will not exceed the 30% threshold for their
administration purposes, then it will be exempt from donor's tax.
Deductibility of donation from gross income
Furthermore, the donation to SLC University may be deducted pursuant to Section 34 (H)(1). Said
provision provides that contributions or gifts actually paid or made within the taxable year to accredited
domestic corporations organized and operated exclusively for religious and educational purposes, among
others, shall be deductible to the gross income of the donor. The amount deductible to the gross income is
however subject to limitations: 5% for corporations; and 10% for individuals. CMI School Inc., being a non-
stock, non-profit corporation, is subject to the deductibility limit of only 5% of the gross income and any
excess of the 5% shall not be included.
Tax on donation to Metro Supermarket
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On the other hand, CMI School Inc.’s donation of a parcel of idle land to Metro Supermarket is
subject to donor’s tax. The National Internal Revenue Code, as amended, provides:
Section 98. Imposition of Tax. -
A. There shall be levied, assessed, collected, and paid upon the transfer by any
person, resident or nonresident, of the property by gift, a tax, computed as
provided in Section 99.
B. The tax shall apply whether the transfer is in trust or otherwise, whether the gift is
direct or indirect, and whether the property is real or personal, tangible or
intangible.
Section 99. Rate of Tax Payable by Donor.
(A). In General. - The tax for each calendar year shall be six percent (6%) computed
on the basis of the total gifts in excess of Two hundred fifty thousand pesos
(P250,000) exempt gift made during the calendar year.
In the case at bar., Metro Supermarket is a stock corporation and does not fall under any of the
exemptions provided by law. So, if the total gifts made by the CMI School, Inc. during the calendar year
exceeds the two hundred fifty thousand pesos (P250,000) exempt gift, the non-stock, non-profit corporation
has a donor’s tax liability of six percent (6%) of the excess amount.
However, the proposed donation in favor of Metro Supermarket cannot be claimed as an allowable
deduction from the gross income of CMI School, Inc. The Tax Code specifically enumerates in Section 34
(H) (1) the recipients or the donees of the charitable contributions that may be allowed as deductions. Metro
Supermarket, Inc. being a stock corporation is not among those enumerated thus, the donation to such
institution cannot be deducted from the gross income of CMI if such donation is effected.
Tax on donation to the Municipality of Minglanilla
With regards to the third donation, Section 101 of the National Internal Revenue Code explicitly
provides that gifts or donations made by residents in favor of the National Government or any entity or
political subdivision thereof shall be exempt from tax. The Code provides;
SEC. 101. Exemption of Certain Gifts. - The following gifts or donations shall be
exempt from the tax provided for in this Chapter:
(A) In the Case of Gifts Made by a Resident. -

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(2) Gifts made to or for the use of the National Government or any entity created by
any of its agencies which is not conducted for profit, or to any political subdivision
of the said Government;
Thus, if the donation is to be effected in favor of the Municipality of Minglanilla, which is a political
subdivision of the government, the donor, CMI School, Inc., will not be liable for donor’s tax.
Under normal circumstances, the donation in favor of the Municipality of Minglanilla may be
deductible in full from the gross income of CMI School, Inc. pursuant to Section 34 (H)(2)(a) of the National
Internal Revenue Code, provided that the donation made is used to undertake priority activities in
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education, health, youth and sports development, human settlements, science and culture, and in
economic development. It states;
(H) Charitable and Other Contributions

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(2) Contributions Deductive in Full. - Notwithstanding the provisions of the preceding

subparagraph, donations to the following institutions or entities shall be deductible in
full:
(a)Donations to the Government- Donations to the Government of the

Philippines or to any of its agencies or political subdivisions, including fully-
owned government corporations, exclusively to finance, to provide for, or to
be used in undertaking priority activities in education, health, youth and
sports development, human settlements, science and culture, and in
economic development according to a National Priority Plan determined by
the National Economic and Development Authority (NEDA), in consultation
with appropriate government agencies, including its regional development
councils and private philanthropic persons and institutions: Provided, That 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 paragraph (1) of this Subsection;
Furthermore, under the Bayanihan to Heal as One Act and its Revenue Regulation, a property,
whether real or personal, such as the use of lots, donated to the National Government or to any political
subdivision of the said Government, shall be considered fully deductible against the gross income of the
donor-Corporation. Provided, the property is given for the sole and exclusive purpose of combating COVID
19 during the period of the state of national emergency. Further, the donor-Corporation shall be required to
secure a Deed of Donation.
In this case, the parcel of idle land donated by CMI School, Inc. to the Municipality of Minglanilla
may be considered fully deductible against the former’s gross income if the property is for the sole and
exclusive purpose of combating COVID-19.
On the other hand, the law provides for a limitation of the allowable deduction if the donation is not
made to undertake any of the priority activities stated above, Section 34 (H) (1) of the same Code provides;
(H) Charitable and Other Contributions
(1) In General. - Contributions or gifts actually paid or made within the taxable
year to, or for the use of the Government of the Philippines or any of its agencies or
any political subdivision thereof exclusively for public purposes, or to accredited
domestic corporations or associations organized and operated exclusively for
religious, charitable, scientific, youth and sports development, cultural or educational
purposes or for the rehabilitation of veterans, or to social welfare institutions, or to
nongovernment organizations, in accordance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the Commissioner, no part of
the net income of which inures to the benefit of any private stockholder or individual in
an amount not in excess of ten percent (10%) in the case of an individual, and five
percent (5%) in the case of a corporation, of the taxpayer’s taxable income
derived from trade, business, or profession as computed without the benefit of
this and the following subparagraphs.
Therefore, if the donation of the parcel of idle land to be made in favor of the Municipality of
Minglanilla is for a non-priority activity and is exclusively for a public purpose, the deduction shall be
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subjected to the limitation of 5% of the donor’s, in this case, CMI School, Inc.’s taxable income before the
contribution.
Conclusion
To conclude, the tax liabilities of CMI School Inc. will vary depending on the entities that received
the donation.
Payment of Donor’s tax is exempt when the donation is made to or for the use of the National
Government or any entity created by any of its agencies when not conducted for profit, or to any political
subdivision of said government. Such charitable contribution may be deducted in full from the gross income
if such donation to the Philippine Government or any of its subdivision is used exclusively and primarily for
used on priority activities in education, health, youth and sports development, human settlement, science
and culture. Otherwise, it is subject to the limitation that no more than 10% in case of individuals and 5%
for corporation, of the taxpayer’s income computed before contribution.
For donations to stock entities, payment of donor’s tax may still be exempt provided that gifts
received do not exceed the amount of P250,000 in total for the taxable year. Under RR No. 12-2018,
incorporating the amendments introduced by RA No. 10963, Donor’s tax is now fixed at 6% computed on
the basis of the total gifts in excess of Two Hundred Fifty Thousand Pesos (P250,000) exempt gift made
during the calendar year. However, such charitable contribution is not deductible from the gross income.
For donations to non-stock, non-profit corporations, our tax code provides an exemption of the
donor’s tax if such corporation meets the requirements. Gifts in favor of an educational and/or charitable,
religious, cultural or social welfare corporation, institution, accredited non-government organization, trust or
philanthropic organization or research institution or organization are exempt. Provided, however, that not
more than thirty percent (30%) of said gifts shall be used by such donee for administration purposes. Such
charitable contribution may be deducted from the gross income subject to the limitation that it is no more
than 5%, for corporation, of the taxpayer’s income computed before contribution.
Recommendation
Based on the foregoing discussion and for the purposes of incurring the least tax liability, the firm
is of the opinion that CMI School, Inc. should consider the possible tax exposures for the donation of its idle
lands to each of the three entities. Donations to non-exempt entities entails cost on tax. If CMI School, Inc.
should push through with the proposed donations it is recommended that they file the necessary documents
for the Donor’s Tax with the Bureau of Internal Revenue and prepare cash for the payment thereof. Further,
it is also recommended that CMI School, Inc. should prepare the Certification of Donation and Notice of
Donation, if such donation exceeds one million pesos, as these are the required documentation for the
purposes of deductibility.
III.
Heeding the pronouncement of the President that the worsening traffic condition in the
metropolis was a sign of economic progress, the congress enacted Republic Act No. 10701 (RA
10701), also known as An Act Imposing a Transport Tax on The Purchase of Private Vehicles.
Under RA 10701, buyers of private vehicles are required to pay a transport tax equivalent to 5°/o
of the total purchase price per vehicle purchased. RA 10701 provides that the Land
Transportation Office (LTO) shall not accept for registration any new vehicles without proof of
payment of the 5% transport tax. RA 10701 further provides that existing owners of private
vehicles shall be required to pay a tax equivalent to 5% of the current fair market value of every
vehicle registered with the LTO. However, RA 10701 exempts owners of public utility vehicles
and the Government from the coverage of the 5% transport tax.
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A group of private vehicle owners threatened to sue on the ground that the law is unconstitutional
for contravening the Equal Protection Clause of the Constitution. As its consultant, the DOF now
asks for your opinion on the legality of the law. What will be your opinion? (2017 Bar)
To whom it may concern:
This refers to your request for our opinion about the constitutionality of Republic Act No. 10701 (RA 10701),
also known as An Act Imposing a Transport Tax on the Purchase of Private Vehicles.
Background Information
The following are the facts presented as per our discussion, the Congress enacted Republic Act No. 10701
known as An Act Imposing a Transport Tax on the Purchase of Private Vehicles wherein buyers of new
private vehicles are required to pay a transport tax equivalent to 5% of the total purchase price per vehicle
newly purchased whereas those existing owners of private vehicles shall be required to pay a tax equivalent
to 5% of the current fair market value of every vehicle registered with the LTO. One of the penalties for
failure to present proof of tax payment would result in the refusal to accept registration of any new private
vehicle by the Land Transportation Office (LTO). However, the aforementioned act specifically exempts
owners of public utility vehicles and the Government from the coverage of the said 5% transport tax.
Issue
Whether or not R.A 10701 is unconstitutional for contravening the Equal Protection Clause of the
Constitution
Discussion & Analysis
Our discussion shall be based on the 1987 Philippine Constitution, Philippine National Internal Revenue
Code of 1997 (NIRC), as amended, and its implementing rules and regulations, and jurisprudence.
On the contravention of the Equal Protection Clause of the Constitution
Section 1, Article III of the 1987 Philippine Constitution specifically states that “Nor shall any person be
denied the equal protection of the laws”. As discussed in Commissioner of Customs vs. Hypermix Feeds
Corporation, the equal protection clause means that no person or class of persons shall be deprived of the
same protection of laws enjoyed by other persons or other classes in the same place in like circumstances.
The guarantee of equal protection of laws is not violated if there is a reasonable classification.
Likewise enunciated in Philippine Plastics Industry Association, Inc. v. San Pedro, if the groupings are
characterized by substantial distinctions that make real differences, one class may be treated and regulated
differently from another.
In British American Tobacco vs. Jose Isidro N. Camacho, the Supreme Court held that a legislative
classification that is reasonable does not offend the constitutional guarantee of the equal protection of the
laws. The classification is considered valid and reasonable provided that: (1) it rests on substantial
distinctions; (2) it is germane to the purpose of the law; (3) it applies, all things being equal, to both present
and future conditions; and (4) it applies equally to all those belonging to the same class.
In a nutshell, if the classification created under a law for the purpose of taxation complies with the
aforementioned requirements, it is valid and constitutional. No such violation of the equal protection clause
has been made. In the case at hand, a substantial distinction was laid down by RA 10701 when it imposed
a 5% Transport Tax on Private Vehicles upon purchase while exempting Public Utility Vehicles operated
for common carriers and the government. It was in pursuance to the purpose of the law which was to resolve
the worsening traffic congestion which applies to all private vehicles across the country, tailored to both
present and future circumstances. Undeniably, it is fairly applied to all private vehicle owners even to those
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who purchased such automobiles prior to the passing of the questioned law. Thus, making RA 10701 a
valid and constitutional law.
On the uniformity of the Tax Imposed by RA 10701
Section 28 (1), Article VI of the 1987 Constitution provides that “The rule of taxation shall be uniform and
equitable. The Congress shall evolve a progressive system of taxation.” Uniformity of taxation, like the
kindred concept of equal protection, merely requires that all subjects or objects of taxation, similarly
situated, are to be treated alike both in privileges and liabilities.
In Churchill v. Concepcion, the Supreme Court explained that a tax "is uniform when it operates with the
same force and effect in every place where the subject of it is found." It does not signify an intrinsic but
simply a geographical uniformity.
The case of British American Tobacco vs. Jose Isidro N. Camacho further elucidates that a levy of tax is
not unconstitutional because it is not intrinsically equal and uniform in its operation. The uniformity rule does
not prohibit classification for purposes of taxation.
Following the rulings mentioned above, the Transport Tax that will be imposed upon purchase of private
vehicles pursuant to RA 10701 is well within the ambit of geographical uniformity and as cited, the rule on
uniformity does not preclude the legislation in establishing classification when deemed required just like
what was done in the law herein. Clearly, it complies with the uniformity requirement wanting in all tax
impositions.
On NIRC’s exclusion of Public Utility Vehicles
Analogous to the matter at hand regarding the transport tax as levied pursuant to R.A 10701--is the excise
tax on automobiles under Section 149 of the National Internal Revenue Code. Paragraph (a) under the said
provision defines “automobile” as any four or more wheeled motor vehicle regardless of seating capacity,
which is propelled by gasoline, diesel, electricity or any other motive power. It further states that for
purposes of the Act, buses, trucks, cargo vans, jeepneys or jeepney substitutes, single cab chassis,
and special-purpose vehicles shall not be considered automobiles, the same being considered as
used for public purpose or operated by common carriers.
In view of the aforementioned provision, it can be gleaned that the Congress has the authority to make
distinctions in the application of the law to achieve the public purpose intended.
Conclusion
R.A. 10701 is a valid law and does not contravene the Equal Protection Clause of the Constitution. There
is a substantial distinction between automobiles used for private purposes and those that are used for public
purpose or being operated by common carriers. It is of our opinion that there exists a substantial distinction
between privately used vehicles as opposed to those vehicles used as public utility. Where privately owned
vehicles may only be used by those who acquired them, publicly utilized vehicles may be used by anyone
who avails of the service.
Applying the provisions discussed in the analysis, the group of private vehicle owners cannot sue on the
ground that R.A. 10701 is violative of the Equal Protection Clause of the Constitution. The classification is
valid and reasonable because the categorization of private vehicle owners under the law is substantial and
not arbitrary. It is germane to achieve the legislative purpose to address the worsening traffic condition in
the Metropolis. The law applies to, all things being equal, to both present and future conditions. Finally, the
classification applies equally well and to all those belonging to the same class. Evidently, given that the
requirements of a valid classification are met and that those which are singled out are a class themselves,
there is no violation of the Equal Protection Clause of the Constitution.
10
Recommendation
On the basis of the foregoing available law and jurisprudence, the following recommendations are drawn
as follows:
• As there is no contravention of the Constitution, the DOF may proceed with their imposition of 5%
transport tax on private vehicles and continue to exempt public vehicles and the government from
said collection.
• The DOF may ask the CIR to issue a revenue memorandum circular in order to clarify and
disseminate to the public the validity of the law authorizing the LTO to impose the 5% transport tax
on private vehicles only.
We appreciate the opportunity to advise you regarding this matter. Please let us know if you wish to discuss
this issue further. Thank you.
IV.
Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles,
established a branch in the Philippines in 2010. The Philippine branch constructed a
manufacturing plant in Kabuyao, Laguna, and the construction lasted three (3) years. Commercial
operations in the Laguna plant began in 2014. In just two (2) years of operation, the Philippine
branch had remittable profits in an amount exceeding 175% of its capital. However, the head
office in Korea instructed the branch not to remit the profits to the Korean head office until
instructed otherwise.
The branch chief finance officer is concerned that the BIR might hold the Philippine branch liable
for the 10% improperly accumulated earnings tax (IAET) for permitting its profits to accumulate
beyond reasonable business needs. He now approached you seeing for your opinion whether the
branch may be subjected to IAET and the possible tax avoidance scheme that the branch may
institute to avoid or minimize the tax effects of the remittance, if any. (2018 Bar)
Greetings!
We are reaching out to you in light of a legal query you submitted to our office. This document contains the
conclusion we have arrived at after careful deliberation on the matter regarding the questions of whether
the Kria Branch located in Kabuyao, Laguna Philippines may be subjected to Improperly Accumulated
Earnings Tax (IAET) as its remittable profits from its commercial operations exceeded 175% of its capital,
and what tax avoidance scheme the branch may avail of.
As per the facts disclosed to this office:
The Kria, Inc., a Korean corporation engaged in the business of manufacturing electric vehicles,
established a branch office in the Philippines in 2010 and constructed a manufacturing plant in
Kabuyao, Laguna. Within two (2) years of operation, the branch had remittable profits in an amount
exceeding 175% of its capital. However, the head office in Korea instructed the branch not to remit
the profits to the Korean head office until instructed otherwise.
As the situation stands, the following queries were set forth by the branch chief finance officer:
(a) Whether the branch may be subjected to IAET considering that the remittable profits of the
Philippine branch from its commercial operations has exceeded 175% of its capital.
(b) What possible tax avoidance scheme may the branch avail of to avoid or minimize the tax effects
of the remittance, if any.
To shed light on the above queries, the following discussion is in place.
11
The provision of the IAET does not apply.
It is to our opinion that such provision does not apply to the Philippine branch as it is outside the coverage
of such tax.
As per the Revenue Regulation 02- 2001, IAET is an additional tax imposed under the Tax Code equal to
10% on the improperly accumulated taxable income of corporations formed for the purpose of avoiding the
income tax with respect to its shareholders or the shareholders of any other corporation, by permitting the
earnings and profits of the corporation to accumulate instead of dividing them among or distributing them
to the shareholders. Thus, it is a tax being imposed in the nature of a penalty to the corporation for the
improper accumulation of its earnings, and as a form of deterrent to the avoidance of tax upon shareholders
who are supposed to pay dividends tax on the earnings distributed to them by the corporation.
However, IAET is imposed only on domestic and closely-held corporations. Stated differently, in order for
the IAET to be imposed on a corporation, it must be a domestic corporation as defined by the Tax Code
and is closely-held. A domestic corporation, under the Tax Code means that the corporation is created and
organized in the Philippines or under its laws. Kria, Inc., being created under Korean law does not fall as a
domestic corporation but rather, it is a foreign corporation.
Under the Revised Corporation Code, a foreign corporation is allowed to do business in its own country or
state and shall have the right to transact business in the Philippines after obtaining a license for such
purpose and a certificate of authority from the appropriate government agency. The phrase “doing
business”, as defined by the Foreign Investments Act shall include opening offices whether called “liaison”
offices or branches, among others. Thus, a foreign company, upon obtaining the necessary license and
authority from the government to do business through a branch office becomes a resident foreign
corporation engaged in trade and business in the Philippines.
As such, one way for a foreign corporation, such as Kria, Inc. to do business in the country is through the
establishment of a branch. A branch does not acquire a separate personality but is a means for the foreign
company to establish, do business activities and derive income in the country. This highlights the fact that
it being but a mere extension of a foreign enterprise is also a foreign corporation. Also, it is not deemed to
be created or organized under our laws having no separate personality and is but created only through the
foreign enterprise obtaining the necessary license and authority from the government. It is clear that the
Philippine branch of Kria, Inc. is not a domestic corporation but is a foreign corporation.
This inference is strengthened by the express provision of the same regulation that states that the
provisions contained therein are not made to apply to branches of a foreign corporation, the same being
a resident foreign corporation.
In light of these findings, there is no more need to discuss the matter of whether the branch is closely-held
to qualify for the application of IAET.
A possible tax avoidance scheme in relation to branch profit remittance is through the application
of a tax treaty convention entered between the Republic of the Philippines and the Republic of Korea
of the lower rate of 10% tax than the 15 % rate in the Tax Code.
A taxpayer may use a legally permissible alternative tax rate or method in order to reduce possible tax
liability. Since the involved party is a foreign entity, one mode to reduce tax liability is through tax treaties.
As elucidated in Air Canada v. CIR, a tax treaty is an agreement entered into between sovereign states “for
purposes of eliminating double taxation on income and capital, preventing fiscal evasion, promoting mutual
trade and investment and according to fair and equitable tax treatment to foreign residents or nationals”.
The purpose of this agreement is to reconcile legislation to avoid simultaneous taxation in two different
jurisdictions.
12
In this case, since Kria Inc. is a foreign corporation and governed by both Korean law and Philippine law
for its branch here in the Philippines, taking advantage of a tax treaty is a way for a permissible reduction
of tax liability.
Under the Tax Code, a 15% tax is applied for remittances of the branch situated in the Philippines of its
profit to the head office abroad. However, a lower rate may be applied for by Kria, Inc.’s branch by taking
advantage of the The Convention between the Republic of the Philippines and the Republic of Korea for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income.
Under such convention, either Contracting State shall be prevented from imposing a tax on the remittance
of profits by branch to its head office so imposed shall not exceed 10% of the amount remitted. Therefore,
there are two different rates on the branch profit remittance that Kria Inc could avail of: (1) 15% under the
Tax Code, and (2) 10% under the Philippines- Korea Convention.
To exploit the lesser rate under the treaty convention, Kria, Inc. must prove that they are entitled to the
preferred rate under the treaty by applying for a Tax Treaty Application (TTRA) to the BIR. Kria, Inc., and
its branch office must be able to cite the applicable tax treaty and prove that they are qualified under that
treaty.
Furthermore, Revenue Memorandum Order 72-2010 requires that all applications relative to the
implementation and interpretation of the provisions of the Philippine tax treaties shall be submitted and
received by the International Tax Affairs Division (ITAD). All the necessary forms and documents outlined
in the Revenue Memorandum shall be submitted to such office.
In sum, the remittable profits of the Philippine branch, from its commercial operations exceeding 175% of
its capital is not subjected to IAET considering that IAET cannot be made to apply to branches of foreign
corporations and Kria, Inc., is a foreign corporation in the eyes of the law. Instead, your office may avail of
a lower tax rate of 10% in relation to branch profit remittance under The Convention between the Republic
of the Philippines and the Republic of Korea for the Avoidance of Double Taxation and the Prevention of
Fiscal Evasion with Respect to Taxes on Income provided you are able to properly apply and prove your
qualifications under the treaty.
As such, we highly encourage that your office be mindful of the faithful and complete observance of the
documentary requirements set forth by the BIR to warrant seamless approval of the application.
We do hope this correspondence shed light to your inquiries. For additional questions, please do not
hesitate to reach us. Thank you.
V.
Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual

compensation of ₱10,000,000.00, while Mr. S is a security guard in the same company earning an
annual compensation of ₱200,000.00. Both of them source their income only from their
employment with MNO Company.
Both Mr. C and S approached you to seek for your opinion as to their tax liability and filing
requirements. Ultimately, they seek to legally minimize their tax liability. (2019 Bar)
Background Information:
The following are the facts that we have gathered from your request:
Both of you are employees of MNO Company. Mr. C is employed as Chief Executive Officer of the company,
receiving an annual compensation of P10,000,000.00. While Mr. S is employed as a security guard,
earning minimum wage in the same company with an annual compensation of P300,000 which is composed
of hazard pay and overtime pay.
13
Aside from your respective employment with MNO Company, you also earn business or profession income.
Mr. C earns P500,000 as fee for his consulting and coaching stints while Mr. S on the other hand derives
an annual income of P100,000 from his small sari-sari store.
Both of you have requested for our formal opinion about your tax liability and filing requirements seeking
for means to legally minimize your tax dues.
Issues:
1. Whether there are available options in order for Mr. C and Mr. S to be able to minimize their tax
liability through legal means.
2. Whether Mr. C and Mr. S are required to file an income tax return. If so, what are the filing
requirements?
Discussion and Analysis:
TAX MINIMIZATION OPTIONS FOR MR. C
Dear Mr. C,
As an individual taxpayer, you are subject to the graduated tax rates of 0-35%. R.A. No. 10963
provides the amended Graduated Income Tax Rates (GITR) on taxable income of the individual taxpayers
effective January 1, 2018 until December 31, 2022:
"Not over P250,000 0%

"Over P250,000 but not over P400,000 20% of the excess over P250,000
"Over P400,000 but not over P800,000 P30,000 + 25% of the excess over P400,000
"Over P800,000 but not over P2,000,000 P130,000 + 30% of the excess over P800,000
"Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess over P2,000,000
"Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000
Section 24 (A)(2)(c) of the National Internal Revenue Code (NIRC), as amended, provides that
taxpayers earning both compensation income and income from business or practice of profession shall be
subject to the following taxes:
(1) all income from compensation; and

(2) all income from business or practice of profession.
As for the latter, Section 24 (A)(2)(c)(2)(a) of the same Code states that if total gross sales and/or
gross receipts and other non-operating income do not exceed three million pesos (P3,000,000) as provided
in Section 109(BB) of the same Code, the individual taxpayer has the option for his income derived from
business or practice of profession to avail under the prescribed tax rates in the tax table above or eight
percent (8%) income tax based on gross sales or gross receipts and other non-operating income in lieu of
the graduated income tax rates under Subsection (A)(2)(a) of this Section and the percentage tax under
Section 116 of the same Code. It is also noteworthy that the 8% option is only applicable to individual
taxpayers earning business or professional income.
In your case, Mr. C, you are considered a mixed income earner since you are earning both
compensation from your employment in the MNO Company as Chief Executive Officer pursuant to an
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employer-employee relationship and at the same time receiving other income from your business or
profession which is gleaned from the fact that you earned fees in the consulting and coaching stints.
In determining your tax liability and how to minimize such, we will illustrate three (3) options which
you are qualified to avail of under the (1) Graduated Income Tax Rates (GITR), as provided in the tax table
above, or (2) the 8% income tax based on your gross receipts and other non-operating income in lieu of
the GITR. It bears stressing that you are qualified for the second option since you are a self-employed
professional, not VAT registered and receiving gross receipts which do not exceed 3M. This option shall be
made in the first quarter return and will continue until the end of the year except when your gross receipts
and other non-operating income exceed the VAT threshold. The illustrations below show the computation
of your tax due in three options:
OPTION 1 (Combined GITR for Professional or Business Income and Compensation Income):
Annual Compensation from Employment P10,000,000.00

Professional Income P 500,000.00
Taxable Compensation Income P10,500,000.00
For the first 8,000,000 P2,410,000.00

In Excess (35% of 2,500,000 (excess of 8,000,000)) P 875,000.00
Tax Liability (Option 1) P3,285,000.00
OPTION 2 (8% Option for Professional or Business Income and GITR for Compensation Income):
As emphasized, this option is only applicable to individuals earning income from business or
profession who are not VAT registered and whose gross receipts/sales do not exceed 3M. Hence, your
income derived from consulting and coaching stints of P500,000 may be computed through this option.
Since you are a mixed income earner, the P250,000 deduction as embedded in the 8% option is not allowed
in your case since it is already deducted in the computation of your income tax due for the compensation
income.
Gross Receipts P500,000.00

Multiplied by: 8%
Tax Due for Professional Income P40,000.00
As for your annual compensation derived from employment, we follow the above-mentioned GITR
in the tax table.
For the first P8,000,000 P2,410,000.00

Tax Due for Compensation Income P3,110,000.00
Tax due for Professional Income P 40,000.00

Tax due for Compensation Income P3,110,000.00
Total Tax Liability (Option 2) P3,150,000.00
OPTION 3 (GITR for Professional or Business Income with Optional Standard Deduction and GITR
for Compensation Income):
Allowable deductions are available to taxpayers who are earning business or professional income
and not to taxpayers who are earning purely compensation income. The Optional Standard Deduction
(OSD) is provided under the Tax Code as an option in lieu of the Itemized Deduction. If you do not want to
claim the itemized deduction or if you cannot properly substantiate your expenses one by one, you may
claim the OSD as there is no need for substantiation for the latter, which is equivalent to 40% of the gross
15
receipts. In other words, 60% of your gross income will be considered as your taxable income subject to
the graduated tax rates.
Gross Receipts P500,000.00

Less: 40% of Gross Receipts P200,000.00
Taxable Professional Income P300,000.00
It bears stressing that the option to avail of OSD is good for one taxable year. Thus, you cannot
switch or change your deduction method to itemized deductions during the taxable year.
To arrive at your total tax liability using this option, we follow the above-mentioned GITR in the tax
table.
Annual Compensation from Employment P10,000,000.00

Professional Income P 300,000.00
Total Taxable Income P10,300,000.00
For the first 8,000,000 P2,410,000.00

Tax Liability (Option 3) P3,215,000.00
Taken all together, Option 2 is the best option to minimize your tax liability as the said option gives
you a total tax liability of P3,150,000.00 as compared to P3,285,000 total tax liability of Option 1 and
P3,215,000 total tax liability of Option 3. The tax liability at the end of the taxable year shall be deducted
with the creditable withholding tax made during the year.
FILING REQUIREMENTS FOR MR. C
As to your filing requirements, as a mixed income earner engaged in business or profession who
is also earning compensation income, you are required to file BIR Form No. 1701 in accordance with
Section 51 of the NIRC, as amended. Please note that should you choose to apply the Optional Standard
Deduction instead of the Itemized Deduction in your business or professional income, there is no more
need to substantiate your expenses one by one unlike in the Itemized Deduction, since 40% of the gross
receipts will automatically be considered as a deduction. According to the Tax Code, your annual income
tax return for the current taxable year should be filed on or before April 15 in the succeeding year in three
copies (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) of the
place where he is required to be registered. For this year, however, the annual filing is extended until June
14, 2020 instead of April 15 due to the COVID-19 pandemic as provided for in R.A. No. 11469 or the
Bayanihan to Heal as One Act.
In places where there are no AABs, the return will be filed directly with the Revenue Collection
Officer or the Authorized Treasurer of the city or municipality in which your legal residence or principal place
of business in the Philippines is located, or if there is none, filing will be at the Office of the Commissioner.
There are three modes of filing tax returns from which taxpayers can choose. Manual filers file and pay
through downloading forms from BIR website or through eBIRForms package v.7.6. eBIRForms Filers file
online through eBIRForms package v.7.6 and pay manually through an authorized agent. Though recently,
online payment is now available through Pay Maya and GCash. For eFPS Filers, filing and payment are
done electronically through eFPS Facility.
It is important to be mindful of the filing deadline because R.R. No. 02-1998 provides that there is
a corresponding penalty of P1,000 for each failure of filing with the aggregate amount not exceeding 25,000
during a calendar year.
TAX MINIMIZATION OPTIONS FOR MR. S
Dear Mr. S,
16
In the given facts in the background information, it is immediately apparent that you are also a
mixed income earner earning both compensation income and business income derived from all
remuneration for services rendered as a security guard and from your sari-sari store respectively.
Income tax treatment varies depending on the kind of taxable income of the taxpayer. It is important
to discuss separately the different types of income, such as compensation income and business income as
in this case, because the Tax Code treats differently every category of income earners and requires a
separate tax return for each type of income.
For mixed income earners, the income tax rates applicable are:
A. Compensation Income shall be subject to the tax rates prescribed under

Section 24(A)(2)(a) of the Tax Code, as amended. However, being a Minimum Wage
Earner, you shall be exempt from the payment of income tax based on your statutory
minimum wage rates which also includes your overtime and hazard pay.
Republic Act (R.A.) No. 9504 as implemented by Revenue Regulations (R.R.) No. 10-2008
specifically exempts compensation income of Minimum Wage Earners (MWEs) who work in the private
sector and being paid the statutory minimum wage from income tax and withholding tax. Holiday pay,
overtime pay, night shift differential pay and hazard pay earned by the aforementioned MWE shall likewise
be covered by the above exemption. The Supreme Court, in the case of Soriano vs Secretary of Finance,
declared as null and void Sections 1 and 3 of R.R. No. 10-2008 which added the requirement not found in
the law by effectively declaring that a MWE who receives/earns additional compensation and other taxable
income other than the statutory minimum wage, holiday pay, overtime pay, hazard pay,and night shift
differential pay is no longer entitled to the exemption provided under R.A. No. 9504. Nowhere in the
provisions of the sad law would one find the qualifications prescribed by the assailed provisions of R.R.
No. 10-2008 as to who are MWEs.
MWEs receiving other income, such as income from the conduct of trade, business, or practice of
profession, except income subject to final tax, in addition to compensation income are not exempted from
income tax on their entire income earned during the taxable year. This rule, notwithstanding, the statutory
minimum wage, holiday pay, overtime pay, night shift differential pay and hazard pay shall still be exempt
from withholding tax.
It is noteworthy that being a Minimum Wage Earner, you are specifically exempted from income
tax and withholding tax. Before the TRAIN Law and as settled in the case of Soriano vs Secretary of
Finance, if a taxpayer is a statutory MWE earning holiday pay, overtime pay, night shift differential pay and
hazard pay on top of his salary, the entire amount is exempt because it does not make him a non-MWE.
However, it is clarified under Revenue Regulation No. 08-2018 that only the additional compensation such
commissions, honoraria, fringe benefits, and other benefits or bonuses in excess of 90,000 shall be subject
to withholding tax using the tax table. What remains to be exempted from income tax are the basic minimum
wage, holiday pay, overtime pay, night differential pay and hazard pay even if the total is beyond the
statutory minimum wage of ₱250,000.
B. To get the tax liability, Revenue Regulation No. 08-2018 provides in part, “The
income from business shall be subject to the following:
If the gross sales and other non-operating income do not exceed

the VAT threshold, the individual has the option to be taxed at:
a. Graduated income tax rates prescribed under section

24(A)(2)(a) of the Tax Code, as amended; OR
b. Eight percent (8%) income tax rate based on

gross sales/receipts and other non-operating
income in lieu of the graduated income tax rates
17
and percentage tax under Section 16 of the Tax
Code, as amended.
xxx
The total tax due shall be the sum of: (1) tax due from compensation, computed using the graduated
income tax rates; and (2) tax due from self-employment/practice of profession, resulting from the
multiplication of the 8% income tax rate with the total of the gross sales/receipts and other non-operating
income.”
In this case, if you opted to be taxed under the graduated income tax rates (option 1) for income
from business/practice of profession, you shall combine the taxable income from both compensation and
business/practice of profession in computing for the total taxable income and consequently, the income tax
due.
OPTION 1 (GITR for Business Income and and GITR for Compensation Income):
Since you are tax exempt from compensation income being a MWE, the only taxable income is the
business income of P100,000 derived from your small Sari-sari store.
Gross Sales P100,000.00

Multiplied by: 8%
Tax Due P 8,000.00
As mentioned, being a MWE, you are exempt from compensation income. Hence, only the business
income of P100,000 will be computed using the 8% regime which gives you a tax liability of P8,000. Clearly,
Option 1 is a better choice for you to avoid paying tax legally.
FILING REQUIREMENTS FOR MR. S

As to your filing requirements Mr S, you are only required to file BIR Form No. 1701 in accordance
with Section 51 of the NIRC, as amended, for your business income from your Sari-sari store and not
anymore for your compensation income.
Section 51 (A) (2) of the NIRC, as amended, provides that the following individuals shall not be
required to file an income tax return:
(d) 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. (As amended by R.A. No. 9504)
Applying the above provision, you are not anymore required to file an annual income tax return for
your compensation income as you are already exempt from income tax pursuant to Section 24 of the NIRC
as amended and R.A. No. 10963. Nevertheless, since you are a statutory minimum wage earner, there is
still proper reporting to the BIR given that you are an employee. Your employer will be the one who will
submit to the BIR a list which includes your name specifying who among the employees are considered a
Minimum Wage Earner.
For your annual income tax return for your business income, the Tax Code provides that the annual
income tax return for the current taxable year should be filed on or before April 15 in the succeeding year
in three copies (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank
(AAB) of the place where he is required to be registered. For this year, however, the annual filing is extended
until June 14, 2020 instead of April 15 due to the COVID-19 pandemic as provided for in R.A. No. 11469 or
the Bayanihan to Heal as One Act.
In places where there are no AABs, the return will be filed directly with the Revenue Collection
Officer or the Authorized Treasurer of the city or municipality in which your legal residence or principal place
of business in the Philippines is located, or if there is none, filing will be at the Office of the Commissioner.
18
There are three modes of filing tax returns from which taxpayers can choose. Manual filers file and pay
through downloading forms from BIR website or through eBIRForms package v.7.6. eBIRForms Filers file
online through eBIRForms package v.7.6 and pay manually through an authorized agent. Though recently,
online payment is now available through Pay Maya and GCash. For eFPS Filers, filing and payment are
done electronically through eFPS Facility.
It is important to be mindful of the filing deadline because R.R. No. 02-1998 provides that there is
a corresponding penalty of P1,000 for each failure of filing with the aggregate amount not exceeding 25,000
during a calendar year.
Conclusion:
From the foregoing provisions and jurisprudence, Mr. C and Mr. S are both considered mixed
income earners, receiving both compensation income from their employment in MNO Company pursuant
to an employee-employer relationship and business or professional income. Both are qualified to avail of
the 8% tax rate based on the gross receipts or gross sales and other non-operating income in lieu of the
graduated income tax and the percentage tax since they are not VAT-registered whose gross receipts/sales
from business or practice of profession do not exceed 3M. Otherwise, GITR will be used in determining
their tax liability both for compensation and business or professional income. In the latter, the taxpayer may
opt for either an Itemized Deduction or an Optional Standard Deduction.
As for Mr. C, there are three possible means of arriving at the total tax liability. In determining lower
to no tax liability, Option 2 is preferable as compared to Options 1 and 3. On the other hand, as for Mr. S,
you are exempt from tax liability in your compensation income but not for your business income, hence you
still need to file for an income tax return.
Recommendation:
On the first quarterly filing it must be already indicated whether you will avail the 8% tax rate based
on the gross receipts or the 0-35% graduated tax rates. The best option is the one wherein the tax liability
is the lowest.
For Mr. S, there is no need for you to file for an income tax return to the BIR for your compensation
income as you are tax exempt being a Statutory Minimum Wage Earner. However, you need to file for an
income tax return for your business income from your Sari-Sari store business.
On the other hand, as observed by the three (3) options provided above, it is our submission for
Mr. C that you account for your compensation income separately from your professional income so that
you may be able to claim deductions from the latter. Nonetheless, the net amounts should still be
consolidated for income tax purposes. Hence, we recommend that you choose Option 2 in the first quarter
return which comprises the GITR for your professional income and compensation income as it gives you
the least tax liability.
Thank you for seeking our legal opinion on this matter. Should you have any clarifications, please
do not hesitate to contact us again.
EH 405
I.
Henry, a U.S. naturalized citizen, went home to the Philippines to reacquire Philippine citizenship
under RA 9225. His mother left him a lot and building in Makati City and he wants to make use of
it in his trading business. Considering that he needs money for the business, he wants to sell his
lot and building and make use of the consideration. However, the lot has sentimental value and
he wants to reacquire it in the future. A friend of Henry told him of the "sale-leaseback
19
transaction" commonly used in the U.S., which is also used for tax reduction. Under said
transaction, the lot owner sells his property to a buyer on the condition that he leases it back
from the buyer. At the same time, the property owner is granted an option to repurchase the lot
on or before an agreed date. Henry approaches you as a tax lawyer for advice. Explain what tax
benefits, if any, can be obtained by Henry and the buyer from the sale-leaseback transaction?
(2016 Bar)
I. BACKGROUND INFORMATION
Henry own a lot and building in Makati City, which he wishes to use in his trading business and to sell the
same to obtain money for the said business. However, due to the sentimental value of the lot and building,
he would want to reacquire them in the future. Subsequently, a friend told him about a “sale-leaseback
transaction” which involves selling the property to a buyer with a condition that he may lease it back from
the buyer and at the same time, he be granted an option to repurchase the lot on or before an agreed date.
II. ISSUE
What tax benefits can be obtained from the “sale-leaseback transaction” for both the Seller-lessee and the
buyer-lessor?
III. DISCUSSION AND ANALYSIS
To begin, a “sale-leaseback transaction” is one where an entity (the seller-lessee) transfers an asset to
another entity (the buyer-lessor) for consideration and leases that asset back from the buyer-lessor. A sale
and leaseback transaction is a popular way for entities to secure long-term financing from substantial
property, plant and equipment assets such as land and buildings.
This transaction would have legal implications when it comes to your deductions from your gross income.
This could lead to lesser taxable income, which consequently means that you could have lesser taxes to
pay.
Under Revenue Regulations (RR) No. 19-86, a lease arrangement may be treated as either an operating
lease, a finance lease or a conditional sale, depending on the substance of the transaction. The RR sets
out the rules to govern the tax treatment of lease agreements and provides guidelines for determining
whether transactions purporting to be leases are in reality conditional sales contracts.
Considering the given facts, we will treat Henry’s situation as Operating Lease.
This opinion shall be divided into two parts. The first part will explain the tax benefits to Henry as Seller-
lessee while the second part will deal with the tax benefits for the prospective Buyer-lessor.
For the first part of this opinion, we shall refer to Section 34 of the National Internal Revenue Code, 1
which provides for the following, in part:
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 trade or business. 2
This includes deduction for 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.3
1
R.A. 8424 as amended by R.A. 10693
2
NIRC, Sec. 34(A)(1)(a)
3
NIRC, Sec. 34(A)(1)(a)(iii)
20
Furthermore, the law also allows for the deduction of the amount of interest paid or incurred within a taxable
year on indebtedness in connection with the taxpayer's profession, trade or business. 4
For the second part of this opinion, we refer to the following provisions, still under the
abovementioned section of the law:
“Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade or
business, shall be allowed as deduction”
IV. CONCLUSION
The foregoing provisions indicate that the Seller-lessee can deduct those rental expense, interest expense
and all other expenses under the lease agreement which the lessee is required to pay to or for the account
of the buyer-lessor to his business’s gross income to arrive at your taxable income. Therefore, should Henry
decide to use the lot and building for his businesses in the future, the “sale-leaseback transaction” could
eventually give him less taxes to pay.
However, Henry can only claim these rental expenses as deductions if there was proper withholding.
Withholding tax is when you withhold a portion of a payment for services or goods to a supplier and remit
that portion to the government on behalf of its supplier. Under your lease, you must deduct 5% the amount
of rental actually due under the lease agreement during the year and remit the same to the government in
order to claim these rental expenses as deductions.
On the other hand, the buyer-lessor will be receiving rental income from the property. Aside from this, the
law also allows him to claim deductions such as real property taxes, 5 repairs and maintenance, 6
depreciation,7 and other expenses necessary for renting out the property. 8 Hence, there will also be lesser
payment of taxes for the buyer-lessor.
V. RECOMMENDATION
Given these legal implications, we recommend that Henry should proceed with the transaction only if he
decide to use these properties in his business. However, if the purpose of the transaction is only to have
them in your possession due to their sentimental value and not for business, then the tax implications we
discussed would not apply.
II.
Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of
Nigeria. Its commercial airplanes do not operate within Philippine territory, or service passengers
embarking from Philippine airports. The firm is represented in the Philippines by its general
agent, Narotel. SAA sells airplane tickets through Narotel, and these tickets are serviced by SAA
airplanes outside the Philippines. The total sales of airplane tickets transacted by Narotel for SAA
in 2012 amounted to Pl0,000,000.00. The Commissioner of Internal Revenue (CIR) assessed SAA
deficiency income taxes at the rate of 30% on its taxable income, finding that SAA's airline ticket
sales constituted income derived from sources within the Philippines.
SAA filed a protest on the ground that the alleged deficiency income taxes should be considered
as income derived exclusively from sources outside the Philippines since SAA only serviced
passengers outside Philippine territory. It, thus, asserted that the imposition of such income
4
NIRC, Sec. 34(B)(1)
5
NIRC, Sec. 34(C)(1)
6
7
NIRC, Sec. 34(F)
8
21
taxes violated the principle of territoriality in taxation. SAA now approached you to confirm if its
position is correct. What will be your opinion on the matter? (2016 Bar)
Sure Arrival Airways (SAA) is a foreign corporation, organized under the laws of the Republic of Nigeria. Its
commercial airplanes do not operate within Philippine territory, or service passengers embarking from
Philippine airports. The firm is represented in the Philippines by its general agent, Narotel. SAA sells
airplane tickets through Narotel, and these tickets are serviced by SAA airplanes outside the Philippines.
The total sales of airplane tickets transacted by Narotel for SAA in 2012 amounted to Pl0,000,000.00. The
Commissioner of Internal Revenue (CIR) assessed SAA deficiency income taxes at the rate of 30% on its
taxable income, finding that SAA's airline ticket sales constituted income derived from sources within the
Philippines.
SAA filed a protest on the ground that the alleged deficiency income taxes should be considered as income
derived exclusively from sources outside the Philippines since SAA only serviced passengers outside
Philippine territory. It, thus, asserted that the imposition of such income taxes violated the principle of
territoriality in taxation. SAA now approached you to confirm if its position is correct. What will be your
opinion on the matter?
II. ISSUE
Whether or not Sure Arrival Airways is taxable for its income derived from its ticket sales through its general
sales agent in the Philippines?
In order to understand the rules on the taxability of a foreign corporation, it is important to establish the
nature of such foreign corporation. Section 28 (a) (1) of the National Internal Revenue Code provides that:
(A) Tax on Resident Foreign Corporations. –
(1) In General. – Except as otherwise provided in this Code, a corporation organized, authorized,
or existing under the laws of any foreign country, engaged in trade or business within the
Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable
income derived in the preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty percent (30%).
In the case of corporations 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.
The corporate income tax rate 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.
Provided, however, That a resident foreign corporation shall be granted the option to be taxed at
fifteen percent (15%) on gross income under the same conditions, as provided in Section 27 (A) 9
In the case of CIR v. British Overseas Airways Corporation, the Court declared that British Overseas
Airways Corporation, an offline international air carrier without landing rights in the Philippines, is a resident
foreign corporation that is engaged in business in the Philippines through its local sales agent that sold and
issued tickets for the airline company.
9
Section 28 (a) (1) of the National Internal Revenue Code
22
The Court emphasized in that case that while there is no specific criterion as to what constitutes "doing" or
"engaging in" or "transacting" business, the peculiar environmental circumstances should be taken into
consideration. The term implies a continuity of commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of commercial gain or for the purpose and object of the business
organization.
The Court also provided that in order that a foreign corporation may be regarded as doing business within
a State, there must be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character. 10
It can be averred from the aforementioned provision and the facts of the case that SAA, as an offline
international carrier with no landing rights in the Philippines is a resident foreign corporation engaged in
trade and business in the Philippines, due to its continued commercial presence in the country through its
sales agent, Narotel.
As a resident foreign corporation, it is subject to the regular corporate income tax equivalent to thirty percent
(30%) of the taxable income which is derived in the preceding taxable year from all sources within the
Philippine. This means that the taxable income covered are those derived from the ticket sales which the
company made through its agent Narotel.
IV. CONCLUSION
V.
Based on the discussion, the position that your income derived from sale of airplane tickets is not taxable
as you only service passengers outside the Philippines is incorrect. The sale of airplane tickets through an
agent locally and permanently found in the Philippines proves that there is a continuing commercial
presence in the Philippines.
Moreover, the imposition of the 30% regular corporate income tax on the sales of airplane tickets by SAA
through Narotel, does not violate the principle of territoriality in taxation since a corporation’s source of
income is not determined by the place where the contract for service is entered into but by the place where
the services were actually performed.
Foreign corporations acquire business situs in the country if they have permanent establishment in the
Philippines or if they maintain an office, a production plant or if they perform a continuous commercial
activity in the country. The activity of securing the sale of the airplane tickets were in the Philippines through
the sales agent Narotel, therefore we can conclude that the income originated from sources within the
Philippines.
During the period covered by the assessment, SAA maintained Narotel as its general sales agent in the
Philippines. As such, Narotel performs acts and exercises functions that are incidental and beneficial to the
purpose of the airline corporation’s business and such activities of Narotel bring direct receipts or profits to
corporation. Through Narotel, SAA is able to engage in an economic activity in the Philippines.
SAA’s income from sale of airline tickets, through Narotel, is income realized from the pursuit of its business
activities in the Philippines. Hence, the assessment of the Commissioner is proper.
VI. RECOMMENDATION
With this, Sure Arrival Airways, a resident foreign corporation deriving income from the Philippines through
Narotel, should pay corporate income tax of 30% of its taxable income.
10
Commissioner of Internal Revenue v. British Overseas Airways Corporation, G. R. No. L-65773-74, (30 April 1987)
23
In its succeeding transactions, we also recommend that Sure Arrival Airways should diligently file its income
tax return to the Bureau of Internal Revenue in order avoid deficiency in future assessments, penalties,
interests and surcharges.
Finally, you may also want to check on any existing tax treaty that the Philippines and Nigeria may have
entered into that may help us eliminate international double taxation since tax treaties bind the Philippines
following the international law principle on pacta sunt servanda.
III.
The Board of Directors of Sumo Corporation, a company primarily engaged in the business of
marketing and distributing pest control products, approved the partial cessation of its
commercial operations, resulting in the separation of 32 regular employees. Only half of the
affected employees were notified of the board resolution. The Board now asks for your opinion
as to the taxability of this course of action and the best way to minimize the tax exposure of the
Company and employees alike. (2017 Bar)
The Board of Directors of Sumo Corporation, a company primarily engaged in the business of marketing
and distributing pest control products, approved the partial cessation of its commercial operations, resulting
in the separation of 32 regular employees. Only half of the affected employees were notified of the board
resolution. The Board now asks for your opinion as to the taxability of this course of action and the best
way to minimize the tax exposure of the Company and employees alike.
II. ISSUES
1. Whether or not the thirty-two regular employees are entitled to separation payments from
Sumo Co.?
2. Whether or not the separation payments made by Sumo Co. to the employees exempt from
income tax?
A. Right to Separation Pay
The right to security means that a regular employee shall remain employed unless his or her services are
terminated for just or authorized caused and after observance of procedural due process. Article 284 of the
Labor Code, provides the grounds for authorized causes of termination are: a) installation of labor-saving
devices; b) redundancy; c) retrenchment to prevent losses; d) closure and cessation of business; and e)
disease or illness.
In termination for authorized causes, separation pay is the amount given to an employee terminated due to
installation of labor-saving devices, redundancy, retrenchment, closure or cessation of business or
incurable disease. In cases of retrenchment, closure or cessation of business or incurable disease, the
employee is entitled to receive the equivalent of one month pay or one-half month pay for every year of
service, whichever is higher.
In termination for an authorized cause, due process means a written notice of dismissal to the employee
specifying the grounds at least 30 days before the date of termination. A copy of the notice shall also be
furnished to the Regional Office of the Department of Labor and Employment (DOLE) where the employer
is located.
B. Separation Pay is Tax Exempt
24
Under Section 32(B)(6)(b) of the Tax Code, any amount received by an official or employee or by his heirs
as a consequence of separation 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 shall be exempt from
tax.
Section 32(B)(6)(b) of the Tax Code, as amended, provides that:
SECTION 32. Gross Income. —|||

(B) Exclusions from Gross Income. — The following items shall not be included in
gross income and shall be exempt from taxation under this Title:
(6) Retirement Benefits, Pensions, Gratuities, etc.
(b) 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.
Decisive on this matter is BIR Ruling 123-2014 where the BIR ruled on the issue of tax exemption of
separation benefits due to partial cessation of business operations resulting in the separation of thirty-two
(32) regular employees who were duly notified.
BIR Ruling 123-2014, provides that:
Pursuant to Section 32(B)(6)(b) of the Tax Code of 1997, as amended, 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 due
to death, sickness or other physical disability or for any cause beyond the control
of the said official or employee is exempt from taxes regardless of age or length
of service.
Accordingly, the separation pay to be received by the retrenched employees as a

result of their separation from the service is exempt from income tax and
consequently from the withholding tax.
Such exemption, however, does not extend to remuneration not relating to the retrenchment per se such
as earned salary, government-mandated 13th month pay and other benefits on account of employment that
are in excess of the P90,0000 tax-exempt threshold. These items are subject to income tax, and
consequently, to withholding tax on compensation regardless of the retrenchment.
Furthermore, to confirm the eligibility for tax exemption of the separation pay, the BIR issued Revenue
Memorandum Order No. 66-2016 to guideline the securing a Certificate of Tax Exemption (CTE) from
Income Tax and Withholding Tax. For closure or cessation of operation, the BIR requires the following
requirements:
1. Copies of the written notices served to the employee and the appropriate Regional Office
of the Department of Labor and Employment (DOLE) at least 30 days before the intended
date of termination, specifying the grounds for separation; and
2. A board resolution, in case of a juridical entity, or sworn statement to be executed by the
owner, in case of a sole proprietor, stating that:
a. That the management has decided to close or cease operation of the

company;
b. That the closure or cessation of operation has been made in good
faith; and
c. That there is no other option available to the employer except to close
or cease operation.
25
IV. CONCLUSION
Based on the aforementioned discussion, the thirty-two employees of Sumo Corporation are entitled to
separation pay and such payment shall be exempt from taxation.
In the present case, it is immediately noticeable that the element of notice to the affected employees is
wanting. Sumo Corporation only notified half of the affected employees of the board resolution approving
the partial cessation of its operations resulting to the separation of thirty-two employees. Worth emphasizing
is the observance of procedural due process requires written notice of dismissal to the employee specifying
the grounds at least 30 days before the date of termination. A copy of the notice shall likewise be furnished
to the Regional Office of the Department of Labor and Employment (DOLE) where the employer is located.
Furthermore, such notice of dismissal to the employee is also required to confirm the eligibility for tax
exemption of the separation pay under the BIR issued Revenue Memorandum Order No. 66-2016.
As confirmed by the Bureau of Internal Revenue (BIR) in its BIR Ruling 123-2014, any payment due to the
employees due to their involuntary termination for grounds beyond their control shall not be included in the
employee’s gross income, and as such, shall be exempt from income tax, regardless of the amount
received, age or length of service.
In this light, it is important to note that such exemption does not extend to remuneration not relating to the
retrenchment per se such as earned salary, government-mandated 13th month pay and other benefits on
account of employment that are in excess of the P90,0000 tax-exempt threshold. These items are subject
to income tax, and consequently, to withholding tax on compensation regardless of the retrenchment.
V. RECOMMENDATION
It is our recommendation that the Sumo Corporation comply with the procedural requirement of notice.
It must send written notice of dismissal to the employee specifying the grounds at least 30 days before the
date of termination. A copy of the notice shall likewise be furnished to the Regional Office of the Department
of Labor and Employment (DOLE) where the employer is located. The requirements discussed above must
be fully complied with so as to preclude any problems in the future. It bears great emphasis that failure to
comply with the requirements mandated by the Labor Code will render the termination of employment
invalid and illegal.
Furthermore, without such notice of dismissal, the employees who are due to receive their separation pay
may not claim for their tax exemption as such notice is required for the confirmation of the eligibility of tax
exemption of the separation pay.
IV.
On April 30, 2020, Patrick resigned as the production manager of 52nd Avenue, a television studio
owned by SSS Entertainment Corporation. 52nd Avenue issued to him a Certificate of
Withholding Tax on Compensation (BIR Form No. 2316), which showed that the tax withheld from
his compensation was equal to his income tax due for the period from January 2020 to April 30,
2020. A month after his resignation, Patrick put up his own studio and started producing short
films. He was able to earn a meager income from her short films but did not keep record of his
production expenses. Patrick now asks you if he need not file for an income tax return in 2020.
What will be your position? (2017 Bar)
Patrick worked as a production manager of 52nd Avenue. He resigned on April 30, 2020. His employer
provided him with a Certificate of Withholding Tax on Compensation (BIR Form No. 2316) which showed
26
that his tax withheld was equal to his income tax due for the period of January 2020 to April 30, 2020. A
month after, presumably around May 2020, he set up his own studio and earned professional or business
income as a self-employed individual.
II. ISSUES
Whether or not Patrick must file an income tax return for the year 2020?
III. DISCUSSION & ANALYSIS
Sec. 51 of Chapter 9 of the National Internal Revenue Code of 1997 (NIRC) requires, inter alia, every
Filipino citizen residing in the Philippines to file an income tax return (ITR). An ITR is defined as a report
prepared by the taxpayer showing to internal revenue officers an enumeration of taxable amounts,
descriptions of taxable transactions, allowable deductions, amounts subject to tax and the tax payable by
the taxpayer to the government.
It is further provided in the same section that the following individuals are not required to file an income tax
return: (1) an individual whose taxable income does not exceed PHP250,000 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 Philippines shall file an income tax return, regardless of the amount of gross income;
(2) an individual with respect to pure compensation income, as defined in Section 32(A)(1), derived from
such 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; and (4) statutory minimum wage earners.
To contextualize, income may be earned through (1) compensation or through (2) business or the practice
of one’s profession; among others. Individuals earning income from these sources differ on many tax-
related aspects, one of which is the ITR requirement.
A person who derives his income solely from working for an employer is a pure compensation earner. The
taxes of these earners are usually collected through withholding. Withholding acts as a “pay as you earn”
system, where the employer deducts the income tax due from the regular salary of the employee. This
deduction acts as a credit to offset the final tax assessment by the BIR.
A pure compensation earner may opt to forego the personal filing of an ITR and choose instead substituted
filing by his employer, provided that certain conditions are met, pursuant to Sec. 79 of the NIRC.
On the other hand, an individual engaged in business or profession earns income without an employer. In
other words, they are self-employed individuals. They must always file an ITR regardless of the amount of
his gross income for a certain taxable period, as was established earlier.
Finally, an individual may earn income through both compensation and business or practice of his
profession. This is what is called a mixed income earner. The ITR requirement for a mixed income earner
is similar to that for an individual earning income through his business or profession. They are always
required to file an ITR, regardless of the amount of gross income.
IV. CONCLUSION
Here, Patrick is a mixed income earner for the taxable year of 2020. He earned compensation income
during the months of January to April 30. Beginning May, he earned income through business or the practice
of his profession, as a self-employed individual.
Would he had opted not to resign, he would have been able to avail of the substituted ITR filing by his
previous employer, 52nd Avenue. However, since he resigned on April 30 and began making his own films,
he must now personally file an ITR regardless of the amount he earns through his self-employment.
27
In the filing of his ITR, due credit may be given to the income tax properly withheld by his previous employer
for the months of January to April 2020. ‘
V. RECOMMENDATION
It is highly recommended that Mr. Patrick file an ITR for the 2nd quarter and such succeeding taxable
quarters as long as he engages in his business or profession, on or before August 15, regardless of the
meagre nature of his earnings as a self-employed individual. For convenience, he may file and pay his ITR
through the BIR’s electronic filing and payment system (eFPS) online. He may also choose to file online
and pay at an authorized agent bank within his area of residence or place of business.
In his ITR, he must include the following:

1. BIR Form No. 2316 evincing properly withheld tax on compensation for the 1st quarter;
2. The gross income he earned as a self-employed individual; and
Other pertinent details as may be required.
V.
JKL-Philippines is a domestic corporation affiliated with JKL-Japan, a Japan-based information

technology company with affiliates across the world. Mr. F is a Filipino engineer employed by
JKL Philippines. In 2018, Mr. F was sent to the Tokyo branch of JKL-Japan based on a contract
entered into between the two (2) companies. Under the said contract, Mr. F would be
compensated by JKL-Philippines for the months spent in the Philippines, and by JKL-Japan for
months spent in Japan. For the entirety of 2018, Mr. F spent ten (10) months in the Tokyo branch.
On the other hand, Mr. J, a Japanese engineer employed by JKL-Japan, was sent to Manila to
work with JKL-Philippines as a technical consultant. Based on the contract between the two (2)
companies, Mr. J's annual compensation would still be paid by JKL-Japan. However, he would
be paid additional compensation by JKL-Philippines for the months spent working as a
consultant. For 2018, Mr. J stayed in the Philippines for five (5) months.
In 2019, the Bureau of Internal Revenue (BIR) assessed JKL-Philippines for deficiency
withholding taxes for both Mr. F and Mr. J for the year 2018. As to Mr. F, the BIR argued that he
is a resident citizen; hence, his income tax should be based on his worldwide income. As to Mr.
J, the BIR argued that he is a resident alien; hence, his income tax should be based on his income
from sources within the Philippines at the schedular rate under Section 24 (A) (2) of the Tax Code,
as amended by Republic Act No. 10963, or the "Tax Reform for Acceleration and Inclusion" Law.
JKL now requests you to render an opinion on the validity of BIR’s assessment as to (1) income
tax on Mr. F's worldwide income and (2) income tax on Mr. J's income within the Philippines at
the schedular rate? (2019 Bar)
Mr. F is a Filipino engineer employed in JKL-Philippines (JKL-PH). In 2018, Mr. F was sent to the JKL-
Japan, Tokyo Branch. According to their contract, Mr. F would be compensated by JKL-PH for the months
spent in the Philippines and by JKL-Japan for months spent in Japan. In 2018, Mr. F spent 10 months in
JKL-Japan.
On the other hand, Mr. J is a Japanese engineer employed by JKL-Japan, and was sent to Manila to work
with JKL-PH as a technical consultant. According to the contract, Mr. J's annual compensation would still
be paid by JKL-Japan. However, Mr. J would be paid additional compensation by JKL-PH for the months
spent working as a consultant. In total, Mr. J stayed in the Philippines for five months.
BIR assessed JKL-PH for deficiency withholding taxes for both Mr. F and Mr. J for the year 2018. BIR
arguing that Mr. F is a resident citizen, thus, his income tax should be based on his worldwide income; and
28
Mr. J is a resident alien, thus, his income should be based on his income from sources within Philippines
at the schedular rate under Sec 24 (A) (2) of TRAIN Law.
II. ISSUES
As to Mr. F:
a) What is the classification of Mr. F as a taxpayer?
b) Whether or not the BIR’s income tax assessment on Mr. F’s worldwide income is valid.
As to Mr. J:
a) What is the classification of Mr. J as a taxpayer?
b) Whether or not Mr. J is subject to 0-35% schedular income tax rate?
A. Mr. F’s taxpayer classification and tax liability
To determine whether or not the BIR’s income tax assessment based on Mr. F’s worldwide income is valid,
it is deemed proper to discuss the classification of Mr. F as a taxpayer for the purposes of income taxation
in the year 2018.
Based on the facts and circumstances of your case, Mr. F is considered as a non-resident citizen in the
year 2018 and under the NIRC, non-resident citizens (NRC) are taxable only for income derived from
sources within the Philippines. Section 22(e) of the Tax Code specifically identified ‘non-resident citizen’
as:
(1) A citizen of the Philippines who establishes to the satisfaction of the

Commissioner the fact of the 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.11
In view of the foregoing, Mr. F falls within the purview of the NRC classification under paragraph 3 since
Mr. F worked abroad “most of the time during the taxable year.” Under Section 2 of the Revenue
Regulations (RR) No. 1-79, the term “most of the time” is defined as physical presence outside the
Philippines for not less than 183 days during the taxable year. 12
Based on the facts and circumstances of your case, Mr. F was sent to JKL-Japan and spent ten (10) months
abroad in the year 2018 which is more or less 300 days. In other words, Mr. F stayed in the Tokyo branch
for more than 183 days. Hence, Mr. F is well considered as a non-resident citizen. Therefore, Mr. F should
11
NATIONAL INTERNAL REVENUE CODE, Title II, Chapter I, Section 22(e).
12
Revenue Regulations No. 1-79, Section 2 (Jan. 8, 1979).
29
be subject to tax only for income earned within the Philippines. It then follows that the assessment
conducted by BIR based on the worldwide income of Mr. F is invalid.
Moreover, Mr. F does not fall under paragraph 2 of the NRC classification since paragraph 2 thereof entails
that the employment must be on a permanent basis which may be evidenced by a working visa. In your
case, the assignment of Mr. F to the Tokyo branch of JKL-Japan was temporary in nature and the
arrangement merely required Mr. F to be physically present abroad most of the time during the said taxable
year.
Mr. F does not also qualify under hybrid status in paragraph 4 of the NRC classification. This is only
applicable to a taxpayer who has been previously identified as NRC in the previous taxable year. In the
present case, Mr. F initially stayed in the Philippines and was considered as a resident citizen before the
subsequent transfer to JKL-Japan in the year 2018, hence, the hybrid personality of a taxpayer does not
apply.
In 2011, the BIR issued BIR Ruling No. 517-2011 which held that employees who rendered services for
more than 183 days in foreign countries do not qualify as non-residents based on two grounds: (1) the
employee-employer relationship continued to exist between the local company and employees; and (2) the
salaries of the employees were paid by the local company.13 It presupposes that the employees are
employed as full-time staff in the local company while the foreign assignment is merely considered as part
of duties and their salaries were paid by the local company regardless of their temporary assignment. 14
This ruling, however, does not apply in your case. Although Mr. F is an employee of JKL-Philippines, based
on the contract you entered into with JKL-Japan, it was agreed that JKL-Japan would pay compensation to
Mr. F for the months spent in the Tokyo Branch, hence, the second requisite as stated in the BIR ruling is
absent. Therefore, Mr. F is still classified as a non-resident citizen.
Furthermore, it can be argued that even though JKL-Philippines remains to be the employer of Mr. F in
paper, the substance of the secondment arrangement points out that JKL-Japan not only exercises the
right to control and direct Mr. F on the manner and means by which the services will be performed and the
results to be accomplished15 during the period Mr. F worked abroad but also the entity that receives the
benefit of the services rendered by Mr. F. 16
B. Mr. J’s taxpayer classification and tax liability.
Mr. J is a non-resident alien, not engaged in trade or business (NRA-NETB).
Under Sec. 22 (G) of the National Internal Revenue Code (NIRC), “non-resident alien” means an individual
whose resident is not within the Philippines, and who is not a citizen thereof. Further, there are two kinds 17
of non-resident aliens (NRA): [1] Non-resident alien, Engaged in Trade or Business (NRA-ETB); and [2]
Non-resident alien, Not Engaged in Trade or Business (NRA-NETB).
Under the NIRC, A NRA-ETB18 is a resident alien who is engaged in trade or business and has business
income in the Philippines. He is one who has stayed within the Philippines for an aggregate period of more
than 180 days during the taxable year. In other words, a NRA-ETB is one who stayed in the Philippines for
an aggregate period of at least 181 days or more. Furthermore, Sec. 25 (A) thereof states that a NRA-ETB
will 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. Thus, a NRA-ETB is subject to 0-35%
tax on net taxable income within the Philippines.
13
BIR Ruling No. 517-2011 (2011).
14
Iryn S. Yap-Balmores, “The new rule on taxation of nonresident citizens”, SGV & Co. (June 11, 2012). Retrieved from
http://www.sgv.ph/the-new-rule-on-taxation-of-nonresident-citizens-by-iryn-s-yap-balmores-june-11-2012/
15
Revenue Regulation 2-98, Section 2.78.3 (May 17, 1998).
16
Balmores, supra note 4.
17
NATIONAL INTERNAL REVENUE CODE, Title II, Chapter III, Section 25 (A) and (B).
18
Id. Section 25 (A) (1).
30
On the other hand, a NRA-NETB19 is one who is a non-resident alien who has stayed within the Philippines
for only 180 days or less and who has no business income in the Philippines. As to the tax rate, Sec. 25
(B) further states that “there shall be levied, collected, and paid for each taxable year upon the entire income
received from all sources within the Philippines by every nonresident alien individual not engaged in trade
or business within the Philippines as interest, cash and/or property dividends, rents, salaries, wages,
premiums, annuities, compensation, remuneration, emoluments, or other fixed or determinable annual or
periodic or casual gains, profits, and income, and capital gains, a tax equal to twenty-five percent (25%) of
such income.” Thus, A NRA-NETB is subject to a final tax rate of 25% of its gross income within the
Philippines.
It is important to distinguish whether or not a non-resident alien is engaged in trade or business because
each classification is subject to a different tax rate. Thus, NRA-ETB is taxed at the regular income tax of
0% to 35% for taxable income within the Philippines, while NRA-NETB is taxed with a final tax rate of 25%
on its gross income within the Philippines.
Essentially, after having discussed the different features of NRA-ETB and NRA-NETB, it is clear now that
the test to be able to classify the two is their length of stay in the Philippines – whether the NRA stays in
the Philippines for more 180 days, or 180 days or less.
In the case at bar, it is important to know first the classification of Mr. J, and then determine what tax rate
is applicable to that classification.
Here, Mr. J is a non-resident alien, not engaged in trade or business (NRA-NETB). Firstly, Mr. J only stayed
in the Philippines for 5 months, and that is equivalent to around 152 days. As abovementioned, a NRA is
considered NRA-NETB if the taxpayer’s stay in the Philippines is only for 180 days, or less. Clearly, Mr. J’s
stay in the Philippines is short of the 181- day threshold as he only stayed here for more or less 152 days.
Thus, following the test of length of stay, Mr. J is a NRA-NETB. It also evident that Mr. J never intended to
have an extended or permanent stay in the Philippines due to the fact that it is still JKL-Japan giving him
his compensation, and he is only getting allowances from JKL-Philippines.
As such, since it is established that Mr. J is a NRA-NETB, he should not be subject to the scheduler 0-35%
tax rates, but rather, is taxable at 25% of his Gross Income earned within the Philippines, as provided in
Sec. 25(B) of the NIRC.
IV. CONCLUSION
It is evident that Mr. F stayed and worked abroad for more than 183 days in the Tokyo branch of JKL-Japan
for the year 2018, in which case, Mr. F is considered as a non-resident citizen. For income tax purposes,
Mr. F should only be assessed by the BIR on income earned within the Philippines in the year 2018 based
on the Tax Code provision as interpreted in past revenue regulations and BIR rulings. Therefore, the BIR
income tax assessment on Mr. F’s worldwide income is invalid.
As to Mr. J, it is very clear that he only stayed in the Philippines for more or less 152 days. As
abovementioned, to qualify as a NRA-ETB, one must have stayed in the Philippines for an aggregate period
of more than 180 days. In other words, Mr. J must have stayed here in the Philippines for 181 days or more.
Clearly, Mr. J cut-short to the 181-day threshold. For income tax purposes, as NRA-NETB, Mr. J should be
subject to a final tax rate of 25% on his gross income earned within the Philippines. Thus, the BIR
Assessment subjecting Mr. J to the schedular tax rate under Sec 24 (A) (2) of TRAIN Law is invalid.
V. RECOMMENDATION
The taxpayer’s right to due process demands that the taxpayer should be given the opportunity to challenge
any finding of the BIR in its entire tax audit procedure. Considering that in your case the BIR’s income tax
assessment as to the income tax on Mr. F’s worldwide income and Mr. J’s income within the Philippines
19
Id. Section 25 (B).
31
subject to the GITR is invalid, it is recommended that JKL-Philippines should file an administrative protest
against the erroneous deficiency tax assessment as provided under the Revenue Regulations No. 18-2013
which amended certain sections of Revenue Regulations No. 12-99.
For a clearer understanding, it is deemed proper to discuss the due process requirement in the issuance
of a deficiency tax assessment. After conducting a review and evaluation, the BIR issues a Preliminary
Assessment Notice (PAN) if there exists a sufficient basis to assess a particular taxpayer for any deficiency
tax or taxes.20 Failure to respond within fifteen (15) days from date of receipt of the PAN, said taxpayer is
considered in default, in which case, a Formal Letter of Demand and Final Assessment Notice (FLD/FAN)
shall be issued calling for the payment of the taxpayer’s deficiency tax liability including the applicable
penalties.21
With this, you or your authorized representative or tax agent may protest administratively against the said
FLN/FAN within thirty days (30) days from its date of receipt by filing a written request for reconsideration
wherein the re-evaluation of the assessment is based on the existing records or request for reinvestigation
wherein the re-evaluation of the assessment is based on a newly discovered or additional evidence that
you intend to present.22 It is important to take note that the protest should specify the date of assessment
notice, the nature of the protest whether for reconsideration or for reinvestigation and the applicable laws,
rules and regulations on which the protest is based, otherwise the protest shall be considered void. 23
Failure to file a valid protest within the 30-day shall render the assessment final, executory and demandable
with no recourse for request for reconsideration or reinvestigation. 24 If such protest is denied, you may
either (1) appeal to the Court of Tax Appeals (CTA) within 30 days from the date of receipt of the Final
Decision on a Disputed Assessment (FDDA); (2) elevate the protest through a request for reconsideration
to the CIR within 30 days from receipt of the said FFDA; or (3) apply for a compromise in accordance with
Section 204 of the Tax Code, as amended.25
In a 2020 CTA decision, it was held that the tax deficiency assessed in the FFDA violated of the taxpayer’s
right to due process as the taxpayer was not given the chance to refute the finding at the administrative
level, hence, the assessment should be cancelled. 26 The CTA further cited Section 228 of the Tax Code,
as amended, which states that the taxpayer needs to be informed of the law and of the facts on which the
assessment is made, otherwise, the assessment will be considered void. 27 This is to inform you that you
are afforded with the right to due process during the entire tax audit procedure of the BIR up until the
issuance of the FFDA.
EH 408
I.
Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design,

engineering, and construction work. Its principal office is located in Cebu City, but it has various
infrastructure projects in the country and abroad. Thus, KKI employs both local and foreign
workers. The company has adopted a policy that the employees' salaries are paid in the currency
of the country where they are assigned or detailed.
Below are some of the employees of KKI. Determine whether the compensation they received
from KKI in 2019 is taxable under Philippine laws and whether they are required to file tax returns
with the Bureau of Internal Revenue (BIR).
20
Revenue Regulations No. 18-2013, Section 3.1.1 (Nov. 28, 2013).
21
RR No. 18-2013, supra note at Section 3.1.3.
22
Id at Section 3.1.4.
23
Ibid.
24
Ibid.
25
Ibidd.
26
CTA EB No. 1831 (Feb. 12, 20).
27
Id.
32
(a) Kris Konejero, a Filipino accountant in KKl's Tax Department in the Makati office, and married
to a Filipino engineer also working in KKI;
(b) Klaus Kloner, a German national who heads KKl's Design Department in its Makati office;
(c) Krisanto Konde, a Filipino engineer in KKl's Design Department who was hired to work at the
principal office last January 2019. In April 2019, he was assigned and detailed in the company's
project in Jakarta, Indonesia, which project is expected to be completed in April 2021;
(d) Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project in Taipei,
Taiwan. Since KKI provides for housing and other basic needs, Kamila requested that all his
salaries, paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso equivalent;
and
(e) Karen Karenina, a Filipino architect in KKl's Design Department who reported back to KKl's
Makati office in June 2019 after KKl's project in Kuala Lumpur, Malaysia was completed. (2018
Bar)
BACKGROUND INFORMATION:
● Kronge Konsult, Inc. (KKI) is a Philippine corporation engaged in architectural design,

engineering, and construction work.
● Its principal office is located in Cebu City.
● It has various infrastructure projects in the country and abroad so it employs both local and
foreign workers.
● Its employees in 2019 include:
a. Kris Konejero, a Filipino accountant in KKl's Tax Department in the Makati office, and
married to a Filipino engineer also working in KKI; wife not req of KKI only income
b. Klaus Kloner, a German national who heads KKl's Design Department in its Makati office;
c. Krisanto Konde, a Filipino engineer in KKl's Design Department who was hired to work at the
principal office last January 2019. In April 2019, he was assigned and detailed in the
company's project in Jakarta, Indonesia, which project is expected to be completed in April
2021;
d. Kamilo Konde, Krisanto's brother, also an engineer assigned to KKl's project in Taipei,
Taiwan. Since KKI provides for housing and other basic needs, Kamila requested that all his
salaries, paid in Taiwanese dollars, be paid to his wife in Manila in its Philippine Peso
equivalent; and
e. Karen Karenina, a Filipino architect in KKl's Design Department who reported back to KKl's
Makati office in June 2019 after KKl's project in Kuala Lumpur, Malaysia was completed.
ISSUES:
A. WON Kris Konejero is taxable under Philippine laws

If yes, WON she is required to file a tax return with the BIR.
B. WON Klaus Kloner, an alien, is taxable under Philippine laws.

If yes, WON he is required to file a tax return with the BIR.
C. WON Krisanto Konde, assigned and detailed in Jakarta, is taxable under Philippine laws
WON he is required to file a tax return with the BIR even though he is residing abroad.
D. WON Krisanto Konde, assigned in Taiwan, is taxable under Philippine laws.

WON he is required to file a tax return with the BIR even though he is residing abroad.
33
E. WON Karen Karenina is taxable under Philippine law for her entire 2019 income.
WON she is required to file a tax return with the BIR for all her income within and without for 2019.
DISCUSSION & ANALYSIS:
A. Yes, the compensation received by Kris Konejero in 2019 is taxable under Philippine laws.
However, she is not required to file her income tax return (ITR) with the BIR.
Section 23(A) and Section 24(A)(1)(a) of the National Internal Revenue Code (NIRC) states that a
“Resident Citizen” is a Filipino citizen who is residing in the Philippines and is taxable on all income
derived from sources within and without the Philippines.
Kris Konejero is a Filipino employed in KKI’s Tax Department in its Makati office. Since she is a
Filipino earning compensation in the Philippines, she is considered a resident citizen. This means
that the compensation she received from the Makati office of KKI is taxable under the NIRC.
Moreover, Section 51(A)(1) requires resident citizens to file their ITR. However, Kris Konejero is
not required to file her ITR if she complies with the requirements for substituted filing. Substituted
filing of ITR is when the filing of an employer of his BIR Form 2316 becomes a “substitute” to the
filing of an individual taxpayer’s ITR.
Sec. 51(A)(2)(b) of the NIRC states that a pure compensation income earner who derives income
from sources within the Philippines, and whose income tax on which has been correctly withheld
by his employer is not required by law to file an ITR provided that he is not deriving compensation
concurrently from two or more employers at any time during the taxable year. On the other hand,
Sec. 51(D) provides that married individuals who do not derive income purely from compensation,
shall file an ITR for the taxable year to include the income of both spouses. Also, according to
Revenue Regulation No. 3-2002, substituted filing applies to an employee if the following are
present: (1) the employee received purely compensation income during the taxable year, (2) the
employee received the income from only one employer in the Philippines during the taxable year,
(3) the amount of tax due from the employee at the end of the year equals the amount of tax
withheld by the employer, and (4) the employee’s spouse also complies with all 3 conditions stated
above.
Assuming that Kris Konejero and her husband’s only sources of income are their respective jobs
in KKI, and that KKI properly withheld their corresponding taxes, then she is not required to file her
ITR with the BIR. Conversely, if Kris Konejero and her husband are not pure compensation income
earners then she is still required to file an ITR but she shall file it together with her husband.
B. Yes, the compensation received by Klaus Kloner in 2019 is taxable under Philippine laws. However,
he is not required to file his ITR with the BIR.
Section 23(D) and 24(A)(1)(c) of the NIRC states that a “Resident Alien” is a foreign citizen residing
in the Philippines and is taxable on his income derived from sources within the Philippines.
Klaus Kloner is a German national who heads KKI’s Design Department in its Makati office. This
makes him a resident alien under the purview of the NIRC. This also means that the compensation
he received from KKI is a taxable income.
Klaus Kloner is not required to file his income tax return (ITR) with the BIR if he complies with the
requirements for substituted filing. According to Sec. 51(1)(c) of the NIRC, a resident alien is
required to file an ITR on income derived from sources within the Philippines with the BIR. However,
Sec. 51(A)(2)(b) states a pure compensation income earner receiving income from only one
employer and whose income tax has been correctly withheld by the latter is not required to file an
ITR.
34
If Klaus Kloner earns purely compensation income solely from KKI, and the amount of tax due to
him equals the amount of tax withheld by the latter, he is not required to file an ITR with the BIR.
C. Yes, Krisanto Konde is taxable for his income abroad because he is considered as a Resident
Citizen. Further, he is not required to file an Income Tax Return (ITR) for the compensation that he
acquired because he may avail of substituted filing.
While Section 22(2)(E) of the National Tax Revenue Code (NIRC) states that 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 will be considered
as a non-resident citizen (NRC).
It was clarified in Section 2 of Revenue Regulations (RR) No. 1-79, that the term “most of the time”
means physical presence outside the Philippines for not less than 183 days during the taxable year.
Although Krisanto was assigned to work in Jakarta from April 2019 to April 2021, clearly more than
183 days, he does not fall under the above definition.
Under BIR Ruling No. 517-2011 employees who rendered services for more than 183 days in
foreign countries may not be considered as NRC on basis that: (1) the employee-employer
relationship continued to exist between the local company and employees; and (2) the salaries of
employees were paid by the local company.
In the case at bar, Krisanto Konde, is considered as a Resident Citizen because he was assigned
and detailed in Jakarta, Indonesia by his Domestic Company. This arrangement is one of
secondment. The employer-employee relationship between Konde and KKI does not cease even
though Konde is working abroad because in fact it was the project of the domestic company that
Konde is performing abroad.
Furthermore, he may not be required to file an income tax return if he proves that he can avail the
substituted filing of income provided in RR 3-2002 which are: (1) That he receives pure
compensation income regardless of amount; (2) that he is working for only one employer in the
Philippines for the Calendar Year; and (3) that the tax has been withheld correctly by the employer.
D. Yes, Kamilio Konde’s income is taxable even though he was assigned to work abroad for more
than 183 days. Moreover, he is not required to file an income tax if he complies the requirements
under substituted filing.
Sec 22 (E)(3) of the NIRC provides that a citizen of the Philippines who works and derives income
from abroad and whose employment thereat requires him to be physically present aboard most of
the during the taxable year is considered a Nonresident Citizen.
Once an individual is considered as a Nonresident Citizen then it follows he is only taxable on

income derived from sources within the Philippines as provided in Sec. 23(B) of NIRC. However,
in a BIR ruling No. 517-2011, it was clarified that employees who rendered services for more than
183 days in foreign countries were not considered nonresidents on the basis that: (1) the employee-
employer relationship continued to exists between the local company and employees; and (2) the
salaries of the employees were paid by the local company. Thus, these employees may avail
substituted filing under RR 3-2002 if the latter are: receiving purely compensation income
regardless of amount, working for only one employer in the Philippines for the calendar year, and
tax has been correctly withheld by the employer.
In the case at bar, Konde is a Resident Citizen because the employer-employee relationship
between him and his Domestic Company did not cease even though he was assigned to work
abroad. Thus, it will not matter whether he will be staying abroad for more than 183 days because
it is still his Domestic Company that provides him his compensation. Furthermore, the fact that
Konde required his employer to directly send his compensation to his wife in the Philippines and
35
converted his income to Peso currency is immaterial because the tax liability of a compensation
earner does not take into consideration how the latter is spending his own salary. Moreover, he is
not required to file a separate income tax return because he may avail substituted filing if he is
compliant with RR 3-2002.
E. The income earned by Karen Karenina after her return to the Philippines is taxable under Philippine
laws. She is likewise required to file an Income Tax Return (ITR) with the BIR with respect to any
income earned after arrival in the Philippines.
Under Sec. 22(E)(4) of the National Internal Revenue Code (NIRC), a former non-resident Citizen
(NRC) who arrives in the Philippines at any time during the taxable year, provided the intention is
to reside here permanently, will be treated by law as an NRC with respect to the income earned by
said individual from sources outside the Philippines until his or her date of arrival.
As Karenina was working in Kuala Lumpur, and returned to the Philippines only after the project in
the former country was completed, she then falls under the above classification.
This means that only the income earned abroad up until Karenina’s arrival in June 2019 will be
exempt from tax since an NRC is taxable only for income within. However, after the said date
Karenina is, for all intents and purposes, a resident citizen, and is therefore taxable for all income
within and outside the country.
Also, Karenina is required to file an ITR with the BIR for income earned after her date of arrival.
This is so because at this point in time, Karenina is already considered, a resident citizen (RC). An
individual classified as such is required under Sec. 51(1)(A) of the NIRC to file an income tax return
to the BIR, unless she is a pure compensation income earner.
Assuming that she is, then substituted filing may be availed of subject to the following requisites
under Revenue Regulation No. 3-2002:
1. The employee received purely compensation income during the taxable year
2. The employee received the income from only one employer in the Philippines during the
taxable year
3. The amount of tax due from the employee at the end of the year equals the amount of tax
withheld by the employer
4. The employee’s spouse also complies with all 3 conditions stated above.
CONCLUSION:
To have a comprehensive understanding of the rationale of the advice given above, one must be familiar
with the definition and the general principles of Philippine Income Taxation.
Income taxation is in the nature of an excise taxation system, or taxation on the exercise of privilege, the
privilege to earn yearly profits from various sources. It is a system that does not provide for the taxation of
property. (Domondon, 2013)
To implement income taxation, the National Internal Revenue Code (NIRC) as well as several BIR Rulings
have meted out the income tax liabilities of individuals depending on their classification, which the NIRC
likewise provides. Several notable authors in Philippine income taxation have also set out ways of
classifying such individuals. This will explain the difference in the income tax treatments of the employees
of KKI as illustrated above.
The general principles of income taxation relevant to the issues raised above are:
1. A resident citizen (RC), or a Filipino citizen who resides in the Philippines, is taxable on any and all
income derived from sources in and out of the Philippines.
2. A non-resident citizen (NRC), or a Filipino citizen who does not reside in the Philippines, is taxable
only on income derived from within the Philippines.
36
3. An alien, or one who is not a citizen of the Philippine regardless of his residence, is taxable only on
income from within the Philippines.
As can be seen from the above principles, one is subject to income taxation based on the following
classifications.
Philippine income tax may be imposed based on the following criteria:

1. Citizenship or nationality of the individual concerned
2. His residence or domicile
3. Source of the income or where the income is from (Mamalateo, 2014)
Applying such to the respective cases above, one can conclude that: First, Kris Konejero Krisanto Konde,
and Kamilo Konde are all taxable on all income derived in and out of the Philippines as they are considered
resident citizens (RC).
Konejero is a simple example of such, being a Filipino accountant assigned to work in the Philippines.
Brothers Krisanto and Kamilo Konde, may appear as non-resident citizens at first glance, however due to
the qualification made by the BIR in Ruling No. 517-2011, the brothers are not to be considered as such
since their work arrangement abroad is merely in the nature of a secondment.
Second, Karenina is considered as a hybrid tax payer. As a Filipino architect working in Malaysia, who
returned to the Philippines only after the completion of a project, Karenina is considered an NRC in so far
as her income from abroad is concerned until the date of her arrival in the Philippines.
After such date, she will then be considered an RC who is not subject to income tax from sources in and
out of the country. This means if in case Karenina still has receivables from abroad upon arrival in the
Philippines, the same is already taxable under Philippine laws.
Third, German national Klaus Kloner working in KKI’s Makati office is a resident alien making him subject
to income tax on income earned within the Philippines.
As to their Income Tax Returns, all of them are required to file an Income Tax Return (ITR) with the BIR as
stipulated by Sec. 51(A)(1), detailing that RCs, NRCs with respect to income earned within, and resident
aliens (RA) on income within, are required to file the same.
It is important to note that the above requirement is subject to an exemption. Thus, if the individual meets
the requirements under Revenue Regulation No. 3-2002, then said individual may opt for substituted filing.
This means that the employer will be the one to file the employee’s ITR with the BIR.
It is likewise important to note that the filing of the ITR of a married couple is different than that of a single
individual. Sec. 51(D) of the NIRC states that if married individuals who do not derive income that is purely
compensation shall file a consolidated ITR, unless it is impracticable for them to do so. This applies to Kris
Konejero and her husband assuming they have other sources of income other than their compensation.
RECOMMENDATION:
1. Since Kronge Konsult, Inc. (KKI) is a corporation established under Philippine laws, the State grants
them a chance to reduce their income tax liabilities.
2. This is done by deducting the expenses they incurred for the payment of the salary of their
employees from their gross income or all the income they earned within a taxable year.
3. The power to deduct is however conditional. KKI must withhold, meaning the employer would
automatically deduct the income tax liabilities of their employee from their monthly income, in order
for them to qualify for expense deduction.
37
4. The power to withhold is however not automatic and applicable to all their employees.
5. KKI must first determine which among its employees’ income is taxable by the BIR.
6. Here, All the named employees should be taxed, subject to a few differences in how they may be
taxed:
a. Since stationed in Makati and a Resident citizen, Kris Konejero is taxable for her income
earned both inside and outside the Philippines.
b. Krisanto and Kamilo Konde are both taxable for income earned inside and outside the
Philippines although they are stationed abroad because they remained to be a resident
citizen employed and under the control of KKI.
c. Klaus Kloner, as a resident alien, is only taxable for his income earned inside the
Philippines.
d. Karenina, the “balikbayan”, is not taxable prior to her arrival in the Philippines. She is only
taxable for income earned inside and outside the Philippines upon her arrival.
7. KKI, as their employer, may withhold their taxes through a process called “Substituted Filing”
a. Substituted filing is a mechanism whereby it is the employer who files for the ITR of its
employee.
b. The employee may dispense with filing their personal ITR only if they are a pure
compensation earner. This means that their only source of income is that which is given
by KKI.
8. For 2019, the following employees are subject to Philippine income tax for their compensation
earned working for KKI:
a. Kris Konejero’s entire 2019 compensation income.
b. Klaus Kloner’s 2019 income but only for services rendered within the Philippines.
c. Krisanto Konde’s entire 2019 compensation income.
d. Kamilo Konde’s entire 2019 compensation income.
e. Karen Karenina’s 2019 income beginning the month of June when she arrived in the
Philippines.
The preceding paragraph enumerates the income that is subject to Philippine income tax that may be
withheld by KKI for 2019.
II.
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract
of land in Kalinga. KKI has devoted 1 /2 of the land for various uses: a church with a cemetery
exclusive for deceased priests and nuns, a school providing K to 12 education, and a hospital
which admits both paying and charity patients. The remaining 1/2 portion has remained idle. The
KKI Board of Trustees decided to lease the remaining 1 /2 portion to a real estate developer which
constructed a community mall over the property. Since the rental income from the lease of the
property was substantial, the KKI decided to use the amount to finance (1) the medical expenses
38
of the charity patients in the KKI Hospital and (2) the purchase of books and other educational
materials for the students of KKI School. KKI’s managing director now requests for your opinion
on whether it is liabile for real property taxes on the land and its possible tax exposure in renting
out a portion thereof. (2018 Bar)
Kilusang Krus, Inc. (KKI) is a non-stock, non-profit religious organization which owns a vast tract of land in
Kalinga. KKI has devoted ½ of the land for various uses: [1] a church with a cemetery exclusive for
deceased priests and nuns, [2] a school providing K to 12 education, and [3] a hospital which admits both
paying and charity patients.
The KKI Board of Trustees decided to lease the remaining ½ portion to a real estate developer which
constructed a community mall over the property. KKI decided to use the rental income to finance: [1] the
medical expenses of the charity patients in the KKI Hospital and [2] the purchase of books and other
educational materials for the students of KKI School.
ISSUES:
[1] Whether or not Kilusang Krus, Inc. (KKI) is liable to pay real property taxes on the land.
[2] What is Kilusang Krus, Inc.’s possible tax exposure as to its rent income.
[1] REAL PROPERTY TAX ON THE LAND
No less than the Constitution provides that, “Charitable institutions, churches and personages or covenants
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.” (Sec. 28(3), Art. VI, 1987 Constitution).
As can be gleaned from above, “churches and personages or covenants appurtenant thereto, mosques,
non-profit cemeteries” are specifically exempt from real property taxation. However, the test for the
properties to be exempt from taxation is whether or not it is “actually, directly, and exclusively used for
religious, charitable, or educational purposes”. What is meant by actual, direct and exclusive use of property
for charitable, religious and educational institutions is the direct and immediate and actual application of the
property itself to the purposes for which the institution is organized.
[A] A CHURCH WITH A CEMETERY EXCLUSIVE FOR DECEASED PRIESTS AND NUNS
Based on the premise above, the land on which the church and the cemetery is located is exempt from real
property taxes by virtue of specific constitutional exemption since it was used actually, directly, and
exclusively for religious purposes.
[B] A SCHOOL PROVIDING K TO 12 EDUCATION
Moreover, the land on which the school stands is likewise exempt from the same taxes since it is being
used actually, directly, and exclusively for educational purposes.
[C] A HOSPITAL WHICH ADMITS BOTH PAYING AND CHARITY PATIENTS
As to the land on which the hospital is situated, it is subject to real property taxes. The reason thereof is
that although it is being used actually and directly for charitable purposes with regard to charity patients, it
is likewise being used for paying patients. Hence, the land does not pass the test of exclusivity as mandated
in our 1987 Constitution in order to be exempt.
39
[D] REAL ESTATE DEVELOPER WHICH CONSTRUCTED A COMMUNITY MALL OVER THE
PROPERTY
Finally, the land leased to the real estate developer is subject to real property taxes. The utilization of the
proceeds derived from this lease contract is not determinative as to whether the land can be exempted from
real property taxation. As mentioned previously, what is material is how the land is being used which should
be actually, directly, and exclusively for religious, charitable, or educational purposes. Thus, the community
mall over the land negates it from real property tax exemption.
[2] POSSIBLE TAX EXPOSURE AS TO ITS RENT INCOME
Section 30 of the NIRC provides:
The following organizations shall not be taxed in this Title in respect to income received by
them as such:
-xxx-
(E) Nonstock corporation or association organized and operated exclusively for religious,
charitable, scientific, or cultural purposes, or for the rehabilitation of veterans, no part of its
income or asset shall inure to the benefit of any member, organizer, officer or any specific
person;
-xxx-
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.
It is clear from this statutory provision that an organization will be exempted only “in respect to income
received by them as such.” Thus, it is material to determine the organization and operation of an entity.
[A] RENT INCOME USED TO FINANCE THE MEDICAL EXPENSES OF THE CHARITY PATIENTS IN
THE HOSPITAL
In the instant situation, the entity is a non-stock, non-profit religious organization. It is only exempt in respect
to income derived from religious purposes. Since its rent income was derived from the leasing of the
property to a real estate developer, this simply does not fall under income derived from religious purposes
in order to be exempt from income taxation. Thus, KKI’s rent income - although a portion thereof was used
to finance the medical expenses of charity patients, is still subject to the 30% corporate income tax as it
fails to qualify under Sec. 30(E) of the NIRC.
[B] RENT INCOME USED TO PURCHASE BOOKS AND OTHER EDUCATIONAL MATERIALS FOR
THE STUDENTS OF KKI SCHOOL
As mentioned earlier, since KKI’s rent income was derived from the leasing of the property to a real estate
developer, it invalidates it from tax exemption under Sec. 30(E) of the NIRC as said income was not derived
from religious purposes.
[C] RENT INCOME FROM THE LEASING OF THE PROPERTY TO A REAL ESTATE DEVELOPER
The proceeds from the commercial lease will likewise be subjected to the normal corporate income tax of
30% due to the last paragraph of Sec. 30 of the NIRC. Such provision clearly states that “...the income of
whatever kind and character of the foregoing organizations from any of their properties, real or personal, or
40
from any of their activities conducted for profit regardless of the disposition made of such income, shall be
subject to tax…” Therefore, since the disposition of the proceeds is immaterial as to its taxability, as long
as the income was generated for profit purposes; then it shall be subject to income tax.
The rental income from the commercial lease with the community mall will be subjected to a creditable
withholding tax of 5% which can be used as a deduction to the organization’s annual income tax liability.
CONCLUSION:
[1] REAL PROPERTY TAX ON THE LAND
Kilusang Krus, Inc. (KKI) will only be subjected to real property tax insofar as the land used for the hospital
is concerned as it does not pass the test of exclusivity required in our 1987 Constitution in order to be
exempt from real property taxes. Furthermore, the land leased to the real estate developer is also subject
to real property tax. This land being used for commercial purposes nullifies it from the constitutional grant
of real property tax exemption.
However, the land which was actually, directly, and exclusively used for religious and educational purposes
for the church, cemetery, and school respectively is exempt from real property tax as it falls under the
constitutional exemption provided under Sec. 28(3), Art. VI, 1987 Constitution.
[2] POSSIBLE TAX EXPOSURE AS TO ITS RENT INCOME
Kilusang Krus, Inc.’s (KKI’s) rent income, although a portion thereof was used to finance the medical
expenses of charity patients and to purchase books and other educational materials for the students, is still
subject to the 30% corporate income tax as it fails to qualify under Sec. 30(E) of the NIRC. Furthermore, it
will also be subjected to a creditable withholding tax of 5%.
RECOMMENDATION:
The following are our recommendations to Kilusang Krus, Inc. (KKI):
[1] INCORPORATE ITSELF AS A NON-STOCK, NON-PROFIT EDUCATIONAL INSTITUTION
KKI must incorporate as a non-stock, non-profit educational institution with regard to their school offering K
to 12 education. In doing so, Section 4(3), Article XIV of the 1987 Constitution guarantees that all the
revenues and assets of such non-stock, non-profit educational institution used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties.
Furthermore, we recommend that the lot on which the school is situated be registered under the name of
the non-stock, non-profit educational institution. The rent income derived from commercial lease must also
be used exclusively for the purchase of books and other educational materials for the students of the KKI
School so that the proceeds would qualify as revenues exclusively used for educational purposes consistent
with Sec. 4(3), Art. XIV, 1987 Constitution.
[2] INCORPORATE ITSELF AS A NON-STOCK, NON-PROFIT CHARITABLE INSTITUTION
KKI must also incorporate as a non-stock, non-profit charitable institution with regard to their hospital
admitting both paying and charity patients. In doing so, the land on which the hospital stands will be exempt
from real property taxes, and any activity not conducted for profit will also be exempt from income tax.
However, it is well-established in the case of CIR v. St. Luke’s Medical Center that to be exempt from real
property taxes, Section 28(3), Article VI of the Constitution requires that a charitable institution must
'actually, directly and exclusively' use the property for charitable purposes. Furthermore, to be exempt from
income taxes, Section 30(E) of the NIRC requires that a charitable institution must be organized and
operated exclusively' for charitable purposes.
41
From the foregoing, even if the charitable institution is 'organized and operated exclusively' for charitable
purposes, it is nevertheless allowed to engage in 'activities conducted for profit' without losing its tax-exempt
status for its activities not conducted for profit. The only consequence is that the income of ‘whatever kind
and character' of a charitable institution from any of its activities conducted for profit, regardless of the
disposition made of such income, shall be subject to income tax at the 10% preferential rate pursuant to
Section 27(B) of the NIRC.
Thus, if the KKI incorporates itself into a non-stock, non-profit charitable institution, the proceeds that it will
receive from the charity patients will be exempt from tax, and those received from the paying patients will
be subject to tax.
[3] FOLLOW THE DOUBLE NEXUS DOCTRINE
After incorporating, KKI must go to the BIR and ask for a tax exemption ruling. For exemptions, it is prudent
to follow the double nexus doctrine: a) That there is a provision under the law and b) you qualify. The KKI
must present proof, and then the BIR will issue a ruling in its favor or not.
Corollarily, we recommend for KKI to acquire a Certificate of Tax Exemption by filing an Application for Tax
Exemption or Revalidation pursuant to RMO 23-2013. Such application is to be filed with the Revenue
District Office (RDO) of registration based on such requirements for securing the certificate which is valid
for 3 years from issuance and subject to renewal.
In case of denial of the request, KKI may file a request for review with the Department of Finance under
DOF Department Order No. 007-02 within 30 days from receipt of the denial.
Documents that KKI could present to bolster their grant for tax exemption could be their audited financial
documents indicating that the rental income was indeed used exclusively for charitable and educational
purposes consistent with the case of CIR v. De La Salle University.
It is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally
in favor of the taxing authority. It is the taxpayer’s duty to justify the exemption by words too plain to be
mistaken and too categorical to be misinterpreted. This is but consistent with the basic tenet in taxation law
that taxation is the rule and exemption is the exception.
[4] PROCUREMENT OF SEPARATE LAND TITLES FOR PURPOSES OF REAL PROPERTY TAX
EXEMPTION
KKI must procure separate land titles with respect to each portion of the land on which a separate asset is
located (e.g. one title for the church with cemetery, one title for the school, etc.) so that they can exclusively
use it for educational, religious and charitable purposes. These titles must be registered under the name of
the organization using such real properties.
III.
Mr. Dan Peralta is a successful businessman in the United States and he is a sole proprietor of a
supermarket which has a gross sales of $10 million and an annual income of $3 million. Mr.
Peralta ass you as follows: (i) if he decides to reacquire his Philippine citizenship under RA 9225,
establish resident in this country, and open a supermarket in Makati City, will the BIR tax him on
the income he earns from his U.S. business? What tax rules should he comply and the most
efficient tax minimization scheme.
42
Mr. Dan Peralta is a successful businessman in the United States engaged in the sale of goods. He used
to be Filipino citizen until he changed his citizenship and engaged in business in the United States.
Subsequently, he wished to re-acquire his Filipino citizenship and expand his business to the Philippines.
ISSUES:
1. If he decides to reacquire his Philippine citizenship under RA 9225, establish residence in this
country, and open a supermarket in Makati City, will the BIR tax him on the income he earns
from his U.S. business?
2. What tax rules should he comply and what is the most efficient tax minimization scheme?

1. Yes, the income you earn from your business in the U.S. will already be subjected to the
Philippine income tax since you will be considered as a resident citizen.
Once you re-acquire your Philippine citizenship and establish your residence in this country, your income
tax classification would then be a ‘resident citizen’. A resident citizen is taxable on all his income, whether
derived within or without the Philippines; accordingly, the income you earn from your business abroad will
now be subject to the Philippine income tax. This is specifically provided under Section 23(A) of the National
Internal Revenue Code of 1997, to wit;
“A citizen of the Philippines residing therein is taxable on all income derived from sources within and without
the Philippines.” In other words, a resident citizen will be taxed on both income from the Philippines and
from abroad because his being a resident citizen makes him taxable on all income wherever derived.
Therefore, you shall be classified as a resident citizen upon reacquisition of your Philippine citizenship, and
shall be taxed from sources worldwide.
2. Once you engage in business in the Philippines, your business income is subjected to a
graduated income tax rate of zero to thirty five percent (0-35%) and you are required to file
a quarterly and annual income tax return. Availing the benefit of the double tax agreement
is the most efficient scheme to minimize your tax liability.
Since you are an individual who decides to open a supermarket in Makati City, your income from within will
be subjected to a graduated income tax rate of zero to thirty five percent (0-35%) provided under Section
24(A)(2)(a) of the National Internal Revenue Code of 1997 as amended by Section 5 of R.A. No. 10963,
otherwise known as the Tax Reform Acceleration and Inclusion (TRAIN) Law. You are then required to file
a quarterly income tax return and annual income tax return as provided under Section 74 of the same code.
With respect to your income derived without the Philippines, to minimize the possibility of double taxation,
you may avail of the benefits provided under the applicable and effective tax treaty, which may either be in
the form of tax exemption or a preferential tax rate. The amount of income taxes paid during the taxable
year to any foreign country may be used as credits against Philippine income taxes.
Since your business is located in the United States, you can avail of the double taxation treaty entered into
by the Philippines and the former. As provided under the Convention between the Government of the
Republic of the Philippines and the Government of the United States of America with respect to Taxes on
Income of 1976, to wit:
“2. In accordance with the provisions and subject to the limitations of the law of the Philippines (as
it may be amended from time to time without changing the general principle hereof), the Philippines
shall allow to a citizen or resident of the Philippines as a credit against the Philippine tax the
appropriate amount of taxes paid or accrued to the United States and, in the case of a Philippine
corporation owning more than 50 percent of the voting stock of a United States corporation from
which it receives dividends in any taxable year, shall allow credit for the appropriate amount of
taxes paid or accrued to the United States by the United States corporation paying such dividends
with respect to the profits out of which such dividends are paid. Such appropriate amount shall be
based upon the amount of tax paid or accrued to the United States, but the credit shall not exceed
the limitations (for the purpose of limiting the credit to the Philippine tax on income from sources
43
within the United States, and on income from sources outside the Philippines) provided by
Philippine law for the taxable year.”
For the purpose of applying the Philippine credit in relation to taxes paid or accrued to the United States,
the rules set forth in Article 4 (Source of Income) shall be applied to determine the source of income. For
purposes of applying the Philippine credit in relation to taxes paid or accrued to the United States, the taxes
referred to in paragraphs 1(a) and 2 of Article 1 (Taxes Covered) shall be considered to be income taxes.
This means that the taxes paid to the Philippine government shall be credited to his tax liability abroad, and
vice versa.
Being a resident citizen of the Philippines, you are allowed to claim credits for any income taxes paid by
you to a foreign country. As per rule, resident citizens, domestic corporations, members of GPPs, and
beneficiaries of estates and trusts are the only persons that can claim tax credits for taxes of foreign
countries. Further, the Tax Code states that the credits shall be allowed only if the taxpayer establishes to
the satisfaction of the Commissioner the following:
i. The total amount of income from sources without the Philippines;

ii. The amount of income derived from each country, the tax paid or incurred to which is claimed as
a credit; and
iii. All other information necessary for the verification and computation of such credits.
CONCLUSION:
Once you re-acquire your Philippine citizenship and establish your residence in this country, your income
tax classification would then be a ‘resident citizen’ and your income from within will be subjected to a
graduated income tax rate of zero to thirty five percent (0-35%), on the other hand, your income from without
may be minimized if you avail of the benefits provided under the tax treaty of the Philippines and the United
States. You are then required to file a quarterly income tax return and annual income tax return for your
business income.
RECOMMENDATION:
Upon re-acquisition of your Philippine citizenship and establishment of your residence in the Philippines,
you must register your business and secure a Tax Identification Number (TIN) and pay your income tax
liability when it is due.
With respect to your income without (outside) the Philippines, to avail of the benefit of the double tax
agreement, the resident taxpayer must submit a Certificate of Residency (COR) to the tax authority of the
foreign jurisdiction to prove that he is a resident of the tax treaty partner of the said foreign country. A COR
shall only be issued to resident taxpayer with an existing Tax Identification Number (TIN) who has complied
with the documentary requirements.
You likewise need to secure a tax ruling or a copy of the tax treaty to prove and avail of its benefit. As
provided by the National Internal Revenue Code of 1997, tax exemption, including reduction, is construed
strictissimi juris against the claimant. Thus, you need to show evidence to support your claim.
IV.
XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal Revenue. It
secured a loan from ABC Bank with a 6% per annum interest. All interest payments made by XYZ
Corp. to ABC Bank is subject to a 2% creditable withholding tax. At the same time, XYZ Corp. has
a trust deposit with ABC Bank in the amount of ₱100,000,000.00, which earns 2% interest per
annum, but is subject to a 20% final withholding tax on the interest income received by XYZ Corp.
XYZ Corp. seeks now your opinion on the manner of withholding the above-mentioned income
and in whether it can claim the withholding taxes paid as tax credit. (2019 Bar)
44
1. XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal Revenue.
2. It secured a loan from ABC Bank with a 6% per annum interest.
3. All interest payments made by XYZ Corp. to ABC Bank is subject to a 2% creditable withholding
tax.
4. At the same time, XYZ Corp. has a trust deposit with ABC Bank in the amount of ₱100,000,000.00,
which earns 2% interest per annum and is subject to a 20% FWT on the interest income received
by XYZ Corp.
ISSUES:
1. Whether or not the manner of withholding above-mentioned income is proper
2. Whether or not XYZ Corp may claim the withholding taxes paid as tax credit

1. XYZ Corp. is listed as a top 20,000 Philippine corporation by the Bureau of Internal Revenue. In other
words, it is a top withholding agent recognized by the BIR. Top withholding agents are those classified and
duly notified by the Commissioner as top twenty thousand (20,000) private corporations, among others.
Top withholding agents, including non-resident aliens engaged in trade or business in the Philippines, are
mandated by Revenue Regulation 11-2018 Sec. 2.57.2.(I) to subject any income payments made to their
local/resident supplier of goods/services, to the following withholding tax rates: 1. Supplier of goods – 1%
2. Supplier of services – 2%.
2. XYZ Corp secured a loan from ABC Bank with a 6% per annum interest. In doing so, it availed of the
services of ABC Bank. The interest payments to be made by XYZ Corporation, therefore, translates to
ordinary income on the part of ABC Bank, and the 2% CWT to be withheld by XYZ Corp serves as a tax
liability on the said income. Under the Creditable Withholding Tax System, taxes withheld on income
payments are creditable against the income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
3. XYZ Corp. also has a trust deposit with ABC Bank in the amount of ₱100,000,000.00, which earns 2%
interest per annum and is subject to a 20% FWT on the interest income received by XYZ Corp. The interest
earned from the trust deposits are in the form of passive income on the part of XYZ Corp. Passive income
is usually subject to a final withholding tax. Sec. 24(B)(1) of the NIRC states that, “a final withholding tax at
the rate of 20% is imposed upon the amount of interest from any currency bank deposit and yield or any
other monetary benefit from deposit substitutes and from trust funds and similar arrangements.” The
amount to be withheld is deemed as a full and final payment of the income tax due from XYZ Corp on the
said interest income. Thus, the income subjected to final withholding tax is no longer required to be filed in
the income tax return of XYZ Corp. The withholding agent being the payor, ABC Bank is tasked to withhold
the 20% final withholding tax on the interest income to be received by XYZ Corp, and to submit the same
to the government as a final settlement of the income tax due. This responsibility lies primarily on ABC
Bank. As such, in case it fails to withhold tax, the deficiency shall be collected from it.
CONCLUSION:
1. The manner of withholding the above-mentioned income is proper. On the matter of interest
payment for the loan, we take note of the fact that XYZ Corp is a top withholding agent. In availing
of a loan from ABC Bank, XYZ Corp. has availed of the bank’s services. Being a top withholding
agent, any income payment made by XYZ Corp to ABC Bank for the said service is therefore
subject to a creditable withholding tax at the rate of 2%. On the other hand, trust deposits are
passive income; therefore, subject to passive income tax which is a final withholding tax at the rate
of 20%. In this case, the payor is the ABC Bank. ABC Bank is therefore tasked to withhold 20% of
the interests earned by XYZ Corp’s deposits.
2. XYZ Corp cannot claim the withholding taxes paid as tax credit. The 2% CWT is a tax liability on
the income due ABC Bank. Therefore, it is claimable as tax credit by ABC Bank, not XYZ Corp.
45
The tax withheld from the interests earned by XYZ Corp’s trust deposit, likewise, cannot be claimed
by XYZ Corp as tax credit. Final withholding tax is a full and final tax on passive income, and it is
not creditable against the income tax due of the payee on other income subject to regular rates of
tax for the taxable year.
RECOMMENDATION:
In the light of the circumstances, although the 2% CWT is the tax payable primarily by the bank because of
its income, the corporation may nonetheless deduct the 6% per annum interest as its interest expense,
subject to the following requisites:
1. There must be an indebtedness

2. There should be an interest expense paid or incurred upon such indebtedness
3. The indebtedness must be that of the taxpayer
4. The indebtedness must be connected with the taxpayer’s trade, business or exercise of profession
5. The interest expense must have been paid or incurred during the taxable year
6. The interest must have been stipulated in writing
7. The interest must be legally due
8. The interest arrangement must not be between related taxpayers
9. The interest must not be incurred to finance petroleum operations
10. In case of interest incurred to acquire property used in trade, business or exercise of profession,
the same was not treated as a capital expenditure.
Since all these requisites are present, XYZ Corp may be allowed to deduct such interest expenses;
however, the deduction cannot be made in full because of the fact that XYZ Corp also gained interest
income due to its Trust Agreement with ABC Bank. This being the case, the XYZ Corp should follow the
tax arbitrage rule wherein the taxpayer’s allowable deduction for interest expense shall be reduced by an
amount equal to 33% of the interest income earned by him which has been subjected to final tax.
Taken all together, despite the fact XYZ Corp cannot claim the withholding taxes paid as tax credit as it is
not the one liable for such tax, it may, however, deduct the 6% per annum interest it paid to ABC as an
allowable deduction of interest expenses, subject to prior reduction based on the tax arbitrage rule.
V.
XYZ Air, a 100% foreign-owned airline company based and registered in Netherlands, is engaged
in the international airline business and is a member signatory of the International Air Transport
Association. Its commercial airplanes neither operate within the Philippine territory nor are its
service passengers embarking from Philippine airports. Nevertheless, XYZ Air is able to sell its
airplane tickets in the Philippines through ABC Agency, its general agent in the Philippines. As
XYZ Air's ticket sales, sold through ABC Agency for the year 2013, amounted to ₱5,000,000.00,
the Bureau of Internal Revenue (BIR) assessed XYZ Air deficiency income taxes on the ground
that the income from the said sales constituted income derived from sources within the
Philippines.
Aggrieved, XYZ Air filed a protest, arguing that, as a non-resident foreign corporation, it should
only be taxed for income derived from sources within the Philippines. However, since it only
serviced passengers outside the Philippine territory, the situs of the income from its ticket sales
should be considered outside the Philippines. Hence, no income tax should be imposed on the
same. As its new retained lawyer, XYZ Air now requests for an objective opinion on whether its
protest will stand a chance. (2019 Bar)
46
XYZ Air is a 100% foreign-owned company based and registered in the Netherlands, which is engaged in
international airline business and is a signatory member of International Air Transport Association. The said
airline sells its airplane tickets within the Philippines through its general agent, ABC Agency. However, the
commercial airplanes of the company do not operate within the Philippine territory and its service
passengers do not embark in Philippine airports.
Due to its ticket sales which amounted to Php 5,000,000.00 for the year 2013, the Bureau of Internal
Revenue (BIR) assessed the said airline for deficiency of its income taxes.It is of the BIR’s contention that
the ticket sales of XYZ Air is an income derived from the Philippines hence, it is subject to Philippine income
tax.
However, XYZ filed its protest and contended that it should only be taxed for income derived from sources
within the Philippines. It further argued that it only caters to passengers outside the Philippines hence the
situs of the income from the ticket sales should be considered outside of the Philippines thereby, no income
tax should be imposed on said transactions.
ISSUES:
Whether the revenue derived by an international air carrier from sales of tickets in the Philippines
for air transportation while having no landing rights in the country, constitutes income of said
international carrier from the Philippine source, and accordingly, taxable under the Tax Code.
1. XYZ Air is a foreign-owned airline company organized and registered under the laws of
Netherlands.
2. A corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent to thirty
percent (30%) of the taxable income derived in the preceding taxable year from all sources within
the Philippine.
3. In order that a foreign corporation may be regarded as doing business within the Philippines, there
must be:
a. Continuity of conduct
b. Intention to establish a continuous business, such as appointment of a general agent and
not one in a temporary character.
4. XYZ Air commercial airplanes neither operate within the Philippine territory nor are its service
passengers embarking from Philippine airports.
5. Nevertheless, XYZ Air designated or appointed a general agent, ABC agency, for the sale of its
airplane tickets in the Philippines.
6. International air carriers are foreign airline corporations doing business in the Philippines 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(Aa), Revenue Regulation No.
15-2002) . They are further classified as on-line or off-line carriers.
7. An on-line carrier is an international air carrier having or maintaining flight operations to and from
the Philippines. They are subject to a tax of 2.5 % based on their Gross Philipipne Billings (GPB)
pursuant to Section 28 (a)(3) of the NIRC of 1997, as amended or to the applicable tax treaty rate.
8. An offline carrier is any foreign air carrier not certificated by the Civil Aeronautics Board(CAB), but
who maintains office or who has designated or appointed agents or employees in the Philippines,
who sells or offers for sale of any air transportation in behalf of said foreign air carrier and/or others,
47
or negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation.”
9. XYZ Air falls in the definition of an offline carrier as it does not maintain flight operations to or from
the Philippines and solely maintains a general agent in the Philippines for its ticket sales. Hence,
the airline is subject to the Corporate Income Tax rate of 30% from its Net Taxable Income from
sources derived within the Philippines. In this case, the ticket sales of Php 5,000,000.00 in 2013
that the airline garnered from its general agent here in the Philippines is subject to Philippine income
taxation.
10. This finds support in the provision found in Sec 28 (a) (1) of the NIRC,which states that a
corporation organized, authorized, or existing under the laws of any foreign country, engaged in
trade or business within the Philippines, shall be subject to an income tax equivalent to 30%.
11. In the case of CIR v British Overseas Airways Corporation, it declared British Overseas Airways
Corporation, an international air carrier with no landing rights in the Philippines, as a resident
foreign corporation engaged in business in the Philippines through its local sales agent that sold
and issued tickets for the airline company.
12. XYZ Air falls within the definition of a resident foreign corporation under the above-mentioned
jurisprudence by virtue of its local agent which sells airline tickets on its behalf.
13. It is further exemplified in the case that there is no specific criterion as to what constitutes "doing"
or "engaging in" or "transacting" business.
14. Furthermore, Republic Act No. 7042 or the Foreign Investments Act of 1991 also provides guidance
with its definition of "doing business" with regard to foreign corporations. Section 3(d) of the law
enumerates the activities that constitute doing business, to wit: "...and any other act or acts that
imply a continuity of commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally incident to, and in
progressive prosecution of, commercial gain or of the purpose and object of the business
organization"
15. In the present case, XYZ Air is able to sell tickets through ABC Agency for the year 2013 and which
amounted to P5, 000, 000.
16. This is a clear indication that ABC Agency performs acts or works or exercises functions that are
incidental and beneficial to the purpose of XYZ Air’s business. As such, XYZ Air is doing business
in the Philippines and deemed a resident foreign corporation subject to corporate income tax.
CONCLUSION:
XYZ Air is a resident foreign corporation "engaged in" business in the Philippines through a local agent
during the period covered by the assessment. It is regarded to be doing business within the Philippines for
the appointment of ABC Agency, its general agent, shows the existence of continuity of conduct and
intention to establish a continuous business. Thus, as a resident foreign corporation "engaged in" business
in the Philippines, it is subject to tax upon its total net income received in the preceding taxable year from
all sources within the Philippines.
The revenue from sales of tickets by XYZ Air in the Philippines constitutes income from Philippine sources
and, accordingly, taxable under our income tax laws. The source of an income is the property, activity or
service that produced the income and for it to be considered as coming from the Philippines, it is sufficient
that the income is derived from an activity within the Philippines. In the case of XYZ Air, the sale of tickets
in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments
for fares were also made here in Philippine currency. The site of the source of payments is the Philippines.
The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection
accorded by the Philippine government. In consideration of such protection, the flow of wealth should share
the burden of supporting the government.
48
RECOMMENDATION:
XYZ may pursue the following recommendations:
1. XYZ Air should pay the Philippine income tax from the proceeds it obtained from the ticket sales in
the Philippines through its general agent, ABC Agency
XYZ Air being a resident foreign corporation and an off-line carrier as it has no flight
operations to and from the Philippines is subject to the 30% corporate income tax on its net taxable
income derived within the Philippines. This is without prejudice to any applicable tax treaty between
the Philippines and the Netherlands.
2. Should XYZ Air decide to claim for a preferential rate or tax exemption pursuant to a tax treaty, the
company must present pieces of evidence to support its claim as the NIRC provides that tax
exemptions are to be construed strictly against the claimant.
EH 409
I.
Ryan Tan, a Filipino national, worked with Y-Square, Inc. (YSI) and was seconded to various YSI-
affiliated corporations:
• from 1999 to 2004 as Vice President of Y-Gold Inc.,
• from 2004 to 2007 as Vice President of YPB Bank;
• from 2007 to 2011 as CEO of Y-Com Inc.;
• from 2011 to 2017 as CEO of Y-Water Corporation, where Ryan served as CEO for seven
years until his retirement last December 12, 2019 upon reaching the compulsory
retirement age of 60 years.
All the corporations mentioned are majority-owned in common by the Yoh family and covered by
a BIR-qualified multiemployer-employee retirement plan (MEE RP), under which the employees
may be moved around within the controlled group (i.e., from one YSI subsidiary or affiliate to
another) without loss of seniority rights or break in the tenure. Ryan was well-loved by his
employer and colleagues, so upon retirement, and on his last day in office, KSI gave him a
Mercedes Benz car worth PhP 5 million as a surprise, with a streamer that reads: "You'll be
missed. Good luck, Sir Ryan."
The CFO of YSI now requests for your formal opnion on whether the retirement benefits paid to
Kim pursuant to the MEERP is taxable and the possible tax exposure on the grant of the car to
Kim by the company. (2018 Bar)
Filipino Ryan Tan has worked with Y-Square, Inc. (YSI) from 1999 until his retirement last
December 12, 2019. During his 20 year stint with YSI, he was seconded to various YSI-affiliated
corporations. From 1999 to 2004, he was Vice President of Y-Gold Inc. From 2004 to 2007, he served as
Vice President for YPB Bank. then from 2007 to 2011 he was CEO of Y-Com Inc. And finally in 2011, he
was CEO again but this time for Y-Water Corporation until he reached the compulsory retirement age of 60
years.
All these companies that Mr. Tan was an officer of are majority-owned in common by the Yoh family
and are covered by a multiemployer-employee retirement plan (MEERP). As per the MEERP, employees
may be moved around within the controlled group without loss of seniority rights or break in tenure.
49
The facts as relayed also show that Mr. Ryan Tan was given a Mercedes benz car worth PhP 5
million by the company as a surprise. The car was given on his last day in office, primarily to show how Mr.
Tan was well-loved by YSI (the employer), as well as his colleagues. There was even a streamer that reads,
"You'll be missed. Good luck, Sir Ryan," which is a representation of the warm reception given to Mr. Tan
on his last day in office.
II. ISSUES
1. Whether the retirement benefits paid to Ryan Tan by the Y-Square Inc. (YSI) pursuant to the
multiemployer-employee retirement plan (MEERP) is taxable
2. Whether there are other possible tax exposures on the grant of the car to Ryan Tan by YSI
III. DISCUSSION/ANALYSIS
As per the first issue, no, the retirement benefits paid to Ryan Tan by Y-Square Inc. (YSI) pursuant
to the multiemployer-employee retirement plan is not taxable.
Section 32 (B)(6)(a) of the National Internal Revenue Code of the Philippines states one of the
exclusions in gross income and shall therefore be exempt from taxation, to wit:
“(a) 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 granted under this subparagraph shall be availed by
an official or employee only once…”
The three requisites needed for this exemption to apply are all present in the instant case. The first
requisite of at least 10 years of service is present. Although in each of the 4 companies Mr. Tan has been
an officer of, he does not reach the required 10 year service, the MEERP clearly states that the employee
may be moved around the controlled group of companies without loss of seniority rights or break in the
tenure. In this case, totalling his years of service with the 4 companies, Mr. Tan has completed 20 years of
uninterrupted service to YSI. Therefore the first requisite has been properly complied with.
The second and third requisites have also been complied with, as Mr. Tan is already sixty (60)
years of age upon his retirement, and he has availed of this exemption only once. Therefore, all requisites
present, the MEERP of YSI for Mr. Tan is exempted from taxation.
Anent the second issue, It is submitted that the grant of the car by the company was in the nature
of a donation and could be subjected to donor's tax.
Art. 726 of the New Civil Code provides that a donation could be given by a donor to the donee on
account of the latter's merits or of the services rendered by the latter to the donor, provided they do not
constitute a demandable debt.
Where the true consideration for the donation was the company's gratitude for his services, and
not the services themselves, the property transferred is a donation. Gratitude has no economic value
and is not "consideration" in the sense that the word is used for taxation purposes. (Pirovano et al.
v. Commissioner, G.R. No. L-19865, July 31, 1965)
So it was that in the same case of Maria Carla Pirovano, etc., et al. v. Commissioner, supra., it was
held that, irrespective of an employee's valued services to the company, such do not constitute a
"demandable debt" which would remove it from its nature of being a donation.
50
Accordingly, a donor's tax must be paid. A donor's tax is levied, assessed, collected and paid upon
the transfer by any person, resident or nonresident, of the property by gift. (Sec. 98, NIRC) The "transfer"
of said gift is perfected from the moment the donor knows of the acceptance by the donee, and is completed
once the property donated is delivered, actually or constructively, to the donee. (BIR Revenue Regulation
02-2003)
IV. CONCLUSION
Hence, as this case concerns, retirement benefits are deemed to be exempted from taxation if it
complies with the minimum requisites as stated in Section 32 (B)(6)(a) of the National Internal Revenue
Code of the Philippines. The retirement benefits paid to Ryan Tan by the Y-Square Inc. (YSI) pursuant to
the multiemployer-employee retirement plan (MEERP) is exempted from tax as it was able to comply with
the age and length of service requirement under Tax code. Also, based on the BIR Ruling 234-13, it appears
that the age and length of service requirements imposed under the Tax Code are deemed by the BIR as
minimum requirements for retirement benefits to qualify for income-tax exemption. Further, based on the
prevailing laws and jurisprudence, there must be strict compliance with the minimum conditions under the
Tax Code to avail the income-tax exemptions on retirement benefits.
With regards to the second issue presented. The grant of the car by the company was in the nature
of a donation and should be subjected to the donor's tax. The act of giving something in exchange for no
consideration is a valid act of pure gratitude and as stated Gratitude has no economic value and is not
considered as consideration for taxation purposes. But this exemption only applies to the donee the
company being the donor has to comply with a Donor’s tax. A donor’s tax as stated above is levied upon
the donor upon the donee’s acceptance of the gift. The company granting Mr. Tan the car as a farewell gift
is covered by Donor’s tax and the company must comply with such obligations with the Bureau of Internal
Revenue.
V. RECOMMENDATION
Employers are constituted by law to be a withholding agent, they are charged to withhold and remit
to the BIR the withholding taxes on its employees’ retirement benefits. With this, the conditions of the non-
taxability of retirement benefits is essentially the responsibility of the employers hence it is very important
for the employers to consistently assess their respective retirement plan and ensure that they comply with
the minimum requirements for retirement benefits for employees to be entitled to income tax exemption
granted by the Tax Code. This is because while retirement laws should be liberally construed and applied
in favor of the retiree, it appears that the exclusion of the retirement benefits from gross income follows the
rule on strict interpretation against tax exemptions.
Accordingly, as stated earlier the company's obligation is only a donor’s tax. The company’s
accounting department must file a Donor’s Tax Return with the Bureau of Internal Revenue (BIR Form
no.1800). The form must be filed in triplicate. Furthermore, the Donor’s Tax Return (BIR Form No. 1800)
shall be filed within thirty (30) days after the date the gift (donation) is made.
The return shall be filed with any Authorized Agent Bank of the Revenue District Office having
jurisdiction over the place of domicile of the donor at the time of the donation
A separate return shall be filed by each donor for each gift (donation) made on different dates
during the year reflecting therein any previous net gifts made in the same calendar year. Only one return
shall be filed for several gifts (donations) by a donor to the different donees on the same date.
When the return is filed with an Authorized Agent Bank, taxpayer must accomplish and submit a
BIR-prescribed deposit slip, which the bank teller shall machine validate as evidence that payment was
received by the Authorized Agent Bank. The Authorized Agent Bank receiving the tax return shall stamp
mark the word “Received” on the return and also machine validate the return as proof of filing the return
and payment of the tax by the taxpayer, respectively. The machine validation shall reflect the date of
payment, amount paid and transactions code, the name of the bank, branch code, teller’s code and teller’s
51
initial. Bank debit memo number and date should be indicated in the return for taxpayers paying under the
bank debit system.
Payments may also be made through the epayment channels of Authorized Agent Banks through
either their online facility, credit/debit/prepaid cards, and mobile payments.
With the value of the car and the payments due exceeding 20000 payments must then come in the
form of a Manager’s check or Cashier’s check. Lastly the time of filing and payment vary depending on the
law applicable at the time of donation
On a final note, it could be advantageous to YSI if they revisit the current retirement plan and include a
stipulation that would further benefit them from tax exemptions in situations similar to this one. The
stipulation would basically state than any other benefits given to the retiree by YSI, out of the latter’s
liberality and generosity, would form part and parcel of the whole retirement plan. Just like in this case, with
the giving of the Mercedes Benz, the additional benefit would be beneficial to the employer since it may
also be exempted from both gross income tax and donor’s tax. This would help YSI use the supposed tax
paid for other internal projects and programs that may benefit the company itself and its stakeholder.
II.
Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a
restaurant chain, Karina's, Inc. The restaurant's principal office is in Cebu City, Philippines.
Korina's became so popular as a Filipino restaurant that the owners decided to expand its
operations overseas. During the period 2010-2015 alone, it opened ten (10) stores throughout
North America and five (5) stores in various parts of Europe where there were large Filipino
communities. Each store abroad was in the name of a corporation organized under the laws of
the state or country in which the store was located. All stores had identical capital structures:
60% of the outstanding capital stock was owned by Karina's, Inc., while the remaining 40% was
owned directly by the spouses Konstantino and Korina.
By late 2019 and early 2020, in light of the immigration policy enunciated by US President Donald
Trump worsened by the COVID-19 pandemic, many Filipinos have since returned to the
Philippines and the number of Filipino immigrants in the US dropped significantly. On account
of these developments, Konstantino and Karina decided to sell their shares of stock in the five
(5) US corporations that were doing poorly in gross sales.
The spouses' lawyer-friend advised them that they will be taxed 5% on the first PhP100,000 net
capital gain, and 10% on the net capital gain in excess of PhP100,000. The spouses now engaged
you to render an opinion as to their possible tax exposure and how they can legally minimize the
effects of taxation. (2018 Bar)
Spouses Konstantino and Karina are Filipino citizens and are principal shareholders of a Filipino
restaurant chain, Karina’s Inc whose principal office is in Cebu City, Philippines. In 2015-2019 it operated
ten (10) stores in the US and five (5) stores in various parts of Europe where there were large Filipino
communities. Each store abroad was in the name of a corporation organized under the laws of the state or
country in which the store was located. Spouses Konstantino and Karina are shareholders of such
corporations, holding 40% of its capital structure. By late 2019 and early 2020, in light of the immigration
policy enunciated by US President Donald Trump worsened by the COVID-19 pandemic, many Filipinos
have since returned to the Philippines and the number of Filipino immigrants in the US dropped significantly.
On account of these developments, Konstantino and Karina decided to sell their shares of stocks in the five
(5) US corporations that were doing poorly in gross sales.
II. ISSUE
52
What is/are the possible tax exposure on the sale of shares of stocks in the five (5) US Corporations
that were doing poorly in gross sales? How can this/these possible exposure be legally minimized?
III. DISCUSSION/ANALYSIS
The sales of shares of stocks from a non-resident foreign corporation by a resident citizen cannot
be subjected to Capital Gains Tax (CGT). Capital Gains Tax is a final tax imposed upon the Net Capital
Gains, which is the excess of the gains over the losses from such sale, barter, exchange or other disposition
of shares of stock in a domestic corporation realized during the taxable year. However, as the Tax Code
provides, the Capital Gains Tax cannot apply to the sale of shares of stock from a non-resident foreign
corporation; only to a domestic corporation. Thus, instead of CGT, the income realized from the sale is
subject to the graduated income tax rate. Under the law, a resident citizen is taxed on his or her income
derived from sources within and without the Philippines.
At present, you own shares of stock from a corporation that is registered and organized under
United States’ laws. Under the tax code, they are considered as non-resident foreign corporation (NFRC).
When you sold those shares from the NFRC any income you derived, less the expenses for such sale, is
taxable here in the Philippines. The question arises as to what tax can be imposed? The 15% tax on the
Net Capital Gain (5% for the first 100k; 10% in excess of 100k) cannot be applied as that provision under
the law only refers to shares of stock from a Domestic Corporation. The Tax Code refers to a domestic
corporation as one that is registered and organized under Philippine Laws. Thus, you are subject to the
graduated income tax rate.
IV. CONCLUSION
Thus, the spouses are not liable for the Capital Gains Tax. As to the query on how you can minimize
the effect of taxation, when you are resident citizens, taxed under graduated income tax, you may elect
either itemized deductions or optional standard deduction of not exceeding 40% of gross business or
professional income. Thus, further reducing your taxable income. Lastly, both of you, shall file your returns
individually, based on the taxable income.
V. RECOMMENDATION
From the foregoing, we recommend that the spouses minimize their net capital gain from the
transaction by minimizing the capital gain and making use of the capital loss to offset the capital gain.
To reiterate, any capital gain from the sale of the shares of stocks in the US corporations will not
be subjected to capital gains tax but will be taxed as their ordinary income subject to the graduated rate of
0-35%. The tax base, however, remains the same. This means that the amount that will be subjected to the
graduated tax rate would still be the net capital gain from the sale. Hence, in order to have a lesser tax to
be paid from the transaction, it is recommended that the tax base, the net capital gain be minimized.
The taxable gain can be potentially be reduced by selling the shares at a low price, or at a price
not far from the cost of the shares. The transaction will result to a gain which is taxable but the amount
would be minimal. In other words, by selling at a low price the taxable gain will be minimized, resulting to a
minimized tax due.
In addition, to further minimize the net capital gain from the transaction, one should make use of capital
losses to offset capital gain. This can be achieved by selling some of the shares at a price lower than its
cost, resulting to a capital loss. Such loss from the sale will then be deducted to the gain earned from the
sale of the other shares. Be it noted that the taxable gain – the amount that is subjected to tax – from the
sale is the net capital gain. This means that the total capital gain is net of any capital loss incurred. Stated
otherwise, the total capital gains is deducted by the total capital loss. So, by increasing the capital loss, the
taxable gain can be potentially reduced resulting to a reduced tax due. In other words, the taxable gain from
sale would be minimized by the amount of loss from the sale thus, lessening your taxable income, and
hence minimizing your tax due.
53
III.
JKL, Inc. is a corporation authorized to engage in the business of manufacturing ultra-high

density microprocessor unit packages. After its registration on July 5, 2015, GHI, Inc. constructed
buildings and purchased machineries and equipment. As of December 31, 2015, the total cost of
the machineries and equipment amounted to ₱250,000,000.00. However, GHI, Inc. failed to
commence operations. Its factory was temporarily closed effective December 15, 2019 due to the
COVID-19 pandemic. With the worsening situation, the company plans to sell its machineries and
equipment to JKL Integrated for P300,000.00 by October 30, 2020. Thereafter, JKL, Inc. will be
dissolved on November 30, 2020. JKL’s CFO now requests for your opinion on what are the
potential tax exposure of the company in the foregoing transaction. (2019 Bar)
GHI Inc. is a domestic corporation engaged in the business of manufacturing ultra-high density
microprocessor packages. The corporation was able to purchase machineries and equipment with a total
cost of ₱250,000,000.00. However, it failed to commence operations. It is now planning to sell said
machineries and equipment to JKL integrated for ₱300,000,000.00.
II. ISSUE/S:
What are the potential tax exposure of the company in the foregoing transaction: whether the sale
of machineries and equipment to JKL integrated is subject to normal corporate income tax or capital gains
tax.
III. DISCUSSION & ANALYSIS:
The problem presented resembles the situation in the case of SMI-Ed Philippines Technology, Inc.,
v. Commissioner of Internal Revenue (G.R. No. 175410, November 12, 2014) where the Supreme Court
said that the income from the sale of machineries and equipment is subject to normal corporate income
tax.
To begin with, Section 39 (A) (1) of the National Internal Revenue Code of 1997 defines "capital
assets":
SEC. 39. Capital Gains and Losses. —

(A) Definitions. — As used in this Title —
(1) Capital Assets. — the term 'capital assets' means property held by
the taxpayer (whether or not connected with his trade or business), but does not
include stock in trade of the taxpayer or other 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, or property held by the taxpayer primarily for sale to customers
in the ordinary course of his trade or business, or property used in the trade or
business, of a character which is subject to the allowance for depreciation
provided in Subsection (F) of Section 34; or real property used in trade or
business of the taxpayer. (Emphasis supplied)
Thus, "capital assets" refers to taxpayer's property that is NOT any of the following:
1. Stock in trade;
2. Property that should be included in the taxpayer's inventory at the close of the
taxable year;
3. Property held for sale in the ordinary course of the taxpayer's business;
4. Depreciable property used in the trade or business; and
5. Real property used in the trade or business.
54
The properties involved in this case are GHI, Inc. 's equipment and machineries which were never
used in its trade or ordinary course of business since GHI, Inc. never commenced operations. Said
properties are not among the exclusions enumerated in Section 39 (A) (1) of the National Internal Revenue
Code of 1997 so they are considered as capital assets.
Capital gains of individuals and corporations from the sale of real properties are taxed differently.
Individuals are taxed on capital gains from the sale of all real properties located in the Philippines
and classified as capital assets. Thus:
SEC. 24. Income Tax Rates.

xxx xxx xxx
(D) Capital Gains from Sale of Real Property. —
(1) In General. — The provisions of Section 39(B) notwithstanding, a
final tax of six percent (6%) based on the gross selling price or current fair market
value as determined in accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been realized
from the sale, exchange, or other disposition of real property located in the
Philippines, classified as capital assets, including pacto de retro sales and
other forms of conditional sales, by individuals, including estates and trusts:
Provided, That the tax liability, if any, on gains from sales or other dispositions
of real property to the government or any of its political subdivisions or agencies
or to government-owned or controlled corporations shall be determined either
under Section 24 (A) or under this Subsection, at the option of the taxpayer.
(Emphasis supplied)
However, the sale of land and buildings, and the sale of machineries and equipment, by
corporations is treated by the National Internal Revenue Code of 1997 differently. Domestic corporations
are imposed a 6% capital gains tax only on the presumed gain realized from the sale of lands and/or
buildings. When it comes to the gains realized from the sale of machineries and equipment, the National
Internal Revenue Code of 1997 does not impose the 6% capital gains tax. Section 27(D)(5) of the National
Internal Revenue Code of 1997 provides:
SEC. 27. Rates of Income tax on Domestic Corporations. —

xxx xxx xxx
(D) Rates of Tax on Certain Passive Incomes. —
xxx xxx xxx
(5) Capital Gains Realized from the Sale, Exchange, or Disposition of
Lands and/or Buildings. — A final tax of six percent (6%) is hereby 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 of fair market value as determined in accordance with Section 6(E)
of this Code, whichever is higher, of such lands and/or buildings. (Emphasis
supplied)
Therefore, if GHI Inc’s land and/or building will also be sold, the presumed gain may be subjected
to a 6% final tax. Since in this case what will be sold are only the equipment and machineries of GHI, Inc.,
the income from said sale will be subject to the provisions on normal corporate income tax.
IV. CONCLUSION
Under Sec. 27 D sub. Par. 5 of the NIRC, a corporation is only subject to capital gains tax for the
sale of land and buildings. In this case, GHI Inc., a corporation, will sell machineries and equipment. Hence,
the gains from said sale, if pushed through, will be subject to normal corporate income tax. It will be
computed together with its other income, if any. Since GHI, Inc. is a domestic corporation, a 30% corporate
income tax will be imposed on its taxable income.
55
V. RECOMMENDATION
If GHI Inc. decides to proceed with the sale of the machineries and equipment to JKL Integrated, it
should include in its tax return, using the BIR form 1702, for the taxable year 2020 its income from the sale
of the machineries and equipment. It must ensure that the filing is made for that taxable quarter and annual
final return. For the final return, it must be made prior to the deadline which is on April 15 of the following
year or on the 15th day of the 4th month following the end of the fiscal year as the case may be.
We see this as the best course of action to take, considering the possibility that GHI Inc., may not be liable
to pay income tax at all. It is likely that GHI Inc. is at loss for the year 2020 given the fact that it decided not
to push through with its operations due to COVID-19. Furthermore, the Minimum Corporate Income Tax
(MCIT) of 2% of the gross income will not apply in GHI Inc.’s case since it did not commence its operations.
Said MCIT is imposed on a taxable corporation beginning only on the 4th taxable year immediately following
the year in which such corporation commenced its business operations, when the minimum income tax is
greater than the normal income tax.
IV.
As a way to augment the income of the employees of DEF, Inc., a private corporation, the
management decided to grant a special stipend of P50,000.00 for the first vacation leave that any
employee takes during a given calendar year. In addition, the senior engineers were also given
housing inside the factory compound for the purpose of ensuring that there are available
engineers within the premises every time there is a breakdown in the factory machineries and
equipment. DEP now requests for your opinion on whether the special stipend will form part of
the taxable income of the receiving employees and its corresponding applicable tax and whether
the cash equivalent value of the housing facilities received by the senior engineers is subject to
fringe benefit tax. (2019 Bar)
DEF, Inc. is a private corporation. In order to increase the income of its employees, the
management decided to grant a special stipend of P50,000.00 for the first vacation leave that any employee
takes during the calendar year. In addition, the senior engineers were provided with housing inside the
factory compound for the purpose of ensuring their availability within the premises in case of breakdown in
the factory machineries and equipment.
II. ISSUES
1. Is the special stipend part of the taxable income of the employees? What is the applicable tax and
tax rate?
2. Is the cash equivalent of the housing facilities received by the senior engineers subject to fringe
benefits tax?
III. DISCUSSION AND ANALYSIS:
1. Is the special stipend part of the taxable income of the employees? What is the applicable tax and
tax rate?
Yes. The special stipend granted to the employees for the first vacation leave forms part of the
taxable income of the receiving employees.
The general rule in compensation income is that it includes all remuneration received under an employer-
employee relationship. Compensation income is the income of the individual taxpayer arising from services
rendered pursuant to an employer-employee relationship. Under the National Internal Revenue Code
(NIRC) of 1997, as amended, every form of compensation for services, whether paid in cash or in kind, is
generally subject to income tax and consequently to withholding tax. The name designated to the
56
compensation income received by an employee is immaterial. Thus, salaries, wages, emoluments and
honoraria, allowances, commissions, fees, bonuses, and other income of a similar nature, constitute
compensation income. (Consolidated Cases of Confederation for Unity, Recognition and Advancement of
Government Employees et al. vs. CIR, G.R. No. Nos. 213446 and 213658, 3 July 2018)
Under the Tax Code, all other benefits of relatively small value which are not included in the list of de
minimis benefits shall not be considered as de minimis benefits but as ordinary fringe benefits. Corollary to
this rule, excess de minimis benefits should be considered as taxable ordinary fringe benefits. For rank and
file employees, other or ordinary fringe benefits shall be treated as compensation income as part of “other
benefits” under “13th month pay and other benefits.” Hence, the excess of the “13th month pay and other
benefits” over PHP 90,000 shall be treated as compensation income subject to the graduated regular
income tax rates of 0 percent to a maximum of 35 percent.
2. Is the cash equivalent of the housing facilities received by the senior engineers subject to fringe
benefits tax?
No. The cash equivalent of the housing facilities received by the senior engineers is not subject to
fringe benefits tax (FBT) because it falls under the exception. The housing provided by DEF, Inc. is located
within the Company’s premises and it is intended for the employer’s convenience.
Benefits or allowances which are intended for the furtherance of the interest of the employer’s business or
to ensure its smooth operations are exempt from income tax. This is more commonly known as the
“convenience of the employer rule.”
Fringe benefits means any goods, service or other benefit furnished or granted by an employer in cash or
in kind, in addition to basic salaries, to an employee (except rank and file employees) such as housing.
Section 33(a) of the Tax Code of 1997 stipulates that fringe benefits which are "required by the nature of,
or necessary to the trade, business or profession of the employer, or when the fringe benefits are for the
convenience or advantage of the employer" are not subject to the fringe benefit tax. If the living quarters
are furnished to an employee for the convenience of the employer, the value thereof need not be included
as part of compensation income subject to withholding.
In BIR Ruling No. 055-99 dated April 23, 1999, It appearing that the 3 kilometer distance was for purposes
of complying with the state policies on the promotion of the health and welfare of workers (Articles 11,
Sections 15 and 18 of the 1987 Constitution) and the constitutional mandate guaranteeing full protection to
labor (Art. 13, Sections 3 and 14, ibid.), this situation falls within the purview of Section 33 of the Tax Code
of 1997. Such being the case, the costs and related expenses associated with the lease of the condominium
unit and residential house for the benefit of the employees are expenses directly attributable to the
development, management, operation and/or conduct of the business pursuant to Section 34(A)(1) of the
Tax Code, the same shall be deducted from the gross income of ABB Power, Inc. As such, and considering
that it is a fringe benefit for the convenience and advantage of the employer, it shall not be included as part
of compensation income of the employee
As espoused in C.T.A. Case No. 6191 Continental Micronesia , Inc. - Philippine Branch v. CIR, under
existing regulations, only those located within the required area are not subject to withholding tax on wages
and fringe benefit tax.
IV. CONCLUSION:
The following points can be deduced from the above discussion:
1. The special stipend of P50,000.00 granted to DEF’s employees for their first vacation leave taken
during a calendar year is part of the taxable income of the receiving employees, because it forms
part of their compensation income. And under the Tax Code, this amount is subject to the graduated
income tax rates, ranging from 0% to 35%.
57
2. The cash equivalent of the housing facilities received by the senior engineers is not subject to
Fringe Benefit Tax (FBT) because it is one of the exceptions. Here, the housing facilities were
granted to these specific employees to make sure that there will always be an engineer readily
available in case of emergencies. Considering that the benefit is for the interest of the employers
and the business, it is exempt from income tax.
V. RECOMMENDATIONS:
1. Since the special stipend granted to DEF’s employees for their first vacation leave taken during a
calendar year is part of the taxable income of the receiving employees and that forms part of their
compensation income, the DEF, Inc. who is the employer of the said employees, shall collect the
tax through Withholding tax which is considered as the primary method of collecting tax from
compensation income. Here, the DEF, Inc. shall withhold the amount and it is the said corporation
who will remit such to the BIR. However, it shall be noted that it is still the employee’s burden to
pay tax even if it is the company withholds it. This collection of tax in advance and its remittance to
the BIR is also referred to as ‘substituted filing’.
Invoke ‘convenience of the employer rule’ since the housing facilities provided for the employees are
situated inside or within the company premises. If the said housing facilities are situated inside or within the
maximum of fifty (50) meters from the perimeter of the company premises or factory, it shall be exempted
upon invoking the said rule since it is provided for by law. If the employer’s factory is hazardous and the
housing privilege is up to one hundred (100) meters, the employee will still be exempted but the employer
should ask for a BIR ruling in this case to serve as proof since it is not provided under the law. To obtain a
ruling, the employer should send a letter stating the facts and legal basis to the legal division of the revenue
region.
V.
CM Corporation, doing business in the City of Cebu, has been a distributor and retailer of clothing
and household materials. It has been paying the City of Cebu local taxes based on Sections 15
(Tax on Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the Revenue Code of
Cebu City (Code). Subsequently, the Sangguniang Panlungsod enacted an ordinance amending
the Code by inserting Section 21, which imposes tax on “Businesses Subject to Excuse, Value-
Added and Percentage Taxes under the National Internal Revenue Code (NIRC),” at the rate of
50% of 1% per annum on the gross sales and receipts on persons “who sell gods and services
in the course of trade or business.” CM Corporation paid the taxes due under Section 21 under
protest, claiming that (a) local government units could not impose a tax on businesses already
taxed under NIRC and (b) this would amount to double taxation, since its business was already
taxed under sections 15 and 17 of the Code. As the City consultant, the City Treasurer now
requests for your opinion on whether the contention of CM Corporation is valid and if there is
indeed double taxation. Likewise, he wants to clarify if the ordinance will be invalidated if there
is double taxation considering the government’s plenary and supreme power to tax.
I. BACKGROUND INFORMATION:
CM Corporation is a distributor of clothing and household materials based in Cebu City. It has been
faithfully paying its taxes subjected to it under the Revenue Code of Cebu City specifically under Section
15 and 17. Thereafter, the Sangguniang Panglungsod enacted an ordinance which imposed an additional
tax burden on CM corporation, Section 21, which imposes tax on business subject to Excise, Value-Added
and Percentage Taxes under the NIRC at a rate of 50% of 1% per annum on the gross sales and receipts
on persons who sell goods and services in the course of trade or business. Cm Corporation paid this tax
under protest and is now challenging the validity of the ordinance stating that this tax amounts to double
taxation.
58
II. ISSUES:
1. WON the additional imposition of tax on Businesses subject to excise, value added, and percentage
taxes under NIRC as provided for under Section 21 of the Code of Cebu City notwithstanding the
taxes already imposed to wholesalers and retailers as provided for under Section 15 and 17
respectively of the same code constitutes double taxation.
2. WON invalidation of the ordinance will be proper if there exists per se double taxation.
III. DISCUSSION AND ANALYSIS:
The tax imposing tax on Businesses subject to excise, value added, and percentage taxes under
NIRC as provided for under Section 21 of the Code of Cebu City constitutes direct double taxation.
As a general rule, double taxation, per se, is not illegal. What is illegal is when there is double
taxation as it amounts to confiscation of property without due process and hence it violates the due process
clause. In the case of City of Manila v. Cosmos Bottling Corporation, The Supreme Court held that for it to
be a direct income tax, the following requisites must be present: (1) same subject matter; (2) same purpose;
(3) same taxing authority; (4) same taxing period; (5) same kind or character.
In the present case, all the elements of double taxation concurred upon the City of Cebu's assessment
on and collection from CM Corporation pursuant to section 21 of the Revenue Code of Cebu City.
Firstly, Section 21 of the Revenue Code of Cebu City imposed the tax on a person who sold goods and
services in the course of trade or business based on a certain percentage of his gross sales or receipts in
the preceding calendar year, while Section 15 and Section 17 likewise imposed the tax on a person who
sold goods and services in the course of trade or business but only identified such person with particularity,
namely, the wholesaler, distributor or dealer (Section 15), and the retailer (Section 17). All these taxes were
being imposed on the privilege of doing business in the City of Cebu in order to make the taxpayer
contribute to the city's revenues — were imposed on the same subject matter and for the same purpose.
Secondly, the taxes were imposed by the same taxing authority (the City of Cebu) and within the same
jurisdiction in the same taxing period (i.e., per calendar year). Lastly, the taxes were all in the nature of local
business taxes.
IV. CONCLUSION:
The new ordinance enacted by the Sanggunian Panlungsod of Cebu City constitutes direct double
taxation because such taxes are already being imposed by Section 15 and 17 of the National Internal
Revenue Code. CM Corporation is being taxed twice for the same purpose, character, and subject matter
by the same taxing authority in the same taxing period. Being a direct double taxation, the new ordinance
passed by the Sanggunian Panlungsod of Cebu City is invalid.
V. RECOMMENDATION:
Considering that the imposition of tax to CM Corporation under section 21 of the Revenue Code of
Cebu City constitutes double taxation, CM Corporation cannot be taxed and assessed under the
amendatory Code. Thus, we recommend the City of Cebu to refund payments made by CM corporation of
the taxes assessed and collected pursuant to section 21 of the Revenue Code of Cebu City.
Furthermore, If the City of Cebu really wants to impose new taxes to earn additional revenues, we
recommend that the City enact an ordinance that would not constitute direct double taxation but an indirect
double taxation. An indirect double taxation is a kind of double taxation that lacks the requisite of a direct
taxation. Although this is legal and valid, however, this is frowned upon.
59

Taxation Problems 2020

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Taxation Problems 2020

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TAXATION PROBLEMS 2020

Discussion & Analysis:

ON DEDUCTIBILITY OF THE DINNER, PARTY AND TIP EXPENSES AS EAR EXPENSE

As to party expenses at the videoke club

As to the tip given to business promotion officers

ON DEDUCTIBILITY OF THE LUNCH EXPENSES WITH HLURB REGIONAL DIRECTOR

To the Finance Department:

Discussion and Analysis

Tax on donation to SLC University

Deductibility of donation from gross income

Tax on donation to Metro Supermarket

Section 98. Imposition of Tax. -

Section 99. Rate of Tax Payable by Donor.

Deductibility of donation from gross income

Tax on donation to the Municipality of Minglanilla

(A) In the Case of Gifts Made by a Resident. -

Deductibility of donation from gross income

(H) Charitable and Other Contributions

(2) Contributions Deductive in Full. - Notwithstanding the provisions of the preceding

(a)Donations to the Government- Donations to the Government of the

(H) Charitable and Other Contributions

To whom it may concern:

Discussion & Analysis

On the contravention of the Equal Protection Clause of the Constitution

On the uniformity of the Tax Imposed by RA 10701

On NIRC’s exclusion of Public Utility Vehicles

As per the facts disclosed to this office:

To shed light on the above queries, the following discussion is in place.

Mr. C is employed as a Chief Executive Officer of MNO Company, receiving an annual

Discussion and Analysis:

TAX MINIMIZATION OPTIONS FOR MR. C

"Not over P250,000 0%

"Over P8,000,000 P2,410,000 + 35% of the excess over P8,000,000

(1) all income from compensation; and

Annual Compensation from Employment P10,000,000.00

For the first 8,000,000 P2,410,000.00

Gross Receipts P500,000.00

For the first P8,000,000 P2,410,000.00

Tax due for Professional Income P 40,000.00

Gross Receipts P500,000.00

Annual Compensation from Employment P10,000,000.00

For the first 8,000,000 P2,410,000.00

FILING REQUIREMENTS FOR MR. C

TAX MINIMIZATION OPTIONS FOR MR. S

A. Compensation Income shall be subject to the tax rates prescribed under

If the gross sales and other non-operating income do not exceed

a. Graduated income tax rates prescribed under section

b. Eight percent (8%) income tax rate based on

Gross Sales P100,000.00

FILING REQUIREMENTS FOR MR. S

(d) A minimum wage earner as defined in Section 22 (HH) of this Code or an

III. DISCUSSION AND ANALYSIS

III. DISCUSSION AND ANALYSIS

(A) Tax on Resident Foreign Corporations. –

III. DISCUSSION AND ANALYSIS

A. Right to Separation Pay

B. Separation Pay is Tax Exempt

Section 32(B)(6)(b) of the Tax Code, as amended, provides that:

SECTION 32. Gross Income. —|||

BIR Ruling 123-2014, provides that:

Accordingly, the separation pay to be received by the retrenched employees as a

a. That the management has decided to close or cease operation of the

III. DISCUSSION & ANALYSIS