HOW INCOME TAX IS STRUCTURED

(From the discussions of Atty. Geronimo on Chan-Robles Internet Bar review)

1. cash receipts and disbursement method most common

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1. What is the subject of the income tax? Who are those made liable for income tax?
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There are only two types of persons liable for income tax
i. individuals including estates and trusts
ii. corporations including partnerships

2. Accrual method in this method, the income is recognized even if the cash is not yet received
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2. On what is the tax imposed (object?

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This simply means that you will report the income when you receive the cash
Further, you will deduct the expense when you pay out the cash or when you disburse the cash
That is why it is called cash receipts (for purposes of reporting income) and cash disbursement (for
purposes of claiming deductions.)

In like manner, the obligation is claimed as a deduction even fi cash is not yet paid for as long as the
obligation to pay has already accrued
ACCRUAL, as a word, means the attachment of the obligation. Thus, once there is already an obligation to
pay, that can be claimed as a disbursement under the accrual method. Conversely, once there is a right to
receive, it must be reported as income even if the cash is not yet received.

Income tax is a tax on income.

3. Installment method

3. What is the tax base?

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GR not all income, but only taxable income

4. What is the income tax rate?

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It is a variable rate variable depending on the nature of the subject and of the income
Progressive tax rate

5. Income is considered as flow over time. Thus, how is that time segmented for purposes of taxation? In other
words, what is the length of the accounting period?

This method permits the taxpayer to report income not at the time the same is actually received, but at the
time the installments are paid

EXAMPLE
Assume that you sell a parcel of land for a period of five years. Upon the execution of the deed of sale,
and upon the delivery of the title, the seller is entitled to payment. Under the accrual method, (if he is using such
method), he must report his entire gain at that time even if the only amount he has received is just the first
installment
Under the cash method, he can report his income only at the time he receives the cash.

The general rule is that the accounting period is a period of 12 months

There are several periods where the accounting period is less than 12 months [CODED]

a. CHANGE - When the taxpayer changes his accounting period with the authority of the commissioner
b. ORGANIZED - when the corporation is a newly organized corporation. this corporation begins its taxable year for
less than 12 months if it adopts the calendar year
c. DEATH - death of the taxpayer. On behalf of the estate, the executor, administrator or heirs must file an income
tax return that covers the time when the decedent last filed his income tax up to the time of his death. That is the final
return of the decedent. The succeeding year shall be covered by the first return of the estate
d. ENDED - tax period is ended or terminated by the commissioner
e. DISSOLUTION - dissolution of the corporation.

Accordingly, what is this taxable year?

There are two kinds of taxable year calendar year and fiscal year
The calendar period is that period from January first to December 31.
The fiscal year (financial year) is any year ending on the last day of any month other than December
Individuals must adopt the calendar year. Corporations, however, may adopt the fiscal year.

6. given that income is a flow over time, how will you know which item goes with which year? (method of accounting)
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Basically, you should know four types of accounting method.

But under the installment method, he is permitted to spread over this income coincident to the time the
installments are supposed to be paid. So, if the proportion of his profit is 1/3 of the installment payments over a
period, let us say, of three years, the installment method permits him to report income by 1/3 for each year for three
years to enable him to gradually report his income.
Why is this permitted? This is permitted because the income tax rate is a progressive tax rate. Therefore,
ifall the income is supposed to be piled up in only one accounting period, then the tax base will increase, and
because we have a progressive tax rate, the tax rate will also go up. This may not be fair because 1.) he has not yet
received all the cash; and 2.) he may not have even been able to recover even his capital.
So, the taxpayer, under certain conditions, is permitted to adopt this installment method. He reports
income in accordance with the installments under the contract.
4. Percentage of completion method
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Akin to the installment method

But this method is usually adopted by construction companies because construction companies also get
paid over a period of time in accordance with the percentage of completion they have accomplished
In like manner, the construction companies did not receive all of their income in any one particular year
Since construction companies do not get paid right away, nor do they get paid at the end of the
completion, they are paid usually over a period of time in accordance with the amount of work they have

completed. In that sense, they are permitted to smooth over and take advantage of the low rates for every
year of completion
5. crop year basis
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Usually used by people in agriculture

Harvest time is not necessarily the time for the payment of the tax
Thus, it is important if we are going to be able to collect from farmers, to collect the time that they have
money; that is, at the time after harvest and they have brought their harvest to market and sold them
The crop year basis seeks to enable the farmers to report their income according to the time that they
received income from their harvest. In that way, they are not unduly burdened with taxation

9. When is the income tax for the taxable year paid?

The income tax, if it is not paid under the pay-as-you go, is usually paid when the return is filed at the end
of the taxable year.
The income tax is paid when the return is filed at the end of the taxable year
This is the system known a pay-as-you-file
Regular income tax return is filed, and the taxes is paid on or before the fifteenth of April of each year,
covering the income for the preceding taxable year. This is what happens with respect to the regular
income tax of an individual who is in business.

EXCEPTION TO THE PAY AS YOU FILE RULE

7. What is the manner of determining the tax liability?
I. the final tax on the sale of stocks which are not traded in the local tax exchange
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We call our income tax law a self-assessment law

In other words, the TP files his own return and tells the government in that return how much he thinks is
the tax due from him

This final tax must be paid within thirty days after its sale
And then, all the gains on the sale of taxed stocks during the taxable year are consolidated and added up,
and the tax is then computed and paid on April fifteen of the following year.

8. is the income tax collected by the government at the same time that the income flows to the TP?
II. Final tax on the sale of real property which is a capital asset sold by an individual or corporation
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Not exactly. No, the income tax is not collected at the same time that the income flows to the TP
The income tax is imposed only on the net result of the taxpayers activities or transactions within a certain
period (accounting period)
Is this true for all income? No. final taxes which are withheld by the payor (e.g. interest on bank deposits)
or final taxes which the taxpayer pays in advance of the regular income tax e.g. gains on the sale of
unlisted stocks or gains by an individual on the sale of capital asset that is real property) these instances
are paid not on april 15, but almost at the time that it is received or very soon thereafter.

EXAMPLES OF WHEN FINAL TAXES ARE COLLECTED AS SOON AS THE INCOME IS EARNED
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That principle where the tax is paid at the time the income is earned is called PAY-AS-YOU-GO RULE

a. Final taxes on interests paid by the bank on a depositors money

- this 20% income tax is padi by the bank to the government and is immediately deducted from the savings account
of the depositor
b. CASH DIVIDENDS when they are declared by the corporation and paid to the SH
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The corporation itself deducts and withholds the tax on the dividends and remits the same to the
government

10. What is a tax return?

The tax is paid within thirty days from the date of sale

d. ROYALTIES other than tax-free royalties for books, literary works and musical compositions
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These are collected at the moment they are received by the person who is entitled to the royalty

e. WINNINGS other than the tax-free winnings on lotto and sweepstakes, are also subjected to the tax at the time the
winnings are paid.

A tax return is a document wherein the taxpayer sets out, in addition to basic data about himself, the
amount of the tax that he considers as what he should pay, based on his own declaration of what ought to
be included into his tax base, and his application of the rate available thereto.
The tax is paid at the time the return is filed
Conversely, the return is filed at the time when the taxes are supposed to be paid

11. What are the characteristics of Philippine Income Tax?

I. DIRECT TAX

c. REAL PROPERTY which is considered as capital asset when sold by an individual.

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This sale is paid within thirty days from date of sale

As distinguished from an indirect tax

A direct tax is imposed upon the income earner and he is the person expected to bear the economic
burden
It is not an indirect tax because, although ordinarily a person who bears the income tax will try to pass on
the tax obligation to other people, the intention of the law is to make the income earner bear the economic
burden

II. GENERAL TAX

It is a general tax because it is applicable to a majority, if not all of the population. Everyone pays some
form of income tax or another

III. SEMI-GLOBAL or SEMI-SCHEDULAR

Some types of income are segregated into schedules and treated differently amongst themselves, and
treated differently from the rest of the income from which they were segregated
The balance is treated uniformly, regardless of where they came, and what kind they are.

IV. PROGRESSIVE

- SCHEDULAR
- GLOBAL
- NET INCOME
- GROSS INCOME
- INCOME TAX SITUS

It is a progressive tax rate schedule that increases as the base enlarges

1. SYSTEMS (tax treatment/approach) OF INCOME TAXATION

12. What is the situs of the income tax? What justification is there that enables the State to impose the income tax?

a. SCHEDULAR SYSTEM

The state may impose income tax for several reasons

I. Citizenship of the taxpayer

II. Residence
III. Location of the property that produces the income
IV. Place where the business or the activity is conducted, resulting in the receipt of income

Schedular system is a system employed where the income tax treatment varies and made to depend on the kind or
category of taxable income of the taxpayer.

13. What is the role of the income tax in our Philippine system as a whole?

The income tax contributes the biggest amount of revenue for the government. That is why it is very
important for the CIR to concentrate to the collection of the income tax. And one of the means by which the
BIR seeks to make more efficient the collection of income tax is by increasing the amount and the
instances of the withholding taxes that are paid on income received in the Philippines.
In addition to contributing the biggest amount of revenue, the graduated and progressive tax rates
implements the constitutional mandate for equity in the system of taxation. Because the tax rate is a
progressive tax rate, the economic effect on individuals is that more taxes, in proportion to the income, are
collected from those who are more able to pay the tax.
The progressive structure of the income tax offsets or negates, or at least minimizes the regressive effect
of business taxes and the VAT. Business taxes, as we very well know, do not depend on how much
income is earned, but on the activity that is being taxed. Thus, it is regressive because even if you have so
much income from that activity, the income tax liability does not increase. The VAT is also a regressive tax
because regardless of whether you have plenty of money, the amount of tax that you pay by way of value
added tax is a fixed 12% of your consumption.
The progressive tax rate helps in the equitable distribution of wealth because as more are collected from
those who are capable of paying more, any amount collected are used for the benefit of the poor who have
less. And this system implements the progressive tax mandate in the constitution.

14. How are individuals taxed?

System of income taxation which applies to individual taxpayers.

AUTHORITATIVE DEFINITION1 (based on US jurisprudence)

varies means that the scheduler system provides for different tax rules or tax treatment
Made to depend of the kind or category implication is that scheduler system classifies or categorizes
income

Shcedular system is a system that provides for different tax rules or tax treatment and classifies or
categorizes income.

Thus, when a system of income taxation provides for different tax rules or treatment, necessarily it
imposes different tax rates.

Remember:

a. It provides for different tax rules/treatment

b. classifies/categorizes income
c. imposes different tax rates

Proof that scheduler system is the one that has been adopted in imposing tax on the income of individual
taxpayers

1. Sec. 32 (a) classifies income as there are eleven (11) different kinds of income.
2. Sec. 24, 25 and 26 here you will find some of the rules that govern these different kinds of income enumerated
in Sec. 32(a)
DIFFERENT TAX RULES/TREATMENT AS REGARDS CLASSIFICATIONS/KINDS OF INCOME

Three basic rules that apply to individual taxpayers

1. Determining individuals TAXABLE COMPENSATION INCOME

SALIENT (BASIC) FEATURES OF INCOME TAXATION

In determining taxable compensation income, start with GCI (Gross Compensation Income.)

CASE: Tan vs. Del Rosario Jr. 237 SCRA 324 Oct. 3, 1994
1

On page 331 of volume 237 of SCRA, footnotes 2 and 3, you will find the authoritative definition of scheduler and global
system.

Determine the three allowable deductions on gross compensation income

- in the case of prizes, the same shall be subject to final tax if the amount is more than 10,000. If the
amount is 10,000 or less, it will not be subject to final tax. Thus it must be reported as part of gross
income.
d. winnings
e. dividend received from domestic corporation
- when will the dividend be subject to final tax and will it be tax exempt?
- dividend received from domestic corporation is subject to FT under two cases: 1. Individual TP; 2.
Received by NR Foreign Corporation.
- dividend is tax exempt 1. If the recipient is another domestic corporation; 2.) if the recipient is a
resident foreign corporation.
-f. share of a partner from net income after tax of a business or taxable partnership
- if it comes from a general professional partnership, the income is not subject to final tax. The partner
must report the income as part of his gross income.

i. Section 35 Basic personal exemption of P50,0002

ii. Additional personal exemption of 25,000 for every qualified independent child
iii. Section 34 (m) premiums on health and hospitalization insurance
Amount which may be claimed P2,400.00 annually
Condition family income must not be more than P250,000 annually
Claimant spouse who claims that additional personal exemption
[These three are the deductible items from gross compensation income of an individual taxpayer.]
If you deduct these three items from the gross income, the result shall be taxable compensation
income.

NOTE these are the notable items of income subject to final tax. Where subject to FT, the recipient
is not required to report these as part of his gross income. this is so because the final tax withheld will
constitute as final payment or settlement of the tax liabilities on these particular items of income.

2. Determining taxable income from business, trade or exercise of profession

- Start with Gross Income from the conduct of trade or business or exercise of profession
- From said gross income, deduct allowable deductions under section 34. There are ten (10) itemized
deductions.
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Based on the foregoing discussions, it has been shown that the scheduler system is the one adopted in imposing tax
on the income of individual taxpayers.

Section 34 (l) optional standard deduction.

Amendment of OSD provision by RA 9504

OSD is increased to 40%
In the case of individual taxpayers, this 40% must be based on gross sales or receipts (not gross
income). Gross income is the tax base insofar as corporate taxpayers are concerned.

As a taxpayer, one is granted the option to claim the itemized deductions under section 34, or
the Optional standard deduction of 40%.

Such option, when availed of, will be irrevocable during the taxable year

DIFFERENT TAX RATES

Refer to sections 24 and 25 (to prove that there are several rates imposed on different types of income
which may be received by an individual taxpayer. The tax rate ranges from 5, 10, 15, 20, 25 up to 32%.
This shows that scheduler system under the NIRC has been adopted in imposing tax on the income of
individual TPs due to the different tax rates imposed.

2. GLOBAL SYSTEM

Deduct the itemized deductions or the OSD and the result will be taxable income from business,
trade or exercise of profession.

3. tax treatment on items of income subject to FINAL TAX

Governed by Final Withholding tax system recognized under section 57-A implemented by RR
2-98.
The tax treatment provides an item of income subject to final tax need not be reported as part of
the gross income of the taxpayer.
This is so because, such final tax withheld (according to RR 2-98, sec. 57-A) will constitute as
final payment of the tax liability on this particular income.

Example (if an individual has received any of the following, apply the above rule)
a. Interest income on bank deposit
b. royalties
c. prizes

See RA 9504 which increased this from 25K to 50K

System employed in imposing tax in the income of corporate taxpayers.

Global system refers to that system that has been adopted in imposing tax on the income of CORPORATE
TAXPAYERS.
AUTHORITATIVE DEFINITION
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It is a system where the tax treatment views indifferently the tax base and, generally, treats in common all
categories all the taxable income of the taxpayer.

This can be simplified as follows

a. views indifferently the tax base means that this is a system that provides for uniform tax rules or tax treatment.
b. generally treats in common all categories all the taxable income of the taxpayer implication is that it does not
generally classify nor categorize income.

When a system of income taxation provides for uniform tax rules, it follows that it imposes uniform rate or
tax rate.

CHARACTERISTICS OF GLOBAL TREATMENT

a. it provides for uniform tax rules or tax treatment
b. does not generally classify or categorize income
c. imposes uniform rate (30% corporate rate)
PROOF OF ADOPTION OF GLOBAL SYSTEM for CORPORATE INCOME TPs

REMINDERS
1. avoid using difficult, deep, highfaluting words
2. dont cite the volume of the scra and the page (there was this cum laude graduate who failed the bar exams
because she cited the volume and the page)
3. as to cases, if it is a landmark case, it is ok to cite. But if it is not, just use the phrases it has been held; case law
teaches us; jurisprudence dictates; it is jurisprudentially settled)

Possible questions on these systems of income taxation

1. how does the tax code impose tax on the income earned or derived by individual taxpayers

See sections 27 and 28 (significant corporate rules are laid down here)

a. SECTION 27-A does not generally classify income in that domestic corporations are subject to the uniform tax rate
of 30%, subject to a few exceptions.
b. SECTION 28-A (on resident foreign corporations). Here the income is not classified or categorized. The income is
also subject to 30% corporate rate.
c. SECTION 28-B (non-resident foreign corporation). Subject to a few exceptions, these NRFC are subject to the
corporate rate of 30%.

Income of individual taxpayers under the present tax code may be taxed under the scheduler system. Under this
system, the income of the individual taxpayer is classified or categorized. These different types of income are subject
to different tax rules or treatment. Likewise, they subject to different tax rates.
2. How does the tax code impose tax on the income of corporate taxpayers under the present NIRC?
The income of corporate taxpayers shall be taxed under the global system of income taxation. Under this system, the
income is not generally classified or categorized. Such an income is subject to uniform corporate rate.

In the bar exams, you might not be asked to define. However, you will be asked to differentiate these two (global and
scheduler).

NOTABLE DISTINCTIONS OF SCHEDULAR AND GLOBAL SYSTEMS OF TAXATION

1. TAX TREATMENT
SCH provides for different tax rules or treatment
GBL provides for uniform tax rules or treatment
2. CLASSIFICATION/CATEGORIZATION
SCH classifies income
GBL does not generally classify income (do not forget the word generally because there are exceptions to this
rule.)
3. TAX RATE
SCH imposes different tax rates
GBL imposes uniform tax rates
4. APPLICABILITY
SCH applies to individual taxpayers
GBL applies to corporate taxpayers
In making distinctions, always use the words while, whereas, on the other hand, in contrast

NET INCOME TAXATION

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This is the one that the NIRC has adopted in the light of sections 34 and 35.

a. Section 34 allows deductions (itemized or OSD)

b. section 35 grants personal exemptions to compensation earners

Net income taxation is different from net taxable income.

Net income taxation is a method of taxation
Taxable income (net) is defined under section 31.

What is net income taxation?

There are two characteristics of net income taxation.
1. it is a method of income taxation that allows deductions and grants exemptions.
2. the tax base is taxable income (net income). Under the net income taxation, the taxable net) income is
just the tax base.
The use of the word taxation implies that it is a system or method of taxation. If you remove the word
taxation net income is precisely the tax base.

Taxable income has been mentioned under the following sections:

a. Section 24 A (1a) here you will find that the income tax is imposed on taxable income.

Who are these individual TPs who can claim deductions and are entitled to personal exemptions.
b. refer to section 28, par. B items 1, 2, 3, and 4. Here you will find gross income, gross charter fees in these four
provisions.

i. resident citizen (RC) both deductions and exemptions

ii. non-resident citizen (NRC) both deductions and exemptions
iii. Resident alien individual (RA) both deductions and exemptions

These corporate taxpayers covered therein are non-resident foreign corporations.

[NOTE that deductions pertain to business, industry or profession. Personal exemptions refer to compensation
income.]

Thus, NRFC cannot claim any deduction because the tax base is gross income.
NOTE: simply stated, the general rule is net income taxation. The exception to the rule is gross income taxation.

b. Section 25 (a1) here you will also find taxable income as the tax base. It provides that the income tax is imposed
on the taxable income of Non-resident alien engaged in trade in trade or business (NRA-ETB).
In view of this provision, non-resident alien engaged in trade or business can claim deductions (business, trade or
profession).

Gross income taxation is not the same as gross income

Gross income taxation is a method of income taxation.
Gross income

As regards personal exemptions, the right of an NRA-ETB to avail of personal exemptions is subject to the rule on
reciprocity under Section 35-D.

BASIC CHARACTERISTICS OF GROSS INCOME TAXATION

c. Section 27-A. The corporate rate is imposed on taxable income of domestic corporations (DC). This is the reason
why DCs can claim deductions since the tax base is taxable income.

i. Allows no deductions and grants no exemptions

ii. the tax base gross income
Gross income is just the tax base under gross income taxation.

d. Section 28 a1 the corporate tax is imposed on taxable income of RESIDENT FOREIGN CORPORATION (RFC).
Thus, RFC can claim deductions because this section provides that the tax base shall be taxable (net) income which
means that allowable deductions may be had.

RESIDENT CITIZEN (RC)

NON-RESIDENT CITIZEN (NRC)
RESIDENT ALIEN (RA)
NON-RESIDENT ALIEN ENGAGED
IN TRADE OR BUSINESS
DOMESTIC CROPORATION (DC)
RESIDENT
FOREIGN
CORPORATION

DEDUCTIONS (ID or OSD) for

income from trade, business or
exercise of profession
YES
YES
YES
YES

EXEMPTIONS (for compensation

income)

YES
YES

NO
NO

YES
YES
YES
YES, subject to reciprocity rule

As has been discussed, gross income has been mentioned under section 25, B, C, D and E referring to
NRA-NETB.
Also mentioned consistently under section 28 B (1, 2, 3, 4) applies to NRFC

NON-RESIDENT
ALIENS
not
engaged in trade or business (NRANETB)
NON-RESIDENT
FOREIGN
CORPORATIONS (NRFC)

DEDUCTIONS (ID or OSD) for

income from trade, business or
exercise of profession
NO

EXEMPTIONS (for compensation

income)

NO

NO

NO

GROSS INCOME TAXATION

a. Have we adopted gross income taxation?
YES, under exceptional cases. Try to check those provisions that make mention of gross income. mark these two
provisions:
a. Section 25 B, C, D and E. here, you will find entire income (B), and gross income (C, D and E).
Know the taxpayers included therein because they are the ones who cannot claim any deduction as the method of
income taxation is gross income taxation. These TPs are as follows:
i. Non-resident alien (NRA) not engaged in trade or business (NETB) cannot claim any deduction or personal
exemption because the tax base (basis of the tax rate) is gross income.

POSSIBLE BAR QUESTIONS

1. Distinctions
Taxpayers claim for deduction
and/or exemptions
Basis of the tax rates as to tax base
Applicability

Net Income Taxation

Allows deductions (34) / grants
exemptions (35)
Tax base taxable income
Applies to the ff:

Gross Income taxation

Allows no deductions / grants no
exemption
Tax base gross income
Applies to the ff:

1. Individual TPs a. RC
b. NRC

1. RA-NETB
2. NRFC

c. RA
d. NRA-ETB
2. Corporate TPs
a. DC
b. RFC

preceding advantages.
OPINION #2 gross income taxation is better than net income taxation
[Remember the two characteristics 1.) no deductions and exemptions 2.) tax base is gross income. You can
develop the advantages based on these two characteristics.]

NOTE: The first thing that you should check in a given problem is the status of the TP. If the TP is a NRA-NETB or
NRFC, ignore all those expenses included. They are only designed to mislead you since under the Code, they are
not entitled to any deduction.

1. Gross income taxation simplifies our tax system

If no deductions are allowed as the tax base is gross income, a taxpayer can easily compute the income
tax due.

2. There is a bill in congress proposing a change from net income taxation to gross income taxation.

2. it dispenses with books of accounts regarding expenses claimed as allowable deductions.

Thus, a TP can easily understand this system.
3. it will simplify the filing of income tax returns

Advantages and disadvantages of net and gross income taxation

If you are of the view that Net Income taxation is still better than Gross Income taxation, the examiner might require
you to explain three or more reasons in your answer.
OPINION #1 net income taxation is better than gross income taxation
a. Allows deductions and grants exemptions as the tax base is taxable income.
- since, under this system, taxpayers can claim deductions and are entitled to exemptions, you may consider this as
acceptable or favorable system of income taxation.
- it is an acceptable or favorable method of income taxation because taxpayers can claim those legitimate business
expenses as allowable deductions to reduce, in effect, their taxable income.
b. equitable relief
(sec. 2, RA 8424 on the underlying purposes of the amendments by said act on income taxation)
- to provide, as much as possible, equitable relief to a greater number of taxpayers in order to improve levels of
disposable income and increase economic activity
- the word is equitable because there are really equitable provisions under the NIRC in the form of deductions and
exemptions (34 and 35)
- if we adopt an equitable system of income taxation, this may increase economic activity. More taxpayers will be
encouraged in income producing activities. Eventually, it will increase the levels of disposable income.
- when we speak of equitable system of taxation, recall those three fundamental principles of sound tax system
(fiscal adequacy, theoretical justice, administrative feasibility). Letter b finds support under the principle of theoretical
justice

4. Most important strongest argument for gross income taxation. Consider the prevalent disadvantage of net income
taxation section 34. According to tax authorities and experts, Sec. 34 creates opportunities for corruption, tax
evasion and tax avoidance.
- revenue or tax collectors have this so-called margin of discretion. These allowable deductions create this margin
of discretion so that tax collectors may whimsically or capriciously allow or disallow such deductions.
- there is a finding by the world bank that because of such corruption, we fail to collect 50% of the potential revenues
- thus, in adopting gross income taxation, this minimize graft and corruption.
In answering this, start with this
allowable deductions create opportunities for corruption, tax evasion and tax avoidance. this will give revenue or tax
collectors margin of discretion. this may result in the loss of potential revenues which may be may be collected.
Thus, where gross income taxation is adopted, TPs will no longer be allowed to claim such allowable deductions.
5. It minimizes cost.
-

The government and the BIR must have spent millions in maintaining such records of the TPs regarding
claims for deductions.
BIR examiners must be granted allowances once they conduct these tax audit examinations.

NOTE: The result of these advantages, more taxpayers will file their income tax returns as it will simplify the filing.
If we graft and corruption shall be minimized, revenue of the government will increase.
If government can minimize cost, the resultant effect is that this will bring about more revenues to the government.

c. Net income taxation is consistent with that sound system of taxation relating to the principle of theoretical justice or
equality
d. it minimizes fraud.

INCOME TAX SITUS

In what way?
In net income taxation, the BIR examiners are tasked to check whether the expenses paid by the TPs are deductible
under the tax code, whether they are legitimate business expenses.

A simple question may be asked as you may simply be required to DESCRIBE THE PRESENT INCOME TAX
SITUS.

There is this so-called Tax Audit examination designed to check whether those expenses claimed as deductions are
business-connected expenses. A TP cannot simply claim an expense. The TP must prove that the expense is a
business-connected one. Otherwise, the same will be disallowed by the BIR.

NOTE: The resultant effect of these advantages (if a system or method of income taxation is favorable to the
taxpayers) is that this may eventually bring about more revenues to the government.
Every system of income taxation has this objective to generate more revenues. But these must be based on the

Refer to section 23

SEC. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the

3. NATIONALITY/CITIZENSHIP on the basis of this criterion, we can tax income from sources within and without
the Philippines.

Philippines;
(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract
worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a
citizen of the Philippines and who receives compensation for services rendered abroad as a member of the
complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

Resident citizens
Domestic corporations

Basis for taxing income from sources ourside can be subjected to Phil. Income tax

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources
within the Philippines;
(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines.

a. Partnership Theory [Commissioner vs. Lidniky 11 SCRA 603]

-

The fundamental doctrine of taxation is that the right of the government to tax income emanates from the
partnership in the production of income by providing protection, resources, incentives and proper climate
for production of such an income. Where it not for this, the taxpayer can hardly derive such an income.
These RCs and DCs receive the protection of the Philippine government wherever they go.
b. Protection Theory [Commissioner vs. British Overseas Airways Corporation 149 SCRA]

Tan vs. Del Rosario landmark case) 237 SCRA 324 (pages 334 and 335)
The SC, in this case, described our income tax situs as comprehensive.

It is comprehensive because we have practically adopted all the possible criteria or basis in imposing tax on income
residence, source and citizenship/nationality.

INDIVIDUAL TAXPAYERS
TAXPAYER
RESIDENT CITIZENS

NON-RESIDENT CITIZENS
Example: OCW

RESIDENT ALIENS
NON-RESIDENT ALIENS

TAXABLE SOURCE
Taxed on ALL INCOME which they receive from ALL
SOURCES, regardless of whether the source is within or
outside the Philippines.
Taxed on income derived from Philippine sources
Income from outside not subject to income tax.
This is to avoid over-burdening the people
who so much remit that we have one of the
biggest reserve at present
Income derived from Philippine sources
Income derived from Philippine sources

Residents source of income (sec. 23)

1. RESIDENCE- we can tax the income of the following TPs because they are residents here:
Resident citizens
Resident aliens
Resident foreign corporations
2. SOURCE taxed from income derived from sources within
Non-resident citizens
Non-resident foreign corporations

In this case, the word protection has been expounded by the SC in this case.
This case pertains to that offline international airline. This is the perennial favorite source of bar question in
corporate income taxation. This was asked three times already in the bar exams 1994 (15), 2005 (7),
2009 (7).
RULING OF SC offline international airline had no landing rights yet, we can still impose tax on the
income derived from the sale of airline tickets. It is in this case where the court amplified the sources of
income. Income may be derived from property. This is capital in that old case of Fisher vs. Trinidad;
Income may be derived from services (labor in the old case of fisher).
Here, BOAC had no landing rights. Thus, it rendered no services from which income may be derived. It
had no properties from which income may be derived. But, the SC said, it performed an activity in the
Philippines the sale of airline tickets. That sale/transaction enjoyed the protection of the Philippine
government. In consideration of such protection, such flow of wealth must share the burden of supporting
the government.

Remember that on jan. 01, 1998, Section 28 A(3a) has been amended in that gross Philippine billings may
only include revenues that may be derived from the carriage, transport or outlet of passengers originating
from the Philippines. In the amended version, it is provided that irrespective of the place of sale, issue or
payment of that transport document.

See South-African Airways vs. Commissioners (clarificatory ruling of the BOAC case.) here the SC clarified
the application of the BOAC case. Thus

When do you apply Section 28 a1 (that such corporation may be taxed as a resident FC)? When do you apply A 3a
(meaning that such corporation may be taxed as international air carrier subject to 2.5 gross phil. Billings.)?
a. if such income has no landing rights, but it derives income from the sale of transport documents through an agent
in the Philippines, offline international airlines derive from such sale and therefore are taxable as RESIDENT
FOREIGN CORPORATION under section 28 a1. Thus, they shall be subject to this 30% based on taxable income.
b. Section 28A 3a (GPB) is applied only if such airline has landing rights. Thus, the international airlines must have
revenues derived from the uplift, transport, carriage of passengers originating from the Philippines. Thus such
airlines must have landing rights and such revenue derived from the transport or carriage of passengers subject to
2.5%.

The court further said that, the general rule is section 28 A1. The exception to this is section 28 A 3a. The general
rule applies to such offline international airlines that derive income from the sale of transport documents through its
agent in the Philippines. (South African Airways case).
[ With all due respect to the ruling of the SC, it never explained why we could tax such an income. it merely cited the
BOAC doctrine. This case would have been the proper opportunity to explain the basis.]
Why do you have to tax such an income from sale of tickets of offline airways? It is derived from an activity
undertaken in the Philippines. Thus, it enjoys the protection of the Philippine government. In consideration of such
protection, this flow of wealth should share the burden of supporting the government.
[Another point which the SC never discussed is that the court never explained why an offline airlines is considered as
a resident foreign corporation. The court should have cited test under RA 7042 (foreign investment act) one of the
instances that will make a FC as an RFC which is that, it designates an agent here, or establishes a branch herein.]
c. FAVORABLE BUSINESS CLIMATE THEORY [Criba vs Romulo, GR 160756, March 9, 2010]
[SEGWAY MCIT has been declared constitutional by the SC. In this case, the court explained the reason why we
can still require corporate taxpayers to pay 2% of their gross income based on the favorable business climate theory]

cited as an example is interest income on bank deposit. This is a classic example on constructive receipt of income.
thus, if one has deposit in a bank that earns income, when the interest is credited to one;s account as depositor, and
the same can be withdrawn at any time during the taxable year, the same shall be subject to the 20% tax on income
may be imposed even if the depositor has nt actually received that.
-

REFERENCE TO THE TAX CODE provisions on constructive receipt

i. Section 24 b(2) refers to cash or property dividend constructively received by resident citizen, nonresident citizen or resident alien individual. here, actual receipt is not required
ii. Section 25 A(2) pertains to cash or property dividend constructively realized by non-resident alien
engaged in trade or business.
iii. Secxtion 26 (last paragraph) the income referred to here is that share of a partner from the net income
of general professional partnerships. Here, you will find the phrase constructively received.\
-

This pertains to MCIT. Section 27e imposes this MCIT of 2% of corporate income. this was challenged
before the SC on the ground that it is a tax on capital, not on income. it does not take into consideration
deductions. The petitioner, in effect, is that it sould be based on taxable income.
It basic and fundamental that congress can fix the rate or the tax base of the income. it is within their
legislative prerogative.
What must be the basis? The SC why is it pegged at 2% of gross income even if such corporations had
no taxable income, or even incurred losses? The SC said Domestic corporations owe their corporate
existence and privilege to do business to the government. They receive benefits from efforts exerted by the
government to maintain financial market and to ensure a favorable business climate.
This pronouncement amplifies this old doctrine of providing protection, resources, incentive and proper
climate for production.
The SS further said that it is therefore fair for the government to require domestic corporations to make
reasonable minimum contribution to public expenses. this is precisely he basis for the imposition of the
MCIT.

TEST OF TAXABLE INCOME

In the above Filipinas case, the SC said, the right to receive must be unconditional, valid and enforceable.

in a GPP, it is not required that the partners share must be actually received. It is enough that thee are
profits declared by the partnership and the partner is entitled thereto, that is, the partner can demand such
income-share from the GPP without limitation or restriction.
iv. Section 73 (d) share of a partner from net income after tax of a business or taxable partnership.

The same rule applies. As a business partner, it is not required that such an income (representing share
from the net income after tax) need not actually be received by the partner in order to be subject to income
tax. It is sufficient that the share-income is already set apart and can be withdrawn any time without any
restrictions.
v. Section 53 (RR #2 of 1940) that interest income of bank deposit covered by constructive receipt

doctrine

vi. rentals deposited in court as a result of unjustified refusal of lessor is taxable to the lessor even if no
actual receipt was had.
Limpian investment Corp. vs Commissioner 17 SCRA 703

WHAT IS THE TEST OF TAXABLE INCOME? (Filipinas Synthetic Fibers Corp. vs. CA 316 SCRA 480)
1. DOCTRINE OF CONSTRUCTIVE RECEIPT OF INCOME
-

It is the right to receive, and not the actual receipt that determines when to include the amount in gross
income.
This reinforces the rule laid down in 1940 (BOR Regulation 2, section 52 thereof.)

This case pertains to rentals deposited in court by the lessee as a result of the unjustified refusal of the
lessor to accept the same.
The SC said that such an amount (income) is taxable to the lessor as the lessor can withdraw the same
from the court without restrictions or limitations. And once it is withdrawn, apply what article 1259 says obligation is
deemed extinguished.

a. Two requisites of constructive receipt

2. ALL EVENTS TEST
i. such an income must be credited to the account of the taxpayer or set apart for the taxpayer
ii. unconditional withdrawal of such income (it can be withdrawn anytime during the taxable year without
any limitations, restrictions or conditions.)

CASE Filipinas Synthetic Fiber Corp. vs CA. This is the case where the SC cited the All Events Test.

All Events Test applies not only to the recognition of income. it also applies to the recognition of an
expense.
Recognition of an expense (See Commissioner vs. Isabela Cultural Corporation 515 SCR 556)

represented to the BIR that the amounts so deducted were incurred as a business expense in the form of interest
and royalties paid to the foreign corporations. It is estopped from claiming otherwise now.
OTHER USEFUL PRONOUNCEMENTS UNDER THE FILIPINAS CASE

The common requisites, as imposed by the All events test, is that the income and expense must be
determined with reasonable accuracy.
-

The word events are circumstances that may fix such an income, that may determine such deductible
expense.
THE CASE OF FILIPINAS
FACTS

Filipinas was assessed deficiency withholding tax at source on income payments to non-resident foreign
corporations. Filipinas contests the said assessment arguing that no payment has yet been made to said NRFCs,
thus no withholding tax is due. CIR contends that the liability for payment of said WHT arises not from the time of
actual payment but from the time of accrual.

1. the withholding agent is explicitly made personally liable for the income tax withheld. The law sets no condition for
the personal liability of the withholding agent to attach. The reason is to compel the withholding agent to withhold the
tax under all circumstances. In effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the withholding agent is constituted
the agent both the government and the taxpayer.
2. With respect to the collection and/or withholding of the tax, he is the Governments agent. In regard to the filing of
the necessary income tax return and the payment of the tax to the Government, he is the agent of the taxpayer. The
withholding agent, therefore, is no ordinary government agent especially because under Section 53 (c) he is held
personally liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal Revenue and his
deputies are not made liable to law.
3. under the accrual basis method of accounting, income is reportable when all the events have occurred that fix the
taxpayers right to receive the income, and the amount can be determined with reasonable accuracy. Thus, it is the
right to receive income, and not the actual receipt, that determines when to include the amount in gross income.

The withholding tax pertained to interest loans, royalties and guarantee fees.
ISSUE When does the liability of a corporation for the payment of the withholding tax arise from the
time of accrual or the time of payment/remittance to NRFC?
HELD
under the accrual basis method of accounting, income is reportable when all the events have occurred
that fix the taxpayers right to receive the income, and the amount can be determined with reasonable accuracy.
Thus, it is the right to receive income, and not the actual receipt, that determines when to include the amount in
gross income.

Thus, under the all events test, what must be determined is not only that income already accrued, but also whether
said accrual was also written-off as business expense in its books by the withholding agent. In effect, said expense,
when written off the books, was considered by the withholding agent as a deduction from its gross income.
-

BAR All Events Test

-

Gleanable from this notion are the following requisites of accrual method of accounting, to wit:
(1) that the right to receive the amount must be valid, unconditional and enforceable, i.e., not contingent upon future
time;
(2) the amount must be reasonably susceptible of accurate estimate; and
(3) there must be a reasonable expectation that the amount will be paid in due course.

The word reasonable implies something less than exact or complete, accurate amount. This also applies
to the recognition of an expense.

The expenses were in the form of legal services performed (professional expenses). Legal services were
performed in 1984 and 1985. But the billing statement was received in 1986. When must such an expense
be recognized? Can that be claimed as a deductible expense only in 1986?

ANSWER no!
It cannot be claimed as a deductible expense in 1986, the year when such billing statement was received because
these expenses was incurred or ACCRUED in 1984 and 1985. The services were rendered in 1984 and 1985.
Thus, the expenses must be claimed as professional expenses in 1984 and 1985, not in 1986 when the billing
statement was received in 1986.

In the case at bar, after a careful examination of pertinent records, the Court concurred in the finding by
the Court of Appeals in CA GR. SP No. 32922 that there was a definite liability, a clear and imminent certainty that at
the maturity of the loan contracts, the foreign corporation was going to earn income in an ascertained amount, so
much so that petitioner already deducted as business expense the said amount as interests due to the foreign
corporation. This is allowed under the law, petitioner having adopted the accrual method of accounting in reporting
its incomes.

ISABELA CASE

Petitioner cannot now claim that there is no duty to withhold and remit income taxes as yet because the
loan contract was not yet due and demandable. Having written-off the amounts as business expense in its books, it
had taken advantage of the benefit provided in the law allowing for deductions from gross income. Moreover, it had

[ This might be asked in your bar exams.]

Thus, an expense should be recognized when such services (in this case) were rendered.

In this case, there were really two expenses claimed by Isabela (the other one was insignificant.) these
were in the form of professional expenses. The other expense claimed was in the form of auditing services.

The ruling of the SC is that the auditing expenses were disallowed by the SC because such an amount was not
proven with reasonable accuracy.
ISABELA CASE
In 1990, ICC received2 assessments for deficiency income tax from CIR both for the year 1986. This is due to the
fact that the BIR disallowed certain deductions made by ICC in its return. These deductions pertained to professional
and security services rendered to it in 1984 and 1985, but of which billing statements were received only in 1986.
ICC contends that since the billing statements were only received in 1986, it should be in 1986 that the deductions
are to be made. CIR contends that the deductions should have been made in 1984 and 1985, the time when such
services were rendered to it, and consequently, the expenses accrued.
ISSUE
When did the expense accrue at the time of receipt of the billing statement or at the time when services were
rendered?
HELD
The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are: (a) the expense must be ordinary and necessary; (b) it must
have been paid or incurred during the taxable year; (c) it must have been paid or incurred in carrying on the trade
or business of the taxpayer; and (d) it must be supported by receipts, records or other pertinent papers. [11]
The requisite that it must have been paid or incurred during the taxable year is further qualified by Section 45 of the
National Internal Revenue Code (NIRC) which states that: [t]he deduction provided for in this Title shall be taken for
the taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting
upon the basis of which the net income is computed x x x.
] In the instant case, the accounting method used by ICC is the accrual method.
under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current year
when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer who
is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so
cannot deduct the same for the next year
The accrual method relies upon the taxpayers right to receive amounts or its obligation to pay them, in opposition to
actual receipt or payment, which characterizes the cash method of accounting. Amounts of income accrue where the
right to receive them become fixed, where there is created an enforceable liability. Similarly, liabilities are accrued
when fixed and determinable in amount, without regard to indeterminacy merely of time of payment
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in
such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay;
and (2) the availability of the reasonable accurate determination of such income or liability.
The all-events test requires the right to income or liability be fixed, and the amount of such income or liability be
determined with reasonable accuracy. However, the test does not demand that the amount of income or liability be
known absolutely, only that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy. The all-events test is satisfied where computation remains uncertain, if its basis is
unchangeable; the test is satisfied where a computation may be unknown, but is not as much as unknowable, within
the taxable year. The amount of liability does not have to be determined exactly; it must be determined with
reasonable accuracy. Accordingly, the term reasonable accuracy implies something less than an exact or
completely accurate amount. [15]
The propriety of an accrual must be judged by the facts that a taxpayer knew, or could reasonably be expected to
have known, at the closing of its books for the taxable year. [16] Accrual method of accounting presents largely a

question of fact; such that the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction. [17]
Corollarily, it is a governing principle in taxation that tax exemptions must be construed in strictissimi juris against the
taxpayer and liberally in favor of the taxing authority; and one who claims an exemption must be able to justify the
same by the clearest grant of organic or statute law. An exemption from the common burden cannot be permitted to
exist upon vague implications. And since a deduction for income tax purposes partakes of the nature of a tax
exemption, then it must also be strictly construed
In the instant case, the expenses for professional fees consist of expenses for legal and auditing services.
From the nature of the claimed deductions and the span of time during which the firm was retained, ICC can be
expected to have reasonably known the retainer fees charged by the firm as well as the compensation for its legal
services. The failure to determine the exact amount of the expense during the taxable year when they could have
been claimed as deductions cannot thus be attributed solely to the delayed billing of these liabilities by the firm.
In the same vein, the professional fees of SGV & Co. for auditing the financial statements of ICC for the year 1985
cannot be validly claimed as expense deductions in 1986. This is so because ICC failed to present evidence showing
that even with only reasonable accuracy, as the standard to ascertain its liability to SGV & Co. in the year 1985, it
cannot determine the professional fees which said company would charge for its services.

OTHER USEFUL PRONOUNCEMENTS FROM ISABELA CASE

1. The requisites for the deductibility of ordinary and necessary trade, business, or professional expenses, like
expenses paid for legal and auditing services, are:
(a) the expense must be ordinary and necessary;
(b) it must have been paid or incurred during the taxable year;
(c) it must have been paid or incurred in carrying on the trade or business of the taxpayer; and
(d) it must be supported by receipts, records or other pertinent papers.
KEY: BRITON Business-related, Receipts as proof, Incurred or paid during Taxable year, Ordinary and Necessary
2. under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as deduction from income for the succeeding year. Thus, a taxpayer
who is authorized to deduct certain expenses and other allowable deductions for the current year but failed to do so
cannot deduct the same for the next year
3. ALL EVENTS TEST
For a taxpayer using the accrual method, the determinative question is, when do the facts present themselves in
such a manner that the taxpayer must recognize income or expense? The accrual of income and expense is
permitted when the all-events test has been met. This test requires: (1) fixing of a right to income or liability to pay;
and (2) the availability of the reasonable accurate determination of such income or liability.

In summary of the ruling in Isabela, the following are in order:

1. In determining when deductions for expenses are to be made by a taxpayer (for expenses incurred), determine
first the method of accounting used.
a. if the method for accounting used is the cash method of accounting, the deductions may be had, on the date of
payment of expense;

b. If the method of accounting used is the accrual method of accounting, the deductions may be had, at the time the
expense was incurred (not paid).

not keep books, or if the taxpayer is an individual, the taxable income shall be computed on the basis of the calendar
year.

2. This finds support in the NIRC which provides that [t]he deduction provided for in this Title shall be taken for the
taxable year in which paid or accrued or paid or incurred, dependent upon the method of accounting upon
the basis of which the net income is computed.

NOTE: from the foregoing provision

- this applies not only to propriety of deductions but also to tax liability for income. Thus, cash method
income considered taxable upon actual receipt; accrual method income taxable when the right to demand the
same arises, even if there is no actual receipt.
3. Under the accrual method of accounting, expenses not being claimed as deductions by a taxpayer in the current
year when they are incurred cannot be claimed as deduction from income for the succeeding year.
4. How is the accrual of income under the Accrual method determined?
- when the all events test has been met.

Rules on accounting period

1. Accounting period used by TP shall govern in accordance with accounting method regularly employed
2. Method which, in the opinion of the commissioner, clearly reflects the income is applied when
- no method of accounting has been employed
- the method does not clearly reflect the income
3. following are considered as using the calendar period
- TPs annual accounting period is other than a fiscal period
- TP has no annual accounting period
- TP is an individual

ALL EVENTS TEST - This test requires:

1. refer to Section 22, items p (calendar) and q (fiscal).

(1) fixing of a right to income or liability to pay; and

(2) the availability of the reasonable accurate determination of such income or liability.
5. As regards the deductions, the same must be treated as exemptions, thus construed strictly against the TP. Thus

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

Thus, the TP, in deducting a particular expense during the subsequent taxable year, must prove that when
the expense was supposed to have accrued, the same cannot be determined with reasonable accuracy. If
such is the case, then he shall be allowed to deduct the same for the subsequent year when the expense
became reasonably certain or ascertainable.
However, if the TP failed to show that the same was NOT reasonably certain or ascertainable during the
time it was supposed to have been incurred, the deduction shall be considered to have accrued on said
year, and will not be allowed to be deducted during the subsequent year.

BASIS OF THE TPs COMPUTATION OF TAXABLE INCOME

Accounting period may either be calendar year period or fiscal year period.
i. CALENDAR PERIOD it is an accounting period of 12 months, ending on December 31. Thus, it must
cover January 1 to December 31.
(P) The term "taxable year" means the calendar year, or the fiscal year ending during such calendar year, upon the
basis of which the net income is computed under this Title. 'Taxable year' includes, in the case of a return made for a
fractional part of a year under the provisions of this Title or under rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the commissioner, the period for which such return is made.

ii. FISCAL PERIOD accounting period of 12 months ending on the last day of any month other than
December.
(Q) The term "fiscal year" means an accounting period of twelve (12) months ending on the last day of any month
other than December.

2. Section 52 b
-

Refer to section 43.

The taxable income shall be computed on the basis of the Taxpayers annual accounting period

SEC. 43. General Rule. - The taxable income shall be computed upon the basis of the taxpayer's annual accounting
period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly
employed in keeping the books of such taxpayer, but if no such method of accounting has been so employed, or if
the method employed does not clearly reflect the income, the computation shall be made in accordance with such
method as in the opinion of the Commissioner clearly reflects the income. If the taxpayer's annual accounting period
is other than a fiscal year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, or does

There are two accounting periods:

Corporate taxpayers may employ or adopt calendar year period or fiscal year period.
It is therefore clear, under section 43, that individual taxpayers are not allowed to adopt fiscal year period.
Only corporate taxpayers are allowed to adopt fiscal year period.
3. Correlate this section 52b with section 77b.

If a corporate taxpayer has adopted the calendar period, when will be the deadline for the filing of FINAL
ADJUSTMENT CORPORATE INCOME TAX RETURN?
Section 77b provides the rule regarding the deadline for the filing of the final adjustment corporate income
tax return. (FACIT return)
If a corporate taxpayer has adopted this calendar year period, the deadline of the filing of the FACIT
return is April 15.

(B) Time of Filing the Income Tax Return. - The corporate quarterly declaration shall be filed within sixty (60) days
following the close of each of the first three (3) quarters of the taxable year. The final adjustment return shall be filed
on or before the fifteenth (15th) day of April, or on or before the fifteenth (15th) day of the fourth (4th) month following
the close of the fiscal year, as the case may be.
-

If a corporate taxpayer has adopted the fiscal period, the deadline for the FACIT return on or before the
fifteenth (15th) of the fourth month following the close of the fiscal year period.

Why is there a necessity to know the rule regarding the filing of the FACIT return?

There is necessity to know because this is the only time where payment of tax liability of corporate
taxpayers can be determined with certainty. The SC has said that there can only be payment in
contemplation of law if such corporate taxpayer has filed that FACIT Return.
Thus, this is important in applying the perennial problem in tax remedy under section 229 the application
of the two year period for the filing of the tax refund.

CASE Commissioner vs. TMX Sales Inc 205 SCRA 184

(NOTE: 229 IS A FAVORITE SOURCE OF QUESTION ON TAX REMEDIES)

In 229, you file the prescriptive period for the filing of the tax refund.
229 provides that the filing for a written claim of refund must be made with the BIR within two years from
the date of payment.
This is where there is necessity to know the rule under 77b.
There will be no problem if the corporate taxpayer has adopted the calendar year period because the
deadline will be April 15
Assuming that such corporation hs adopted the fiscal year period, he filed a written claim of refund. You
should know if the claim was filed on time or out of time.

EXAMPLE

1. section 43 taxable income shall be computed on the basis of accounting period.

2. section 22 (p) calendar period
3. Section 22 (q) fiscal period
4. Section 52 (b) corporate taxpayers may adopt the calendar or fiscal year period.
5. go back to section 43 under this, individual taxpayers are only allowed to adopt the calendar year period.
6. section 77b
- corporate TP adopts calendar year period, filing of the FACIT Return shall be on or before April 15
- corporate TP adopts fiscal period, filing of the FACIT return shall be on the fifteenth day of the fourth month
following the close of the fiscal year period.
[You ought to know this because of the SC pronouncement in TMX Sales that there is only payment in contemplation
of law upon the filing of this FACIT return.]

INCOME TAX RATES

GERONIMO
-

1. INTERESTS
-

In the above problem, the same falls on October 15, 2007. You count the two year period from October 15, 2007.
Thus, the claim for refund must be filed not later than October 15, 2009.
This is the significance of this accounting period.
[Note again the related sections:

Dividends are payments or distributions of profits by corporations

If the corporation distributes dividends, and that corporation is a DC, regardless of where the DC earned its
income, that dividend that is paid is considered dividend from Philippine sources
If the corporation, on the other hand, is a foreign corporation, and more than 50% of its income for the last
three years come from the Philippines, then that corporation is considered a corporation gaining income
derived from Philippine sources. [Notice that more than 50% of the gross income must come from the
Philippines.]

3. FEES FOR SERVICES

-

Based on Section 77b, the deadline for the filing of the FACIT return shall be the commencement or reckoning date
of the two-year period because payment is made, in contemplation of law, upon the filing of the FACIT Return. Thus,
the fifteenth day of the fourth month following the close of the fiscal period shall be the deadline or last day of filing
the FACIT Return.

When derived from sources within the Philippines, and when paid on indebtedness of residents, are called
interests derived from Philippine sources.

2. DIVIDENDS

A corporate TP has adopted a fiscal year period ending on June 30, 2007. [Note that this is a fiscal year period
because the same ends on a month other than December.] this TP filed a written claim for refund.
The perennial question in the bar exam is that is such claim for refund filed on time or filed out of time? here, you
apply the two year period under 229.

it is important to determine what income are considered as income from Philippine sources.
For this purpose, what we have to do is to segregate the different types of income and find out what the
rules are in respect to that particular type of income.

Services are intangible. But when the service is performed in the Philippines, payment for the service,
even if it is payment to an overseas account, or one deposited in an account outside of the Philippines, if it
can be proven that these deposits were for services rendered in the Philippines, that fee can be
considered as a fee from Philippine sources

4. RENTALS AND ROYALTIES

-

These are income based on the use or enjoyment of property, and therefore, the rule on situs applies.
Where the property rented, or the right for which the royalties are paid are in the Philippines, then rents
and royalties so paid are considered derived from Philippine sources

5. GAINS ON SALE OF REAL PROPERTY

-

Here, we follow the universal rule on property that is, where the property is located.
Consequently, if the real property is located in the Philippines, if it was sold and gain is generated by that

sale, regardless of who the owner is, that income is considered income from Philippine sources.
GERONIMO
6. GAINS ON THE SALE OF PERSONAL PROPERTY
-

Personal property is a little bit complicated

1. If the personal property is PRODUCED in the Philippines and SOLD outside, or PRODUCED outside
and SOLD in the Philippines, the gains are considered generated partly from within and partly from outside
the Philippines
2. If personal property is BOUGHT in the Philippines, and sold outside of the Philippines, or sold in the
Philippinea after being bought ourside the Philippines, then the place of sale applies [ where the sale is
made.]
- thus, if the sale is made in the Philippines, the gains are taxable in the Philippines
- if the sale is made abroad, then it is not considered gain from philippine sources

7. SALE OF SHARES OF STOCK OF A DOMESTIC CORPORATION

-

Because these are shares of a domestic corporation, the gains on the transaction on these shares of stock
are always considered income from within the Philippines

1. interest income from bank deposits 20%

2. interest from deposits under E-FCDU, the final tax is not 20% but 7.5% only.
-

GERONIMO
What are the income taxes on citizens and on resident aliens?

As we said, we have the scheduler, the semi-schedular, the global and semi-global system thus, the first
set of taxes are those which fall under the scheduler system of taxation.

1. PASSIVE INCOME income where the taxpayer does not exert any effort
-

Interests
Royalties
Prizes and winnings
Cash and property dividends from domestic corporations

These are subjected to a FINAL TAX of different rates

FINAL TAX means that the tax collected or withheld by the payor is considered the tax on that income,
and once paid, there is no need to report it any further in any other return.

The law imposes a final tax of 5% on the first 100,000 of NET GAINS; and
10% of the excess of 100,000

What happens is that this is paid within 30 days from the date of the sale; and later on consolidated in one
so that the 5% or 10% is determined for the entire year

3. CAPITAL GAINS from the sale of real property in the Philippines

-

Subject to 6% final tax based on gross selling price

This rule says that if a depositor gives money to the bank under a contract that permits the bank to hold on
to the money for five years, the government may forego the collection of tax on the interest.
This is so because the government wants people to put their money in banks so that the latter may lend
these to borrows in industry and commerce, thereby generating economic activity that will redound to the
benefit of the entire nation
In order to induce people to deposit their money long-term, they devised this so-called long term deposit
instrument. The income during those five years is tax free.
Consequently, because that is the purpose of the long term certificate, pre-termination before the five
years impairs the purpose of the tax-free grant, warranting the government to take back a part of the
concession of its being tax-free.
If the depositor keeps the money and the remaining period is three years, then only five present is
collected
If the remainder is one year or less, then a bigger percentage is collected.

4. royalties are generally taxed at 20%, except for the royalties on books, literary works and musical compositions
which are taxed at 10%
-

2. CAPITAL GAINS from the sale or exchange of shares of stock not traded in the Philippine tax exchange?

This is so because the interest of the Philippines is to try to induce people to bring back their money to the
Philippines, or for foreign investors to deposit their money in the Philippines. In order to induce them to
deposit their money in the Philippines, they are given a preferential tax rate such that where the peso
deposits are subjected to 20%, the foreign currency deposits are subjected only to 7.5%

3. long term deposit certificate / long term investment certificate

What are the income taxes on PASSIVE INCOME received by a Philippine resident from domestic
sources?

The reason for the concession for books and other literary works is that there is a bias for education. The
tax code wants people to be educated and, therefore, makes the income from books and literary works
less expensive for tax purposes

5. prizes are taxed at 20% of the gross amount thereof, except sweepstakes and lotto which are tax-free
-

These are exempted because the money generated for the sale of tickets are supposed to be used for
charitable purposes.

6. cash and other property dividends from domestic corporations 10%

-

The reason for the concession is because the income tax is supposed to be a tax on individuals. Because
we have a two-layer tax, meaning that the income, when received by the corporation, is subjected to tax,
when the corporation puts that money in the hands of the individual stockholders, it has already been
subjected to some tax. Therefore, only 10% is collected from the individual.

7. Gains from the sale by a resident of domestic shares of stock 1258 06.01

4. ANY OTHER INCOME aside from passive income and the capital gains from shares of stock or sale of real
property by an individual are now subject and lumped together under the progressive system of tax rates.
-

These rates go from 5% to 32%. This is why, the bigger the tax base with respect to this residual income,
the bigger the percentage of tax to be collected will be. This constitutes the global system in our income
tax system

QUESTION:

How do you describe income tax rates under the NIRC as amended?
Congress has the power to define:
1. Individual
i. Section 24 A 1(c)
- individual tax rates are progressive rates (from 5% to 32%)

1. what tax shall be imposed

2. why it should be imposed
3. how much tax shall be imposed
4. against whom the tax shall be imposed
5 where it shall be imposed.

SEGWAY: TAX PYRAMIDING

PEOPLE VS. SANDIGANBAYAN
467 SCRA 161 August 16, 2005
Tax pyramiding has long been rejected since 1922. It has, therefore, no basis in law.
It is a tax imposed on another tax
This is oppressive, confiscatory, unjust and violative of due process under the constitution
This is different from the progressive nature of individual tax rates

The following are within the power of congress. These are amplifications of a a previous ruling of the court in
Tolentino vs. Sec. of Finance when it said that congress has the power and discretion to determine the nature or kind
of tax, the object or purpose, the extent or rate, the coverage or subject, and the place or situs of taxation. CONES
Thus, the congress may change the tax rate from progressive to uniform or uniform to progressive because of the
power of congress to levy, provided that the same shall not violate any of theose inherent and constitutional
limitations.

2. Corporate
i. See 27 A and 27 A1
-

This refers to the uniform (30%) corporate rate of 30%

This 30% corporate rate became effective on January 01, 2009.

ii. This poses a hypothetical question requiring analysis.

QUESTION: Suppose the Congress changes the rates in case of individuals from progressive to uniform, is that a
valid law?
Conversely, suppose that Congress changes this corporate from being uniform to progressive. Is this a valid law?
-

This requires your knowledge of the power of congress to fix rates.

CRIBA vs. ROMULO MARCH 09, 2010

The legislature has the authority to prescribe a certain tax at a specific rate for a particular public purpose
on persons or properties within its jurisdiction.

[NOTE: however, that the Sc did not expound on said pronouncement. Thus, although Congress has the power to
prescribe certain tax at a specific rate, it must not violate any of the constitutional limitations, particularly on the
provision on equitable taxation and due process. Because, if such rate shall be unjust, oppressive or confiscatory,
that will clearly violate such rule under Article VI, section 28 (1) which provides that the rule on taxation shall be
uniform and equitable.
Due process dictates that tax rates must not be unjust, oppressive, confiscatory or oppressive.]

[If there is a question on whether a particular item can be the subject of taxation, even if your answer is wrong, if you
can cite these jurisprudence, the examiner will credit to your answer.
In this recent case decided by the SC, it explained the power of congress in determining and fixing the tax rate on a
particular subject of taxation.

TWO SYSTEMS OF INCOME TAXATION UNDER SEC. 57

1. Section 57 A refers to the Final Withholding tax System (FWT)
2. Section 57B refers to the Creditable Withholding Tax System (CWT)
I. FINAL WITHHOLDING TAX SYSTEM

How can we understand this?

We can easily understand the same by pointing out distinctions. Through these distinctions, we can
explore possible questions here.

The first thing to know is that there is a common applying to both FWT and CWT. The word withholding
implies that the source or payor of such an income is considered as WITHHOLDING AGENT of the
government. As withholding agent, it is legally obliged to 1.) deduct, and 2.) withhold the tax.

DISTINCTIONS
1. ITEMS OF INCOME COVERED
CWT [refer to section 78. Here you will find those items of income subject to CWT
Section 78 - Definitions. - As used in this Chapter:
(A) Wages. - The term 'wages' means all remuneration (other than fees paid to a public official) for services
performed by an employee for his employer, including the cash value of all remuneration paid in any medium other
than cash, except that such term shall not include remuneration paid:
(1) For agricultural labor paid entirely in products of the farm where the labor is performed, or
(2) For domestic service in a private home, or
(3) For casual labor not in the course of the employer's trade or business, or
(4) For services by a citizen or resident of the Philippines for a foreign government or an international organization.
If the remuneration paid by an employer to an employee for services performed during one-half (1/2) or more of any

payroll period of not more than thirty-one (31) consecutive days constitutes wages, all the remuneration paid by such
employer to such employee for such period shall be deemed to be wages; but if the remuneration paid by an
employer to an employee for services performed during more than one -half (1/2) of any such payroll period does not
constitute wages, then none of the remuneration paid by such employer to such employee for such period shall be
deemed to be wages.

(MINUS) PERSONAL AND ADDITIONAL EXEMPTIONS

(MINUS) PREMIUMS ON HEALTH AND HOSPITALIZATION INSURANCE
(EQUALS) TAXABLE COMPENSATION INCOME

refers to compensation to services rendered (compensation income).

FWT [RP WIDS]

-

Apply the tax rates (5% to 32%). The result is income tax due.

Applying the CWT, the CWT may be deducted or credited against such an amount, thus reducing a
taxpayers TAX LIABILITY.

Thus it can be said that the CWT may be subtracted from the income tax due. Hence, when it is said that
the CWT reduces TPs tax liability, it is a tax that should be subtracted from such income tax due.

There are actually 28 items of income subject to FWT. But the notable ones are the following

i. royalties
ii. prices (subject to final tax only if amount is more than 10,000. If 10,000 or less, must be included in the gross
income of the recipient subject to the regular rates.)
iii. winnings (Except PCSO and Lotto winnings which are exempt)
iv. Interest income on bank deposits (income on loan is not subject to final tax. It must be interest income on bank
deposits.)
v. dividends

EXAMPLE [DEDUCTIBLE TAX]

GROSS INCOME
(LESS) ALLOWABLE DEDUCTIONS (Sec. 34 C)3

dividends received from Domestic Corporations is subject to final tax under two situations
a. the recipient is an individual taxpayer
b. the recipient is a non-resident foreign corporation.
vi. Share of a partner from the net income after tax of a business or taxable partnership.

Such items of income are subject to final tax. The recipient is not required to report the same as part of his
gross income

2. AS TO TAX WITHHELD

CWT under this, the tax withheld, are be credited.

The deductible tax here is the tax which may be deducted from gross income of a business or profession.
If you deduct the same from gross income, the effect would be to reduce the taxpayers taxable income.

Why do you have to know this? You ought to know this because you might be asked whether this 20%
discount granted to senior citizens may be claimed as creditable tax or deductible tax.

The SC in the case of COMMISSIONER VS. CENTRAL LUZON DRUG CORPORATION 456 SCRA 414,
construing the old law on Senior Citizens (RA 7432) ruled that such 20% should be claimed as CREDITABLE TAX.
However, RA 9257, a law that expanded the Senior Citizens law, specifically section 4 thereof, declares that such
20% is a deductible tax and no longer a CWT.
Such provision of RA 9257 has been carried over in the new law on Senior Citizens RA 9994. So, the
prevailing rule now is that this 20% discount given to senior citizens is a deductible tax, and no longer a CWT. So,
the effect is that it reduces taxpayers taxable income.

FWT cannot be claimed as CWT

POSSIBLE CASES

COMMISSIONER VS. BICOLANDIA DRUG CORP. 467 SCRA 176

In this case, the SC had the occasion to distinguish creditable tax from DEDUCTIBLE tax.

As the word final connotes, such Final tax withheld will constitute as final settlement on the tax liability of a
particular income.

3. EFFECT

rd

The SC cited such jurisprudence found in Blacks Law Dictionary 3 Edition, p. 1461. Thus
-

CWT

CWT reduces a taxpayers tax liability whereas deductible tax reduces a taxpayers taxable income.

EXAMPLE [CWT] an example of income subject to CWT is compensation income. gross compensation
income less personal and additional exemptions and premiums on health and hospitalization insurance equals
TAXABLE compensation income.
GROSS COMPENSATION INCOME

Will not extinguish a TPs tax liability on a particular income

FWT

Recall that section 34C allows those deductible taxes as deductions. These deductible tax falls under item 34C.

Will extinguish taxpayers tax liability on a particular income. The final tax is considered as a final
settlement of the tax liability therein.

Take the case of interest income on bank deposit. This is subject to 20% Final tax. The TP need not report
such an income because such 20% FT will extinguish your tax liability on the interest income.
4. WHETHER INCOME MUST BE REPORTED
CWT
-

We have established that the CWT will not extinguish TPs liability on an item of income, this is the reason
why such recipient of the income must report that as part of his gross income.

Income subject to CWT must be reported by the TP-recipient of the same

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 twentyfive percent (25%) of such income. Capital gains realized by a nonresident alien individual not engaged in trade or
business in the Philippines from the sale of shares of stock in any domestic corporation and real property shall be
subject to the income tax prescribed under Subsections (C) and (D) of Section 24.
-

you will realize that this income tax rate under Section 25 B is a final tax, and this applies to that ordinary
non-resident alien not engaged in trade or business.

BAR may a non-resident alien NETB be required to file an ITR as regards interest income, rent income
derived in the Philippines? The answer is NO!! The reason is that he is taxed at a final tax rate of 25%. Such final tax
withheld extinguishes his tax liability on all those items of income he receives within the Philippines. Therefore, he is
not required to file an ITR.
Section 25 c

FWT
-

Recipient of an income subject to FWT need not report the same as part of his gross income for the
reason that such final tax withheld extinguishes a TPs tax liability.

5. FILING OF INCOME TAX RETURN

CWT
-

(C) Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies. - There shall be levied, collected and paid for each taxable year upon the gross income
received by every alien individual employed by regional or area headquarters and regional operating headquarters
established in the Philippines by multinational companies as salaries, wages, annuities, compensation, remuneration
and other emoluments, such as honoraria and allowances, from such regional or area headquarters and regional
operating headquarters, a tax equal to fifteen percent (15%) of such gross income: Provided, however, That the
same tax treatment shall apply to Filipinos employed and occupying the same position as those of aliens employed
by these multinational companies. For purposes of this Chapter, the term 'multinational company' means a foreign
firm or entity engaged in international trade with affiliates or subsidiaries or branch offices in the Asia-Pacific Region
and other foreign markets.

A TP whose income is subject to CWT is required to report the same as part of his income. reporting of
such an income through the filing of an ITR.
Section 25 D

FWT
-

An item of income subject to FT need not be reported as part of the gross income of the TP. That is why, if
the only source of income is an income subject to FT (under two provisions which will be explained later
on), the TP shall not be required to file an ITR.

D) Alien Individual Employed by Offshore Banking Units. - There shall be levied, collected and paid for each taxable
year upon the gross income received by every alien individual employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation, remuneration and other emoluments, such as honoraria
and allowances, from such off-shore banking units, a tax equal to fifteen percent (15%) of such gross income:
Provided, however, That the same tax treatment shall apply to Filipinos employed and occupying the same positions
as those of aliens employed by these offshore banking units.

[NOTE this has already been asked in a previous bar exam]

CORRELATION
Section 25 E
I. Section 51 A 2 sub item C
-

It provides that the following individuals shall not be required to file an income tax return
a. an individual whose sole income has been subjected to final withholding tax pursuant to section 57a.
Who are these individual TPs referred to under Section 51 A to C. Correlate this with section 25B, C D and

E.
Section 25 B
(B) Nonresident Alien Individual Not Engaged in Trade or Business Within the Philippines. - There shall be levied,
collected and paid for each taxable year upon the entire income received from all sources within the Philippines by

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor. - An Alien individual who is a
permanent resident of a foreign country but who is employed and assigned in the Philippines by a foreign service
contractor or by a foreign service subcontractor engaged in petroleum operations in the Philippines shall be liable to
a tax of fifteen percent (15%) of the salaries, wages, annuities, compensation, remuneration and other emoluments,
such as honoraria and allowances, received from such contractor or subcontractor: Provided, however, That the
same tax treatment shall apply to a Filipino employed and occupying the same position as an alien employed by
petroleum service contractor and subcontractor.
Any income earned from all other sources within the Philippines by the alien employees referred to under
Subsections (C), (D) and (E) hereof shall be subject to the pertinent income tax, as the case may be, imposed under
this Code.

Under Section 25 C D and E, the following are not required to file an ITR as the 15% reduced income tax rate
imposed upon them is a final tax

i. Alien Individual Employed by Regional or Area Headquarters and Regional Operating Headquarters of
Multinational Companies
ii. Alien Individual Employed by Offshore Banking Units
iii. Alien Individual Employed by Petroleum Service Contractor and Subcontractor
-

Section 52 A provides that every corporation subject to the tax herein imposed, except foreign corporations
NETB, shall file their quarterly corporate income tax returns (CITR).
Thus, this section categorically declares that NRFC noe engaged in trade or business is not required to file
an income tax return.

A) Requirements. - Every corporation subject to the tax herein imposed, except foreign corporations not engaged
in trade or business in the Philippines, shall render, in duplicate, a true and accurate quarterly income tax return
and final or adjustment return in accordance with the provisions of Chapter XII of this Title. The return shall be filed
by the president, vice-president or other principal officer, and shall be sworn to by such officer and by the treasurer or
assistant treasurer.
REASON correlation. This can be answered by referring to section 28 B items 1, 2, 3 and 4.
SECTION 28 B 1, 2, 3, and 4
(B) Tax on Nonresident Foreign Corporation. (1) In General. - Except as otherwise provided in this Code, a foreign corporation not engaged in trade or
business in the Philippines shall pay a tax equal to thirty-five percent (35%) of the gross income received during
each taxable year from all sources within the Philippines, such as interests, dividends, rents, royalties, salaries,
premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or
casual gains, profits and income, and capital gains, except capital gains subject to tax under subparagraphs (C) and
(d): Provided, That effective 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1,
1999, the rate shall be thirty-three percent (33%); and, effective January 1, 2000 and thereafter, the rate shall be
thirty-two percent (32%).
(The rate is now 30% effective January 01, 2009)
(2) Nonresident Cinematographic Film Owner, Lessor or Distributor. - A cinematographic film owner, lessor, or
distributor shall pay a tax of twenty-five percent (25%) of its gross income from all sources within the Philippines.
(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals. - A nonresident owner or lessor of
vessels shall be subject to a tax of four and one-half percent (4 1/2%) of gross rentals, lease or charter fees from
leases or charters to Filipino citizens or corporations, as approved by the Maritime Industry Authority.
(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment. - Rentals, charters and other fees
derived by a nonresident lessor of aircraft, machineries and other equipment shall be subject to a tax of seven and
one-half percent (7 1/2%) of gross rentals or fees.

Thus, from the foregoing provision, the following foreign corporations shall not be required to file ITRs
i. Non-resident foreign corporation not engaged in trade or business
ii. Nonresident Cinematographic Film Owner, Lessor or Distributor
iii. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals
iv. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment

all of these can be considered as special nonresident aliens not engaged in trade or business. The word
special means that they are a subject to this reduced special income tax rate of 15%.

II. CORPORATE TAXPAYERS not required to file ITR

Under Section 28B (1), this 30% gross income imposed on ordinary NRFC is a final tax. Thus, the reason
why this NRFC-NETB is not required to file a quarterly corporate income tax return is because, under
28B(1), the corporate rate of 30% is in the nature of a final tax.

Thus the rule of FWT applies such FT withheld will constitute as final payment of the tax liability on all
those items of income received in the PH by non-resident foreign corporation NETB.

The last three are known as special non-resident foreign corporations because the corporate rate has
been reduced, as follows:
i. Nonresident Cinematographic Film Owner, Lessor or Distributor 25% of the gross income
ii. Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals 4 % of gross rentals,
lease or charter fees from leases or charters to Filipino citizens or corporations
iii. Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment - (7 1/2%) of gross rentals
or fees

There are, therefore, two taxpayers under the tax code who may not be required to file an ITR-

1. On the basis of section 51 A 2 sub item c, in relation to Section 25 B, C, D and E NON-RESIDENT ALIENS NOT
ENGAGED IN TRADE OR BUSINESS
2. corporate taxpayers on the basis of section 52A in relation to Section 28 B 1, 2, 3 and 4 NON-RESIDENT
FOREIGN CORPORATIONS
NOTE: however the following provisions under the NIRC as regards those not required to file ITR
Section 51 individual returns
(2) The following individuals shall not be required to file an income tax return;
(a) An individual whose gross income does not exceed his total personal and additional exemptions for dependents
under Section 35: Provided, That a citizen of the Philippines and any alien individual engaged in business or practice
of profession within the Philippine shall file an income tax return, regardless of the amount of gross income;
(b) An individual with respect to pure compensation income, as defined in Section 32 (A)(1), derived from sources
within the Philippines, the income tax on which has been correctly withheld under the provisions of Section 79 of this
Code: Provided, That an individual deriving compensation concurrently from two or more employers at any time
during the taxable year shall file an income tax return:
(c) An individual whose sole income has been subjected to final withholding tax pursuant to Section 57(A) of this
Code; and
(d) An individual who is exempt from income tax pursuant to the provisions of this Code and other laws, general or
special.
*** Add to these foreign corporations not engaged in trade or business (non-resident) under Section 28 B(1), and
other non-resident foreign corporations specified under section 28 B (2), (3), and (4)
[But do not be confused with the above discussions. The above discussions are merely under the topic on FWT
where income subject to FWT will not require the filing of ITR. If the examiner asks who are the TPs not required to
file an ITR, then the discussion shall be broader to include those inside this box.]

(A) Payment of Tax. BAR QUESTION

What do you mean by items of income subject to final tax? Explain.
Items of income subject to final tax are those items that are governed by the Final Withholding Tax
System. Under this system, the payor or the source is obliged legally to deduct and withhold the tax and thereafter
remit the same to the BIR.

(1) In General. - The total amount of tax imposed by this Title shall be paid by the person subject thereto at the time
the return is filed. In the case of tramp vessels, the shipping agents and/or the husbanding agents, and in their
absence, the captains thereof are required to file the return herein provided and pay the tax due thereon before their
departure. Upon failure of the said agents or captains to file the return and pay the tax, the Bureau of Customs is
hereby authorized to hold the vessel and prevent its departure until proof of payment of the tax is presented or a
sufficient bond is filed to answer for the tax due.
SEC. 77. Place and Time of Filing and Payment of Quarterly Corporate Income Tax. -

The recipient of such items of income may no longer be required to report the same as part of his gross
income. this is so because, such final tax withheld shall extinguish his tax liability on those items of income.

(C) Time of Payment of the Income Tax. - The income tax due on the corporate quarterly returns and the final
adjustment income tax returns computed in accordance with Sections 75 and 76 shall be paid at the time the
declaration or return is filed in a manner prescribed by the Commissioner.

If such taxpayer has income derived only from those subject to final withholding tax, he is not required
income tax return.

------------------------------------------------------------SEC. 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly
summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters
upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so
computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and
shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.

The bar examiners may modify this and change the same to items of income subject to creditable
withholding tax. Thus

What do you mean by items of income subject to creditable withholding tax?

--------------------------------------------------------------

Incomes subject to CWT are those subject to the Creditable withholding tax system. Under this system, the
payor or the source s required to deduct and withhold the tax and, thereafter remit the same to the BIR.

SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that
year, the corporation shall either:

The recipient of such income is required to report the same as part of his gross income. this is so because
such creditable tax withheld will not extinguish the taxpayers tax liability on such income.
Further, the recipient of such income is required to file an income tax return.
Examples:
1. wages
2. salaries
3. other forms of compensation income.

PAY AS YOU FILE SYSTEM (SEC. 56 A(1) AND 77 C

PAY AS YOU FILE simply means that the individual or corporate taxpayer shall pay his or her or its income tax
upon the filing of the income tax return.
Section 56 A1 refers to individual TPs
Section 77 C refers to corporate TPs
Section 51 C(1) provides for the deadline for the filing of ITR (April 15) for individuals
SECTION 56 A(1)
SEC. 56. Payment and Assessment of Income Tax for Individuals and Corporation. -

(A) Pay the balance of tax still due; or

(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.
In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefor.

Section 51
(C) When to File. (1) The return of any individual specified above shall be filed on or before the fifteenth (15th) day of April of each
year covering income for the preceding taxable year.

HYPOTHETICAL QUESTIONS
1. Can the deadline for filing be changed through a law to quarterly filing of ITR for the individual?
The present system, as provided for in 51 (c1) is that, in the case of individual TPs, they are required to
file their income tax return annually. Suppose this is changed to quarterly filing of individual ITR. Is that a valid law?

Justification for annual collection of individual tax (recall such basic and fundamental principles of a
sound tax system fiscal adequacy, theoretical justice and administrative feasibility.)
If we require the individual taxpayers to file their ITR quarterly, do you think the BIR can monitor
compliance therewith?
This present system of annual filing as regards individual TPs can easily be enforced and implemented.
This is mandated by this fundamental principle of sound tax system of ADMINISTRATIVE FEASIBILITY.
Thus, under Administrative feasibility, any tax law, rule system, regulation or method must be capable of
effective and efficient administration or implementation.
But is the law valid? Remember that this fundamental principle of a sound tax system (Admin feasibility) do
not have any constitutional basis. Hence, a violation of this will not render the law invalid. Such law is valid although
unsound for violation of administrative feasibility. Nevertheless, the wisdom of the law is always within the discretion
of the legislature and cannot be interfered with by the courts or executive department regardless of whether the
same is unsound or not.
REASON for VALIDITY the Congress has the power to determine the manner of collecting tax, which
includes the time within which said tax must be paid or collected.

Filing of ITR by Corporate taxpayers (asked during 2001 bar)

BAR
1. How often does a domestic corporation file its income tax return for income earned during a single year?
2. Explain the procedure
3. What is the reason for such procedure?

In case the corporation is entitled to a tax credit or refund of the excess estimated quarterly income taxes paid, the
excess amount shown on its final adjustment return may be carried over and credited against the estimated quarterly
income tax liabilities for the taxable quarters of the succeeding taxable years. Once the option to carry-over and
apply the excess quarterly income tax against income tax due for the taxable quarters of the succeeding taxable
years has been made, such option shall be considered irrevocable for that taxable period and no application for cash
refund or issuance of a tax credit certificate shall be allowed therefor.

1. Domestic corporation shall file its corporate ITR quarterly. Thus, four times a year.
The provision of Section 75 and 76 is quite technical.
There are three words that you must underscore, as follows
i. summary under 75
ii. cumulative under 75
iii. final adjustment tax return under 76
2. Procedure
DC shall file its first, second and third quarterly tax returns showing therein the summary of gross income
and allowable deductions which must be reported on a cumulative basis. Thereafter, such DC shall file its final
adjustment tax return reflecting therein its total income and allowable deductions during that particular taxable year.
3. REASON
i. To ensure the timeliness of collection of corporate taxes
ii. to lessen the burden on domestic corporation by allowing it to pay its corporate taxes in installments
(quarterly payment)
iii. to improve the liquidity of the government.
iv. to improve the cash flow of the government
QUESTION

[Some examinees answered annually. This is wrong. The examiner will be turned off by that answer.]

Suppose congress will change this present system from quarterly to annually, will that be a valid law?
Refer to section 75 and 76.

SEC. 75. Declaration of Quarterly Corporate Income Tax. - Every corporation shall file in duplicate a quarterly
summary declaration of its gross income and deductions on a cumulative basis for the preceding quarter or quarters
upon which the income tax, as provided in Title II of this Code, shall be levied, collected and paid. The tax so
computed shall be decreased by the amount of tax previously paid or assessed during the preceding quarters and
shall be paid not later than sixty (60) days from the close of each of the first three (3) quarters of the taxable year,
whether calendar or fiscal year.

SEC. 76. Final Adjustment Return. - Every corporation liable to tax under Section 27 shall file a final adjustment
return covering the total taxable income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the entire taxable income of that
year, the corporation shall either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount paid, as the case may be.

It has been previously emphasized that these corporate taxes may be needed by the government as this
may constitute the bulk of revenue collections to carry out its operations. This brings us to this fundamental or basic
principle of sound tax system known as FISCAL ADEQUACY.
Fiscal adequacy provides that proceeds of taxes must be adequate to meet the requirements of
government expenditures. The government, then, needs these corporate taxes as they may be used to carry out the
governments legitimate objectives.
If we change this from quarterly to annually, this will clearly violate the mandate of fiscal adequacy.
However, the constitution itself does not require compliance with fiscal adequacy. There is therefore no constitutional
basis for this. Observance of the same merely makes the tax system sound. But it does not invalidate the same.
Thus, such law is valid.

Again, as a rule, one cannot question the wisdom, object, motive, necessity, expediency behind the
passage of such law. As long as it does not violate any of the inherent and constitutional limitations, the law shall be
considered valid and may not be struck down.

And to complete these principles, there is also the need to incorporate the rules regarding the filing of ITR.
QUESTIONS ON RECEIPT OF INCOME

REVENUE REGULATION 3-2002

Substituted Filing of ITR - Under this, compensation earner may no longer be required to file ITR if the following
conditions are present:
i. The TP must be an individual having one source of income only, which income must be compensation income
-

If the TP has other sources of income such as business, trade or professional income, he is required to file
an income tax return.

1. Is that an income derived from sources within or without? If without, is that taxable?
2. When you earn income, necessarily you incur an expense particularly if you engage in a business. Thus, the next
question would be is such an expense paid or incurred deductible?
-

Here, you seek to know the tax base, whether it is taxable income or gross income.

3. After determining entitlement to such deductions, apply the tax rates. Thus, the question would now be what
would be the applicable tax rate? Would the rate be the normal/regular rate, progressive rate, uniform rate or final
tax?

ii. he must have only one employer in the Philippines

4. After determining the income tax due, the next question would be am I required an ITR?
Justice Vitug asked this in 1997 bar exams. If he has two or more employers, he is required to file an
income tax return.
iii. The income tax withheld by the employer must be the same or equal to the income tax due applying the
progressive rates (5% to 32%)
-

If the income tax due as computed, applying the rates of 5% to 32% is more than the tax withheld, this will
necessitate the filing of the income tax return.
At this juncture, check your tax code as you may be using the old one. NOTE that section 51 A2 item b has
already been amended (RA 9504, section 5). Previous to the amendment, there was this 60,000 limitation.
This was already removed.
Revenue regulation 3-2002 has no limitation

iv. The employer is required to file this so-called INFORMATION TAX RETURN (BIR FORM 1604) showing therein
the tax withheld on these compensation income.

Here we have to collate the rules on ITR.

Answering these questions would help you understand the flow.

FOUR SETS OF RULES EMBODYING THE FOLLOWING SOURCES OF INCOME, TAX BASE, TAX RATES and
the RULES REGARDING THE FILING OF ITR
Kinds of taxpayers (sec. 22 in relation to 24 and 25;)
Sources of income (sec. 23)
Rules on Tax Base (sec. 24, 25, 27 and 28)
Income tax rates (progressive, final or uniform) 24, 25, 27, 28
Filing of ITR (51, 52, 75, 76 and 77)
Sources

Tax Base

Tax Rates

Filing of ITR

a. RC

Within and without

Taxable income

Progressive rates
(5%-32%)

Required to file ITR

b. NRC

Within

Taxable income

Progressive rates

GENERAL PRINCIPLES OF INCOME TAXATION SECTION 23

c. RA individual

Within

[PROBLEMS WERE ALREADY GIVEN ON THIS IN THREE BAR EXAMINATIONS 1998 (1), 2000 (8) AND 2002
(1)]

d. NRA ETB

Within (23D)

e. NRA NETB

Within

RR 3-2002 declares that these tax withheld on these compensation income is tantamount to a substituted
filing of ITR. Thus, it is as if you have filed your ITR.

There is need to elaborate on these because the rules under section 23 are not really complete. They
pertain only to sources. Thus, these can only answer questions on whether an income derived from sources within
and without may be subject to PH income tax.
Are these the only general principles of income taxation?

Kinds of TPs
1. INDIVIDUALS

Taxable income (24

A1c)
Taxable income
(25A 1)

Progressive rates
Progressive rates

Gross income (25 B,

C, D and E)

Final tax rates (25%

or 15% special
rates)

a. DC

Within and without

(23E)

Taxable income

Uniform corporate
rate (30%)

b. RFC

Within

Taxable Income

Uniform corporate
rate (30%)

NOT required to file

ITR (51A 2c)

2. CORPORATE
TAXPAYERS

These cannot answer questions on tax base or whether a TP can claim deductions.
We must also incorporate the description of tax rates whether they are normal, final or progressive rates.

Required to file (51A

1b)
Required to file (51A
1c)
Required to file (51A
1d)

Required to file
quarterly corporate
ITR, and FACIT
return (52 in re 75,
76 and 77)
Required to file
quarterly corporate

c. NRFC

Within

Gross income/ gross

charter fees/gross
rentals and the like
(28B 1, 2, 3 and 4)

Final tax (30% 28b1)

28B2 25%
28B 3 4.5%
28B 4 7.5%

ITR and FACIT

return on income
derived from
sources within

The established jurisprudence for RA as regards the test for an alien to be a resident is the Principle of the
Intention to return (animus revertendi)

RFC

NOT required to file

CITR (52a)

The definition of RFC under section 22h is not really complete. It is ambiguous.
The definition merely sys that it is a foreign corporation that is engaged in trade or business.
The problem is determining whether or not the RFC is engaged in trade or business. Thus, there is need to
rely on jurisprudence

NOTE:
-

TEST in determining if RFC is ETB

When we refer to taxable income, it implies that the TP is allowed deductions and/or exemptions
Where the tax base is gross income, no deductions or exemptions

BAR QUESTIONS
1998 From what sources of income are the following TPs subject to Philippine Income tax?
2000 question pertained to NRA-ETB. How is such an income on sources within the PH and other countries of
NRA-ETB taxed?
-

Mr. corpus, having stayed in the Philippines for more than 180 days, shall be taxed as a non-resident alien
engaged in trade or business. (this must be your premise). Thus, the rules on income taxation that will
apply to him are as follows:
1. he is taxable only on income derived from sources within the PH
2. he can claim deductions as the tax base is taxable income. he can claim personal exemption by way of
reciprocity (35d).
3. His taxable income is subject to this progressive rate of 5% to 32%,
4. Mr. Corpus is required to file an ITR regarding his income from source within the PH.
2002 What is the rule of income taxation that we apply to non-resident citizen on income derived from sources
within and without?

1. CASE: Mentholatom Doctrine (based on the case of Mentholatom vs. mangalingon 72 Phil 524)
-

2. CASE: ERIKS doctrine (based on Eriks Company Ltd. Vs CA 267 SCRA 567)
-

The most reasonable question would be if the examiner will adopt the title of section 23 What are the
general principles of income taxation in the PH?

NRA-ETB

There is such provision considered as a test as to whether the NRA is engaged in trade or business
The key word is aggregate. The law does not say continuous and uninterrupted.
The code says MORE THAN 180 days
It also says deemed does not require actual engagement in a business.
Totality rule applies
Thus, the rule would be that where the NRA stayed in the Philippines for an aggregate period of more than
180 days during a particular taxable year, he is deemed or considered as an NRA engaged in trade or
business

The test that has been developed here is the TEST OF SUBSTANCE
To be considered as engaged in trade or business, it must carry on the body or substance of the business
in accordance with the purpose for which the corporation was organized.

3. CASE: B. Van Zuiden vs. GTVL manufacturing Corp (May 28, 2007) 523 SCRA 223
-

Commercial law experts consider this as the test of continuity.

In order to be considered as doing business, the foreign corporation must undertake transactions
characterized as being ordinary; that is, in connection with the activities of the business. The transaction
must not be isolated.
Thus, if a foreign corporation performs a business transaction in the PH, and the same is an ordinary
transaction, it must be continuous, there must be a series of transactions so as to be considered as doing
in business.
This is important in the light of the defective definition of RFC under the Tax Code.

TEST OF ACTUAL COMMERCIAL TRANSACTION to be considered as doing business, the FC must

perform an actual, specific commercial act within the PH.
Mere exporting of goods does not, in itself, make such foreign corporation as RFC in the absence of an
actual specific act performed within the Philippines. (REASON the PH has no jurisdiction over such
action performed outside the PH. So that we can acquire jurisdiction, this corporation may be required to
obtain a license.)

In the Eriks case, the foreign corporation had an agent here in the Philippines. In the B. Van Zuiden, there
was no agent designated in the Philippines. There was no single commercial act although goods were exported and
delivered in Hongkong through another corporation. There being no actual specific commercial act, though goods
were exported, the same did not make as engaged in business.
HYPOTHETICAL QUESTION
Can congress pass a law imposing tax on the income of RFC derived from sources outside the Philippines?

RA individual (Section 22f)

Here, RA merely describes an RA as a resident of the Philippines not a citizen thereof.

The tax code is silent on the particular criterion that will establish the status of such alien as resident.

Always remember inherent and constitutional limitations. For as long as the same are not violated, the law
shall be considered valid.

One of the inherent limitations is the principle of territoriality. Bear in mind that these FCs are organized
under foreign law. Thus, the imposition of tax of a foreign corporation from sources outside PH will violate the
principle of territoriality.

DIFFERENT ITEMS OF INCOME

In the case of Criba vs. Romulo, the SC pointed out that 28A 1 is the general rule. 28A item 3a is the
exception to the rule. and this applies to airlines which have landing rights and deriving income from the
carriage or transport of passengers originating from the PH.

NRFC

Section 32A enumerates those different types of income

Under this, income is categorized into 11 items therein.

If you refer to item #2, it covers 2 types of income business or trade and professional income.
Item #9 also covers two types of income prizes and winnings
Though it made mention of 11 items, there are actually 13 items since 2 and 9 both provide two types of
income.

1994 (16) BAR rules on tax base

The Sec. of Finance, upon recommendation of the BIR commissioner, issued BIR regulation using gross
income as the tax base for C doing business in the PH. Is this BIR regulation valid?
-

If there will be a question on the validity of BIR regulations, always remember CRUP which are the
requisites for BIR regulations.
C Consistent / in harmony with the Tax Code
R Reasonable
U useful or necessary
P published in the O.G. or in a newspaper of general circulation.

Recall the provision of the tax code that in the case of corporations doing business, the tax base is taxable
income.
CASE Misamis Oriental Assoc of coconut traders vs. Sec of finance 238 SCRA / commissioner vs
central Luzon drug corp 456 SCRA 414

1. Compensation for services in whatever form paid

2. Business, trade and professional income
3. Gains derived from dealings in property
- this may simply be described as property income
4. Interest income
5. rent
6. Royalties
7. Dividend income
- there are 8 provisions which lay the rules on dividend income
8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners distributive share from GPP.
KEY WORD PBC (provincial Board of canvassers) PRP (Peoples reform Party) WPD (Western Police District)
PARI

It is settled that BIR regulation is a mere interpretative rule. it cannot amend, modify, alter or supplant the
provisions of the tax code. Having this in mind, we can now answer the question.

PBC

It is not a valid BIR regulation.

Professional Income
Business or Trade Income
Compensation Income

Settled is the rule that BIR regulations are valid only if they are consistent or in harmony with the Tax
Code. The tax code provides that the tax base for corporations doing business is taxable income. indeed, the BIR
regulation contravenes the provision of the tax code.
Jurisprudence dictates that BIR regulation is a mere interpretative rule. Therefore, it cannot amend,
modify, alter or supplant the provisions of the tax code. Thus, the BIR regulation in question constitutes an
impermissible encroachment on legislative prerogative.

PRP
Property income
Rent Income
Prizes
WPD

QUESTION
The secretary of finance, upon recommendation of the commissioner, issued BIR regulation using taxable
income for foreign corporations not doing business in the Philippines. Is the regulation valid?

Winnings
Pensions
Dividend Income

No, the regulation is not valid.

PARI

It is jurisprudentially.

Partners distributive share from the net income of GPP

Annuities
Royalties
Interest income

AUTHORITATIVE DEFINITION OF GROSS COMPENSATION INCOME

RR 2-98 defines gross compensation income as all remuneration for services performed by an employee
for his employer arising from employer-employee relationship, unless specifically excluded by the Tax
Code.
From this definition, the TEST has been established that is, not all payment for services rendered may
form part of the gross compensation income; only those payments made under the EE relationship.
From this definition, we can glean that there are those items of gross compensation income that may be
excluded from the same. EXAMPLE those benefits, allowances that may be granted for the convenience
and exclusive advantage of the employer (these benefits are tax exempt under the CONVENIENCE OF
THE EMPLOYER RULE).
TEST OF EE RELATIONSHIP AC-DC

A appointment or selection
C compensation
D dismissal
C control

Try to refer to section 34A1a(i). there is really a corresponding provision on this. The title allowable
deductions, business expenses, ordinary and necessary expenses. And under item (i), it says reasonable
allowance for salaries, wages and other forms of compensation for personal services actually rendered.
You should know by now that 32A1 provides this tax implication
to the employee which may be treated as compensation income;
to the employer, that is a deductible, ordinary and necessary expense
Thus, when payment is made for services rendered, there are two tax implications
i. the recipient of such a compensation income is taxable as an income to the employee
ii. the one making payment (employer) however, can claim that as a deductible expense

How much can be claimed as deductible expense on the part of the employer?

In 34A1a(i), the word used as criterion is reasonable. But it is given that only such fair value of the
services rendered may be considered as taxable compensation income.
Fair value is the same as reasonable. Thus, only such reasonable amount can also be claimed as
deductible, ordinary and necessary expense.
EXAMPLE

EXAMPLE of payment for services rendered which may not be taxed as compensation income
1. payment received by a contractor from the contractee. In the absence of EE relationship., such an
income received shall be taxed as business or trade income

Employer paid employee 30,000. Assume that of the 30,000, only 20,000 represents fair value of the
services rendered. Assume that the excess 10,000 was given by reason of love and affection.
How much may be taxed as compensation income to the employee?

2. professional income payment must have been made for services rendered in the absence of EE
relationship

Why is it important to know whether such an income is compensation or not?

It is important because, in determining such taxable compensation income, one can only deduct from
gross compensation income these three items 1. Basic personal exemption of P50,000
2. Additional personal exemption of 25,000 for every qualified dependent child (not to exceed 4
dependents)
3. premiums on health and hospitalization insurance - 2,400 a year
NOTE: If you commit an error here in that you exclude item which should have been a tax as compensation income,
there is an understatement of income.

Fair value of the services rendered. thus, the employee can be taxed as follows:
20,000 for the compensation income; she is still taxable with respect to the 10,000. This is where you
invoke this provision under 32A - derived from whatever source. Thus, the source of income is immaterial whether
illegal or legal, moral or immoral that is definitely subject to tax.
You will note that this 30,000 is taxable. But only 20,000 may form part of the gross compensation income
of the employee. But she can still be taxed on the receipt of the 10,000 applying the rule that gross income is income
derived from whatever source.
On the part of the employer, guided from this rule that only reasonable allowance, salaries or wages may
be claimed as ordinary and necessary expense, he can only claim 20,000 as reasonable, ordinary and necessary
expense.

Let us construe the phrase in whatever form paid under 32A1

CORRELATION

Correlate 32A with 34.

Compensation for services in whatever form paid

If you refer to 34A1a(i), the language of the law provides other forms of compensation for personal
services actually rendered.
This (in whatever form paid) implies that taxable compensation income is not only limited to the payment
made in cash. Thus, it may be in the form of payment of premiums by the employer on the life insurance policy of the
employee. This may be treated as taxable compensation income.

It also covers payment made in kind. Similarly, this provision other forms also implies the same.
[NOTE: it is an income to the employee; it is an expense to the employer]
BAR
1. Premiums paid on life insurance of employee for services rendered.

(4) Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person
financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer
is directly or indirectly a beneficiary under such policy.
There is really no categorical provision saying that life insurance premiums can be claimed as deductible
ordinary and necessary expense. This is the time to construe section 34A1a(i). Thus, we have to consider this rule
as previously discussed reasonable allowance, salaries and wages and other forms of compensation for personal
services rendered. As such, this may include premiums paid by the employer.

2. cancellation or forgiveness of indebtedness.

But how do we reconcile this with the provision on 36A(4)?
What may be the possible tax implication on the part of the employee?
Here, the employer condones or renounces the obligation of the employee. To be considered as taxable
compensation income, such indebtedness must have been cancelled, remitted or condoned in consideration or on
account of the services rendered. this will also fall under the phrase in whatever form paid. The services is paid
through cancellation or forgiveness of the employees obligation by the employer.

Tax implication insofar as the employer is concerned

Such compensation for services rendered may be treated as a deductible expense as this may fall under
this phrase other forms of compensation for personal services rendered.
-

This is how to understand these phrases under 32A (in whatever form paid) and under 42A1a(i) (other
forms of compensation for personal services rendered. this must be the basis for such a rule that
premiums paid by the employer on the life insurance policy of his employee; that is, it will result in taxable
compensation income to the employee and deductible expense to the employer.

Note that under 36A(4), the provision provides when the taxpayer is directly or indirectly a beneficiary
under such policy. This is the key. The taxpayer referred to here is the employer.
Thus, where the employer is the beneficiary (direct or indirect) of the life insurance policy of his officer or
employee, and he pays for the premium of such, the same cannot be considered as deductible business expense.
But if he is not, then we have to apply the provisions of Article 34A1a(i) which says that it shall be considered
reasonable ordinary and necessary business expense as other forms of compensation for personal services
rendered.

Under 34A1a(i), it is given here that to be considered as deductible expense, the employer must not be the
beneficiary. This section presupposes that the employer is not the beneficiary of the policy. If the employer is the one
designated as the beneficiary, you apply 36A(4)
- the payment of premiums shall not be considered as deductible
expense.
With these four provisions, we can now summarize the rules governing tax treatment of life insurance
premiums paid by the employer on the life insurance policy of the employee. Thus TAX TREATMENT OF LIFE INSURANCE PREMIUMS OF EMPLOYEE PAID BY EMPLOYER

PROVISIONS UNDER THE TAX CODE ON LIFE INSURANCE PREMIUMS

i. 33B(10) one of the taxable fringe benefits are life insurance premiums
- the tax treatment of this is that this is a taxable fringe benefit subject to final tax
- the rule, however, applies to managerial and supervisory employees
- if the insured employee is a rank and file, this is the time to apply sec. 32A1
- under section 32A1, compensation income may cove those items of income in whatever form paid.

BENEFICIARY DESIGNATED
Estate, executor or administrator or
heirs of EMPLOYEE

TAX IMPLICATION for employer

(claimed as deductible expense)
Deductible - other compensation
for services rendered (34A1a(i))

Thus, note that while the premiums paid for life insurance of the rank and file employee is not considered for fringe
benefits tax (which is a final tax), the same shall be considered as taxable compensation income on his part.
Thus, WHAT IS THE TAX EFFECT OF PAYMENT OF LIFE INSURANCE PREMIUMS? (tax effect may
also mean TAX INCIDENCE / TAX CONSEQUENCE / TAX IMPLICATION)
Tax implication as regards the employer
It may be a deductible expense. But there is only one provision (Sec. 36A(4)) on this. The rule is that life
insurance premiums paid for by the taxpayer (the employer or the person claiming such an expense), whether the
designation is direct or indirect, these life insurance premiums are non-deductible items or expenses.
Section 36A(4)

Employer

Non-deductible (36A(4))
REASON common sense will tell
us that it is a mere return of capital.
upon the death of the employee, the
proceeds go back to the employer.
Thus he cannot be allowed to claim
the same as deductible expense

TAX INCIDENCE for the employee

(treated as taxable income)
- If the insured is a manager or
supervisor, apply 33B(10) taxable
fringe benefit subject to final tax.
Thus, it should not be reported as
part of his income because subject
to FT.
- if insured is rank and file, apply
32A1 in whatever form paid
these premiums must have been
paid pursuant to that EE
relationship. Thus, it shall be a
taxable compensation income.
therefore, must be reported as part
of gross compensation income.
- Will not result in taxable income
REASON the basis of income tax
is the benefit that may be received
by the employee. Here, the
employee never receives anything
because upon his death, the
proceeds go to the employer. Thus,

there is nothing to tax as there is no

benefit that accrues to the estate,
executor, etc. of the employee.
CANCELLATION OF INDEBTEDNESS

- the debtor must be a stockholder

Creditor-corporation condones the
obligation of the debtor-stockholder
(Sec. 50 of RR-2)

The tax code does not provide for any specific rule on this.
You can find rules on this under the 1940 RR-2, section 50 thereof. These rules are still applicable. In fact,
justice Vitug, in 1997, asked this through a hypothetical problem.

COMPENSATION INCOME (32A1) VS. FRINGE BENEFIT (33)

Since this involves indebtedness, we have to know the rules on the tax effect on the creditor and the
debtor.

DEBTOR
- taxable compensation income

On compensation for services

- deductible

Employer is creditor

Based on (34A1a(i)) other forms of

compensation for personal services
rendered

- Based on 32A1 in whatever form

paid

- Not deductible.
- considered as taxable donation
- being a donor, he is subject to
donors tax

Is the debtor-donee subject to

donees tax? donees tax has long
been abolished by PD 69.
Thus not subject to
donees tax.

Creditor simply condones obligation

of debtor without receiving any
consideration except the liberality of
the former.

Based on 1270 of the CC in relation

to the definition of donation under
725 CC

Capital Transaction
- The creditor must be a corporation

CI subject to 5-32% progressive rates. Thus, this must be reported as part of gross income.
FB subject to final tax. Since, final tax constitutes as final payment on the tax liability, therefore, the same need not
be reported as part of the gross income of the recipient.

TAX EFFECT
CREDITOR

- condones debt on account of

services
rendered
under
EE
relationship
Taxable donation

Recall Section 43 of BP 68
dividend may be in the form of cash,
stock or property. We also have
liquidating dividend. There is also
the indirect dividend a payment is
made
through
other
form.
Condonation of debt of SH is one
such indirect dividend. (NOTE trust
fund doctrine must be observed.)

FRINGE BENEFIT

1. It may result in compensation for services rendered.

2. it may give rise to taxable donation
3. it may amount to taxable capital transaction

Situations

- it shall be considered as interest on

capital.5
- not deductible

TAX TREATMENT ON CANCELLATION / FORGIVENESS OF INDEBTEDNESS

SH, that is an income for the SH. but

what about the effect on the
corporation?

In corporation law, when a dividend

is declared by a corporation to the

Is he subject to dones tax? See

32B(3) one of the inclusions from
gross income is donation. Thus, the
same shall not be subject to income
tax. (This was asked by J. Vitug in
1997)4
- taxable indirect dividend. (dividend
income to the SH)

BAR (2003)
Who is legally obliged to pay fringe benefit tax?
Basis of answer - RR -3-98 (sec. 2.33 2nd par.) in re RR 2-98 on withholding agent.
The tax imposed under Section 33 of the Tax Code shall be treated as a final income tax on the employee
(manager or supervisor) which shall be withheld and paid by the employer who will report the same in a quarterly
calendar basis pursuant to section 57A of the Tax Code. Thus, it is the one legally obliged to pay the FBT.
Recall the rules on FWT system. RR-2-98 (sec. 2.57a) provides that it is the withholding agent who is
legally obliged to pay that final tax. This is so because since it is a legal obligation, in case of breach of the same, the
BIR will go after the employer, not the manager or supervisor.
BAR QUESTIONS
1. BAR 2001 (11) on Exemption from FBT (Housing unit within the business premises of the employer
2. BAR 2003 (3) Who is legally obliged to pay FBT?
3. BAR 2005 (4b) Are de minimis benefits tax exempt?
4. BAR 2007 (8) Rice allowance or subsidy

BAR An insolvent company had an outstanding obligation in the amount of 100,000. Since the debtor could not pay its
obligation, the creditor agreed to accept property through dacion en pago worth 30,000. In the dacion in pago document, the
unpaid balance is condoned. What is the tax effect of the condonation on the debtor? Insofar as the creditor, tax-wise, what is
the tax effect?
ANSWER
1. the creditor, having condoned the unpaid balance of 70,000, without any consideration, a donation arises. The debtor-donee
is not subject to donees tax as donees tax has long been abolished. The debtor-donee is neither subject to income tax as
donation is excluded from gross income under section 32B(3) of the Tax Code.

Section 33 has three paragraphs (a, b and c)

PARAGRAPH A

BAR (1999) Is interest on preferred shares of stock interest on capital) deductible?

ANSWER Rev. Memo Circular 17-71 [July 12, 1971] made no qualification. It is an absolute rule that interest on capital
(which may include interest on preferred shares of stock) is a non-deductible interest. applying such a rule to the corporation,
it cannot claim such amount as a deductible expense.

Notice that in paragraph A, there are so many rates mentioned therein. Nothing to worry because you will
not be asked on these rates.
Take note of the provision that the tax base of FB shall be the grossed-up monetary value of fringe
benefit furnished
This means that the applicable tax rate is a final tax
So, if you multiply the tax rate with the final tax rate, the result is fringe benefit tax
This is the tax that must be withheld and paid by the employer on a calendar quarterly basis pursuant to
section 57a of the tax code.

and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such
rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into
account the peculiar nature and special need of the trade, business or profession of the employer.

Said section provides that the following fringe benefits are not taxable under this section:

PARAGRAPH B
-

It is paragraph B that must be memorized. Section 33B enumerates those taxable fringe benefits.
Here the definition is defective. If you just rely on this, you will be misled especially if a question will be
asked which may not be covered by such definition.
You ought to know the clear-cut definition of fringe benefits.
RR 3-98 section B provides for a complete definition. Thus,

FRINGE BENEFIT may include goods, service or other benefit furnished or granted by an employer in cash, or in
kind in addition to basic salaries to an individual employee, except rank and file employees.
There are those who advance this view that basic salaries of managers or supervisors are subject to this fringe
benefit tax. This is an erroneous opinion.
Basic salaries of managers or supervisors shall form part of the gross compensation income, not FBT. That is why
the definition provides that FB is in addition to basic salaries. Thus basic salaries of managers and supervisors
shall be taxed nder the progressive rates.

What may be the form of such fringe benefit?

As the definition says, it may be in goods, services or other benefits (cash or income).

Who must be the source or giver?

Of course it is the employer, the employer may be an individual or corporate, whether taxable or tax
exempt.

Recipient
Managerial or supervisory employees since the definition says to an individual employee EXCEPT RANK
AND FILE
A tax author advances this opinion that fringe benefits received by rank and file employees are exempt
from income tax. This is not correct. He misconstrued section 33C(3) thereof.
Refer to Section 33C(3).

3. Benefits given to the rank and file employees, whether granted under a collective bargaining agreement
or not.
The proper interpretation of this provision is that fringe benefits received by rank and file employees are
not subject to this final tax imposed under Section 33A. on the part of the rank and file employees, that must be
considered as part of their gross income subject to 5-32%.

Having clarified the ambiguities, let us now discuss section 33 B and explore possible questions under this.

[it is very remote that a question will be asked on the enumeration of these taxable fringe benefits. If asked, it may,
however, be in the form of a problem. That is why you should know these taxable fringe benefits as amplified under
RR 3-98.]
-

The enumeration consists of ten items. This enumeration is not exclusive as the provision provides such
as, but not limited to

Section 33B
(B) Fringe Benefit defined.- For purposes of this Section, the term "fringe benefit" means any good, service or other
benefit furnished or granted in cash or in kind by an employer to an individual employee (except rank and file
employees as defined herein) such as, but not limited to, the following:
(1) Housing;
(2) Expense account;
(3) Vehicle of any kind;
(4) Household personnel, such as maid, driver and others;
(5) Interest on loan at less than market rate to the extent of the difference between the market rate and actual rate
granted;
(6) Membership fees, dues and other expenses borne by the employer for the employee in social and athletic clubs
or other similar organizations;
(7) Expenses for foreign travel;
(8) Holiday and vacation expenses;
(9) Educational assistance to the employee or his dependents; and
(10) Life or health insurance and other non-life insurance premiums or similar amounts in excess of what the law
allows.

Section 33
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not;

1. HOUSING PRIVILEGE / BENEFIT

-

This has been further explained under RR 3-98

This is exempt under three (3) cases under RR 3-98 s. 2.33 (b) (1) (sub item f,g and x)

i. Military Housing unit

-

This was asked in 1991

REASON consistent with the state doctrine that the state shall provide lodging quarters within the military
camp or one accessible therefrom
These military housing units are exempt pursuant to the doctrine that the state shall provide living quarters
within the military camp or such place accessible from such military camp in order that they be readily on
call to meet the exigencies of military service

EXAMPLE
The employer granted 500,000 to its manager or supervisor. Under this, four situations may arise
i. The rate is more than 12% (e.g. 14%)
ii. Actual rate imposed is 12%
iii. Actual rate of interest is less than 12% (e.g. 6%)
iv. employer imposed 0%

ii. Housing units situated within the business premises of the employer
-

This was asked in the 2001 BAR (11).

REASON (Collector vs. Henderson 1 SCRA 169) The Convenience of the Employer Rule is the basis of
the exemption.
This is also in accordance with the provision under section 2.33 of RR 3-98 when it provides that fringe
benefits that are given for the advantage or benefit of the employer shall be exempt from fringe benefit tax

The fringe benefit taxed shall be the difference between the market rate (12%) and the actual rate granted.

Under situation 1, there will be no taxable fringe benefits since is more than 12%
Under situation 2, there will also be no fringe benefits tax because the law provides that fringe benefits tax
is imposed if the actual rate is less than 12%
Under situation three, the 6% is covered by the fringe benefits tax as regards the difference between 12%
and 6%.
Under situation 4, if the interest rate is 0%, this will definitely result in taxable fringe benefit.

What about those adjacent housing units?

-

The rule provides including such adjacent housing unit

The word adjacent has been defined therein t mean that the housing unit must be within the maximum fifty
(50) meters from the perimeter of the business premises. Thus, it is beyond such 50 meter perimeter, it will
no longer be exempt from FBT.
This adjacent housing unit also falls under the Convenience of the Employer Rule.
iii. Temporary housing unit

6. MEMBERSHIP BENEFIT
7. EXPENSES FOR FOREIGN TRAVEL
- this was rumored as one of the questions in 2002.

Temporary means that the employees stay in the premises is only for three (3) months or less.
REASON warranted by the exigency of the service. It is an amplification of the Convenience of the
Employer Rule.
If beyond the three month period, it will not be considered exempt from fringe benefits tax

2. EXPENSE ACCOUNT
3. (MOTOR) VEHICLE OF ANY KIND
4. HOUSEHOLD PERSONNEL BENEFIT
- here, it is the employer who pays for the salaries of drivers and other members of the household of managers and
supervisors
- this must be explained because the provision is quite ambiguous
5. INTEREST ON LOAN at less than market rate to the extent of the difference between the market rate and actual
rate granted

REASON this manager can secure loans from other sources wherein they may be made to pay only the
legal rate of interest. in the event that the employer lowers the rate to 11% down to 0%, there is such
benefit that may accrue to the manager or supervisor.

EXEMPTION FROM FRINGE BENEFIT REQUISITES

I. required by the nature of the trade or business of the employer
- this must be paid in connection with business meetings, conventions, seminars held abroad
II. There has to be an official communication from business associates abroad
III. Substantiated by receipts and documents
-

Daily allowance (not more than $300 a day)

Exempt cost of airplane ticket (cost of economic and business class. As to cost f first class tickets, it is
exempt only for up to 70% of the cost of the ticket. In other words, the cost of 30% of the first class ticket
shall be taxable.)

8. HOLIDAY AND VACATION EXPENSES

9. EDUCATION BENEFIT

- this is also an ambiguous provision which has been clarified by RR 3-98

When is this subject to fringe benefits tax? This is also n ambiguous provision because it merely says
market rate.
The rule simply provides that it may result in taxable interest benefit on loan if the actual rate of interest is
less than the market rate.
This market rate, under RR 3-98 may refer to the 12% base mark rate. Thus, the rule now is clear there
can only be taxable interest benefit on loan if the actual rate of interest imposed by the employer is less
than 12%. If it is exactly 12%, it will not result in taxable fringe benefit.

EXEMPTION UNDER TWO SITUATIONS

I. Educational benefit in the form of scholarship grant given to the manager or supervisor

Requisite:

a. There has to be a written contract or stipulation to the effect that such manager or supervisor must
remain in the employ of the employer for a certain period of time
b. it must be connected with or relation to the nature of the employers trade or business

II. scholarship grants given to dependents of the manager or supervisor

-

1. Courtesy discounts
2.

Requisites
a. the dependent must be able to pass such competitive examination which may be administered by the

TAX EXEMPT FRINGE BENEFITS

employer

10. LIFE OR HEALTH INSURANCE and OTHER NON-LIFE INSURANCE PREMIUMS

THREE EXEMPTIONS ON FBT UNDER INSURANCE PREMIUMS

I. Life Insurance Premiums on GSIS
- REASON based on sound public policy as provided by the GSIS Law
II. SSS Life Insurance Policies
RA 8282 grants exemption

III. Premiums on Group Insurance Policy

REASON recall your knowledge on estate tax. You can understand the basis for such an exemption if
you read section 85E of the Tax Code.

Section 33
(C) Fringe Benefits Not Taxable. - The following fringe benefits are not taxable under this Section:
(1) fringe benefits which are authorized and exempted from tax under special laws;
(2) Contributions of the employer for the benefit of the employee to retirement, insurance and hospitalization benefit
plans;
(3) Benefits given to the rank and file employees, whether granted under a collective bargaining agreement or not;
and
(4) De minimis benefits as defined in the rules and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.
The Secretary of Finance is hereby authorized to promulgate, upon recommendation of the Commissioner, such
rules and regulations as are necessary to carry out efficiently and fairly the provisions of this Section, taking into
account the peculiar nature and special need of the trade, business or profession of the employer.

Insofar as RR 3-98 is concerned, there are basically three exemptions as follows:

Sec. 85
[CNN]
(E) Proceeds of Life Insurance. - To the extent of the amount receivable by the estate of the deceased, his executor,
or administrator, as insurance under policies taken out by the decedent upon his own life, irrespective of whether or
not the insured retained the power of revocation, or to the extent of the amount receivable by any beneficiary
designated in the policy of insurance, except when it is expressly stipulated that the designation of the beneficiary is
irrevocable.

Take note that section 85E provides taken upon his own life. This should be construed to mean that
proceeds of group insurance policy must be excluded from the gross estate.
Invariably, consistent with such a rule that proceeds of group insurance policy should be excluded from the
gross estate, it should also be excluded from income tax.

1. required by the nature of the trade or business of the employer

2. necessary to the employers trade or business or profession
3. given for the convenience or advantage of the employer
-

Master the de minimis benefits as provided under 22C(4)

DE MINIMIS BENEFITS benefits which are relatively of small value

There are four BIR RRs relative to this

i. RR 3-98

GUIDE TO EXEMPTIONS OF FRINGE BENEFITS

Fringe benefits will be exempt if
1. required by the nature of the trade or business of the employer
2. necessary to the employers trade or business or profession
3. given for the convenience or advantage of the employer

a. REASONS why de minimis benefits are tax exempt

i. they are relatively of small value

ii. granted to promote any of the following
Contentment
Health
Efficiency
Good will

BAR (8) 2007 asked about de minimis benefits

HYPOTHETICAL QUESTIONS
NOTE: that the enumeration is not exclusive. Suppose you are asked
What are those fringe benefits not mentioned in 32B which are likewise subject to final tax?

Insofar as de minimis benefits are concerned, RR 3-98 has been amended by RR 10-2000
This has been further amended by RR 5-2008 and RR 10-2008

AMOUNT ranges from 125 a month to 10,000 a year.

The rule therefore is this a private employee who receives commuted or monetized sicj leave credits is
taxable irrespective of the number of the days. You only apply the ten day period when it comes to
vacation leave credits.

125/Month medical cash benefit given to the dependent of employees (must be in cash
DECIDED CASE (asked at least four times)
-

The RRs say employees. Thus, it will cover rank and file employees, managerial and supervisory
employees, private or public. The law makes no distinction

300/Month laundry allowance

1,500/Month rice subsidy

What is the tax treatment of this terminal leave pay? (Zialcita doctrine 190 SCRA 851)
In this case, the SC held that terminal leave pay, which may include commuted value of vacation and sick
leave credits, is exempt from income tax. The court cited section 32D6(b). this is so because it is received on
account of cost beyond the control of the employee compulsory retirement.
Compulsory has been construed by the court as a cause beyond the control of such employee or official.

4,000/year - Uniform/clothing allowance

5,000/year 1.) anniversary gift; 2.) partake of the nature of Christmas gift
-

See sec. 32B7(e) exclusions from gross income

a. thirteenth month pay

b. other benefits (including Christmas bonus under RA 6686)
- if christmas bonus, you should apply the lumpsum of 30,000, not the 5,000 above.
- thus, if the examiner uses the word gift, apply the 5,000 limitation. It is a tax exempt de minimis benefit
- if the word used is bonus, apply the lumpsum limitation of 30,000. [lumpsum becase there are other
benefits which must be taken into consideration, among which is this christmas bonus.]
10,000/year
1. medical benefit to employees
- here, distinction must be made. In regard to dependent of the employee, you apply the 125/month. But if
the recipient is the employee, you apply the 10,000/year.
2. employees achievement award (given precisely to promote efficiency)
-

In regard to overtime pay, it is limited to that 25% of the minimum basic wage. (????)

What are those benefits which are not subject to clear-cut limitations?
Fruits, flowers, books, - no specific amount fixed. Thus, the amount must be of reasonable value given on
account of special occasions

As to the exemption from income tax of the monetized or commuted value of vacation and sick leave
credits, RR 10-2000 makes no distinction insofar as government employees are concerned. Distinction
must be made only to private employees.

Here, no distinction has been made insofar as government employees are concerned. Monetized value of
leave and sick credits are considered de minimis benefits.
Thus, such an exemption as regards government employees extends to vacation and sick leave credits.
You only qualify if the recipient of the monetized value of leave or sick leave credits is when the recipient is
a private employee. Thus, it is exempt only insofar as the value of the 10 day vacation is concerned. This
means that in excess of that 10 day period, the excess shall be taxable.
RR 10-2000 grants no exemption to private employees with respect to their receipt of the commuted value
of such sick leave credits.

APPLICATION
Refer to this tax exempt de minimis benefit. This contemplates a situation where the employee has not yet
retired. But once he retires compulsorily from employment, he is expected to receive the so-called terminal leave
pay. This terminal pay is excluded from gross income.

---------------------------------------------------------

GROSS INCOME DERIVED FROM THE CONDUCT OF TRADE, BUSINESS OR

EXERCISE OF PROFESSION

Covered herein are the following

Business or trade income

Professional income

Insofar as individual TPs are concerned, what is the technical term for this? Refer to section 74 (second
sentence). You should know by now that business or trade income which may be received or derived by
an individual taxpayers, or professional income form part of the so-called self-employment income.
There are actually three items of income which may comprise the so-called self-employment income.
These two (business/trade and exercise of profession) are mentioned in 74. It consists of earnings
derived by the individual from the practice of profession,
from the conduct of trade or business carried on by a sole proprietor or by a partnership of which he is a
member.

Section 74 (second sentence)

In general, self-employment income consists of the earnings derived by the individual from the practice of profession
or conduct of trade or business carried on by him as a sole proprietor or by a partnership of which he is a member.

This individual who receives self-employment income shall be required to make and file a declaration of his
estimated income during the current taxable year.
He may pay the same in installment according to paragraph B of 74.

Dates of payment of estimated income tax of individuals deriving self-employment income

First installment paid at the time of the declaration

Second installment August 15 of the current year
Third installment November 15 of the current year
Fourth installment on or before April 15 of the following calendar year when the final adjustment income
tax return is due to be filed

(B) Return and Payment of Estimated Income Tax by Individuals. - The amount of estimated income as defined in
Subsection (C) with respect to which a declaration is required under Subsection (A) shall be paid in four (4)
installments. The first installment shall be paid at the time of the declaration and the second and third shall be paid
on August 15 and November 15 of the current year, respectively. The fourth installment shall be paid on or before
April 15 of the following calendar year when the final adjusted income tax return is due to be filed.

Do not forget the phrase derived from whatever source. This means that income from illegal business is
definitely taxable. The source of income is immaterial. This is based on the CLAIM OF RIGHT THEORY
What is meant by business or trade?

Entails time, attention, effort as means of livelihood, or with a view to profit. (US jurisprudence)
Business mat refer to trade or commercial activity regularly engaged in as a means of livelihood or with a
view to profit. (RA 7160, S. 131D)

Is gross income similar to gross sales or receipts? They are not the same.
FORMULA (to arrive at gross income from conduct of trade/business)

Start with gross sales (goods) or receipts (if the business is service-oriented)
Then, deduct the 1.) cost of investment termed as cost of goods and manufacture
In addition, also deduct 2.) sales returns and allowances, and 3.) sales discounts
The foregoing are the things which must be deducted from gross sales or receipts to arrive at the gross
income derived from business/trade.
To repeat, to arrive at the gross income from the conduct of trade or business, you must first deduct from
gross sales or receipts the following: 1.) cost of sales/goods sold or manufactured; 2.) sales returns and
allowances; and 3.) sales discount. After deduction, the result will be gross income from the conduct of
trade or business.
In accounting parlance, this is also described as gross profit. But as far as the tax code is concerned, the
term is gross income.

GROSS INCOME AS BASIS OF TAX RATES

CORPORATE TAXPAYERS

I. GROSS INCOME TAX OPTION (GITO)

Try to refer to section 27A(4). This has been introduced by RA 8424

Section 27A(4)

(3) A VAT tax effort of four percent (4%) of GNP; and

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial Position (CPSFP) to GNP.
The option to be taxed based on gross income shall be available only to firms whose ratio of cost of sales to gross
sales or receipts from all sources does not exceed fifty-five percent (55%).
The election of the gross income tax option by the corporation shall be irrevocable for three (3) consecutive taxable
years during which the corporation is qualified under the scheme.
For purposes of this Section, the term 'gross income' derived from business shall be equivalent to gross sales less
sales returns, discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all business
expenses directly incurred to produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, "cost of goods" sold shall include the invoice cost of the goods sold, plus
import duties, freight in transporting the goods to the place where the goods are actually sold, including insurance
while the goods are in transit.
For a manufacturing concern, "cost of goods manufactured and sold" shall include all costs of production of finished
goods, such as raw materials used, direct labor and manufacturing overhead, freight cost, insurance premiums and
other costs incurred to bring the raw materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross income' means gross receipts less sales returns,
allowances and discounts.

J
Thus, from the foregoing, you may be asked if a domestic corporation may be taxed on its gross income. the answer
would be YES.
Under section 27A(4), the DC may opt for the gross income tax option of 15% if allowed by the President upon the
recommendation of the Secretary of Finance after compliance with certain conditions.
II. MINIMUM CORPORATE INCOME TAX OF 2%
-

TAX BASE of this 2% is gross income

III. TAX LIABILITY OF NRFC

-

Provided, further, That the President, upon the recommendation of the Secretary of Finance, may effective January
1, 2000, allow corporations the option to be taxed at fifteen percent (15%) of gross income as defined herein, after
the following conditions have been satisfied:
(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);
(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

The provision provides that the President, upon the recommendation of the Secretary of Finance, may,
effective January 1, 2001, allow corporations the option to be taxed at 15% of their gross income.
If you are asked this explain this income tax option under the Tax Code? the Tax base is gross income
(equivalent to gross sales less sales returns, discounts and allowances and cost of goods sold). The
reduced corporate rate s 15%. However there are four conditions that must be satisfied (technical
requirements).
JUST REMEMBER that there is such a rule under section 27 allowing domestic corporations to avail of a
reduced corporate rate of 15% and the tax base here is gross income (not taxable income.) [NOTE:
Normally, the tax rate is 30% of taxable net income.

30% based on gross income

RULES GOVERNING GAINS DERIVED FROM DEALINGS IN PROPERTY (PROPERTY INCOME)

Refer to section 39 which provides for four sets of rules

Section 40 which provides another four sets of rules

SECTION 39
I. Section 39A(item 1) CAPITAL ASSETS

ii. investment in stock there is gain derived from sale of investment in stock
iii. Goodwill which may refer to established business reputation. This is an intangible asset which can be
the subject of a sale. The gain derived from the sale of business goodwill is treated as capital gain, not as ordinary
gain.

[NOTE: This has been a perennial and favorite source of bar questions]

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.
-

Here, you will find the technical definition of ordinary asset as distinguished from capital asset as well.

BAR (10) 1998 - This is a question on the distinction of capital gain and ordinary gain.
BAR (6) 2003 distinguish capital asset from ordinary asset
BAR (4e) 2005 state the tax treatment on the sale of capital asset and ordinary asset
BAR 2008 first four questions dealt with capital transactions
-

The tax code has accorded preferential tax treatment to capital transactions

CAPITAL ASSET defined by way of exclusion

-

Common feature of these four ordinary assets all of them are held by the taxpayer in connection with his
trade or business

HYPOTHETICAL QUESTION are there properties held by the taxpayer in connection with his trade or
business which may be considered as capital asset? YES

Examine the definition of capital asset. It provides that property held by the taxpayer, whether or not
connected with his trade or business. The implication is that there are those properties which are held by
the taxpayer in connection with his trade or business which may be considered as capital asset for the
simple reason that it is not one of the four enumerations (expresio unius est exclusio alterius what is not
included is deemed excluded.)

INTANGIBLE ASSETS which are considered capital assets because not included in SOUR

i. Accounts receivable there is gain derived from the discounting of accounts receivables. This should be
treated as capital gain, not ordinary gain

This means property held by the taxpayer, whether or not connected with his trade or business, but does
not include SOUR

a. Stock in trade (the other technical term for this is inventoriable asset.)
- it is an asset which may remain in the inventory of the taxpayer at the close of the taxable year.
- thus, all those goods which remain in the inventory of the taxpayer at the end of the taxable year are ordinary
assets
- if that is the subject of sale, the gain derived therefrom shall be treated as ordinary gain
b. Ordinary course of trade or business property primarily held for sale to customers in the ordinary
course of trade or business
-

ORDINARY ASSET defined by way of enumeration [KEY: SOUR]

a. Stock in trade (the other technical term for this is inventoriable asset.)
b. Ordinary course of trade or business property primarily held for sale to customers in the ordinary course of trade
or business
c. USED property used in trade or business subject to depreciation
d. REAL PROPERTY used in trade or business

The rule is basic. If the subject of sale, exchange or other disposition of property is any of these SOUR, the
gain derived therefrom is treated as ordinary gain.
Gain derived from the sale, exchange or other disposition of an asset other than SOUR shall be treated as
capital gain

Example property sold by a real estate dealer. The gain derived from the sale is treated as ordinary gain
c. USED property used in trade or business subject to depreciation

This can be simplified as follows depreciable asset used in trade or business

(just memorize the exclusive enumeration of ordinary assets. If an asset is not one of them, the same shall be
considered as capital asset)
d. REAL PROPERTY used in trade or business
II. SECTION 39B HOLDING PERIOD RULE
-

This is the rule called the HOLDING PERIOD RULE (2008 BAR)

III. SECTION 39C CAPITAL-LOSS LIMITATION

IV. SECTION 39D NET CAPITAL LOSS CARRY OVER

CAPITAL ASSET
Defined by way of exclusion
Refers to property held by the
taxpayer, whether connected to his
business or trade or not, but which
does not include SOUR

ORDINARY ASSET
Defined by way of enumeration
Limited to the following:
1. Stock in trade
2. Property sold in the ordinary
course of business

3. property actually used in

connection with his trade or
business subject to depreciation
4. real property used in trade or
business

CAPITAL GAIN is a gain derived from the sale, exchange or other disposition of an asset held by the
taxpayer, whether or not connected with his trade or business, other than SOUR.
ORDINARY GAIN is a gain derived from the sale, exchange or other disposition of an asset such as
SOUR.

Is it possible that ordinary asset may be converted to capital asset, and vice versa?

From ordinary to capital, this is possible.

From the tuazon case

KEY: BASIC
1. consider whether there is such broker-owner relationship indicative of business to engage in trade or
business. Consider whether the owner is actually engaged in such business
2. area of property (in the case, the area involved seven hectares of land)
3. consider if such property has been developed as subdivision divided into lots
4. consider the sales volume
5. Consider the improvement which must be valuable
6. continuity or frequency of such transactions
-

EXAMPLE
A real estate dealer holds this property for sale to customers in the ordinary course of trade or business.
(thus, it falls under Section 39A). It becomes capital asset when the real estate dealer dies, in which case, these
properties shall be transmitted to his heirs by succession and the heirs discontinue the business.

From the Calasanz case

-

If the heirs discontinue the business, and decide to sell these properties, the gain they derive therefrom
shall be treated as capital gain, not as ordinary gain.
-

A parcel of land has been inherited, thus capital asset. This may become ordinary asset by applying
certain factors. This is exemplified by the following cases
a. 1974 case of Tuazon Jr. vs. Lingag 58 SCRA 170 july 31, 1974
b. 1986 case of Calasanz vs. Commissioner 144 SCRA 644 October 9, 1986
Both cases involve inherited parcel of land. Thus, at that stage, these properties are considered as capital
asset. The heirs subsequently substantially improved these parcels of land as they even converted them into
subdivisions.
IN the Tuazon case, the SC laid down the test of valuable improvement.

Extensive improvements may include the following (LIC)

1. laying out of streets
2. installation of drainage and lighting system
3. construction of concrete gutters

Capital asset may also be converted to ordinary asset.

EXAMPLE

You can apply these to hypothetical problems particularly the test of valuable improvements.
The SC has said that the improvements must be valuable in that they are introduced in the subdivided lots
with the unmistakable purpose of not simply liquidating the estate, but of making these lots more attractive
to the general problem

Another test for substantial improvement

If the amount expended is double the original cost.

SPECIAL RULES THAT APPLY TO CAPITAL TRANSACTIONS

Why is necessary to know whether an asset involved in a transaction or sale is capital transaction or not?
REASON If it were a capital asset, it shall be governed by these three special rules
1. 39B holding period rule
2. 39C Capital Loss Limitation
3. 39D Net capital loss carry over

The case of Calasanza case espoused the Substantial or Extensive Improvement. Simply stated, if such
property which was originally considered as capital asset, has been improved in that there were valuable
improvements introduced, the same may convert such capital asset into ordinary asset.

HOLDING PERIOD RULE

Thus, where there are substantial or extensive improvements on the capital asset inherited, the same is an
indication that the heirs may have held such property primarily for sale to customers in the ordinary course of trade or
business, thus effectively converting the same from capital asset to ordinary asset.

(B) Percentage Taken Into Account. - In the case of a taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale or exchange of a capital asset shall be taken into account
in computing net capital gain, net capital loss, and net income:
(1) One hundred percent (100%) if the capital asset has been held for not more than twelve (12) months; and
(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12) months;

FACTORS TO DETERMINE WHETHER PROPERTY IS ORDINARY ASSET

Section 39B

1. An individual taxpayer A sold his personal car after two years from the date of purchase. He derived
capital gains in the amount of 200,000. What is the tax treatment of this 200,000 capital gain?
-

An application of this rule may lead to tax avoidance

Tax avoidance is the employment of legally permissible means to reduce tax liability
It may constitute tax avoidance in that the seller of a capital asset is taxable only up to 50% of that capital
gains if the capital asset has been held for more than 12 months from the date of acquisition before selling
the same.

It is taxable only up to 50% of the same. the holding period rule applies in that it was sold after the 12
month period.
2. Suppose that this car was used in business (thus considered as ordinary asset), would your answer be
the same?

EXAMPLE
If your personal car was sold within this 12 month period. If the capital gain amounted to 100,000, this will
be 100% fully taxable. The tax avoidance scheme will only come into play if you sell the same after the lapse of this
12 month period. Such capital gains of 100,000 will now be 50% taxable. (NOTE TAXED AT 50%)

12 MONTH PERIOD this consists of 360 days based on Article 13 of the CC.
The tax code does not say one year. If it were so, we can easily apply article 13 of the CC because it will
consist of 365 days.
But it speaks of 12 months. If you refer to article 13, you will find that 1 month is composed of 30 days.
Thus, to my mind, since a month consists of 30 days, if multiplied by 12 would result merely in 360 days.

How do you describe this that capital gain derived from such capital asset sold after that 12 month
period?

This is described as a long term capital gain.

LONG TERM CAPITAL GAIN the sale or exchange of capital asset after the 12 month holding period,
which therefore is 50% taxable only
This is described by the SC as a statute of partial exemption

It would not be the same because the holding period rule applies only to capital asset. Thus, if it were an
ordinary asset, the amount that is taxable is the entire gain of 200,000.
3. Suppose the seller is a corporate taxpayer. Will your answer be the same?
My answer will not be the same. the holding period rule does not apply to corporations.

CAPITAL LOSS LIMITATION

(C) Limitation on Capital Losses. - Losses from sales or exchanges of capital assets shall be allowed only to the
extent of the gains from such sales or exchanges. If a bank or trust company incorporated under the laws of the
Philippines, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note, or
certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or
political subdivision thereof), with interest coupons or in registered form, any loss resulting from such sale shall not
be subject to the foregoing limitation and shall not be included in determining the applicability of such limitation to
other losses.

Capital loss limitation simply means that capital loss is deductible only from capital gain.

How do you describe such capital gain derived from sale, exchange or other disposition of capital asset
within the 12 month holding period?

SHORT TERM CAPITAL GAIN sale or exchange of capital asset within the 12 month holding period,
which therefore is 100% taxable

You can only deduct capital loss from capital gain. if there is no capital gain from which capital loss may be
deducted, this capital loss is a non-deductible loss
The deductibility of the capital loss depends on the existence of the capital gains
In view of this rule, you are not allowed to deduct capital loss from ordinary gain.

If there is an ambiguity, how will the long term capital assets be construed?

BAR (6) 2003

Since it is a statute of partial exemption, the same must be construed strictly; exclusions therefrom must
be construed broadly.
Simply put, if the taxpayer claims that the asset involved is a capital asset, he must prove that it is a capital
asset

What is the rationale for this rule prohibiting the deduction of capital losses from ordinary gains?

TAXPAYERS UNDER THIS HOLDING PERIOD RULE

It is clear under section 39B that this holding period rule, which reduces taxable capital gain by 50%
applies only to individual taxpayers. This is so because of the phrase other than a corporation.
A corporation who may dispose of a capital asset is taxed at 100% of that capital gain irrespective of the
period during which such asset has been held by the corporation.

EXAMPLE

[Do not answer because capital loss is deductible only against capital gains]
It boils down to your basic rule or principle in claiming deduction. Section 34 allows taxpayers to claim
deductions. You can only claim those expenses which are paid or incurred in connection with a taxpayers trade or
business. Thus, only business expense is deductible.
This is mandated/required by this basic principle of matching of costs against revenues as observed under
34. Having this in mind, there is no doubt that capital loss is sustained not in connection with the trade or business of
the taxpayer. It is not one of those considered as ordinary asset.

The rationale behind such a rule prohibiting such deduction of capital losses from ordinary gains is to
ensure compliance with this principle of matching of cost against revenue which dictates that only those businessconnected expenses are deductible from gross income. undoubtedly, capital loss is a non-business expense.

EXAMPLE
Capital gain is 150,000, the capital loss is 200,000. So, the result is 50,000 net capital loss. That is the
one which may be carried over as a deduction in the SUCCEEDING TAXABLE YEAR.

(Do not answer lifeblood doctrine. It will be a clear abuse of such doctrine)
Thus, if this happened in 2008, this 50,000 can be claimed as deduction from capital gain in 2009.

Thus, it is clear that capital loss is deductible only from capital gain
It is also settled that capital loss cannot be deducted from ordinary gain
Likewise, settled is the rule that ordinary loss is deductible from ordinary gain.

HYPOTHETICAL QUESTION

GENERAL RULE when an expense/loss is paid or incurred, that should be claimed as deduction during
the year the same was paid or incurred.
EXCEPTION TO THE RULE (AMONG OTHERS) net capital loss can be carried over as a deduction
from capital gain in the succeeding taxable year.

Can we deduct ordinary loss from capital gains?

Corporations are not allowed to avail of the carry-over of net capital loss. Only individuals can

The rule is that what is allowed is deduction of capital loss from capital gain. What is prohibited is
deduction of capital loss from ordinary gain. here, what is being claimed is deduction of ordinary loss from capital
gain.

However, there is a new rule that corporate taxpayers can carry over such a loss. This is the provision of
section 34D (item 3).

Section 34D (item 3)

Because the tax code provides for no prohibition, you can deduct ordinary loss from capital gains. What is
not allowed is to deduct capital loss from ordinary gain.
(You must know this because the examiner may develop a problem wherein the taxpayer derived capital gains from
the sale or exchange from the sale or exchange of capital asset, and he likewise derived gain from the sale or
exchange of ordinary assets. Further, he sustained losses from both sale/exchange. By applying the above rules,
you will never be misled.)

This capital loss limitation rule applies to both individual and corporation except BANK o TRUST
COMPANIES

NET CAPITAL LOSS CARRY OVER

[You should know the meaning of net capital loss because that is the one which may be carried over from capital
gain in the succeeding taxable year.]
(D) Net Capital Loss Carry-over. - If any taxpayer, other than a corporation, sustains in any taxable year a net capital
loss, such loss (in an amount not in excess of the net income for such year) shall be treated in the succeeding
taxable year as a loss from the sale or exchange of a capital asset held for not more than twelve (12) months.

Section 39A (par. 2 and 3)

(2) Net Capital Gain. - The term "net capital gain" means the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges.
(3) Net Capital Loss. - The term "net capital loss" means the excess of the losses from sales or exchanges of capital
assets over the gains from such sales or exchanges.

Refer to section 39A(3). Here, NET CAPITAL LOSS has been defined as the excess of the losses from the
sales or exchange of capital assets over the gains.
Thus, capital loss must be more than capital gains.

(3) Net Operating Loss Carry-Over. - The net operating loss of the business or enterprise for any taxable year
immediately preceding the current taxable year, which had not been previously offset as deduction from gross
income shall be carried over as a deduction from gross income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, however, That any net loss incurred in a taxable year during
which the taxpayer was exempt from income tax shall not be allowed as a deduction under this Subsection:
Provided, further, That a net operating loss carry-over shall be allowed only if there has been no substantial change
in the ownership of the business or enterprise in that (i) Not less than seventy-five percent (75%) in nominal value of outstanding issued shares., if the business is in the
name of a corporation, is held by or on behalf of the same persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation, if the business is in the name of
a corporation, is held by or on behalf of the same persons.
For purposes of this subsection, the term "not operating loss" shall mean the excess of allowable deduction over
gross income of the business in a taxable year.
Provided, That for mines other than oil and gas wells, a net operating loss without the benefit of incentives provided
for under Executive Order No. 226, as amended, otherwise known as the Omnibus Investments Code of 1987,
incurred in any of the first ten (10) years of operation may be carried over as a deduction from taxable income for the
next five (5) years immediately following the year of such loss. The entire amount of the loss shall be carried over to
the first of the five (5) taxable years following the loss, and any portion of such loss which exceeds, the taxable
income of such first year shall be deducted in like manner form the taxable income of the next remaining four (4)
years.

Corporate taxpayers can carry over net operating losses

This is quite technical. But you will never be misled if you know how to distinguish this from net CAPITAL
LOSS carry over.

As to taxpayer covered

Transaction

covered

and

asset

NCLCO
Individual taxpayer only

NOLCO
Individual and corporate taxpayer

Capital

- this is so because the provision

does not make no distinction. It
merely
says
business
or
enterprise. Thus, it may include
both.
Entails ordinary transaction. Thus,

transaction.

Thus,

must

involved

involve capital asset.

must involve ordinary asset

Period for application

Implied by the word capital

Succeeding taxable year (not plural)

May be carried over in

consecutive taxable years.

If mining company, apply the five

year period.
Are all capital transactions subject to the FOLLOWING?

HOLDING PERIOD RULE

CAPITAL LOSS LIMITATION
NCLCO
NO!!!

What are these capital transactions which are subject to specific or special rules other than those
mentioned above?
1. Sales of shares of stock

Listed and traded through local stock exchange

Applicable rate is of one percent of gross selling price

Not listed
Net capital gain not more than 100,000 5%

(sec. 127)

Any amount in excess of 100,000 10%

Not covered by the above rule

Final income tax

Sec. 23C applies to RC, NRC and RA
Sec. 25A(3) applies to NRA-ETB
Sec. 25B applies to NRA-NETB
27D (item 2) applies to DC
28A7(c) applies to RFC
28B5(c) applies also to NRFC
Thus, this income tax rates may be considered
as common income tax rule or treatment in
that it applies to all individual and corporate
taxpayers.
The net capital gain is the tax base
Net capital loss assumes relevance in the light
of section 39D on the application of the
NCLCO
Net capital gain is the excess over net capital
loss.
EXAMPLE Capital gain 150,000. So that
this may result in net capital gain, this must be
more than the capital loss. Thus, if the capital
loss is 100,000, the net capital gain shall be
50,000. This 50,000 shall be considered as
the tax base.

2. Sale, exchange or other disposition of a real property considered as capital asset

So that you can answer any problem on this, there is the need to establish distinctions between this
provision of section 24D applies to individual seller of real property considered as capital sset) and this
new rule which applies to DC (27D [5]).

The common rules of the two are

three

Thus covers only one taxable period

Section 24D

Section 27D (5)

COMMON RULES
SUBJECT OF SALE
REAL PROPERTY
TRANSACTION
Not limited to ordinary sale, exchange or other disposition. May include
PACTO DE RETRO SALES or CONDITIONAL SALES
TAX BASE
Higher amount of the gross selling price and zonal value
TAX RATE
6% of the higher amount between the gross selling price and zonal value
EXISTENCE OF PRESUMED GAIN
There is presumptive gain in both6. This is gain by legal fiction.
DISTINCTIONS
OPTION OF TP WHERE Option individual can apply capital gains Domestic corporation not granted
BUYER IS GOVERNMENT
tax or progressive rates under A1(c) such option.
referring to the 5%-32%
There is only one applicable income
tax rate 6% based on gross selling
(24D1)
price
TAX AVOIDANCE SCHEME
Available to individual TP
DC cannot legally avoid the payment
of the 6% CGT
REQUIREMENT concurrence of five (5)
requisites
1. proceeds of sale is applied to
- construct; or
- purchase new principal residence.
[This presupposes that the subject of the
sale must be a principal residence]
2. Observance of the 30 day notice to the
BIR from the date of sale
- notice of intention to avail of the
exemption
3. compliance with the 18-month period
- within 18 months from the date of sale,
the seller-individual must use the proceeds
thereof either to construct or purchase a
new principal residence
4. subject to the 10-year limitation
- this can only be availed of once every 10
years
5. execution of a ESCROW agreement
[imposed by RR 17-2003]
- the seller, buyer, revenue district officer
and authorized agent bank shall execute
the escrow agreement.
6

BAR 2001 A seller incurred a loss in that he sold a parcel of land he acquired ten years ago for 1,000,000 (cost). He sold this
at 800,000 (selling price.) he incurred a loss of 200,000. When he was made to pay this 6% capital gains tax, he argued that he
was not liable because he derived no gain and, in fact, incurred a loss. Is such argument tenable?
The argument is not tenable. Under the tax code, sale of real property as capital asset gives rise to the presumption of gain.
further, the tax base of said transaction is gross selling price, which therefore precludes any deduction of cost or preclusion
from liability due to loss. Thus, a taxpayer who incurred losses in the sale of real property considered as capital asset will still
be liable for the 6% capital gains tax on the gross selling price thereof.

- Under this requirement, the 6% capital

gains tax shall be deposited under this
escrow account
- such individual seller must present proof
within 30 days from the lapse of that 18
month period about such construction or
purchase of new principal residence.
- if he can show such proof, he can
withdraw the 6% CGT deposited from the
authorized agent bank
Otherwise, the amount deposited shall go
to the government.
(24D2)

Offeror he will derive gain if the offeree fails to exercise such privilege, and the offeree will incur a capital
loss (capital loss of the offeree is the capital gain to the offeror)
The capital asset here is the privilege or the option to buy or sell
The transaction is the failure to exercise such privilege or option to buy or sell

Under RR#2, section 142 the following are also considered as capital transactions

a. the adjustment of interest in a partnership that may result in a gain or loss.

- the gain is capital gain; the loss capital loss
b. liquidation of partnership which may result in the distribution of the residue to the partners
- if there is gain derived therefrom, that gain will be treated as capital gain, the loss, a capital loss

---------------------------------------------------GUIDELINES TO DETERMINE WHETHER A REAL PROPERTY IS CAPITAL OR ORDINARY ASSET

The following are also considered as capital transactions

-

a. retirement of bonds (39E) if there is any gain derived therefrom, it is treated as capital gain; if there is loss, it
would be a capital loss
b. short sale transactions (39F1) based on the US revenue code and implemented in that 1940 RR#2, section 135
thereof.

These are set forth under RR# 7-2003

KEY CRAFIN
SITUATIONS
a. Change of business from real estate to non-real estate business

The book of justice vitug says that this represents an obligation payable in kind, not in cash. This is not that
-

clear.

The subject must be securities

The seller must not be an owner of the securities (he just borrows these securities)
This seller, he being a speculator, therefore not the owner, earns profit if the price of securities declines
this is treated as capital gains
If the price of securities increases, he incurs a loss this is capital loss

How do you consider those existing properties?

Remember that the business has been changed from real estate to non-real estate business. This is the

rule
i. if such change, which may require an amendment to the articles of incorporation, has no effect on these properties
used previously in real estate business, it will remain as ordinary assets.

SITUATION

But note that under section 39 (SOUR), this real property must be used in business. This must be held by the
taxpayer for sale to customers in the ordinary course of trade or business.

M, seller of securities, anticipated that three days from now, the price of securities will decline. Thus, he
borrowed securities from a dealer thus, it represents an obligation payable in kind, not in cash, because of the
obligation to return the securities. So, if the price of securities today is 1,000, and three days from now the price
decreases to 800, M can purchase securities at the price of 800. Thus, he earns in the amount of 200 because he
has to pay his obligation in securities. But if the price of such securities increases say 1200, M will incur a loss of
200.

But the above rule provides that even if the real property has ceased to be used in the ordinary course of business,
they remain as ordinary asset. This is inconsistent with the substantive provision of 39A. it must be used in business.
So that if it is no longer used in business. It ceases to be ordinary asset. There must be a qualification that such
properties must be used in the new business of the taxpayer. But the rule does not clarify such situation. The rule
merely provides that the real property will remain as ordinary asset.

NOTE this speculator (this is how he is described) speculates that on a certain date, the price of
securities will decline. If that happens, he earns profit. On the other hand, if the price of securities increases, he
incurs capital loss.
c. Failure to exercise privilege or option to buy or sell property (39F2)
-

Take note that the property subject of the option to buy and sell may be capital or ordinary. The law makes
no distinction.
What is considered as capital transaction is the failure to exercise the privilege

b. Real estate business, whether as a real estate dealer, developer or real estate lessor.
i. The rule is that properties acquired by the real estate dealer will be considered ordinary asset
ii. real properties used by the real estate developer in his business, or held by him in the ordinary course of business
for sale to customers will be considered as ordinary asset
iii. as to real estate lessors, the real properties for rent or lease, including those used in the business of leasing, shall
be considered ordinary asset
c. Abandoned idle real properties

This means previously used in business or previously held for sale to customers in the ordinary course of
trade or business which have been abandoned.
RR 7-2003 declares that these properties shall continue to be treated as ordinary asset.
NOTE that this is clearly inconsistent with the substantive provision of 39A. under 39A, the real property
must be used in business for the same to be considered as ordinary asset.

This must also be in accordance or by virtue of a plan of merger or consolidation so that the gain will not
be subjected to tax

IMPLICATION OF THE ABOVE THREE RULES the tax code encourages business combinations,
mergers or consolidations.
Recall your knowledge of exemptions. These exemptions must be based on a sound economic policy of
the government
Merger or consolidation, for purposes of this exemption, means

d. failure to subsequently operate such real estate business

These properties originally acquired for the intended real estate business shall continue to be treated as
ordinary asset.
Again this runs counter with the provision of section 39A.

e. Involuntary transfer of real property

-

RR 7-2003 declares that these properties previously used in business, or previously held for sale to
customers in the ordinary course of business shall remain as ordinary asset
Again, this runs counter with the substantive provision of 39A.

Sec. 40c(2) NO GAIN, NO LOSS RECOGNIZED RULE

-

ABC Corporation entered into a contract of merger with LMN Corporation. In that merger, there were
exchanges of properties, shares of stocks and securities. A gain was derived therefrom in the a amount of two
million. Is this two million tax exempt? What is the tax treatment of this two million gain?

This may include expropriation of property and foreclosure sale

Such involuntary transfer of real property will not affect the classification of property. Thus, if it were a
capital asset, it will remain as capital asset; if ordinary asset, it will remain the same.

f. No longer engaged in business

-

EXAMPLE

This applies to four transactions

Applying section 40C(2), the same will be tax exempt.

Suppose no merger was entered into between the two corporations. The situation is this ABC
corporation transferred all its assets or substantially all of its assets to LMN Corporation in exchange solely for the
shares of stock of the latter. Would your answer be the same?
In Corporation Law, this is not merger in contemplation of section 76 thereof. Some will answer that the
two million will now be subject to tax. This is not correct. This is the time to refer to the meaning of merger or
consolidation as defined under section 40C(6b). there you will find this definition. Thus
merger or consolidation for purposes of this exemption may include ordinary merger or consolidation (as
contemplated under section 76 of BP 68) and transfer of all or substantially of all properties in exchange solely for
shares of stock.

RULE # 01 NO GAIN RECOGNIZED NO LOSS RECOGNIZED

NO GAIN RECOGNIZED it means that the gain is tax exempt
NO LOSS RECOGNIZED implies that the loss is non-deductible

Thus, in the second situation, the answer would be the same because the same is considered as merger
as far as the tax code is concerned. (this may be what the examiner will use to mislead you.)

NOTE that this is a form of tax avoidance (Remember also the holding period rule which also involves tax
avoidance as the same minimizes also the tax liability of the taxpayer.)

The first three transactions must be made in accordance with this plan of merger or consolidation.
4. EXCHANGE OF PROPERTY FOR SHARES OF STOCK (not under merger)
1. EXCHANGE OF PROPERTY FOR SHARES OF STOCK
-

If it were an ordinary exchange, the gain will be taxable and the loss shall be deductible
But if it is made in accordance with this plan of merger or consolidation, such gain is tax exempt. However,
the loss shall also be non-deductible

2. EXCHANGE OF SHARES OF STOCK FOR ANOTHER KIND of SHARES OF STOCK

-

For the gain derived from the exchange may be tax exempt, this must be made in accordance with the
plan of merger or consolidation

3. EXCHANGE OF SECURITIES FOR SHARES OF STOCK

Here, the requisite for exemption is different.

The condition for exemption is corporate control
CORPORATE CONTROL (40C (6c)) at least 51% ownership of the voting rights
Some authors misconstrue the provision as to the number of transferors. Some say that the maximum
number of transferors must be four. This is not correction. Rather, the Code provides as follows

Alone, including others not exceeding four thus, the maximum number is five, not four. BIR rulings
affirm this. Thus, there is one transferor up to not more than five transferors who transfer/s property to a corporation
in exchange for shares of stock for the purpose of acquiring corporate control. If such is the case, any gain derived
from said transaction shall not be subject to tax.
RULE # 02 GAIN IS RECOGNIZED NO LOSS RECOGNIZED

1. TRANSACTION NOT SOLELY IN KIND

-

Section 40C3 GAIN RECOGNIZED LOSS NOT RECOGNIZED

Thus, the gain is taxable
This is now described as a transaction NOT SOLELY IN KIND
Here, the exchange involves not merely property, stock or securities but also money or cash
If, in addition to property, stock or security, money is exchanged, the gain derived from the exchange shall
be taxable. However, the loss shall still be considered as non-deductible

- thus you must ask whether thirty days before the sale, the seller has acquired identical or substantially the same
securities.
ii. thirty (30) days after the sale if he did not acquire substantially the same securities within thirty days
before the sale, determine whether thirty days after the sale, he has acquired identical, or substantially the same
securities. If he did acquire, the same may be considered as a wash sale transaction.
-

If the transaction is considered as a wash sale in tat the seller acquired identical or substantially the same
securities thirty days before or after the sale, what may be the tax treatment as to the gain derived
therefrom? What about the loss that may be sustained? The gain from wash sale is taxable. Thus, gain is
recognized for purposes of income tax. The loss from wash sale, however, is not recognized. Therefore,
the loss is considered as non-deductible.

REASON for the rule that loss from wash sale is non-deductible remember the rule that capital losses
may not be deducted from ordinary gain only business expenses may be considered deductible from
gross income of business.

Section 34D allows taxpayers to claim losses as deductible items. You must have noticed that the
indispensable requisite for the deductibility of losses is that this must be actually sustained r incurred.
Jurisprudence tells us that loss from wash sale is a mere artificial loss. In other words, the loss is not
actually sustained or incurred. This is the reason for its non-deductibility.

EXAMPLE the seller incurred an actual loss of 2,000. Here, he can recover such loss by adding such
amount to the selling price of those securities which he will subsequently dispose of. Through this practice
or scheme, the seller can eventually recover such a loss. This is the reason why the loss is not actually
sustained or incurred, thus appropriately termed ARTIFICIAL LOSS

2. ILLEGAL TRANSACTIONS
BAR (12) 2001
-

Illegal gain is definitely subject to tax. BASIS recall 32A referring to income derived from whatever
source in relation to Claim of Right Doctrine
Claim of Right Doctrine dictates that illegal gain can be taxed by the state.
Illegal expense or loss is non-deductible. BASIS section 34A1(c) this is a new provision which
emphasizes the rule that illegal payments (e.g. bribe money) are non-deductible expense

3. TRANSACTIONS INVOLVING RELATED TAXPAYERS

-

There are four groups of related taxpayers as provided under section 36B, as follows

i. Members of the same family

ii. between corporation and stockholder they may be considered as related taxpayers in that the SH has acquired
corporate control over that corporation. Such control establishes this relationship.
iii. two corporations owned and controlled by the same stockholders. It is the corporate control over the two that
establishes this relationship, making them related TPs
iv. Parties to a trust (trustee, trustor and beneficiary)
-

If there is gain derived, taxable. If there is loss or expense incurred, non-deductible

4. WASH SALE TRANSACTION

-

Section 38 (can hardly be understood)

To simplify the situation under 38, these are the questions which must be asked

a. Since it involves a sale, what may be the subject of the sale?

- shares of stock, securities including stock options
b. who must be the seller?
-

The seller must not be a dealer in securities.

c. Are there periods that must be observed which are determinative of whether the transaction is a wash sale or not?
-

Yes, there are two periods that must be observed, as follows

i. thirty (30) days before the sale under this, the seller who is not a dealer in securities must have
acquired substantially the same or identical securities.

INTEREST INCOME (32A[4])

HOW TO DETERMINE WHETHER AN INTEREST INCOME IS TAXABLE
-

Just remember these five exempt interest income

If in the problem involving interest income, the interest income is not among the following, the same is
taxable.
Thus, all you have to remember are these five exempt interest income under the tax code

1. THE RECIPIENT IS A FOREIGN GOVERNMENT

2. THE RECIPIENT IS A FINANCING INSTITUTION FINANCED OR CONTROLLED BY A FOREIGN
GOVERNMENT
3. REGIONAL OR INTERNATIONAL FINANCIAL INSTITUTION ESTABLISHED BY A FOREIGN GOVERNMENT

The interest income they receive from investment within the PH is tax exempt
These recipients are found under Section 32B7(a)
The reason for their exemption is to encourage foreign investment in the PH

4. INTEREST INCOME ON LONG TERM DEPOSIT OR MANAGEMENT INVESTMENT CERTIFICATE (Section

22ff)
-

To be exempt, the same must have a term of five (5) years or more

Section 22FF merely defines long term deposit or investment certificate. However, said provision provides
for no exemption
You can find the provision on exemption in sections 24B1, section 25A2
Thus, the recipients of this interest income must be any of these three

Section 24B1
i. resident citizen
ii. non-resident citizen
iii. resident alien individual
section 25A2
i. non-resident alien engaged in trade or business
- suppose the depositor (individual taxpayer) is non-resident alien NOT engaged in trade or business. Is
the interest income he receives tax exempt? Read section 25B which is a provision which applies to NRA-NETB.
There, you will find no provision on exemption. Thus, if the recipient is a NRA-NETB, there being no exempting
provision, the interest income he derives is taxable.
-

Suppose the recipient is a resident individual or corporate taxpayer, what is the tax treatment?
-

Suppose the depositor is a corporate taxpayer. Thus, assume that a domestic corporation receives interest
income on these deposits which has a term of five years or more. Is such interest income tax exempt?

Read section 27 and see the definition of long term deposit or investment certificate. Section 22FF clearly
provides explicitly individual taxpayer. This is the reason why you will not find any exempting provision for
corporate taxpayers under section 27 and 28. Thus, interest income received by a corporate taxpayer is
definitely subject to tax.
Thus, if the recipient is NRA-NETB or Corporate taxpayer, the exemption will not apply.

5. INTEREST INCOME FROM DEPOSITS UNDER E-FCDS RECEIVED BY NON-RESIDENT

This will be subject to 7.5% final tax.

Segway
-

Dont memorize tax rates except these four

1. 6% capital gains tax

2. 5% / 10% final tax rates which apply to net capital gain derived from sale of shares of stocks not listed and traded
through local stock exchange
3. 7.5% final tax rate which applies to interest income derived from deposit maintained under the E-FCDS
4. of 1%
INTEREST INCOME ON GOVERNMENT SECURITIES
Taxable as it does not belong among the five exemptions above-mentioned
Excluded from the enumerations from exclusion from gross income under section 32B.

NOTE: there will only be exemption on interest income for long term deposit or investment certificate if the
recipient of the interest income is any of the following RC, NRC, RA-individual, NRA-ETB.

c. Section 28A7(b) exempt if the recipient or depositor is a non-resident; if resident, subject to 7.5% final
tax

ROYALTIES INCOME
ROYALTIES may involve intangible properties
-

subject to final tax. The recipient need not report the same as part of his gross income.

RENT may involve tangible real or personal properties for use or enjoyment of the same
-

subject to regular tax

if individual lessor, included in gross income subject to progressive rate
if lessor is a corporation, included in gross income subject to 30% corporate rate
TAXABLE RENT INCOME is not only limited to such rent agreed upon in the contract of lease. It includes
additional rent income

What are these additional rent income (RR 2, section 49) categorized into two

BAR (16) 2008

a. Obligations of the lessor assumed by the lessee (KEY: RIDI)
Under the old tax code, it made no qualification in that interest income on deposits maintained under the
expanded foreign currency deposit system is tax exempt. This rule has been modified. If it is an interest income on
deposits maintained under the expanded FCDS, this is the amendment of RA 8424
-

It will be exempt only if the depositor or taxpayer is a non-resident. Non-resident may cover non-resident
individual taxpayer and non-resident corporate taxpayer. The exemption is provided for under the following
provisions

a. for individuals section 24B1 which provides except non-resident meaning that he shall not be subject
to the interest income tax.
b. for corporation section 27D3. The last paragraph thereof provides that if the recipient is a non-resident
C, it shall be exempt.

i. Real property tax this is supposed to be paid by the lessor. If paid or assumed by the lessee in taxation, this is
treated as additional rent income
ii. interest on loan obtained by the lessor supposed to be paid by the lessor. If assumed by lessee, tax
consequence is that the same is additional income to the lessor
iii. Lessee-corporation gives dividend to lessor. If lessor is a corporation, it is supposed to declare dividends. If such
dividend is given by the lessee-corporation, that is an additional rent income to the lessor.
iv. Insurance Premiums on property leased supposed to be paid by the lessor. If paid by lessee, the tax
consequence will be that the same shall be considered as additional rent income
b. Value of permanent Improvement erected on leased property by lessee
Methods which may be employed to report such additional rent income

1. OUTRIGHT METHOD upon completion of such permanent improvement, the fair value thereof is
reported an additional rent income during that taxable year
2. SPREAD OUT METHOD the depreciated value of the permanent improvement at the time of the
expiration of the lease shall be spread-out evenly and reported by the lessor regularly from the time of its
establishment (improvement) until the expiration of the lease.

The rule says cash or property dividend received from domestic corporation by RC, NRC or RA
individual is subject to final tax.

RATE 10%

2. 25A(2)
-

Visualize this situation. This normally occurs when there is this long term contract of lease. Let us assume
that the term of the contract of lease is 40 years. The usual stipulation in a long term contract of lease is to
the effect that the lessee may introduce permanent improvements on the leased property subject to the
condition that, upon the expiration of the contract of lease, the ownership shall be transferred to the lessor.
The lessee, therefore, is allowed to construct a building. Assume that on the fifth year of the contract of
lease, a building was built thereon. Under the spread-out method, aliquot, a portion of the depreciated
value of this permanent improvement upon the expiration of the contract of lease shall be reported
regularly until such expiration.

This is the rule cash or property dividend received from DC by a NRA-ETB is also subject to final tax
(20%0

3. 25B

Dividend received from DC by NRA-NETB subject to final tax (20%)

4. 27D(4)
TAX TREATMENT OF PRE-PAID RENT (RENT PAID IN ADVANCE)
-

a. CONTROL TEST - if such advanced rentals can be used by the lessor without any limitation, taxable to the lessor
b. ADVANCED RENTALS AS DEPOSITS - If the advanced rentals are in the nature of deposits to answer for
damages which may be sustained to the leased premises, there will be no income to speak of. As such, it will not
result in a taxable income.
c. ADVANCED RENTALS AS LOAN TO LESSOR if the advanced rentals partake of the nature of a loan to the
lessor, there will be no income to speak of. Hence, this will never result in taxable income to the lessor of such
property.

TAX TREATMENT OF DIVIDEND INCOME (32A(7)

-

This is known as the inter-corporate dividend because the source is a DC. The recipient is another DC.

This was asked in the 2005 bar.

This provides that this is tax exempt.

Will depend upon the following situations

This has been mentioned in 8 provisions. Try to group them so that we can visualize all these rules.

1. Section 24B (2)

(2) Cash and/or Property Dividends - A final tax at the following rates shall be imposed upon the cash and/or
property dividends actually or constructively received by an individual from a domestic corporation or from a
joint stock company, insurance or mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the distributable net income after tax of a
partnership (except a general professional partnership) of which he is a partner, or on the share of an individual in
the net income after tax of an association, a joint account, or a joint venture or consortium taxable as a corporation of
which he is a member or co-venturer:
Six percent (6%) beginning January 1, 1998;
Eight percent (8%) beginning January 1, 1999; and
Ten percent (10% beginning January 1, 2000.
Provided, however, That the tax on dividends shall apply only on income earned on or after January 1, 1998. Income
forming part of retained earnings as of December 31, 1997 shall not, even if declared or distributed on or after
January 1, 1998, be subject to this tax.

5. 28A 7(d)

Also known as inter-corporate dividend in that the source is a DC and the recipient is a corporation

The recipient however is a RFC. The rule is that, this is tax exempt

6. 28B (5b) [will be expounded under discussion on corporate income taxation]

Inter-corporate dividend dividend received from DC by NRFC.

Taxable subject to this rate which must be memorized (15% final tax). This is the one that is taxable

7. 42A 2(b) two rules are observed here

Here, the situation is different unlike in the preceding 6 situations.

You will note that in the preceding situations, the source is a DC. This time the giver is a foreign
corporation.
It constitutes an income derived from source within, thus subject to income tax under these two conditions

1. 50% rule. it is a dividend income received from sources within, thus subject to income tax if 50% or more of the
gross world income of this foreign corporation comes from sources within. If less than 50%, not taxable a it will not be
treated as gross income from within
2. 3 year rule this 50% gross income from Philippine sources must have been derived in the last three taxable year
or three preceding taxable years
8. 73B always asked)

Refers to stock dividend

Stock dividend is tax exempt

REASON refer to the definition of income. there must be gain or profit. Here there is no gain or profit.
There is really no flow of wealth since, as provided under 73B, it is just a transfer of the surplus account to
the capital account. There is no flow of wealth. It merely increases the value of their investment.
It just represents an increase in the value of ones investment in such corporation. There is, therefore, no
realized gain. this must be the reason why stock dividends are not subject to income tax.

GENERAL RULE see Commissioner vs CA and Soriano Corp 108576 1/20/99

A stock dividend representing the transfer of surplus to capital account shall not be subject to tax.
Having been derived from a foreign law, resort to the jurisprudence of its origin may shed light. Under the US
Revenue Code, this provision originally referred to stock dividends only, without any exception. Stock dividends,
strictly speaking, represent capital and do not constitute income to its recipient.[63] So that the mere issuance
thereof is not yet subject to income tax[64] as they are nothing but an enrichment through increase in value of
capital investment.[65] As capital, the stock dividends postpone the realization of profits because the fund
represented by the new stock has been transferred from surplus to capital and no longer available for actual
distribution.[66] Income in tax law is an amount of money coming to a person within a specified time, whether as
payment for services, interest, or profit from investment.[67] It means cash or its equivalent.[68] It is gain derived
and severed from capital,[69] from labor or from both combined[70] - so that to tax a stock dividend would be to tax a
capital increase rather than the income.[71] In a loose sense, stock dividends issued by the corporation, are
considered unrealized gain, and cannot be subjected to income tax until that gain has been realized. Before the
realization, stock dividends are nothing but a representation of an interest in the corporate properties.[72] As capital,
it is not yet subject to income tax. It should be noted that capital and income are different. Capital is wealth or fund;
whereas income is profit or gain or the flow of wealth.[73] The determining factor for the imposition of income tax is
whether any gain or profit was derived from a transaction.[74]

The issue here is When will such redemption of shares of stock declared as stock dividend result in
taxable dividend?

remember, under corporation law, that when a corporation authorizes shares of stock and thereafter the
same may be the subject of subscription, this stocks may be classified as common, preferred, as well as
redeemable shares of stock.

When stock dividends are declared, that may also be classified as redeemable shares of stock
Having that in mind, this is now the rule

a. if such redeemed shares of stock comes from original capital subscription, that will never result in
taxable gain because this is just a mere return of capital.
b. at such time and in such manner as to make the distribution and cancellation or redemption, in whole
or in part, essentially equivalent to the distribution of a taxable dividend explained the SC explained that it must be
one that may reslt in flow of wealth, meaning there mus be realized gain. thus, it will only result in taxable dividend if
the source is stock dividends declarations.
- there must be redemption of shares of stock issued as stock dividends
- thus, it must involve stock dividends declarations. And this must come from those dividends subsequently declared
as such. This must not come from initial capital investment or original capital subscription.
-

This transaction must result in the distribution of taxable dividend. Here there is now a flow of dividend.
Here, there is now a flow of wealth, and therefore will result in realized gain.

The exception was designed to prevent the issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution of cash dividends, which is
taxable.[76] Thus,
the provision had the obvious purpose of preventing a corporation from avoiding dividend tax treatment by
distributing earnings to its shareholders in two transactions a pro rata stock dividend followed by a pro rata
redemption that would have the same economic consequences as a simple dividend

EXCEPTION to the rule on stock dividend (as provided by jurisprudence)

REDEMPTION AND CANCELLATION
a. redemption of stock dividends subsequently declared
Commisioner vs. AnsCor 301 SCRA
Redemption may result in taxable stock dividend
See section 73B
(B) Stock Dividend. - A stock dividend representing the transfer of surplus to capital account shall not be subject to
tax. However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the distribution of a
taxable dividend, the amount so distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent that it represents a distribution of earnings or profits.
-

This section provides a stock dividend representing transfer of surplus to capital account shall not be
subject to tax.
However, if a corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent to the
distribution of a taxable dividend, the amount so distributed in redemption or cancellation of the stock shall
be considered as taxable income to the extent that it represents a distribution of earnings or profits.

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is redemption or cancellation;
(b) the transaction involves stock dividends and (c) the time and manner of the transaction makes it essentially
equivalent to a distribution of taxable dividends. Of these, the most important is the third.
Redemption is repurchase, a reacquisition of stock by a corporation which issued the stock[89] in exchange for
property, whether or not the acquired stock is cancelled, retired or held in the treasury.[90] Essentially, the
corporation gets back some of its stock, distributes cash or property to the shareholder in payment for the stock, and
continues in business as before. The redemption of stock dividends previously issued is used as a veil for the
constructive distribution of cash dividends. In the instant case, there is no dispute that ANSCOR redeemed shares of
stocks from a stockholder (Don Andres) twice (28,000 and 80,000 common shares). But where did the shares
redeemed come from? If its source is the original capital subscriptions upon establishment of the corporation or from
initial capital investment in an existing enterprise, its redemption to the concurrent value of acquisition may not invite
the application of Sec. 83(b) under the 1939 Tax Code, as it is not income but a mere return of capital. On the
contrary, if the redeemed shares are from stock dividend declarations other than as initial capital investment, the
proceeds of the redemption is additional wealth, for it is not merely a return of capital but a gain thereon.
It is not the stock dividends but the proceeds of its redemption that may be deemed as taxable dividends.
The three elements in the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is

realized or received, actually or constructively,[108] and (3) it is not exempted by law or treaty from income tax. Any
business purpose as to why or how the income was earned by the taxpayer is not a requirement. Income tax is
assessed on income received from any property, activity or service that produces the income because the Tax Code
stands as an indifferent neutral party on the matter of where income comes from.[109]

SUMMARY
1. if the source of redeemable shares is initial or original capital investment or subscription, it will never result in
taxable income REASON return of capital only
2. if the redeemable shares come from stock dividends declared, this may result in such taxable income as there
may be flow of wealth.

NET EFFECT TEST the test applied by the court - the effect of the declaration of the shares of stocks
dividends and redemption of the same on the SH and C

b. STOCK DIVIDENDS RECEIVED BY USUFRUCTUARY

basrach vs. Seifer 87 Phil 483

Is a sotck dividend received by usufructuary taxable?

According to the SC, this is an exception to the rule.

d. CHANGE IN THE STOCKHOLDERS INTEREST IN THE CORPORATION

-

This is not provided under the Tax Code.

This is the rule laid down under section 241 of RR#2.
When there is a change in the SH interest, this may result in taxable stock dividend
EXAMPLE
Assume that the SH are A B C D and E.
A 100 shares of stock
B 100
C 100
D 100
E 100

Ten percent stock dividend was declared. (thus, add 10 to their shares, thus becoming 110 shares of stock
for each.). here, there is no increase in interest.
When will there a change in the interest? this will happen if one or two of them received cash in lieu of
stock dividend.
Thus, assume that A and B received cash dividend. Thus their shares of stock remain at 100. The shares
of C D and E become 110, an increase. Thus, A and Bs interests are reduced to 18.86. in the case of C D and E,
the shares interest is increased to 20.76 each. This is a situation where stock dividend may be taxed, since there is
increase in the interest.

2 views cited by the court

e. ISSUANCE OF A DIFFERENT SHARES OF STOCK

1. pensilvania view subject to tax

2. Mississippi view - Not subject to tax

EXAMPLE
Authorized capital stock is common and preferred. Outstanding capital stock is common and preferred. The stock
dividend is only common shares of stock or only preferred shares of stock. This is another exception to the rule.

We have adopted the pennsilvania view

The SC cited as a basis article 566 of the CC when it says that the usufructuray shall have the right over
all the natural, civil and industrial fruits of the property in usufruct.

c. DISGUISED DIVIDENDS
Treasury Shares of Stock (BAR 1994)
Commissioner vs. Manning 66 SCRA
Bar exam 1994 what are disguised dividends?
Dividends were declared by the board. The board called the same as stock dividends to avoid the payment
of stocks. But it turned out that these dividends although named stock dividends, not in accordance with the
Corporation Code. Remember that under section 43 of the BP 86, the declaration must be out of unrestricted
retained earnings. This was violated.
Thus, in the guise of stock dividends, in order to avoid stock on dividends.

Such declaration will result in taxable income

EXCHANGE OF COMMON WITH PREFERRED SHARES
Exchange is an act of taking or giving one thing for another[122] involving reciprocal transfer[123] and is generally
considered as a taxable transaction. The exchange of common stocks with preferred stocks, or preferred for
common or a combination of either for both, may not produce a recognized gain or loss, so long as the provisions of
Section 83(b) is not applicable. This is true in a trade between two (2) persons as well as a trade between a
stockholder and a corporation. In general, this trade must be parts of merger, transfer to controlled corporation,
corporate acquisitions or corporate reorganizations. No taxable gain or loss may be recognized on exchange of
property, stock or securities related to reorganizations.[124]
Reclassification of shares does not always bring any substantial alteration in the subscribers proportional interest.
But the exchange is different there would be a shifting of the balance of stock features, like priority in dividend
declarations or absence of voting rights. Yet neither the reclassification nor exchange per se, yields realize income
for tax purposes. A common stock represents the residual ownership interest in the corporation. It is a basic class of
stock ordinarily and usually issued without extraordinary rights or privileges and entitles the shareholder to a pro rata
division of profits.[126] Preferred stocks are those which entitle the shareholder to some priority on dividends and
asset distribution.[127]

Both shares are part of the corporations capital stock. Both stockholders are no different from ordinary investors who
take on the same investment risks. Preferred and common shareholders participate in the same venture, willing to
share in the profits and losses of the enterprise.[128] Moreover, under the doctrine of equality of shares all stocks
issued by the corporation are presumed equal with the same privileges and liabilities, provided that the Articles of
Incorporation is silent on such differences.[129] In this case, the exchange of shares, without more, produces no
realized income to the subscriber. There is only a modification of the subscribers rights and privileges - which is not
a flow of wealth for tax purposes. The issue of taxable dividend may arise only once a subscriber disposes of his
entire interest and not when there is still maintenance of proprietary interest.[130]

PRICES AND WINNINGS

-

Prices are either subject to regular tax or final tax

If the amount is more than 10,000, subject to final tax
If 10,000 or less, treated as other income subject to progressive rates

Winnings exempt Sweepstakes and Lotto winnings

TAXABLE PENSION
f. DIVIDEND IN STOCK
-

ANNUITY VS. PENSION

Not found under the tax code

Found in RR#2 section 251
Stock dividend is the one exempt
If it is a dividend in stock, under section 251, it is taxable

PENSION the retirement must come under a retirement plan (by virtue of a law)

Notice that there are tax-exempt pensions under 32B 6(6)

When may a dividend in stock arise?

Those not covered by the exemption are taxable

If the source is another corporation. If the recipient is not the stockholder of the source or giver of the
same.

Know the exemptions

Section 32
ABC C.
LMN C.
Stockholders of ABC C.
-

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt
from taxation under this title:

These stockholders are not Sh of LMN C. if the dividends come LMN C., this is the one described as
dividends in stock
Of course, if the source is ABC C., it could not ask stock dividend.
But if the source is another corporation and the recipient is not a stockholder of the giver, this is termed as
dividend in stock.

Summary of rules
GR stock dividends are exempt from dividend tax
EXC
1. redemption of stock dividends subsequently declared
2. stock dividends received by usufructuary
3. disguised dividends
4. change in SH interest in the corporation involving declaration of Stock dividends
5. Issuance of different shares of stock
6. dividend in stock

ANNUITIES
-

There is nothing difficult here

Source is contract of annuity
The periodic payment that is received is the one subject to tax

(6) Retirement Benefits, Pensions, Gratuities, etc.(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 of by an official or employee only once. For purposes of
this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at
no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and employees.
(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.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government agencies and other institutions, private or
public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the
United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of
Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.

DISTRIBUTIVE SHARE OF A PARTNER FROM THE NET INCOME OF

GENERAL PROFESSIONAL PARTNERSHIP
-

What about the share of a partner from the net income after tax of the business or taxable partnership?
this is not covered under this. This is mentioned in sections 24 and 25.
TAX TREATMENT
You must distinguish this from the net income after tax of a business or taxable partnership

SOURCE/GIVER GPP is tax exempt (Sec. 22B)

Distributive share from GPP
SOURCE / GIVER

GPP is tax exempt (sec. 22B)

Share of a partner must be reported

by the professional partner subject
to the progressive rate (sec. 26)

Income from the net income after tax

of business or taxable partnership
Business partnership

Bear in mind that corporation

includes partnership, no matter how
created or organized
Subject to final tax[10% or 20% as
the case may be](sec. 24B1 and
25B2)
Therefore, business partner not
required to report as part of gross
income
Final tax constitutes as a final
payment of the tax liability

(4) Compensation for Injuries or Sickness. - amounts received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account of such injuries or sickness.
(5) Income Exempt under Treaty. - Income of any kind, to the extent required by any treaty obligation binding upon
the Government of the Philippines.
(6) Retirement Benefits, Pensions, Gratuities, etc.-

Taxed as corporate TP subject to

30% corporate rate.

TAX TREATMENT

however, That income from such property, as well as gift, bequest, devise or descent of income from any property, in
cases of transfers of divided interest, shall be included in gross income.

The common rule is that 26 and 73D have common provision

Thus it is not required that such an income must be actually received. The word constructively has been
mentioned in both provisions
Section 26 applies to share of partner from net income of GPP
Sec. 73 applies to share of a partner from net income after tax of a business partnership

EXCLUSIONS FROM GROSS INCOME (32B)

(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 of by an official or employee only once. For purposes of
this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing
plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and
employees the earnings and principal of the fund thus accumulated, and wherein its is provided in said plan that at
no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for
the exclusive benefit of the said officials and employees.
(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.
(c) The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or nonresident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government agencies and other institutions, private or
public.
(d) Payments of benefits due or to become due to any person residing in the Philippines under the laws of the
United States administered by the United States Veterans Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with the provisions of
Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.
(7) Miscellaneous Items.

(B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt
from taxation under this title:

(a) Income Derived by Foreign Government. - Income derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on deposits in banks in the Philippines by (i) foreign
governments, (ii) financing institutions owned, controlled, or enjoying refinancing from foreign governments, and (iii)
international or regional financial institutions established by foreign governments.

(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured, whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross income.

(b) Income Derived by the Government or its Political Subdivisions. - Income derived from any public utility or from
the exercise of any essential governmental function accruing to the Government of the Philippines or to any political
subdivision thereof.

(2) Amount Received by Insured as Return of Premium. - The amount received by the insured, as a return of
premiums paid by him under life insurance, endowment, or annuity contracts, either during the term or at the maturity
of the term mentioned in the contract or upon surrender of the contract.

(c) Prizes and Awards. - Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:

SECTION 32B

(i) The recipient was selected without any action on his part to enter the contest or proceeding; and
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift, bequest, devise, or descent: Provided,

(ii) The recipient is not required to render substantial future services as a condition to receiving the prize or award.

In bar exams, there are always two questions on life insurance 1.) on exclusion from gross income; 2.)
on whether subject to estate tax

(d) Prizes and Awards in Sports Competition. - All prizes and awards granted to athletes in local and international
sports competitions and tournaments whether held in the Philippines or abroad and sanctioned by their national
sports associations.

85E may be construed as follows: (perennial bar problem)

When included, when excluded from gross estate

(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and private
entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:
(i) Benefits received by officials and employees of the national and local government pursuant to Republic Act No.
6686;

1. INCLUDED

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986;

b. [This is where different interpretations may lie] If a third person [other than estate, executor,
administrator] is the one designated as beneficiary, it is included in the gross estate and therefore subject
to estate tax if the designation is revocable (last provision of 85E)

(iii) Benefits received by officials and employees not covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and

2. EXCLUDED

(iv) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty
thousand pesos (P30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon
recommendation of the Commissioner, after considering among others, the effect on the same of the inflation rate at
the end of the taxable year.

a. irrevocable designation of third person

On the other hand, proceeds of life insurance policy may be excluded from the gross estate and therefore
exempt from estate tax if the third person is irrevocably designated as a beneficiary.

(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare and Pag-ibig contributions, and union
dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. - Gains realized from the same
or exchange or retirement of bonds, debentures or other certificate of indebtedness with a maturity of more than five
(5) years.
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized by the investor upon redemption of shares of
stock in a mutual fund company as defined in Section 22 (BB) of this Code.

The enumerations are not exclusive

Notice that interest income on government securities is no longer mentioned therein. Effective January 1,
1998, interests on government securities are subject to tax.
KEY: LAGCIRM
L life insurance proceeds
A- Amount received as return of premiums
G GIFTS, bequests, devises
C compensation for injuries or sickness
I income exempt under a tax treaty
R retirement benefits, pensions, gratuities, etc (6 items)
M Miscellaneous items (8 items)

Insofar as section 32B is concerned, there are 19 exclusions from gross income

LIFE INSURANCE PROCEEDS

-

Must be read in relation to sec. 85E (on law on estate taxation).

Such irrevocable designation may refer to such person other than the estate, executor or administrator
b. proceeds of group insurance policy

a. if the beneficiary is the estate, executor or administrator

The designation is immaterial, whether revocable or irrevocable

the provision also provides taken upon his own life. This implies that excluded from gross estate are
proceeds of group insurance policy
In income tax, premiums on group insurance are not subject to income tax. It is based on this if it is
excluded from the gross estate, consistently, it should also not be subject to income tax

We have to be guided by this rule

Remember that the estate tax is a tax on the privilege to transmit property gratuitously.

It is not the property. The property is considered only for purposes of determining the tax rates. But
remember that estate tax is an excise tax not property tax. What is taxed is the right of privilege to transfer.

The perennial questions here is that is that excluded from the gross income of the recipient? Will that
form part of the gross estate?

To answer this, consider the beneficiary designated.

1. Assume that the beneficiary is the estate, etc.. let us assume, further, that the third person is the
beneficiary
-

INCOME TAX excluded from the gross income because there is no income realized.
The common blunder here is this supposed that the employer was designated. So, upon the death of the
employee the proceeds go to the employer. Is that taxable?

32B1 is clear any beneficiary. Thus, the rule is that proceeds fo life insurance policy should always be
excluded from the gross income of any recipient thereof.
Thus, it should likewise be excluded from the gross income of the third person who may be an employer.
REASON the amount represents indemnification for loss of life
2. will that be subject to estate tax?

Assumption 1 estate is the beneficiary

Always included in the gross estate

Assumption 2 beneficiary is third person

If revocable subject to estate tax, thus included
If irrevocable not included as exempt from estate tax

COMPENSATION FOR INJURIES OR SICKNESS

The usual problem here is this
A vehicular accident occurred. Passenger suffered injuries. A filed an action for damages against driver and owner of
car. Court awarded the following damages:
-

Hospitalization expenses (60,000)

Cost of repair (damages car) 30,000
Moral damages (50,000)
Exemplary damages (50,000)
Lost income or profit (30,000)

Are the following tax exempt or taxable?

See Section 11 of insurance code the insured shall have the right to change the beneficiary designated unless he
has expressly waived this right in said policy.

The rule therefore under insurance code is that the designation is revocable. There can only be irrevocable
designation f the policy expressly so provides.

If the problem does not provide that the designation is irrevocable, presume that the designation is revocable
because of said rule.
AMOUNT RECEIVED AS RETURN OF PREMIUM
-

Not income but merely return of capital. no gain realized.

(An author says it is taxable REASON - 32A says derived from whatever source. The tax code provides no clear
exemption from taxation)
-

GIFTS
-

These are really donatons

Donations under the CC are classified into inter vivos and mortis causa

As to hospitalization expenses, there is no doubt that it is squarely covered by exemption. it is not

taxable because it represents compensation for injuries declared excluded from gross income by the tax
code. No income received or realized.
Cost of repair of damaged car should also be excluded from the gross income because it just represents
the amount expended. No income realized
Moral and exemplary damages

With all due respect, when 32A says derived from whatever source, this presupposes flow of wealth as to
qualify as income. moral and exemplary damages will never qualify as income. The consistent view is that
moral and exemplary damages are tax exempt. REASON
Recall that under the CC, moral damages may be awarded under article 2210. Exemplary damages may
be awarded by the court on those grounds set forth under 2221 of the CC. those grounds are as follows:

KEY: (SWS) Social weather station; (MBA) master of business administration; (PAF) Philippine Air Force
QUESTIONS DONATIONS INTER VIVOS
WHAT ARE THE TAX IMPLICATIONS OF DONATION INTER VIVOS INSOFAR AS THE GIVER/DONOR IS
CONCERNED?
-

Donor is subject to donors tax

What is the tax effect on the recipient-donee?

-

Not subject to donees tax. Donees tax has long been abolished by PD 69.
Not subject to income tax as well because sec. 32B3 says the same is excluded from the gross income of
the recipient thereof

QUESTIONS DONATION MORTIS CAUSA

-

Estate subject to estate tax

Heirs not subject to inheritance tax same abolished by pd 69
Heirs (devises or legatees) not subject to income tax / excluded from gross income

S Social humiliation
W Wounded feelings
S Similar injuries
M Moral shock
B Besmirched reputation
A Anxiety (serious)
P Physical suffering
A- Anguish (mental)
F Fright
If we tax moral damages, we are imposing tax on such an amount awarded by the court which just approximates the
injuries. This will not qualify as income because there is no income realized. This never qualifies as income.
What about exemplary damages?

Article 2229 provides that this may be awarded by way of correction, example for public good. Not taxable. No
income realized.
-

As to the lost income or profit, the same shall be taxable since it represents income 7-9 cont 730

Some opine that recovery of damages that may represent as lost income or profit shall be treated as
ordinary income. REASON even if he had not been in an accident or sustained injuries, he is expected
to receive said income or profit. That is why the receipt of such income as may be ordered by the court is
subject to tax.

EXAMPLE of CAUSES BEYOND THE CONTROL OF THE EMPLOYEE

1. death
2. physical disability
3. illness or sickness
BAR
Is this 100,000 received by the surviving spouse from the employer of the deceased husband subject to tax?
No, as it is only death benefit. Does not qualify income but merely separation benefit.

RETIREMENT PAYMENTS, PENSIONS, GRATUITIES, ETC.

BAR
-

Just focus on items A and B as the subsequent items there can be easily understood
Mind you, item C, was once asked in the bar exams as regards pensions received by a non-resident
citizen who finally resided in the PH from foreign governments, agencies (whether private or public) all
these benefits, pensions, gratuities, etc. are exempt according to that provision.

A (retirement benefits from private employer) vs. B (separation pay

The tax code is strict insofar as A is concerned in that it imposes four conditions for exemption
1. the payment must come from a BIR-approved retirement plan
2. the retiree must be at least 50 years of age
3. he must have rendered at least 10 years of service to the employer
4. can only be availed of once

A DC established two divisions construction division and manufacturing division. Due to economic reasons, the
company was constrained to dissolve its construction petition. It has a BIR-approved retirement plan which requires
that the retiring employee or official must at least be 50 years of age and must have rendered 10 years of service.
The employees affected were grouped into two a.) employees who were 50 years of age and had rendered 10
years of service; b.) employees below 50 years of age or rendered less than 10 years of service. Both were given
benefits. The second group were further classified into two 1.) employees who received one month salary for every
year of service plus ex gratia benefits; 2.) the other group simply received one month salary for every year of service.
Based also on the problem, included in these benefits were commuted value of the unused vacation and sick leave
credits.
The company seeks your advice as to whether these benefits given are subject to withholding tax?

On the other hand, for B, there is only one requisite for exemption it must be received on a ground or
cause beyond the control of the employee
However, you must underscore 32B6(f)

EXAMPLE
A received 1M from his employer as retirement payment. If he got employed under another employer, and
retired after 10 years of service. He received another 1M. this is no longer tax-exempt.
Suppose the second employer is a government agency (GOCC). He now becomes a member of GSIS.
Thus, the source of payment is GSIS. RA 8291 declares that all benefits under this, including retirement gratuities
are exempt. Thus, by virtue of this, the limitation under item A will apply only to subsequent private employer. This
will not apply to a subsequent public employer because, here, the GSIS Law will apply which declares that all
benefits received from GSIS is exempt.
RETIREMENT PAYMENT
SOURCE
AGE REQUIREMENT
LENGTH OF SERVICE

SEPARATION PAY
NO requirement as to source (BIR
approved retirement plan)
No age requirement
No requirement as to length of
service

All these benefits are tax exempt because they were received on account of cause beyond the control of
the employee
Economic crisis is beyond the control of the employee
LESSON ignore the source of payment; dont consider requirement on age and length of service when
the benefit was received on account of causes beyond the control of the employees
Thus, the answer is qualified by B such that if these benefits on account of cause beyond the control of the
employee, all these requisites are rendered inconsequential

BIR rulings tell us that if such separation pay is received as a result of voluntary resignation, that is subject
to tax because it is received on account of a cause within the control of the employee.

Implementation of labor saving devices which must be approved by the DOLE, retrenchment and financial
reverses are also considered as causes beyond the control of the employees. Thus, separation pay on
account of such shall be tax exempt.

CASE on 32B7A
July 22, 1990
Recipient of income 1.) foreign government 2.) financing institution controlled or financed by foreign
government 3.) regional or international financial institution established by foreign government
Forms of investments from which income may be derived by the three

1. deposit in a bank RULE interest income of this bank deposit received by these three are EXEMPT
2. Loan income derived therefrom interest on loan are also exempt if the one that extended the same
is any of the three
3. bonds, debentures or certificates of indebtedness if the three are the creditors, lenders, thus the
income is in the nature of an interest income, that is exempt under this provision.
4. If the investment is in the form of stock the income is in the form of dividend income exempt from
income tax

------------------------------------32B
-

There are two requisites for exclusion

a. consider the source
b. consider the recipient of such an income

Commissioner vs. Mitsubishi Metl Corp. 181 SCRA 214

Export Import bank of japan is a consortium of Japanese banks. They are therefore exempt by virtue of
this provision as it enjoyed financing from the Japanese government. It extended a 20M loan to a janapense
corporation Mitsubishi mental. It was stipulated in the contract that this 20M was to be used to extend a loan to
Atlas Corporation a DC. There was this contract nominated as Loan Sale. Sale because there was this machinery
of which Atlas bound itself to sell the same to Mitsubishi for a period of fifteen years. The provision on loan earned
interest. is this interest on the loan subject to tax?
The truth here is that the source is a tax exempt institution. This was the contention of MMC, because the
source of the 20M was sourced from an exempt financing institution.
The CTA sustained the contention of MMC. It ruled that MMC was an agent of Expoert-import bank of

this is the basis for the rule that income derived from the exercise of essential governmental functions is
tax exempt (32B 7b)
also considered exempt are income derived from public utility
make sure that the recipient is the government of the Philippines which is synonymous with republic of the
Philippines
NOTE however that it is not the same as national government. The tax code does not say national
government but government of the Philippines. Thus, a local government unit is covered under this.

TAX EXEMPT PRIZES AND AWARDS

-

Not all prizes are taxable

They are exempt if covered under item C and D of 32B7

Under item c, there are three requisites for exemption

Japan.
The SC reversed the decision of the CTA. The SC ruled that CTA erred in holding that MMC was an agent
of EIB of japan as there was no clear evidence that MMC was an agent. The most important issue here (which would
require your knowledge of civil law) is this what would be the effect of the consummation of such contract of loan?
Article 1953 provides the basic rule. in a contract of loan, it is basic that upon the consummation of the
same, the money becomes the exclusive money of the borrower. It ceases to be the money of the creditor. When
that 20M loan was consummated, the effect is that the same ceased to be the money of IEB of Japan. Thus, it
became the exclusive money of MMC. In that contract between atlas and MMC, IEB of japan was never made a
party thereto. the court ruled that MMC is subject to tax on that interest income on the loan extended to Atlas.
It would be different if EIB was made a party to the contract. Further, it would be different if MMC was
shown to have been an agent of EIB.
If the problem categorically states that MC was an agent of EIB, apply the rule on agency that is the
agent is an extension of the personality of the principal, it will be as if it is EIB who extended the loan. Thus, this will
make the income on such loan exempt from tax.
AUTOMATIC REVIEW RULE
Payment under protest applies only to real property tax.
Automatic review procedure

a. these prizes must be received in recognition scientific, charitable, religious, artistic, literary, educational
or civic achievement. [NOTE that cultural achievement is not covered. Thus apply the principle of strictissimi juris]
KEY: CARCELS
C CHARITABLE
A ARTISTIC
R RELIGIOUS
C CIVIC
E EDUCATIONAL
L LITERARY
S SCIENTIFIC
b. no action on his part to enter the contest or proceedings
In the actual bar exam on this, the taxpayer filed an application s a contestant in a poster contest
sponsored by the Lions Club of manila. In recognition of his artistic achievement, he received a 100,000 prize. This is
taxable because he performed an act to become a contestant
c. unconditional receipt of such prize or award. Thus, he should not be required to perform a substantial
service as a condition for the receipt of such prize.

Corporate income taxation there are only very feq questions asked on this. The favorite one is a question on offline
international airlines.

Under item D, the provision provides only for one requisite for exemption

MCIT may also be asked.

Tax Sparing Rule

These refer to prizes and awards received in sports tournaments.

The venue is immaterial

The only requirement is that the same is sanctioned by the respective sports association. this is
ambiguous. Nevertheless, this has been clarified by RA 6847
RA 6847 provided that the same must be approved by POC Philippine Olympic Committee
This exemption of such an award received in sports tournaments, whether held in the PH or abroad, is
based on a special law RA 7549.
RA 7549 provides three rules on this. Thus, when an award is given to an athlete who participated in a
sports competition, these are the tax implications

a. the recipient of such an award is exempt from income tax (incorporated under 32B7d)
b. the donor or contributor is exempt from donors tax (REASON this is to encourage contributions)
c. the donor or contributor can claim the same as deductible contribution. He can deduct the amount
contributed from his gross income.

2. INTEREST ON BONDS, DEBENTURES or OTHER CERTIFICATE OF INDEBTEDNESS having a term of five

years or more these are not exempt from income tax as there is no exemption provided by the Tax Code.
-

TAKE NOTE that what is derived is gain derived from the SALE, EXCHANGE OR RETIREMENT of
bonds, debentures or other certificate of indebtedness with a maturity date of not less than five years

May this be subject to a bar question? Yes, considering that there has been an erroneous BIR Ruling
saying that interest on banks, debentures or other certificate of indebtedness with a maturity date of not less than
five years is exempt. The BIR clearly misconstrued this. What is clear is exemption of gain derived from the sale,
exchange or retirement of bonds, but does not include interest on those bonds
3. GAIN from SALE, EXCHANGE OR RETIREMENT of bonds, debentures and other certificates of indebtedness
having a term of not less than five years the gain is tax exempt
4. INTEREST ON BANK DEPOSITS -

NOTE when the question refers to the last two, do not cite the tax code as the latter does not provide for
the same. you should cite RA 7549.

32B 7g EXEMPTION FROM INCOME TAX OF SUCH GAIN DERIVED FROM SALE, EXCHANGE OR
RETIREMENT OF BONDS, DEBENTURES OR OTHER CERTIFICATES OF INDEBTEDNESS
(FF) The term "long-term deposit or investment certificates" shall refer to certificate of time deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and
other investments with a maturity period of not less than five (5) years, the form of which shall be prescribed by
the Bangko Sentral ng Pilipinas (BSP) and issued by banks only (not by nonbank financial intermediaries and
finance companies) to individuals in denominations of Ten thousand pesos (P10,000) and other denominations as
may be prescribed by the BS.

These deposits must qualify as long term deposits or investment certificates, that is, IT MUST HAVE A
TERM OF AT LEAST FIVE YEARS

GAIN DERIVED FROM REDEMPTION OF SHARES OF STOCK

-

GR taxable
Exempt if these shares of stock are issued by mutual fund company defined under section 22BB

(BB) The term "mutual fund company" shall mean an open-end and close-end investment company as defined under
the Investment Company Act.

[NOTE: Dimaampao, here, keeps on saying more than five year. Keep in mind that the maturity date as provided
for under the Tax Code provides not less than five years, thus making it five years or more.]

NOTE the maturity date or the term must be more than five (5) years
If less than five years, the exemption will not apply
Do not be confused here
We have discussed interest income on long term deposit. That is the time when you apply this five year
period.
Section 22ff provides us the term five year which applies to long term deposits

Is interest on a loan with a maturity of five years or more exempt?

Note that the tax code provides no exemption. What is only exempt is 1.) interest on long term deposit or
investment certificate; 2.) gain derived from sale, exchange or retirement of bonds, debentures or other certificate of
indebtedness with a maturity date of five years or more than five years.

ALLOWABLE DEDUCTIONS
SECTION 34 allows taxpayers, individual or corporate to claim these deductions.
This has been subject to amendments by RA 9504/

AD may be categorized into two

1. Optional standard deduction (OSD)
2. Itemized standard deduction (ISD)

AMENDMENTS

To avoid any ambiguity here and misleading questions, note The investment may be in the form of loan,
deposit or bonds, debentures or other long term indebtedness.

1. INTEREST ON LOAN which has a maturity date of five years or more is definitely subject to tax as the tax code
provides for no exception.
BAR

According to the amendment of RA 9504, under 34 item L, the rate of 10% has been increased to 40%
(OSD)
Another amendment corporate taxpayers are now allowed to avail of this OSD of 40%
3rd amendment as to tax base: Individual the tax base has been changed from gross income to gross
sales or receipts. With respect to corporation, the tax base is gross income.

Is the availment of OSD revocable or irrevocable?

This provision has not been amended. Once you avail of the same, it becomes irrevocable during the taxable year.

There are 10 itemized deductions. This used to be 9.

8424 added research and development expenditures.

In this regard, the GENERAL RULE is that capital expenditure is non-deductible. This capital expenditure
should be amortized, should be capitalized over a reasonable period of time.
EXCEPTION

The Sc said that this akin to an effort to establish business reputation. Thus, expenses incurred in
connection with the establishment of business reputation should be capitalized and, thus, cannot be claimed as
deductible expense.

1. those which may stimulate current sale of merchandise or use of services

2. one to stimulate future sale of goods of merchandise or use of services
-

1. research and development expenditures. This used to be non-deductible under the old tax code as the
same were treated as capital expenditures.
2. capital expenditure in connection with the expansion of educational facilities [34A(2)] - this can only be
availed of by private educational institution. Such institution is given the option to claim for allowance for
depreciation, or to claim such capital expenditure during the same is paid or incurred
3. Interest on loan the proceeds of which is used to acquire capital asset [34B(3)] here, the term capital
asset here has a different meaning vis--vis capital asset under section 39. Here, an asset is capital if it
has an estimated useful life of more than one year. The interest on that loan may be claimed as deductible
interest expense.
4. Intangible drilling and development cost in petroleum exploration [34G in re 36A(3)] deductible though
it partakes of the nature of capital expenditure
ADVERTISING EXPENSES/PROMOTIONAL EXPENSES
-

This has been mentioned under 34A under that item on necessary and ordinary expenses.

CASE Atlas consolidated mining vs. Commissioner (1981) 102 scra; Commissioner vs Algue (1988) 158
scra; Commissioner vs. general Food Phil. Inc. 401 scra 545

Algue case
Here, the Sc ruled that the 125,000 promotional expense is a reasonable expense, and may be claimed as
such during the year when incurred. Reasonable because such corporation that has to be formed involved millions of
pesos. So the amount is reasonable under the circumstances.

The one that can be claimed as deductible advertising expenses are expenses to stimulate CURRENT
sale of merchandise or use of services
The second should be capitalized. It is similar as those expenses to establish business reputation.

TEST OF DETERMINING IF EXPENSE IS ORDINARY OR NECESSARY

KEY: DOM
RA 8424
-

An expense is necessary or ordinary if it is attributable, or paid or incurred in connection with the

development of the trade or business or exercise of profession.

CASE Standard eastern Ink vs commissioner 175 scra 158

An expense which may be claimed as deductible one must be paid or incurred in the production of income,
not in the disposition of income. this margin fee in the amount of 240, 822 is this an expense incurred? No, this
was paid or incurred after the production of income, meaning, in the disposition of income, therefore non-deductible.

ALL EVENTS TEST (commissioner vs isabela cultural corp 515 SCRA)

Applies to the recognition of an expense. An expense may be recognized under two conditions
1. such liability to pay must be fixed
2. the amount must be determined with reasonable accuracy

Atlas case
Here, the court ruled that payment made to an advertising company to promote sale of capital stock for the
acquisition of additional capital stock should be capitalized. It is a capital expenditure.

Advertising expenses are of two kinds

EVENTS WHICH MAY BE TAKEN INTO CONSIDERATION

1. consider the nature of such expense
2. consider span of time during which the services were engaged
3. familiarity of the rates
Reasonable accuracy does not require that such an amount must be determined exactly. It implies less than exact or
complete accurate amount.

The amount is unreasonable if the business is merely a sarisari store.

TAX BENEFIT RULE
General Foods case
Bar 2003 and 2005
The SC ruled that payment made for advertising expenses to protect brand franchise should be
capitalized. It cannot be claimed as deduction. It should be capitalized over a reasonable period of time.

Sec. 34C and sec. 34E

In section 34C, the second paragraph thereof refers to tax refund
Sec. 34E refers to recovery of bad debt written off

Special Assessment Tax

Income tax
Donors tax
Estate tax

34C
(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as deduction

ILLUSTRATION

Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as
part of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

34E bad debt recovered

34C says shall be included in the gross income in the year of receipt to the extent of the income tax benefit of said
deduction.

2008 NET INCOME before bad debt written off 150,000

Amount of bad debt written off 30,000
NET INCOME after bad debt was written off 120,000

Thus, it must be a deductible item and claimed as deduction from the gross income in the preceding
taxable year.

BAD DEBT was recovered in 2009 as the debtors financial status improved. Is this recovery of bad debt written off
subject to tax?

34E

(E) Bad Debts. (1) In General. - Debts due to the taxpayer actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or business and those sustained in a
transaction entered into between parties mentioned under Section 36 (B) of this Code: Provided, That
recovery of bad debts previously allowed as deduction in the preceding years shall be included as part
of the gross income in the year of recovery to the extent of the income tax benefit of said deduction.

34E has the same principle - shall be included in the gross income in the year of recovery to the extent of the
income tax benefit of the said deduction.
-

It means that this bad debt written off must have been claimed as a deduction from the gross income from
the preceding taxable year.

ILLUSTRATION

It shall be included in the gross income in the year of recovery to the extent of the income tax benefit of
such deduction.
Here, he received benefit as it reduced his taxable income by said amount.
If it were not claimed as deduction, there would have been no benefit as there will be no reduction of
taxable income.

HYPOTHETICAL QUESTION
Suppose the taxpayer had a net loss in the amount of 150,000. If you add bad debts considered as
worthless, the total net loss is 180,000. This 30,000 charged off against the taxpayers book of accounts in 2008,
was recovered in 2009. Is this taxable? This is not taxable.
RR 5-99 is correct when it declared that if the taxpayer had a net loss, subsequent recovery of bad debts
written off would not result in taxable income as it is just a return of capital.
In other words, it is not taxable because the taxpayer received no benefit as there was nothing to reduce.

INTEREST EXPENSE

34C deductible tax subsequently

DECIDED CASE ON non-deductible interests
2008 NET INCOME before deductible tax 150,000
Claimed as deductible local business taxes 30,000
Thus, it reduces the taxpayers net income
Net income after deductible tax 120,000
-

This 30,000 claimed as deduction was subsequently refunded in 2009. Is this a taxable income? Yes.
Reason he received tax benefit. He was able to reduce his taxable income by such an amount. There
must have been a deduction made. If there was no such deduction, the taxpayer received no benefit.
Therefore, the refund of the same will not result in taxable income.
It is therefore important to know those DEDUCTIBLE taxes because these are the ones covered by this
rule under 34C on Tax benefit rule.
Non-deductible taxes [KEY SIDE]

PCOP industries corporation of the phil. Vs. commissioner 250 SCRA 44

Is theoretical interest deductible or not?
The SC, citing RR#2, ruled that theoretical interest is non-deductible for two reasons
1. it is not paid or incurred as it is merely computed or calculated
2. it does not arise from interest bearing corporation

DECIDED CASE ON DEDUCTIBLE BAD DEBTS WRITTEN OFF

PHIL. REFINING CORP. (PRC) VS COMMISSIONER 256 SCRA

-

ADDITIONAL PERSONAL EXEMPTION

This supplants the requisites for the deductibility of bad debts expense under section 34E.
The Sc ruled to be deductible,

1. this must arise from taxpayers trade, business or proffesion. Thus, it must be a business-connected
expense and not a personal obligarion.
2. paid or incurred during the taxable year
3. must arise from a valid, legal and enforceable obligation
4. it must not arise from obligations between relative taxpayers
5. it must be ascertained to be worthless and charged-off against the TPs book of accounts during the
taxable year

Additional requisite
It must be proven that such debt is uncollectible in the future. Thus, if there is such slim chance of
collecting the same, it should be disallowed.

Increased from 8,000 to 25,000 for every qualified dependent

The maximum of number of dependents for which the additional exemption may be availed of is not more
than four
Thus, the maximum additional personal exemption is 100,000
This is important in the light of section 34M. the one who can claim these premiums on health and
hospitalization insurance (2,400 a year) is the spouse claiming the additional personal exemption.
Thus, you ought to know who may claim the additional exemption.
As a rule, it is the husband because he is considered the head of the family.
However, under certain situations, the wife can claim this additional personal exemption that is, if the
husband is a member of the PALAMUNIN GROUP, or if the wife will assert her authority as speaker of the
house here, what happens is the husband must execute a waiver of such right
Thus, the husband may waive the right to avail of such additional exemption in favor of the wife.

This has been a subject of a bar exam question

Refer to the last paragraph change of status

It is in this particular deduction where this BUSINESS JUDGMENT RULE may apply. (RR 5-99)

Consider the following

Amount of obligation vis--vis the expenses of collection
PRC Doctrine steps which must be undertaken
1. earnest efforts must have been exerted (e.g. sending of billing statements to the debtor / statements of

accounts)
2. if debtor refuses to pay, this is the time to refer the same to a lawyer for a possible filing in court.
-

These must be exerted first. If exerted, these may prove that indeed such debt is uncollectible in the future.

PERSONAL EXEMPTION (35)

Subject of amendments under RA 9504

The exemptions are categorized into basic and additional exemptions

BASIC PERSONAL EXEMPTION

Basic personal fixed at this uniform amount of 50,000 this applies to all individual (married, single,
individual, legally separated, man or woman, with or without dependent)
Is this not violative of the equal protection?
Bear in mind that section 36A1 disallows this family personal and living expenses. In lieu of such
disallowance, as a substitute of the same, you are granted personal exemption of 50,000
The old law which allowed for different amounts must have taken into consideration the fact that these
individual taxpayers are not similarly situated.
But here, the RA 9504 pegged the amount to a uniform 50,000. The implication is that, these individual
taxpayers incurred the same personal and family living expenses, which is not the case.
Humble opinion is that this violates equal protection as these individuals are not similarly situated.
Nevertheless, apply the presumption of constitutionality

35C

35C last paragraph

If the spouse or any of the dependents dies or if any of such dependents marries, becomes twenty-one
(21) years old or becomes gainfully employed during the taxable year, the taxpayer may still claim the
same exemptions as if the spouse or any of the dependents died, or as if such dependents married,
became twenty-one (21) years old or became gainfully employed at the close of such year.
a. dependent dies
-

The last paragraph of 35C refers to dependent who dies during the taxable year.
The law provides that if the dependent dies during the taxable year, it is as if he died during the close of
the taxable year. Therefore, the taxpayer can claim the additional exemption of 25,000 for such dependent
By legal fiction, this dependent may be considered to have been alive for the entire taxable year.

b. dependent becomes 21 years of age during the taxable year

-

The rule is that he is deemed, by legal fiction, to have attained said age only at the close of the taxable
year.

c. marriage of dependent during the taxable year

-

The rule provides that if the dependent gets married during the taxable year, for purposes of claiming the
additional exemption, the dependent will be considered to have been married only at the close of the
taxable year. Thus, by legal fiction, the dependent could be considered unmarried for the entire taxable
year.

d. gainful employment of the dependent during the taxable year

The rule provides that if the dependent gains useful employment during the taxable year, he is considered
by law to have acquired gainful employment only at the close of the taxable year, in which case, the
taxpayer can still claim the 25,000 additional exemption pertaining to such dependent.
By legal fiction, said dependent could be considered not to have acquired gainful employment for the
entire taxable year.

42A1
-

HYPOTHETICAL QUESTIONS
a. at the beginning of the taxable year, this dependent got married. Sometime in September of the same taxable
year, the marriage was annulled by competent court. Can this dependent whose marriage was annulled during the
taxable year be considered dependent of the taxpayer.
35C is silent on this. But we can answer this by analogy. What is clear here is that at the beginning of the taxable
year, he got married. The taxpayer can still consider him as a dependent because the law says that he is deemed to
have gotten married only at the close of the taxable year. Thus, it is as if the marriage took place only at the close of
the taxable year.
By analogy, this may be applied. The dependent was married at the beginning of the taxable year.The
marriage was annulled during the same taxable year. This annulment must be considered as if the same occurred at
the close of the taxable year. Thus, such dependent is disqualified.

Place does not apply to interest incomes (BAR 1989) [See national development corp. vs commissioner
151 scra 472]

The word is resident. Thus, it is the residence of the debtor which will determine whether such interest
income is an income derived from sources within.
Thus, even if the consummation of the contract was performed abroad, where the debtor resides in the
Philippines, the interest income on his loan shall be subject to interest income tax.

HOW DO YOU KNOW IF THE INCOME IS FROM SOURCES WITHIN OR WITHOUT?

1. in the case of capital, it is the pace where the capital is employed
2. as regards labor (performance of services) it is the place where such labor is done or services performed
3. sale of an asset it is the place where the sale is made
These are recognized tests in determining whether such an income is one from sources within or without, in line with
the rules under section 42.

TRUSTS AND ESTATES

b. Such rule by analogy can also be applied to gainful employment.

What is clear under section 35 is this not gainfully employed at the beginning of the taxable year. He
became gainfully employed in September. So, the rule is that he is considered to have gained employment only at
the close of the taxable year. So, by legal fiction, he is considered not to have been gainfully employed during said
taxable year.
Assume the reverse. At the beginning of the taxable year, he was gainfully employed. Sometime in
September, he was no longer gainfully employed. Can the dependent be considered as such for the purpose of
claiming additional exemption? No. by analogy, he will be treated as having been employed for the entire taxable
year. And his loss of gainful employment will be deemed to have taken place only at the close of the taxable year.
35D allowing the NRA to claim personal exemptions
-

This has been the subject of conflicting views.

Domondon says NRA engaged in trade or business is entitled to basic personal and additional exemptions
by way of reciprocity
De leon and vitug opine that this NRA-ETB is entitled to this personal exemption by way of reciprocity and
this must only cover basic personal exemption. According to justice vitug, the rule on reciprocity covers
only basic personal exemption but not additional exemptions.

REFER TO SECTION 42
-

This mentions several items of income

You will notice the common income tax situs - place, which is considered in determining the applicability of
the tax code - where activity is undertaken, place where services are performed, place of sale, place of
use of properties in case of rent or royalties

Remember that the one that is considered as taxable estate is one which is under judicial settlement
The one which is a taxable trust is an irrevocable trust
Section 61 declares that the taxable income of estates and trust shall be computed in the basis and in the
same manner as individual taxpayers, except that, as regards contributions made to the beneficiaries, the
same can be claimed as deduction from the income of the trust
Section 62 allowing estate and trusts to claim personal exemptions in the amount of 20,000 has not been
amended.

CORPORATE INCOME TAXATION

CORPORATION is defined under Section 22B

(B) The term "corporation" shall include partnerships, no matter how created or organized, joint-stock companies,
joint accounts (cuentas en participacion), association, or insurance companies, but does not include general
professional partnerships and a joint venture or consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy operations pursuant to an operating
consortium agreement under a service contract with the Government. "General professional partnerships" are
partnerships formed by persons for the sole purpose of exercising their common profession, no part of the income of
which is derived from engaging in any trade or business.
-

Under this definition, taxable partnership is taxed as a corporate taxpayer

Thus, corporation includes partnership, no matter how created or organized
This has been construed by the Supreme Court in that 1957 case of Collector vs. Evangelista (102 Phil
140)

In this case, the SC construed this phrase no matter how created or organized to mean as follows this
qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms

[normally, it must be in writing and registered], or in conformity with the requirement of the law on partnership in order
that one may be considered as a corporation for purposes of income tax on corporation.
Simply stated, this partnership is not required to be formed in writing. We have learned under the law on
partnership that the same may be orally constituted.

The heirs received rental income from several apartments. When the BIR assessed the heirs as taxable
unregistered partnership, they claimed that they never formed a partnership. There was no formal written agreement
to that effect. The BIR claimed that there was such intention to divide the profits among themselves. Is there an
unregistered partnership?

It also not required that the partnership be registered with SEC for the same to be taxable as an entity.
Thus, this qualifying expression clearly indicates that a joint venture need not be undertaken in any of the
standard forms, or in conformity with the requirement of the law on partnership in order that the same may be
constituted for purposes of tax on corporation.

There was an unregistered partnership subject to tax in their rental income.

OBILLOS CASE isolated transaction

What happened here was that Obillos Sr. entered into a contract with Ortigas Lmt. Co. There was an
agreement that OLC will subdivide the lot of Obillos into residential lot. The purpose of Obillos Sr, father of
four children, is for his children to build residential houses. When the children received their respective
shares, they decided not to build residential houses as they found the said venture quite expensive. Thus,
they instead sold these subdivided lots. When the BIR learned of the same, they assessed them as
taxable partnership as regards the income they earned from sad sale.

The SC said that there was no taxable partnership formed or organized because the children never
intended to divide the profits among themselves. The SC said that the sale was merely an isolated
transaction. There was no intention to form a partnership or to divide the profits among themselves.

PASCUAL ANDRAGON CASE this is the case where the court applied the test under article 1769(3) of
the CC mere sharing in gross returns does not establish a partnership, whether or not the parties have
joint or common interest in a property.

Here, pascual andragon purchased five parcels of land three from Bernanrdina and two from roque. The
three parcels of land sold from bernardina were sold at a profit of 165,244.70 to Mariner Development
Corporation. And the remaining two parcels of land were eventually sold to Samson Enriquez at a profit of
60,000. The BIR claimed that they formed a taxable partnership even if there was no such agreement.

The SC ruled that there was no partnership formed. REASON they shared in the gross returns. It is basic
in partnership that the partners must share in the net profits, not gross profits Article 1812 CC. The
interest of a partner in the partnership is their share in the net profits. In this case, the parties shared not in
the net profits but in the gross profits. Thus, the court was correct in applying article 1769(3) that mere
sharing in gross returns does not, in itself, establish a partnership.

DOCTRINE OF UNREGISTERED TAXABLE PARTNERSHIP

There are ten (10) important cases decided by the SC on this. Let us just zero in on four of these ten as
the other six are old cases.
DOCTRINE OF UNREGISTERED TAXABLE PARTNERSHIP this has been the doctrine developed by
the SC in these cases.
This simply means that a partnership is subject to tax even if it is merely orally constituted, and even if it
has not been registered with the SEC.

a. 1972 Doctrine Onia Doctrine [ONIA VS. COMMISSIONER 45 SCRA 74]

b. 1985 Obillos Doctrine [OBILLOS SR. VS. COMMISSIONER 139 SCRA 436]
c. 1988 Doctrine of Pascual Andragon [166 SCRA 560]
d. 1999 Afisco Insurance Company vs. Commissioner 302 SCRA 1

The common question is this Was there an unregistered taxable partnership formed or organized and
therefore, may be taxed as a corporate taxpayer?

ONIA CASE in this case, the rule is this When the heirs receive inherited property, they become coowners of sad property before partition. Thus, co-ownership is formed. Here, there is no taxable
partnership to speak of.

Co-ownership, as a rule, is tax exempt for the simple reason that it is formed or organized not for profit but
for common use and enjoyment of the property co-owned.
However, the SC said that once the heirs make contributions to a common fund AFTER they have
received their respective shares in the inheritance, and allowed one of them to administer such common
fund with the intention to divide the profits among themselves, an unregistered taxable partnership is
formed or organized.
To dissect

AFISCO CASE

i. The co-ownership must have been dissolved due to partition

ii. the former co-owners contributed their property inherited in a common fund
iii. they allowed an administrator to administer such common fund
iv. for the purpose or with the intention to divide the profits among themselves

Here there was taxable partnership formed among agents of foreign insurance companies. However, they
claimed that no formal agreement was formed.
The court, however, said that they made a contribution to a common fund pursuant to that pool agreement
they entered into.
The association was termed pool of machinery insurance. It claimed that it never issued an insurance
policy.
However, the court discovered that in the pool agreement, there was this rule on distributions. Although it
did not issue insurance policies, but it performed services which may be indispensable in carrying out the
business of that foreign insurance companies. Further, there was an agreement regarding the rules on
distribution as to the profits which may be earned or derived from the transaction.
Thus, the SC ruled that there was such contribution to a common fund pursuant to that pool agreement.
Thus, a taxable unregistered partnership was formed.

ACTUAL BAR QUESTION

Here, the court cited the 1957 evangelista doctrine which laid down the rule that there is no need tof any
formal agreement in order to form a partnership for purposes of corporate income taxation.
There is no requirement of registration. What is required is that 1.) there must be a contribution to a
common fund and 2. The intention to divide the profits among themselves.

TAX EXEMPT CORPORATIONS AND ASSOCIATIONS

YOU will find this in three sections

(D) Cemetery company owned and operated exclusively for the benefit of its members;
C- Cemetery, owned and operated for the benefit of the members. Thus, not profit-oriented
(E) Nonstock corporation or association organized and operated exclusively for religious, charitable, scientific,
athletic, or cultural purposes, or for the rehabilitation of veterans, no part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person;
N non-stock corporations CARS charitable and cultural organizations; athletic organizations; religious
organizations, and rehabilitation of veterans; scientific organizations

1. Section 22B grants exemption to three (3) associations

-

General professional partnerships

Joint venture or consortium for the purpose of undertaking construction projects
Joint venture or consortium under an agreement with the government for engaging in energy operations

(F) Business league chamber of commerce, or board of trade, not organized for profit and no part of the net income
of which inures to the benefit of any private stock-holder, or individual;

(G) Civic league or organization not organized for profit but operated exclusively for the promotion of social welfare;
2. Section 27C provides for four (4) exempt government owned and controlled corporations
(H) A nonstock and nonprofit educational institution;
-

GSIS
SSS
Philippine Health Insurance Corp.(PHIC)
Philippine Charity Sweepstakes Office (PCSO)
NOTE that PAGCOR is no longer exempt as its exemption has already been withdrawn by RA9337 [July 1,
2005]

3. Section 30 enumerates eleven (11) exempt corporations.

SEC. 30. Exemptions from Tax on Corporations. - The following organizations shall not be taxed under
this Title in respect to income received by them as such:

LMB CCNB CNG FF

(A) Labor, agricultural or horticultural organization not organized principally for profit;
L labor, agricultural or horticultural organization not principally organized for profit

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or irrigation company, mutual or
cooperative telephone company, or like organization of a purely local character, the income of which consists solely
of assessments, dues, and fees collected from members for the sole purpose of meeting its expenses; and
-

M mutual savings bank / cooperative bank

(C) A beneficiary society, order or association, operating for the exclusive benefit of the members such as a fraternal
organization operating under the lodge system, or mutual aid association or a nonstock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits exclusively to the members of such
society, order, or association, or nonstock corporation or their dependents;
B Beneficiary society, order or fraternal organization under the Lodge System here, the members are accorded
certain benefits when they incur illness, physical disabilities

Farmers cooperative, irrigation, mutual ditch, even insurance

It exists on that fund that the farmers may contribute
Not for profit

(K) Farmers', fruit growers', or like association organized and operated as a sales agent for the purpose of marketing
the products of its members and turning back to them the proceeds of sales, less the necessary selling expenses on
the basis of the quantity of produce finished by them;
-

(B) Mutual savings bank not having a capital stock represented by shares, and cooperative bank without capital
stock organized and operated for mutual purposes and without profit;

This is just a reiteration of Article XIV, section 4(3) of the Constitution.

Under the old tax code, there was really no provision on non-stock non-profit educational institution

Fruit-growers associations

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.

Common characteristics which justify the exemptions under section 30

These associations are organized not principally for profit

These organizations must have been organized for mutual purposes
No part of the income of any of these shall inure to the benefit of a particular member or individual
No need to memorize these 11 exempt corporations
NOTE however, that there is need to memorize the last paragraph

The last paragraph has been construed by the court in the YMCA Case.
NEED to memorize because even if your answer is not correct, since you have cited an important
provision in the Tax Code, the examiner will definitely give credit

LAST PARAGRAPH
-

Note the first word notwithstanding. this implies that said corporations are not totally exempted from
corporate income tax
The income, of whatever kind or 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
an income, shall be subject to tax imposed under the Code.
PROPERTY, REAL OR PERSONAL
REGARDLESS OF DISPOSITION MADE OF SUCH AN INCOME (use of such income)

These may involve dealings in property, real or personal.

Sale of real or personal property
Lease of real or personal property interest income
Exchange of property, real or personal
Interest income on bank deposit
Investment in money market placements

NOTE dividend received from another corporation is exempt (inter-corporate dividend) under section
27D(4)
Suppose the recipient of the foregoing enumerations is a non-stock, non-profit organization the
applicable provision is the exemption under the Constitution. Do not apply the last paragraph of section 30.

YMCA CASE (298 SCRA)

-

YMCA was considered as a religious and charitable organization. But the court did not declare the same
as a non-stock educational institution, YMCA not being qualified to be such.
Applying the present tax code, it falls under item E [declared exempt non-stock religious, charitable
institution.
Here, YMCA derived income from the lease of its property. It invoked Article VI, Section 28(3) which made
mention of charitable and religious institution exempt from taxation. For this contention, the SC said that
the exemption as mentioned applies only to property tax. In the present case, it involved income tax.
YMCA then claimed exception on the basis of the purposes for which it was organized that it was not
organized for profit; that it was a non-stock, non-profit association not engaged in a business. However,
the last paragraph of section 30 clearly provides from any of its properties, real or personal The
implication is that it is not whether the institution is for profit or not. YMCA can be taxed on that rent income
derived from the lease of its real property because it makes no distinction whether such lease is for
business or not, the same being immaterial.
YMCA then invoked Article XIV section 4(3) of the constitution which grants exemption to non-stock, nonprofit educational institution. However, the SC court, as has been pointed out earlier, ruled that YMCA is
not qualified as an educational institution. REASON it does not have all the features of a school or
university. Thus, the provision cited is inapplicable.
The strongest argument raised by YMCA is this such meager income shall never be used for profit and in
fact, it shall be used in furtherance of its charitable and religious purposes. The court said that the tax code
is clear and unequivocal. Regardless of the disposition of such an income, regardless of use of the same,
the income shall be subject to tax imposed under the tax code.

MODIFICATION OF FACTUAL MILIEU OF YMCA CASE

Suppose that the examiner will change the facts in that the income is now interest income on bank deposit.
Is YMCA, which is a religious and charitable institution, taxable on its interest income on bank deposit? Is it subject to
the 20% final tax?
YES!!! YMCA is subject to that 20% final tax on its interest income. the last paragraph of section 30
squarely applies.

Suppose the recipient is a government educational institution. These government educational educations
are squarely covered by the last paragraph of section 30, except the dividend received from a corporation.

REQUIREMENTS ON EXEMPTION of NSNP EDUCATIONAL INSTITUTION RELATIVE TO INTEREST INCOME

ON BANK DEPOSITS
Department of Finance Order 149-95 [Nov. 24, 1995] requires the concurrence of the following conditions in order
that these NSNP educational institutions may be exempt from the 20% FT on interest income from bank deposits.
1. certification by the depository bank regarding the existence of the deposit made by the NSNP Educational
institution
2. Certification of the actual use or utilization of such interest income on bank deposit
3. Purpose for which such amount may be used must be embodied in a board resolution. The purpose must be for
educational purpose, and may include expansion of educational facilities, purchase of school equipment, supplies
and the like
-

If these conditions are complied with, the depository bank is not supposed to withhold the 20% final tax on
the interest income

INCOME DERIVED FROM THESE ANCILLARY EDUCATIONAL FACILITIES

-

QUESTIONS
1. What are those possible sources of income covered by the last paragraph of section 30 when it says from any of
its properties, whether real or personal?

Article XIV, section 4(3) of the constitution provides for the test of exemption. Thus, income that may be
received by non-stock non-profit educational institution is exempt from income tax provided the said
income is actually, directly and exclusively used for educational purposes. Thus, it is the use of such an
income that is the criterion of exemption. Section 30, last paragraph must yield to the constitutional
provision. The last paragraph suffers a constitutional infirmity insofar as the inclusion of the non-stock,
non-profit educational institution is concerned. This is so because the last paragraph will not really apply to
NS NP educational institution as its exemption is constitutionally granted under Article XIV, section 4(3).
And it is basic that any law must defer to the constitution.
Having that in mind, suppose that the above items of income are received by NS-NP education institution,
said income shall be exempt provided that such income must be actually, directly and exclusively used for
education purposes, including interest income on bank deposit.

E.g. income derived from operation of restaurants, canteens, bookstores, dormitory within the premises of
the school
We have to be guided by DECS regulation 137-87
Requisites for exemption

The income derived from these ancillary educational facilities is exempt provided that
REAL PROPERTY TAX
- Article VI, sec. 28(3) of
the Constitution78

1. these must be owned and operated by NSTP educational institution; and

2. the same must be located within the educational premises
--------------------------------

DONORS
TAX
on
donations inter vivos
- be guided by sec.
101A(3) of the NIRC10

FAVORITE TOPICS IN THE BAR [REC]

1. RELIGIOUS ORGANIZATIONS
2. EDUCATION INSTITUTIONS categorized into three
- private educational institution
- government educational education
- non-stock, non-profit educational institution
3. CHARITABLE INSTITUTIONS
Exemption from income tax
Exemption of real properties of REC from real property tax
Donation given to REC exemption from donors tax
Donation is mortis causa exemption on estate tax

INCOME TAX
- here you have to be
guided by sec. 30 of NIRC

RELIGIOUS
ORGANIZATION
EXEMPT from income tax
(sec. 30[e]) subject to the
last paragraph thereof

EDUCATIONAL
INSTITUTIONS
PRIVATE

NOT
EXEMPT
- subject to preferential
corporate rate of 10%
under section 27B; or
30% corporate rate

CHARITABLE
INSTITUTIONS

EXEMPT provided that the

real property is actually,
directly and exclusively9
being used for religious
purposes
EXEMPT

GOVERNMENT
EXEMPT

EXEMPT provided that the

real property is actually,
directly and exclusively
being used for charitable
purposes
EXEMPT

NSNP ORG EXEMPT if donee is nonstock

non-profit
educational institution
REQUISITE
FOR
EXEMPTION (101A3)
1. NSNP EI must be
governed by the board of
trustees
2. trustees must receive
no compensation
3. not more than 30% of
such donation is used for
admin purposes
4. income, contributions,
donations, fees received
by it must be devoted to
the accomplishment of the
purposes stated in the AOI
5.
the
AOI
mmust
categorically declare that it
is a NSNP Educational
institution

* Remember the nine (9)

qualified
donees
for
exemption [CARTER C
PS]
- charitable institution
- accredited NGO (8424)
- religious organization
- Trust organization
- educational institution
(non-stock, non-profit)
- Research org.
- Cultural org
- Philanthropic org
- Social Welfare org

EXEMPT
(Sec. 30[e]) subject to the
last paragraph thereof

As
to
Government
educational institution, this
is a gray area. governed
by board of trustees who
receive no compensation.
Also established not for
profit they may be
covered

10% preferential rate

income from unrelated
trade, business or activity
is not more than 50% of its
total income
30% corporate rate if
income from unrelated
business is more than
50% of its total income

constitutional exemption
under Art. XIV, sec. 4(3).
EXEMPT provided that the
real property is actually,
directly and exclusively
being used for educational
purposes

ESTATE
TAX
on
donations mortis causa
- refer to sec. 87D

NOT EXEMPT donation

mortis causa not exempt
from estate tax

PRIVATE

definitely
subject to donors tax
NOT
EXEMPT

donations mortis causa

subject to estate tax

EXEMPTED

(Sec. 30[i]) subject to the

last paragraph thereof
NON-STOCK,
NONPROFIT EDUCATIONAL
INSTITUTION EXEMPT
(Sec. 30[h]) exemption is a
mere reiteration of the

COMMON BLUNDER some people opine that this exemption fro real property tax does not apply to private educational
institution. This is erroneous. The constitution does not make any distinction. Thus, for as long as the real property is actually,
directly and exclusively used for religious, charitable and EDUCATIONAL purpose, the educational institution is exempt. Note
here that what determines the exemption is the use of the real property, not the nature of such institution.
8
This has been construed in the case of Lung Center of the Philippines vs. Orosas 433 SCRA 119
9
The SC, in the case of Lung Center vs. orosas strictly construed the word exclusively to mean solely. The interpretation
that exclusively means primarily has been abandoned. What would be the effect of this? The doctrine of incidental facilities is
no longer applicable in view of such strict interpretation.
10
Perennial source of bar exam questions on donors tax. Majority of questions on donors tax dwell on exemptions

Just
remember

donations mortis causa to

the following institutions
shall be exempt from
estate tax - CSC
- charitable
- social welfare org
- cultural org

SIGNIFICANT CORPORATE RULES

Actual corporate income tax (applying the 30% corporate rate)

Minimum corporate income tax 2% on gross
Corporate income tax due/payable
1. First situation
Assuming that the actual corporate income tax amounted to 600,000.
Let us also assume that 2% of the gross income of this corporation is 800,000.
This is where you can apply squarely MCIT.
-

The corporate income tax due must not be lower than 2% of the gross income. if lower than 2% of the
gross income, the MCIT shall apply.

1. MCIT MINIMUM CORPORATE INCOME TAX (Sec. 27E and 28A[2])

2. second situation
-

RATE 2% of gross income

MCIT applies to the following

a. DOMESTIC CORPORATION (SEC. 27)
b. RESIDENT FOREIGN CORPORATION (SEC. 28A[2])

Is there a provision on MCIT under section 28B relating to NRFC? There is none

MCIT does not apply to NRFC. It applies only t DC and RFC

Suppose that the actual corporate income tax amounted to 800,000.

Assume that the 2% of gross income is only 600,000.
Here, the corporation shall be liable for the actual corporate income tax.
-

You can only apply the MCIT if the 2% is higher than the actual corporate income tax. If it is less than the
actual liability, then the latter shall be considered as the tax due.

Are corporations which incurred a net loss subject to MCIT?

2. IMPROPERLY ACCUMULATED EARNINGS TAX (SEC. 29)

SITUATIONS
-

RATE 10%
1. The gross income is equal to the expenses claimed as deduction, thereby creating 0% gain.

3. BPRT BRANCH PROFIT REMITTANCE TAX (28A[5])

2. The gross income is lower than the expenses claimed as deduction, thus resulting in a net loss
-

RATE 15%
-

4. GROSS PHILIPPINE BILLINGS (SEC. 28A[3])

-

RATE 2.5%
-

5. TAX SPARING CREDIT(28B[5b]) See Procter and Gamble Phil. Vs. Commissioner
-

RATE 15% tax on dividend received by a NRFC

MINIMUM CORPORATE INCOME TAX

IMPLEMENTED by RR 9-98
The SC in the case of Criba vs. Romulo sustained the constitutionality of MCIT and its IRR 9-98
The word minimum simply connotes that DC and RFC must pay corporate income tax not lower than 2% of
its gross income

ILLUSTRATION

Section 27E is silent insofar as these two situations are concerned. Is the corporation having no taxable
income or incurred net loss liable to pay MCIT?
RR 9-98 provides that the corporation is liable for MCIT. Such situations will not exempt the corporation
from the payment of the MCIT.
RATIONALE the rule on net income taxation has been the subject of abuse in that the claims for
deductions for expenses made were not all legitimate expenses. The net income system may give rise to a
connivance between the collector and the taxpayers. Thus, the purpose of the MCIT is to curb this evil.
Thus, the purpose of the MCIT is to forestall the prevailing practice of corporations of over-claiming
deductions in order to reduce their income tax payments. In view of such prevailing practice, the MCIT was
conceptualized.

Is this unjust, unfair or inequitable by requiring the corporation who had no taxable income or incurred net
losses to pay corporate income tax?

The SC sustained the MCIT. The court said MCIT has these following purposes
i. to prevent tax evasion
ii. to prevent tax avoidance schemes achieved through such artful manipulations, devices
iii. to put a cap on tax shelters employed by several corporations

It is not unjust in that, as provided for in section 27E(2) and as clarified under RR 9-98, although the
corporation can be made to pay the 2% on gross income despite the fact that it had no taxable income or
incurred net losses, this 2% can be used as a tax credit by these corporations which may be credited
against its estimated tax liabilities in three consecutive taxable years.
The court, in this case, emphasized the so-called safeguards and corrective measures of MCIT

According to the petitioner, the same is imposed on capital, not on income.

The SC said that it is not a tax on capital but a tax on income. here, the tax base is gross income. it is
within the power of congress to prescribe a certain tax at a specific rate on persons or things for a particular purpose
within its jurisdiction. This is a legislative prerogative to fix the tax base either on taxable income or gross income,
after all the grant of deduction is a legislative grace.

CORRECTIVE MEASURES UNDER MCIT

I. It will only apply on the fourth year of corporate existence. Hence, at that time, the corporation would
have already attained financial stability. [Thus, belies the belief that it is unjust]. Thus, by the time the MCIT is
applied, the corporation would have already attained financial viability.
II. TAX credit provision the 2% paid by a corporation that had no taxable income or incurred net losses
can make use of the same as tax credit on its estimated tax liabilities in three consecutive taxable years.
III. MCIT may be suspended on equitable grounds
a. if such corporation has experienced prolonged labor dispute. The dispute must have lasted for more
than six (6) months, and it must cause temporary cessation of business
b. Force majeure or accident
c. serious financial reverses

In the case of domestic corporation, is private educational institution subject to MCIT? I

Proprietary private educational educations and non-profit hospitals under 27B are not subject to MCIT
because they are subject to the preferential rate of 10% on their taxable income.
But note that the fact that they are automatically exempted from MCIT does not make them automatically
exempted from corporate income tax.

IMPROPERLY ACCUMULATED EARNINGS TAX

See 29B(2) BPI

Represents those corporations not covered by the 10% tax. These corporations are the following

B bank and other non-bank financial intermediaries

P publicly held corporations this is so because covered are closely held corporations. The definition of closed
corporation under section 96 of BP 68 is applicable not more than 20 stockholders. This has been mentioned
under RR 2-2001.
I insurance companies
-

The question on this may be this what is the purpose of this tax on improperly accumulated earnings?
RR 2-2001, section 2 explains the purpose of IAET. Visualize this situation

A corporation is expected to declare dividends and distribute the same to the SH once there is surplus
profits or earnings. This is precisely the business motive here. SH or investors invest in a corporation because they
are after the fruit of their investment.
But such corporation, even if it has surplus earnings, may improperly withhold the same by refusing to
declare dividends. On the part of the government, the dividends which should have been declared, would have been
taxed had there been such declaration. the tax would be 10% or 20% depending on the recipient.

Depository bank is not subject to MCIT as it is subject to the special rate of 10%
Those enterprises registered with PEZA (RA 7916), BCDA (7227) are also not subject to MCIT because
they are subject to a special preferential corporate rate under these special laws 5%(?).

As regards to resident Foreign Corporation, the following are not subject to MCIT

Thus, the purpose of this 10% tax on improperly accumulated earnings is to penalize these corporations
for this unsound business practice of improperly accumulating corporate earnings.

Regional headquarters of multinational corporations as they are subject to 10% special corporate rate
International carrier as it is subject to a preferential corporate of 2.5% based on gross Philippine billings
Offshore Banking Units are not subject to MCIT as they are subject to a preferential rate of 10%

Another reason cited is that this is a deterrent to the avoidance of tax on these dividends by the SH. It
would have been subject to tax had there been a declaration of dividends. In the end, such non-declaration results
in the loss of revenue on the part of the government.

Suppose the question is modified in the following manner

What must be the basis or rationale for the imposition of the MCIT?

FAVORABLE BUSINESS CLIMATE DOCTRINE Domestic corporations owe their corporate existence
under a privilege to do business to the government. They also benefit from the efforts of the government to the
financial market and to ensure a favorable business climate. It is, therefore, fair for the government t require them to
make reasonable minimum contributions to the public expenses.

MCIT not violative of due process

Thus, the state must regulate this by imposing IAET.

The word improper is the justification of the imposition of the IAET. This means unjustified accumulation
of corporate earnings
Section 43 of the corporation code has a related provision here . it provides that stock corporations are
prohibited from retaining surplus profits in excess of 100% of its paid up capital.
However, section 43 provides exceptions to the rule.
When a stock corporation retains surplus profits in excess of 100% of its paid up capital, this IAET is
applicable.
RR 2-2001 made mention of two cases which may result in IAE.

1. the remittance is effectively connected with the conduct of trade or business in the PH.
-

Investment of this earnings in unrelated trade or business may also constitute improperly accumulated
earnings as to be subject to IAET.
Investment in bonds and other long term securities of these surplus profits considered IAE.
In the language of R 2-2001, these are prima facie instances of improper accumulation of corporate
earnings.

MAROBINI DOCTRINE 177 SCRA 500

Here, marobini of Japan was the mother corporation. it had an office here in the Philippines marobini
Philippines. Marobini of japan made a direct investment with a Philippine corporation Atlantic and Pacific Gulf Corp.
Is such income derived from this direct investment considered as branch profit subject to the reduced rate
of 15%?

Summary
1. Non-declaration of dividends when proper
2. investment of such surplus profits in unrelated trade, business or activity
3. investment of such surplus profits in bonds and other long term securities

If such accumulation is proper or justified, the IAET may not be imposed.

The third paragraph of section 43 of BP 68 mentions three cases where the accumulation or retention of
corporate earnings may be justified even if it may exceed 100% of the pad up capital [PNP]
I. P PROJECTS expansion of corporate projects covered by board reso
II. N Necessary for probable contingencies
III. P PROHIBITED by a loan with a financial institution

I and II are mentioned in RR 2-2001 as reasonable means which may justify accumulation. The second is
not included under RR 2-2001

BRANCH PROFIT REMITTANCE TAX (15%)

two amendments have been introduced by RA 8424, as follows:

I. TAX BASE this has been changed from amount actually remitted to amount applied or earmarked for
remittance

The SC said no because such investment was not derived from that business that is effectively carried out
by the business of Marobini in the Phlippines. The investment made by marobini PH was distinct and separate from
the business that was effectively carried out by this branch office in the PH.

How could you consider a profit as one effectively connected with the conduct of trade or business in the
PH?

The branch has been established here purposely for such foreign corporation to carry out its business
through that branch. Thus, the business of such corporation should be carried out by this branch office.
Thus, it must be an investment that must be channeled through such branch office so that it may be
considered as effectively connected with the conduct of trade or business.
In this actual case, it was a direct investment from the mother corporation to the domestic corporation
without passing through the branch it established in the PH

GROSS PHILIPPINE BILLINGS

EXAMPLE
The problem may state as follows 5M branch profits actually remitted. Ignore this. Look for such an
amount representing profits applied or earmarked for remittance. That will be the tax base.

II. EXEMPT PROFITS those remitted by enterprises registered with PEZA

NOTE the last sentence section 28, particularly the word effectively. To be considered as branch profits
subject to 15% final tax, these profits must be effectively connected with the conduct of trade or business
in the Philippines.

Bear in mind that the establishment of a branch office will make such corporation as a resident foreign
corporation.
What is being taxed here are profits remitted to the mother foreign corporation. but in recognition of its
business here, the tax rate has been reduced to 15%.
But the following conditions must be complied with for the imposition of the reduced corporate rate

This applies to an international airline or vessel

The definition of gross Philippine billings has been amended by RA 8424
Before January 1, 1998, it was the place of sale or payment of the transport document which determined
whether the income will form part of the gross Philippine billing
It is no longer the place of sale which determines whether such revenue may form part of the gross
Philippine billings. Such revenue must be received from the uplift or transport originating from the PH.
In the case of international airlines, gross Philippine billings applies to an international airlines having
landing rights. Thus, it can only derive such revenue if it has landing rights considering that the revenue is
considered as derived from the transport of passengers originating from the Philippines
PLACE of sale, issue of transport document, or place of payment is immaterial. Irrespective of said place,
for as long as the international airline transports passengers originating from the PH, the income theren
shall be taxable under gross Philippine billings
since the same applies to international airlines with landing rights, gross Philippine billings does not apply
to those having no landing rights even if they received income from the sale of transport documents
conducted in the PH. in this case, we apply section 28A1 which is the general rule insofar as resident
foreign corporations are concerned. Thus, they may be taxed as resident foreign corporation.
the court declared that the BOAC doctrine [149 SCRA 395] is squarely applicable. In this case, the SC said
that these offline corporations shall be considered as resident foreign corporation because it engaged in a
business there is continuity of commercial transactions involving sales of transport documents.
The court declared that since the sale of these transport documents has its origin in the PH as payments
were made here, and the tickets exchanged hands here, the flow of wealth occurred within the territory of
the PH. as such, it enjoyed the protection of the PH government. In consideration of such protection, this
flow of wealth (sale) must share the burden of supporting the government. [Protection theory in taxation]

TAX SPARING CREDIT RULE

-

This is the most difficult and complicated provision on corporate income tax

Section 28B5(b)
This can be simplified by asking these questions

1. In this case, justice paras insisted that there must be proof of the amount actually granted as tax credit
by the foreign government.
2. the withholding agent does not have legal personality. It is the mother corporation who has the legal
eprsonality
WONDER CASE (160 SCRA 573)

a. What is that situation contemplated under 28B5b?

-

1. Made no pronouncement regarding proof of actual credit granted by the foreign government.

Non-resident foreign corporation receives dividend (cash or property) from domestic corporation. thus, the
income covered is cash or property dividend.

b. is that taxable? YES

c. If it is taxable, what is the applicable rate? Final withholding tax at the rate of 15% is imposed on cash or
property dividend

2. Withholding agent has the legal personality to claim for refund

d. why is the rate reduced to 15%?

-

In the Procter and gamble case, the SC said that the purpose of the tax code in reducing the same to 15%
is to encourage foreign investments. One way of attracting investment is to reduce the corporate rate.
This 15% reduction refers precisely to the tax spared or saved. The tax rate spared is the difference
between the regular corporate rate of 30% and the applicable reduced rate of 15%. The tax saved or
spared is 15%.

e. is there a condition for the imposition of such reduced rate?

-

Tax credit
The word credit refers to the condition that must be complied with
The provision is quite technical. It provides a final withholding tax at the rate of 15% is hereby imposed
on the amount of cash or property dividend received from domestic corp. which shall be collected and paid
as provided in section 57A, subject to the condition that the country where such corporation is domiciled
shall allow credit against the tax due from the non-resident foreign corporation taxes deemed to
have been paid
The requirement is that there must be a tax credit. The tax code does not say actual credit. It merely says
shall allow.
This has been the subject of two conflicting decisions of the court (april 15, 1988)

It is now clear that a withholding agent has the legal personality to file a claim for refund.

To understand this, refer to section 22K which defines withholding agent, and 22N which defines a
taxpayer.

As defined under section 22K, a withholding agent is any person required to deduct and withhold any tax
under the provisions of section 57.

Taxpayer is defined as any person subject to tax imposed under this title.

The technical words subject to tax a construed by justice Paras, means that a withholding agent is liable
for tax. And his opinion was that one who is liable for tax is not necessarily subject to tax. That is why his
view is that only the mother corporation should file a written claim for refund. But he was overruled in the
en banc decision

We are talking here about the obligation to pay the tax. It is very difficult and conceptually impossible to
consider a person liable for tax as not subject to tax. This connotes an obligation to pay.

The SC said that a withholding agent is an agent of the government in regard to the collection and
withholding of such tax. It is an agent of the taxpayer in regard to the payment of such tax and the filing of
such tax return.

Thus, following such pronouncement that the withholding agent is the agent of the taxpayer in the payment
of tax, this withholding agent is technically the taxpayer. Therefore, he is the taxpayer giving rise to his

1. Commissioner vs Procter and gamble

2. Wonder case
-

These conflicting decisions seldom happen. But this happened because both cases were decided and
promulgated on the same day.
Two issues were resolved in these two cases -\

1. Tax credit does not require proof of the amount actually granted
2. The personality of the withholding agent to file a written claim for refund (perennial bar question)

The prevailing rule now is this the tax code does not require actual grant. It merely says shall allow a
credit
Proof of the amount actually granted as tax credit is not required
(Opinion of dimaampao) when the code says shall allow it does not mean that such corporation should
not present any proof. The proof that must eb presented must refer to the existence of that provision on tax
credit. It is not required to present proof of the amount actually granted as tax credit. But it must present
proof that there exists such tax credit provision under the revenue code of the foreign country.
(opinion/question of Jay) But what if there is no such proof of the foreign law? Will the doctrine of
processual presumption apply? Note that this doctrine provides that if the foreign law alleged is not proved,
it shall be considered as being the same with our laws. Applying the doctrine in this case, if there is no
proof that such grant of tax credit exists, then we will have to apply our own tax code. Our tax code
provides for tax sparing credit rule. Thus, it would seem that whether or not proof of the foreign law is
presented, we will always go back to the applicability of the tax sparing rule.

PROCTER AND GAMBLE (204 SCRA)

legal personality to file a claim for refund. This is now the consistent ruling of the court. This has been
asked five times already in the bar.

GENERAL PRINCIPLES

The following are always in the bar exams

1. NATURE OF TAXATION
2. SCOPE OF TAXATION
3. THEORY OF TAXATION (COMMISSIONER VS. ALGUE)
4. BASIS OF TAXATION
5. SECONDARY PURPOSES / NON-REVENUE PURPOSES / REGULATORY PURPOSES OF TAXATION

a. to promote national economy

b. to promote national security
c. to promote general welfare
In article VI, sec. 28(2) what you will find there is within the framework of the national evelopment program of the
government
2. Article X, Section 5

[The first three questions are always based on these principles.]

NATURE OF TAXATION

Inherent it co-exists with the state. It requires no constitutional conferment

Why is the power to tax inherent in the sovereign? It is inherent because it is a necessary attribute of
sovereignty. Without this power, no sovereign state can exist nor endure. The power to tax proceeds upon the theory
that the existence of the government is a necessity, and this power is an essential and inherent attribute, belonging
as a matter of right to every independent state or government. No sovereign can continue to exist without the means
to pay its expenses. And for these means, it has the right to compel its citizens and property within its limits, to
contribute. Hence, the emergence of the power to tax.
-

Legislative because such power can be exercised by the lawmaking body of the state. This power cannot
be delegated as a rule.

Legislative, as it is based on the theory that taxes are a grant of the people, and this grant must be made
by the immediate representatives of the people. And where the people have laid this power, there it must remain and
be exercised.
-

In imposing a tax, the legislature acts upon its constituents

Since it is legislative in nature, it cannot be delegated except where the constitution allows such
delegation.
This is the two-fold nature of taxation

BAR
What are these provisions in the constitution that allow delegation of the power to tax?
1. Article VI, sec. 28(2) tariff power of the president
-

In the light of section 401 of the tariff and customs code FLEXIBLE POWER OF THE PRESIDENT
This was the only question on TCC in 2001 bar.
This is really the implementing provision of this delegation of the power to tax
Thus, the president may adjust the customs and tariff rates
He can increase the rates
He can lower the rates, depending upon prevailing conditions

He purpose is either of the following

Local government units have the power of taxation

There are two words you should underscore here guidelines and limitations
According to RA 7160 may refer to fundamental principles of local government taxation see sec. 130
local government taxation; 198 fundamental principles of real property taxation
When we speak of limitations, refer to 133 (there are fifteen common limitations). The last item there no
tax may be imposed on national government and its instrumentalities.
Manila Int; Airport vs Paranaque / MIA vs quezon city here the Sc said that properties of MIA are not
subject to real property tax because it is considered as an instrumentality of the government. This in effect
abandoned the mactan doctrine.

SCOPE OF TAXATION
COMPREHENSIVE
UNLIMITED
PLENARY
SUPREME
-

It is one that reaches to every trade, occupation, to every object of industry, use, enjoyment, to every
species of possession, which, in case of failure to discharge the same, may be followed by seizure, sale or
confiscation of property.

CONES
The legislature has the authority to determine the
COVERAGE OR SUBJECT OF TAXATION
OBJECT OR PURPOSE OF TAXATION
NATURE OR KIND OF TAX
EXTENT OR RATE OF TAX
SITUS OR PLACE OF TAXATION
CASE
The Supreme Court explained this in the following manner
The legislature has the power to define what shall be taxed (coverage), why it should be taxed (purpose), what tax
shall be imposed, against whom the tax shall be imposed, and where the tax shall be imposed.

THEORY OF TAXATION

1. SYMBIOTIC RELATIONSHIP THEORY this is really an improvement of that reciprocal duties of support and
protection

Despite the natural reluctance to surrender part of ones hard-earned income to the taxing authorities,
every person who is able to must contribute his share in the burden of running the government. (This s the
obligation to pay tax).
The government, for its part, is expected to respond in the form of tangible and intangible benefits intended
to improve the lives of the people and enhance their material and moral values.

Chief Justice Marshall of the US SC said yes it includes the power to destroy
Justice Holmes ssaid that it does not include the power to destroy while the court sits. This was the one
quoted in the case of Sison vs. Ancheta.
If this will be asked, we can adopt the view of justice Isagani Cruz. The view of Cruz is this:
Both views are correct bur from different viewpoints.
The power to tax includes the power to destroy if it is used validly as an implement of the police power of
the state. In this context. Certain businesses may be regulated
The power to tax does not include the power to destroy if it is used solely for the purpose of raising
revenue.

2. LIFEBLOOD DOCTRINE

STAGES / ASPECTS OF TAXATION

CASES

LAP

a. COMMISSIONER VS. PINEDA 21 SCRA 105

Levy or imposition of tax enactment of laws

Assessment and collection
Payment incidence of taxation

BIR has the necessary discretion to avail itself of the most expeditious way to collect taxes

b. COMMISSIONER VS. CITY TRUST 234 SCRA 348

LEVY
-

Lifeblood doctrine was cited by the court as a justification for this ruling that it is a long and firmly settled
rule of law that the government is not bound by the errors committed by its agents.
OMEN theses omission, mistake, error and neglect of agents of government, as a rule, are not binding
upon the government

NON-REVENUE /REGULATORY PURPOSES OF TAXATION

Levy or imposition is also described as impact of taxation.

These two terms (impact and incidence) are material in answering this frequently asked question in the bar exams
what is the difference between direct tax and indirect tax?
So that your answer will be impressive, explain these two terms.
Impact upon whom the tax is imposed
Incidence payment of tax

KEY: PIER
1. PROTECT our local industries against unfair foreign competition

Here, the government may impose certain taxes and special customs duties (dumping duties,
countervailing duties and discriminatory duties). These are imposed with the end in view of protecting local
products from foreign competitions.
Incidentally, these are the favorite questions under the TCC

2. REDUCE social inequalities

-

The power of taxation may be used to promote social justice.

System must be adopted in that regard. This is the adoption of progressive system of taxation

In the case of direct tax, the same falls on the same person. It is imposed on that taxpayer and that
taxpayer must be the one to pay that income tax.
In indirect taxation, the impact of taxation falls on one person, while the incidence of taxation falls on
another. This is so because the burden of tax may be shifted.
Bear in mind that when the burden of tax is shifted, it is not really a tax. When it is shifted, it ceases to be a
tax as it now forms part of the price. NOTE that what is shifted is not the tax. That is why if the buyer is exempt, the
seller cannot claim such an exemption.
CASE regarding refund of indirect tax

3. ENCOURAGE the growth of local industries

Who has the legal personality to claim refund of indirect tax?
-

The power to tax includes the power to grant exemptions

Through the grants of exemptions, condonations or tax amnesties

4. IMPLEMENT of the police power of the state

-

Does the power to tax include the power to destroy?

See Silk hair vs. Commissioner 571 SCRA

The Sc said that it can only be filed by the statutory taxpayer the person upon whom the payment of tax
is imposed though he can shift the same to another

Thus, in the refund of a value added tax, the one who has the legal personality to file tax refund must be
the seller

FUNDAMENTAL PRINCIPLES OF A SOUND TAX SYSTEM

When can we say that our tax system is sound?
-

If the proceeds of tax are adequate (fiscal adequacy)

If the tax imposed is just, fair and reasonable (theoretical justice)
If a tax law, rule or regulation is capable of effective implementation or enforcement (administrative
feasibility)

# TERRITORIALITY
Destination principle [see atlas consolidated mining corpo. Case.] this principle applies to VAT taxed
only at the place where the goods are consumed.
Exception to this cross-border doctrine this considers those export processing zones as territory
beyond our jurisdiction. They are considered foreign territory. Thus, goods sold therein shall not be subject
to tax.

AUTOMATIC REVIEW UNDER THE TCC

CONSTITUTIONAL LIMITATIONS

JUST REMEMBER THIS KEY REVENUE LESS DAN PTF

REVENUE
1. Free exercise of RELIGIOUS PROFESSION (Art. 3, sec. 5)
2. Equal protection clause (Art. 3, sec. 1)
3. Veto power of the president on [ART] appropriation, revenue and tariff bills (Art. 6, sec. 27(2))
4. Exemption from taxation of [REC] religious, educational and charitable institutions (Art. 6, sec. 28(3))
5. Non-impairment clause (Art. 3, sec. 10)
6. Uniformity of taxation (Art. 6, Sec. 28(1))
7. Exemption from taxation must be approved by absolute majority of congress (Art. 6, Sec. 28(3))
LESS
8. LOCAL government units refers to the constitutional delegated power (Art. 10, Sec. 5)
9. EXEMPTION from income tax, property tax, customs duties of non-stock, non-profit educational institutions
(Art. 14, Sec. 4(3))
10. SUPREME COURT power of the SC to review, revise, affirm on appeal decisions of the lower courts regarding
the validity or legality of a tax, impost, penalty (Art. 8, sec. 5(b))
11. SPECIAL FUND collected under special law shall be used only for such special purpose (Art. 6, sec. 29(3))
TRI-PAD
12. tariff rates
13. No public money which may be derived from taxes shall be used directly or indirectly for religious purpose
14. No person shall be imprisoned for non-payment of poll tax, capitation tax (community tax)
15. Freedom of the Press
16. Appropriation, revenue and tariff bills must originate exclusively in the HR (Art. 6, sec. 24)
17. Due process (Art. 3, sec. 1)
KEY WORD ON INHERENT LIMITATIONS
PINT
PUBLIC PURPOSE
INTERNATIONAL COMMITTEE
NON-DELEGATION OF THE POWER TO TAX (EXC. TO PRESIDENT AND LGU)
TERRITORIALITY

SEE Yaucasin vs customs commissioner 180 SCRA 591

It cited customs memo order 2087
according to the CMO, if the collectors decision is favorable to the taxpayer, the decision of the collector is
automatically elevated on appeal to the customs commissioner.
Before the customs commissioner, there are two things which may happen

a. he may reverse the decision of the collector of customs. If he does so, the remedy of the taxpayer-importer is to
appeal the same to the CTA. The decision of the CTA en banc is appealable to the SC;
b. if the decision of the customs commissioner is favorable to the taxpayer-importer, this is automatically elevated (on
appeal) to the Secretary of Finance.
Before, the Secretary of Finance, there are two possible situations which may occur
i. the decision may be adverse to the taxpayer. If the decision is adverse to the taxpayer, the latter may appeal the
same to the CTA. The CTA en banc decision may be appealed to the SC
ii. if the decision is favorable to the taxpayer, such decision becomes final and executory.
In the case cited, the SC said that the purpose of the law in allowing this automatic review is to protect the
interest of the government in the collection of customs duties.

SITUATION
If the decision of the collector of customs who may be assigned to Jolo or tawitawi, is favorable to the
taxpayer, in all likelihood, such decision may be questioned. But he is assigned in a far-flung area. There is no way
through which the secretary of finance may be cognizant of such situation. Thus, the collector of customs assigned in
far-flung areas may be given unbridled discretion to declare imported goods (subject to customs duties) as locally
manufactured goods (exempt from customs duties).
Thus the automatic review has been designed to prevent such irregular and anomalous situation.
It has also been discovered that before the implementation of this procedure, the government was
defrauded of millions of pesos which could have redounded to the public coffer.

REMEDIES ON PROTEST OR TAX REFUND

ADMINISTRATIVE REMEDIES

QUESTION is this admin remedy of protest and tax refund available under the NIRC, the LGC, real property
taxation, and TCC?
-

TAX PROTEST
NIRC YES, section 228
-

Within 30 days from receipt of such assessment, the TP may file a protest in a form of request for
investigation or reconsideration.
Reinvestigation is proper if there is newly discovered evidence
The decision of the commissioner is appealable to the CTA 30 days from receipt of the same

CASE RCBC vs. Commissioner 522 SCRA 144

These remedies are exclusive. A resort to one will constitute a bar to availment of the other.

With all due respect, this is not the import of section 228 (last paragraph). If you read the last paragraph, it
only allows an appeal of that inaction. If no decision has been rendered within that 180 day period, you
may appeal such an inaction after the lapse of that 180 day period.

What must be appealed from CTA to the SC must be a decision en banc. This is where you apply the
fifteen day period.

NIRC REFUND ALLOWED

Protest against local tax may be lodged within 60 days before the local treasurer
Decision of local treasurer may be appealed to the RTC (court of competent jurisdiction) within 30 days
from receipt
The decision of the RTC is appealable to the Court of Tax Apeeals within 30 days from receipt thereof
The decision of the CTA en banc is appealable to the SC within 15 days from receipt thereof

REAL PROPERTY TAX refer to secton 252

Two years from the date of payment

CASE commissioner vs. TMX sales inc. 251 SCRA

MEANING of PAYMENT in the case of the corporate taxpayer, from the filing of the FACIT Return

LOCAL GOVERNMENT CODE Protest is allowed under sec. 195

Payment of customs duties must first be made

Within fifteen days from payment, file a protest before the collector of customs
The decision of the collector of customs is appealable to the customs commissioner within 15 days from
receipt
The decision of the customs commissioner is appealable to CTA within 30 days (RA9282)
The decision of the CTA en banc

TAX REFUND

Within 30 days after payment, protest may be lodged before the local treasurer.
The decision of the local treasurer is appealable to the Local Board of Assessment Appeals within 60 days
from receipt
The decision of the LBAA to the Central Board of Assessment Appeals apply the 30 day period
(RA 9282) The decision of the CBAA is appealable to the CTA within 30 days from receipt thereof
CTA decision en banc is appealable to the SC within 15 days

TCC section 2308 of PD 1464

The SC sustained this rule embodied in the rules of the CTA allowing the taxpayer this option:
1. If no decision has been rendered within that 180 day period, the TP has the remedy to appeal the
inaction to the CTA
2. Await such decision of the BIR thus, even if the BIR rendered decision beyond that 180 day period,
you can still appeal the same thirty days from receipt thereof.

See Rami textiles vs. Mathay 89 SCRA 386 here the SC explained the meaning of this. When a payment
is made under protest, that implies that he is questioning the validity of the tax assessment. If he paid the
same knowing that the tax is valid, the rule will not apply.
As ruled by the court, if it turned out that the tax is valid, this prior payment is not required.

Section 229 provides that the two year period shall not be suspended regardless of any supervening
cause which may arise after payment
However, the SC made mention of these exceptional cases based on equitable considerations which may
suspend the running of the two year period. These were laid down by the SC in the case of Filam Life vs.
Commissioner 244 SCRA 664. In this case, the Court said

a. Assurance by the BIR that the refund will be granted on equitable grounds, this will suspend the
running of the two year period
b. when there is such an agreement between the BIR and the TP to await the decision of the SC to guide
them in the settlement of a similar issue
-

Prior payment is required before you can protest the same

-

The filing of the written claim of refund may be filed before the BIR commissioner
From the decision of the BIR commissioner, the TP may appeal to the CTA within 30 days
Take note that there are two periods here that must be observed. The two year period still applies. So
when you file a petition for review under rule 42 involving a decision of the BIR on refund, make sure that it
is filed within the two year period from the date of payment. Thus, make sure that the two year period and
the 30 day period is followed.
Thus, it must be filed within 30 days of the receipt of the BIR decision. Nonetheless, the filing of the appeal
from receipt of the BIR decision must still be within the two year period from the date of payment GIBBS

vs. CTA 107 SCRA 232 based in US vs. Michelle. this is incorporated in Rule4, section 3A(2) of the
Rules of Court of the Tax Appeals
If the two year period is about to lapse, do not wait for the decision of the BIR because, the court said, the
filing of protest with the BIR does not suspend the suspend the running of the two year period.
NOTE the inaction of the BIR will not suspend the two year period.
See RA9282 section 7 inaction of the BIR can be appealed to the CTA
You will see the difference here between protest of assessment and written claim for demand. In the case
of the decision of the BIR involving disputed assessment, there is such period within which the BIR may
make the decision the 180 day period. However, in cases of claims for refund, the law does not provide
for any period within which the BIR may entertain the same and render a decision therein.
In the absence of such statutory provision (on the period within which the BIR may render a decision),
apply the settled jurisprudence which provides that if the two year period is about to lapse, you may appeal
such an inaction to the CTA since the inaction of the BIR will not suspend the running of the two year
period. This is a mandatory positive requirement.
From the decision of the CTA en banc, apply the 15 days from receipt of decision period.

LOCAL GOVERNMENT TAXATION ALLOWED under sec. 196

The provision here is ambiguous

This provision also provides for the two year period. However, this requirement is different from the two
year period in the NIRC
The difference is this
The provision under LGC provides from the date of payment or from the time he is entitled thereto.
NOTE that in 229, it is only from the date of payment.
It has been opined that there is such provision saying from the date he is entitled thereto, th two year
period may be suspended by a supervening cause.
Thus, the difference is that, under the LGC, the two year period may be suspended by a supervening
cause.
Thus, two year from the date of payment or from the time he may be entitled thereto this is the reason
why under section 196 of RA 7160, there is no such similar provision under sec. 229 (NIRC) that it
cannot be suspended by any supervening cause.
Such refund may be filed before the LOCAL TREASURER within two years from the date of payment or
from the time he is entitled thereto
The decision of the local treasurer (note that in cases of protest under 195 wherein the decision of the local
treasurer is appealable to the RTC) may be appealed to the court of competent jurisdiction (as opined by
Vitug)
Vitug opines that that the two year period, as well as the 30 day period. This has yet to be sustained by the
court. This is is just an opinion in view of such inadequacy of the provision of 196.
Such decision of the RTC is appealable to the CTA within 30 days from receipt thereof. This is provided for
under RA 9282 decision of RTC on tax cases are appealable to the CTA
The decision of the CTA en banc is appealable to the SC applying the fifteen (15) day period

REAL PROPERTY TAXATION ALLOWED under section 253 of RA 7160

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Also provides for the two year period. Thus, the claim must be filed within two years from the date of
payment or from the time he is entitled thereto.
Thus, the doctrine of supervening cause applies
The claim for refund may be filed before the Local Treasurer

The decision of the local treasurer is appealable to the Local Board of Assessment Appeals within 60 days
from receipt thereof.
The decision of the LBAA is appealable to the CBAA within thirty days from the receipt of the decision
thereof
The decision of the CBAA is appealable to the CTA within 30 days from receipt thereof
The decision of CTA en banc is appealable to the SC within 15 days

TARIFF AND CUSTOMS CODE ALLOWED under 1701 to 1708

The law is not clear on this. It just enumerates the grounds for tax refund under sections 1701-1708 or 9.
But these provisions never provided for a prescriptive period although the filing of refund for customs
duties is recognized.
There is, therefore, the need to refer to jurisprudence. Refer to Philippine Phosphate fertilizers vs.
Commussioner of customs.

The SC ruled in said case that if the law does not provide of a prescriptive, apply the provisions under the
Civil Code.
The prescriptive period for filing a claim for refund under the TCC falls under 1145 of the Civil Code which
refers to erroneous payment or excessive payment amounting to solutio indebiti. Thus, the prescriptive period shall
be six years from payment.
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Decision of collector of customs is appealable to the customs commissioner within fifteen days from receipt
of decision
from the decision of the customs commissioner, go to the CTA within 30 days
from CTA en banc to the SC, 15 days