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Transcribed by JULAN ILAO Special Thanks to Atty.

MARJ MONCES
These notes are meant to be shared to all who may benefit from it, provided, that THE USER SHALL NOT IN ANY MANNER
WHATSOEVER DELETE, DIMINISH, OR OTHERWISE REFUSE TO GIVE CREDIT TO THE PEOPLE WHO MADE THIS. Whoever
does such ungrateful and dastardly acts shall most definitely suffer the consequences under the law of Karma and no
amount of prayer can save them from its effects. This was made available through the collective efforts of the following
UST bar examinees and friends:

Atty.LordV Atty.Julan Atty.Tracy Brian NickG. Atty.DennisM. Atty.Levie Atty.Rommel Atty.Dk


Edwin Atty.Claudette Bim Charm Deo Atty.Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

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

I.
II.
III.
IV.
V.
VI.
VII.
VIII.

Income Tax
Remedies (incl CTA)
General Principles
Estate Tax
Donors Tax
Local Tax
Real Property Tax
Tariff and Customs

2005
13
9
7
1
0
3
0
3

2004
5
7
9
1
1
1
0
1

2003
8
2
2
1
2
2
1
1

2002
5
17
1
0
1
1
2
0

2001
12
3
2
2
1
0
1
1

2000
7
8
7
2
1
0
0
2

1999
10
6
0
0
1
0
0
0

INCOME TAX (TITLE II- SECS. 22-83)


The law on Income Taxation is found in Title II of
the NIRC, as amended by RA 8424, otherwise
known as the 1997 Comprehensive Tax Reform
Act. Only Sec 22 up to Sec 42 are the more
important ones. Sec 43 to Sec 83 are seldom
asked in the Bar Exams. This is a Bar subject
which cannot be understood through self-study. I
am here to guide you, to tell you the provisions
which you should memorize and the related
provisions so that all the probable questions may
be covered once we discuss them. As far as
taxation law is concerned, just concentrate on the
20 provisions Sec 22 42. Just read the
subsequent provisions. I will mention some of
them in this lecture and what you will hear will be
sufficient and you need not to read Sec 43 83.
Let me start with this 22 to 23. You check
whether you have understood these sections or
provisions and you never can tell it might be
asked in the bar exams. You know this was asked:
question 1 in the 1996 bar exams but if this will be
asked again, Im sure the examiner will modify this
question. There is really this instruction not to ask
questions previously asked in the Bar Exams. But
you can modify the questions and the answer will
be the same.
Sec 32A this was asked in the 1995 Bar Exams
(Sec 28 under the old tax code). Define Gross
Income. But the examiner may change the tenor.
If you notice the title of 32A, General Definition
of gross income, so the examiner may modify this
as follows: State the general definition of gross
income.
The question asked in 1996 has something to do
with the salient features of our present income tax
system. So that can be answered under the old
tax code. The examiner may modify as follows:
What are the salient features of the NIRC, as

amended by RA 8424, otherwise known as the


Comprehensive Tax Reform Act?
There are actually 45 amendments introduced by
RA 8424. So I advice you not to master all the
suggested answers to the bar questions asked
before 1998 because those questions which we
answered before 1998 were based on provisions
of the old tax code.
In 2003, a question on tax benefit was asked. Last
year, 2005, I told them that may not be the
question. The examiner may modify that. You will
recall that tax benefit rule applies to two cases
tax refund, recovery of what is written off. I told
them that may be the question. It came up.
When you speak of features, this may include
methods of income taxation, systems of income
taxation, basic rules or principles.

I. SALIENT
FEATURES
OF
OUR
PRESENT INCOME TAX SYSTEM:
A. Schedular System of Taxation and Global
System of Taxation
B. Income Tax Situs
C. Determinative Test of Whether Income is
Taxable Doctrine of Constructive
Receipt of Income
D. Basis of Taxable Income
E. Net Income Taxation
F. Gross Income Taxation
G. Pay as you file
H. Creditable Withholding Tax
I. Final Withholding Tax
J. Substituted Filing of Income Tax Return

A. SCHEDULAR SYSTEM OF TAXATION


and GLOBAL SYSTEM OF TAXATION:
1. TAN vs DEL ROSARIO 237 SCRA 324
Landmark case that was asked twice
already in the Bar Exams

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 1 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

The two recognized systems of income


taxation:

tax rules and tax treatments that


may apply.

a. SCHEDULAR SYSTEM OF TAXATION


Is the system of taxation adopted in
imposing taxes on the income of
individual taxpayers.
SC: The Schedular System of Taxation
is the system employed where income
tax treatment varies and made to
depend on the kind or category of
taxable income of the taxpayer.
It is a system that provides for different
tax rules or treatments.
By making it depend on the kind or
category of taxable income, it means
that it classifies or categorizes income.
1997 Bar: discuss the meaning of
Schedular Tax System. Possible
modification: How does the Tax Code
impose tax on the income of individual
TP?
These features are incorporated in the
present tax code.

2. Do not memorize 24 and 25. Just


try to read.
Sec 24
Sec 25

IMPORTANT CHARACTERISTICS OR
FEATURES
i. Income is classified or categorized
Section 32A gives 11 categories of
income (actually 13)
Sec.32. Gross Income- (A). General
Definition- Except when otherwise
provided in this title, gross income
means all income derived from
whatever source, including (but not
limited to the following items:
1. Compensation for services in
whatever form paid, including
but not limited to fees, salaries,
wages,
commissions,
and
similar items;
2. Gross income derived from the
conduct of trade or business, or
the exercise of a profession;
3. Gains derived from dealings in
property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings;
10. Pensions; and
11. Partner's distributive share from
the income of the general
professional partnership
ii. It provides for different tax rules or
treatment.
1. How are dividend income,
royalties, prizes and winnings
taxed? Correlate with sec 24 and
25 where you will find the different

So, to answer the Question, How does the tax


code impose tax on income of the individual
taxpayer?, just state the 3 characteristics. The
Answer therefore is: the income of the individual
taxpayer is taxed under the schedular system of
taxation. Under this system, it operates as follows
or has these following characteristics:
1. the income of the taxpayer is categorized
or classified;
2. it is subject to different tax rules or
treatment; and
3. the tax code imposes different tax rates
on these different categories of income
There are 3 basic rules/ formula that you should
remember here:
A. Where income is derived from the
performance of services, sec 35 applies.
From gross compensation income is
deducted
personal
and
additional
exemptions. Also to be deducted under
sec
34(10)
are
premiums
on
hospitalization and health insurance
(2001 Bar). After such deductions, you
arrive at Taxable Compensation Income.
B. Where income of individual TP partakes
of the nature of business income, a
different tax treatment applies. The
formula is as follows: Gross Income from
the conduct of trade or business or the
exercise of profession less allowable
deductions under Sec 34.
Personal and additional exemptions may
not be deducted as these are allowable
only in compensation income.
C. Where income is derived solely from
income subject to final tax, as in dividends
received from a domestic corporation,
such is not included in gross income. The
tax withheld will constitute a final
settlement on the tax liability on that
particular income.

Fringe benefit
is subject to final tax under 33A.
The individual TP is not required
to report this as part of gross
income because the tax withheld
which is a final tax will serve or
constitute a final settlement on
the tax liability on that particular
income.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 2 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

iii.

Other income
subject to final tax royalties,
interest on bank deposits, prizes
and winnings.
It imposes different tax rates.
Sec 24 and 25 provide for
different tax rates which are
known as the progressive rates of
income tax.

b. GLOBAL SYSTEM OF TAXATION


one adopted in imposing tax on income of
corporate taxpayers
Try to recall this technical definition cited by
the SC in the case of TAN vs. DEL
ROSARIO. The SC said it is the system
where the tax treatment views indifferently
the tax base, and generally treats in
common all categories of income of the
taxpayer.
Indifferently views the tax basemeans uniform tax rules or tax
treatments
generally treats in common all
categories of income of the taxpayermeans that it does not classify or
categorize income
Global system is really the opposite of
Schedular Tax System
Secs. 27 & 28 are the 2 important
provisions as far as Corporate Taxpayers
are concerned. These are classifications
similar to 32 A.
in 32 A- it classifies income into 11
categories. Here in Secs. 27 & 28, the
rules are uniform as far as Domestic
Corporations are concerned, subject
to certain exceptions. Also, the rules
are uniform as far as Non Resident
Foreign Corporations are concerned;
and also uniform as applied to NRFC.
Sec 27
Sec 28
So, uniform corporate tax rules, subject to
certain exceptions. No classification of
income and also imposes a uniform or fixed
corporate rate of 35%. The 32% has been
amended to
35% by RA 9337
(EVAT LAW) which took effect on July 1,
2005 (RR-14-2005 implemented it on Nov.
01, 2005)

B. INCOME
TAX
SITUS:
provision is Sec. 23)

(Relevant

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
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 from sources
within the Philippines. Provided, that a
seaman who is a citizen of the Philippines
and who receives compensation for
services rendered abroad as a member of
the complement of a vessel engaged
exclusively in international trade shall be
treated as an overseas contract worker;
D. An alien individual, whether a resident or
not of the Philippines, is taxable only on
income derived from sources within the
Philippines;
E. A domestic corporation is taxable on all
income derived from sources within and
without the Philippines; and
F. A foreign corporation, whether engaged
or not in trade or business in the
Philippines, is taxable only on income
derived
from
sources
within
the
Philippines

1996 Bar: Basis on imposing income tax


(RPN): [Tan vs Del Rosario]
1. R- residence
2. P- place where the income was
derived; and
3. N- nationality or citizenship
Residence:
Resident alien-can be taxed on his income
derived from sources within
RFC- basis of the imposition of tax is the
doing/conduct of business in the Philippines
Place:
NRA- can only be taxed from its income
derived from sources within the Philippines
NRFC-can only be taxed from its income
derived from sources within the Philippines
Nationality:
the place is not the basis, it is the nationality.
That's why even the income derived from
sources without can be taxed
You know that Resident Citizen (RC) and
Domestic Corporation (DC) can be taxed
(Sec 23(A&E) on income derived from
sources within and without the Philippines.
Please be reminded of the amendment
because this has been the subject of
misleading 2002 bar Q. #1 regarding NRC
and NRA. Take note of the effectivity of
RA 8424,Jan. 1,1998.
These rules in Sec.23 about NRC (that
they can only be taxed on income derived
from sources within, and so is with
Resident Alien, took effect on Jan. 1,1998

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 3 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

therefore, if the income was derived in


1997, within and without, it is subject to
tax

2002 Bar Q. #1- this has something to do with the


income derived from sources w/in and w/out
of a seaman or NRCitizen. Several examinees
answer the Q. under the new rule. This is not
correct. What they have in mind is that the
1997 Comprehensive Tax Reform Act took
effect in 1997. This is not correct. This
RA8424, took effect only on January 1, 1998

Pls be reminded about this. That these 2


individual taxpayers (Nonresident Citizen
and Resident Alien) have been the subject
of the amendment introduced by RA 8424.
they could be taxed on their income derived
from sources w/in and w/o in 1997, or
before 1998. But starting 1998, they could
only be taxed on their income derived from
sources within.
The word used by the SC in describing the
present income tax situs, and this is also
provided under the present tax code is
COMPREHENSIVE. The SC said we
have adopted a Comprehensive Income
Tax situs xxx because we have practically
adopted all the possible criteria in imposing
tax on income (residence, nationality or
citizenship, and place).

Q: Why is it that the Income derived by Resident


Citizen from sources w/in and w/o is subject to
tax? What is the rationale behind this? What
must be the basis for this?
CIR vs. Lednicky (re: Partnership Theory)
-GRN L-18169 July 31, 1964:

Issue:

Right of the Philippine


Government to tax the income of
resident
from
outside
the
Philippines.

Held: The right of a government to tax


income emanates from its partnership in
the production of income, by providing the
protection, resources, incentives, and
proper climate for such production, the
interpretation given by the respondents to
the revenue law provision in question
operates, in its application, to place a
resident alien with only domestic sources
of income in an equal, if not in a better,
position than one who has both domestic
and foreign sources of income, a situation
which is manifestly unfair and short of
logic.
NOTE: This case was decided
during the OLD Tax Code.
Under
the
principle
of
Personal
Jurisdiction, wherever you go, citizens of
the Philippines, you are entitled to the
protection of the Philippine Govt. This is in
relation to Partnership Theory between
the Taxpayer and the State---the State
will provide protection but in return you
have to pay taxes. The right of the Govt,
therefore, to impose taxes on income
must be based on its capacity to extend
protection. In other words, if the Phil. Govt
cannot provide protection, then it has no
right to imposed taxes. As simple as that.
This is the reason why the income derived
by Resident citizen from sources without
can be subject to Philippine income tax.

SUMMARY:
KIND OF TAXPAYER

CRITERIA or INCOME TAX SITUS

SOURCES of TAXABLE INCOME

RC

Residence and Nationality

Within and without

NRC

Place

Within

RA

Residence
- They can claim personal and additional
exemptions and as well as deductions

Within

NRA

Place
- In certain cases, they are not allowed to
claim deductions

Within

DC

Nationality

Within and without

RFC

Residence

Within

NRFC

Place
- they are not allowed to claim deductions

Within

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 4 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

C. DETERMINATIVE TEST OF WHETHER THE INCOME IS TAXABLE Doctrine of


Constructive Receipt of income:

This is cited in the case of Filipinas Synthetic Fiber Corp. vs CIR. The SC said that it is not the actual
receipt of income but the right to receive that determines when to include an amount as income in
the gross income. This is the most important pronouncement of the SC in this case which you should
remember. This is consistent with the Doctrine of Constructive receipt of income.

FILIPINAS SYNTHETIC FIBER vs. CA 316 SCRA 480, GRN 118498 October 12, 1999
Under the accrual basis method of accounting, income is reportable when all the events have occurred
that fix the taxpayer's right to receive the income, and the amount can be determined with reasonable
accuracy. Thus, it is the right to receive income, and not the actual receipt, that determines when to
include the amount in gross income whether the income is taxable.
In Title II, there are specific rules regarding Constructive Realized Cash or Property Dividends.
The Rule is provided in Rev. Reg. #2 Sec.53. It gives us 2 requisites:
1. The income or the amount must be credited to the account of the taxpayer or set apart or
set aside for the taxpayer; and
2. It must be unconditional; that is, not subject to any limitation or restriction. The right to
receive must not be subject to any contingent event
Examples:
a.) Dividend income perceived to be received from Domestic Corporation it is not required
that the stockholder must actually receive the dividends before the 10% tax must be
imposed. As long as it is set apart for the stockholder and the latter could demand the
same w/o any limitation, the 10% tax may be imposed to the corporation
b.) As cited in Rev. Reg #2, the Partner's Share in the Income of the Partnershipit is not
required that the share of such partner be actually received or distributed. As long as the
partner could demand the same w/o any limitation or restriction, such share is already
taxable.

Classic example using the word creditedInterest income on Money Deposit


if you have money deposit in the bank and it earns interest, such interest income is credited to
your account. So, constructive receipt of income. An example of an income that is
constructively in your hand, you have yet to receive the same, no actual receipt, but it is
already subjected to 20% tax. The 20% Final Tax already applies because the 2 requisites are
present (1) credited to your account and (2) you can withdraw the same anytime during the
taxable year without any limitations or restrictions.

Case: Limpian Investment vs. CIR (17 SCRA 703) --- What is the income considered as constructively
received here? it is the rentals deposited in court by the lessee as a result of the unjustified refusal of the
lessor to
accept the same. The rentals were consigned in court. The rentals deposited in court is
considered as
constructively received by the lessor because the lessor can withdraw the same
without any restriction. So, take note of this constructive receipt of income.

D. BASIS FOR THE COMPUTATION OF TAXABLE INCOME:


If you have not read Sec.43, you cannot answer this.
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 maybe) x x x

if we try to analyze this, it uses the words basis, then taxable income, then computed. It shall be
computed on the basis of what? Answer: your taxable income shall be based on either of these
accounting periods: 1) fiscal year period or 2) calendar year period
1990 Bar: There was a Q. on the distinction between these 2 accounting periods. The importance of this
Q. is that
it tells us that there is a basis in the computation of taxable income. These terms are defined in Sec.22
P & Q.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 5 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Sec 22.

Definitions(P) The term taxable year means the calendar year, or the fiscal year ending during such
calendar year, upon which the net income is computed under this Title. x xx
(Q) the term fiscal year means an accounting period of twelve (12) months ending on the
last day of any month other than December.

You must know these terms because individual taxpayers can only adopt the calendar year period,
starting January 1 and as defined under Sec 22 Q, Fiscal Year Period is that accounting period of 12
months ending on any month other than December. Therefore, Fiscal Year period can only be
applied to Corporate TP. Corporate TP have the option either to adopt the calendar year period or
the fiscal year period.

Correlate with Sec.77B, you'll find therein that Corporate taxpayers have the option to adopt
calendar year period or fiscal year period. But in the case of individual taxpayers, there is no
choice but to adopt the calendar year period. So the taxable period will cover only from Jan.1 up
to Dec.31. You must master this so as to correlate with Sec. 229.
Under Sec. 229, and you are Familiar w/ this Doctrine-- the 2 year period for filing tax refund
shall commence to run from the filing of the final adjustment corporate tax return
(_________vs. CIR 205SCRA184). You ought to know whether the Corporation adopted the
fiscal or calendar period.

Theres no problem if the corp. has adopted the calendar period because it is April 15. What if it
adopted the fiscal year period? When can you apply this 2 year period? Sabe, the 2 year period
of filing the tax refund shall commence to run from the filing of the final adjustment corporate tax
return.
If the corporation has adopted the fiscal year period, then it is not April 15. Sec. 77B says
th
th
on the 15 day of the 4 month following the end of the taxable period. So if the fiscal year
th
ended on June 30, you count 4 months---July,August, September & October. On the 15
th
day of the 4 month following the end of the fiscal year period. So that would be on October
15 (2 yr. period starts from this date). So correlation

It is really very important to correlate because questions will be asked on the application of the 2
year period and the problem will state that the corporation has adopted the fiscal year period.
Take note of Sec. 77B, it is not April 15.

E & F. NET INCOME TAXATION and GROSS INCOME TAXATION:


NET INCOME TAXATION (NIT) vs. GROSS INCOME TAXATION (GIT):

NIT- one generally adopted under the present tax code. Bases are Secs. 34 & 35
Under Sec. 34 (Deductions from Gross income), NIT allows deductions. It also grants
exemptions, basic and additional personal exemptions under Sec. 35.

GIT- can be applied or adopted under exceptional cases.


It is not really correct to say that we have not adopted GIT
Sec. 25 B, C, D, and E, speak of gross income
Sec 25 B: the provision says the income tax is imposed on the entire income. That means
that the basis is the Gross income. The subsequent paragraphs (C, D, &E) consistently say
or provide or use the word gross income.

Who are these individual taxpayers whose income shall be taxed at gross, and therefore the
method of taxation is GIT? NRA-NETB
The income of these individual taxpayers is taxed at Gross, therefore, the method or system
that apply
to them is GIT
Who are those individual taxpayers who cannot claim any deductions/exemptions? NRA-NETB

As regards Corporate taxpayers:


Sec. 28 B (1,2,3&4) provide for those corporations taxed under GIT
Sec 28 B (1) - the 35% corporate income tax is imposed on Gross Income (NRFC-NETB)
(2) - The 25% corporate income tax shall be imposed on gross income on
rentals(NR film owner)
(3) - The 4.5% corporate income tax shall be imposed on gross income on rentals
or charter
fees (lessor of vessels)
(4)- The 7.5 % corporate income tax shall be imposed on gross income on rentals
or fees (lessor of aircraft, machineries)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 6 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Corporations covered by Sec. 28B (1,2,3,&4) are nonresident foreign corporations. So, corporate
taxpayers who cannot claim deductions are NRFC. The method of taxation applied to these
corporation is, no doubt, GIT.

Simply put, NIT is the Rule. GIT is the exception to the rule. Exception in the sense that it applies
only to these 2 kinds of taxpayer:
1. Individual -NRA-NETB; and
2. Corporate- Nonresident foreign corporation

1997 Bar:
Explain NIT
2000 Q#10Define Net or Taxable Income (the word 'taxation is not present here)
1983 BarExplain the meaning of GIT
1995 Q#1Define Gross income
the use of the word taxation' really matters

In 1995 Q#1- Define Gross income. 1 examinee answered: One where the tax is imposed at
gross. This is not really correct. This maybe partly correct if the Q. asked was that of 1983 Bar,
because if we speak of GIT, that is really the method or system
If the Q. is the Definition of Gross Income, then you really have to enumerate the items under
Sec. 32 A

GIT- is a method or system that allows no deduction; it grants no exemptions. In other words, the tax base
or the
basis of the tax rate is Gross Income
NIT- not the same with Net Income or taxable income. Sec. 31 ( one sentence provision) defines Net or
Taxable
Income. Do not confuse this with the concept of NIT because the word 'taxation'
connotes method or system.

Sec. 31-Taxable Income Defined- The term 'taxable income' means the pertinent items of gross
income
specified in the tax code, less the deductions and/or personal and additional
exemptions, if any, authorized for such types of income by this code or other special laws

So what then is Net Income Taxation? How does it operate? ---NIT allows deductions and grant
exemptions. The basis of the tax rate is taxable/net income as defined under Sec.31

Probable Bar Q. here: What are the distinctions between GIT and NIT?
Answer:
1. As to the claim for deductions or exemptions: GIT-No exemption/deductions; NIT-allows
deductions and grants exemptions;
2. As to the basis of the tax rate: GIT-Gross income; NIT- Net/Taxable income;
3. As to the applicability under the tax code:
GIT applies to 2 taxpayers: 1) NRA-NETB(Sec.25 B,C,D,&E) and 2) NRFC (Sec.28
B(1,2,3,&4))
NIT applies to the following taxpayers: 1) RC; 2) NRC; 3) RA; 4) NRA-ETB; and
Corporate:1) DC; 2) RFC

Q.: Are you in favor for the adoption of GIT? Congress is proposing a change from NIT to GIT
this may be a bonus Q. but your answer or opinion must be based on tax. Point out
significant advantages. There's no such thing as perfect system because both have their
own disadvantages.

As regards NIT, it allows deductions and grants exemptions. Therefore the tax paid is less. I
think, we can develop advantages on this.
Try to recall these, as these are the characteristics or features of NIT:
1) To the taxpayers, they may consider this as fair, just and equitable system of taxation.
One or two sentence will suffice and you have to explain that. Favorable/fair in the sense
that taxpayers can claim those business connected expenses as deductions, and
taxpayers can also claim exemptions;
2) This brings us to the next advantage, as cited in Sec. 2 (State Policy) of RA 8424. this is
one of the underlying purposes of the amendments. It says that it provides for equitable
relief to a greater number of taxpayers in order to improve levels of disposable income
and increase economic activity.
o Equitable relief may refer to those allowable deductions under Sec.34 and personal
exemptions under Sec.35. The effect of this is that it will increase the levels of their
disposable income. If taxpayers can claim those business related expenses as

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 7 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

deductions, they may file their income tax return religiously and they may be
encouraged to engage in income producing activities. This is the amplification of the
provision under Sec. 2 of RA 8424 when it says increase economic activity. That will
be the effect of that grant of deductions and exemptions
3) We can also cite as an advantage, that NIT minimizes fraud. In what sense?
o Through this tax audit examination of the taxpayers' books of accounts. The
taxpayer can not just claim expenses not supported by receipts. BIR will check
whether these expenses are indeed business connected or not. This is what we
called counter checking. If you incurred expenses, make sure that it is supported
by receipts or is connected to business otherwise the BIR will disallow the same. So
it minimizes fraud in this context.
The result of this is that, if we have fair, just and equitable tax system, taxpayers will
religiously file their income tax returns and fraud will be minimized. This will generate more
revenues to the Govt which is really the objective of every system of taxation

Q: if you are against NIT (in effect, you are for the adoption of GIT) what must be your reasons
here?
Take note of the 2 salient features of GIT:
a) No deductions are allowed and no exemptions may be granted; and
b) The tax basis is the gross income. Have these in mind.

Reasons:
1) The complaint of showbiz people under the present system is that, according to them,
we have a complicated system because there are so many requirements that must be
complied with and they could not just determine their taxable income-services of CPAs
are still needed. But here in GIT, since no deductions are allowed, this will simplify our
income tax system. In what sense? You can easily compute your income tax due or
payable. Just multiply your Gross income by the tax rate and that is the Income tax due.
It dispenses with these several requirements on the claims for deductions. And this is
consistent with or in harmony with the sound fundamental principle of ADMINISTRATIVE
FEASIBILITY. GIT makes our system sound in the sense that it is capable of effective
enforcement or implementation.
2) So what would be the effect of this? If we have a simplified income tax system which
can be easily understood by common citizens, more will be religiously filing their income
tax returns because they can easily understand the system, they can easily file their tax
returns w/o the assistance of a CPA or tax experts.

3) The most important about GIT, as cited by the sponsor of the proposed Bill is that it
minimizes (we
cannot use the word eradicate because this is next to M I 3) it
minimizes graft and corruption.
How do we explain this? The evil of NIT, is that there's that abuse of discretion; margin of
discretion on
the part of the BIR examiner. They abuse it by collaborating with the
taxpayer and allow deductions not supported by receipts. This reduces the taxpayer's liability.
Because of this margin of discretion, there's that measure to the effect that this should not
be the source of graft and corruption. So, no more deductions and no more exemptions must
be allowed so that the BIR cannot make use of the same. Here, it can no longer be the
source of graft and corruption, so it minimizes the same.
The result of this GIT is that, it will generate more revenues to the Govt. which is really the
objective of every system of taxation.

NIT vs GIT (As regards the objective of generating more revenues):


1. In NIT, more revenues may be brought by these 3 factors:
a. favorable system
b. system that provide for equitable relief
c. minimizes fraud (by the taxpayer)
2. In GIT, more revenues may be brought by these 3 factors:
a. simplification
b. easy to understand system
c. minimization of graft and corruption (by the BIR Examiners)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 8 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

You should also know the disadvantages of these 2 systems.


In the case of NIT, #1
disadvantage is that it really is vulnerable to graft and corruption because of the margin of
discretion (BIR can allow or disallow the grant of discretion). #2 is that it is a complex or
complicated system. It is very complicated and there are so many requirements to be complied
with.
the effect of this graft and corruption is tax evasion

The disadvantage of GIT is that there's always tax evasion. In NIT, tax evasion may be brought
about by graft and corruption. In GIT, it is the employment of fraudulent methods, schemes or
devices to understate Gross income. Also, if you are a businessman who cannot claim those
business expenses as deductions, you may find this system as unfair. In what sense? Even
legitimate expenses cannot be classified as deductions.

Sec 24 A, you'll find 32% progressive rate in 2000. if we will formally adopt this GIT, do you think
this tax rate will be retained?
If this will be retained, that would make the system unjust. These tax rates are quite high up to
32%. but it allows deductions, so there's a balancing feature. But once we formally adopt GIT,
we cannot retain the same. We really have to reduce the rates to make this system just. In my
view, it must not exceed 10%. Eliminate deductions, no more Sec. 34, but we have to reduce the
rates.

In my view, it should be modified income tax system. I'm not really in favor of pure Net Income or
pure Gross income taxation. It should be modified income tax system.

G. FILING OF INCOME TAX RETURN AND PAYMENT OF TAX:

The system that we have adopted is PAY AS YOU FILE.


In the case of individual, Sec. 36 A (1) states that the tax shall be paid upon the filing of income
tax return
Sec. 36 A. Payment of tax (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. X X X
In the case of Corporation, Sec. 77 C provides that corporate taxpayers shall pay their corporate
income
tax upon the filing of corporate income tax return
Sec. 77 C. Time of payment of Income Tax - the income tax due on the corporate quarterly
returns and the final adjustment income tax returns computed in accordance with Secs. 75 and
76 shall be paid at the time of the declaration or the return is filed X X X

2001 Q#4. This will test your knowledge about the filing of tax return by a corporation. I will modify:
How often does a Domestic Corporation file its Income Tax Return for income earned during a single
year. Explain the process. What must be the reason for such procedure? Answer: LIFEBLOOD
DOCTRINE---Hehehehehe
Refer to Secs. 75 and 76. Is it annually? No. How often, Once? No
o Sec. 75 explains the process. It says 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, shall be
levied, collected and paid. X X X
So, four times. The word used is Quarterly. All Domestic Corporation file their income tax
st
nd
th
quarterly. Quarterly, so 1 Quarter, 2 Quarter, 3rd Quarter and the final (4 ) quarter requires
the filing of Final Adjustment Return (Sec. 76)
What are the words that you should say in your answer aside from Quarterly? You should say in
your answer, that under Sec.75, it requires the Quarterly declaration of gross income and
th
deductions. As regards the 4 Quarter, it requires the filing of final adjustment tax return.
Now, what do you think is the reason for the procedure? LIFEBLOOD, (hehehehe) If we allow
the Corporation to file their income tax returns annually, what would be the effect? The effect is
that the Govt would run out of funds before it can collect. That's the reasonthe timeliness of
collection of corporate income tax...Medyo may Lifeblood pa rin
Answer should be: The reason for this procedure is to ensure timeliness of collection of
corporate income tax because (lifeblood na) taxes are the lifeblood of the Govt...hehehehe.
There should be no undue delay

What if it is an individual? How often does an individual taxpayer file his income tax return? 4X?
Hehehe
Only Once (Annually) (Sec. 56)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 9 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

What is the reason why individual taxpayers are only required to file their ITR Annually?
LIFEBLOOD na naman,hehehe...iba na cguro to. If we allow them to file their ITR Quarterly, sa
tingin mo kaya the BIR can check compliance with such? Millions of individual taxpayers will be
filing their ITR quarterly. The reason here is to make our system capable of effective
implementation or enforcement consistent with the sound principle of Administrative Feasibility

This is modified by these 3 systems:


1. Creditable withholding tax system
2. Final Withholding tax system
3. Substituted filing of ITR

H & I. CREDITABLE WITHHOLDING TAX AND FINAL WITHHOLDING TAX SYSTEMS:

medyo mahirap to. 1995 Bar- 5 Q. on these: Creditable Withholding tax system (CWTS) vs. Final
Withholding tax system (FWTS):
the common feature with these withholding systems is that there's a withholding agent
authorized by the Govt to deduct and withhold the tax
1) As to income subject of the system:
As regards CWTS, Sec. 78 enumerates those items subject to CWTS.
Classic example of this system is Compensation Income. The employer is the
withholding agent, the employee is the recipient of the income. Under this system, the
employer will deduct and withhold the tax on that compensation income. Remember that
the employee is required to include the income in his gross compensation income

On the other hand, classic examples of income subject to FWTS are dividends received from
Domestic Corp., Royalties, Prizes more than 10,000, Winnings, and Interest income on bond
deposit. If you are the recipient of these, you are no longer required to include these incomes
in your gross income.
The word 'final' connotes that the tax withheld will constitute as a final and full settlement
(FAFS for brevity) of the tax liability on that income.

2) As to whether or not the income should be reported as part of the gross income:
According to CWTS, since the income will not constitute as a FAFS of the tax liability on that
income, the recipient should report the said income in his gross income.
this is provided for in Rev. Reg. 2-98. it is said therein under Sec 2.54, that an income
subject to CWT must still be reported by the recipient as part of his gross income

On the other hand, the said Rev. Reg. 2-98 also provides that in the case of FWTS the
recipient may not report said income as part of his gross income because the tax withheld
will constitute as a FAFS of the tax liability

3) As to the effect of the tax withheld:


The tax withheld under the CWTS can be claimed as a tax credit or may be deducted from
the income tax due or payable.
if you are a compensation earner, and you have other sources of income. Let us
assume that your income tax due is 150,000. the tax withheld by your employer can be
claimed as a tax credit. It may be credited against or deducted from your income tax
due or payable. Say, if the tax withheld is 50,000, deduct this to your income tax due or
payable of 150,000, the final income tax due is 100,000.
Again, Creditable implies that the tax withheld by the employer can be claimed as a tax
credit or can be deducted from your income tax due or payable

On the other hand, in FWTS, the tax withheld cannot be claimed as a tax credit. The Final
Tax Withheld will constitute as a FAFS on the tax liability on said particular income
For instance, the stockholder is not required to report as part of the gross income the
dividends received from a domestic corp. The reason is because the 10% tax withheld
on the amount will constitute as a FAFS of the tax liability on the dividend income
Fringe Benefit under Sec. 33 A is subject to Final Tax, therefore this is also governed by
FWTS. This is another example of income subject to FWT
2003 Bar: Who is legally obliged to pay Fringe Benefit Tax? This Q. is not about the
definition of FB but requires your knowledge about withholding tax. Rev. Reg. 398
Sec. 2(2) say that the employer is the one legally obliged to pay the tax
person legally obliged to pay the tax---is the one who in case of nonpayment may be
legally demanded to pay the tax. If the Final tax on FB will not be paid, the BIR will not
go after the employee but to the EmployER. This is the same in the case of interest on

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 10 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

bond deposit. In case of nonpayment, the BIR will not run after the stockholder but to
the corporation. The Corporation being the withholding agent is the one legally obliged
to pay the tax. The rule is that it is the withholding agent that is legally obliged to pay
the tax
4) As to the Filing of Tax Return:
In the case of CWTS, the compensation earner reports the income received as part of
his gross income. Necessarily , he has to file an ITR
Whereas if the only source of income is subject to Final tax, you need not file an ITR

These are the provisions on individual whose sole income is one that is subject to final tax (Sec. 51
A(2C)):
1. 25% final tax under Sec. 25 B-NRA-NETB
2. 15% final tax under Sec. 25 C, D, and E (Alien employed by Multinational Companies, offshore
banking unit and petroleum service contractor or sub contractor)

So they are NRA-NETB

Bar Q: Why are NRA-NETB not required to file ITR? This can be answered by 1 sentence. It is
because their income is already taxed as a Final tax.

So as to the 2 Questions:
1) Who are these individual taxpayers who are not required to file ITR? NRA-NETB
2) Why are NRA-NETB not required to file ITR? Because they are subject to a final tax rate. Final
tax withheld will constitute as a FAFS of the tax liability

How about Corporate taxpayer?


Sec. 52 A. it says 'except nonresident foreign corporation'. The rule is that corporate taxpayers
must file their ITR, except Nonresident foreign corporations
Why? The reason is Sec. 28 B(1,2,3,4)
Sec. 28 B- Tax on Nonresident Foreign Corporation1. FC not engaged in trade or business- 35% FT;
2. Nonresident Cinematographic Film Owner- 25% FT;
3. Nonresident Owner or lessor of Vessel- 4.5% FT
4. Nonresident Owner or lessor of Aircraft, Machineries- 7.5% FT

these are all Nonresident Foreign Corporations. Apply the Rule that they are not required to file
ITR because the tax withheld constitutes as a FAFS of the tax liability

J. SUBSTITUTED FILING OF INCOME TAX RETURN :

Rev. Reg. 3-2002 (1,2,3,4). the effect of this system is that you are no longer required to file ITR.
Requirements for one to avail of this system:
1. You must be a compensation earner, meaning that your income is derived solely on
compensation. If you have other sources of income such as business, trade or profession, you
are still required to file an ITR;
2. You must have only 1 employer in the Philippines. So if you have 2 or more employers, you are
not allowed to avail of this system;
3. The tax withheld by the employer must be the same or equal to the tax due or payable after
applying the tax rate.
For example: tax due is 250,000. Make sure that the exact amount is withheld by the
employer. Otherwise, you will be required to file ITR.
4 The employer must file an information return (BIR Form 1704) showing therein the income tax
withheld on the compensation income.

Rev. Reg. 3-2002 declares that is tantamount to a substituted filing of ITR by the employees hence
they are no longer required to file ITR.

Let us examine Sec. 51 A and B.


Rules laid down therein:
1. If your compensation income is not more than 60,000;
2. Only 1 Employer; and
3. Tax withheld is the same with the tax due,

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 11 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Then you are no longer required to file ITR. But if your compensation income is more than
60,000 even if you satisfy requirements 2 & 3, you are still required to file ITR
these rules have been modified by Rev. Reg. 3-2002. Under 3-2002, it imposes no limitation as
to the amount. What is important is that as long as the tax withheld is the same with the tax due,
irrespective of the amount, this new system applies.
is this not an impermissible encroachment on administrative prerogative because it is a mere
regulation? BIR has the power to promulgate regulations for the enforcement of rules as part of
its administrative functions. Nobody questioned this.

II.

GENERAL PRINCIPLES OF INCOME TAXATION:

This is precisely the title of Sec. 23 - General Principles of Income Taxation in the Philippines
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 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 from sources within the
Philippines. Provided, that a seaman who is a citizen of the Philippines and who
receives compensation for services rendered abroad as a member of the complement of
a vessel engaged exclusively in international trade shall be treated as an overseas
contract worker;
D. An alien individual, whether a resident or not of the Philippines, is taxable only on
income derived from sources within the Philippines;
E. A domestic corporation is taxable on all income derived from sources within and without
the Philippines; and
F. A foreign corporation, whether engaged or not in trade or business in the Philippines, is
taxable only on income derived from sources within the Philippines

Sec. 23 classifies taxpayers into two: individual and corporate


Can only answer the Q: Can we tax the income derived from sources w/in and w/o? Sec 23 cannot
answer the Q. on whether the taxpayer can claim deductions, (which is also a general principle or
basic rule). There's a need to supplement this particular provision. That's why under Secs. 24 & 25,
there are provisions that apply to individual taxpayers that answer the Q. on whether they can claim
deductions

As regards Corporate Taxpayers: Q. on whether they can claim deductions cannot also be answered
by Sec. 23. We really need to refer to Sec. 27 & 28 which give us the tax rates and the tax base

Bar Questions on General Principles:


2000 Bar Q#8, 2002 Q#1 & 1998 Q#2. Try to refer to these Q because these are really
questions on the general principles of income taxation
2000 Q#8- the tenor of the Q was: How will this individual taxpayer, a NRA-NETB be taxed on
his income derived from sources w/in and w/o?
In 2000 bar, our suggested answer includes not only these 2 sources: 1) whether income
from w/in and w/o can be taxed; and 2) regarding tax base; whether the taxpayer can claim
deductions. 3) We also mentioned about the applicable tax rates
2002 Bar- the tenor of the Q has been changed: What is the Rule of Income Taxation with
respect to the income of Mr. Sebastian, a NRC deriving income from sources w/in and w/o?
2002 Q#1 also requires these 3 basic principles
The answers to these Q are the same even if the examiner changed the tenor of the Q.
However, 1998 Q#2 can be squarely answered by Sec. 23 alone. This is a Q. on sources alone.
So when we speak of General Principles, these are not limited to sources alone under Sec. 23.
These also include Rules on tax base as well as tax rates.
There are really different ways on how to ask Q on General Principles
Provisions regarding General Principles : Sec. 23, 24, 25, 27 & 28
The tax code classifies the taxpayer as either individual or corporate. So, this General Principles
may be broken into 2:
1. General Principles of Individual Income Taxation; and
2. General Principles of Corporate Income Taxation

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 12 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

1. General Principles of Individual Income Taxation:


RESIDENT CITIZEN:
How will the income of RC be taxed? RC can be taxed on his income w/in and w/o (Sec.
23 A)
Can a RC claim deductions? The income tax is imposed on the taxable income. That
means that RC can claim as deductions those expenses paid or incurred w/in and w/o
(Sec 24 A [1][a]
The taxable income of RC is subject to 5-32%. it is known as the Progressive tax rate
schedule
NONRESIDENT CITIZEN:
Can only be taxed on his income from sources w/in (Sec.23 B, C). this has been the
subject of an amendment . This is a new rule (took effect on Jan. 1,1998). So that if the
income w/in and w/o was derived in 1997, that income could be taxed under the old tax
code. But beginning 1998, we can only tax his income derived from sources w/in
Can he claim those expenses incurred within the period? Sec. 23 is not clear on this.
This can be answered by Sec. 24 A(1, b). it says that the income tax is based on the
taxable income under Sec. 31. Meaning, Gross income less allowable deductions. But
the allowable deductions are only those expenses paid or incurred w/in the Philippines
because he could only be taxed on his income derived from sources w/in.
this taxable income is subject to 5-32% progressive rate schedule
2002 Q#1: Mr. Sebastian, a seaman, received income in 1997 from sources w/in and
w/o. What is the rule with regard to the income of Mr. Sebastian in 1997?
o Some answered this Q. under the new rule. This is not really correct. This should be
answered under the old tax code because the present tax code took effect only on
Jan.1, 1998.
RESIDENT ALIEN:
Could be taxed only on his income derived from sources w/in
Entitled to deductions (Sec. 24 A (1, C)) because you can see therein the word taxable
income. But the allowable deductions are only those expenses paid or incurred w/in the
Philippines
Subject to 5-32% progressive tax rate schedule
NONRESIDENT ALIEN ENGAGED IN TRADE or BUSINESS:
How do you know that a NRA is engaged in trade or business? Determinative test is Sec.
25 A(1)- He is considered engaged in trade or business if his aggregate stay in the
Philippines is more that 180 days.
Sec. 25 A (1) X X X A nonresident alien individual who shall come to the Philippines
and stay therein for an aggregate period of more than one hundred eighty (180) days
during any calendar year shall be deemed a nonresident alien doing business in the
Philippines X X X
If it is exactly 180 days, then it is not engaged in trade or business because the law
is very clear. This must be strictly construed because of the tax benefit that may
accrue to this alien individual.
What is that tax benefit?
If the alien is engaged in trade or business, the tax benefit is that, he can claim
deductions because the tax base is taxable income under Sec. 25A (1). On the other
hand, if he is not engaged in trade or business, he is not entitled to this tax benefit
because the tax base is Gross income under Sec. 25 B.
Refer to Sec 25 B, you will find therein the rule that NRA-ETB can claim basic
personal exemption subject to reciprocity. This is another tax benefit that can be
availed of by NRA-ETB to the exclusion of NRA-NETB.
2000 Q#8- Mr. Corpuz, A NRA was based in Hongkong. In 1999, he stayed in the
Philippines for more than 180 days. Q: How will the income of Mr. Corpuz derived from
sources within the Philippines and other countries, be taxed?
When it made mention about w/in and w/out, then refer to Sec. 23 D. NRA-ETB can
only be taxed on his income derived from sources w/in the Philippines. The rule has
not been changed. This is still the same under the old tax code

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 13 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Q: can he claim deductions?


Yes. Sec 25A (2) - the income tax is imposed on the taxable income. Of course, only
those expenses incurred w/in the Philippines could be deducted. The tax base is
subject to 5-32% progressive rate
Authoritative answer: Youll know that the problem did not categorically state that he is
engaged in trade or business. So you should start with this: Having stayed in the
Philippines for more than 180 days, Mr. Corpuz is engaged in trade or business. Under
the tax code (You need not cite the Provision), NRA-ETB shall be taxed under the
following general rules/principles:
a. Only his income derived from sources w/in the Philippines can be taxed. We cannot
tax the income derived from other countries;
b. Indicate also the rule regarding deductions: Mr. Corpuz can also claim deductions
because the tax base is taxable income. These 2 will suffice. But you can add this
c. the taxable income is subject to the progressive tax rate schedule of 5-32%.
Modifications: Supposed the examiner changed this to 9 months?
In answering this problem, Art. 13 of the NCC will come in handy one month is
equal to 30 days, so multiply 9 (months) with 30 (days) = 270 days. Mr. Corpuz is a
NRA ETB.
What if it is exactly 6 months?
the law says more than 180 days. This is strictly construed, so he is a NRA-NETB.
The Rule says, he cannot claim deductions
How about if the problem is specific in that it indicates the Specific months, for example
from April 15, 2004 to October 15, 2004?
Remember the boxer rule:
April
- 15
May
- 31
June - 30
July
- 31
August - 31
Sept
- 30
Oct
- 15
183 days = NRAETB
So, remember that the problem may categorically state more than 180 days; or will state
the number of months; or will indicate specifics months. Remember the rules applicable
in each of the situation
NONRESIDENT ALIEN NOT ENGAGED IN TRADE or BUSINESS:
Under Sec. 23 D, NRA-NETB can only be taxed on his income derived from sources
w/in (same with the old tax code)
Can he claim deductions? No. Under Sec. 25 B, the basis is entire income, meaning
Gross income. So, he cannot claim any deductions. This is the one that you should
underscore.
As regards tax rate, it is not 5-32 %. the tax rate applicable to NRA-NETB is 25% FT.
that means that this is subject to Final withholding tax, and the tax withheld constitute as
a FAFS of the tax liability on the income
Questions regarding these 3 special NRA-NETB, have yet to be asked in the Bar:
Sec. 25 C, D, E:
[C] Alien Individual Employed by Regional or Area Headquarters and Regional
Operating Headquarters of Multinational Companies
[D] Alien Individual Employed by Offshore Banking Units.
[E] Alien Individual Employed by Petroleum Service Contractor and Subcontractor.

they can only be taxed on their income derived from sources w/in; they cannot claim
deductions because tax base is Gross income; and the tax rate has been reduced to
15%

Q: Mr. Corpuz stayed in the Philippines for more than 180 days. How will his income be
taxed if he was employed by Regional Headquarters of Multinational Company? Would
your answer be the same as in the previous bar exam Question?

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 14 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

You have to change only the tax rate. As to the sources and tax base, the rules are
still the same

SUMMARY:

GENERAL PRINCIPLES OF INDIVIDUAL INCOME TAXATION


KINDS OF
INDIVIDUAL TP

SOURCES OF INCOME
(Sec. 23)

TAX BASE
(Sec. 24 and 25)

TAX RATE
(Sec. 24 and 25)

RC

Within and without

Sec. 24A 1 (a) TAXABLE INCOME.


Hence, can claim deductions expenses paid
within and without.

Progressive rate
5-32%

NRC

Within
(1 1 98)

Sec. 24A 1 (b) TAXABLE INCOME.


Hence, can claim deductions expenses paid
within.

Progressive rate
5-32%

RA

Within
(1 1 98)

Sec. 24A 1 (c) TAXABLE INCOME.


Hence, can claim deductions expenses paid
within.

Progressive rate
5-32%

NRA ETB

Within

Sec. 25A 1 (a) TAXABLE INCOME.


Hence, can claim deductions expenses paid
within

Progressive rate
5-32%

NRA NETB

Within

Sec. 25B GROSS INCOME. Hence, NO


deductions or exemptions can be claimed.

25% FINAL TAX

Within

Sec. 25 C, D and E GROSS INCOME.


Hence, NO deductions or exemptions can
be claimed.

15 % FINAL TAX

Special NRA NETB:


1.

Alien
Individual
Employed
by
Regional or Area HQ
and
Regional
Operating HQ of
Multinational Co.
par.C

2.

Alien
Individual
Employed
by
Offshore
Banking
Units. par D3.
Alien Ind Employed
by
Petroleum
Service Contractor
and Subcontractor
par E

2. General Principles of Corporate Income Taxation:


DOMESTIC CORPORATION (SEC 23 E):
taxable on its income derived from sources w/in and w/o
as to the tax base, refer to Sec. 27 A. It says that the corporate rate is based on the
taxable income. This means that expenses paid or incurred w/in and w/o are deductible.
the taxable income w/in and w/o is subject to 35 % ( effective July 1, 2005 implemented
on Nov. 01, 2005))
RESIDENT FOREIGN CORPORATION (SEC 23 F):
Taxable on its income derived from sources w/in only
as to the tax base, refer to Sec. 28 A (1). It says that the corporate rate is based on the
taxable income. This means that expenses paid or incurred w/in are deductible.
the taxable income w/in is subject to 35 % (effective July 1, 2005)
NONRESIDENT FOREIGN CORPORATION (SEC 23 F):
Taxable on its income derived from sources w/in only
as to the tax base, refer to Sec. 28 B (1). It says that the corporate rate is based on
Gross income. This means that expenses paid or incurred are nondeductible.
the taxable income w/in is subject to 35 % FT

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 15 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Just like NRA-NETB, there are also special kinds of Corporate taxpayers, and this is yet
to be asked in the Bar:
[B][2] Nonresident Cinematographic Film Owner, Lessor or Distributor-25% FT
[B][3] Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals4.5%FT
[B][4] Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment7.5% FT
1994 Bar: The Secretary of Finance upon the Recommendation of the CIR issued BIR
regulation using Gross Income as the tax base for Corporation doing business in the
Philippines. Q: Is this BIR Regulation valid?
It is not a valid BIR Regulation for the simple reason that it runs counter to the
provisions of the tax code. The SC, in one case held that the Requisites for the BIR
Regulations to be valid are as follows ( CRUP):
a. Consistent or in harmony with the provisions of the tax code or the law it seeks
to implement;
b. Reasonable;
c. Useful and Necessary; and
d. Published in the OG or in a newspaper of general circulation

CASE: Misamis Oriental Association of Coconut Dealers vs. Sec. Of Finance


The SC made a pronouncement in this case that BIR Regulations are mere
interpretative rules. Therefore, it cannot go beyond the scope of the provision of the tax
code

Another case: Auto Products Incorporated vs CIR 240 SCRA 368


the SC said in this case that BIR Regulation is designed or intended to carry out the
provisions of the tax code. It cannot supplant, modify, or alter the provisions laid down in
the tax code.

You need not cite the name of the case. It is enough to use the following words: it has been
held that' or settled is the rule that, or it is jurisprudentially settled that .... BIR Regulation
is valid if it is in harmony or consistent with the provisions of the tax code. The BIR
Regulation in question contravenes the provision of the tax code that the tax base for the
corporation doing business in the Philippines is taxable income. It is a mere interpretative
Rule intended to carry out the provisions of the tax code. It cannot alter, supplant, or modify
the provisions of the tax code. The BIR Regulation in question therefore, constitutes an
impermissible encroachment on legislative prerogative.

SUMMARY:
GENERAL PRINCIPLES OF CORPORATE INCOME TAXATION
KINDS OF
CORPORATE TP

SOURCES OF
INCOME (Sec. 23)

TAX BASE
(Sec. 27 and 28)

TAX RATE
(Sec. 27 and 28)

DC

Within and without

Sec. 27A TAXABLE INCOME. Hence,


can claim deductions expenses paid
within and without.

35%

RFC

Within

Sec.28A(1) TAXABLE INCOME.


Hence, can claim deductions expenses
paid within.

35%

NRFC NETB

Within

Sec. 28B(1) GROSS INCOME.


Hence, NO deductions or exemptions
can be claimed.

35% FINAL TAX

Within

Sec. 28B(2) GROSS INCOME Hence,


NO deductions or exemptions can be
claimed.

25 % FINAL TAX

Special
NRFC NETB:
(Sec. 28B2,3, and 4)
1. Par. B2 Nonresident
Cinematographic
Film
Owner,
Lessor
or
Distributor.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 16 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. Par. B3 Nonresident
Owner or Lessor of
Vessels Chartered by
Philippine Nationals.
3. Par. B4 Nonresident
Owner or Lessor of
Aircraft, Machineries and
Other Equipment.

Within

Sec. 28B(3) GROSS RENTALS,


LEASE or CHARTER FEES Hence, NO
deductions or exemptions can be
claimed.

4.5% FINAL TAX

Within

Sec. 28B(4) GROSS RENTALS,


CHARTER FEES and OTHER FEES
Hence, NO deductions or exemptions
can be claimed.

7.5% FINAL TAX

SPECIFIC RULES:
NRA-ETB vs. NRA-NETB:
NRA ETB

NRA NETB

As to the TAX BASE

- taxed on the basis of his taxable or


net income

- taxed on the basis of his gross income

As to the right to claim


deductions

- Can claim deductions

- not allowed

As to the filing of the ITR

- required to file his ITR

- not required to file since he is subjected


to final tax see Sec. 51-A2(c) in
relation to Sec. 25B, C, D and E

Q: When is a corporation considered as Doing Business?


In Mentholatum vs. Mangiliman (72 Phil 324), the SC said that it implies continuity of
Commercial transactions. It was cited in BOAC vs. CIR. Doing business, engaging in
business, conducting business must imply continuity of commercial transactions. There's
OCT (Original Certificate of Title,hehehehe):
O - The activity is done in connection with its ORDINARY business in the Philippines
C - There is a CONTINUITY of commercial transactions or dealings (so, look at the intention)
T - TRADE or business
It must engaged in a business here in the Philippines; it must be an ordinary one; and there
must be continuity of the same
In the case of _____ vs CA, it is the intention to engage in a continued business in the
Philippines; it is not the number; it is not the frequency; but the intention to engage in a
continued business in the Philippines, that determines whether the Corporation is doing or
engaging business.
If the corporation is not doing business, the tax effect is that it cannot claim any deductions
because the tax base is Gross Income.
In the case of individual, it is easy because it is fixed, it says more than 180 days. But in the
case of a corporation, the SC said that it depends upon the peculiar circumstances of the
case. But in one case, the SC said that it is really the intention to engage in a continued
business.

RFC vs NRFC:
RFC

NRFC

As to the TAX BASE

- taxed on the basis of his taxable or


net income

- taxed on the basis of his gross


income

As to the right to claim


deductions

- Can claim deductions

- not allowed

As to the filing of the ITR

- required to file its ITR

- not required to file since it is


subjected to final tax see Sec. 52A
in relation to Sec. 28B 1, 2, 3 and 4

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 17 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

III.

GROSS INCOME:
Sec. 32 A must be memorized. There are 13 items here

Keywords:

PBC PRP WPD PARI


PBC Provincial Board of Canvassers
PRP Peoples Reform Party
WPD Police
PARI Priest

Section 32A Except when otherwise provided, GI means all income derived from whatever source,
including but not limited to the following items:
1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions and similar items;
2. Gross income derived from the conduct of trade or Business or the exercise of a
Profession; (two items here);
3. Gains from dealings in Property;
4. Interest;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings; (2 items also)
10. Pensions;
11. Partners distributive share from the net income of the general professional partnership;

1995 Q#1- Define Gross income for purposes of income tax? As modified in the next bar: State the
General Definition of Gross income
you can easily answer these questions by the keyword. But if you cannot recall all the
enumeration, then answer in paragraph form

ENUMERATION UNDER Sec. 32A IS NOT EXCLUSIVE:


The following is likewise included in the taxpayers gross income:
a. Treasure found or punitive damages representing profits lost
b. Amount received by mistake
c. Cancellation of the TPs indebtedness
d. Payment of usurious interest
e. Illegal gains
f. Tax refund
g. Bad Debt Recovery

ITEM # 1: COMPENSATION INCOME:

Fringe Benefit is a form of compensation income. Under the old tax code, Fringe Benefit was taxed
as part of the Gross compensation income of the employEEs. But Sec. 33 modified or changed this
rule FB is now subject to Final Tax.
Sec. 35, provides the rule that personal and additional exemptions are deductible from the Gross
compensation income
1977 & 1978 Bar: Q was so basic: Define Compensation Income.
How do you answer this Q? Compensation for services in whatever form paid, including but not
limited to fees, salaries, wages, commissions, and similar items---this is not really the answer to
this Q.
the definition is found in Rev. Reg. 2-98. it defines compensation income in 1 sentence: All
remuneration for services rendered by an employee for his employer under an EE-ER
relationship
unless specifically excluded under the Tax Code
The meaning of this is that, there are really tax exempt or excluded gross compensation income
from gross income and you will find this in Sec. 32 B. This implies that not all compensation for
services rendered may be subjected to tax, there are those that are tax exempt and should be
excluded from gross income under Sec 32 B.
Example: in the case of services performed by an independent contractor, in the absence of
EE-ER relationship, (actually there's really no EE-ER relationship), the income received by
the independent contractor shall be recorded as trade or business income. Professional
income should not be included in the gross compensation income in the absence of EE-ER
relationship.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 18 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

TEST WHETHER INCOME IS COMPENSATION INCOME:


It is not the name of the remuneration upon which it is paid and the manner of payment, what is
important is that it is derived from E-E relationship.

TEST TO DETERMINE THE EXISTENCE OF E-E RELATIONSHIP:


A Appointment or selection
C Compensation or payment of wages
D Dismissal
C Control

2 Tax implications when the payment is made for services rendered:


1. as far as the ER is concerned, it may be claimed as deductible expense. Under Sec. 34
A (1, a), it says ...reasonable allowance for salaries.... the tax implication as far as the
employer is concerned is that it can be claimed as a deductible expense.
2. It is an income to the employee

Requisites for Deductibility:


a. it is a payment for services rendered;
b. it must arise from EE-ER relationship;
c. it must be reasonable, meaning that it represents the fair value of the services rendered
Example: ER pays 30,000 for the services rendered by his secretary. Assume that of the 30,000,
only 20,000 represents the FV of the services rendered. The 10,000 is a manifestation of the
love and affection of the ER to his EE being his Sexytary. Q: how much can be deducted on the
part of the ER?
Apply the Rule under Sec. 34 A [a][1], it must be reasonable. It is very clear, 20,000 can be
claimed as a deduction as it is the only amount that represents the FV of the service
rendered.
Q: How much can be taxed as income on the part of the EE?
To the employee, the entire 30,000 is taxable:
20,000 - Taxable as part of the compensation income
10,000 - Sec. 32 A, taxable as it is considered as derived from whatever source. So
it forms part of the Gross Income.

Keyword: AC-DC

LIFE INSURANCE PREMIUM:


As to taxability or nontaxability--- Consider Sec. 32 A(1), that is, in whatever form paid. This
may be taxed as compensation income because the premium is maintained by the employer
under ER-EE relationship. Also, under Sec.33 B(10), one of the taxable Fringe Benefits applies
to Insurance Premiums. Here, it is subject to Final tax.
When you speak of taxability, that is the implication as far as the EE is concerned
As to deductibility (it is as far as the ER is concerned) ---Consider Sec. 34 A (1) (a,1)--- this is
the basis for that. It says xxx reasonable payment for salaries, wages, and other forms of
compensation for personal services rendered. Life Insurance premium is one of the other forms
of compensation.
Sec 36A (4), says that this life insurance premium is nondeductible. So, let us summarize 4
provisions in the tax code relative to this
Life insurance premium. You will see how technical
the rules are. That is, you really have to group related provisions that apply to this item
Beneficiaries that may be designated:
1. The heirs, family, executor or administrator of the estate of the EE
2. Employer

Implications:
To the employer, it may be treated as an expense; and to the employee, as income

Q: As to assumption that the beneficiary is the heirs, family, executor or administrator of the
estate: Can the employer claim deductions?
Under Sec. 34 A (1) (a,1), the provisions say other forms of compensation for personal
services rendered. So this includes Life Insurance premiums paid by the employer under
ER-EE relationship. So, YES.
Is the amount taxable to the Employee?
Qualify: Bear in mind that there is a new rule --- Sec. 33 B (10). So:
1. It is taxable FB and therefore subject to Final tax if the insured employee is a
supervisor or managerial EE;
2. If the insured EE is a rank and file EE- that's the time to apply Sec. 32 A(1) when it
says in whatever form paid. So, that may include Life insurance premium. The
employee here must be rank and file

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 19 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Simply put, it is taxable to the employee, but you should qualify:


it is subject to FT (Sec.33B (10)) if the insured EE is a supervisor or manager; and
it is subject to compensation income subject to 5-32% progressive rate if the EE is a
rank and file

As to second the assumption that the employer is the beneficiary: Can the employer claim it as a
deductible expense?
No. Why? Because upon the death of the EE, the proceeds will go to the ER, being the
beneficiary. Shall we allow him to deduct the premiums paid? No because it is just a mere
return of capital. The Proceeds received by the ER is a mere return of capital (of the
proceeds paid by him). That's the reason why in Sec. 36 A (4), whether the EE is directly or
indirectly designated as beneficiary, Sec. 36 A(4) says, NONDEDUCTIBLE.
Is the amount taxable to the employee? This is not taxable to the employee for the simple
reason that his family will receive no benefit. His estate will receive no benefit. The proceeds
will go the employer. If there's no benefit received, there's nothing to tax. There's no basis
for imposing the same

SUMMARY OF THE TAX TREATMENT ON THE LIFE INSURANCE PREMIUM:


BENEFICIARY

EMPLOYER

EMPLOYEE
QUALIFY: if the employee is a:

The heirs, family,


executor
or
administrator
of
the estate of the
EE

The ER can deduct the amount of


the premiums paid as a form of
business expense Sec. 34A(i)

Employer

The ER cannot claim it as


deductions or expenses because
the insurance proceeds are but a
mere return of capital. (Sec. 36A(4))

a. Managerial or supervisory EE - it is subject to FINAL


TAX (fringe benefit)
b.

Rank-and-File EE it is considered a
COMPENSATION INCOME and is therefore subject to
the progressive rate of 5-32%

- NOT TAXABLE Since there was no benefit received by


the EE or his family.

TAX IMPLICATION OF CANCELLATION, CONDONATION or FORGIVENESS OF


INDEBTEDNESS:
This is a favorite bar Q. on forms of Compensation income. If you try to read Secs. 32-83, you'll
find no specific tax rules on this.
The amount condoned may be considered as compensation income or a donation or a capital
transaction, depending on the circumstances of the case.
Sec. 32A says compensation in whatever form paid. We have already discussed one, that is Life
insurance premiums. The next is cancellation or forgiveness of indebtedness.

3 Tax effects / implications / incidences:


1) Considered as Compensation Income to the EE/ Deductible to the ER:
Requisites:
a. the cancellation or forgiveness must be in consideration or based on account of
services rendered;
b. the creditor must be the ER, the debtor must be the EE;
c. the ER condoned or canceled the debt of the EE in consideration of the services
rendered

Effects if these requisites are present:


To the ER-Creditor, that may be claimed as a deductible expense because this
is really a form of compensation for services rendered (Sec. 34 A (1).
To the EE-Debtor, it is a compensation income taxable (Sec.32A (1) in
whatever form paid.

2) As a Taxable Donation:
If no consideration was given; the obligation was simply condoned, renounced by
the creditor-employer; then that may amount to a taxable donation. There is a
donation in accordance with Art. 1270 of NCC: it says if it is gratuitous in character,
it shall be governed by the rules on donation. Also, under Rev. Reg. 2---- it says if

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 20 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

the cancellation or forgiveness was made w/o any consideration, that may amount to
donation
Effects:
1. If there's a donation, the creditor becomes the donor. The debtor becomes the
donee or the recipient of the liberality
2. The creditor-donor is subject to donor's tax
3. the debtor-donee is no longer subject to donee's or inheritance tax as the same
was abolished by PD 69 on Nov. 24,1972
4. It is not also subject to income tax because Sec 32 B(3) says that donations/gifts
shall be excluded from Gross income. So the debtor-donee is neither subject to
donee's or income tax
1997 Bar- An insolvent company has an outstanding obligation to its creditor for
100,000. Since the debtor could not pay its obligation, the creditor agreed to accept
through dacion en pago document, property valued at P30,000. Q1: What is the tax
effect on the discharge of the unpaid balance on the debtor-corporation? Explain.
The unpaid balance discharge here is 70,000; and the transaction referred to in
the Q is the condonation of the unpaid balance
The creditor, having received no consideration as regards the 70,000 unpaid
balance, is liable to pay donor's tax as the transaction gives rise to a donation.
The debtor becomes the donee, the recipient of the liberality. He is not subject
to donee's tax as donee's tax was abolished by PD 69. Neither is he subject to
income tax, as donation under Sec. 32 B (3) is excluded from Gross income
Q2: in so far as the creditor is concerned, tax-wise, how is it affected as a result of
that transaction?
The creditor becomes the donor--The one who canceled or renounced the
obligation without receiving any consideration. As donor, he is subject to donor's
tax

3) The other tax implication is declared by Rev. Reg. #2 Sec. 50., that may amount to
capital transactions. This may take the form of INDIRECT DISTRIBUTION of dividends
by a corporation. Hence, the creditor here must be a corporation and the debtor must
be a stockholder. That must be the situation.
Under Sec. 43 of the Corporation Code (Provision on declared dividends)- Dividends
that may be declared may be in the form of cash, property, stock, liquidated, script
and indirect dividends.
Indirect dividends may arise when a corporation condoned or canceled the
obligation of the stockholder.
This is a form of indirect dividends in the sense that it is made through the
cancellation or forgiveness of stockholder's obligations.
On the part of the stockholder, such amount condoned or canceled is a taxable
income subject to 10% FT.
On the part of the Corporation, this is considered as Interest on Capital.
Is this interest deductible? 1999 Bar #14- Q. on whether or not this Interest is
deductible or not?
De Leon is of the opinion that it depends upon the circumstances. He is of the
view that if the declaration of the dividends is dependent upon surplus profits,
there is no obligation to speak of, so it is not a deductible interest. On the other
hand, if the declaration is not dependent upon surplus profits, there is an
obligation to speak of, in this case, it is a deductible interest.
In our suggested answer in the 1999 Bar, we did not qualify our answer because
interest on preferred shares of stock is considered as interest on capital. In your
book, I did mention about this RMC 17-71, July 12, 1971, w/c enunciates the
rule that interest on capital, and that may include interest on preferred shares of
stock, is a non-deductible interest. So, we can apply this, that it may be treated
as interest on capital. And it is now an absolute rule that interest on capital is a
non deductible interest. So, the corporation cannot claim this as a deductible
interest. Since it partakes the nature of a dividend, though indirect, and since
dividend under the tax code if received by individual taxpayer is subject to 10%,
20% or 25% Final tax depending on the kind of the taxpayer receiving the same,
said indirect dividend is therefore subject to the same rate as if it is a dividend

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 21 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

SUMMARY:
TAX IMPLICATION OR CONSEQUENCE OR INCIDENCE OR EFFECT of CONDONATION
Rev. Reg. 2, Sec. 50 must be made in consideration for services rendered on
account of an E-E relationship.
ER is the creditor and the EE is the debtor.

COMPENSATION INCOME

ER can claim it as a deduction and the same is considered as a taxable


compensation income on the part of the EE.

Article 1270 of the NCC if the creditor condones the obligation of the debtor
without receiving any consideration. It is considered as a taxable donation because
only the creditors liberality is the consideration involved.
Q: Does it mean that the donor and the donee will be made to pay donors tax?
A: NO. PD 69 abolished donee's and inheritance tax which became effective on
Nov. 24, 1972.

TAXABLE DONATION

Q: Is the amount donated/condoned part of the donees gross income?


A: NO. Sec. 32B(3) provides that donations are excluded from GI.

When the debtor is the corporation and the creditor becomes a stockholder in
exchange of the condonation of the debtors obligation
-considered as indirect dividends
The amount condoned is subject to 10% FINAL TAX if the corporation is a
DC.

CAPITAL TRANSACTION
The corporation (creditor) cannot claim the same as a deduction. When
corporations declare dividends, it can be considered as interest on
capital. Rev. Memo. Circ. 17-71, effective on July 12, 1971, provides
that interest on capital which includes stocks or dividends ARE NOT
deductible.

Favorite Bar Q: Convenience of the Employer Rule (Hernandez Doctrine) 1 SCRA 649
This is the justification that may be used in granting exemptions from income tax on certain
benefits that may be received under an ER-EE relationship

HOUSING PRIVILEGE/ BENEFITS


You should consider the employee who may be recipient of this.
In Rev. Reg. 3-98, there's a provision on this, and this applies to Managerial / Supervisory EEs
What are these housing benefits that are tax exempt and granted to the convenience of the ER?
If the EE is a Rank and file EE---the governing rule is Rev. Administrative Memo Order
(RAMO) 1-87
Before the amendment on some of the parts of Sec. 33, it was RAMO 1-87 that applies to all
employees.
In the light of the new provision under Sec 33 C (a new rule on Fringe Benefit), the rule
under RAMO 1-87 has been modified. And this has been implemented by Rev. Reg. 3-98
Rev. Reg. 3-98 says, housing benefits that is exempt is one situated w/in the business
premises of the employer. The new rule included here is including housing units that are
situated w/in the 50 meter perimeter of the business of the employer (adjacent housing units).
RAMO 1-87 provides no provision to this effect. This Rev. Reg. 3-98 will only apply to
managerial employees
So, if the housing unit is outside the premises of the employer, it may or may not be covered
by the exemption. If it is within the 50-meter perimeter, then covered by the exemption,
otherwise, it is not exempted
2001 Bar: House constructed w/in the premises of the employer and the employee is a
manager. Yet to be asked (in the light of Rev. Reg. 3-98): Suppose the house is constructed
outside?
Answer is YES, as long as it is within the 50-m perimeter. If not, no longer covered by
the exemption
The trick of the Q is that, would your answer be the same if the employee is a rank and
file employee? Remember that Rev. Reg. 3-98 applies only to managerial/supervisory
employees.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 22 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

As far as rank and file EE are concerned this is the rule: Housing units covered by the
exemption are those situated within the business premises of the ER. RAMO 1-87
provides 2 Conditions which are not really found or covered by RR 3-98:
1. It must be situated w/in the business premises of the employer
2. this must be given as condition of employment
If you read Rev. Reg. 3-98, it imposes no conditions. These requisites are provided
only in
RAMO 1-87 and these requisites apply only to rank and file EE.

MEAL ALLOWANCE
Traditional rule is: As long as it is given within the business premises of the employer and it is
justified by the Convenience of the Employer, it is tax exempt.
New Rule: Rev. Reg. 10-2000 (Meal Allowance for Overtime Work)---- It says it is exempt
provided that the meal allowance for overtime work does not exceed 25% of the basic minimum
wage; and it applies only to managerial/ supervisory employee because this is not provided
under RAMO 1-87

FRINGE BENEFITS: (Sec. 33B)


Bar Q: Watch out for this: Compensation Income (under Sec. 32 A (1)) vs. Fringe Benefit (Sec.
33). What are the notable distinctions between the two?
The common features of these 2 is that both must be given under the ER-EE relationship
Distinction:
1. As to the tax rate-- Compensation income is subject to 5-32%; FB is subject to FT
2. Whether to be reported as part of the Gross income-- Compensation income is to be
reported;
FB, being subject to FT, need not be reported as part of the Gross income
3. As to the tax withheld-- Compensation income is subject to creditable withholding
tax; FB is subject to FT

Define Fringe Benefit (FB): Sec 33 has 3 paragraphs: Par A (Imposition of Tax Rates) is the
most difficult one (this is only proper for CPA Board exams). You will not be asked to compute
but you might be asked to enumerate those tax exempt FB
In Par. A, you must note that the tax base is the Grossed-up monetary value; the tax rate is
a FT (32, 25 or 15%). Multiply the 2, and the result would be the FB tax

2000 Q#3: Who is legally obliged to pay FB tax?


It is the employer (Rev. Reg. 3-98 Sec 2.33(2)

Fringe Benefit
1) may be in cash or in kind; it may be goods, services or other benefits;
2) the giver/source must be the employer. So, the benefits are given under an ER-EE
relationship;
3) Recipient must be a managerial or supervisory employee
Q: Suppose the recipient is a rank and file employee?
There's an author who is in the view that the benefits received by the rank and file
employee is exempt from the income tax. Do not follow this!
Under Sec 33 C, it states the following FB are exempt from the tax imposed therein
(1,2,3, &4). And the tax imposed on taxable FB is a FT.
The correct interpretation of this is that FB given to rank and file employee are not
subject to FB Tax which is a Final tax but it does not mean that it is also exempt from the
income tax. That can still be taxed as part of the gross compensation income. The FB
should be reported as part of the Gross Compensation income.
Example: A managerial employee's basic salary is 75,000/month. He received housing
benefit the monetary value of which is 25,000/ month. How do we tax this 75,000
representing basic salary?
Do not be confused. It does not mean that all benefits/salaries received by the
managerial EE are subject to FT. Excluded from the imposition of FBT is the basic
salary of the managerial EE.
If you read Sec. 33B, it is not clear on this. But Rev. Reg 3-98 clarifies it. It says other
than basic salary. This is because basic salary is taxed as Compensation Income
subject to 5-32%. It is only the housing benefit that is subject to FBT.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 23 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Take note of this because the Q may be framed like this: are all salaries & wages
received by the managerial EE subject to FBT? No, you should exclude the basic salary
because it is subject to 5-32% progressive rates.

Taxable Fringe Benefits: Sec. 33B Means any good, service or other benefit
furnished or granted by an employer
in cash or in kind, given in addition to the basic salary
of an individual employee, EXCEPT rank-and-file, such as, but not limited to the following:
Keywords: HEV HIM HEEL
1. Housing
2. Expense Account
3. Vehicle of any kind
4. Household personnel maid, yaya, driver etc.
5. Interest on loan at less than market rate (12% benchmark 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. Holiday and Vacation expenses
8. Expenses for foreign travel
9. Educational assistance to the EE or his dependents
10. Life or Health Insurance and other non-life insurance premiums or similar amounts
in excess of the law allows.
Item #5: The actual rate of interest must be less than the market rate. According to Rev.
Reg. 3-98, market rate refers to 12% benchmark rate
If the actual rate of interest is not less than 12%, or 12%, or more than 12%, then there's
no taxable FB
Example: Loan amounting to 300,000 granted to managerial employee. Situation that
may arise:
1) If the actual rate is 14 %----then it does not result to taxable interest benefit
2) Employer imposed 12%---- still it does not result to taxable interest benefit
3) 6%--- then it is taxable interest benefit
4) 0%--- also taxable interest benefit
Rationale: Rate is peg at 12%. So, it is possible that the employer will secure loan from
other sources and he may only be made to pay the legal interest rate. By lowering the
rate to less than 12%, there's that benefit that will accrue to the employee

SUMMARY OF LEGAL PROVISIONS OF TAX EXEMPT FB:


Under Rev. Reg. 3-98

- 3 tax exempt housing benefits


2 tax exempt educational benefit
3 tax exempt life insurance premium

RAMO 1-87

- 1 tax exempt benefit (expenses for foreign travel)

Sec 33 C

- 4 Not taxable FB

SEC. 33B

H1

TAXABLE FB

EXEMPTIONS, if any, UNDER RR 3 98


1. Military Housing
2. Temporary Housing Unit ( 3 months or less stay in the premises)
3. Business premise of the ER including housing unit within 50 meters from
the perimeter of the business premise.

HOUSING

KEYWORD: M T B
E 2

EXPENSE
ACCOUNT

V3

VEHICLE
ANY KIND

H4

HOUSEHOLD
PERSONNEL

OF

Helicopters or aircrafts are exempted because they are considered as


business expenses of the employer.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 24 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

IF the ACTUAL interest imposed is LESS THAN 12%, the same is taxable.
If it is exactly or more than 12%, it is tax exempt.
Ex.
INTEREST
LOAN

I5

ON

Loan of P500,000 extended to a managerial employee at the rate of:


a.) 14% - NOT taxable
b.) 12% - NOT taxable
c.) 6 % - Taxable
d.) 0% - Taxable

REASON: Lowering of interest rate on loan gives benefit to the employee


(they get to save). So if the actual rate is less than 12%, the FB will be
taxable to the extent of the difference between the market rate and the
actual rate.
M6

MEMBERSHIP
BENEFIT

H7

HOLIDAY AND
VACATION
EXPENSES
EXEMPT IF:
1. Required by the nature of the employers trade, business or exercise
of profession;
2. Paid or incurred in connection with the business conventions, mtgs or
seminars abroad;
EXPENSES FOR
FOREIGN
TRAVEL

E8

3.
4.

All expenses are substantiated by receipts or documents


there must be an official communication coming from the
business associates abroad;

Tax treatment of the cost of airline ticket:


Economy class- Exempt
Business class- Exempt
st
1 class tickets--- are exempted only up to 70%
5. Allowance exempt only up to $300.00
EXEMPT in 2 CASES:
EDUCATIONAL
BENEFIT for
the employee or
his dependent

E9

1. Scholarship grant to managerial or supervisory employees there


must be a written agreement that the employee shall remain in the
employ of the employer for a certain period of time, and such a
scholarship is required by the nature of the employers business.
2. Scholarship grant to the dependent/s of an employee the dependent
must have passed the competitive exam conducted by the employer.

LIFE or NONLIFE
INSURANCE
PREMIUMS

L 10

3 Tax Exempt Life insurance Premium:


a. Life insurance premium on GSIS
b. Life insurance premium on SSS
c. Life insurance premium on Group Insurance policy

Sec. 33 C- Fringe Benefits Not Taxable1) 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 EE, whether granted under a collective bargaining
agreement or not; and
4) De minimis benefits
The recent regulation is Rev. Reg. 10-2000
These refer to facilities or privileges furnished or offered by an employer to his
employees that are of relatively small value and are offered or furnished by the
employer merely as a means of promoting HEALTH, GOOD WILL, CONTENTMENT
or EFFICIENCY of his employees.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 25 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Tax exempt de minimis benefit:


REVENUE REGULATIONS 10 2000

MONETIZED VALUE OF UNUSED BENEFITS

QUALIFY:
PRIVATE EMPLOYEES vacation leave exempt
up to 10 days; sick leave always taxable.
GOVERNMENT EMPLOYEES VL and SL are
always tax exempt regardless of the number of days.

MEDICAL CASH BENEFIT or ALLOWANCE


GIVEN TO THE DEPENDENTS OF THE
EMPLOYEE

- P125.00 per month OR P725.00 per semester.

RICE SUBSIDY

- P1,000.00 per month OT 1 sack of 50kg rice per


month not more than P1,000.00

UNIFORM or CLOTHING ALLOWANCE

- NOT to exceed P3,000.00 per annum

MEDICAL
BENEFIT
EMPLOYEES

GRANTED

TO

LAUNDRY ALLOWANCE

- NOT to exceed P10,0000 per annum


- NOT to exceed P300.00 per month

EMPLOYEES ACHIEVEMENT AWARD


ACCT OF LENGTH OF SERVICE

ON

- must be in the form of TANGIBLE PERSONAL


PROPERTY other than cash or gift certificates,
NOT to exceed P10,000.00

GIFTS or DONATIONS DURING XMAS and


MAJOR ANNIVERSARY CELEBRATION

- NOT to exceed P5,000.00 per employee per annum


th
with respect to XMAS bonus, add the 13 month
bonus to the XMAS bonus the same must not
exceed P30,000.00.

FLOWERS, FRUITS, BOOKS and SIMILAR


ITEMS OF RELATIVELY SMALL VALUE:

death of a child

marriage of the E-yee

birth and birthdays

- Reasonable value depending on the Employers


capacity

MEAL ALLOWANCE FOR OVERTIME WORK

- NOT exceeding 25% of the Eyees basic minimum


wage managerial and supervisory employees.

ITEM # 2: INCOME FROM BUSINESS or TRADE or EXERCISE of PROFESSION:

INCOME COVERED:
1.

Income derived by SELF-EMPLOYED from trade or business (trading, manufacturing,


merchandising, farming and others).
SELF-EMPLOYMENT INCOME (Sec. 74) consists of the earnings derived by the individual
from
a) the practice of profession or
b) conduct of trade or business carried on by him as a sole proprietor or
c) a partnership of which he is a member.
SELF-EMPLOYED a person engaged in trade or business or performs services for others
for a fee and who derived personal income from such trade or business or from the
performance of such services.

2. Income derived by PROFESSIONALS from the practice of professions


PROFESSIONALS persons who derive their income from the practice of their profession
lawyers and other persons registered with the PRC. It may also refer to one who pursues an
art and makes living there from such as artists, athletes and others who are similarly situated.
NOTE: It is not material whether they have a business license or whether they are
registered or if they are self-declared. so si Mang Kepweng taxable (joke ni Japs to)

BUSINESS INCOME:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 26 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

FORMULA of GROSS INCOME:


GROSS SALES
Less:

P1,000,000.00

COST of INVESTMENT:
2. cost of sale
3. cost of goods
4. sales allowance
5. sales discount
P 530,000.00

GROSS BUSINESS INCOME

P 470,000.00

BUSINESS includes: one, which entails time, effort and activity for purposes of LIVELIHOOD
and PROFIT
Q: Is income from illegal business taxable?
A: YES, it falls under the phrase income from whatever source section 32A
Q: Are expenses from illegal business deductible?
A: NO. By express provision of law, only legitimate expenses are deductible
Q: Suppose Corporation A gave P100,000.00 to a customs official to process their license.
Is the P100,000 taxable as income? May the corporation deduct the same as business
expense?
A: The P100,000.00 is taxable and should be included in the gross income of the
customs official since it is income from whatever source. However, the same is not
deductible since unlawful or illegitimate expenses are not deductible items from gross
income (sec. 34A)

ITEM # 3: PROPERTY INCOME- GAINS DERIVED FROM DEALINGS IN PROPERTY:

You should know the provisions that amplify this. There are 2 Provisions:
1. Sec. 39-- in Sec. 39, there are 4 set of rules that will apply to Gain from dealings in property;
2. Sec. 40- in Sec. 40, are also 4 set of rules that will apply to Gain from dealings in property.

So, all in all there are 8 Rules that apply to Gains from Dealings in Property or property income

Favorite Bar Q: Sec 39A (1)- Ordinary Asset vs. Capital Asset
1998 Q#10: a) Distinguish Ordinary Gain from Capital Gain; b) What is ordinary income?
2003Q#6(b)- Distinguish Ordinary Asset from Capital Asset
Q. not yet asked: 1) What is Ordinary loss?; 2) Distinguish Ordinary Gain from Ordinary loss

Classification of Assets (Sec. 39 A (1)):


1. Ordinary Asset- defined by way of enumeration. There are 4 categories of Ordinary asset
( SOUR)
2. Capital Asset- defined by way of exclusion. Meaning, other than ordinary assets. What is not
included in SOUR is considered as capital asset

S O U R:
1. Stock in trade such as inventoriable asset. These are really assets that remain in the
inventory of the taxpayer at the end of the taxable year. This includes raw materials, workin process and finished goods
2. Ordinary course of business or trade. So, property primarily held for sale to customers may
be ordinary if it is held in the ordinary course of business or trade
Example: A real estate dealer sold real properties. Such real properties, being held in
the ordinary course of trade or business is an ordinary asset. The gain derived from
such sale is treated as Ordinary income
3. Used in business- Property used in business subject to depreciation. These are really
depreciable
assets. If these assets are not used in trade or business, they are
capital assets, and therefore the
gains from such sale of assets are treated as
Capital income. Ex. Furniture & Fixture, Machineries &
Equipment- these are

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 27 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

really subject to depreciation, but these must be used in trade or business,


otherwise it would be classified as capital asset
4. Real Property used in trade or business such as parcels of land, machineries& buildings. If
these are not used in trade or business, then they are considered as Capital Assets. Real
property not used in trade or business include residential house and lot

What is not included in this enumeration is automatically considered as capital asset


ORDINARY ASSETS
Keyword: SOUR

Those which remain in the inventory of the TP


at the end of each taxable year.

STOCK in trade or inventoriable properties

Ex. Raw materials, goods under process

Properties in the ORDINARY COURSE of


business

Ex.

USED in business

Primary for sale to customers in the ordinary


course of business.
Sale of land in a real property
development business

Properties used in the business which is subject


to depreciation if they are NOT used in
business then its capital asset and therefore
subject to capital gain.
Ex. Furniture and fixtures, machineries and
equipment

REAL PROPERTY used in trade or business

- sale of a building or parcel of land by a real


estate dealer

Q. Are all properties used in trade or business by the taxpayer considered as ordinary assets?
No. Not all properties used in trade or business are considered as ordinary asset because they
are only limited to SOUR. Assets which may be held in connection with the business but not
included in SOUR may be considered as Capital Asset
Examples:
1. Accounts Receivable- these are held by the taxpayer in connection with the
business. But since it is not included in the SOUR, the gain derived from sale of A/R
is considered as Capital Income
2. Investments in Stocks
3. Sale of Goodwill- Goodwill may be sold and the gain from the sale of goodwill is a
capital income

You will note that in the provision, the definition of Capital Asset includes properties whether or not
held by the taxpayer in connection with the trade or business. So, you cannot apply the business
test because these are really properties which are held in connection with the business of the
taxpayer and yet considered as capital asset. So capital assets cover not only properties not used
in trade or business. It may also include properties used or held by the taxpayer in connection with
his business. This is true in the case of A/R, Investment in stocks,& Goodwill

But the definition of Ordinary Asset may refer only to properties used in trade or business. So it is
safe to say that Ordinary assets are limited only to those used in connection with his trade or
business and capital assets may include all properties not used in trade or business including those
assets which may be used in trade or business

2003 Bar: Distinguish Ordinary Asset from Capital Asset


Answer: In ordinary asset, you cannot use the word includes because that is not really accurate.
The word includes may be used only in defining capital asset because the enumeration of
Ordinary Assets is exclusive. So, you will just say that Ordinary asset may refer or is just limited
to the following items: SOUR
On the other hand, Capital Asset (You can now use the word include) includes properties
whether or not connected in trade or business, except or other than SOUR, because capital
asset is defined by way of exclusion. So, you have to exclude SOUR

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 28 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

ORDINARY ASSET
Refers to and is limited to the following assets:
Stocks in trade or business, properties in
Ordinary course of business, those Used in
business and Real property used in trade or
business.

CAPITAL ASSET
includes property whether or not connected with
the trade or business of the TP other than Stocks in
trade or business, properties in Ordinary course of
business, those Used in business and Real
property used in trade or business.

Q: Distinguish Ordinary Gain from Capital Gain


Answer: Ordinary gain refers to the gain derived from the sale or exchange of ordinary assets
whereas capital gain may include gain derived from the sale or exchange of capital assets. To
elaborate on this, you may define it in this way: Ordinary gain is a gain derived from the sale or
exchange of an asset such as SOUR whereas capital gains refer to the sale or exchange of an
asset whether or not used in trade or business except that of gain derived from the sale or
exchange of the following asset: SOUR
ORDINARY GAIN

CAPITAL GAIN

Gain derived from the sale or exchange of


ordinary assets such as Stocks in trade or
business, properties in Ordinary course of
business, those Used in business and Real
property used in trade or business.

Gain derived from the sale or exchange of capital


assets OR property whether or not connected with
the trade or business of the TP other than Stocks in
trade or business, properties in Ordinary course of
business, those Used in business and Real
property used in trade or business

Q: Define Ordinary income


Refer to Sec. 22(Z). The term ordinary income includes any gain from the sale or exchange of
an ordinary asset. So, it made mention of Sec 39 A (1). Ordinary income is not only limited to
that gain derived from the sale or exchange of an asset. Remember that there may other
business that may be the source of this ordinary income. But if the only source of income is sale
or exchange of ordinary asset, that definition may be considered as is really defined in that
limited sense. Hence, you can use the word includes because there are other sources of this
income

Q: Define Ordinary Loss


This is a loss that may arise or may be sustained from the sale or exchange of an asset that is
SOUR

Q: Distinguish Ordinary income from Ordinary loss


Answer: Ordinary income refers to the income that may be derived from the sale of an asset
SOUR. On the other hand, Ordinary loss is one that may be incurred from the sale or exchange
of an asset considered
SOUR

ORDINARY INCOME

ORDINARY LOSS

Includes the gain derived from the sale or


exchange of ordinary asset

Loss which may be sustained from the sale or


exchange of an ordinary asset.

Q: Capital Gain vs Capital Loss


Answer: Capital gain may include gain derived from the sale or exchange of an asset whether or
not connected in trade or business except SOUR. On the other hand, Capital loss is one that
may be incurred from the sale or exchange of an asset whether or not used in the ordinary trade
or business except SOUR
CAPITAL GAIN

CAPITAL LOSS

Includes the gain derived from the sale or


exchange of an asset, WON connected with T or
B, except SOUR

Loss which may be sustained from the sale or


exchange of an asset, WON connected with T or
B, except SOUR

Q: If an asset is considered ordinary, can it be converted to Capital Asset?


Answer: there's no really rule that says Ordinary asset is always an Ordinary asset. There's no
rule to that effect because there are exceptional case that Ordinary asset may become capital
asset. Conversely, there's no such rule that say that Capital Asset is always a Capital asset.
Capital Asset, also under certain situation may be converted to Ordinary Asset

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 29 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2 important cases:
TUASON vs LINGAT Jr. 58 SCRA 170
CALASANZ vs CIR 144 SCRA 664
these are the cases decided by the SC laying down the criteria /test on when Ordinary asset
may become Capital Asset and vice-versa

TUASON vs LINGAT Jr., 58 SCRA 170: In this case, the SC mentioned 7 circumstances that
may convert a Capital Asset to Ordinary Asset:
1. Area of the property
2. Whether the property or land is divided into lots
3. The improvements introduced must be valuable
4. Whether the lots are for sale
5. If for sale, if they are for sale on installments
6. If a broker was employed to manage or administer the sale
7. If the seller is engaged in the real estate business
All of these circumstances were present in this case. It turned out that the seller was really
in the real estate business; the property (78 h) was originally classified as Capital asset; it
was subdivided into lots; improved; sold in installment; and the seller derived substantial
income from such sale
Q: What is really the importance in knowing whether the asset is OA or a CA?
Bear in mind that capital transaction is accorded preferential tax treatment (i.e. reduced
tax rate). Under Sec. 39 B, this holding period rule which reduces the taxable capital
gains by 50% only applies to capital transactions. This is a form of tax avoidance. If you
sell a capital asset, try to recall this provision. Don't sell it w/in the 12 month period
because if the sale is w/in that 12 month period, the gain is 100% taxable. The tax
avoidance scheme is that you sell after the lapse of the said holding period because the
gain is taxable only up to 50%. You cannot apply this rule to sale of OA. This is what the
taxpayer is alleging in this case, that the asset is a CA so as to avail of the reduced tax
rate
OA Converted to CA:
Situation: A real estate dealer, business is buying and selling of real property. So, this is
considered as OA. When will this OA become CA? What happened?
The real estate dealer died. Upon the death, this property is transmitted to the heirs
under the law on Succession. The heirs now are in possession of the property.
Answer: It really depends upon the circumstances:
1) If the heirs will continue the business, these properties will remain as OA.
2) If the heirs will not continue the business, then these properties will now be
converted to CA, so that if the heirs sell these properties, the gain is
considered as Capital Gain

CALASANZ vs CIR, 144 SCRA 664: In this case, the SC cited the circumstance substantial or
extensive improvements. How do you improve a parcel of land? You subdivide it; construction
of concrete gutters (?); mapping; installation of lighting systems and drainage facilities. These
are substantial improvements according to the SC. The SC in this case mentioned that it may
become an Ordinary asset if the cost of the improvement is twice the cost of the property. In this
case, the cost of the property is 4, 742.66; the cost of the improvement is 170,028.60, more than
twice the cost of the property.
there is really no fixed rule or formula that will determine whether an OA will be converted to
CA or vice versa. Consider these circumstances. These are really the criteria or tests
3 Rules that apply only to Capital Transactions: (Sec. 39 B, C, D)
1. Holding Period Rule (HPR) (Sec. 39 B)
2. Capital loss limitation (CLL) (Sec. 39 C)
3. NELCO- Net Capital Loss Carry Over (Sec. 39 D)
2001 Bar- Q. on the Distinction between NELCO (Sec. 39 D) and NOLCO (Sec. 34 D(3))
NELCO- Net Capital Loss Carry Over
NOLCO- Net Operating Loss Carry Over
3 Notable Distinctions:
a. NELCO arises from capital transactions (meaning, involving capital assets);
NOLCO arises from
Ordinary transaction (may involved ordinary asset)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 30 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b. Sec. 39 D Categorically says other than corporate, So NELCO can only be


availed of by individual
taxpayer. Under NOLCO (Sec. 34 D(3)), there's no
similar provision.
Sec. 34 D(3) admits of no distinction, so individual and
corporate taxpayer may avail of this NOLCO.
c. NELCO may be carried over only in the next succeeding taxable year. On the
other hand, NOLCO allows carry over of operating loss in 3 succeeding taxable
years or in the case of mining companies, 5 years.
If you will be asked, Define tax avoidance? Distinguish the same from tax evasion. 1996
Bar: there's a follow up Q. Give examples of tax avoidance. You can cite these as
examples
Holding period rule - this implies that the asset sold has been held by the taxpayer
for a period of more than 12 months; if the sale took place after the lapse of the said
12-month period, then the gain is taxable only up to 50%.
Will this rule apply to Ordinary assets?
No, the gain from the sale of OA is always 100% taxable. The gain derived from
the sale of OA is 100% taxable, immaterial of the holding period. This 50%
reduced tax rate can only be availed by individual taxpayer.
Q: An individual taxpayer, Mr. A, sold his property considered as CA. He derived a gain
amounting to 150,000. The property has been held for 2 yrs. from the date of purchase.
Q#1: What is the tax treatment on the 150,000 capital gain?
Only 50% (70,000) is taxable
Q.#2: What if the seller is a corporation?
The whole amount (150,000) is taxable. Sec 39D says that other than
Corporate taxpayers, that means that 100% taxable if capital gains is derived
by Corporate TP

Capital Loss is deductible to the extent of Capital Gain


this means that you can only deduct capital loss from capital gain. If there's no capital gain, no
deduction is allowed. The deductibility of Capital loss is dependent upon the existence of Capital
Gain. Since you can only deduct capital loss from capital gain, then you cannot deduct capital
loss from Ordinary gain. To allow such is to violate this rule (Sec. 39 C)

2003 Bar- the rationale behind the prohibition that capital loss cannot be deducted from Ordinary
Gain
Answer: Under Sec. 34, there's a rule on matching cost against revenue. This principle states
that Only ordinary and necessary expenses (business connected expenses) are deductible from
Gross income or Ordinary income. These non-business connected expenses cannot be
considered as deductible items. Capital loss is non-business connected expenses as it arises
or can be sustained only from capital transactions. If we allow capital loss as a deduction from
ordinary income, it will violate this rule that only ordinary and necessary expenses are deductible
from Gross income as required by the Principle of Matching cost against revenues

SUMMARY:
CAPITAL TRANSACTIONS 3 special rules
Sec. 39 B, C and D

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 31 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

TAXABLE CAPITAL GAINS:

100% subject to tax if capital asset sold after being held by the TP for a period of
not more than 12 months.
RULE 1:
HOLDING PERIOD RULE
Sec. 39B
- applies only to INDIVIDUAL
TP

RULE 2:
CAPITAL LOSS LIMITATION
Sec. 39C

applies to INDIVIDUAL and


CORPORATE
taxpayers
except, in the latters case,
banks and trust companies.

50% if holding period is more than 12 months


NOTE: Gain from ORDINARY ASSETS is always taxable regardless of the
holding period.
Ex. Individual TP sold a car which is not used in business for P100,000
Tax treatment:

If the car was NOT held for more than 12 months the whole of
P100k is taxable.

If the car was held over 12 months, only P50k is taxable


RULES:
Ordinary loss is deductible to the extent of ordinary gain
Capital loss is deductible from capital gain
Capital loss IS NOT deductible from ordinary gain
Q: Reason why capital loss is NOT deductible from ordinary gain?
A: Sec. 34 (Allowable Deductions) follow the principle of matching of cost
against revenue. Only ordinary and necessary expenses are deductible
from ordinary income. Capital loss is a non-business loss; if we deduct
it from ordinary income then it would be violative of the principle.
Q: Can you deduct ordinary loss from capital gain?
A: YES, the NIRC provides no prohibition against it.

When capital loss is more than capital gain:


Capital gain
Capital loss
Net capital loss

RULE 3:
NET CAPITAL LOSS CARRY
OVER Sec. 39 D

applies only to INDIVIDUAL


TP

GR:

P 50,000.00
P100,000.00
P50,000.00 may be carried over to the succeeding
taxable year BUT the loss must not be more
than the net income for the year it was
incurred.

Expenses which includes losses may not be carried over to the


succeeding taxable year.

XPN: NET CAPITAL LOSS CARRY OVER such loss (in an amount not in
excess of the net income of such year) shall be treated in the
succeeding taxable year as a LOSS from sale or exchange of capital
assets held for not more than 12 months.
NET CAPITAL LOSS CARRY OVER
(Sec. 39D)

NET OPERATING LOSS CARRY OVER


(Sec. 34D(3))

- Arises from capital transactions which necessarily


involves capital assets

- arises from ordinary transactions which necessarily


involves ordinary assets

-other than corporate TP Hence, available only to


INDIVIDUAL TP

- may be availed of by BOTH individual and corporate


TP

- may be carried over to the succeeding taxable year


(1year only)

- Allows carry over of operating loss for 3 succeeding


years, 5 years for mining companies

Rules to be remembered:
1. it is settled that OL is deductible for OG
2. It is also allowed to deduct CL form CG (Sec. 39 C)
Justice Vitug asked this Q: Can you deduct OL from CG?
His opinion is that the tax code provides no prohibition. The prohibition only applies
to the deductibility of CL from OG, as the rule says CL is deductible only from CG.
But the tax code, Justice Vitug emphasized, provides no prohibition in deducting OL
from CG, therefore, it is allowed.
3. in the case of Capital Loss Limitation- it applies to both individual and corporate taxpayer,
except trust companies and banking institutions
4. NELCO- this only applies to individual taxpayers. Sec. 39 B says other than corporate
taxpayer. So, corporate taxpayers are not allowed to carry over Net capital losses.
The term Net Capital Loss is defined in Sec. 39A (3). It says it is the excess of Capital
Losses over Capital Gains. It means that Capital Loss is more than Capital Gain

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 32 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Example: CG - 150,000
CL - 200,000
It says there can only be Net Capital Loss if the CL is more than the CG. In this
case therefore, Net Capital Loss is 50,000. This is the one that may be carried
over as a deduction in the CG of the succeeding taxable year.

Net Capital Gain-- excess of the CG over the CL. Just the opposite of Net Capital Loss
The general Rule is that expenses must be paid and be claimed in the year the same is
paid or incurred. You cannot, as a rule, carry over an expense.
Exception: Sec. 34-- Net Operating Losses- these can be carried over as a
deduction from the GI in the next succeeding taxable year. Thus when we speak of
Capital Transactions, this is the Exception, Sec. 39 (D)--Net Capital Loss can be
carried over as a deduction from the CG in the succeeding taxable year

SALE OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET:


Sec. 27 D(5): A final tax is hereby imposed on the gain presumed to have been realized on the
sale, exchange or disposition of lands and/ or buildings which are not actually used in the
business of a corporation and are treated as capital assets based on the GROSS SELLING
PRICE or FMV, whichever is higher, of such lands and/or buildings.

Sec. 24 D: X X X a final tax is hereby imposed upon capital gains presumed to have been
realized on the sale, exchange or disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of conditional sales X X X

Favorite Bar Q: Sec. 24 D; compare this to 27 D (5)


Sec. 24 D applies to individual taxpayer while Sec. 27 D (5) applies to Domestic Corporation
It is 27 D (5) that is yet to be asked in the Bar. Sec. 24 D was asked 3x already
These 2 provisions pertain to sale, exchange or other disposition of Real property classified
as Capital Asset. This is the transaction contemplated therein. Try to compare these 2. It will
help you establish distinctions between these 2.
The tax rate is the same---6%. The tax base is likewise the sameit is the higher
amount between the Gross Selling Price and Zonal Value.
These are the distinctions: (24 D vs. 27 D(5))
A) As to the taxpayer---Sec 24 D applies to individual taxpayers; Sec 27 D(5) applies to
Domestic Corporation;
B) In 24 D, it says Real Property. However the Real Property in 27 D(5) covers only
land and building. In 24 D, it says Real Property while in 27 D (5), it is very specific
that it covers only land and building.
You must have learned in Civil law that under certain conditions, (Art. 415 (5)),
machinery may be considered as R/P. But since 27 D(5) limits this to land and
building, this machinery which may be considered under 24 D as R/P, may not
be covered.
You have to refer to the definition of R/P for purposes of R/P tax. We can adopt
Art. 415(5) and this has been cited by the SC in several cases, since there is
really no clear definition of R/P under the Tax Code. By analogy, we can apply
the definition under the Civil Code; in fact under RA 7160 Sec. 99(M), it
incorporates Machinery.
C) Another point of distinction-- in Sec 24 D(2), there is tax avoidance scheme,
whereas Sec. 27 D(5) provides no tax avoidance scheme. In other words, Domestic
corporations cannot legally avoid the payment of Capital Gains Tax on the Sale of
Real Property classified as Capital Asset involving land and building.
We have extensively discussed the meaning of Capital Assets [C/A]. Take note
that this applies to R/P (Expressio Unius Est Exclusio Alterius), so this does not
include those considered as Ordinary Assets Real Property used in trade or
business. So here in Sec 27D(5), it must be land and building not used in trade
or business, that's why it is considered as Capital Asset.
Let us emphasize these additional requisites as provided for in RR 17-2003.
This was mentioned in your book:
This 6% Capital Gains Tax can be legally avoided if the following requisites
are present:
1. The proceeds of the sale of Principal Residence must be applied either
to construct or purchase new principal residence. It is very clear in

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 33 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2.

3.

4.
5.

6.

Sec.24 D (2) that the same must involve Principal Residence (So, it only
applies to sale of principal residence). Principal residence may include
also the land which it is built as clarified in Rev. Reg. 30-99)
The trick of the problem is that: Suppose what was sold was not in
the nature of Principal Residence. Then this tax avoidance scheme
will not apply. It must be a sale of Principal Residence. We may
call it own principal residence; then
Observe the 30 day notice to the BIR. That means that w/in 30 days
from the date of sale, you should notify the BIR for their recognition of
this tax avoidance scheme. The date of sale as construed under Rev.
Reg. 17-2003 refers to the date when the deed of sale was notarized--It
is the date of the Notarization of the Deed of Sale;
Comply with the 18-month period. How do you comply with this?
Within 18 months from the date of sale, the construction or
purchase of this residence must be made. So, the construction of
new principal residence or the purchase of the new principal
residence must be made w/in 18 months from the date the sale was
notarized
There's another limitation, the 10 year period. This can be availed of
only once every 10 years.
Under this Rev. Reg., the 6% capital Gains Tax must be deposited
under an escrow account with the authorized agent bank.
You must be familiar with the term escrow because it is in the
Corporation Law---shares held in escrow.
Here, the purpose is to ensure compliance with the requisites.
Under this escrow agreement, there are certain limitations set by the
authorized revenue district officer to the effect that if the seller can
comply with these requisites, then the seller can ask for the
withdrawal of the same.
After the execution of escrow agreement, it is required under Reg.
17-2003 that the seller and the buyer should file joint tax return with
respect to this 6% Capital Gains Tax so as to comply with the filing
of the so called ITR of this 6% Capital Gains tax
there is another rule under RR 17-2003: within 30 days after the lapse of
th
the 18 month period, the seller should submit documents showing that
he has complied with these requisites. That he used the proceeds to
construct or purchase new principal residence. If there's no compliance
th
from the lapse of the 18 month period, RR 17-2003 says that the
seller is considered as a delinquent taxpayer as far as non-compliance
of this provision is concerned. And he can be charged with appropriate
penalty. This is cited in your book, and the 30 day period from the lapse
th
of 18 month period really applies to the submission of certain
documents showing compliance to this regulation.

So if this will be asked again, you should state these new requisites and the
execution of escrow agreement among the buyer, seller, RDO and authorized
agent bank.
So far, we have mentioned 3 tax avoidance scheme:
1. I mentioned that Sec. 39 B- the holding period rule- is really a tax avoidance
scheme because it reduces your taxable gain by 50%, and the permissible
method to reduce the same is to sell the Capital Asset after 12 months from
the date of purchase;
2. We also discussed Sec 40 C(2). What is that tax avoidance scheme or
legally permissible means?
The exchange of properties, shares of stocks or securities must be
made in accordance with the plan of Merger or Consolidation (M or C)
3. And this is the third. If you want to avoid the effect of the 6% Capital Gains
Tax, comply with the requisites laid down under Sec. 24 D(2)
D) Another distinction between Sec 24 D and Sec. 27 D(5) is when the buyer is the
Gov't , political subdivision of the state, agency, instrumentality or GOCC.
You will note that under Sec 24 D, the seller has the option. There's that option
granted by law for the seller (that is, individual taxpayers only) either to avail of
the 6% Capital Gains Tax or the progressive tax rate of 5-32% under Sec. 24A.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 34 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

It is unfortunate that the BIR has yet to issue a Regulation to this effect. In
applying the 6%, there's no doubt that the basis is either the SP or Zonal Value,
whichever is higher. The cost is nondeductible. If you apply Sec. 24A, you will
note that the tax rates are higher; and the very purpose here is for the seller to
avail of the reduced rate. So, is the cost deductible under Sec. 24 A?
If you read Sec. 24A which provides progressive rates, the tax base is
taxable income. So an opinion must be expressed that since the purpose
of the law is to make the seller to avail of the reduced tax rate, he must be
entitled to deduct the cost.
On the other hand, under Sec. 27D (5), there's no option given to Domestic
Corporation if the buyer is the Govt, political subdivision of the state, agency,
instrumentality or GOCC.

SUMMARY:
CAPITAL GAINS TAX 6% FINAL TAX
Applicability

Applies to real property classified as capital asset

Tax Base

GSP or the Zonal value of the property, whichever is higher

BIR ruling includes:

Exchange of property and other dispositions such as:


assignment of real rights over real property
pacto de retro sale
conditional sale subject to a suspensive condition

If the buyer is the GOVERNMENT


option of the seller to apply the tax
rates under 6% capital gains tax as
provided in Sec. 24D of the NIRC or
the progressive tax rates under Sec.
24A

NOT applicable to corporate TP

Avoidance of 6% CGT

- In cases of sale or exchange of principal residential house of the


individual TP see the requirements for the tax avoidance.

CG Tax of 6% under Sec. 24D

CG Tax of 6% under Sec. 27A 5

- a TAX AVOIDANCE SCHEME for individual TP


sec. 24D 2

- Corporate TP cannot avail of any tax avoidance


scheme

- applicable to individual taxpayers

- applicable only to Domestic Corporations

- applicable to all real property classified as capital


asset

- only to land and building

- OPTION of the tax rate applicable in case the


government is the buyer 5-32% or CGtax of 6%

- no such option available

PRESUMED GAIN:
There is a term you should remember under Sec. 24 D & Sec. 27 D(5). The word there is
presumed gains. The CG Tax of 6% shall be imposed on the presumed gains.
2001 Q: A doctor by profession acquired a parcel of land in 1990 for 1 Million. He sold the same
in 2000 at 800,000. It would appear that he had incurred an actual loss in the amount of 200,000
because he received the SP amounting to 800,000 (the problem did not state the Zonal Value so,
we considered this as the basis) and he previously acquired it at 1 Million, so he incurred an
actual loss of 200,000. The doctor argued that he should not be made to pay the tax because he
derived no gain, in fact he incurred a loss. Is the contention of the doctor/seller tenable?
The problem may be answered by these provisions:
NO. Because the cost is a nondeductible item. If you are an ordinary citizen/taxpayer, you
will surely argue that how can I be made to pay the tax if I derived no gain and more so I
incurred a loss? Not all taxpayers are aware of this Sec.24 D which fixed the tax base at
GSP or Zonal value, whichever is higher. The cost is nondeductible. The contention of the
doctor is not tenable because the basis of the 6% CG tax is the amount received (the GSP

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 35 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

which is presumed in this problem to be higher than the Zonal Value), so the cost is
disregarded.

Q#1. Can a taxpayer-seller be made to pay tax even if he derived no gain, for instance:
GSP (higher than the Zonal Value) 800,000
Cost
800,000
Gain
- 0 Answer: Even if he derived no gain, since the basis is the higher between the GSP and
Zonal Value, he can be made to pay the 6% CG tax

Q#2: Is there a situation wherein a seller can be made to pay a tax even if he incurred a loss
from such transaction?
YES. He really incurred an actual loss of 200,000 but he is still required to pay the 6% CG
tax because the cost is not allowed to be deducted (Actual Bar Question in 2001)
Note under Sec. 24 D the meaning of other dispositions.
Sec. 24D says sale or
exchange (sale is defined in Art. 1458 NCC, and exchange or barter in Art.1638), and then,
other dispositions. If you read the subsequent provision, this covers also conditional sale
such as pacto de retro sale.

Q#3: Would your answer be the same if the seller is a Domestic Corporation?
Recall Sec 27 D(5)---that's the 6% CG tax. Sec. 28 A applies to RFC while Sec 28 B applies
to NRFC
So, there is really no provision mentioned about this 6% CG tax in Sec. 28 (A & B), as this
6% CGTax is a rule on corporate income tax that applies solely to Domestic Corporations
This is a capital transaction which is not covered by the rules w/c we discussed under Sec
39 (B, C, D)

Q: What are the capital transactions not covered by the Rules under Sec 39 B, C & D (Holding
period, Capital loss limitation & NELCO)
Answer:
1. Capital transaction involving the sale of Real Property (of course, this must be a Capital
Asset): this is subject to 6% CG Tax based on the higher between the GSP and the
Zonal Value. So, Sec. 39 ( B, C, D) does not apply to all capital transactions
2. Another can be found in 4 Sections (Secs 24, 25, 27, & 28): this means that this is a rule
that applicable to both individual and corporate taxpayer.
If you will be asked: Is there a common rule that can be applied to both individual
and
corporate taxpayer?
YES. It is a capital gain (which is really a capital transaction) derived from the
sale of shares of stock NOT listed and traded through local stock exchange. The
tax rates are 5% & 10%
Net CG not exceeding 100,000 - 5%
In excess of 100,000- 10%

Q: Suppose the shares of stocks are listed and traded through the local stock exchange, will
your answer be the same?
The examiner should not ask this Q because this is excluded from the coverage as this is
really a percentage tax. You can find in Title V Sec. 127: if the shares of stocks are listed
and traded through LSE, the tax applicable is not an income tax (that's why the examiner
should not ask this Q) but a percentage tax, of 1 % of the GSP. But you must still answer
the same even if the examiner inadvertently overlooks the coverage as we will recommend
that the Q be a bonus one.
Thus, these are the 2 capital transactions not covered by the Rules under Sec. 39 (B, C, & D)

ITEM # 4: INTEREST INCOME:


If a Q will be asked on Interest income, it would be on whether it is taxable or tax exempt.
There are only 5 items under the tax code w/c are exempt from income tax as far as interest income
is concerned:
1. Interest income from bank deposit;
The recipient must be any of the following tax exempt recipients:
a. Foreign Government;
b. Financial institutions (FI) controlled or financed by foreign govt
c. Regional or Int'l FI established by foreign govt
2. Interest income on loan extended by any of these 3

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 36 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

3. Interest income on Bonds, Debentures and other certificate of indebtedness received by any of
these 3.
The first 3 you'll find in Sec. 32 B (7, a)
4. This has been the subject of amendment by RA 8424. It is an interest income on bond deposit
maintained under the expanded foreign currency deposit system. The rule has been changed.
Under the old tax code- irrespective of the recipient of this deposit---TAX EXEMPT
Under the present tax code (as amended by RA 8424) -- it is only tax exempt if the recipient
is a NONRESIDENT taxpayer whether individual or corporate. Thus, if the depositor (the
recipient of this deposit maintained under the expanded foreign currency deposit system) is
a resident taxpayer, it is subject to 7.5 % FT.
Under the old tax code, tax exempt; Now, 7.5%
5. Interest income from long term investment or deposit. You'll find the meaning of this under Sec
22 F. It is regulated by the BSP & the term is 5 yrs. or more. If less than 5 yrs this is subject to
the diminishing rates.

If we refer to Sec. 24 & 25, you'll find therein a provision exempting interest income from long-term
deposit from income tax. Is this found in Sec. 27 & 28?
Note that Secs. 24&25 apply to individual taxpayers while Secs. 27& 28 apply to corporate
taxpayers. There is really no similar provision that you'll find in 27 & 28. So, the exemption
therefore, applies only to individual taxpayers; it does not apply to corporate taxpayer

Q: What is this interest Income that is subject to Final Tax?


It must be an interest income on bank deposit. If it is an interest income on loans, assuming it is
not tax exempt, then such interest income is subject to regular income tax, whether the deposit
is Philippine or Foreign Currency Deposit. This is also one of the amendments introduced by RA
8424.
Before, it only applies to Philippine Currency. Now, the law makes no distinction, bank deposit
whether Phil. Deposit or not, is subject to Final tax.

Hypothetical Q: a taxpayer derived income from a loan that he extended to a certain person. He
has also interest income from his bank deposit. Q#1. As regards his interest on loan, what is the tax
treatment?
Subject to regular income tax since it is not subject to exemption.
Q#2: As regards interest on bank deposit?
It is subject to Final Tax
The tax treatment here is that interest income from loans must be reported as part of his gross
income but the interest on bank deposit, since it is subject to FT, need not be reported as part of the
Gross income.

Regarding interest income on Gov't Securities, don't be misled. Under Sec. 32B, that item was
deleted. There is no item under 32 B regarding interest income on Gov't securities. That's why it is
not included in the exemptions. Interest income on Govt securities, effective Jan. 1, 1998, is already
taxable. This is no longer tax exempt as the item was deleted from the enumeration on the exclusion
from Gross income.

SUMMARY:

INTEREST

TAX EXEMPT

INTEREST FROM BANK DEPOSITS Sec. 32 B 7(a)


INTEREST ON LOANS EXTENDED BY
INTEREST INCOME ON BONDS or OTHER CERTIFICATES
OF INDEBTEDNESS ISSUED IN FAVOR OF:
INTEREST INCOME ON BANK DEPOSITS MADE UNDER
THE EXPANDED FX CURRENCY DEPOSIT

1.
2.

Foreign Governments
Financial Institutions controlled or financed
by FX govts, Regional or international FI
established by FX

- The recipient must be a by a NRTP NRA or


NRFC
- If by a resident, its subject to 7.5% FINAL TAX

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 37 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

INTEREST INCOME from long-term deposit or investment


Sec. 22F term of 5 years or more made in pursuance of
CB regulations and in denominations of P10,000 or more

- only INDIVIDUAL TPs are exempted

NOTE: As of January 1, 1998 INTEREST on GOVERNMENT SECURITIES are no longer tax


exempt.

ITEM # 5: RENT INCOME:

Fixed sum either in cash or property equivalent, to be paid at a definite period for the use or
enjoyment of a thing or a right.
SCOPE ALL rentals derived from lease of property, whether used in business or not, from real
estate or personal property; earnings from copyrights, trademarks, patents and natural resources
under lease.
Q: What is the difference in terms of tax treatment between Rent Income and Royalties

AS TO REPORTING
AS TO TAX RATE

RENT

ROYALTY

- must be reported as part of gross


income

need not be reported since subject to


FINAL TAX

- regular progressive rate of 5-35%

FINAL TAX

2002Q#3: This is a Q designed by the examiner to test the knowledge of the examinees regarding
the difference between Royalties & Compensation Income.
Q: UKV-UK entered into a licensing agreement with UKV-Phils. UKV-UK authorized UKV-Phils.
to distribute computer software in the Philippines. UKV-Phils., thereafter entered into a licensing
agreement with a bank in the Phils. In the contract, it was categorically stated that the licensing
agreement entered into by UKV-Phils and the bank did not involve the transfer of proprietary
rights over the assets. Thereafter, Royalty was paid by UKV-Phils. to UKV-UK. How do you treat
these payments made by the banks to UKV-Phils? Is it in the form of Royalty or compensation
for the services rendered?
The key here is, since it does not involve the transfer of proprietary rights when UKV-Phils.
Entered into a licensing agreement, and it rendered technical services to the bank, then that
partakes the nature of compensation for services rendered. It is therefore subject to regular
or normal tax. (if this is in the nature of royalty, it is subject to FT.) (Japs answer is different
from the suggested answer of the UPLC)
Modification: Is the payment be subjected to FT? If not, then why? (the words if not is a guide
that pag hindi subject to FT, what would then be the appropriate treatment?)
So, it should be treated as compensation for services rendered because it rendered
technical services to the bank although there's a licensing agreement, because it is
authorized by UKV-UK.
If there was really no transfer of proprietary rights, that may be treated as compensation for
services rendered, otherwise (that is, there was transfer of proprietary rights), that may be
treated as Royalty.

ADDITIONAL RENT INCOME:


Rev. Reg # 2 Sec. 49 provide Rules not found in Title II which states that: Rent Income is not
only limited to the ordinary rent but also to additional rent income.
There is no rule under Title II regarding Additional Income. What you can find in Sec. 32A(5) is
only ordinary income. Additional Rent Income may be grouped into 2 according to Rev. Reg. #2
Sec. 49:
rd

1. Obligations of lessors to 3 parties assumed by the lessee:


real estate taxes on the leased premises
insurance premiums paid by lessee
dividends paid by lessee to SH of lessor corporation
interest paid by lessee to holder of bonds issued by lessor-corporation;
2.

Value of permanent improvements made by the lessee on leased property that will
become the property of the lessor upon the expiration of the lease.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 38 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

VALUE OF PERMANENT IMPROVEMENT: A permanent improvement may arise in


long term contract of lease. Under the long term contract of lease, which is usually
10-30 yrs., the lessee can introduce improvements, such as building on the property.
As far as taxation is concerned, the value of the property may be taxed as additional
rent income. Under Rev. Reg #2 Sec. 49, it may be reported under either of the 2
recognized methods:
a. Spread-out method; and
b. Outright method

There will be no computation. You will only be asked to state the methods which this
value of permanent improvement may be reported as additional rent income.
In legal ethics, if you will be asked to draft Long term contract of lease, you should
not forget, say it is for the period of 30 years, to incorporate the usual stipulation that
the lessee can introduce improvements on the premises and upon the expiration of
the LT contract of lease, the ownership of such improvements on the premises shall
be transferred to the lessor.

In Outright method--- it is the FV of the permanent improvement upon its completion


that should be reported as additional rent income during the taxable year it was
completed

In Spread-out method--- (the technical term to be remembered as to what should be


spread-out is depreciated Value. It is the depreciated value of the permanent
improvement upon the expiration of the contract of lease. You have to consider the
depreciated value of the permanent improvement upon the expiration of the contract
and divide it by the remaining term of the contract of lease. Every year, an aliquot
part of the depreciated value should be reported as additional rent income in
addition to the regular rent income.

Ex. Term of the Contract of lease is 30 years. In the 5 year, a building is


constructed with a value of 25M; the remaining term of the lease therefore is 25
years. Every year, 1M is to be reported as additional rent income (25M / 25 yrs.)
This 1M is the aliquot part of the 25M. You need not state the amount in your
answer. As long as you can explain that an aliquot part of the depreciated value of
the improvement should be reported.

th

ADVANCE RENTALS:
- if there is material benefit to the lessor, it is taxable
1. Prepaid Rentals- taxable if so received under a claim of right and without restrictions as to its
use
2. Security deposit--- generally not taxable; it is only taxable if the lessee violates any provision
of the contract and lessor forfeits the deposit
3. Loan- not taxable
ITEM # 7: DIVIDEND INCOME:

There are 8 provisions under Title II that deal with Dividend Income:
1) Sec. 24 B (2)--- RC, NRC & RA are subject to 10% FT on dividends received from Domestic
Corporation effective year 2000;
2) Sec. 25 A (2) --- covers NRA-ETB. Tax is 20% FT on the dividends received from Domestic
Corporation;
3) Sec. 25 B--- NRA-NETB.
Tax is 25% FT on the dividends received from Domestic
Corporation;
4) Sec. 27 D(4)--- Dividend received by a Domestic Corporation from another Domestic
Corporation. It is tax exempt;
5) Sec. 28 A (7, d) --- 2005 Bar--- Recipient is RFC. Is that Taxable? No. it is tax exempt;
6) Sec. 28 B (5, b) --- received by NRFC. This is subject to 15% FT and this is subject to tax
credit system;
7) Sec. 42 A (2) --- the source is a FC. In the first 6 provisions, the source is DC;
Q: the giver is a FC, what is the tax treatment?
Answer: It is an income derived from sources w/in if:
a) the Gross Philippine Income of this FC in the last 3 preceding taxable years is at least
50% of its foreign income (income w/o). if it is less than 50%, that's not an income derived
from sources w/in, so not taxable;

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 39 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

8) Sec. 73 B--- It provides that stock dividend is not subject to tax.


because it is just a transfer from the surplus to the capital account.

It is not subject to tax

SUMMARY:

TAX RULES ON DIVIDEND INCOME


GIVER of DIVIDEND

RECIPIENT

BASIS

TAX TREATMENT

DC

RC
NRC
RA

Sec. 24B 2

10% FINAL TAX

DC

NRA ETB

Sec. 25A 2

20% FINAL TAX

DC

NRA NETB

Sec. 25B

25% FINAL TAX

DC

DC

Sec. 27D 4

Tax exempt

DC

RFC

Sec. 28A 7(d)

Tax exempt

DC

NRFC

Sec. 28B 5(b)

15% FINAL TAX subject


to the tax credit system for
corporate income tax
INCOME FROM WITHIN
IS TAXABLE IF:

FC

STOCK DIVIDENDS

Individual or corporate TP

Sec. 42A 2

Sec. 73B

If the income from


within
is
AT
LEAST 50% of its
income
from
without. Otherwise
its not taxable.

GENERALLY TAX
EXEMPT

TAXABLE GAIN AND DEDUCTIBLE LOSS:


Sec. 40 has 3 paragraphs:
Par. A) provides the basic rules on taxable gain and deductible loss;
B) Provides the rules on the determination of the cost or adjusted basis thereof; and
C) States 2 Rules:
1. NO GAIN, NO LOSS which means that if the gain is not taxable, the loss is
not deductible
2. GAIN RECOGNIZED, LOSS NOT RECOGNIZED

Q: When you sell property how do you know whether you derive gain from such sale or exchange or
you incur losses from such sale or exchange of an asset or capital?
The Rules are basic, there's taxable gain if the amount received or realized is more than the cost
or adjusted basis.
Example: You sold your property; the selling price (that's the amount you received) is 500,000.
This 500,000 is not the taxable gain. You are allowed under Sec. 42B to deduct the cost or
adjusted basis. Say for example, you acquired it at 300,000. It is really the difference between
the Selling Price and the cost. So, the taxable gain is 200,000.
Is there an exception to this rule, that as a rule the cost is deductible from the amount received
or realized?
YES. It is clear in Sec. 24 B (1) that the basis of the tax rate of 6% Capital Gains tax is the
higher amount between the Gross Selling Price and the Zonal Value.
Thus if you will be asked: It is the general rule that cost or adjusted basis is deductible from the
Selling Price, is there an exception to this Rule? YES. What is that Sale? It is a sale of capital
asset, and that must be real property. It is a sale of capital asset classified as real property.
The general rule is, If there is a loss, that is, the amount received or realized is less than the cost
or adjusted basis, such loss is deductible. That means that, for example, the Selling Price (the
amount received or realized) is 300,000. This property was previously acquired for 400,000,
there's a loss of 100,000. As a rule this is deductible. Exception to this is Sec. 24B (1).

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 40 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

BASIS FOR DETERMINING GAIN or LOSS FROM SALE OR DISPOSITION OF PROPERTY:


It is really important to know the cost or adjusted basis because this will help you determine
whether or not you incur gain or loss. What are the Rules on this? It depends upon the Mode
of acquisition or purchase of such property.
Sec. 40 B enumerated all the possible modes of acquiring property
MODES: 1. Purchase
2. Succession or inheritance
3. Donation
4. Acquired through insufficient or inadequate consideration
5. Property or shares of stocks acquired through the so called tax exempt
transactions

If the property is acquired under the above modes, we call that NO GAIN, NO LOSS
transaction
The last 2 modes are the technical ones.
You sold property for 500,000; property was previously acquired through purchase.
The basis therefore is the purchase price. Thus, if the Purchase price is 300,000,
deduct it from 500,000. The gain therefore, is 200,000
#2: the law says, it is the FMV of the property at the time of acquisition. What does that
mean?
In the law of succession, when the property was acquired through inheritance, the right
accrues upon the death of the decedent/testator. For purposes of determining the
amount refer to Sec. 88. How would you know the FMV of the property transmitted
through succession? Sec 88 says it depends upon the nature of property, whether real
or personal.
Correlate. The exam will not ask you to compute. Just remember: the basis is the FMV
at the time of death of the decedent that is the date of acquisition. If you sold property
acquired through inheritance, selling price is 500,000. What must be the cost or
adjusted basis?
To answer this, determine how you acquire this property which you sold for 500,000.
you acquired it through inheritance. And since Sec. 40 B(2) says the cost or the
adjusted basis is the FMV of the property. Then it is a matter of referring to the date
of property to determine the FMV. The schedule of FMV of the property is usually
supplied by the executor or administrator. So, if according to the Schedule of FMV of
property, the FMV at the time of death is 400,000 (date of death is very material).
The gain derived would be 100,000
#3: The tax Code provides all the possible mode of acquiring properties. It is possible that
the property was acquired through Donation. Say, the property was donated to you by your
friend. You are in dire of money so you subsequently sold the same for 500,000. How do
you know whether you derived a gain or incurred a loss?
The provision is quite long. It may be simplified as follows: a) it is the same basis in the
hands of the donor. In the case of inheritance above, it is the FMV of the property at the
time of death of the testator. Here, it is the same basis in the hands of the donor. What
you have to do is to inquire from the donor his basis in acquiring the property. It is
possible that the donor acquired it through purchase, so he can tell you the purchase
price.
the rule under this situation may change if it is acquired through inadequate or
insufficient consideration
Example: B acquired property through insufficient consideration from A. B sold said
property to C. SP=500,000. So the property was not acquired through purchase or
inheritance. It was acquired by the seller for inadequate or insufficient consideration
imaginable. It is below or way below the FMV of the property.
1986 Bar- many examinees complained to the SC that taxation was a killer subject
because several Questions involved computations. The example above was one of the
Q. If this will be asked again, I think you will only be asked about the legal provisions:
What may be the basis for the sale of the property acquired through insufficient or
inadequate consideration?
Answer: it is the amount paid by the transferee who now becomes, as far as the
present sale is concerned, the transferor.
Example: A had this property with a FMV of 500,000. He sold it to B for 200,000. it
was acquired by B for inadequate or insufficient consideration in money's worth.
Under ordinary transaction, A can sell that at a price not below the FMV but he sold

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 41 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

it a price way below the FMV, so it was sold for inadequate or insufficient
consideration. B therefore acquired the property valued at 500,000 for only 200,000
(this is the amount paid by B to A in acquiring the property). Subsequently, B
disposed the same to C. What then is the basis for the sale of the property?
It is the amount or consideration paid by the transferee (as far as the first
transaction is concerned--A to B), now the transferor (as far as the present
transaction is concerned which is the sale from B to C). Since B paid 200,000,
that is the amount or consideration as far as A is concerned. B is the transferee,
now the present transferor. So, deduct 200,000. the gain derived is 300,000.
1994 Q#4 -- Suppose the property was acquired through these exempt exchanges as
provided for in Sec. 40 C(2). What are the situations covered therein?
These are tax exempt exchanges of properties, shares of stocks or securities when
these are paid in accordance with the plan of merger or consolidation. According to
Sec. 40 C(2), All these exchanges made in accordance with the plan of M or C are
tax exempt. This is not a subject of subsequent sale. So if these properties, shares
of stocks or securities were acquired pursuant to the plan of M or C, the gain derived
from this exchange is tax exempt.
However, subsequently, these were sold.
As regards the subsequent sale, that is the one that is subject to tax.
Example: ABC Corp. entered into a contract of M or C with LMN corp. All those
exchanges of properties, shares of stocks, and securities are tax exempt. But the
subsequent disposition is already subject to tax. For instance these properties were
subsequently sold by the Corp for 500,000. Remember that this was acquired through
an exempt transaction. What would be the tax treatment?
Answer: Just take note of the legal provision under Sec. 40 C (5). It says' in the
same basis in the hands of the transferor. In UP law Center suggested answer the
basis is the original cost of the property or shares of stocks or securities, as the case
may be. The basis shall be the original or historical cost of the property, shares of
stock or securities when still in the hands of the transferor
SUMMARY OF THE RULES:

MODE OF ACQUISITION

COST or ADJUSTED BASIS (tax base)

PURCHASE

Ex.

INHERITANCE or SUCCESSION

DONATION

TRANSFER
CONSIDERATION

Purchase price

FOR

Selling price
Cost of acquisition
Property income

P500,000
P300,000
P200,000

FMV at the time of death of the decedent or testator


correlate with Sec. 88B.
Ex.

Selling price
FMV
Property income

P600,000
P500,000
P100,000

FMV is the same basis in the hands of the donor

The amount paid by the transferee who is the transferor at


the present sale

INSUFFICIENT

Ex. As house and lots FMV was P500,000 but A sold


his house and lot to B for P200,000, thereafter B
sold the same to C for P600,000.
deduct P200,000 (SP of A to B) from P600,000
(SP of B to C) P400,000 property income

PROPERTY
OR
SHARES
OF
STOCKS
ACQUIRED THROUGH THE SO CALLED TAX
EXEMPT TRANSACTIONS

- The original or historical cost of the property or share of


stocks, as the case may be.

Sec. 40C TAX EXEMPT EXCHANGES:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 42 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

NO GAIN, NO LOSS RECOGNIZED:


The Rule is No Gain, No Loss recognized. This means that the gain if the gain is not taxable,
or the transaction is tax exempt, the loss is not deductible. There are four transactions
covered by this Rule:
1. Properties for Stocks
2. Stocks for Stocks
3. Securities for Stocks

These 3 transactions are exchanges purely in kind. Each of the transactions must be
made in accordance with the plan of M or C

4. Exchange of property for corporate control----this is also a purely in kind exchanges.


This is another form of Tax Avoidance
Sec.40 C(6,b)- Supposed the exchange is not made in accordance with the plan
of M or C as it is a transaction wherein, say, ABC Corp. transferred all its
property to LMN Corp. in exchange for shares of stock. No M or C was made.
Is this transaction covered by the exemption?
If you have not read Sec. 40C (6, b), you may answer that since it is not a M
or C, then it is not exempt. This is not correct. The meaning of M or C a a
requisite under Sec. 40 C (2) has been relaxed. According to Sec. 40 C(6
(2)), it is not only limited to the ordinary meaning of M or C. Under the
Corporation Code (Secs. 76-87) this is not definitely covered. But the Tax
Code says it also covers the acquisition and substantial transfer of all
properties to another Corp. in exchange solely for shares of stocks. So, it is
considered as M or C in so far as the Tax Code is concerned. So this
transaction is also covered by the exemptions. Therefore, if there is any gain,
the gain is tax exempt.
The trick in the Q is: Would your answer be the same if the exchange is made
not in accordance with the plan of M or C. It is a transaction that involved the
transfer of all assets of the corp. to another corp. in exchange solely for shares
of stock.
The answer would still be the same. It is still tax exempt.
Another Tax Avoidance is, that transaction is also tax exempt, not in
accordance with the plan of M or C, is the exchange for Corporate Control.
That means that as a result of the exchange of property for shares of stocks,
the transferor/s has/have acquired corporate control.
What do you mean by Corporate Control?
Sec. 40 C (6,C), it means that at least 51% ownership of the
Outstanding Capital. The provision says one person alone, including
others not exceeding 4. How do you construe this?
This means that: the transferor may be 1, that is alone; or including
others not exceeding 4 (that is 1 transferor plus 1 other; 1+2 up to
1+4, or up to the maximum of 5). To be exempted, the transferor
must acquire at least 51% ownership of the outstanding capital
stock
SUMMARY:

PURELY IN KIND EXCHANGES

REQUIREMENT FOR EXEMPTION

Must be in accordance with a plan for merger or consolidation


Ex. ABC Corp, pursuant to a plan of M or C, gave all its
properties to LMN Corp in exchange of stocks such
transaction is tax exempt BUT should LMN Corp sell the
said properties to another person, such sale would be
subjected to tax.

PROPERTY FOR STOCK

STOCK FOR STOCK

Must be in accordance with a plan for merger or consolidation

SECURITY FOR STOCK

Must be in accordance with a plan for merger or consolidation

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 43 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Must result to corporate control of the transferee corporation


corporate control should be 51% or more - there may be more
than 1 transferor but the same must not exceed 5 whether the
transferor is an individual or a corporate TP.
Ex.

PROPERTY FOR STOCK

ABC Co. transferred all its property to XYZ Corp in


exchange of shares of stock but there was no plan for M
or C. Is the transfer exempt from tax?

The concept of merger or consolidation under Sec.


40C(2) has been relaxed. The concept is not limited to
the ordinary concept of M or C it likewise covers
transfers of ALL properties in exchange for stocks even
if theres no plan for M or C PROVIDED that the
transferors would acquire control over the corporation
shares of stock is 51% or more.
So, in the case at bar, if the shares of stock would be at
least 51%, the transaction is tax exempt, otherwise its
taxable.

TAXABLE GAIN DOES NOT ONLY ARISE FROM ORDINARY SALE, it is also derived from exchange of
property for stocks:
FMV of shares of stocks
Less: Cost of the Prop
Gain or Loss

GAIN RECOGNIZED, LOSS NOT RECOGNIZED:

Q: When does this occur?


A: In the following circumstances:
1. When the transaction is NOT solely in kind that is, aside from the property, cash is
also given in the transfer
Thus, suppose cash is given as additional consideration? This means that cash
+ property, securities or shares of stock. A different rule will apply. The Rule that
will apply now is GAIN RECOGNIZED, LOSS NOT RECOGNIZED. How do
you describe this transaction?
This is a transaction not solely in kind because it involves cash or money as an
additional consideration. The gain will now be subject to tax. So, don't give additional
cash or money because it will now be governed by this Rule GAIN RECOGNIZED,
LOSS NOT RECOGNIZED.
2. Illegal transactions
2001 Bar: Illegal transaction is governed by this rule because the illegal gain is
taxable but the illegal loss or expense is not deductible. We can tax the illegal
gain because of Sec 32 A(1) derived from any other source, but the loss that
may be sustained from illegal transaction is a nondeductible loss because only
those losses that are legitimate ones, actually sustained from legal transactions
are deductible
illegally acquired income constitutes realized income under the claim of right
doctrine
3. Transactions between related TP
Transactions between related taxpayers shall be governed by this rule. If
there's a gain, the gain is definitely taxable, but the expense or the loss is a
nondeductible expense
Group of Related Taxpayers (Sec.36 B)
a. Members of the same family
b. A Stockholder and a Corporation---- 1-man Corporation, that is, the
corporation is owned or controlled by a single individuals
c. Between 2 corporations---they are related in the sense that they are owned
and controlled by the same stockholders
d. Parties to a trust
1. trustor

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 44 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. Trustee
3. Beneficiary
4. Fiduciary
4. Wash sale----one of the illegal trading devices
The reason why it is an illegal trading device is because there's really no
substantial change of beneficial ownership
Q: 1. What may be the subject of wash sale?
It may be shares of stocks, securities, including stock options
Q: 2. Who must be the seller of such shares of stocks, securities or stock
options?
It must not be a dealer in securities
Are there periods that must be observed?
YES. a) 30 days before the sale; and 2) 30 days after the sale. These 2
periods are really determinative of whether it is a wash sale or not
What must be that event that must transpire or occur 30 days before the sale or
30 days after the sale (this is the reason why this is called 61-day sale)?
The event that must transpire is the purchase or acquisition of identical or
substantially the same stock or securities
It is important to know whether it was a wash sale or not because if it was a
wash sale transaction, the gain is taxable and the loss is nondeductible (Sec. 38)
Q: What must be the reason for this?
The rationale behind this is that, this is a mere artificial loss and it is not
actually sustained. In actual transaction, the seller can recover his loss by
adding the amount of loss to the Selling Price involving the sale of stocks or
securities. The seller can recover this loss through the subsequent sale of
the same. In effect, the loss can be recovered. So there is really no loss
actually incurred or sustained as it is a mere artificial loss

STOCK DIVIDENDS: Generally: Tax Exempt


These are the 3 important cases that provide exceptions to the rule that stock dividend is tax
exempt:
1. CIR vs. ANSCOR---this pertains to the redemption of shares of stock
2. CIR vs. MANNING--- this was 1994 Bar Q #1---this pertains to dividends declared in the
guise of stock dividends
3. BACHRACH vs SEIFERT (87 Phil 483)--- this pertains stock dividends received by the
usufructuary

CIR vs. ANSCOR: The requisites of redemption of stock dividends that may result to taxable
income according to this case are:
a. there must be a redemption or cancellation
b. it must be of shares of stock involving stock dividends
c. the cancellation must result in distribution of taxable dividend or income
Sec. 73 B second sentence thereof made mentioned of these 3 requisites -- at such time
and in such manner that may result in the distribution or cancellation of taxable dividend.
These are really the criteria or tests.
According to the tax courts of US, consider the following:
a. the real or business purpose that would justify redemption;
b. the redemption must be bonafide;
c. the lapse of time between the issuance and redemption;
d. the net effect of the redemption of the shares of stockholder
ANSCOR CASE: The 2 purposes raised by the taxpayer: a) legitimate business purpose;
and b) justification for the cancellation or redemption, were not considered by the SC. The
case made mention about the Filipinization(?) of the Corp. and citizenship(?); and the
reduction of foreign exchange transactions. These 2 were not a justification. The period of 23 years was not also considered. However, the net effect, the SC said, resulted in taxable
income. Here 108,000 shares ____(?) the original 25,247.50 shares____(?). It turned out
the corporation redeemed the original investment on the original 25,247.50 shares of stocks.
The SC modified the decision of the CA on the amount representing the taxable income.
In Corporation law, shares of stock may be classified as redeemable upon incorporation
but it must be expressly provided for in the Articles of Incorporation as redeemable. If this
will be redeemed by the Corporation, this is not the one referred in the exception. So, if the
source is the original subscription or the initial investment, Sec. 73 B will not apply because

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 45 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

it is still capital. But if the source is additional shares of stock, that is, stock dividends were
declared and these are in the nature of redeemable shares, then this is the one
contemplated by this Sec. 73 B.
The SC said, if these redeemable shares of stock are in the nature or formed part of the
original investment, the redemption is not covered by Sec. 73 B. the exception is not
applicable. It must be the shares of stock declared as stock dividends and were classified as
redeemable shares. The situation in this case is that the corporation declared stock
dividends classified as redeemable shares.
The rule regarding stock dividend is that it is tax exempt because there is just a transfer
from surplus to capital account. There is No realized gain or profit. In this case, a device
could really be availed of by the corporation. If this stock dividend declared would be
categorized as redeemable shares of stock, this would be the situation: under the Corp.
Code this may be redeemed in cash. Once this will be redeemed the stockholder will receive
cash. There is now a flow of wealth according to SC. This is the reason why stock dividends
declared in the nature of redeemable shares of stock is taxable.
In the language of the SC, it is really a constructive ploy or device to evade the effect of
taxation having in mind that the stock dividend is stock exempt but if it is classified as
redeemable shares of stock once redeemed from the corp., the stockholder will receive not
only receive cash but be also exempt from tax. There being a flow of wealth, stockholders
cannot allege that stock dividend is tax exempt. You cannot apply the principle here because
there is a flow of wealth. Here, there may arise a flow of wealth because the stockholder will
now receive cash.
The reason of the exceptions that you'll find in Sec. 77 B is that it is an income
constructively devised to avoid the effects of taxation. So, stock dividends, as a rule is tax
exempt. But once it is in the nature of redeemable shares of stock, there being a flow of
wealth as the stockholder may receive cash, then that's the time we can tax such stock
dividends

CIR vs MANNING 66 SCRA 14:

Disguised Dividends

In the case of, it is in this case that you'll find the language in the guise of stock dividends.
What does that mean? The board may declare dividends and treat the same as stock dividends,
name it as stock dividends in the books. But the BIR may examine the books.
In this case it was discovered that the stocks were declared not in accordance with the
Corporation Code. It was not declared out of the unrestricted retained earnings of the corp. It
was declared out of the Outstanding capital stock. So there was a violation of the basic
requirement under the Corp. Code that dividends, including stock dividends can only be declared
out of unrestricted retained earnings.
So as to evade the effects of taxation, stock dividend being tax exempt, the Corporation, in
connivance with the stockholders treated such as stock dividends. So it is a dividend in the guise
of stock dividends as to avoid the payment of tax. This is taxable of course. This is taxable as
there is no stock dividends legally declared under the Corporation Code

BACHRACH vs SEIFERT 87 Phil 483: The Q here is: Is the stock dividend received by the
usufructuary tax exempt or taxable?
This is taxable according to the SC, rejecting the opposite view that it is tax exempt. The SC
adopted the Pennsylvania Rule. The SC cited Art. 566 of the Civil Code. Under this Article the
usufructuary is entitled to the natural, industrial, and civil fruits of the thing in usufruct. The thing
in usufruct here is the shares of stock. As this is a thing in usufruct, the SC considered this an
exception to the rule and held that the stock dividends received by the usufructuary are subject
to tax. Stock dividend is a fruit of the thing in usufruct. It is a civil fruit, therefore, it is subject to
tax.

WHEN THERE IS A CHANGE IN THE STOCKHOLDER'S INTEREST IN THE CORPORATION:


This is another exception to the rule.
Illustration: A, before the declaration of stock dividends had a 20% ownership of the Outstanding
capital stock of the Corporation. If there's no change pertaining to the percentage of ownership
after the declaration of the stock dividends, then such stock dividends is tax exempt. But if

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 46 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

there's a change, and it must be an increase in the interest, if this increase to 22%, it is
considered as an exception to the rule

OTHER SOURCES OF INCOME:


CAPITAL GAIN FROM SALE OF SHARES OF STOCK
ACQUISITION & DISPOSITION OF CAPITAL STOCK WHICH INCLUDE SALES AND
RETIREMENT OF BONDS
ILLEGAL GAINS
gambling betting, extortion or fraud
RECOVERY OF DAMAGES
Taxable only when it represents lost profit or income.
BAD DEBTS RECOVERY
Taxable if it results in reduction of the TPs tax liability in the previous year. TAX BENEFIT
RULE or DOCTRINE OF EQUITABLE BENEFIT applies in this case.
It must be claimed as a deduction from the gross income in the preceding year the
reduction results in a tax benefit.
TAX REFUND
Taxable if it results in reduction of the TPs liability in the preceding year. This means that
the tax refunded must be previously claimed as deduction from gross income. The tax
benefit rule also applies.

In the items mentioned under Sec. 32 A ( we said that there are 13), the following are subject to FT:
1. Royalties;
2. Prizes--- take note of the clarification.
Prizes subject to FT must be more than 10,000. If the amount is 10,000 or less, the tax
treatment is that it is subject to 5-32%. It must be included in the Gross Income of the
taxpayer;
3. Winnings except lotto and sweepstakes;
4. Interest
this is subject to FT if this is an interest income on bank deposit. If it is an interest on
loan, then it is subject to regular tax;--reported as part of the gross income
5. Dividends are subject to FT under 2 cases:
a) When it is received by Individual taxpayers. We can simply say that when a dividend is
received by an individual taxpayer from a Domestic Corporation, it is subject to FT;
b) If the recipient is a NRFC. So, if it is received by a Domestic Corporation or a RFC, it is
not a FT;(exempt)
6. Share of a partner from the net income after tax of a business or taxable partnership. Try to
compare this to item 11 of Sec. 32 A. under Sec. 32A (11), the source is general
professional partnership.
Q: A is a partner in ABC Partnership, a business partnership. A received an income
amounting to 150,000 representing his share in the income of the partnership.
1. How do you tax the 150,000 income received by A from ABC partnership?
Answer: Since the source is a taxable partnership, this is subject to FT and
therefore the partner is not required to report this income as part of his gross
income
2. Would your answer be the same if ABC is a general professional partnership?
Answer: No. if it is received from a tax exempt partnership, Sec. 26 last
paragraph states that the professional partner shall report such share from the
professional partnership as part of his Gross income. So Sec. 32 A (11), as the
tax treatment in Sec. 26 will tell you, should be reported as part of the Gross
income of the professional partner. But in the case of a taxable partnership,
Sec.24 states that the share of a partner if it is received from a taxable
partnership (that is not a general professional partnership) shall be subject to
FT. And the rule provides that the recipient of the same is not required to report
that as part of his GI.

2001 Bar: If a cash dividend (or property) is received by a RC or RA, this is subject to FT (Sec
24, 10% FT). Q: What do you think is the reason why these dividends received by RC or RA are
subject to 10% FT and not by 5-32% progressive rate?
Answer: The reason is to ensure the collection of tax on these dividends. If we subject these
to 5-32%, which can only be done through the filing of ITR, there is no assurance that the
taxpayer will report these as part of his GI because he has also other sources of Income. It is
extremely difficult for the BIR to monitor compliance w/ this considering the number of
stockholders.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 47 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

By shifting the responsibility to remit the tax to the corporation, it is easy for the BIR to check
compliance because there are fewer withholding agents compared to the # of stockholders. By
subjecting this to FT the Govt. is assured of revenues in the earliest possible time because these
taxes are needed by the Govt to carry out its legitimate objectives-- LIFEBLOOD na naman--hehehehe..... this is really favored by the LIFEBLOOD DOCTRINE.
By the way, In the case of interest on deposits, it is the bank that is legally obliged to
withhold the tax
SUMMARY:

ITEMS SUBJECT TO FINAL TAX-not required to be reported


R

ROYALTIES

Always subject to final tax

DEPENDS:
P10,000 or less it forms part of gross income subject to 532% progressive rate

PRIZES

More than P10,000 20% FINAL TAX


GR:
W

Always subject to final tax

WINNINGS
XPN: sweepstakes and lotto winnings (exempted)

INTEREST FROM BANK


DEPOSITS

Subject to FT whether in Philippine or FX currency

NOTE:

IV.

DIVIDENDS GIVEN TO AN
INDIVIDUAL TP

SHARE OF A PARTNER
FROM THE NET INCOME
OF A TAXABLE
PARTNERSHIP

Subject to FT BUT if the recipient is a DC or a RFC, its


exempt
Cash Dividends given by DC to RC. NRC and RA is
subject to 10% FINAL TAX due to the following reasons:

1.

To ensure collection on the cash dividends otherwise


there would be no assurance that the TP will report it in
his ITR

2.

The BIR will have a hard time monitoring compliance


since there are numerous SHs

3.

Shifting the responsibility to the corporation as the


withholding agent easier collection since there are fewer
Corps than SHs

4.

Taxes are made available to the govt in the earliest time


possible.

If the source is a TAXABLE PAT the share is subjected


to a FT. if the source is a TAX EXEMPT PAT, according
to the last paragraph of Sec. 26, it must be reported and
included in the gross income of the TP.

Sec 24B (2) and Sec. 25A (2) - JOINT PAT etc are tax
exempt

EXCLUSIONS FROM GROSS INCOME: Sec. 32B


In a recent case, the SC held that exclusions are in the nature of Exemptions and therefore these
should be strictly construed against the taxpayer and liberally in favor of the Govt. So, this gives us this
probable bar Q because in the Recent case of PLDT vs. Laguna, the SC distinguished Exclusions from
Exemptions.
There are 2 Probable Bar Q here:
a) Exclusions vs. Exemptions; or

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 48 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b) Exclusions vs. Allowable deductions (Sec. 34)


In this case of PLDT vs. Laguna (2005 case), for the first time the SC made distinctions between
these 2, that's why this is a probable bar Q.

1. Exclusions---refers to the removal of otherwise taxable items from the reach of taxation (this is
the language of the US tax court as cited in the PLDT vs. Laguna case);
Exemptions--- refers to an immunity or privilege, freedom from charge or burden to which other
persons are subject to tax.
The court said, they are the same as to their effect or nature. That's why the old rule that would
apply to them is the principle of STRICTISSIMI JURIS. Exclusions and Exemptions must be
strictly construed against the taxpayer and liberally in favor of the Govt.
If that would not be asked, this would be the Q on this section-- What are the distinctions
between Exclusions from Gross Income (32 B) and allowable deductions from GI (Sec. 34)?
According to Sec. 61 of Rev. Reg. #2:
Exclusions from Gross income refer to a flow of wealth to the taxpayer which does
not form part of the GI because of the following reasons:
1) It is excluded by applicable laws;
2) Excluded by the tax code; or
3) Excluded by the Constitution.
On the other hand, allowable deductions refer to amounts, which the law allows to
be deducted from GI in order to arrive at taxable or net income
2. Another point of distinction is that Exclusions may pertain to the computation (this is material) for
purposes of determining GI, whereas allowable deductions is important for purposes of
determining net or taxable income and this must be deducted from GI to arrive at taxable
income. I repeat, exclusions may be material for purposes of determining GI because you have
to exclude it to arrive at GI.
3. Exclusions are something earned or received which do not form part of GI, while deductions are
something paid or incurred in earning GI.

Try to analyze the enumeration under Sec. 32 B. if you count, there may be 19 Exclusions from GI.
The Enumeration is not exclusive because there are other items not mentioned in 32 B but should be
excluded. For instance, in Sec. 24 & 25, there is that tax exempt interest income which we have
already cited and is not included in Sec. 32 B. This is Interest Income on Long term deposit. This is
not included in the exclusion under Sec. 32 B. You will find that in Secs. 24 & 25---if the term is 5
years or more, the interest income is tax exempt.
Keyword: L A G C I R M
1. Life insurance proceeds
2. Amount received as return of premium
3. Gifts, bequests, devises & legacies
4. Compensation for injuries or sickness
5. Interest exempt under tax treaty
6. Retirement benefits, pensions, gratuities, etc. ( favorite Bar Q)
7. Miscellaneous items

Under item 6, there are 6 exclusions ( a-f) and under items 7, there are 8 items there. So, 19
items all in all

Favorite Bar Q: Life insurance proceeds, Compensation for injuries or sickness, Retirement benefits,
pensions, gratuities, etc., and on item 7, just focus on 2 items (prizes and awards)

Item # 1. Life insurance proceeds:

Correlate this with Sec. 85E because there are 2 Q on this in the previous bar exams.
Sec. 85 E--- refers to the Rule regarding Exclusions or inclusions from Gross Estate of Life
Insurance Proceeds.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 49 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

When a beneficiary is designated, you ought to know whether it is revocable or irrevocable,


in which case you must really consider the rule under Sec. 11 of the Insurance Code.

In 1983 Bar: There are 3 Q on this:


a) Whether the proceeds received by the beneficiary may be excluded from GI. So it's a Q on
the Exclusion from GI;
b) Whether this should form part of the Gross Estate.
We have already discussed the tax implications of Life Insurance Premium. When the life
insurance policy is obtained by the employer for his employee, premiums may be paid by the ER.
And we have already extensively discussed the rule/tax implication of life insurance premium.
Just incorporate the rules that we have simplified.
Tax implications:
a) Life insurance premium may be taxable or not taxable to the employee; or
b) As regards the employer, it may be a deductible or non-deductible expense
For these tax implications, you must know the beneficiary designated in the life insurance
policy, and we have 2 assumptions:
1. Beneficiary is the heir, estate, executor or administrator of the EE
rd
2. Beneficiary designated is a 3 person, which may include the employer
Under assumption #1, this should always be excluded from the GI of the recipient whether
irrevocably or revocably designated.
rd

Under assumption #2---some examinees answered that, since its a 3 person, that should
be subject to tax. That is not correct. The provision says any beneficiary. There is really no
profit or gain here.
This just represents indemnification) and the insured has the right to
designate the beneficiary. So it is always excluded from the GI of the recipient irrespective of
the beneficiary designated in the life insurance policy.
Sec. 32B. Gross IncomeExclusions.
(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 other wise, but, if
such amounts are held by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income
Sec. 85. Gross Estate(E) Proceeds of Life Insurance--- To the extent of the amount received 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.
RULES under Sec. 85 E:
A) Included and therefore subject to estate tax under 2 cases:
1. If the beneficiary designated in the life insurance policy is the heirs, estate,executor or
administrator of the estate. Whether the designation is revocable or irrevocable, always
included if the beneficiary is the estate, executor or administrator of the estate
2. If a third person (including the employer) is revocably designated as beneficiary. If a 3
person is designated as beneficiary, the rule says excluded from gross estate

rd

B) Excluded and therefore Not subject to Estate tax under 2 cases:


rd
1. if 3 person is irrevocably designated as beneficiary
You see now the possible confusion. The designation of the beneficiary is
IMMATERIAL if the one designated as beneficiary is the heirs, estate, executor or
administrator of the estate. This is ALWAYS INCLUDED.
rd
But if the one designated is a 3 person, you ought to know or check whether the
rd
designation is revocable or irrevocable. If the designation of this 3 person as
beneficiary is REVOCABLE, you have to INCLUDE that, therefore subject to estate tax.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 50 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

rd

If this 3 person is IRREVOCABLY designated, EXCLUDED from the Gross Estate and
therefore not subject to estate tax.
2. if it partakes of a nature of Group insurance policy
I mentioned about Sec. 11 of the Insurance Code. Under the Old Insurance Code,
the rule was that designation is irrevocable. However, the rule now is REVOCABLE,
unless that right is waived.
Under Sec. 11 if the Insurance Code there is only
Irrevocable designation of the beneficiary if the life insurance policy expressly so
provides'. If it is silent, then it is presumed that the designation is revocable. So in A#2, it
rd
shall be included in the Gross Estate subject to Estate tax. But if a 3 person is]
designated as beneficiary and the policy is silent, you may consider the designation
revocable.
RULES ON PREMIUMS:
In Life insurance, premiums are paid. We say the following tax implications: To the employee, it
may be a taxable income, and to the employer, that may be an expense.
1. Under the assumption that it is the heirs, estate, executor or administrator of the estate who
received the premium as beneficiary, it is TAXABLE to the employee. It is taxable to the
employee and the rules are:
a. Under 32 A, taxable as compensation income if the employee is a rank and file
employee;
b. Under 32 B (m), taxable as Fringe Benefit if the insured employee is a managerial or
supervisory employee
Q: Can it be claimed as an expense by the employer?
Yes. It is a deductible expense (32 A (1, a (i) ) as other forms of compensation for
personal services rendered
rd

2. Under the assumption that a 3 person was the one designated ( and this may include the
employer), it is NOT TAXABLE on the part of the employee there being no benefit accruing
to the family or heirs.
To the employer designated as beneficiary, the proceeds he received upon the death of the
EE just represent a mere return of capital. This being the case, the employer should not be
allowed to claim the life insurance premium paid as a deductible expense.
SUMMARY RULES ON LIFE INSURANCE POLICY:
Example: A life insurance was obtained by an employer for his EE. The estate of the EE was
designated as the beneficiary. During the lifetime of the EE, premiums were paid by the ER.
Q#1. Upon the death of the EE, the proceeds shall go to the beneficiary designated in the
Policy. Will that form part of the GI of the beneficiary?
Answer: No. For purposes of exclusion, since Sec. 32 B (1) make no distinction as
regards beneficiary, the proceeds of life insurance policy are always excluded from the
Gross income of any recipient or beneficiary of the same. It is excluded whether the
beneficiary is the employer or the heirs, estate, executor or administrator of the estate.
Q#2: Will that be included in the Gross Estate of the decedent-EE? Is that subject to Estate
Tax?
Answer: Qualify: Under Sec. 85 E: if the beneficiary is the heirs, estate, executor or
administrator of the estate, it should always be INCLUDED in the Gross Estate whether
the designation is revocable or irrevocable. This will form part of the Gross Estate.
rd

rd

If the beneficiary is a 3 person, Sec. 85 E makes a qualification. If a 3 person is


the designated beneficiary, it is INCLUDED if the designation is revocable. It is
rd
EXCLUDED from the Gross Estate and therefore tax exempt if the designation of the 3
person is irrevocable
Q#3. Are premiums paid by the ER on the policy:
a. Deductible expense to the ER?

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 51 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Answer: YES. It is a deductible expense on the part of the ER if the designated


beneficiary is the heirs, estate, executor or administrator of the estate.
If the one
rd
designated as a beneficiary is the employer (considered as 3 person) that is not a
deductible expense
b. Taxable compensation income to the EE?
Answer: YES. It is taxable compensation income to the employee if the designated
beneficiary is the heirs, estate, executor or administrator of the estate. Since the
beneficiary designated is the estate of the EE, then it is taxable. If the beneficiary
rd
designated is a 3 person ( that includes the employer), it is not taxable since it is just a
mere return of capital
SUMMARY:

TAX TREATMENT of LIFE INSURANCE PROCEEDS


BENEFICIARY DESIGNATED
EFFECTS

HEIRS, EXECUTOR OR
ADMINISTRATOR

EMPLOYER

EXCLUSION FROM THE GROSS


INCOME

EXCLUDED from the gross income of


the
beneficiary
(revocable
0r
irrevocable) --- it represents a
compensation for the loss of life, hence
a mere return of capital

EXCLUDED from the gross income


of the employer no realization of
profit and express exclusion by law.

rd

WON INCLUDED or EXCLUDED


IN THE GROSS ESTATE

INCLUDED- whether the designation is


revocable or irrevocable( sec. 85 E)

considered a 3 person
QUALIFY:
IRREVOCABLE -- EXCLUDED
REVOCABLE INCLUDED

TAXABLE to the EMPLOYEE during


his lifetime Sec. 33B 10:

PREMIUMS PAID

MANAGERIAL or SUPERVISORY
employee (32 B (m)) taxable as
fringe benefits
RANK & FILE (32A) taxable as
compensation income

NOT TAXABLE on the part of the


employee-- there being no benefit
accruing to the heirs
NONDEDUCTIBLE EXPENSE to
the employer as the same just
represent a mere return on capital

DEDUCTIBLE EXPENSE to the


Employer

Item # 2. Amounts received as Return of Premium:


This is self-explanatory in the sense that, the same as that of Life insurance Proceeds, these are not
included or mentioned under Sec. 32 on Exclusions, but still it is excluded because this really does
not qualify as an income. It is just a return of capital. Return of premium means a repayment of a
part or the whole of the premiums paid.
Item # 3. Donations:
There are 2 kinds of Donations: Donation Inter Vivos and Donation Mortis Causa.
Distinctions:
1. Donation Inter Vivos- the giver is the donor
Donation Mortis Causa-- the giver is the testator or decedent
2. Donation Inter Vivos-- the recipient is the donee
Donation Mortis Causa-- recipient are the heirs or beneficiary

Q: If a donation inter vivos is given, what are the tax implications?


Sec. 32 B (3) laid down just one of the tax implications.
As far as the donor is concerned----subject to donor's tax

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 52 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

As far as the donee is concerned--1. Not subject to donee's tax as donee's tax was abolished by PD 69 (favorite # of
my good friend Prof. Sandoval... Prof. Portfolio).
2. This is not also subject to income tax because the same, according to Sec.32 B
(3) is excluded from Gross Income
Q: Tax implications of Donation Mortis Causa
As far as the testator is concerned--- subject to estate tax
As far as the donee (heirs of the decedent or beneficiary) --1. Not subject to donee's tax as donee's tax was abolished by PD 69
2. This is not also subject to income tax because the same, according to Sec.32 B
(3) is excluded from Gross Income

1994 Q#2b: Are donations inter vivos and mortis causa subject to Estate Tax?
Answer: It is donation mortis causa that is subject to Estate tax. Donations inter vivos are
subject to donor's tax.

Q: What about the implication in so far as the donee is concerned?


Answer: At present, the right to receive donation is not subject to any tax

SUMMARY:

TAX TREATMENT or IMPLICATION


MODE OF DONATION

GIVER

RECIPIENT
Donee is NOT subject to donees tax since
Donees tax has been abolished by PD 69

INTER VIVOS

Donor is subject to donor's


tax

The same is not subject to income tax since


donations are expressly excluded from the gross
income by the NIRC Sec. 32 B 3)

Heir/s NOT subject to inheritance tax since


Inheritance tax has been abolished by PD 69
MORTIS CAUSA

The estate of the testator is


subject to Estate Tax

NOT subject to income since the same are


expressly excluded from the gross income by the
NIRC ( Sec. 32 B 3)

Item # 4 Compensation for Injuries or Sickness:

In 2003 Q#5: Examinees were asked whether the following is subject to Income tax:
a. Hospitalization expenses
b. Cost of repair of damaged vehicle; and
c. Moral and Exemplary damages

Q: X, while driving home from his office, was seriously injured when his automobile was bumped
from behind by a bus driven by a reckless driver. As a result, he had to pay P200,000 to his
doctor and P10,000 to the hospital where he was confined for treatment. He filed a suit against
the bus driver and the bus company and was awarded and paid actual damages of 300,000 (for
his doctor and hospitalization bill), P 100,000 by way of moral damages for what he had to pay
his attorney for bringing the case to court. Which, if any of the awards are taxable as income to
X and which are not? Explain
a. Hospitalization expenses---this is tax exempt because this represents compensation for
injuries sustained ( this is the one covered by Sec. 32 B 94)
b. Cost of repair of damaged vehicle--- not taxable. There is really no income here. So,
compensation for the amount spent for the repair of the car is not subject to tax
c. Moral and Exemplary damages--- Prof. Domondon advanced the view that moral
damages and exemplary damages are taxable (he may have changed his view because
when we answered this in the UPLC, we unanimously suggested that moral and exemplary
damages are tax exempt.) He made mention about the definition of Gross Income under Sec.
32 A derived from whatever source. He pointed out that there are really no clear

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 53 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

exemptions from Gross income and there are really no clear exemptions from income under
Title II.
The Committee on taxation in UPLC always answers this Q as not subject to tax. Under the
NCC Art. 2197 (you must master this) & 2229 (Exemplary damages) you should know the
grounds for recovery of damages. There are 9 grounds under 2217 (you should memorize
this article):
1. mental anguish
2. serious anxiety
3. wounded feeling
4. besmirched reputation
5. physical suffering
6. social humiliation
7. moral shock
8. fright
9. similar injury
The enumeration is not really exclusive because there are other grounds in the subsequent
sections.
If we tax moral damages, you can just imagine the effect, taxing any of the 9 grounds for
which moral damages are awarded. There is really no gain or profit realized, how can we tax
that? We shall not tax that, otherwise, we are in effect taxing the grounds for which moral
damages may be awarded. The is the same as in the case of exemplary damages under
2229. Under 2229, there are 2 grounds mentioned there: 1) by way of example; and 2) as
deterrent for the commission of similar offense. If we tax that, we are in effect taxing the
grounds laid down under Art. 2229.
The correct answer is, and it is a unanimous decision of the members of the Committee in
Taxation of UPLC---- it should not be subject to tax.

Q: What about the award representing loss income or earnings or profit? He was hospitalized &
wasnt able to earn his 2 months salary amounting to, let us say P 30,000. This P 30,000 is
included in the judgment rendered by the court. Is this subject to tax or excluded from Gross
income?
Answer: What is clear here is that it is compensation for injuries or sickness that is not
taxable. There is an opinion expressed by 1 author that it should not be taxed because it is
the result of that injury or hospitalization. I mentioned this in my book (as revised, p. 17)
citing that opinion of tax experts of U.S. It is there in 1961 that the opinion is that this award
representing loss income or profit is the one taxable. So, all damages that may be included
in the judgment of the court are tax exempt EXCEPT that amount representing loss of
income. That is the one that is taxable.

Item # 6 Retirement Benefits, Pensions, Gratuities, etc:

You should try to distinguish Paragraph (a) from paragraph (b). Par (a) refers to tax exempt
retirement benefits, pensions, gratuities, etc. Par (b) is popularly known as separation pay.
Item (a) refers to that retirement benefits received from private firm, whether corporate or
individual. The Tax Code is strict on this, in that it provides 4 requisites for exemption or
exclusion. But if you try to refer to item (b), there is only 1 requisite for exemption, that is, if it is
received beyond the control of the employee or official.

In Par. (a) there are 4 Requisites for exemption:


1. There must be BIR approved retirement plan ( RA 4917);
2. The retiring employee or official must be at least 50 years of age;
3. The retiring employee or official must have rendered at least 10- years of service
4. This can be availed of only once. Subsequent retirement that may be received from a private
employer is no longer tax exempt.

Compare the provisions:


In Par. (b) the source of payment in the case of separation pay is immaterial. So, even if it is
paid under the approved BIR retirement plan or not, exempted. Also, Par. (b) does not
require a certain age to avail of the exemption, even if the employee is below 50 years of
age. Theres also no requirement on the length of service. Even if he rendered only 1 yr. or 2
yrs., if this benefit or pay is received on account or by reason beyond the control of the EE or
official, it is tax exempt.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 54 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Example of causes beyond the control of the EE or official:


a. death;
b. physical disability;
c. sickness or illness

1996 Bar: An employee died and his surviving spouse received P 100,000 separation pay
benefits from the ER. Is this amount subject to tax?
Others answered this Q in this way: taxable because under Sec. 32 A Gross income means
all income from whatever source.
This Q. is covered by item #6 (Sec. 32 B 6 (b)). This is a tax exempt separation pay and
should be excluded from the Gross Income of the surviving spouse.
So dont always refer to Sec. 32 A derived from whatever source. Consider also Sec. 32 B.
Sec.32 A is modified by Sec. 32 B. Yes, it is derived from whatever source but there are
items that are excluded from Gross Income under 32 B and a retirement benefit is one of
them.

Availed of only once--st


Illustration: Assume that A, received from his 1 employer 500,000. The employee is 50 yrs.
old, at least 10 yrs. of service. Payment was made under a BIR approved retirement plan.
He got employed in another ER and after rendering 10 yrs of service he retired from
employer #2 and received P300,000.
Can only be availed of once means that the subsequent retirement benefit received form
private firm is no longer tax exempt. It is the first retirement benefit that is covered by the
provision. So the P 300,000 received from the subsequent ER is already subject to tax.
Suppose the subsequent ER is a Govt. Say, the employee was employed by a Government
owned and controlled corporation (GOCC). Would your answer be the same?
No. All benefit he received, according to RA 8291 (Revised GSIS law), are tax exempt,
including retirement gratuity.
So, this limitation applies only to retirement benefit received from a subsequent private
employer. It does not apply to subsequent public employer as the benefits are still exempt;
not subject to tax under RA 8291
1999 Q# 10: A Co., a Philippine Corporation has two divisionsmanufacturing and
construction. Due to the economic situation, it had to close its construction division and layoff the employees in that division. A Co. has a retirement plan approved by the BIR, which
requires a minimum of 50 years of age and 10 years of service in the same employer at the
time of retirement. There are two groups of employees to be laid off:
a) Employees who are at least 50 years of age and has at least 10 years of service at the
time of termination of employment
b) Employees who do not meet either the age or length of service A Co. plans to give the
following:
For category (A) employees--- the benefits under the BIR approved plan plus an ex gratia
payment of one month for every year of service
For category (B) employees--- one month for every year of service
For both categories, the cash equivalent of unused vacation and sick leave benefits.
A Co. seeks your advice as to whether or not it will subject any of these payments to
Withholding Tax. Explain your advice

SUGGESTED ANSWER:
For category A employees, all the benefits received on account of their separation are not subject to
income tax, hence no withholding tax shall be imposed. The benefits received under the BIR approved
plan upon meeting the service requirement and age requirement are explicitly excluded from gross
income. The ex gratia payment also qualifies as an exclusion from Gross income being in the nature of
benefit received on account of separation due to causes beyond the employees control. (Sec. 32 B).
The cash equivalent of unused vacation and sick leave credits qualifies as part of separation benefits
excluded from gross income.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 55 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

For category B employees, all the benefits received by them will also be exempt from income tax,
hence not subject to withholding tax. These are benefits received on account of separation due to
causes beyond the employees' control, which are specifically excluded from gross income (Sec. 32 N)
JAP's ANSWER:
Majority of the examinees qualify their answer based on age & length of service; others also
answered regarding the monetized unused sick leave credits. They mentioned about the 10 day rule
and answered that sick leave credits are taxable. That is not correct.
Answer: All of these benefits are not taxable. Why? They overlooked the second sentence due to
economic situation. This is considered as a cause beyond the control of the employee or official. So,
when the benefit or separation pay received from the employer is brought about by causes beyond the
control of the employee or official, that is tax exempt. Disregard the source.
So, don't just take note of the benefits stated in the problem. Remember also the rule on separation
pay, it must be one received on account of cause beyond the control of the employee or official.
Separation pay as a result of voluntary resignation----this is subject to tax as the cause is not beyond
the control of the employee or official.
In 1 Bar exam: A govt employee received benefits from GSIS. He deposited the amount
received & it earned interests. Q: Is the benefit representing GSIS benefit taxable?
No. It is tax exempt. But as regards interest on this benefit, that is the one that is subject to
tax. This is the same also with SSS benefits. If the amount received is deposited in a bank &
it earned interest, such interest is subject to 20% FT. So, do not apply in this case the rule
that accessory follows the principal because of the rule that exemptions must be strictly
construed against the taxpayer and liberally in favor of the government.

SUMMARY:

ITEMS INCLUDED

CONDITIONS or PARTICULARS
REQUISTES: keyword FORT
a. retiring official must be AT LEAST 50 years of age
b. approved or availed only ONCE
c. REASONABLE private benefit plan approved by the BIR
d. 10 years in service

RETIREMENT BENEFIT FROM A


PRIVATE RETIREMENT PLAN

NOTE: If the employee is still on active employment with the


company, any and all the funds distributed from the fund to the
private member over and above his personal contributions shall
be taxable.
nd

If he has a 2 employer and he has received benefits from


the GSIS, the same shall be tax exempt.
The benefit shall be tax exempt, whether his employee is a
private firm OR the government PROVIDED the pay is given on
account of:

SEPARATION PAY

a. Death
b. Sickness
c. Other Physical disability
d. For any cause beyond the control of the official or employee
cessation of business operation due to continued losses
--- dissolution of the corporation
--- other authorized causes under the labor code
--- compulsory retirement
--- terminal leave pay

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 56 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

SOCIAL SECURITY BENEFITS,


RETIREMENT GRATUITIES AND
OTHER SIMILAR BENEFITS

BENEFITS FROM

SSS RA 8282

Tax exempt

GSIS RA 8291

Tax exempt

- received by RC, NRC and RA from foreign government agencies


and other private or public institutions.
US Veterans Administration by veterans residing in the Phils

COMMUTATION OR MONETIZED VALUE OF LEAVE PAY


IF it forms part of TERMINAL LEAVE PAY

VL

SL

NOT taxable

NOT taxable

IF given during the taxable year with NOT


retirement to:

GOVERNMENT EMPLOYEES
RANK-and-FILE

RR 10 2000
TAX EXEMPT

TAX EXEMPT

Exempt up to 10 days

Unused taxable

Item # 7 Miscellaneous Items:


I am confident that 1 or 2 on this item will be asked in this coming bar!
4 most important items: Paragraphs a, b, c & d

Par. (a) refers to investment in the Phils. By any of these:


1. foreign government
2. financing institutions controlled or financed by the foreign government
3. regional or international financing institutions established by the foreign government
What are the forms of investments that may be made by these 3 parties?
1. interest income from bank deposits
2. interest income from loan extended to the persons or citizens of the Phils
3. interest income from bonds, debentures and other certificate of indebtedness
4. dividend income because the investment may be in the form of shares of stocks
This now brings us to the case which has yet to be asked in the BAR
CIR vs. MITSUBISHI METAL CORPORATION (181 SCRA 214). I hope this would be asked this
coming bar
Export-import bank of Japan is a tax exempt financing institution under the RP- Japan Tax
Treaty. It extended 20 M loan to Mitsubishi Metal Corp., a Japanese corporation. The same amount
was used by Mitsubishi in extending loan to Atlas Corp., a domestic corp. The contract was quite
peculiar because it was denominated as sale, loan, then contract of sale. Loan in the sense that the
20M was extended as loan to Atlas. Sale because there is such an agreement to the effect that the
produce of this mining equipment concentrates shall be sold by Atlas to Mitsubishi for a period of 15
years. So, there are mutual stipulations, terms and conditions. The BIR claimed that Mitsubishi is
subject to income tax on the interest of the loan. This was protested by Mitsubishi and these were its
argument:
1. tax exempt because it came from a tax exempt financing institution- source of 20M is a
tax exempt entity (export-import bank of Japan)
2. tax exempt as Mitsubishi is an agent of export-import bank of Japan
BIR denied the protest or request for consideration.
The CTA ruled that Mitsubishi is
considered as an agent of export-import bank of Japan therefore it should not be taxed on that
interest income
RULING: As to argument #1, in a contract of loan, once the contract is consummated, the money
will become the exclusive money of the borrower (Art. 1953 NCC, opinion of Tolentino). Applying this,
when such contract of loan between export-import bank of Japan and Mitsubishi was consummated,
the 20M became the exclusive money of Mitsubishi. It ceased to be the money or property of exportimport bank of Japan. The export-import bank of Japan was never made a party to the contract of
loan executed between Atlas and Mitsubishi. The creditor/lender as clearly stated in the contract is
Mitsubishi.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 57 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

As to Argument #2, as to the argument that the interest is tax exempt as it was an agent of
export-import bank of Japan, the SC said there was no clear and convincing evidence that
Mitsubishi was agent of export-import bank of Japan. Since Mitsubishi failed to prove that it is
entitled to such exemption, the interest income from the loan is subject to tax.
In the ruling of the SC, it made mention of this and it is now found in Sec. 32 B (7, a)--Mitsubishi
is not one of those tax exempt entities under the Tax Code. Under the Tax Code, interest income
on loan is tax exempt only if the recipient is a foreign government or financing institution controlled or
financed by foreign government, or regional or international financing institutions established by the
foreign government. Mitsubishi is not one of these financing institutions.
The possible modification is: Mitsubishi is designed as an agent of export-import bank of Japan.
In the problem, it is clear that there is a principal-agent relationship. So, they are considered one and
the same if that is the assumption in the problem. The interest income is tax exempt.
But in the actual case as ruled by the SC, Mitsubishi was never made as an agent of exportimport bank of Japan. The examiner is aware of that. The source is a tax-exempt entity. That is the
argument of Mitsubishi. That is immaterial because in the contract of loan, upon consummation of
the same, that money will become the exclusive money of the borrower. You have to check in the
problem if the creditor or the lender is not a financing institution controlled or financed by a foreign
govt, etc. If not, the interest on the loan is definitely subject to income tax.
This case was the favorite forecast of Prof. Jose Nolledo who died 2 years ago. In 1994, he
mentioned that this is a sure Q. in taxation. Again in 1995, he made a prediction that this case will be
asked. It was not asked, until he died!!! hehehehe. Hope this will be asked in honor of his memory,
hehehe. Mr. Examiner, its about time that you ask this case!!!!

Par. (b) Income derived by the Government or its Political Subdivisions:


Sec. 32. Exclusions from Gross income-(B) 7b. income derived by the Government or its Political Subdivisions--- Income derived from
any public utility or from the exercise of any essential governmental functions accruing
to the Government of the Phils. or to any political subdivision thereof.
Sec. 27. Rates of Income Tax On Domestic Corporations-(C) Government owned or controlled corporations, agencies or instrumentalities-- the
provisions of existing special or general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned or controlled by the Government
EXCEPT the GSIS, SSS, PHIC, PCSO and the PAGCOR, shall pay such rate of tax
upon their taxable income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry or activity
There are 2 requisites for exemption:
a) source - it is an income derived from the exercise of essential governmental functions. If it is
derived from the exercise of proprietary function, that is subject to tax; and apply the
principle of Strictissimi juris
b) recipient - must be any of the following:
1. Government of the Phils. or Republic of the Phils.
2. political subdivision of the State (LGU)
It does not say national Government. It says Gov't of the Phil. Thus in MACTAN CEBU
INTERNATIONAL AIRPORT AUTHORITY vs. MARCOS (261 SCRA 667) the SC extensively
discussed the distinction between Govt of the Phils. and National Govt. The SC said these are
different. Gov't of the Phils is synonymous with Republic of the Phils but it is different from national
gov't. Gov't of the Phils (or RP) refers to instrumentality to which the political authority is exercised
through out the Phils. This may include autonomous regions and LGU. LGU is within the
contemplation of Govt of the Phils or RP.

1999 Bar: there was a Q regarding GOCC. Do government-owned and controlled corporations
form part of the Govt of the Phils (RP) or national govt?
It is believed that GOCC are within the contemplation of national govt. so that if the income
nd
is received by GOCC, since it is not covered by this (2 requirement), even if it is an income
derived from the exercise of essential Governmental functions, that may be subject to tax.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 58 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

But this is qualified by Sec. 27 C, as amended by RA 9337. Under Sec. 27 C, as amended,


it grants exemptions to 4 GOCC:
a) GSIS
b) SSS
c) PHIC
d) PCSO
PAGCOR is no longer a tax exempt GOCC. This is the amendment introduced by RA 9337
which took effect July 1, 2005. So, even if the recipient is not an LGU, as it is a GOCC,
exemption is granted to the 4 GOCC under Sec. 27 C. PAGCOR was deleted from the list.
Take note of Paragraphs C & D (favorite Bar Q).

Par. (c) Prizes and Awards:


Sec. 32. Exclusions from Gross Income(B) 7c. Prizes and Awards-- Prizes and awards made primarily in recognition of religious,
charitable, scientific , educational, artistic, literary, or civic achievement but only if:
(i) the recipient was selected without any action on his part to enter the contest or
proceeding; and
(ii) the recipient is not required to render substantial future services as a condition to
receiving the prize or award
The Tax Code is strict with regard to Paragraph C. There are 3 requisites in Par. C. while in Par. D,
there is only 1, sanctioned by their respective sports association (Phil. Olympic Committee (RA 7549)
3 requisites for exemption under Par. C:
1. prize must be received in recognition with SCRALEC ( scientific, religious, artistic, charitable,
literary, educational, or civic achievement);
2. No action on his part to enter the contest or proceedings;
3. Unconditional receipt of such prize---meaning that the recipient is not required to render
substantial future services as a condition to receiving the prize or award

2000 Q#10: Jose Miranda, a young artist and a designer, received a prize of P100,000 for
winning in the on-the-spot- peace contest sponsored by a local Lions Club. Shall the reward be
included in the gross income of the recipient for tax purposes? Explain
Answer: Yes it is in recognition of his artistic achievement but since he performed an act
he qualified as a contestant-- we pointed out that in the absence of the 3 requisites, the
100,000 received must be subject to tax. Exemptions must be strictly construed against the
taxpayer.

Par. (d) Prizes and Awards in Sports Competition


Sec. 32. Exclusions from Gross Income-(B) 7d 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 Phils or
abroad and sanctioned by their national sports association
Sec. 32 B 7d provides only 1 of the Rules under RA 7549. RA 7549 (which is the one you will find in
32 B 7d) provides that the recipient is exempt form income tax; it is excluded from Gross income.
There are other Rules which are not incorporated in the Tax Code; the other Rule is: the donor or
contributor of the award is not subject from donor's tax. If you read Sec. 101 A (3) (Note this as this
is a favorite Q under donor's tax), this particular contribution or donation is not covered, but it is still
exempt. The donor or contributor is exempt from donor's tax, not under the tax code but by virtue of
RA 7549.

Q: Is the contribution a deductible contribution?


According to RA 7549, it is a deductible contribution. But if you read Sec. 34 H (Exemptions),
it enumerates all those deductible contributions, and this is not one of them.
To reiterate, it is deductible not under the provisions of the Tax Code but because of RA
7549. It is RA 7549 that is the source of the Rule that the donor of the award is exempt from
donor's tax. It is also the law that allows the contributions as deductible from the Gross
income of the donor or contributor.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 59 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

1996Q#10: Onyoc, an amateur boxer, won in a boxing competition sponsored by the Gold Cup
Boxing Council, a sports association duly accredited by the Philippine Boxing Association.
Onyoc received the amount of P500,000 as his prize which was donated by Ayala Land
Corporation. The BIR tried to collect income tax on the amount received by Onyoc and donor's
tax from Ayala Land Corporation, which taxes, Onyoc and Ayala Land refuse to pay. Decide
Answer: The prize will not constitute a taxable income to Onyoc, hence the BIR is not
correct in imposing the income tax. RA 7549 explicitly provides that All prizes and awards
granted to athletes in local and international sports tournaments and competitions held in the
Philippines or abroad and sanctioned by their respective national sports associations shall
be exempt from income tax.
Neither is the BIR correct in collecting the donor's tax from Ayala Corporation. The law is
clear when it categorically stated that the donor's tax of said prizes and awards shall be
exempt from the payment of the donor's tax.

But this Q may be asked also: How about the amount of the contributions, can that be claimed
as deductible contributions?
Under RA 7549, YES. (You must state the # of the law to impress the examiner... 75
grade you must obtain; 49avoid this, mortal sin!)

So to summarize, in paragraph d, the following are exempted:


1. the recipient of the awardexempt from income tax
2. contributor/donor of the award-- exempt from donor's tax
3. Contributor/donor is allowed to claim the same as deductible contribution. This is based
on RA 7549 and not on the Tax Code.

Under the Old Tax Code, the following items were EXCLUDED from Gross Income:
a) Informer's reward
Under the Present Tax Code (as amended by RA 8424 Sec. 282), this informer's reward
is now subject to 10% FT (effective Jan. 1, 1998);
b) Interest income on Govt. securities
This has been deleted from the enumeration under the Present Tax Code. This means
that it is now taxable
c) Interest income from bank deposit maintained under the Expanded Foreign Currency
Deposit System
Under the Old Tax Code, it made no distinctions, irrespective of the recipient or
depositor, tax exempt. Under the Present Tax Code, if it is received by Resident
Taxpayer it is now subject to 7.5% FT. It is exempt only if the recipient is a Nonresident
taxpayer (Individual or corporate)

SUMMARY ON MISCELLANEOUS ITEMS:


INCLUDES:
a. Foreign Government
b. Financing Institutions controlled by FX Govt
c. Intl or Regional FI established by FX Govt
INCOME DERIVED BY FOREIGN
GOVERNMENT FROM THEIR
INVESTMENTS IN THE PHILS

REASON:
To lessen the burden of foreign loans inasmuch as the interest of these
loans are, by contractual arrangement, borne by domestic borrowers.
COVERS THE FF INCOME GIVEN BY (a-c): INTEREST INCOME
1. from bank
2. on loan granted
3. on certificate of indebtedness on banks issued in F/O
4. Dividend income received from DC stock investment income

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 60 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

to be exempted it must be derived from GOVERNMENTAL FUNCTIONS

INCOME DERIVED BY THE GOVT


OR ITS POL. SUBD.

XPN: Proprietary income of the ff. are tax exempt


1. GSIS
2. SSS
3. PHIC
4. PCSO
NOTE: PAGCOR is no longer tax exempt RA 9337 Expanded VAT
REQUISITES:
a. received in recognition of SCRA LEC scientific, charitable, religious,
artistic, literary, educational and civic achievement.

PRIZES and AWARDS

b. recipient was selected without any action on his part to enter the contest
or proceeding
c. recipient is not required to render substantial future services as a
condition of receiving the prize
Under RA 7549, the venue is immaterial BUT the sports competition must be
sanctioned by the Philippine Sports Commission.

PRIZES and AWARDS IN SPORTS


COMPETITIONS

13

TH

MONTH AND OTHER


BENEFITS

GAINS FROM SALE OF BOND,


DEBENTURES OR OTHER
CERTIFICATE OF INDEBTEDNESS

TAX TREATMENT:
exempt from income tax
donor or contributor is exempt from donors tax under RA 7549
he may claim the same as a deduction in addition to those available
under Sec. 34H
Total exclusion shall not exceed P30,000

- maturity of MORE than 5 years

GAINS FROM REDEMPTION OF


SHARES IN MUTUAL FUND

V.

CORPORATE INCOME TAX:


These are the provisions that apply to corporate taxpayers:
1) Under Sec. 22B---you'll find therein the definition of Corporate taxpayers; the meaning of
corporation for purposes of income tax;
2) Secs. 27,28,& 29-- these provisions lay down different corporate rules
3) Sec. 30-- enumerates 11 tax exempt corporations
4) Sec. 34-- allowable deductions from GI of Corporate Taxpayers
Tax Exempt corporations: Sec. 22B enumerates 3 tax exempt associations or entities. Add those tax
exempts GOCC under Sec. 27 C, as amended by RA 9337. As amended, there are 4 tax exempt GOCC.
Also add Sec .30 (11 items). So, all in all, there are 18 tax exempt corporations
Sec. 22 B -- Definition of Corporation for purposes of Income Tax--- Corporation includes partnership no
matter how created or organized.
There are 6 cases cited by the SC on this and there is also a BIR
Ruling on this.
No matter how created or organized:
EVANGELISTA vs. COLLECTOR (104 Phil 42): According to the SC, the phrase simply means that
corporations may be formed or organized in writing, orally or in a public instrument. It requires no
particular form under which a partnership may be formed or organized.
RALLOS vs. RALLOS (?): 2 persons made a contribution to a common fund for the purpose of
engaging in a profit oriented business. So, there was a contribution to a common fund. Remember

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 61 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

that under the law on Partnership, a partnership is formed or created or organized if these 2
requisites concur:
1. contribution to a common fund; and
2. Intention to divide profit among themselves.
In this case, they have the intention to divide the profits among themselves.
These persons,
according to the SC, formed a taxable unregistered business
GATCHALIAN vs. COLLECTOR: 15 persons made a contribution to a common fund to buy a
sweepstakes ticket and agreed to divide the winnings among themselves. The SC held that there
was a partnership formed.
REYES vs. COLLECTOR (1968 case): Father & son purchased a building and put up a business.
They agreed to divide the profit. Then an administrator was appointed. The SC said that there was a
partnership created. These father & son formed a taxable unregistered partnership.
OA VS. CIR (45 SCRA 74; Favorite Bar Q; 1972 case-asked 1997 bar): As a rule, co-ownership is
tax exempt because the co-owners formed the co-ownership not for profit but for common enjoyment.
One of the causes that give rise to co-ownership is inheritance. The heirs are considered co-owners
and in that stage, they cannot be considered as unregistered taxable partnership. Here in Oa, after
partition, the co-owners made a contribution to a common fund out of their inherited properties. They
allow one of them to administer the properties and the surviving spouse made use of these funds
and made investments in businesses that produced income. The SC said, this co-ownership was
converted into a taxable unregistered partnership because:
a) The heirs made a contribution to a common fund; and
b) There was an intention to divide the profits among themselves.
Co-ownership may be converted into unregistered taxable partnership once the heirs made a
contribution to a common fund with the intention to divide the profit among them. The SC held that
the circumstance of the case would reveal that there was an intention to divide the profits among
themselves because they authorize the surviving spouse to administer the property and make use of
these to invest in a profitable business.
Cases which are yet to be asked in the BAR:
OBILLOS, Sr. vs. CIR (139 SCRA 436) ---OBILLOS DOCTRINE - Obillos, Sr. entered into a contract
with Ortigas Corp. The agreement stipulates that the parcels of land be divided into residential
houses. But the children found the construction as expensive so they decided to sell the parcels of
land. The BIR claimed that they formed a Partnership No matter how it is created.
The SC said that there was no partnership created because it was just an isolated transaction.
From the very beginning, the children never intended to form a partnership. There was really no
intention to divide the profits among themselves.
PASCUAL vs. CIR (166 SCRA 506; 1988 case): The SC ruled that there was no taxable
unregistered partnership formed or organized. Pascual acquired 5 parcels of land. They sold these
parcels of land for a profit. The BIR claimed that there was a partnership formed. The SC ruled that
there was no partnership formed or organized. The SC cited Art. 1769 B of NCC, these are the tests
to determine the existence of a partnership---it says mere sharing of gross returns does not of itself
establish partnership. Here, they shared in the gross returns, not in the net profit. There was that
absence of intention to divide the profits among themselves.
These to my mind, are the probable bar Q's. Oa case was already asked but it may be asked again.
Obillos and Pascual are the most probable Q.
BIR Ruling 87-102 (April 8, 1987):
If the heirs who inherited a property, an apartment in this case, whereby rent income is derived
on such property, continue to engage in the business (rental) and with intent to divide the rentals
among themselves, then they shall be taxed as a taxable unregistered partnership
TAX EXEMPT:
Sec. 22 B- 3 tax exempt entities or associations:
1. General Professional Partnership;
2. Joint venture for the purpose of undertaking construction projects;
3. Joint consortium with the govt for the purpose of engaging in petroleum and other energy
operations

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 62 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Sec. 27 C-- 4 tax exempt GOCC's:


4. GSIS;
5. SSS;
6. PHIC;
7. PCSO
Sec. 30- 11 tax exempt corporations:
8. labor horticultural organization not principally formed or organized for profit;
9. Mutual savings bank not for profit but organized for mutual purposes;
10. Beneficiary society or fraternal society. It is organized for the benefit of the members;
11. Non-profit cemetery formed or organized for the benefit of the members;
12. Non-stock corporations which must not be organized or formed for gain or profit;
13. Business League, Board of Trade or Chamber of Commerce, formed or organized for the
promotion of collective business interest (Manila Stock Exchange is not qualified under this
particular exemption);
14. Civic League formed or organized for the promotion of the general welfare of the people
15. Non-stock, nonprofit educational institution;
16. Government educational institution;
17. Farmers cooperatives; and
18. Fruit Growers Association
You need not memorize these. What is important is that you are familiar with the characteristics or
features of these tax exempt corporations.
Q: Why are these corporations tax exempt? The reasons are: 1) they are not really organized for
profit. They may be organized for charitable, educational, religious, philanthropic and other purposes.
These are really non-stock corporations; 2) No part of the income of these corporations inures to the
benefit of a particular member or individual.
But Memorize the last paragraph of Sec. 30. This may be asked again!
Sec. 30 last paragraph: 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

2002 Q#6: XYZ Foundation is a non-stock, non-profit (NSNP) association duly organized for
religious, charitable and social welfare purposes. Last January 3, 2000, it sold a portion of its lots
used for religious purposes and utilized the entire proceeds for the construction of a building to
house its free Day and Night Care Center for children of single parents. In order to subsidize the
expenses of the Day and Night Care Center and to support its religious, charitable and social
welfare projects, the Foundation leased the 300-square meter area of the second and third floors
of the building for use as a boarding house. The foundation also operates a canteen and a gift
shop within the premises, all the income from which is used actually, directly and exclusively for
the purposes for which the Foundation was organized.
A. Considering the constitutional provision granting tax exemption to Non-stock corporations
such as those formed exclusively for religious, charitable and social welfare purposes,
explain the meaning of the last paragraph of said Sec. 30 of the 1997 Tax Code which states
that 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
B. Is the income derived by XYZ Foundation from the sale of a portion of its lot, rentals from its
boarding house and the operation of its canteen and gift shop subject to tax? Explain

SUGGESTED ANSWER:
A. The exemption contemplated in the Constitution covers real estate tax on real properties
actually, directly and exclusively used for religious, charitable and social welfare purposes. It
does not cover exemption from the imposition of the income tax which is within the context of
Sec. 30 of the tax code.
As a rule, Non-stock, non-profit corporations organized for
religious, charitable and social welfare purposes are exempt from income tax on their

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 63 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

income derived by them as such. However, if these religious, charitable and social welfare
corporations derived income from their properties or any of their activities conducted for
profit, the income tax shall be imposed on said items of income irrespective of their
disposition (Sec. 30; YMCA vs. CIR)
COMMENT: Since this was asked already, the possible problem may be based on that case of
CIR vs. YMCA, which is a case wherein the SC construed the meaning of the last paragraph of
Sec. 30.
When it says NOTWITHSTANDING, it implies that these 11 tax exempt corporations are
not totally exempt from corporate income tax because their income derived from their properties
real or personal, regardless of the use of the same is subject to tax because their income
derived from activities conducted for profit irrespective of the use of the same is subject to tax.
They are not totally exempt form their corporate income tax because they can be taxed on their
income derived from the sale of their properties, real or personal. They can be taxed on their
income derived from the lease of their properties, real or personal. They can be taxed on the
interest income from bank deposit. With more reason, income derived from businesses. YMCA
falls under paragraph E, Non stock corporations, non stock associations, charitable, religious
and educational organizations.

CIR vs. YMCA (298 SCRA 83):


4 arguments of YMCA in claiming that it is a tax-exempt corporation or association:
1. it invoked the constitutional exemption under Art. VI, Sec. 28, par. 3. it says that
religious, educational and charitable institutions are exempt from taxation;
2. YMCA, under Art. 14 Sec. 4(3), claimed that it is a NSNP educational institution
therefore exempt form tax;
3. YMCA argued that it could not be taxed because it did not engage in a business;
4. Such an amount shall never be used for business or for gain. It shall be used to carry
out its non-profit purposes which are religious, educational and charitable purposes.
RULING:
1. Art. VI, Sec. 28 (3) applies only to property tax. The tax subject matter of the case is an
income tax and not property tax.
2. YMCA is not qualified as a NSNP educational institution.
The SC scrutinized the
provisions of the Articles of Incorporation and By Laws of YMCA and ruled that it did not
possess the features of NSNP educational institution
3. Yes it did not engage in a business. The leasing of such property cannot be considered
as business. It is an isolated transaction. But this is where the provision in Sec. 30 last
paragraph saying from any of their properties, real or personal or from any of their
activities conducted for profit, came into play.
The SC construed that: whether for profit or not, that income derived from the sale
of real property, lease of real property including personal property is subject to tax. So,
this is now settled that such phrase for Profit does not qualify this provision. But the
basis of this, the SC said: Yes, that may be considered as isolated transaction; yes, we
believe that YMCA is not engaged in a business, but the law says from any of their
properties, real or personal. It is immaterial whether such transaction is for business or
not, as even isolated transaction is covered by this.
Transactions covered:
a) Income derived from the sale of real or personal properties received by any of Corp.
under Sec. 30;
b) Income derived from the exchange of real or personal property even for isolated
transaction;
c) Income derived from lease of personal or real property or in other words, Income
derived from dealings in property. Recall Sec. 32 A(3)---one of the items that will
form part of the GI is gain derived from dealings in property. Here, it made mention
of Real or Personal property as the source whatever the transaction-- be it in the
nature of sale, exchange or lease of property.
So: 1) the income derived from the sale of real or personal property of any of these
corporations under Sec. 30 is subject to tax; 2) the income derived from the exchange of
real or personal property of any of these corporations under Sec. 30 is subject to tax; 3)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 64 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

the rent income from real or personal property of any of these corporations under Sec.
30 is subject to tax; 4) as well as interest income from bank deposit is subject to 20 FT.
The SC said in this case that if YMCA derived income from deposits in the bank, that
interest income is subject to 20% FT. Can it argue that the interest income shall be used
to carry out its educational, religious and charitable purposes? No. It brings us to the last
argument:
4. That it being a religious educational charitable institution, the income (rent income) shall
be used in furtherance of its purpose. It is clear in the last paragraph of Sec. 30
regardless of the disposition made on such income. Disposition also means use. So,
even if this income (rent income or income derived from sale or exchange of real or
personal property or interest in bank deposits) shall be used in furtherance of non-profit
purposes, that is not an argument because the tax code categorically says regardless
of the disposition; irrespective of use, that income is subject to tax.

Q: What about NSNP educational institution, is this covered by the last paragraph of Sec. 30
(Par. H)?
There is Constitutional infirmity. Don't apply the last paragraph of Sec. 30. What should be
applied in so far as NSNP educational institution is concerned is Art. 14 Sec. 4(3) of the
Constitution. It says as long as the revenue (income) shall be ACTUALLY, DIRECTLY AND
EXCLUSIVELY used for educational purpose, EXEMPT. But here in Sec. 30, even if such
income is actually, directly and exclusively used for educational purpose, it is still subject to tax;
source of the income is immaterial
This Constitutional exemption must prevail over Sec. 30.
amended as not to apply to NSNP educational institution.

Sec. 30 last par. must be

Q: A govt educational institution received interest from its bank deposits.


#1. Is this subject to 20% FT?
YES. The last Par. Of Sec. 30 squarely applies to Gov't educational institutions. Gov't
educational institutions cannot argue that it shall be used for educational purpose.
#2. Would your answer be the same if the educational institution is a NSNP educational
institution?
The answer would not be the same because as long as there is proof that the interest
income shall be actually, directly and exclusively used for educational purpose, that is
exempt from the 20% FT.

In par. E, it covers non-stock corporations. It includes charitable and religious institutions. YMCA falls
under this. It is a charitable and religious corporation based on its By-laws. So, the last par. of Sec.
30 squarely applies to it.

Q: Is the interest income received by YMCA subject to 20% FT? YES. It is a charitable and
religious institution but it is not considered a NSNP educational institution.

Educational Institutions are favorite Bar Q. You should know the Rules on these (Rules under Title II;
Exemptions from property taxation; tax treatment on donations that may be given to these
educational institutionsinter vivos or mortis causa)

Classification of educational Institutions:


1) Private educational institution;
2) Government educational institution;
3) Non-stock, non-profit (NSNP) educational institution

There may be 4 Q on these educational institutions:

Q#1. Are these educational institutions subject to income tax? (be guided by Sec. 30);
Answer: As regards Private educational institution--- Sec. 27 B imposes 10% preferential
corporate rate or 35% as amended effective July 1, 2005. The 10% preferential corporate

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 65 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

rate applies if the income from unrelated trade, business or activity is NOT MORE THAN
50% of its total income. It means that if it is more than 50% of its total income, apply the 35%
corporate rate.
As regards Gov't educational institution--- it is not subject to income tax (Sec. 30 (I)).
As regards NSNP educational institution--- Under Art. 14 Sec. 4 (3) of the Constitution, it is
exempt from income tax, property tax and customs duties. The constitutional exemption from
income tax is reiterated under Sec. 30 H.
Q: What is the importance of knowing whether it is a constitutional exemption or a statutory
exemption? If a law is passed by Congress withdrawing this exemption (Sec. 30 I), is that a
valid law?
YES. The power to grant an exemption carries with it the power to withdraw the same.
Would that be the same if the withdrawal pertains to NSNP educational institution?
That is UNCONSTITUTIONAL. The exemption is by virtue of a constitutional provision.
Yes, the power to grant an exemption carries with it the power to withdraw the same but
it cannot withdraw Sec. 30 H because it is just a reiteration of a Constitutional provision.
It is the Constitution that grants the exemption

Q#2. Are the properties of these educational institutions subject to property tax?
Answer: Under Art. VI Sec. 28 (3) of the Constitution it makes no distinction. Provided it is
actually, directly & exclusively used for educational purposes
LUNG CENTER OF THE PHILS vs. ROSAS (433 SCRA 119): The SC construed
exclusively to mean solely. This now abandons the principle of incidental facilities. Meaning,
those incidental facilities may no longer be covered by this Constitutional exemption

Q#3. Are donations inter vivos given to these educational institutions subject to donor's tax?
(Sec101 A (b))
Answer: Private educational institutions are not one of those mentioned under Sec. 101A(3).
What it mentioned there is Non-stock Corporation that may include NSNP educational
institution and Govt. educational institution formed or organized as non-profit educational
institution.
When this was asked in the bar exams, we suggested that the examinee should state these
requisites for the exemption from donor's tax:
a. the donee must be a NSNP educational institution;
b. the institution must be governed by the Board of Trustees;
c. the Trustees receive no compensation;
d. the donation shall be used or devoted to the accomplishment of purposes stated in
the Articles of Incorporation;
e. Not more than 30% of the amount shall be used for administrative purposes
If the Government educational institution and NSNP educational institution possess
these requisites/ characteristics, the donor is not subject to donor's tax with respect to
donation inter vivos given to these Government educational institution and NSNP
educational institution

Q#4. Is donation mortis causa made in favor of these educational institutions subject to Estate
tax? (Sec. 87 (d))
Answer: YES, under Sec. 87, the institutions covered are:
a. transfers made in favor of social welfare organization;
b. given to charitable institutions;
c. cultural institutions
So, Educational institution is not one of them. Since it does not cover educational
institution, by the principle of strictissimi juris, any donation mortis causa given to private
educational institution, government educational institution and NSNP educational institution
is subject to estate tax.

SUMMARY:
EDUCATIONAL

(Sec 30 NIRC) SUBJECT TO:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 66 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

INSTITUTION

PRIVATE

INCOME TAX

PROPERTY TAX

10%
preferential
corporate rate if the
income from unrelated
business is not more
than 50% of the total
income; if more than
50%
then
normal
corporate rate of 35%;

DONOR'S TAX

ESTATE TAX

Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose

Donor is subject to tax


(Sec. 101 A (3) does not
include private
educational institution)

Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions

Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose

Donor exempt provided


that:
a. the donee/Govt
educational institution
is organized as nonprofit educational
institution;
b. the institution must be
governed by the Board
of Trustees;
c. the Trustees receive no
compensation;
d. the donation shall be
used or devoted to the
accomplishment of
purposes stated in the
Articles of
Incorporation;
e. Not more than 30% of
the amount shall be
used for administrative
purposes

Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions

Exempt provided:
actually,
directly
and
exclusively
used
for
educational
purpose

Donor exempt provided


that:
a. the donee is organized
as non-stock, non-profit
educational institution;
b. the institution must be
governed by the Board
of Trustees;
c. the Trustees receive no
compensation;
d. the donation shall be
used or devoted to the
accomplishment of
purposes stated in the
Articles of
Incorporation;
e. Not more than 30% of
the amount shall be
used for administrative
purposes

Donation is subject to
Estate tax as Sec. 87
does not include
educational
institutions

20% FT on income
from bank deposit

Exempt ;
GOVERNMENT

Interest income on bank


deposit---20% FT

Exempt ;
Interest income on bank
depositExempt
provided ADE used for
educational purpose
-certification from bank
that the account exists
-certification
of
the
educational purpose
-there must be a project
for educational purpose

NSNP

TAX TREATMENT ON CORPORATIONS


TAX RATE

GOVERNING PROVISIONS

MCIT

2% on Gross Income (DC, RFC)

Sec. 27E and 28A (2)

BPRT

15% of profits applied or earmarked for remittance

Sec. 28A (5)

TAX SPARING CREDIT

15%

Sec. 28B 5-b

IAE

10% IAE

Sec. 29

BPRT--- case is MARUBENI vs. CIR (177 SCRA 500)

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 67 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

TAX SPARING CREDIT (Sec. 28B5b):


Cases are: Procter & Gamble Phils. vs CIR (160 SCRA 560)
Wander Phils. vs. CIR ( 160 SCRA 573)
Procter & Gamble Phils. vs CIR (204 SCRA 377)

You should also be aware of the modification on the BOAC Doctrine.


BOAC DOCTRINE--- CIR vs. British Overseas Airways Corporation--- this case has been
modified by Sec. 28 A(3) as reiterated by RR 15-2002.

Minimum Corporate Income Tax of 2%:


Before the adoption of this, there was that prevailing practice of corporations that prompted Sen.
Enrile to introduce the new corporate rule. The prevailing practice to reduce their income tax
payments are:
Illustrations:
1) A Corp. had a GI of 10M. To understate its taxable income it claims 8M expenses not
supported by receipts. Because there was an overstatement of expenses, it resulted to only
2M taxable income. This 2M is not really the net income of the corporation. It does not
reflect the true income;
2) Understate GI to 8M. Even if true expenses is 8M, net taxable income is zero
3) It may also be possible that GI is 10M while expenses claimed is 12M. So it resulted to a net
loss of 2m.
Studies revealed that in reality, an examination of the books of the corporation may result in a
contrary finding. The problem here is overstatement of expenses which resulted in a net income not
clearly representing the true income; or resulted in a zero net income; or in a net loss. So, Sen.
Enrile introduced this new corporate rule.
Since it is impossible to eradicate this problem (which is really the evil of NIT), Sen. Enrile
suggested to adopt a rule that even if these corporations will overstate its expenses, it can still be
held liable to pay Corporate income tax. This is now the rationale behind this MCIT. From the
language of Sen. Enrile the rationale behind this MCIT is to forestall the prevailing practice of
corporations of over claiming deductions in order to reduce its income tax payments. So that even if
these corporations have no taxable income, it is still liable to pay 2% of its Gross income.
Corporations that have a net loss can still be held liable to pay 2% of its Gross income (answer to
2001Q#9---What is the rationale of the law in imposing what is known as the MCIT on Domestic
Corporation?)
You know the effect of this? Stockholders will no longer invest in a corporation because they are
after dividends. MCIT goes against the business motive on the part of the stockholders to form a
corporation. If every year a net loss arises and still it is required to pay tax, it goes against the
business motive of forming a corporation.

Situations covered by MCIT (Under RR 9-98):


1. No taxable income as the gross income is the same as expenses. Corporation is still liable to
pay 2% MCIT
2. If the corporation incurred a net loss, it is still subject to 2% MCIT under the Corporate Rule
as implemented by RR 9-98
3. MCIT applies if the actual corporate income tax applying the corporate tax rate is less than
2% of its gross income
Example: Actual corporate income tax is 300,000. 2% of the GI is 500,000. The MCIT therefore
that must be paid is not lower than 500,000. The new rule says not lower than 2% of its GI
since 2% of its GI is 500,000, the 500,000 is the amount to be paid by the domestic corporation,
and not the 300,000 actual corporate tax.
Suppose the actual is 500,000 and 2% of GI is 300,000. How much is the corporate income tax
that must be paid? Of course, 500,000. You apply MCIT (2% of Gross income) if the actual
corporate income tax is less than 2% of the Gross income.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 68 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Q: How do you counter the argument that MCIT is unjust or inequitable? Even if the corporation
has no taxable income or incurred a net loss, yet it is still required to pay 2% MCIT? Are there
equitable provisions?
YES under Sec. 27 E (2).What are these equitable provisions?
1. Corporation that incurred a net loss has a tax benefit. The excess of that 2% of GI over
the actual corporate income tax may be carried over by way of tax credit---this excess of
2% MCIT over the normal corporate income tax may be credited against actual
corporate tax in the next 3 succeeding taxable years

Illustration:
2000

2001

2002

Normal income tax

50,000

100,000

100,000

MCIT

200,000

50,000

60,000

Tax Payable (higher between MCIT & normal tax)

200,000

100,000

100,000

100,000

50,000

-0-

50,000

LESS: excess MCIT over normal income tax


(distribute the 150,000 (200,000 50,000) excess
MCIT for the next 3 succeeding TAXABLE year
NET AMOUNT of TAX PAYABLE

200,000

2. Another equitable provision is that MCIT applies only after 4 years from the
commencement of the corporate business and not in the first year of operation. If you
st
apply this in the 1 year of corporate existence---the year of adjustment of corporation
that would be unjust. (Sec. 27 E). The law assumes that corporations are already
th
financially stable on its 4 yr. Of operation.
3. This may be suspended under equitable exceptional circumstances (Sec. 27 E (3)):
a. suspended in the sense that upon the cessation of this cause, MCIT shall
automatically be applied;
b. prolonged labor dispute experienced by the corporation.
Equity dictates MCIT must be suspended. This is clarified by RR 9-98. What
is meant by prolonged labor dispute that will justify the suspension of this
MCIT? This must be brought about by a labor strike and have lasted for
more than 6 months and it must result in the shutdown of the business
operations
c. force majeure
this is construed under RR 9-98 to include FILES (Flood, Insurgency,
Lightning, Earthquake, and Storm)
d. Financial business reverses/losses brought about by FERT (Fire, Embezzlement,
Robbery, Theft)

2 Corporations covered by MCIT:


a. Domestic Corporations (Sec. 27 E); and
b. Resident Foreign Corporations ( Sec. 28 A2)
4 Tax Exempt Domestic Corporations from MCIT under RR 9-98:
a. Private or proprietary educational institution;
b. Non-profit hospital;
c. Depositary bank that operates under the Expanded Foreign Currency Deposit System
d. Enterprises or firms registered with:
1. PEZA pursuant to RA 7960;
2. registered with Bases Conversion Development Authority
Resident Foreign Corporations not subject to MCIT:
a. regional headquarters of multinational corporations doing business in the Phils
b. those engaged in offshore banking activities
c. international carriers which may include international airlines and international shipping
or vessel
d. Enterprises or firms registered with:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 69 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

1. PEZA pursuant to RA 7960;


2. registered with Bases Conversion Development Authority
2001 Q#9b: Is a corporation which is exempted from MCIT automatically exempted from the
regular corporate income tax? Explain your answer.
Answer: No. Corporations may be exempted from MCIT but are still subject to corporate
income tax. The MCIT is a proxy for the normal corporate income tax, not the regular
corporate income tax paid by a corporation. For instance:
a. Private or proprietary educational institution---exempt form MCIT but subject to
corporate income tax of 10% under Sec. 27 B depending on its dominant income
b. Non-profit hospital---exempt from MCIT but subject to 10% or 35% as the case may
be
c. Depositary bank that operates under the Expanded Foreign Currency Deposit
System-- exempt from MCIT but subject to 10% FT
d. Enterprises or firms registered with:
1. PEZA pursuant to RA 7960;
2. registered with Bases Conversion Development Authority
Exempt from MCIT but subject to 5% special corporate rate

Improperly Accumulated Earnings Tax of 10%: (new provisionhas yet to be asked in the Bar)

Q: Explain the rationale of this new corporate rule imposing what is known as IAET
Sec. 2, RR 2-2001Don't just try to memorize this. Understand the implication so that you
can easily recall the provision
Answer: In a domestic corp, if dividends are declared & distributed to stockholders, the
stockholders are subject to the 10% tax on these dividends. The source of these dividends is
earnings (Sec. 43 says unrestricted R/E). Let us say, the corporation Improperly
accumulates the corporate earnings. It withheld the declaration of dividends. The effect of
this is that the Govt was deprived of the right to impose tax on the dividends. Improperly
accumulated earnings means that the corporation is not justified under the circumstances.
Thus, according to RR 2-2201 Sec.2, it is imposed in the nature of a penalty to the
corporations for such improper accumulation of corporate earnings and as a deterrent to
avoidance of tax upon stockholders who are supposed to pay tax on that dividends. These
are the reasons for the imposition of IAET.

What do you mean by this? When is an accumulation improper?


Under RR 2-2201, this 10% improperly accumulated tax can only be imposed if there is
improper accumulation of corporate earnings. This brings us to the meaning of improper
accumulation of corporate earnings. Improper in the sense that it is not justified by
reasonable means. It is unreasonable and unreasonable means it is not necessary for the
business of the corporation under certain circumstances.
As clarified by RR 2-2001-- Prima Facie Instances of IAE includes the following:
nd
1. Based on 2 par. Of Sec. 43 of the Corporation Code--- stock corporations are
prohibited from retaining surplus profits in excess of 100% of its paid in capital. If
there's a violation of this, RR 2-2002 says that this may gave rise to IAE. This is a
classic case wherein the 10% tax may be imposed; (retention of surplus profits
exceeding 100%)
2. when substantial earnings and profits of the corporation were invested in unrelated
trade, business or activity of the corporation;
3. when such corporation made an investment in bonds and other long term securities
This is a good Q in the Bar---what are the 3 instances that may give rise to prima facie
evidence of IAE.
On the other hand, when is it proper to accumulate earnings in excess of 100% of paid in
capital?
Sec. 43 Corporation Code & RR 2-2001:
1. when justified by definite corporate expansion projects or programs approved by the
BOD; or

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 70 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

2. when the corporation is prohibited under any loan agreement with any FI or creditor,
whether local or foreign from declaring dividends w/o its/his consent, and such
consent has not yet been secured; or
3. when it can be clearly shown that such retention is necessary under special
circumstances obtaining in the corporation, such as when there is a need for special
reserve for probable contingencies;
4. to purchase land or building approved by the BOD
Note: there are 6 cases under RR 2-2001 but these 4 are the notable ones
Sec. 29. Imposition of improperly Accumulated Earnings tax-B (2) Exceptions-- the IAET as provided for under this Section shall not apply to:
a. Publicly held corporations;
b. Banks and other non-bank financial intermediaries; and
c. insurance companies

Since corporations covered are closely held corporations, not covered are the following:
Under Sec. 29--- 3 ( B-P-I):
1. Publicly held corporations;
2. Banks and other non-bank financial intermediaries; and
3. Insurance companies
In RR 2-2002, there are additional tax exempt corporations in addition to the 3 mentioned in
Sec. 29:
4. Taxable partnership
5. General professional partnership
6. Non-taxable joint ventures
7. Enterprises duly registered with the Philippine economic Zone Authority under RA
7916 and
8. Enterprises registered pursuant to the Bases Conversion and development act of
1992 under RA 7227.
These are the 8 corporations or entities which are not covered by the 10% tax on Improperly
accumulated earnings.

What was asked in the 2001 Bar is tax exempt or exempt corporations from MCIT. If this will be
the trend, the Q maybe corporations which are not subject to the 10% IAE (Sec. 29)

Branch Profit Remittance Tax of 15%: (Sec. 28 A(5)

2 amendments were introduced by RA 8424. These amendments refer to the basis and the
enterprise not subject to 15% FT

Sec. 28 A Tax on Resident Foreign Corporations-5 Tax on Branch Profit Remittances-- Any profit remitted by a branch to its head office
shall be subject to a tax of 15% which shall be based on the total profits applied or
earmarked for remittance without any deduction for the tax component thereof EXCEPT
those activities which are registered with the Philippine Economic Zone Authority. xxx
Provided, that interests, dividends, xxx received by a foreign corporation during each
taxable year from all sources within the Philippines shall not be treated as branch profits
unless the same are effectively connected with the conduct of its trade or business in the
Philippines

Questions that must be answered:


1. What constitutes branch profits subject to 15% FT?
2. What is the tax base of the 15 FT?
3. What are the tax exempt branch profits?

Q#1. MARUBENI CORP. vs. CIR (177 SCRA 500) 1999Q#9:


HK Co. is Hongkong company, which has a duly licensed Phil. Branch, engaged in trading
activities in the Phils. HK Co. also invested directly in 40% of the shares of stock of A Co., a
Phil. corporation. These shares are booked in the Head office of HK Co. and are not reflected
as assets of the Phil. branch. In 1998, A Co. declared dividends to its stockholders. Before
remitting the dividends to HK Co., A. Co. seeks your advice as to whether it will subject the
remittance to WT. No need to discuss WT rates, if applicable. Focus your discussion on what is
the issue

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 71 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

SUGGESTED ANSWER:
I will advise A Co. to withhold and remit the withholding tax on dividends. While the general
rule is that a foreign corporation is the same juridical entity as its branch office in the Phils, when,
however, the corporation transacts business in the Philippines directly and independently of its
branch, the taxpayer would be the foreign corporation itself and subject to the dividend tax
similarly imposed on non-resident foreign corporation. The dividends attributable to the Home
Office would not qualify as dividends earned by a resident foreign corporation, which is exempt
from tax.
JAPS ANSWER:
Branch Profits are gains or profits which are effectively connected with the conduct of trade
or business in the Phils. That is exactly the last provision of Sec. 28A5. The case of Marubeni
Corp. involves a direct investment by the mother corporation (Marubeni Japan) in the Philippine
corporation. It received income from such direct investment. Marubeni Japan claimed that that
should form part of the branch profit subject to this 15% FT.
RULING: It should not form part of the branch profits because such investment has no
connection with the trade or business conducted in the Philippines.
With this ruling of the SC, we can now say that to be considered as effectively connected with
the trade or business in the Philippines, it must be one that is made by the branch office. If the
investment is directly made by the mother corporation, the income or profit derived therefrom
cannot be considered as branch profit subject to this 15% FT. Don't be misled if in the problem
the mother corporation invoked that under the principal-agent relationship theory, that may be
considered as branch profit or profit of the branch office. Principal-agent relationship was
rejected by the SC. You cannot apply that theory which dictates that the profit of the mother
corporation is considered as profit of the agent and vice versa. It is not applicable because
there is a clear provision under the Tax Code. This has not been amended. That is, it must be
effectively connected with the conduct of trade or business in the Philippines. It may be
considered as branch profit if that investment is made through the branch office.
Q: How do you know whether the investment is effectively connected with the conduct of
trade or business in the Philippines?
You can determine it by inquiring with the SEC because a RFC is required to register its
business with the SEC. There you can check the nature of the business of the RFC.

Q#2. What is the basis of this 15% FT?


There are 2 decisions of the SC: City Bank case and Chartered Bank case. The SC based
its rulings on the old provision because these 2 cases were promulgated before the
effectivity of RA 8424. The SC said that the 15% branch profit remittance tax should be
based on profits actually remitted. This is no longer the rule. With the effectivity of RA 8424
amending that particular provision, the basis now is, it is no longer the amount actually
remitted, it is the amount applied or earmarked for remittance. So, in the problem, it is
possible that the amount applied or earmarked for remittance is 5M. Amount actually
remitted is 4M. This is the old rule which is deemed repealed by Sec. 28 A5.

Q#3. Tax exempt branch profits--- profits earned or derived by firms or enterprise registered
under Philippine Economic Zone Authority. Under the old Tax Code, it was Export Processing
Zone authority. But now, it is under PEZA.

Tax Sparing Credit:(Sec. 28B5b):


What is the situation contemplated therein?

Q#1: NRFC received a dividend from a Domestic Corporation. So, the income subject matter of
that provision is dividend income. Is that taxable?
YES, that is taxable.
If it is taxable, is it subject to corporate FT or regular corporate rate?
The tax rate is in the nature of a FT (It is mentioned in Sec. 28B5b, and it made
mentioned of Sec. 57Athis is the rule on Final Withholding tax---there are 26 items in
Sec. 57A and this is one of them). This means that this 15% corporate income tax is a
FT. Since it is a FT, the source (w/c is the domestic corporation) is considered as the
withholding agent of the Govt. And applying the Rule under RR 2-98, as w/holding agent,
it is the one legally obliged to pay the tax.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 72 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Q#2. Why is it that the corporate rate has been reduced to 15%? The SC in the case of Proctor
& Gamble Phils said that the purpose of the tax code is to attract/encourage foreign investment.
If we reduce the tax rate from 35% to 15%, is there a tax saved or spared?
YES. As described by the SC, this is known as the Tax Sparing Credit. So, this implies that
there is a tax saved.
Try to analyze, 35% would have been the applicable corporate income tax but Sec. 28B5b
reduced it to 15%. so, the tax saved percentage wise, is 20%.

Q#3. What is the condition for the imposition of this 15% reduced corporate rate?
A condition sine qua non to the imposition of reduced corporate rate is that the foreign Govt,
in the language of Sec. 28B5b shall allow tax credit on taxes deemed paid in the
Philippines by this foreign corporation.

Q#4. When it say shall allow tax credit on taxes deemed paid in the Philippines What does that
mean? Will these corporations obliged to present clear & convincing proof of the amount
actually granted as tax Credit?
This now brings us to the 2 cases decided by the SC on the same date (April 15, 1988):
1. Procter & Gamble Philis. vs. CIR (160 Scra 560)
2. Wander Phils. vs. CIR (160 SCRA 573)
These 2 cases were decided on the same date but were in conflict with each other. (the
jurisprudence has yet to be asked in the BAR)
nd

In the Procter case, according to Justice Paras of the 2 Division, there should be proof of
rd
the amount actually granted as tax credit. However, in the Wander case decided by the 3
division of the SC, did not make any ruling to that effect. It can be inferred from the
WANDER case that proof as to the actual amount granted as a tax credit need not be
necessary.
Prevailing Doctrine laid down in the MR of the Procter case (204 SCRA 377):
On Dec. 02,1991, acting on the MR filed by Procter & Gamble, SC En Banc ruled that
the Tax Code does not require actual grant. It says Shall allow, it did not say Actual
grant. The SC is absolutely correct in its ruling that since the Tax Code does not require
actual grant, proof of the amount granted as tax credit by the foreign Govt is enough.
According to the SC, this is an old provision, except for the tax base. This provision is the
same as the old tax code. And there is really no BIR Ruling requiring actual grant.
So, the prevailing view is No proof of the actual amount granted as tax credit. What is
only required is to prove that the foreign Govt allows such tax credit.
Q: How do you prove if the foreign Govt allows tax credit?
Refer to the Revenue Code of the foreign Govt. In fact, in the Procter case, there is a
provision in the U.S Revenue Code allowing tax credit to these American corporations.
Twice asked in the Bar: Whether or not the withholding agent (subsidiary corp., in this case
Procter Phils.) has the legal personality to file written claim for refund.
nd
In the Procter case, the 2 division of the SC said It is the mother corporation that has
a legal personality to file the written claim for refund because the mother corporation is
the one considered as the taxpayer. Since withholding agent is not considered as
taxpayer, it has no legal personality to file a claim for refund
rd
But in the Wander case, the 3 division said Withholding agent has the legal personality
to file a written claim for refund.
This issue was also resolved by the SC en banc in the MR of the Procter case on Dec. 2,
1991. The SC en banc ruled that the withholding agent is not only an agent of the Govt.;
it also an agent of the taxpayer. Since it is an agent of the taxpayer, it is technically
considered as a taxpayer. As such, it has legal personality to file a written claim for
refund. (The SC cited the case of Phil. Life Insurance vs. CIR 1 SCRA 15). It is an
agent of the Govt for the collection of taxes and it is an agent of the taxpayer for the
filing and payment of income tax.
SUMMARY:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 73 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

PROCTOR & GAMBLE


vs. CIR
April 15, 1988

WANDER PHILIPPINES vs. CIR


April 15, 1988

PROCTOR & GAMBLE vs. CIR MR


Dec. 2 1991

WHETHER THE WITHHOLDING AGENT OF THE MOTHER CORPORATION MAY


FILE FOR A WRITTEN CLAIM FOR REFUND
NO personality to file an
action
for
refund
because
only
the
mother corporation can
file the same since it is
the TP.

YES, since the agent is an agent of the


TP and likewise an agent of the
government. It is an agent of the mother
corporation since it is the one
responsible for the reporting of such an
income CONTROLLING DOCTRINE

YES - Under sec. 222, in case of failure


to remit the tax withheld, the agent shall
be liable for the same

PROOF NEEDED TO AVAIL OF THE TAX CREDIT

There must be proof of


the actual amount of the
tax credit by the FX
government.

Actual proof is not required.

Sustained Wander ruling the law didnt


mention actual the amount actually
allowed need not be proved, it would
suffice that under the Tax Code of the FX
Govt, it allows its corporation to claim tax
credit for the taxes paid to FX
governments.

BOAC DOCTRINE (take note of the modification as to tax situs):

Doctrine #1. Sources of income --- it reiterates the settled rule that the sources of income are PA-S (Property, Activity and Service). Recall the technical definition? Income is a gain derived
from CAPITAL, LABOR or BOTH labor and capital (Fisher vs. Trinidad (?). In BOAC case, it
just changed the terms: from capital to property; labor to services; but activity is added. This
nd
now brings us to the 2 doctrine

Doctrine #2. When can you say that an income is derived from sources within? It is also in this
case that the SC enunciated the rule that: An income is considered as income WITHIN when
the source of such income is undertaken within the Philippines. In the BOAC case, what is the
determinative test of that income considered within? It is an income derived from sources within
when the source of the same is made or conducted or undertaken in the Philippines. So, it is
considered income WITHIN if: the property from which the income is derived is situated in the
Philippines; or the activity from which such income is derived is undertaken in the Philippines; or
if the service is perform\med within the Philippines. Thats the meaning of that.

Doctrine #3. State-Partnership Theory - The Philippines has the right to tax the same because
it enjoys the protection of the Philippine Govt. It can be taxed if the particular subject of taxation
enjoys the protection of the Philippine Govt. If that subject of taxation does not enjoy the
protection of the Phil. Govt (Theory of Protection reiterated in the BOAC case), we cannot tax
that. So, in the BOAC case, the SC said that an income derived from the sale of transport
documents (airline tickets) can be taxed because such activity enjoys the protection of the Phil.
Govt. This now brings us to the tax situs of sale transport document.
In BOAC case, the tax situs is the place of sale or place of payment. This has been changed
or modified by Sec. 28 A (3). The composition of Gross Phil. Billings or the determinative test of
those revenues that would constitute Gross Philippine Billings has been changed by RA 8424.
Under the BOAC case, it is the place of sale or payment

NEW DOCTRINE: Now, it is the origin of passengers, baggage, cargoes and the like.

This in effect changed the tax situs under Sec. 42A (6)it speaks of sale of personal
property and this may include sale of transport document or intangible personal property. In
Sec. 42 A (6), the tax situs is the place of sale. This is modified by Sec. 28 A (3), that is, if the
subject of sale is a transport document, then consider the origin of the passengers, baggage or
cargoes. As amended by RA 8424, Gross Philippine Billings may now consist of revenue that
may be derived from the transport of passengers, cargoes and the like, irrespective of the place
of sale or payment.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 74 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

RR 15-2000 now declares that off-line international airlines cannot be taxed on the income
derived from the sale of transport documents where the passengers and cargoes do not
originate from the Phils.

1994Q#15: An off line international airline sold transport documents (airline tickets) in the Phils
to his clients and officers. Can this off line international airline be taxed from income derived from
the sale of transport documents?
Under the BOAC case, YES because while it is true that it rendered no service; no property
in the Philippines from which income may be derived; there was that ACTIVITY. There was
such activity undertaken in the Philippines. The SC said that the activity refers to the sale of
transport document. Since these transport documents are sold in the Philippines, payment
is made in the Philippines, the flow of wealth therefore, occurred within the Philippines.
The rule now has been changed. We can no longer tax this. The origin of the passengers,
baggage or cargoes must be here in the Philippines.

VI.

ALLOWABLE DEDUCTIONS & PERSONAL AND ADDITIONAL EXEMPTIONS:

The TP must point to some specific provisions of the statute authorizing the deduction and he must
be able to prove that he is entitled to the deduction authorized or allowed.

If a TP fails to deduct certain expenses for the taxable year, he cannot deduct them from the income
of the next year or any succeeding year.

The following are not allowed to claim deductions their tax base is GROSS INCOME:
a. NRA NETB
b. NRFC

EXCLUSION FROM GROSS INCOME


Section 32B

ALLOWABLE DEDUCTIONS
Section 34

refers to a flow of wealth which doesnt form part of


the gross income because they are excluded by
the TC or by special laws or the Constitution

refers to amounts which the law allows as deductions


from gross income in order to arrive at net income or
taxable income

material to arrive at gross income exclude such


items to arrive at gross income

necessary to arrive at net or taxable income

something earned or received which do not form


part of gross income

something paid or incurred in earning gross income

ALLOWABLE DEDUCTIONS

PERSONAL EXEMPTIONS

As to nature

in the nature of business expenses

in the nature of personal, living or family


expenses

As to purpose

is to recover or recoup the cost of doing


business

to recover the personal living and family


expenses paid or incurred during the
taxable year

may be claimed by individual and corporate


TPs
As to claimant

As to amount

As to kinds of
deductions or
exemptions

Except:1) NRA-NETB (Sec. 25 B, basis is GI);


2) NRFC (Sec. 28 B1, basis of 35% is
GI)
the actual expenses paid or incurred in the
conduct of trade, business or profession

Under Sec. 34 are classified into:


1) Itemized deductions
2) Optional Standard Deductions of
10% of GI

are granted only to individual TP except


NRA-NETB

arbitrary amounts granted to approximate


the personal expenses that may be
incurred by individual TP
Exemption may be classified into:
1) basic personal exemption;
2) addt'l personal exemption of P8k for
every
qualified
dependent,legitimate,
recognized illegitimate child or children not
more than 4

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 75 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

Sec. 35 D-- Rule on reciprocity regarding NRA-ETB:


It only applies to basic personal exemptions and should not exceed our maximum basic personal
exemption:
for married individual = 32,000
head of the family
= 25,000
single
= 20,000

Q: A non-resident foreigner was doing business here in the Philippines. He is married and has 2
minor children.
Check if the country of the foreigner allows basic personal exemption to the citizens of the Phils.
If no personal exemptions is granted by his govt, we cannot grant him any personal exemption.
But if his govt allows basic personal exemption to Filipino citizens, we can grant him basic
personal exemption but the amount must not exceed our maximum basic personal exemption.
Example: his country allows 25k basic personal exemption to married Filipinos. Then he is also
entitled to 25k basic personal exemption here in the Phils. If his country allows 40k as basic
personal exemption to married Filipinos in his country, he is only entitled to a basic personal
exemption of 32k as the amount is the maximum basic personal exemption granted by our
country to a married person.
the foreigner cannot claim additional exemption as regards his 2 minor children as the rule on
reciprocity applies only to basic personal exemptions

OSD of 10% of GI vs. Itemized deductions:

CLASSIFICATIONS OF DEDUCTIONS
ITEMIZED

As to proof

As to
claimant

OPTIONAL STANDARD

substantiated by receipts or documents

requires no proof of expenses or incurred because


allowable deductions is 10% of GI or gross
receipts

claimed by individual and corporate TP

claimed only by 3 individual TP:


a. RC
b. NRC
c. RA

Q: Suppose your friend asks you about these 2 deductions, would you advise him to avail of
itemized deductions or OSD of 10%?
Answer: It depends upon the circumstances of the case. If your friend has receipts or
documents which may substantiate all the expenses, it's better to avail of the itemized
deduction because he can claim more deductions. On the other hand, if he has no receipts
to substantiate the expenses incurred, he should avail of the 10% OSD.
No proof or
receipts are required to avail of the 10% OSD.

ALLOWABLE DEDUCTIONS FROM GROSS INCOME: Section 34


Business expense
Interest expense
Taxes
Losses
Bad Debts
Depreciation
Depletion of oil and gases wells and mines
Charitable and other contribution
Research and development
Pension trust
Additional requirements for deductibility of certain payments
Optional standard deduction
Premium payments on health and / or hospitalization insurance of an individual TP

COMMON REQUISITES OF DEDUCTIONS:


must be incurred in the exercise of the TPs the trade or business
incurred during the taxable year EXCEPT losses which may be turned over
must be substantiated by receipts

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 76 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

must be reasonable
must not be contrary to law, public morals or public policy

Favorite Bar Questions:


A) Sec. 34 A (1)-- Ordinary and Necessary expense
B) Sec. 34 B Interest Expense
C) Sec. 34 C-- Taxes (re: Tax Benefit Rule; asked 2003 Bar; Q was modified in 2005 Bar)
D) Sec. 34 D-- Losses
E) Sec. 34 E-- Bad Debt Expense

Tax Benefit Rule:(Sec. 34 C (taxes) and 34 E (bad debts):

What is the provision under the Tax Code which enunciates the Tax Benefit Rule? This applies to
two provisions under Sec. 34, paragraphs C and E. There is that common provision on income tax
benefit.

Paragraph C provides: shall be included in the gross income in the year of receipt to the extent of
the income tax benefit of said deduction. So, this refers to tax refund.

Paragraph E deals with recovery of bad debts. The provision says: shall be included in the gross
income in the year of recovery to the extent of the tax benefit of said deduction

These are the provisions on Tax Benefit Rule. It applies to 2 cases:


1. Tax Refund
2. Recovery of Bad Debts written off

Tax Refund:

shall be included in the GI in the year of receipt to the extent of the income tax benefit of said
deduction---it talks about deduction, so it means that what is involved is a deductible tax. This must
be a deductible tax and must be actually claimed as deductions. That is precisely the tax benefit---it
is one that may reduce the taxable income. Stated otherwise, that may only reduce the taxable
income if it is a deductible tax

Example: 2003 taxable year:


Net income before tax
Less: Local Business tax
Taxable Income

150,000
(50,000)
100,000

In 2004, the Local business tax of 50,000 was recovered through a refund because it turned out that
the taxpayer is tax exempt. This 50,000 tax refund is subject to tax because applying the tax benefit
rule, it was claimed as deduction and therefore it reduces taxable income by 50,000. It reduced your
taxable income by 50,000.

However, if the taxpayer receives no tax benefit, the recovery of such tax refund may not result to
taxable income. Example is when the tax refunded is a non-deductible tax. If a tax refunded is a
non-deductible tax, it is not subject tot income tax in the year of recovery because it did not result in
a tax benefit as it did not reduce the the taxable income of the taxpayer for the simple reason that it
is not a deductible item.

So you ought to know what are non-deductible taxes because if the tax refunded is a non-deductible
tax, common sense will tell you it never reduced the taxable income in the preceding year. There is
no tax benefit, so there is nothing to tax. In short, it is not taxable

TAXES:

Sec. 34 CNon-deductible taxes ( S-I-D-E):


1. Special assessment;
2. Income tax;
3. Donor's Tax;
4. Estate Tax

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 77 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

These taxes if refunded, will not result in a taxable gain because the taxpayer received no tax benefit

Deductible Taxes:
1. VAT;
2. Percentage Taxes;
3. Excise Taxes;
4. Documentary stamp taxes;
5. Local business taxes
Take Note: Only Local taxes are included in the coverage of the exam!!!

NON DEDUCTIBLE TAXES

DEDUCTIBLE TAXES

S Special assessment tax

E Excise tax

I Income tax

V Value added Tax

D Donors tax

P Percentage Tax

E Estate tax

D Documentary Stamp Tax


L Local business Tax

NOT taxable and does not form part of the gross


income

Taxable if tax refunded was a deductible tax, hence


forms part of the gross income in the year of receipt

Recovery of Bad Debts Written Off:

Same principle as that of refund applies---- to the extent of the income tax benefit of said deduction.
It presupposes that the bad debt was claimed as a deduction; that it was actually claimed as a
deduction.

Example: 2003 taxable year:


Net income before write off of worthless accounts
Less: Bad Debts Written off
Taxable income after BDWO

150,000
(50,000)
100,000

In 2004, this 50,000 was recovered by the creditor. Will this result in taxable gain?
Applying the Tax benefit rule, yes, because such taxpayer received tax benefit. By claiming the
50,000 as deduction from the net income, it reduced the taxable income by 50,000. it follows
that if such amount was not claimed as a deduction, it will never result in a taxable income.

Suppose:

Net loss
(150,000)
BDWO
(50,000)
Total Net loss (200,000)
The 50,000 was subsequently recovered in 2004. Is that subject to tax?
That is not taxable because the taxpayer received no tax benefit since it was never claimed
as a deduction. According to RR 5-99, the recovery of bad debts written off is a mere return
of capital. The reason is simple: it was never claimed as deduction because the taxpayer
has no net income in the preceding taxable year. There is nothing to reduce.

2000 Q#8: a) What is meant by the tax benefit rule? b) Give an illustration of the application of the
tax benefit rule.
SUGGESTED ANSWER:
a) TAX BENEFIT RULE states that the taxpayer is obliged to declare as taxable income
subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit
enjoyed by the taxpayer when the bad debts were written off and claimed as a deduction from
income.
It also applies to taxes previously deducted from gross income but which were
subsequently refunded or credited. The taxpayer is also required to report as taxable income
the subsequent tax refund or tax credit granted to the extent of the tax benefit the taxpayer
enjoyed when such taxes were previously claimed as deduction from income

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 78 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

b) X Company has a business connected receivable amounting to 100,000 from Y who was
declared bankrupt by a competent court. Despite earnest efforts to collect the same, Y was not
able to pay, prompting X company to write-off the entire liability. During the year of write-off, the
entire amount was claimed as a deduction for income tax purposes reducing the taxable net
income of X company to only P1M .
Three years later, Y voluntarily paid his obligation
previously written-off to X company. In the year of recovery, the entire amount constitutes part
of the gross income of X company because it was able to get full tax benefit three years earlier.

JAPS ANSWER:
Citing 2 cases, tax benefit rule applies to:
1. Tax Refund. It is subject to tax if the tax refunded is a deductible tax;
2. Recovery of bad debts written off. It is subject to tax if the amount recovered was claimed
as a deduction from gross income in the preceding year
2005Q#2: Are the following taxable:
a) Tax refund
b) Recovery of bad debts

Answer: You really have to qualify your answer.


In letter (a) it may be taxable depending on the nature of the tax refunded, whether it is a
deductible or non-deductible tax. If it is non-deductible, then it is not taxable as there is no tax
benefit on the part of the one claiming the refund.
In letter (b) you must qualify and cite RR 5-99 if the problem states that there was a net loss in
the preceding taxable year. It was just a return of capital, so not taxable.

BUSINESS EXPENSE:

Considered as ordinary or necessary expenses. They are directly attributable to the development,
management, operation and/or conduct of the trade or business of the TP or in the exercise of his
profession

The enumeration of ordinary and necessary expenses under Sec. 34 A is not complete. Other
reasonable business expenses are:
Compensation for personal services rendered---ex. Life insurance premium paid by the
employer
Traveling expenses meal and lodging
Representation
Entertainment
Advertising or promotional expenses
Rent
Repairs and maintenance must be ordinary or incidental

Q: How do you know whether or not an expense is ordinary or necessary?


ANSWER: D-O-M : An expense is ordinary and necessary if it is paid or incurred in connection
with the DEVELOPMENT, OPERATION, or MANAGEMENT of the business or exercise of
profession.
This is a new provision. Under the old tax code, there was no determinative test because as
explained by the SC in several cases, ordinary and necessary cannot be defined with
completeness

Promotional Expenses:
CIR vs. ALGUE (158 SCRA 9):
Q: Is the P125,000 promotional expenses considered reasonable?
The word reasonable is a question of fact. It is a relative term and will depend upon the
circumstances of the case and the nature of the business of the taxpayer. According to
the SC, the 125,000 promotional expense is reasonable under the circumstances. It is
reasonable because the experimental project involves millions of pesos. P125,000 is
unreasonable if your business is a mere sari-sari store.
ESSO STANDARD DOCTRINE:

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 79 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

The doctrine enunciated here is that an expense is deductible if it is paid or incurred in the
production of income. It is not deductible if it is paid or incurred after the production of income or
disposition of income.
The case is about whether the margin fee paid to the Central Bank is a deductible expense. The
SC said that it is not deductible because this was paid or incurred not in the production of
income. It was paid or incurred after the disposition of income.

INTEREST EXPENSE:

Amount of compensation paid for the use of money or forbearance from such use. They are
deductible under the following conditions:
There must be a valid and subsisting indebtedness
It must be an interest bearing obligation see art. 1956
Obligation incurred or paid in connection with the business or trade or the exercise of ones
profession
Must be proven or substantiated by receipts or documents

Just focus on non-deductible interest!!!


PICOP vs. CIR (yet to be asked in the Bar)-- a case regarding non-deductible interest
Q: Is theoretical interest deductible?
There are 2 reasons why theoretical interest is non-deductible (citing RR 2 Sec. 79):
1. It is not paid or incurred. Here, the interest is merely computed or calculated (iniisip
pa lang);
2. It lacks the essential requisite for the deductibility of interest expense --- it must arise
from interest bearing obligation. The SC said, this does not arise from interest
bearing obligation

MANO A MANO: PACQUIAO vs. LARIOS------ unanimous decision


PACQUAIO vs. ANTONINO--- Darlene Antonino won by TKO

Interest on Capital: (non-deductible interest):


1994Q#14: A Co., a Philippine corporation, issued preferred shares of stock with the following
features:
1. Non voting;
2. Preferred and cumulative dividends at the rate of 10% per annum, whether or not in any
period the amount is covered by earnings or projects;
3. In the event of dissolution of the issuer, holders of preferred stock shall be paid in full or
ratably as the assets of the issuer may permit before any distribution shall be made to
common stockholders; and
4. the issuer has the option to redeem the preferred stock.
A Co. declared dividends on the preferred stock and claimed the dividends as interests
deductible from its gross income for income tax purposes. The BIR disallowed the deduction. A
Co. maintains that the preferred shares with their features are really debt and therefore the
dividends are really interests. Decide
SUGGESTED ANSWER:
The dividends are not deductible from gross income. Preferred shares shall be considered
capital
regardless of the conditions under which such shares are issued and therefore,
dividends paid thereon are not considered interest which are allowed to be deducted from the
gross income of the corporation (RMC # 17-71, July 12, 1971)
JAPS ANSWER:
The Q here is: Is the interest on preferred shares of stocks deductible? De Leon qualifies his
answer.
Yes if the payment of dividends is not dependent upon surplus profits.
No if the payment of dividends is dependent upon surplus profits.
We do not qualify. Under RMC 17-71, it is clear here that interest on capital, which may include
interest on preferred shares of stocks, is a non-deductible interest. It makes no qualification.

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 80 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

BAD DEBTS EXPENSE:

Under Sec. 34 E; RR 5-99 (as amended by RR 25-2002) and PRC vs. CIR (256 SCRA 57), these
are the requisites for the valid deduction of bad debts written off:
1. there must be an existing, valid and enforceable obligation;
2. this must be connected with the business, trade or exercise of profession by the taxpayer;
3. this must not arise from transactions between related taxpayers under Sec. 36 B:
Between FAMILY MEMBERS
Between an INDIVIDUAL and a CORPORATION, more than 50% of the OCS is
owned by such individual
EXCEPT IN LIQUIDATION
Between 2 corporations
same exception as the foregoing
Between GRANTOR and FIDUCIARY of any trust
Between the FIDUCIARY OF A TRUST and A FIDUCIARY OF ANOTHER TRUST if
the same
person is a GRANTOR with respect to each trust
Between a FIDUCIARY of a trust and a BENEFICIARY of such trust
4. it must be charged or written off from the books of the taxpayer;
Under RR 5-99, there must be an actual charged off or written off of such amount; mere
recording will not suffice. The implication is that: only those taxpayers who have books
of accounts can claim these particular expenses as deductions;
5. It must be ascertained to be worthless and uncollectible as of the end of the taxable year;
6. PRC vs. CIR-- it must be uncollectible in the near future (not just at the end of the taxable
year; there must be no slim chance of collecting the same)

Tests or factors that are determinative of worthlessness of a debt or obligation (p. 119-120 of the
book)--- based on American Jurisprudence:
1. Consider whether the obligation has already prescribed (Application of Statute of Limitation-once it is already prescribed, it is already an exercise in futility);
2. The amount should also be considered. It may be collected but if the cost of collecting the
same is more than the amount to be collected, it is impractical to collect such amount;
3. Injury that may be sustained by the debtor. For example, na hospital ang debtor, wala ng
panggastos; wag mo na lang singilin; maawa ka naman);
4. Deathe of the debtor leaving no property (galang natin ang patay);
5. Bankruptcy/ insolvency of the debtor;
6. Insufficiency of collateral;
7. Destruction of documentary evidence or receipts which will prove the payment---if there's no
evidence to prove that the debtor incurred obligation
8. Under RR as amended by 25-2002:
a. The CIR is authorized to waive that required evidence regarding the determination of
worthlessness of an account. It made mentioned of the financial incapacity or
condition of the debtor;
b. It also mentioned the insufficiency of collateral;
c. Referral of debtor/defendant lawyer (?) ( the lawyer must execute an afffidavit to the
effect that filing of the case in court would be unsuccessful (di ko maintindihan
sinsasabi ni japs dito)

Coming soon: F4; Shrek3 (now showing na as of the time of the printing of this notes); Harry PotterOrder of the Phoenix plus the last book (July 21,2007)-2 characters will die; Pirates at worlds end;
transformer the movie

EXEMPTIONS:

In Sec. 35 there are 2 important provisions there:


a. Master the definition of head of the family; the Q on senior citizen has never been asked in
the Bar (marami tayo dito nyan, Dimayuga, Aligada, Alcantara)
b. Sec. 35 C
Head of the Family----An unmarried or legally separated man or woman; with one or
both parents; or with one or more brothers or sisters; or with one or more legitimate,
recognized natural or legally adopted childrenliving with and dependent upon him or
her for their chief support; and where such brothers or sisters or children are 1) not more
than 21 years of age, 2) unmarried, and 3) not gainfully employed, or 4) where such

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 81 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

children, brothers or sisters, regardless of age are incapable of support because of


mental or physical defect (last paragraph Sec. 35 A)
RA 7432, as amended by RA 9257: Senior citizens shall be treated as dependents
provided for in the NIRC and as such, individual taxpayers caring for them, be they
relatives or not, shall be accorded the privileges granted by the Code insofar as having
dependents are concerned.
Ex. 60 yrs. Old, resident citizen of the Phils. Even if he is receiving income, if the
gross income is not more than 60,000, this senior citizen can be considered as a
dependent.
Take note that relationship is not a requisite.
Sec. 35 C---there are 2 new rules here. Master this. This was asked in 2004. I told them
don't forget this Sec. 35 C (yung natutulog, di nasagot to). This refers to change of
status.
Q in 2004 Bar: Ram married Liza in Jan, 2003. Liza died in Nov., 2003. For purposes
of filing his income tax return, what would Ram declare as status?
a) Single
b) married
c) head of the family
d) none of the above

This may be answered by Sec. 35 C. Sec. 35 C has 3 paragraphs:


st

1 Paragraph: if the taxpayer marries or should have additional dependent(s) during


the taxable year, the taxpayer may claim the corresponding additional exemptions,
as the case may be, in full for such year
Par. 1 covers 2 situation:
a) Marriage of the taxpayer during the taxable year
Ex. You have developed an unexplained feeling with your seatmate. So,
you agreed to get married after the Bar (Dec. 31,2006). You made it
sure that the marriage will be solemnized before the midnight of
December 31. Even if you will be considered married for only 1 hour,
you can claim 32,000 basic personal exemption as married individual.
As long as the marriage is within the taxable year.
b) Additional dependent
Ex. Masipag si mister. Punong puno si Mrs. May anak ng isa, nanganak
pa si mrs. Twice in the same year. Can you claim this 2 children as
dependents? Yes
nd

2 Paragraph: If the taxpayer dies during the taxable year, his estate may still claim
the personal and additional exemptions for himself and his dependent(s) as if he
died at the close of such year
rd

3 Paragraph: If the spouse or any of the dependents dies or if any of such


dependents marries, becomes 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 21 years
old or became gainfully employed at the close of such year

2 new rules under this paragraph:


1. marriage of a dependent during the taxable year
Old Tax Code--- he could no longer be claimed as dependent
New Tax Code--- taxpayer can still claim this as dependent (P8K)
2. gainful employment of the dependent during the taxable year
Old Tax Code--- he could no longer be claimed as dependent
New Tax Code--- the taxpayer is entitled to claim that dependent. As
such he can claim the P8K as additional personal exemption

NRA-NETB is not entitled to claim personal exemption

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 82 J. Dimaampao Tax Part One

Transcribed by JULAN ILAO Special Thanks to Atty. MARJ MONCES

NRA-ETB--- Sec. 35 D requires the reciprocity rule. The foreign Govt. of the NRA-ETB must also
grant exemption to Filipino citizen doing business therein. If no exemption is granted, we cannot
grant exemption to this NRA-ETB. That rule in reciprocity applies only to basic personal exemption.
So even if the foreign govt grants additional personal exemption to citizens doing business therein,
we cannot grant additional personal exemption because it is clear in Sec 35 C basic personal
exemption, that means additional personal exemptions are excluded.

Q: Who can claim the additional personal exemption of P8K in the case of married individuals?
The additional exemption for dependents shall be claimed by only one of the spouses in the
nd
case of married individuals. (2 par. Sec. 35 B). The husband shall be the proper claimant for
st
qualified dependent children (last par. Sec 2.79 (I) (1) (b), and the 1 sentence Sec. 2.79.1 A 5
of RR 2-98)

Instances when the wife shall claim full additional exemptions for qualified dependent children:
1. Husband is unemployed
husband is a member of this group---PALAMUNIN
2. The husbands waives his right to claim the exemptions of children (waiver should be for
all children)
husband is a member of RAMBO--- Report Again kay Misis Bawat Oras (Alcantara
is a member of this)
or a member of BBB--- Bantay Bata Brigade
3. Husband is a non-resident citizen deriving income from foreign sources

END OF LECTURE ON PART I - INCOME TAX


Special thanks to Ms. Lea Lara for her contributions

GOOD LUCK AND GOD BLESS!

-------------- -------------LordV Julan Tracy Brian NickG. DennisM. Levie Rommel Dk Edwin Claudette Bim Charm Deo Gani Shawie
Atty.Leo Atty.Henry Atty.Rob Atty.Marj Atty.Ana Atty.Louie Atty.Joy Atty. Dianne

Grupong Tapsi Notes page 83 J. Dimaampao Tax Part One