December 11, 1997 REPUBLIC ACT NO.

8424 Effective January 1, 1998

AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE,AS AMENDED, AND FOR
OTHER PURPOSES

SECTION 1Short Title This Act shall be cited as the "Tax Reform Act of 1997"

SECTION 2 State Policy It is hereby declared the policy of the State to promote
sustainable economic growth through the rationalization of the Philippine internal
revenue tax system, including tax administration; to provide, as much as possible,
an equitable relief to a greater number of taxpayers in order to improve levels of
disposable income and increase economic activity; and to create a robust
environment for business to enable firms to compete better in the regional as well
as the global market, at the same time that the State ensures that Government is
able to provide for the needs of those under its jurisdiction and care.

SECTION 3 Presidential Decree No. 1158, as amended by, among others,

Presidential Decree No. 1994 and Executive Order No. 273, otherwise known as
the National Internal Revenue Code, is hereby further amended to read as follows:

TITLE I Organization and Function of the Bureau of Internal Revenue

SECTION 1. Title of the Code This Code shall be known as the National
Internal Revenue Code of 1997.

SECTION 2. Powers and Duties of the Bureau of Internal Revenue The

Bureau of Internal Revenue shall be under the supervision and control of the
Department of Finance and its powers and duties shall comprehend the assessment
and collection of all national internal revenue taxes, fees, and charges, and the
enforcement of all forfeitures, penalties, and fines connected therewith, including
the execution of judgments in all cases decided in its favor by the Court of Tax
Appeals and the ordinary courts. The Bureau shall give effect to and administer the
supervisory and police powers conferred to it by this Code or other laws.

SECTION 3. Chief Officials of the Bureau of Internal Revenue The Bureau of

Internal Revenue shall have a chief to be known as Commissioner of Internal
Revenue, hereinafter referred to as the Commissioner and four (4) assistant chiefs
to be known as Deputy Commissioners.
SECTION 4. Power of the Commissioner to Interpret Tax Laws and to
Decide Tax Cases The power to interpret the provisions of this Code and other
tax laws shall be under the exclusive and original jurisdiction of the Commissioner,
subject to review by the Secretary of Finance.

CASES DIGEST
The power to decide disputed assessments, refunds of internal revenue taxes, fees or
other charges, penalties imposed in relation thereto, or other matters arising under this
Code or other laws or portions thereof administered by the Bureau of Internal Revenue is
vested in the Commissioner, subject to the exclusive appellate jurisdiction of the Court of
Tax Appeals.

Unlike the Commissioner of Internal Revenue who has been given the express power to
interpret the Tax Code and other national tax laws, no such power is given to the BLGF.
SMART's dependence on BLGF's interpretation was thus misplaced.

City of Iloilo, et al. vs. Smart Communications, Inc.,

G.R. No. 167260, February 27, 2009

Period for filing an appeal with the Court of Tax Appeals.

The jurisdiction of the Court of Tax Appeals has been expanded to include not only
decisions or rulings but inaction as well of the Commissioner of Internal Revenue. The
decisions, rulings or inaction of the Commissioner are necessary in order to vest the
Court of Tax Appeals with jurisdiction to entertain the appeal, provided it is filed within
30 days after the receipt of such decision or ruling, or within 30 days after the expiration
of the 180-day period fixed by law for the Commissioner to act on the disputed
assessments. This 30-day period within which to file an appeal is jurisdictional and
failure to comply therewith would bar the appeal and deprive the Court of Tax Appeals of
its jurisdiction to entertain and determine the correctness of the assessments. Such period
is not merely directory but mandatory and it is beyond the power of the courts to extend
the same.

RCBC vs. CIR, G.R. No. 168498, April 24, 2007

Conclusions and opinions of the Court of Tax Appeals are extended due consideration.

It has been a long standing policy and practice of the Supreme Court to respect the
conclusions of quasi-judicial agencies such as the Court of Tax Appeals, a highly
specialized body specifically created for the purpose of reviewing tax cases. The CTA, by
the nature of its functions, is dedicated exclusively to the study and consideration of tax
problems. It has necessarily developed an expertise on the subject. Due consideration is
extended to its opinion unless there is an abuse or improvident exercise of authority.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.,

G.R. No. 143672, April 24, 2003

The Commissioner of Internal Revenue is not bound by the ruling of his

predecessors.That the previous Commissioners considered copra as an "agricultural
food product", is not reason for holding that the present interpretation is wrong. The
Commissioner of Internal Revenue is not bound by the ruling of his predecessors. To the
contrary, the overruling of decisions is inherent in the interpretation of laws.

Misamis Oriental Association of Coco Traders, Inc. vs. Dept. of Finance Secretary, et al.,
G.R. No. 108524, November 10, 1994

SECTION 5. Power of the Commissioner to Obtain Information, and to Summon,

Examine, and Take Testimony of Persons - In ascertaining the correctness of any
return, or in making a return when none has been made, or in determining the
liability of any person for any internal revenue tax, or in collecting any such
liability, or in evaluating tax compliance, the Commissioner is authorized:

(A) To examine any book, paper, record, or other data which may be relevant or
material to such inquiry;

(B) To obtain on a regular basis from any person other than the person whose
internal revenue tax liability is subject to audit or investigation, or from any office
or officer of the national and local governments, government agencies and
instrumentalities, including the BangkoSentralngPilipinas and government-owned
or -controlled corporations, any information such as, but not limited to, costs and
volume of production, receipts or sales and gross incomes of taxpayers, and the
names, addresses, and financial statements of corporations, mutual fund
companies, insurance companies, regional operating headquarters of multinational
companies, joint accounts, associations, joint ventures or consortia and registered
partnerships, and their members;

(C) To summon the person liable for tax or required to file a return, or any officer
or employee of such person, or any person having possession, custody, or care of
the books of accounts and other accounting records containing entries relating to
the business of the person liable for tax, or any other person, to appear before the
Commissioner or his duly authorized representative at a time and place specified in
the summons and to produce such books, papers, records, or other data, and to give
testimony;
(D) To take such testimony of the person concerned, under oath, as may be
relevant or material to such inquiry; and

(E) To cause revenue officers and employees to make a canvass from time to time
of any revenue district or region and inquire after and concerning all persons
therein who may be liable to pay any internal revenue tax, and all persons owning
or having the care, management or possession of any object with respect to which a
tax is imposed.

The provisions of the foregoing paragraphs notwithstanding, nothing in this

Section shall be construed as granting the Commissioner the authority to inquire
into bank deposits other than as provided for in Section 6(F) of this Code.

BIR ISSUANCES
REVENUE MEMORANDUM ORDER NO. 088-10 December 22, 2010
Guidelines and Procedures in the Issuance and Enforcement of Subpoena DucesTecum;
and the Prosecution of Cases for "Failure to Obey Summons"
The powers of the Bureau of Internal Revenue to examine and inspect books of accounts
and other accounting records and conduct investigations relating to internal revenue tax
liabilities of taxpayers include the legal process of issuing "Summons" or "Subpoena
DucesTecum" (SDT) to persons enumerated under Section 5 (c) of the National Internal
Revenue Code of 1997 (NIRC). The BIR may invoke the authority of the courts in case of
non-compliance with the aforesaid legal processes by filing a criminal case against the
taxpayer for violation of Section 5, in relation to Sections 14 and 266 of the NIRC.

REVENUE MEMORANDUM CIRCULAR NO. 23-00 November 27, 2000

Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on the "Best
Evidence Obtainable.""When a report required by law as a basis for the assessment of
any national internal revenue tax shall not be forthcoming within the time fixed by laws
or rules and regulations or when there is reason to believe that any such report is false,
incomplete or erroneous, the Commissioner shall assess the proper tax on the best
evidence obtainable."An Assessment Based on Estimates is Valid in the absence of proof
of any irregularities in the performance of official duties, an assessment will not be
disturbed. Even an assessment based on estimates is prima facie valid and lawful where
it does not appear to have been arrived at arbitrarily or capriciously. The burden of
proof is upon the complaining party to show clearly that the assessment is erroneous.
Failure to present proof of error in the assessment will justify the judicial affirmance of
said assessment.

REVENUE MEMORANDUM ORDER NO. 04-06 January 23, 2006

Guidelines and Procedures in the Conduct of Benchmarking and Adapting/Implementing
the Performance Benchmarking Method in the Revenue District Offices
The downward trend in revenue collections due to numerous incidents of registered
taxpayers not filing their tax returns and paying their taxes correctly brought about the
necessity of instituting a systematic program that would level the playing field among
taxpayers engaged in similar line of industry, in accordance with Section 5(E) of the
National Internal Revenue Code, as amended, in relation to Section 6 (C) of the same
Code. The performance benchmarking of taxpayers by line of industry where the best
performers, among taxpayers within the same line of industry or business, will be
identified using profit margin rate, Net VAT Due and Income Tax Due in relation to gross
sales/receipts, could be an excellent tool in increasing taxpayers' voluntary compliance.
Monitoring and evaluation of tax payments through the use of performance
benchmarking will determine/identify taxpayers within industry groups who are paying
below the minimum amount or set benchmarks for tax compliance purposes.

REVENUE REGULATIONS NO. 010-10 October 6, 2010

SUBJECT : Exchange of Information Regulations
Implementing the necessary guidelines to enable the Bureau of Internal Revenue (BIR) to
respond to a request for exchange of information pursuant to an existing international
convention or agreement on tax matters and to implement Republic Act No. 10021
entitled "An Act to Allow the Exchange of Information by the Bureau of Internal Revenue
on Tax Matters Pursuant to Internationally-Agreed Tax Standards, Amending Sections 6
(F), 71 and 270 of the National Internal Revenue Code of 1997, as Amended

REVENUE MEMORANDUM ORDER NO. 09-06 December 11, 2005

Prescribing the Guidelines and Procedures in the Conduct of Tax Compliance
Verification Drive (TCVD) in line with the Bureau's effort to expand its tax base, enhance
tax compliance and consequently boost its tax collection effort, the Commissioner
spearheaded actual tax mapping activities under the Tax Compliance Verification Drive
(TCVD) project pursuant to RMO 31-2003. This is aimed at establishing cordial
relationship with taxpayer by giving assistance thru tax information drive and
verification of taxpayer's compliance requirements during the actual visitation of
taxpayer's establishment and its branches.

SECTION 6.Power of the Commissioner to Make Assessments and Prescribe

Additional Requirements for Tax Administration and Enforcement
(A) Examination of Returns and Determination of Tax Due After a return has
been filed as required under the provisions of this Code, the Commissioner or his
duly authorized representative may authorize the examination of any taxpayer and
the assessment of the correct amount of tax: Provided, however, That failure to file
a return shall not prevent the Commissioner from authorizing the examination of
any taxpayer.

The tax or any deficiency tax so assessed shall be paid upon notice and demand
from the Commissioner or from his duly authorized representative.

Any return, statement or declaration filed in any office authorized to receive the
same shall not be withdrawn: Provided, That within three (3) years from the date of
such filing, the same may be modified, changed, or amended: Provided, further,
That no notice for audit or investigation of such return, statement or declaration
has, in the meantime, been actually served upon the taxpayer.

CASES DIGEST
Remedies of a taxpayer in case the Commissioner fails to act on a disputed assessment.

In case the Commissioner failed to act on the disputed assessment within the 180-day
period from date of submission of documents, a taxpayer can either: 1) file a petition for
review with the Court of Tax Appeals within 30 days after the expiration of the 180-day
period; or 2) await the final decision of the Commissioner on the disputed assessments
and appeal such final decision to the Court of Tax Appeals within 30 days after receipt of
a copy of such decision. However, these options are mutually exclusive, and resort to one
bars the application of the other.

RCBC vs. CIR, G.R. No. 168498, April 24, 2007

The power to collect forest charges rests with BIR, not with Bureau of Forestry.

Forest charges are internal revenue taxes and the sole power and duty to collect the
same is lodged with the Bureau of Internal Revenue and not with the Bureau of Forestry.
The computation and/or assessment of forest charges made by the Bureau of Forestry
may or may not be adopted by the Commissioner of Internal Revenue and such
computation made by the Bureau of Forestry is not appealable to the Court of Tax
Appeals.
Mambulao Lumber Company vs. Republic of the Phil., G.R.
No. L-37061, September 5, 1984

Mandamus may not lie against the Commissioner to compel him to impose a tax
assessment.

Since the office of the Commissioner of Internal Revenue is charged with the
administration of revenue laws, which is the primary responsibility of the executive
branch of the government, mandamus may not lie against the Commissioner to compel
him to impose a tax assessment not found by him to be due or proper for that would be
tantamount to a usurpation of executive functions. Such discretionary power vested in the
proper executive official, in the absence of arbitrariness or grave abuse so as to go
beyond the statutory authority, is not subject to the contrary judgment or control of
others.

Meralco Securities Corp. vs. VictorinoSavellano, et al., G.R. No. L-

36181, October 23, 1982

BIR ISSUANCES
REVENUE MEMORANDUM CIRCULAR NO. 40-03 July 3, 2003Effect of the Issuance
and Receipt of Letter Notice (LN) to the Taxpayer's Right to Amend its Tax Returns as
Provided under Section 6 of the National Internal Revenue Code."AnLN being served by
the Bureau upon taxpayers who were found to have under-declared their sales or
overdeclaredpurchases through the Third Party Information Program can be considered
a notice of audit or investigation which would in effect disqualify the taxpayers
concerned from amending any return which is the subject of such audit or investigation."

Section 6(B)Failure to Submit Required Returns, Statements, Reports and other

Documents When a report required by law as a basis for the assessment of any
national internal revenue tax shall not be forthcoming within the time fixed by laws
or rules and regulations or when there is reason to believe that any such report is
false, incomplete or erroneous, the Commissioner shall assess the proper tax on the
best evidence obtainable.

In case a person fails to file a required return or other document at the time
prescribed by law, or willfully or otherwise files a false or fraudulent return or
other document, the Commissioner shall make or amend the return from his own
knowledge and from such information as he can obtain through testimony or
otherwise, which shall be prima facie correct and sufficient for all legal purposes.

CASES DIGEST
When the rule on "best evidence obtainable" applies.

The law is specific and clear. The rule on the "best evidence obtainable" applies when a
tax report required by law for the purpose of assessment is not available or when the tax
report is incomplete or fraudulent. Thus, the persistent failure of the decedent and the
taxpayer to present their books of accounts for examination for the taxable years
involved left the Commissioner of Internal Revenue no other legal option except to report
to the power conferred upon him under Section 16 of the Tax Code.

BonifaciaSy Po vs. Court of Tax Appeals, et al., G.R. No. L-81446, August 18, 1988

BIR ISSUANCES
REVENUE MEMORANDUM ORDER NO. 019-10 March 9, 2010

SUBJECT : Taxpayers' Lifestyle Check System

I. Objectives

It has been observed that there are several individual taxpayers with substantial
investments, and assets and/or conspicuous lifestyles but have a relatively small income
declared, and consequently, reduced income tax payments.

Likewise, it has been noted that individuals attempting to evade or minimize tax payments
rarely report their income and would often not provide their books and records for
scrutiny. This Order is being issued to help address the difficulty encountered by revenue
officers in examining a taxpayer's tax compliance when there is no direct evidence of
income or the books and records are inadequate, not available or inaccurate, yet, it is
palpably clear that the taxpayer is earning income as evidenced by an increase in or
substantial assets they own and/or the lavish lifestyles they maintain.

II. Policies and Guidelines

1. Policies

1.1 It is the policy of the Bureau to exhaust all means and methodology of determining
the individuals' income. This Order is being issued to prescribe the policies and
guidelines in the conduct of investigations on the lifestyle and assets of individuals in
order to properly determine their tax compliance.

1.2 An individual's taxable income may be established by using direct evidence,

whenever available.

1.3 Indirect methods can be used, however, when one or more of the following
conditions, among others, prevail:

a. The taxpayer maintains no books and records.

b. The taxpayer's books and records are not available.

c. The taxpayer's books and records are inadequate.

d. The taxpayer withholds books and records from investigation/verification by

authorized revenue officers.

The fact that the taxpayer's books and records reflect the figures on the income
and business tax returns, however, does not prevent the use of the indirect method of
proof. The revenue officer can still look beyond the "self-serving declaration" in the
taxpayer's books and records and use any evidence available to contravene their
accuracy. In this connection, the provisions of RAMO No. 1-2000 shall be followed. The
BIR shall rely on RMC No. 23-2000 in making deficiency tax assessments based on the
"Best Evidence Obtainable". Section 6 (c) of the National Internal Revenue Code allows
the BIR to prescribe the minimum taxable base for which internal revenue taxes shall be
determined.

REVENUE MEMORANDUM CIRCULAR NO. 23-00 November 27, 2000

Revenue Procedures on the Assessment of Deficiency Internal Revenue Taxes Based on

the "Best Evidence Obtainable."

Scope It has been observed that a very significant number of taxpayers either refuse or
fail to present their respective accounting records when demanded for tax audit
purposes, thereby resulting to the delay in the submission of the Revenue Officer's report
of investigation as required by the existing Audit Program and inconsistency in the
determination of the deficiency internal revenue tax that may properly be assessed and
demanded from the taxpayer, to the damage and prejudice against the revenue.

In the absence of accounting records or other documents necessary for the proper
determination of the taxpayer's internal revenue tax liability, Section 6 (B) of the
National Internal Revenue Code of 1997 requires that the assessment of the tax be
determined based on the "Best Evidence Obtainable," as follows:

"When a report required by law as a basis for the assessment of any national internal
revenue tax shall not be forthcoming within the time fixed by laws or rules and
regulations or when there is reason to believe that any such report is false, incomplete or
erroneous, the Commissioner shall assess the proper tax on the best evidence
obtainable."

(C) Authority to Conduct Inventory-taking, Surveillance and to Prescribe

Presumptive Gross Sales and Receipts The Commissioner may, at any time
during the taxable year, order inventory-taking of goods of any taxpayer as a basis
for determining his internal revenue tax liabilities, or may place the business
operations of any person, natural or juridical, under observation or surveillance if
there is reason to believe that such person is not declaring his correct income, sales
or receipts for internal revenue tax purposes. The findings may be used as the basis
for assessing the taxes for the other months or quarters of the same or different
taxable years and such assessment shall be deemed prima facie correct.

When it is found that a person has failed to issue receipts and invoices in violation
of the requirements of Sections 113 and 237 of this Code, or when there is reason
to believe that the books of accounts or other records do not correctly reflect the
declarations made or to be made in a return required to be filed under the
provisions of this Code, the Commissioner, after taking into account the sales,
receipts, income or other taxable base of other persons engaged in similar
businesses under similar situations or circumstances or after considering other
relevant information, may prescribe a minimum amount of such gross receipts,
sales and taxable base, and such amount so prescribed shall be prima facie correct
for purposes of determining the internal revenue tax liabilities of such person.

BIR ISSUANCES
REVENUE MEMORANDUM ORDER NO. 003-09 January 15, 2009
Guidelines in the Conduct of Surveillance and Stock-Taking Activities, and the
Implementation of the Administrative Sanction of Suspension and Temporary Closure of
Business
Mandatory Requirement for the Conduct of Surveillance and Apprehension of Business
Establishments for Non-Compliance with the Provisions of Section 113, 114, 236, 237
and 238 of the NIRC, as amended. No surveillance activities shall be conducted nor
apprehension effected unless the same has been authorized by a mission order issued in
accordance with the provisions of this Order.
(D) Authority to Terminate Taxable Period When it shall come to the
knowledge of the Commissioner that a taxpayer is retiring from business subject to
tax, or is intending to leave the Philippines or to remove his property therefrom or
to hide or conceal his property, or is performing any act tending to obstruct the
proceedings for the collection of the tax for the past or current quarter or year or to
render the same totally or partly ineffective unless such proceedings are begun
immediately, the Commissioner shall declare the tax period of such taxpayer
terminated at any time and shall send the taxpayer a notice of such decision,
together with a request for the immediate payment of the tax for the period so
declared terminated and the tax for the preceding year or quarter, or such portion
thereof as may be unpaid, and said taxes shall be due and payable immediately and
shall be subject to all the penalties hereafter prescribed, unless paid within the time
fixed in the demand made by the Commissioner.

(E) Authority of the Commissioner to Prescribe Real Property Values The

Commissioner is hereby authorized to divide the Philippines into different zones or
areas and shall, upon consultation with competent appraisers both from the private
and public sectors, determine the fair market value of real properties located in
each zone or area. For purposes of computing any internal revenue tax, the value of
the property shall be, whichever is the higher of:

(1)the fair market value as determined by the Commissioner; or

(2)the fair market value as shown in the schedule of values of the Provincial and
City Assessors.

CASES DIGEST
Clearly, while the law grants to the Commissioner of Internal Revenue the power to
determine zonal values, including the authority to delegate to the Assistant Commissioner
of the Assessment Service the authority to approve and sign TCRPV resolutions involving
requests for revaluation of established zonal values of real properties, the same is for the
purpose of computing internal revenue taxes.

Capitol Steel Corp. vs. Phividec Industrial Authority,

G.R. No. 169453, December 6, 2006
(F) Authority of the Commissioner to Inquire into Bank Deposit Accounts and
Other Related Information Held by Financial Institutions Notwithstanding any
contrary provision of Republic Act No. 1405, Republic Act No. 6426, otherwise
known as the Foreign Currency Deposit Act of the Philippines, and other general
and special laws, the Commissioner is hereby authorized to inquire into the bank
deposits and other related information held by financial institutions of:

(1)a decedent to determine his gross estate; and

(2) any taxpayer who has filed an application for compromise of his tax liability
under Sec. 204(A)(2) of this Code by reason of financial incapacity to pay his tax
liability.

In case a taxpayer files an application to compromise the payment of his tax

liabilities on his claim that his financial position demonstrates a clear inability to
pay the tax assessed, his application shall not be considered unless and until he
waives in writing his privilege under Republic Act No. 1405 or under other general
or special laws, and such waiver shall constitute the authority of the Commissioner
to inquire into the bank deposits of the taxpayer.

(G) Authority to Accredit and Register Tax Agents The Commissioner shall
accredit and register, based on their professional competence, integrity, and moral
fitness, individuals and general professional partnerships and their representatives
who prepare and file tax returns, statements, reports, protests, and other papers
with, or who appear before, the Bureau for taxpayers. Within one hundred twenty
(120) days from January 1, 1998, the Commissioner shall create national and
regional accreditation boards, the members of which shall serve for three (3) years,
and shall designate from among the senior officials of the Bureau, one (1)
chairman and two (2) members for each board, subject to such rules and
regulations as the Secretary of Finance shall promulgate, upon the recommendation
of the Commissioner.

Individuals and general professional partnerships and their representatives who are
denied accreditation by the Commissioner and/or the national and regional
accreditation boards may appeal such denial to the Secretary of Finance, who shall
rule on the appeal within sixty (60) days from receipt of such appeal. Failure of the
Secretary of Finance to rule on the appeal within the prescribed period shall be
deemed as approval of the application for accreditation of the appellant.

BIR ISSUANCES
REVENUE REGULATIONS NO. 004-10 February 24, 2010
REVENUE REGULATIONS NO. 014-10 November 25, 2010
Accreditation of Tax Practitioners/Agents as a Prerequisite to Their Practice and
Representation of Taxpayers before the Bureau of Internal Revenue

Objectives These Regulations are being issued to (1) prescribe additional guidelines in
the accreditation of tax agents and practitioners (TAPs) to shorten the processing time;
(2) ensure the continuing professional education and training of TAPs from duly
accredited service providers; (3) implement a transparent and accessible database of
accredited, suspended and delisted TAPs; (4) require the annual submission of schedule
of services provided by the TAPs; (5) specify specific penalties and sanctions for
violation of the provisions of these Regulations; and, (6) prescribe the payment of the
annual registration fee for each TAP.
(H) Authority of the Commissioner to Prescribe Additional Procedural or
Documentary Requirements The Commissioner may prescribe the manner of
compliance with any documentary or procedural requirement in connection with
the submission or preparation of financial statements accompanying the tax
returns.

SECTION 7 Authority of the Commissioner to Delegate Power The

Commissioner may delegate the powers vested in him under the pertinent
provisions of this Code to any or such subordinate officials with the rank
equivalent to a division chief or higher, subject to such limitations and restrictions
as may be imposed under rules and regulations to be promulgated by the Secretary
of Finance, upon recommendation of the Commissioner: Provided, however, That
the following powers of the Commissioner shall not be delegated:

(a) The power to recommend the promulgation of rules and regulations by the
Secretary of Finance;

(b) The power to issue rulings of first impression or to reverse, revoke or modify
any existing ruling of the Bureau;

(c) The power to compromise or abate, under Sec. 204(A) and (B) of this Code,
any tax liability: Provided, however, That assessments issued by the regional
offices involving basic deficiency taxes of Five hundred thousand pesos
(P500,000) or less, and minor criminal violations, as may be determined by rules
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner, discovered by regional and district
officials, may be compromised by a regional evaluation board which shall be
composed of the Regional Director as Chairman, the Assistant Regional Director,
the heads of the Legal, Assessment and Collection Divisions and the Revenue
District Officer having jurisdiction over the taxpayer, as members; and

(d) The power to assign or reassign internal revenue officers to establishments

where articles subject to excise tax are produced or kept.

CASES DIGEST
Under Section 7 of the NIRC, the Commissioner is authorized to delegate to his
subordinates the powers vested in him except, among others, the power to issue rulings of
first impression.

Secretary of Finance, et al. vs. La Suerte Cigar and Cigarette Factory, et al.,
G.R. No. 166498, June 11, 2009

COMMISSIONER OF INTERNAL REVENUE CANNOT DELEGATE POWER TO MAKE

FINAL ASSESSMENT The Commissioner of Internal Revenue cannot delegate the
power to make a final assessment to his subordinate, and consequently despite an order
of said Commissioner granting Regional Directors authority to close tax cases, said
order(Memorandum Order No. V-634 dated July 3, 1956) is applicable to his
subordinate officers only and could not bind the Commissioner himself, who has been
entrusted by law to make final assessments.Delegatus non potestdelegare; the person to
whom an office or duty is delegated cannot lawfully devolve the duty on another.

THE CITY LUMBER, INC. vs. THE HON. MELECIO R. DOMINGO, Commissioner of
Internal Revenue and THE HON. COURT OF TAX APPEALS
G.R. No. L-18611. January 30, 1964

SECTION 8. Duty of the Commissioner to Ensure the Provision and

Distribution of Forms, Receipts, Certificates, and Appliances, and the
Acknowledgment of Payment of Taxes
(A) Provision and Distribution to Proper Officials. It shall be the duty of the
Commissioner, among other things, to prescribe, provide, and distribute to the
proper officials the requisite licenses, internal revenue stamps, labels, all other
forms, certificates, bonds, records, invoices, books, receipts, instruments,
appliances and apparatus used in administering the laws falling within the
jurisdiction of the Bureau. For this purpose, internal revenue stamps, strip stamps
and labels shall be caused by the Commissioner to be printed with adequate
security features.

Internal revenue stamps, whether of a bar code or fuson design, shall be firmly and
conspicuously affixed on each pack of cigars and cigarettes subject to excise tax in
the manner and form as prescribed by the Commissioner, upon approval of the
Secretary of Finance.

(B) Receipts for Payment Made. It shall be the duty of the Commissioner or his
duly authorized representative or an authorized agent bank to whom any payment
of any tax is made under the provisions of this Code to acknowledge the payment
of such tax, expressing the amount paid and the particular account for which such
payment was made in a form and manner prescribed therefor by the Commissioner.

SECTION 9 Internal Revenue Districts With the approval of the Secretary of

Finance, the Commissioner shall divide the Philippines into such number of
revenue districts as may from time to time be required for administrative purposes.
Each of these districts shall be under the supervision of a Revenue District Officer.

SECTION 10 Revenue Regional Director Under rules and regulations, policies

and standards formulated by the Commissioner, with the approval of the Secretary
of Finance, the Revenue Regional Director shall, within the region and district
offices under his jurisdiction, among others:

(a) Implement laws, policies, plans, programs, rules and regulations of the
department or agencies in the regional area;

(b) Administer and enforce internal revenue laws, and rules and regulations,
including the assessment and collection of all internal revenue taxes, charges and
fees;

(c) Issue Letters of Authority for the examination of taxpayers within the region;
(d) Provide economical, efficient and effective service to the people in the area;

(e) Coordinate with regional offices or other departments, bureaus and agencies in
the area;

(f) Coordinate with local government units in the area;

(g) Exercise control and supervision over the officers and employees within the
region; and

(h) Perform such other functions as may be provided by law and as may be
delegated by the Commissioner.

SECTION 11. Duties of Revenue District Officers and Other Internal Revenue
Officers It shall be the duty of every Revenue District Officer or other internal
revenue officers and employees to ensure that all laws and rules and regulations
affecting national internal revenue are faithfully executed and complied with, and
to aid in the prevention, detection and punishment of frauds or delinquencies in
connection therewith.

It shall be the duty of every Revenue District Officer to examine the efficiency of
all officers and employees of the Bureau of Internal Revenue under his
supervision, and to report in writing to the Commissioner, through the Regional
Director, any neglect of duty, incompetency, delinquency, or malfeasance in office
of any internal revenue officer of which he may obtain knowledge, with a
statement of all the facts and any evidence sustaining each case.

SECTION 12. Agents and Deputies for Collection of National Internal

Revenue Taxes The following are hereby constituted agents of the
Commissioner:

(a) The Commissioner of Customs and his subordinates with respect to the
collection of national internal revenue taxes on imported goods;

(b) The head of the appropriate government office and his subordinates with
respect to the collection of energy tax; and

(c) Banks duly accredited by the Commissioner with respect to receipt of payments
of internal revenue taxes authorized to be made thru banks.
BIR ISSUANCES

REVENUE REGULATIONS NO. 04-97 March 1, 1997

Revenue Regulations Prescribing the Acceptable Modes of Payment of Internal Revenue

Taxes Through Accredited Banks and their Subsidiaries and the Enrollment of Taxpayers
Required Thereunderto ensure that tax payments are made only to authorized collection
agents of the BIR, properly credited to the accounts of the taxpayer concerned, and duly
remitted to the government, any person liable to any internal revenue tax shall pay the
same only through (a) an over-the-counter cash transaction; (b) the bank debit system, or
(c) a credit facility with a bank, a credit company or similar institution

Any officer or employee of an authorized agent bank assigned to receive internal

revenue tax payments and transmit tax returns or documents to the Bureau of
Internal Revenue shall be subject to the same sanctions and penalties prescribed in
Sections 269 and 270 of this Code.

SECTION 13. Authority of a Revenue Officer Subject to the rules and

regulations to be prescribed by the Secretary of Finance, upon recommendation of
the Commissioner, a Revenue Officer assigned to perform assessment functions in
any district may, pursuant to a Letter of Authority issued by the Revenue Regional
Director, examine taxpayers within the jurisdiction of the district in order to collect
the correct amount of tax, or to recommend the assessment of any deficiency tax
due in the same manner that the said acts could have been performed by the
Revenue Regional Director himself.

CASES DIGEST
Role and significance of a Letter of Authority.

Based on Section 13 of the Tax Code, a Letter of Authority or LOA is the authority given
to the appropriate revenue officer assigned to perform assessment functions. It empowers
or enables said revenue officer to examine the books of account and other accounting
records of a taxpayer for the purpose of collecting the correct amount of tax. Clearly,
there must be a grant of authority before any revenue officer can conduct an examination
or assessment. Equally important is that the revenue officer so authorized must not go
beyond the authority given. In the absence of such an authority, the assessment or
examination is a nullity.
Commissioner of Internal Revenue vs. Sony Phil., Inc.,
G.R. No. 178697, November 17, 2010

SECTION 14.Authority of Officers to Administer Oaths and Take Testimony

The Commissioner, Deputy Commissioners, Service Chiefs, Assistant Service
Chiefs, Revenue Regional Directors, Assistant Revenue Regional Directors, Chiefs
and Assistant Chiefs of Divisions, Revenue District Officers, special deputies of
the Commissioner, internal revenue officers and any other employee of the Bureau
thereunto especially deputized by the Commissioner shall have the power to
administer oaths and to take testimony in any official matter or investigation
conducted by them regarding matters within the jurisdiction of the Bureau.

SECTION 15. Authority of Internal Revenue Officers to Make Arrests and

Seizures The Commissioner, the Deputy Commissioners, the Revenue Regional
Directors, the Revenue District Officers and other internal revenue officers shall
have authority to make arrests and seizures for the violation of any penal law, rule
or regulation administered by the Bureau of Internal Revenue. Any person so
arrested shall be forthwith brought before a court, there to be dealt with according
to law.

SECTION 16. Assignment of Internal Revenue Officers Involved in Excise

Tax Functions to Establishments Where Articles Subject to Excise Tax are
Produced or Kept The Commissioner shall employ, assign, or reassign internal
revenue officers involved in excise tax functions, as often as the exigencies of the
revenue service may require, to establishments or places where articles subject to
excise tax are produced or kept: Provided, That an internal revenue officer
assigned to any such establishment shall in no case stay in his assignment for more
than two (2) years, subject to rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.

SECTION 17. Assignment of Internal Revenue Officers and Other Employees

to Other Duties The Commissioner may, subject to the provisions of Section 16
and the laws on civil service, as well, as the rules and regulations to be prescribed
by the Secretary of Finance, upon the recommendation of the Commissioner,
assign or reassign internal revenue officers and employees of the Bureau of
Internal Revenue, without change in their official rank and salary, to other or
special duties connected with the enforcement or administration of the revenue
laws as the exigencies of the service may require: Provided, That internal revenue
officers assigned to perform assessment or collection functions shall not remain in
the same assignment for more than three (3) years: Provided, further, That
assignment of internal revenue officers and employees of the Bureau to special
duties shall not exceed one (1) year.

CASES DIGEST
Re-assignments of Personnel
FACTS: The CIR filed with the COMELEC a request for exemption from the ban on the
transfer, promotion, reassignment, and recruitment of public sector employees during the
election period for the May 14, 2001 elections. The COMELEC granted the request. On
May 24, 2001, or during the election period for the May 14, 2001 elections, petitioner
issued a Revenue Travel Assignment Order (RTAO) reassigning private respondents as
Technical Assistants in the Taxpayer Assistance Service at its National Office in Quezon
City. The RTAO was issued pursuant to Section 17 of the Tax Reform Act of 1997
(Republic Act No. 8424) authorizing the BIR Commissioner to assign and reassign
personnel in the exigencies of the service. On May 25, 2001, petitioner submitted to the
COMELEC the names and positions of the said personnel detailed to other posts who
were exempted from the ban on transfer during the election period.

On June 1, 2001, private respondents filed with the RTC a Complaint for Injunction with
Prayer for a Temporary Restraining Order (TRO) and/or Preliminary Injunction. They
sought to enjoin petitioner from implementing the RTAO, as well as the Memorandum
ordering them to comply therewith. The complaint alleged that their
transfer/reassignment pursuant to the RTAO was tantamount to a removal without cause,
hence, illegal; that while there was no diminution in salaries, however, they suffered a
demotion in terms of rank or status; and that the RTAO is void as it does not bear the
imprimatur of the Secretary of Finance. On June 5, 2001, respondent judge issued a TRO
enjoining petitioner from implementing the RTAO. Thereafter, she conducted hearings on
private respondents' application for the issuance of a writ of preliminary injunction. On
June 25, 2001, respondent judge issued an Order declaring the reassignment under the
RTAO neither a demotion nor a removal without cause. Moreover, that the RTAO is in
accordance with law. Still, respondent judge issued a preliminary injunction on the
ground that petitioner had not "obtained any exemption from the election ban."
ISSUE: Whether respondent judge committed grave abuse of discretion amounting to
lack or excess of jurisdiction in holding that petitioner violated the election ban on the
transfer of BIR personnel during election period

HELD: Yes. Section 261(h) of the Omnibus Election Code prohibits the transfer or
detail of any public officer or employee, such as private respondents herein, during an
election period, except upon prior approval of the COMELEC. It is on record that
petitioner, thru the Secretary of Finance, filed a request with the COMELEC for
exemption from the election ban on the transfer, assignment, promotion, and recruitment
of its officers and employees. The COMELEC granted the request on January 24, 2001,
subject to the submission by petitioner of certain supporting documents. On March 27,
2001, petitioner complied with the COMELEC's requirement by submitting copies of
Executive Order No. 175 and the BIR Organizational Structure as of March 27, 2001. On
May 25, 2001, petitioner furnished the COMELEC with the names and positions of the
BIR officers and employees transferred or reassigned to other places of work pursuant to
RTAO No. 4-2001. But respondent judge ruled that a subsequent approval by the
COMELEC of petitioner's compliance is still required. This is untenable and
unnecessary.

Resolution No. 3499 of the COMELEC is clear and categorical. It granted petitioner's
request for exemption from the election ban on the transfer of personnel subject only to
submission of certain documents. Clearly, the COMELEC's further approval of these
requirements is no longer necessary. Otherwise, the COMELEC should have withdrawn
its favorable action had it found that petitioner's compliance was not in order. Therefore,
in issuing the assailed Order granting private respondents' application for preliminary
injunction, respondent judge gravely abused her discretion. Grave abuse of discretion
exists where an act of a court or tribunal is performed with a capricious or whimsical
exercise of judgment equivalent to lack of jurisdiction, as in this case.C I R vs. Rose
Marie Alonzo-Legasto, et al., G.R. No. 148443, April 24, 2006

Re-assignment of Personnel

Facts: On 26 October 1993, President Fidel V. Ramos ("President Ramos") issued

Executive Order No. 132, entitled "Approving the Streamlining of the Bureau of Internal
Revenue." On 28 July 1997, President Ramos issued Executive Order No. 430 ("EO
430") entitled "Further Streamlining the Bureau of Internal Revenue in line with its
Computerized Integrated Tax System."
Pitargue sued as a taxpayer fearing possible misappropriation of public funds. Vasquez,
who received an Revenue Travel Assignment Order reassigning him, raised violation of
his constitutional rights to security of tenure and to due process. Perez sued as a BIR
employee fearing a violation of her constitutional rights to security of tenure and to due
process by a probable inclusion in the RTAOs.

The central question for resolution is whether Pitargue, Perez and Vasquez are entitled
to the writ of preliminary injunction granted by the trial court.

The trial court's ruling was a reversal of the rule on the burden of proof since it assumed
the proposition which the respondents here were bound to prove. Moreover, the trial
court's grant of the writ of preliminary injunction in favor of respondents despite the lack
of a clear and unmistakable right on their part constitutes grave abuse of discretion
amounting to lack of jurisdiction,therefore the corresponding writ of preliminary
mandatory injunction dated 7 April 1998, both issued by Branch 77 of the Regional Trial
Court of Quezon City in Civil Case No. Q-97-32928, are declared VOID.BEETHOVEN
L. RUALO vs. ELISEO P. PITARGUE, NOBLE BAMBINA B. PEREZ and EDMUND
VASQUEZ G.R. No. 140284. January 21, 2005

SECTION 18. Reports of Violation of Laws When an internal revenue officer

discovers evidence of a violation of this Code or of any law, rule or regulation
administered by the Bureau of Internal Revenue, of such character as to warrant
the institution of criminal proceedings, he shall immediately report the facts to the
Commissioner, through his immediate superior, giving the name and address of the
offender and the names of the witnesses, if possible: Provided, That in urgent
cases, the Revenue Regional Director or Revenue District Officer, as the case may
be, may send the report to the corresponding prosecuting officer. In the latter case,
a copy of his report shall be sent to the Commissioner.

SECTION 19. Contents of Commissioner's Annual Report The Annual

Report of the Commissioner shall contain detailed statements of the collections of
the Bureau with specifications of the sources of revenue by type of tax, by manner
of payment, by revenue region and by industry group and its disbursements by
classes of expenditures.

In case the actual collection exceeds or falls short of target as set in the annual
national budget by fifteen percent (15%) or more, the Commissioner shall explain
the reasons for such excess or shortfall.
SECTION 20Submission of Report and Pertinent Information by the
Commissioner

(A) Submission of Pertinent Information to Congress The provision of Section

270 of this Code to the contrary notwithstanding, the Commissioner shall, upon
request of Congress and in aid of legislation, furnish its appropriate Committee
pertinent information including but not limited to: industry audits, collection
performance data, status reports in criminal actions initiated against persons and
taxpayer's returns: Provided, however, That any return or return information which
can be associated with, or otherwise identify, directly or indirectly, a particular
taxpayer shall be furnished the appropriate Committee of Congress only when
sitting in Executive Session unless such taxpayer otherwise consents in writing to
such disclosure.

(B) Report to Oversight Committee The Commissioner shall, with reference to

Section 204 of this Code, submit to the Oversight Committee referred to in Section
290 hereof, through the Chairmen of the Committee on Ways and Means of the
Senate and House of Representatives, a report on the exercise of his powers
pursuant to the said Section, every six (6) months of each calendar year.

SECTION 21 Sources of Revenue The following taxes, fees and charges are
deemed to be national internal revenue taxes:

(a) Income tax;

(b) Estate and donor's taxes;

(c) Value-added tax;

(d) Other percentage taxes;

(e) Excise taxes;

(f) Documentary stamp taxes; and

(g) Such other taxes as are or hereafter may be imposed and collected by the
Bureau of Internal Revenue.

TITLE II Tax on Income

CHAPTER I Definitions

SECTION 22 Definitions When used in this Title:

(A) The term 'person' means an individual, a trust, estate, or corporation.

(B) The term 'corporation' shall include partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion),
associations, or insurance companies, but does not include general professional
partnerships and a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating or consortium agreement under a
service contract with the Government. 'General professional partnerships' are
partnerships formed by persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from engaging in any trade or
business.

CASES DIGEST

Taxability of Partnerships
With respect to the tax on corporations, the issue hinges on the meaning of the terms
"corporation" and "partnership", as used in sections 24( Now Sec. 27) and 84( Now Sec
22B) of said Code, the pertinent parts of which read:

"SEC. 24 Rate of tax on corporations There shall be levied, assessed, collected,

and paid annually upon the total net income received in the preceding taxable year from
all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including duly registered
general co-partnerships (compaiascolectivas), a tax upon such income equal to the sum
of the following: . . . ."

"Sec. 84(b) The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations
or insurance companies, but does not include duly registered general copartnerships
(compaiascolectivas)."

Article 1767 of the Civil Code of the Philippines provides:

"By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits
among themselves."

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an
agreement to contribute money, property or industry to a common fund; and (b) intent to
divide the profits among the contracting parties. The first element is undoubtedly present
in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money
and property to a common fund. Hence, the issue narrows down to their intent in acting
as they did. Upon consideration of all the facts and circumstances surrounding the case,
we are fully satisfied that their purpose was to engage in real estate transactions for
monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a
property inherited by them pro indiviso. They created it purposely. What is more they
jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944,
they purchased 21 lots for P18,000.000. This was soon followed, on April 23, 1944, by
the acquisition of another real estate for P108,825.00. Five (5) days later (April 28,
1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between each, particularly the
last three purchases, is strongly indicative of a pattern or common design that was not
limited to the conservation and preservation of the aforementioned common fund or even
of the property acquired by petitioners in February, 1943. In other words, one cannot but
perceive a character of habituality peculiar to business transactions engaged in for
purposes of gain.

For purposes of the tax on corporations, our National Internal Revenue Code, includes
these partnerships with the exception only of duly registered general co-partnerships
within the purview of the term "corporation." It is, therefore, clear to our mind that
petitioners herein constitute a partnership, insofar as said Code is concerned, and are
subject to the income tax for corporations.

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA and FRANCISCA

EVANGELISTA vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT
OF TAX APPEALS G.R. No. L-9996. October 15, 1957
To be taxed, a joint venture need not be constituted in accordance with usual legal
requirements.

The qualifying expression: "the term corporation includes partnerships, no matter how
created or organized" clearly indicates that a joint venture need not be undertaken in any
of the standard forms, or in conformity with the usual requirements of the law on
partnerships, in order that one could be deemed constituted for purposes of the tax on
corporations.

Eufemia Evangelista vs. Collector of Internal Revenue, et al., G.R. No. L-9996, October
15, 1957

For tax purposes, the co-ownership of inherited properties is automatically converted

into an unregistered partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a
project partition either duly executed in an extrajudicial settlement or approved by the
court in the corresponding testate or intestate proceeding. The reason for this is simple.
From the moment of such partition, the heirs are entitled already to their respective
definite shares of the estate and the income thereof, for each of them to manage and
dispose of an exclusively his own without the intervention of the other heirs, and,
accordingly, he becomes liable individually for all taxes in connection therewith. If after
such partition, he allows his share to be held in common with his co-heirs under a single
management to be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or instrument were executed for
the purpose, for tax purposes, at least, an unregistered partnership is formed.
Ona vs. Commissioner, G.R. No. L-19342, May 25, 1972

What constitutes a "partnership" under American law.

Under American law, the term 'partnership' includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. For purposes of the tax on
corporations, our National Internal Revenue Code, includes these partnerships with the
exception only of duly registered general copartnershipswithin the purview of the term
"corporation."

Eufemia Evangelista vs. Collector of Internal Revenue, et al., G.R. No. L-9996, October
15, 1957

Tax on income of insurance pool is different from tax on dividends received by individual
corporate entities.
An insurance pool is a taxable entity distinct from the individual corporate entities of the
ceding companies. The tax on its income is obviously different from the tax on the
dividends received by the said companies. Clearly, there is no double taxation here.

Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25,
1999

Unregistered partnerships and associations are included in the concept of

"corporations".

The Philippine legislature included in the concept of corporations those entities that
resembled them such as unregistered partnerships and associations. Parenthetically, the
NLRC's inclusion of such entities in the tax on corporations was made even clearer by
the Tax Reform Act of 1997.

Afisco Insurance Corp., et al. vs. Court of Appeals, et al., G.R. No. 112675, January 25,
1999

Personality is not a condition precedent to the existence of partnerships.

The term 'corporation' includes among others, joint accounts (cuentas en participacion)
and associations, none of which has a legal personality of its own, independent of that of
its members. The lawmakers could not have regarded personality as a condition
precedent to the existence of partnerships referred to therein.

Florencio Reyes, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-24020-
21, July 29, 1968

Taxes enforced against a corporate taxpayer cannot be imposed on its officers and
stockholders.

Taxes being personal to the taxpayer, it can only be enforced against petitioner because
the payment of unpaid customs duties and taxes are the personal obligation of the
petitioner as a corporate taxpayer, thus, it cannot be imposed on its corporate officers,
much so on its individual stockholders, for this will violate the principle that a
corporation has personality separate and distinct from the persons constituting it.

Proton Pilipinas Corp. vs. Republic of the Phil., G.R. No. 165027, October 16, 2006

(C) The term 'domestic,' when applied to a corporation, means created or organized
in the Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a corporation which
is not domestic.

(E) The term 'nonresidentcitizen' means:

(1) A citizen of the Philippines who establishes to the satisfaction of the

Commissioner the fact of his physical presence abroad with a definite intention to
reside therein.

(2) A citizen of the Philippines who leaves the Philippines during the taxable year
to reside abroad, either as an immigrant or for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from abroad and
whose employment thereat requires him to be physically present abroad most of
the time during the taxable year.

BIR ISSUANCES
REVENUE REGULATIONS NO. 05-01 July 31, 2001 Revoking the Requirement for
Non-Resident Citizens, Overseas Contract Workers (OCWs) and Seamen to File
Information Returns on Income Derived from Sources Outside the Philippines. Non-
resident citizens who are exempt from tax with respect to income derived from sources
outside the Philippines in accordance with Section 23(B) and (C), in relation to Section
22 (E) and Section 51 (A)(2)(d) and (A)(3) of the Tax Code of 1997, but who are
nevertheless mandated to file information returns (BIR Form 1701C or the new
computerized BIR Form 1703) pursuant to RMO 30-99 and RR 9-99, shall no longer be
required to file the same on their income derived from sources outside the Philippines
beginning taxable year 2001.

(4) A citizen who has been previously considered as nonresident citizen and who
arrives in the Philippines at any time during the taxable year to reside permanently
in the Philippines shall likewise be treated as a nonresident citizen for the taxable
year in which he arrives in the Philippines with respect to his income derived from
sources abroad until the date of his arrival in the Philippines.

(5) The taxpayer shall submit proof to the Commissioner to show his intention of
leaving the Philippines to reside permanently abroad or to return to and reside in
the Philippines as the case may be for purposes of this Section.
(F) The term 'resident alien' means an individual whose residence is within the
Philippines and who is not a citizen thereof.

BIR ISSUANCES
REVENUE REGULATIONS No. 2 / Section 5 Definition- A "non-resident alien
individual" means an individual

(a) Whose residence is not within the Philippines; and

(b) Who is not a citizen of the Philippines.

An alien actually present in the Philippines who is not a mere transient or sojourner is a
resident of the Philippines for purposes of the income tax. Whether he is a transient or
not is determined by his intentions with regard to the length and nature of his stay. A
mere floating intention indefinite as to time, to return to another country is not sufficient
to constitute him a transient. If he lives in the Philippines and has no definite intention as
to his stay, he is a resident. One who comes to the Philippines for a definite purpose
which in its nature may be promptly accomplished is a transient. But if his purpose is of
such a nature that an extended stay may be necessary for its accomplishment, and to that
end the alien makes his home temporarily in the Philippines, he becomes a resident,
though it may be his intention at all times to return to his domicile abroad when the
purpose for which he came has been consummated or abandoned.

(G) The term 'nonresident alien' means an individual whose residence is not within
the Philippines and who is not a citizen thereof.

(H) The term 'resident foreign corporation' applies to a foreign corporation

engaged in trade or business within the Philippines.

(I)The term 'nonresident foreign corporation' applies to a foreign corporation not

engaged in trade or business within the Philippines.

(J) The term 'fiduciary' means a guardian, trustee, executor, administrator, receiver,
conservator or any person acting in any fiduciary capacity for any person.

(K) The term 'withholding agent' means any person required to deduct and
withhold any tax under the provisions of Section 57

(L) The term 'shares of stock' shall include shares of stock of a corporation,
warrants and/or options to purchase shares of stock, as well as units of
participation in a partnership (except general professional partnerships), joint stock
companies, joint accounts, joint ventures taxable as corporations, associations, and
recreation or amusement clubs (such as golf, polo or similar clubs), and mutual
fund certificates.

(M) The term 'shareholder' shall include holders of a share/s of stock, warrant/s
and/or option/s to purchase shares of stock of a corporation, as well as a holder of a
unit of participation in a partnership (except general professional partnerships) in a
joint stock company, a joint account, a taxable joint venture, a member of an
association, recreation or amusement club (such as golf, polo, or similar clubs) and
a holder of a mutual fund certificate, a member in an association, joint-stock
company, or insurance company.

(N) The term 'taxpayer' means any person subject to tax imposed by this Title

(O) The terms 'including' and 'includes', when used in a definition contained in this
Title, shall not be deemed to exclude other things otherwise within the meaning of
the term defined

(P) The term 'taxable year'means the calendar year, or the fiscal year ending during
such calendar year, upon the basis of which the net income is computed under this
Title. 'Taxable year' includes, in the case of a return made for a fractional part of a
year under the provisions of this Title or under rules and regulations prescribed by
the Secretary of Finance, upon recommendation of the Commissioner, the period
for which such return is made.

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

(R) The terms 'paid or incurred' and 'paid or accrued' shall be construed according
to the method of accounting upon the basis of which the net income is computed
under this Title.

(S) The term 'trade or business' includes the performance of the functions of a
public office.

(T) The term 'securities' means shares of stock in a corporation and rights to
subscribe for or to receive such shares. The term includes bonds, debentures, notes,
or certificates, or other evidence of indebtedness, issued by any corporation,
including those issued by a government or political subdivision thereof, with
interest coupons or in registered form.

CASES DIGEST
Shares of stock are ordinary assets only to a dealer in securities.

Shares of stock, like the other securities defined in the NIRC, would be ordinary assets
only to a dealer in securities or a person engaged in the purchase and sale of, or an
active trader (for his own account) in, securities. In the hands, however, of another who
holds the shares of stock by way of an investment, the shares to him would be capital
assets. When the shares held by such investor become worthless, the loss is deemed to be
a loss from the sale or exchange of capital assets.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

BIR ISSUANCES
REVENUE REGULATIONS NO. 001-08 February 1, 2008

SUBJECT : Amending Certain Provisions of Revenue Regulations No. 10-2006

Prescribing the Guidelines and Conditions for the Tax Treatment of Securities Borrowing
and Lending Transactions Involving Shares of Stock or Securities Listed in the Philippine
Stock Exchange

Concept of Securities Borrowing and Lending (SBL) Securities Borrowing and

Lending (SBL) is an important element in securities trading and capital market
development among emerging markets. It is a vital facility behind the efficient trading
settlements and growth of derivatives and options market. SBL exists for both equity and
debt securities. For purposes of these Regulations, however, SBL shall be limited to
borrowing and lending of shares of stock or securities listed in the PSE unless declared
by the Securities and Exchange Commission to be ineligible for borrowing and lending
under an SBL Program. SBL Program for other securities listed and traded in other
Exchanges shall be covered by a separate Regulation.

SBL involves the lending of shares of stocks or securities by the Lender, who owns or
controls them, to the Borrower who needs the shares of stocks/securities borrowed to
support trading strategies or settlement obligations, in exchange for a collateral and the
promise to return the equivalent shares of stocks/securities at the end of the borrowing
period. The borrowing period in any agreement cannot be more than two (2) years.
Typically, the Borrower will use or dispose of the shares of stocks/securities borrowed
strictly in connection with a particular purpose or purposes as herein mentioned. Being
fungible in nature, the borrowed shares of stocks/securities are transferred from the
Lender to the Borrower. For the duration of the borrowing and lending period under the
agreement, the Lender temporarily loses ownership of the shares of stock/securities lent
but acquires a contractual right to receive all benefits accruing to the shares of
stock/securities. The objective is to put the Lender into the same economic position as the
Lender would have been had the securities not been lent. This means that in case of
corporate actions like stock rights, dividend declarations, and other benefits accruing to
the shares of stock, the Borrower would have to "manufacture" the corresponding
benefits thereon and return the same to the Lender as if the shares of stock/securities
"never left his hands".

Upon demand of the Lender or at the end of the stipulated borrowing period, the
Borrower is then obligated to return the equivalent shares of stock/securities and the
Lender, in turn, returns the collateral put up by the Borrower. If the borrower fails to
return the shares of stock/securities or the equivalent Shares of Stock/Securities, the
Lender/Lending Agent, as part of the SBL transactions, may purchase shares of
stock/securities from the stock exchange. In effect, SBL is similar to a simple
collateralized cash loan transaction. However, instead of cash, what is borrowed are
listed shares of stock/securities and what is provided as collateral is either cash,
government or equity securities, or standby letter of credit issued by a bank."

(U) The term 'dealer in securities' means a merchant of stocks or securities,

whether an individual, partnership or corporation, with an established place of
business, regularly engaged in the purchase of securities and the resale thereof to
customers; that is, one who, as a merchant, buys securities and re-sells them to
customers with a view to the gains and profits that may be derived therefrom.

CASES DIGEST
Equity investment is capital, not ordinary, asset.

An equity investment is a capital, not ordinary, asset of the investor the sale or exchange
of which results in either a capital gain or a capital loss. The gain or the loss is ordinary
when the property sold or exchanged is not a capital asset. Thus, shares of stock, like the
other securities defined in Section 20(t) 4 of the NIRC, would be ordinary assets only to a
dealer in securities or a person engaged in the purchase and sale of, or an active trader
(for his own account) in, securities.
China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(V) The term 'bank' means every banking institution, as defined in Section 2 of
Republic Act No. 337, as amended, otherwise known as the General Banking Act.
A bank may either be a commercial bank, a thrift bank, a development bank, a
rural bank or a specialized government bank.

BIR ISSUANCES
REVENUE REGULATIONS NO. 004-11 March 15, 2011
Proper Allocation of Costs and Expenses Amongst Income Earnings of Banks and Other
Financial Institutions for Income Tax Reporting Purposes

REVENUE REGULATIONS NO. 09-04 June 21, 2004

Implementing Certain Provisions of Republic Act No. 9238, Re-Imposing the Gross
Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-
Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1,
2004
Definition of Terms For purposes of these Regulations, the terms enumerated
hereunder shall have the following meaning:
2.1. Financial Institution shall refer to banks, non-bank financial intermediaries
performing quasi-banking functions, and other non-bank financial intermediaries
including finance companies. This does not, however, include insurance companies.
2.2. Banks or Banking Institutions shall refer to those entities as defined in Section
3 of Republic Act No. 8791, as amended, otherwise known as the General Banking Law
of 2000. The term "banks" or "banking institutions" are synonymous and interchangeable
and specifically include universal banks, commercial banks, thrift banks (savings and
mortgage banks, stock savings and loan associations, and private development banks),
cooperative banks, rural banks, Islamic banks and other classifications of banks as may
be determined by the Monetary Board of the BangkoSentralngPilipinas.
2.3. Non-bank Financial Intermediaries shall refer to persons or entities whose
principal functions include the lending, investing or placement of funds or evidences of
indebtedness or equity deposited with them, acquired by them or otherwise coursed
through them, either for their own account or for the account of others. This includes all
entities regularly engaged in the lending of funds or purchasing of receivables or other
obligations with funds obtained from the public through the issuance, endorsement or
acceptance of debt instruments of any kind for their own account, or through the issuance
of certificates of assignment or similar instruments with recourse, trust certificates, or of
repurchase agreements, whether any of these means of obtaining funds from the public is
done on a regular basis or only occasionally.
2.4. Quasibanking Activities shall refer to the borrowing of funds from twenty (20)
or more personal or corporate lenders at any one time, through the issuance,
endorsement or acceptance of debt instruments of any kind other than deposits for the
borrowers own account, or through the issuance of certificates of assignment or similar
instruments, with recourse, or of repurchase agreements for purposes of relending or
purchasing receivables and other similar obligations. Provided, however, that
commercial, industrial and other non-financial companies, which borrows funds through
any of these means for the limited purpose of financing their own needs or the needs of
their agents or dealers, shall not be considered as performing quasi-banking functions.
2.5. Deposit Substitutes shall refer to an alternative form of obtaining funds from
the public (the term public means borrowing from twenty [20] or more individual or
corporate lenders at any one time), other than deposits, through the issuance,
endorsement, or acceptance of debt instruments for the borrowers own account, for the
purpose of relending or purchasing of receivables and other obligations, or financing
their own needs or the needs of their agent or dealer. These instruments may include, but
need not be limited to, bankers acceptances, promissory notes, repurchase agreements,
including reverse repurchase agreements entered into by and between the
BangkoSentralngPilipinas (BSP) and any authorized agent bank, certificates of
assignment or participation and similar instruments with recourse: Provided, however,
That debt instruments issued for inter-bank call loans with maturity of not more than five
(5) days to cover deficiency in reserves against deposit liabilities including those between
or among banks and quasi-banks shall not be considered as deposit substitute debt
instruments.
2.6. Insurance Companies shall refer to entities that undertakes for a consideration
to indemnify another (insured) against loss, damage or liability arising from an unknown
or contingent event.
2.7. Financing Companies shall refer to corporations except banks, investments
houses, savings and loan associations, insurance companies, cooperatives, and other
financial institutions organized or operating under other special laws, which are
primarily organized for the purpose of extending credit facilities to consumers and to
industrial, commercial, or agricultural enterprises, by direct lending or by discounting or
factoring commercial papers or accounts receivables, or by buying and selling contracts,
leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of
movable as well as immovable properties (R.A. No. 5980 as amended by R.A. No. 8556).
2.8. Financial Leasing shall refer to the mode of extending credit through a non-
cancellable lease contract under which the lessor purchases or acquires, at the instance
of the lessee, machinery, equipment, motor vehicles, appliances, business and office
machines, and other movable or immovable property in consideration of the periodic
payment by the lessee of a fixed amount of money sufficient to amortize at least seventy
percent (70%) of the purchase price or acquisition cost, including any incidental
expenses and a margin of profit over an obligatory period of not less than two (2) years
during which the lessee has the right to hold and use the leased property with the right to
expense the lease rentals paid to the lessor and bears the cost of repairs, maintenance,
insurance and preservation thereof, but with no obligation or option on his part to
purchase the leased property from the owner-lessor at the end of the lease contract (R.A.
No. 5980 as amended by R.A. No. 8556). A finance lease is a lease that transfers
substantially all the risks and rewards incident to ownership of an asset. Title may or
may not eventually be transferred.
2.9. Operating Lease shall refer to a lease other than a finance lease of a finance
company.
2.10. Interest Income the term shall include interest and discounts earned on loans
and investment transactions.
2.11. Securities shall include shares of stock in a corporation and rights to subscribe
for or to receive such shares; and bonds, debentures, notes or certificates, or other
evidence of indebtedness issued by any corporation, including those issued by the
government or political subdivision thereof, with interest coupons or in registered form.
2.12. Government Securities shall refer to securities issued by the Republic of the
Philippines or any of its agencies, instrumentalities, and political subdivisions.
2.13. Private Securities shall refer to securities not covered by Subsection 2.12.
hereof.
(W) The term 'non-bank financial intermediary' means a financial intermediary, as
defined in Section 2(D)(c) of Republic Act No. 337, as amended, otherwise
known as the General Banking Act, authorized by the BangkoSentralngPilipinas
(BSP) to perform quasi-banking activities.

(X) The term 'quasi-banking activities' means borrowing funds from twenty (20) or
more personal or corporate lenders at any one time, through the issuance,
endorsement, or acceptance of debt instruments of any kind other than deposits for
the borrower's own account, or through the issuance of certificates of assignment
or similar instruments, with recourse, or of repurchase agreements for purposes of
relending or purchasing receivables and other similar obligations: Provided,
however, That commercial, industrial and other non-financial companies, which
borrow funds through any of these means for the limited purpose of financing their
own needs or the needs of their agents or dealers, shall not be considered as
performing quasi-banking functions.
REVENUE REGULATIONS NO. 09-04 June 21, 2004
Implementing Certain Provisions of Republic Act No. 9238, Re-Imposing the Gross
Receipts Tax on Banks and Non-Bank Financial Intermediaries Performing Quasi-
Banking Functions and Other Non-Bank Financial Intermediaries Beginning January 1,
2004
(Y) The term 'deposit substitutes' shall mean an alternative form of obtaining funds
from the public (the term 'public' means borrowing from twenty (20) or more
individual or corporate lenders at any one time), other than deposits, through the
issuance, endorsement, or acceptance of debt instruments for the borrower's own
account, for the purpose of relending or purchasing of receivables and other
obligations, or financing their own needs or the needs of their agent or dealer.
These instruments may include, but need not be limited to bankers' acceptances,
promissory notes, repurchase agreements, including reverse repurchase agreements
entered into by and between the BangkoSentralngPilipinas (BSP) and any
authorized agent bank, certificates of assignment or participation and similar
instruments with recourse: Provided, however, That debt instruments issued for
interbank call loans with maturity of not more than five (5) days to cover
deficiency in reserves against deposit liabilities, including those between or among
banks and quasi-banks, shall not be considered as deposit substitute debt
instruments.

(Z) The term 'ordinary income' includes any gain from the sale or exchange of
property which is not a capital asset or property described in Section 39(A)(1).
Any gain from the sale or exchange of property which is treated or considered,
under other provisions of this Title, as 'ordinary income' shall be treated as gain
from the sale or exchange of property which is not a capital asset as defined in
Section 39(A)(1). The term 'ordinary loss' includes any loss from the sale or
exchange of property which is not a capital asset. Any loss from the sale or
exchange of property which is treated or considered, under other provisions of this
Title, as 'ordinary loss' shall be treated as loss from the sale or exchange of
property which is not a capital asset.

CASES DIGEST
An equity investment is a capital, not ordinary, asset of the investor the sale or exchange
of which results in either a capital gain or a capital loss. The gain or the loss is ordinary
when the property sold or exchanged is not a capital asset.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(AA) The term 'rank and file employees' shall mean all employees who are
holding neither managerial nor supervisory position as defined under existing
provisions of the Labor Code of the Philippines, as amended.

(BB) The term 'mutual fund company' shall mean an open-end and close-end
investment company as defined under the Investment Company Act.
(CC) The term 'trade, business or profession' shall not include performance of
services by the taxpayer as an employee.

(DD) The term 'regional or area headquarters' shall mean a branch established in
the Philippines by multinational companies and which headquarters do not earn or
derive income from the Philippines and which act as supervisory, communications
and coordinating center for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.

(EE) The term 'regional operating headquarters' shall mean a branch established in
the Philippines by multinational companies which are engaged in any of the
following services: general administration and planning; business planning and
coordination; sourcing and procurement of raw materials and components;
corporate finance advisory services; marketing control and sales promotion;
training and personnel management; logistic services; research and development
services and product development; technical support and maintenance; data
processing and communication; and business development.

(FF) The term 'long-term deposit or investment certificate' shall refer to certificate
of time deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments
with a maturity period of not less than five (5) years, the form of which shall be
prescribed by the BangkoSentralngPilipinas (BSP) and issued by banks only (not
by nonbank financial intermediaries and finance companies) to individuals in
denominations of Ten thousand pesos (P10,000) and other denominations as may
be prescribed by the BSP.

(GG) The term 'statutory minimum wage' shall refer to the rate fixed by the
Regional Tripartite Wage and Productivity Board, as defined by the Bureau of
Labor and Employment Statistics (BLES) of the Department of Laborand
Employment (DOLE).

(HH)The term 'minimum wage earner' shall refer to a worker in the private sector
paid the statutory minimum wage, or to an employee in the public sector with
compensation income of not more than the statutory minimum wage in the non-
agricultural sector where he/she is assigned.
BIR ISSUANCES

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. The following income payments

are exempted from the requirements of withholding tax on compensation:

xxxxxxxxx

Compensation income of Minimum Wage Earnerss who work in the Private sector and
being paid the Statutory Minimum Wage (SMW), as fixed by Regional Tripartite Wage
and Productivity Board (RTWPB)/National Wages and Productivity Commission
(NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
form income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.

CHAPTER II General Principles

SECTION 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;

BIR ISSUANCES
REVENUE REGULATIONS NO. 001-11 February 24, 2011

Tax Treatment of Income Earnings and Money Remittances of an Overseas Contract

Worker (OCW) or Overseas Filipino Worker (OFW)

OCW refer to Filipino citizens employed in foreign countries, commonly referred to as

OFWs, who are physically present in a foreign country as a consequence of their
employment thereat. Their salaries and wages are paid by an employer abroad and is not
borne by any entity or person in the Philippines. To be considered as an OCW or OFW,
they must be duly registered as such with the Philippine Overseas Employment
Administration (POEA) with a valid Overseas Employment Certificate (OEC).
Seafarers or seamen are Filipino citizens who receive compensation for services
rendered abroad as a member of the complement of a vessel engaged exclusively in
international trade. To be considered as an OCW or OFW they must be duly registered
as such with the Philippine Overseas Employment Administration (POEA) with a valid
Overseas Employment Certificate (OEC) with a valid Seafarers Identification Record
Book (SIRB) or Seaman's Book issued by the Maritime Industry Authority (MARINA).

(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.

CASES DIGEST
Taxes are the lifeblood of the government.

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved.

Commissioner of Internal Revenue, et al. vs. Court of Appeals, et al., G.R. No. 119322,
June 4, 1996

Taxation is a destructive power which interferes with the personal and property rights of
the people and takes from them a portion of their property for the support of the
government. And, since taxes are what we pay for civilized society, or are the lifeblood of
the nation, the law frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimijuris against the taxpayer and liberally in favor
of the taxing authority. A claim of refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to be mistaken. Elsewise stated,
taxation is the rule, exemption therefrom is the exception.

Atlas Consolidated Mining and Dev't. Corp. vs. Commissioner of Internal Revenue, G.R.
No. 159471, January 26, 2011
Symbiotic relationship between government and people is the rationale of taxation.

It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for the lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's hard-earned income to taxing
authorities, every person who is able to must contribute his share in the running of the
government. The government for its part is expected to respond in the form of tangible
and intangible benefits intended to improve the lives of the people and enhance their
moral and material values. This symbiotic relationship is the rationale of taxation and
should dispel the erroneous notion that it is an arbitrary method of exaction by those in
the seat of power.

Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17,
1988

Obligation to pay taxes rests upon the necessity of money for the support of the state.

The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection
afforded to, a citizen by the government, but upon the necessity of money for the support
of the state. For this reason, no one is allowed to object to or resist the payment of taxes
solely because no personal benefit to him can be pointed out. While courts will not
enlarge, by construction, the government's power of taxation, they also will not place
upon tax laws so loose a construction as to permit evasions on merely fanciful and
insubstantial distinctions. When proper, a tax statute should be construed to avoid the
possibilities of tax evasion. Construed this way, the statute, without resulting in injustice
to the taxpayer, becomes fair to the government.

Pablo Lorenzo vs. Juan Posadas, Jr., G.R. No. 43082, June 18, 1937

The power to tax is an attribute of sovereignty.

The power to tax is an attribute of sovereignty. It is a power emanating from necessity. It

is a necessary burden to preserve the State's sovereignty and a means to give the
citizenry an army to resist an aggression, a navy to defend its shores from invasion, a
corps of civil servants to serve, public improvements designed for the enjoyment of the
citizenry and those which come within the State's territory, and facilities and protection
which a government is supposed to provide.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-
22074, April 30, 1965
Every person who is able to must contribute his share in the running of the government.

It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. Hence,
despite the natural reluctance to surrender part of one's hard-earned income to the
taxing authorities, every person who is able to must contribute his share in the running of
the government. The government for its part, is expected to respond in the form of
tangible and intangible benefits intended to improve the lives of the people and enhance
their moral and material values. This symbiotic relationship is the rationale of taxation
and should dispel the erroneous notion that it is an arbitrary method of exaction by those
in the seat of power.

Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17,
1988

Power of taxation must be exercised reasonably and in accordance with prescribed

procedure.

a) But even as the inevitability and indispensability of taxation is conceded, it is a

requirement in all democratic regimes that it be exercised reasonably and in accordance
with the prescribed procedure. If it is not, then the taxpayer has a right to complain and
the courts will then come to his succor. For all the awesome power of the tax collector,
he may still be stopped in his tracks if the taxpayer can demonstrate . . . that the law has
not been observed. Thus while "taxes are the lifeblood of the government," the power to
tax has its limits, inspite of all its plenitude.

Commissioner of Internal Revenue, et al. vs. Court of Appeals, et al., G.R. No. 119322,
June 4, 1996

Taxes are the lifeblood of the government and so should be collected without unnecessary
hindrance. On the other hand, such collection should be made in accordance with law as
any arbitrariness will negate the very reason for government itself. It is therefore
necessary to reconcile the apparently conflicting interests of the authorities and the
taxpayers so that the real purpose of taxation, which is the promotion of the common
good, may be achieved.

Commissioner of Internal Revenue vs. Algue, Inc., et al., G.R. No. L-28896, February 17,
1988

The power to tax is not the power to destroy.

Taxation is said to be equitable when its burden falls on those better able to pay.
Taxation is progressive when its rate goes up depending on the resources of the person
affected. The power to tax "is an attribute of sovereignty". In fact, it is the strongest of all
the powers of government. But for all its plenitude, the power to tax is not unconfined as
there are restrictions. Adversely effecting as it does property rights, both the due process
and equal protection clauses of the Constitution may properly be invoked to invalidate in
appropriate cases a revenue measure. If it were otherwise, there would be truth to the
1903 dictum of Chief Justice Marshall that "the power to tax involves the power to
destroy." The web or unreality spun from Marshall's famous dictum was brushed away by
one stroke of Mr. Justice Holmes' pen, thus: "The power to tax is not the power to destroy
while this Court sits." "So it is in the Philippines."

Antero M. Sison, Jr. vs. Ruben B. Ancheta, et al., G.R. No. L-59431, July 25, 1984

Tax laws must operate equally and uniformly on all persons under similar circumstances.

The taxing power has the authority to make a reasonable and natural classification for
purposes of taxation but the government's act must not be prompted by a spirit of
hostility, or at the very least discrimination that finds no support in reason. It suffices
then that the laws operate equally and uniformly on all persons under similar
circumstances or that all persons must be treated in the same manner, the conditions not
being different both in the privileges conferred and the liabilities imposed.

Jose B.L. Reyes vs. Pedro Almanzor, et al., G.R. Nos. L-49839-46, April 26, 1991

Laws granting tax exemption are construed strictissimijuris

a) The settled rule in this jurisdiction is that laws granting exemption from tax are
construed strictissimijuris against the taxpayer and liberally in favor of the taxing power.
Taxation is the rule and exemption is the exception. The effect of an exemption is
equivalent to an appropriation. Hence, a claim for exemption from tax payments must be
clearly shown and based on language in the law too plain to be mistaken.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

The Court has laid down the rule that "as the power of taxation is a high prerogative of
sovereignty, the relinquishment is never presumed and any reduction or dimnution
thereof with respect to its mode or its rate, must be strictly construed, and the same must
be couched in clear and unmistakable terms in order that it may be applied." More
specifically stated, the general rule is that any claim for exemption from the tax statute
should be strictly construed against the taxpayer
Luzon Stevedoring Corp. vs. Court of Tax Appeals, et al., G.R. No. L-30232, July 29,
1988

Along with police power and eminent domain, taxation is one of the three basic and
necessary attributes of sovereignty. Thus, the State cannot be deprived of this most
essential power and attribute of sovereignty by vague implications of law. Rather, being
derogatory of sovereignty, the governing principle is that tax exemptions are to be
construed in strictissimijuris against the taxpayer and liberally in favor of the taxing
authority; and he who claims an exemption must be able to justify his claim by the
clearest grant of statute.

CompagnieFinanciereSucresEtDenrees vs. Commissioner of Internal Revenue, G.R. No.

133834, August 28, 2006

Tax amnesty is construed strictly against the taxpayer.

A tax amnesty, much like a tax exemption, is never favored nor presumed in law and if
granted by statute, the terms of the amnesty like that of a tax exemption must be
construed strictly against the taxpayer and liberally in favor of the taxing authority.
Bibiano V. Baas, Jr. vs. Court of Appeals, et al., G.R. No. 102967, February 10, 2000

Tax exemptions are not violative of the equal protection clause.

A tax is uniform when it operates with the same force and effect in every place where the
subject of it is found. Uniformity means that all property belonging to the same class
shall be taxed alike. The Legislature has the inherent power not only to select the subjects
of taxation but to grant exemptions. Tax exemptions have never been deemed violative of
the equal protection clause.

Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Co., Inc., G.R. No.
L-23771, August 4, 1988

Grant of tax exemption to National Power Corp. is not a case of tax evasion.

This tax exemption is intended not only to insure that the NPC shall continue to generate
electricity for the country but more importantly, to assure cheaper rates to be paid by the
consumers. The allegation that this is in effect allowing tax evasion by oil companies is
not quite correct. There are various arrangements in the payment of crude oil purchased
by NPC from oil companies. Generally, the customs duties paid by the oil companies are
added to the selling price paid by NPC. As to the specific and ad valorem taxes, they are
added as part of the seller's price, but NPC pays the price net of tax, on condition that
NPC would seek a tax refund to the oil companies. No tax component on fuel had been
charged or recovered by NPC from the consumers through its power rates. Thus, this is
not a case of tax evasion of the oil companies but of tax relief for the NPC.

Ernesto M. Maceda vs. CatalinoMacaraig, Jr., et al., G.R. No. 88291, May 31, 1991

Tax exemption provision in a treaty should be construed in favor of the party for whose
benefit the stipulation was inserted.

Where two meanings of a stipulation are admissible, that which is least to the advantage
of the party for whose benefit the stipulation was inserted in the treaty should be
preferred. Thus, an ambiguity in the tax exemption provision in the Military Bases
Agreement and in the "Aide Memoire" in accordance with which a contract was entered
into, cannot be interpreted in favor of the American Government or for that matter a
party claiming under it, like a taxpayer, especially when it is considered that for the
Philippine Government "the exception contained in tax statutes must be strictly construed
against the one claiming exemption and that he who would seek to be thus privileged
must justify it by words too plain to be mistaken and too categorical to be
misinterpreted."

Commissioner of Internal Revenue vs. P. J. Kiener Co., Ltd., et al., G.R. No. L-24754,
July 18, 1975

Requisites for availment of tax exemption under RP-US Military Bases Agreement.

In order to avail oneself of the tax exemption under the RP-US Military Bases
Agreement: he must be a national of the United States employed in connection with the
construction, maintenance, operation or defense of the bases, residing in the Philippines
by reason of such employment, and the income derived is from the U.S. Government

Commissioner of Internal Revenue vs. Frank Robertson, et al., G.R. Nos. L-70116-19,
August 12, 1986

Employees' claims prevail over government's claims only in case of bankruptcy or

judicial liquidation of the employer.

There is no merit in the contention of the NLRC that taxes are absolutely preferred
claims only with respect to movable or immovable properties on which they are due and
that since the taxes sought to be collected in the case are not due on the barges in
question, the government's claim cannot prevail over the claims of employees of the
Maritime Company of the Philippines which, pursuant to Art. 110 of the LaborCode,
"enjoy first preference." Art. 110 of the Labor Code on worker preference in case of
bankruptcy applies only in case of bankruptcy or judicial liquidation of the employer.
This is clear from the text of the law. This case does not involve the liquidation of the
employer's business.

Commissioner of Internal Revenue vs. NLRC, et al., G.R. No. 74965, November 9, 1994

State's undertaking to guarantee promissory notes does not diminish its taxing power.

An undertaking of the Republic of the Philippines signed by the Secretary of Finance in

each of the promissory notes merely guaranteed the obligations of the NDC but without
diminution of its taxing power under existing laws.

National Development Company vs. Commissioner of Internal Revenue, G.R. No. L-

53961, June 30, 1987

Mere filing of tax amnesty does not ipso facto shield taxpayer from immunity against
prosecution.

The mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto
shield taxpayer from immunity against prosecution. Tax amnesty is a general pardon to
taxpayers who want to start a clean tax slate. It also gives the government a chance to
collect uncollected tax from tax evaders without having to go through the tedious process
of a tax case. To avail of a tax amnesty granted by the government, and to be immune
from suit on its delinquencies, the taxpayer must have voluntarily disclosed his previously
untaxed income and must have paid the corresponding tax on such previously untaxed
income.

Bibiano V. Baas, Jr. vs. Court of Appeals, et al., G.R. No. 102967, February 10, 2000

Principle of estoppel does not operate against the government for neglect or omission of
its officials tasked to collect taxes.

Taxes are the lifeblood of the Government and their prompt and certain availability are
imperious need. Upon taxation depends the Government's ability to serve the people for
whose benefit taxes are collected. To safeguard such interest, neglect or omission of
government officials entrusted with the collection of taxes should not be allowed to bring
harm or detriment to the people, in the same manner as private persons may be made to
suffer individually on account of his own negligence, the presumption being that they take
good care of their personal affair. This should not hold true to government officials with
respect to matters not of their own personal concern. This is the philosophy behind the
government's exception, as a general rule, from the operation of the principle of estoppel.

Misael P. Vera, et al. vs. Jose F. Fernandez, et al., G.R. No. L-31364, March 30, 1979

The State can never be in estoppel, and this is particularly true in matters involving
taxation. The errors of certain administrative officers should never be allowed to
jeopardize the government's financial position.

Commissioner of Internal Revenue vs. Manila Bankers' Life Insurance Corp., G.R. No.
169103, March 16, 2011

The power to tax is an attribute of sovereignty.

Requisites for availment of tax exemption under RP-US Military Bases AgreementIn
order to avail oneself of the tax exemption under the RP-US Military Bases Agreement:
he must be a national of the United States employed in connection with the construction,
maintenance, operation or defense of the bases, residing in the Philippines by reason of
such employment, and the income derived is from the U.S. Government.

Commissioner of Internal Revenue vs. Frank Robertson, et al.,

G.R. Nos. L-70116-19, August 12, 1986

Employees' claims prevail over government's claims only in case of bankruptcy or

judicial liquidation of the employer.

There is no merit in the contention of the NLRC that taxes are absolutely preferred
claims only with respect to movable or immovable properties on which they are due and
that since the taxes sought to be collected in the case are not due on the barges in
question, the government's claim cannot prevail over the claims of employees of the
Maritime Company of the Philippines which, pursuant to Art. 110 of the LaborCode,
"enjoy first preference." Art. 110 of the Labor Code on worker preference in case of
bankruptcy applies only in case of bankruptcy or judicial liquidation of the employer.
This is clear from the text of the law. This case does not involve the liquidation of the
employer's business.

Commissioner of Internal Revenue vs. NLRC, et al.,

G.R. No. 74965, November 9, 1994

State's undertaking to guarantee promissory notes does not diminish its taxing power.
An undertaking of the Republic of the Philippines signed by the Secretary of Finance in
each of the promissory notes merely guaranteed the obligations of the NDC but without
diminution of its taxing power under existing laws.

National Development Company vs. Commissioner of Internal Revenue,

G.R. No. L-53961, June 30, 1987

Atlas Consolidated Mining & Development Corp. vs. Commissioner of Internal Revenue,
G.R. No. L-26911, January 27, 1981

CHAPTER III Tax on Individuals

BIR ISSUANCES
REVENUE REGULATIONS NO. 007-10 July 20, 2010
Implementing the Tax Privileges Provisions of Republic Act No. 9994, Otherwise Known
as the "Expanded Senior Citizens Act of 2010", and Prescribing the Guidelines for the
Availment Thereof in order for the ff:
1. The availment of the income tax exemption of Senior Citizens;
2. The value-added tax exemption privileges granted to VAT-registered taxpayers
selling goods and services identified in the Act to Senior Citizens;
3. The tax privileges granted to establishments giving discount on their sale of goods
and services to Senior Citizens;
4. The tax implication of taking care and supporting senior citizens by their
benefactors; and,
5. The tax privileges granted to private entities who engage Senior Citizens as their
employees.

REVENUE REGULATIONS NO. 001-09 December 9, 2008

Regulations Implementing Republic Act No. 9442, entitled "An Act Amending Republic
Act 7277, Otherwise Known as the Magna Carta for Persons with Disability", Relative to
the Tax Privileges of Persons with Disability and Tax Incentives for Establishments
Granting Sales Discount

SECTION 24Income Tax Rates

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of
the Philippines.

(1) An income tax is hereby imposed:

(a) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within and without the Philippines by every
individual citizen of the Philippines residing therein;

(b) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual citizen of the
Philippines who is residing outside of the Philippines including overseas contract
workers referred to in Subsection (C) of Section 23 hereof; and

(c) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for each
taxable year from all sources within the Philippines by an individual alien who is a
resident of the Philippines.

(2) Rates of Tax on Taxable Income of Individuals. The tax shall be computed
in accordance with and at the rates established in the following schedule:
Not over P10,000 5%

Over P10,000 but not over P30,000 P500 + 10% of the

excess over P10,000

Over P30,000 but not over P70,000 P2,500 + 15% of the

excess over P30,000

Over P70,000 but not over P140,000 P8,500 + 20% of the

excess over P70,000

Over P140,000 but not over P250,000 P22,500 + 25% of the

excess over P140,000

Over 250,000 but not over P500,000 P50,000 + 30% of the

excess over P250,000

Over P500,000 P125,000 + 32% of the

 excess over P500,000.

For married individuals, the husband and wife, subject to the provision of Section
51(D) hereof, shall compute separately their individual income tax based on their
respective total taxable income: Provided, That if any income cannot be definitely
attributed to or identified as income exclusively earned or realized by either of the
spouses, the same shall be divided equally between the spouses for the purpose of
determining their respective taxable income.

Provided, That minimum wage earners as defined in Section 22 (HH) of this Code
shall be exempt from the payment of income tax on their taxable income:
Provided, further, That the holiday pay, overtime pay, night shift differential pay
and hazard pay received by such minimum wage earners shall likewise be exempt
from income tax.
REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation and Other Concerns

(B) Rate of Tax on Certain Passive Income:

(1) Interests, Royalties, Prizes, and Other Winnings A final tax at the rate of
twenty percent (20%) is hereby imposed upon the amount of interest from any
currency bank deposit and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements; royalties, except on
books, as well as other literary works and musical compositions, which shall be
imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten
thousand pesos (P10,000) or less which shall be subject to tax under Subsection
(A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and
Lotto winnings), derived from sources within the Philippines: Provided, however,
That interest income received by an individual taxpayer (except a nonresident
individual) from a depository bank under the expanded foreign currency deposit
system shall be subject to a final income tax at the rate of seven and one-half
percent (7 1/2%) of such interest income: Provided, further, That interest income
from long-term deposit or investment in the form of savings, common or individual
trust funds, deposit substitutes, investment management accounts and other
investments evidenced by certificates in such form prescribed by the
BangkoSentralngPilipinas (BSP) shall be exempt from the tax imposed under this
Subsection: Provided, finally, That should the holder of the certificate pre-
terminate the deposit or investment before the fifth (5th) year, a final tax shall be
imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:

Four (4) years to less than five (5) years 5%;

Three (3) years to less than four (4) years 12%; and

Less than three (3) years 20%.

(2) Cash and/or Property Dividends A final tax at the following rates shall be
imposed upon the cash and/or property dividends actually or constructively
received by an individual from a domestic corporation or from a joint stock
company, insurance or mutual fund companies and regional operating headquarters
of multinational companies, or on the share of an individual in the distributable net
income after tax of a partnership (except a general professional partnership) of
which he is a partner, or on the share of an individual in the net income after tax of
an association, a joint account, or a joint venture or consortium taxable as a
corporation of which he is a member or co-venturer:

Six percent (6%) beginning January 1, 1998;

Eight percent (8%) beginning January 1, 1999;

Ten percent (10%) beginning January 1, 2000.

Provided, however, That the tax on dividends shall apply only on income earned
on or after January 1, 1998. Income forming part of retained earnings as of
December 31, 1997 shall not, even if declared or distributed on or after January 1,
1998, be subject to this tax.

CASES DIGEST
Ordinary dividends distinguished from liquidated dividends.
The determining element therefore is whether the distribution was in the ordinary course
of business and with intent to maintain the corporation as a going concern, or after
deciding to quit with intent to liquidate the business. The distinction between a
distribution in liquidation and an ordinary dividend is factual; the result in each case
depending on the particular circumstances of the case and the intent of the parties. If the
distribution is in the nature of a recurring return on stock it is an ordinary dividend.
However, if the corporation is really winding up its business or recapitalizing and
narrowing its activities, the distribution may properly be treated as in complete or partial
liquidation and as payment by the corporation to the stockholder for his stock. The
corporation is, in the latter instances, wiping out all or part of the stockholders' interest
in the company.

Wise & Co., Inc. vs. Bibiano L. Meer, G.R. No. 48231, June 30, 1947

DIVIDENDS

FACTS: Sometime in the 1930s, Don Andres Soriano, a citizen and resident of the United
States, formed the corporation "A. Soriano Y Cia", predecessor of ANSCOR, with a
P1,000,000.00 capitalization divided into 10,000 common shares at a par value of
P100/share. ANSCOR is wholly owned and controlled by the family of Don Andres, who
are all non-resident aliens. In 1937, Don Andres subscribed to 4,963 shares of the 5,000
shares originally issued. On September 12, 1945, ANSCOR's authorized capital stock
was increased to P2,500,000.00 divided into 25,000 common shares with the same par
value. Of the additional 15,000 shares, only 10,000 was issued which were all subscribed
by Don Andres, after the other stockholders waived in favor of the former their pre-
emptive rights to subscribe to the new issues. This increased his subscription to 14,963
common shares. A month later, Don Andres transferred 1,250 shares each to his two
sons, Jose and Andres, Jr., as their initial investments in ANSCOR. Both sons are
foreigners.

By 1947, ANSCOR declared stock dividends. Other stock dividend declarations were
made between 1949 and December 20, 1963. On December 30, 1964 Don Andres died.
As of that date, the records revealed that he has a total shareholdings of 185,154
shares 50,495 of which are original issues and the balance of 134,659 shares as stock
dividend declarations. Correspondingly, one-half of that shareholdings or 92,577 shares
were transferred to his wife Doa Carmen Soriano, as her conjugal share. The other half
formed part of his estate. A day after Don Andres died, ANSCOR increased its capital
stock to P20M and in 1966 further increased it to P30M. In the same year (December
1966), stock dividends worth 46,290 and 46,287 shares were respectively received by the
Don Andres estate and Doa Carmen from ANSCOR. Hence, increasing their
accumulated shareholdings to 138,867 and 138,864 19 common shares each.

On March 31, 1968 Doa Carmen exchanged her whole 138,864 common shares for
138,860 of the newly reclassified preferred shares. The estate of Don Andres in turn,
exchanged 11,140 of its common shares for the remaining 11,140 preferred shares, thus
reducing its (the estate) common shares to 127,727. On June 30, 1968, pursuant to a
Board Resolution, ANSCOR redeemed 28,000 common shares from the Don Andres'
estate. By November 1968, the Board further increased ANSCOR's capital stock to P75M
divided into 150,000 preferred shares and 600,000 common shares. About a year later,
ANSCOR again redeemed 80,000 common shares from the Don Andres' estate, further
reducing the latter's common shareholdings to 19,727. As stated in the Board
Resolutions, ANSCOR's business purpose for both redemptions of stocks is to partially
retire said stocks as treasury shares in order to reduce the company's foreign exchange
remittances in case cash dividends are declared.

In 1973, after examining ANSCOR's books of account and records, Revenue examiners
issued a report proposing that ANSCOR be assessed for deficiency withholding tax-at-
source, pursuant to Sections 53 and 54 of the 1939 Revenue Code, for the year 1968 and
the second quarter of 1969 based on the transactions of exchange and redemption of
stocks. The BIR made the corresponding assessments despite the claim of ANSCOR that it
availed of the tax amnesty under P.D. 23 which were amended by P.D.'s 67 and 157.
However, petitioner ruled that the invoked decrees do not cover Sections 53 and 54 in
relation to Article 83(b) of the 1939 Revenue Act under which ANSCOR was assessed.
ANSCOR's subsequent protest on the assessments was denied in 1983 by petitioner.

ISSUE: Whether ANSCOR's redemption of stocks from its stockholder as well as the
exchange of common with preferred shares can be considered as "essentially equivalent
to the distribution of taxable dividend," making the proceeds thereof taxable under the
provisions of the above-quoted law.

HELD: Yes.

General Rule

Section 83(b) of the 1939 NIRC was taken from Section 115(g)(1) of the U.S. Revenue
Code of 1928. It laid down the general rule known as the 'proportionate test' wherein
stock dividends once issued form part of the capital and, thus, not subject to income tax.
Specifically, the general rule states that:
"A stock dividend representing the transfer of surplus to capital account shall not be
subject to tax."

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

The Exception

However, if a corporation cancels or redeems stock issued as a dividend at such time and
in such manner as to make the distribution and cancellation or redemption, in whole or
in part, essentially equivalent to the distribution of a taxable dividend, the amount so
distributed in redemption or cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings or profits accumulated after
March first, nineteen hundred and thirteen.

In a response to the ruling of the American Supreme Court in the case of Eisner v.
Macomber (that pro rata stock dividends are not taxable income), the exempting clause
above quoted was added because corporations found a loophole in the original
provision. They resorted to devious means to circumvent the law and evade the tax.
Corporate earnings would be distributed under the guise of its initial capitalization by
declaring the stock dividends previously issued and later redeem said dividends by
paying cash to the stockholder. This process of issuance-redemption amounts to a
distribution of taxable cash dividends which was just delayed so as to escape the tax. It
becomes a convenient technical strategy to avoid the effects of taxation. Thus, to plug the
loophole the exempting clause was added. It provides that the redemption or
cancellation of stock dividends, depending on the "time" and "manner" it was made, is
"essentially equivalent to a distribution of taxable dividends," making the proceeds
thereof "taxable income" "to the extent it represents profits". The exception was designed
to prevent the issuance and cancellation or redemption of stock dividends, which is
fundamentally not taxable, from being made use of as a device for the actual distribution
of cash dividends, which is taxable.

Requisites:

For the exempting clause of Section 83(b) to apply, it is indispensable that: (a) there is
redemption or cancellation; (b) the transaction involves stock dividends and (c) the "time
and manner" of the transaction makes it "essentially equivalent to a distribution of
taxable dividends." Of these, the most important is the third. It is not the stock dividends
but the proceeds of its redemption that may be deemed as taxable dividends. Here, it is
undisputed that at the time of the last redemption, the original common shares owned by
the estate were only 25,247.5. This means that from the total of 108,000 shares redeemed
from the estate, the balance of 82,752.5 (108,000 less 25,247.5) must have come from
stock dividends. Besides, in the absence of evidence to the contrary, the Tax Code
presumes that every distribution of corporate property, in whole or in part, is made out of
corporate profits, such as stock dividends. The capital cannot be distributed in the form
of redemption of stock dividends without violating the trust fund doctrine wherein the
capital stock, property and other assets of the corporation are regarded as equity in trust
for the payment of the corporate creditors. Once capital, it is always capital. That
doctrine was intended for the protection of corporate creditors.

With respect to the third requisite, ANSCOR redeemed stock dividends issued just 2 to 3
years earlier. The time alone that lapsed from the issuance to the redemption is not a
sufficient indicator to determine taxability. It is a must to consider the factual
circumstances as to the manner of both the issuance and the redemption. The "time"
element is a factor to show a device to evade tax and the scheme of cancelling or
redeeming the same shares is a method usually adopted to accomplish the end sought.
Was this transaction used as a "continuing plan," "device" or "artifice" to evade payment
of tax? It is necessary to determine the "net effect" of the transaction between the
shareholder-income taxpayer and the acquiring (redeeming) corporation. The "net
effect" test is not evidence or testimony to be considered; it is rather an inference to be
drawn or a conclusion to be reached. It is also important to know whether the issuance of
stock dividends was dictated by legitimate business reasons, the presence of which might
negate a tax evasion plan.

The issuance of stock dividends and its subsequent redemption must be separate, distinct,
and not related, for the redemption to be considered a legitimate tax scheme. Redemption
cannot be used as a cloak to distribute corporate earnings. Otherwise, the apparent
intention to avoid tax becomes doubtful as the intention to evade becomes manifest.
Depending on each case, the exempting provision of Sec. 83(b) of the 1939 Code may not
be applicable if the redeemed shares were issued with bona fide business purpose, which
is judged after each and every step of the transaction have been considered and the
whole transaction does not amount to a tax evasion scheme. As stated above, the test of
taxability under the exempting clause of Section 83(b) is, whether income was realized
through the redemption of stock dividends. The redemption converts into money the stock
dividends which become a realized profit or gain and consequently, the stockholder's
separate property. Profits derived from the capital invested cannot escape income tax. As
realized income, the proceeds of the redeemed stock dividends can be reached by income
taxation regardless of the existence of any business purpose for the redemption.
Otherwise, to rule that the said proceeds are exempt from income tax when the
redemption is supported by legitimate business reasons would defeat the very purpose of
imposing tax on income. Such argument would open the door for income earners not to
pay tax so long as the person from whom the income was derived has legitimate business
reasons. In other words, the payment of tax under the exempting clause of Section 83(b)
would be made to depend not on the income of the taxpayer, but on the business purposes
of a third party (the corporation herein) from whom the income was earned. This is
absurd, illogical and impractical considering that the Bureau of Internal Revenue (BIR)
would be pestered with instances in determining the legitimacy of business reasons that
every income earner may interpose. It is not administratively feasible and cannot
therefore be allowed.

Exchange of Common With Preferred Shares

ANSCOR reclassified its shares into common and preferred, and that parts of the
common shares of the Don Andres estate and all of Doa Carmen's shares were
exchanged for the whole 150,000 preferred shares. Thereafter, both the Don Andres
estate and Doa Carmen remained as corporate subscribers except that their
subscriptions now include preferred shares. There was no change in their proportional
interest after the exchange. There was no cash flow. Both stocks had the same par value.
Under the facts herein, any difference in their market value would be immaterial at the
time of exchange because no income is yet realized it was a mere corporate paper
transaction. It would have been different, if the exchange transaction resulted into a flow
of wealth, in which case income tax may be imposed.

Reclassification of shares does not always bring any substantial alteration in the
subscriber's proportional interest. But the exchange is different there would be a
shifting of the balance of stock features, like priority in dividend declarations or absence
of voting rights. Yet neither the reclassification nor exchange per se, yields realized
income for tax purposes. A common stock represents the residual ownership interest in
the corporation. It is a basic class of stock ordinarily and usually issued without
extraordinary rights or privileges and entitles the shareholder to a pro rata division of
profits. Preferred stocks are those which entitle the shareholder to some priority on
dividends and asset distribution. Both shares are part of the corporation's capital stock.
Both stockholders are no different from ordinary investors who take on the same
investment risks. Preferred and common shareholders participate in the same venture,
willing to share in the profits and losses of the enterprise. Moreover, under the doctrine
of equality of shares all stocks issued by the corporation are presumed equal with the
same privileges and liabilities, provided that the Articles of Incorporation is silent on
such differences.

In this case, the exchange of shares, without more, produces no realized income to the
subscriber. There is only a modification of the subscriber's rights and privileges which
is not a flow of wealth for tax purposes. The issue of taxable dividend may arise only
once a subscriber disposes of his entire interest and not when there is still maintenance
of proprietary interest.

COMMISSIONER OF INTERNAL REVENUE vs. THE COURT OF APPEALS, COURT

OF TAX APPEALS and A. SORIANO CORP. [G.R. No. 108576. January 20, 1999.]

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.
The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed
below is hereby imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange.

Not over P100,000 5%

On any amount in excess of P100,000 10%

BIR ISSUANCES
REVENUE REGULATIONS NO. 006-08 April 22, 2008

Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter,

Exchange or Other Disposition of Shares of Stock Held as Capital Assets

Pursuant to Section 244, in relation to Sections 24 (C), 25 (A) (3), 25 (B), 27 (D) (2),
28 (A) (7) (c), 28 (B) (5) (c), 34 (D) (4) (5), 38, 40, and Section 127 (A) and (B) of
the 1997 National Internal Revenue Code (Tax Code), as amended, these Regulations are
hereby promulgated in order to harmonize and consolidate the rules relative to the
imposition of tax for the sale, barter, exchange or other disposition of shares of stock of
domestic corporation that are listed and traded through the Local Stock Exchange, or
disposition of shares through Initial Public Offering (IPO) or disposition of shares not
traded through the Local Stock Exchange.

(D) Capital Gains from Sale of Real Property

(1) In General The provisions of Section 39(B) notwithstanding, a final tax of

six percent (6%) based on the gross selling price or current fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, is
hereby imposed upon capital gains presumed to have been realized from the sale,
exchange, or other disposition of real property located in the Philippines, classified
as capital assets, including pacto de retro sales and other forms of conditional sales,
by individuals, including estates and trusts: Provided, That the tax liability, if any,
on gains from sales or other dispositions of real property to the government or any
of its political subdivisions or agencies or to government-owned or -controlled
corporations shall be determined either under Section 24(A) or under this
Subsection, at the option of the taxpayer;

BIR ISSUANCES
REVENUE REGULATIONS NO. 07-03

SUBJECT: Providing the Guidelines in Determining Whether a Particular Real

Property is a Capital Asset or an Ordinary Asset Pursuant to Section 39(A)(1) of
the National Internal Revenue Code of 1997 for Purposes of Imposing the Capital
Gains Tax under Sections 24(D), 25(A)(3), 25(B) and 27(D)(5), or the Ordinary
Income Tax under Sections 24(A), 25(A) & (B), 27(A), 28(A)(1) and 28(B)(1), or
the Minimum Corporate Income Tax (MCIT) under Sections 27(E) and 28(A)(2) of
the same Code
CASES DIGESTS
SPOUSES MARIO AND ELIZABETH TORCUATOR vs. SPOUSES REMEGIO AND
GLORIA BERNABE and SPOUSES DIOSDADO and LOURDES SALVADOR [G.R. No.
134219. June 8, 2005.]

TAXATION; CAPITAL GAINS TAX; WHEN IMPOSABLE.

The differences between a contract to sell and a contract of sale are well-settled in
jurisprudence. As early as 1951, we held that in a contract of sale, title passes to the
buyer upon delivery of the thing sold, while in a contract to sell, ownership is reserved in
the seller and is not to pass until the full payment of the purchase price is made. In the
first case, non-payment of the price is a negative resolutory condition; in the second case,
full payment is a positive suspensive condition. Being contraries, their effect in law
cannot be identical. In the first case, the vendor has lost and cannot recover the
ownership of the land sold until and unless the contract of sale is itself resolved and set
aside. In the second case, however, the title remains in the vendor if the vendee does not
comply with the condition precedent of making payment at the time specified in the
contract. In other words, in a contract to sell, ownership is retained by the seller and is
not to pass to the buyer until full payment of the price or the fulfillment of some other
conditions either of which is a future and uncertain event the non-happening of which is
not a breach, casual or serious, but simply an event that prevents the obligation of the
vendor to convey title from acquiring binding force. Capital gains taxes, after all, are
only imposed on gains presumed to have been realized from sales, exchanges or
dispositions of property. The contract to sell in this case was aborted by petitioners'
failure to comply with the twin suspensive conditions of full payment and construction of
a residence, the obligation to pay taxes never arose.

BIBIANO V. BAAS, JR., petitioner, vs. COURT OF APPEALS, AQUILINO T. LARIN,

RODOLFO TUAZON AND PROCOPIO TALON, respondents. [G.R. No. 102967. February
10, 2000.]

SYNOPSIS

Petitioner, Bibiano V. Baas Jr., sold to Ayala Investment Corporation (AYALA), 128,265
square meters of land located at Bayanan, Muntinlupa, for two million, three hundred eight
thousand, seven hundred seventy (P2,308,770.00) pesos. The Deed of Sale provided that
upon the signing of the contract AYALA shall pay four hundred sixty-one thousand, seven
hundred fifty-four (P461,754.00) pesos and the balance of one million, eight hundred forty-
seven thousand and sixteen (P1,847,016.00) pesos to be paid in four equal consecutive
annual installments. The same day, petitioner discounted the promissory note with AYALA,
for its face value of P1,847,016.00, evidenced by a Deed of Assignment signed by the
petitioner and AYALA. AYALA issued nine (9) checks to petitioner, all dated February 20,
1976, drawn against Bank of the Philippine Islands with the uniform amount of two hundred
five thousand, two hundred twenty-four (P205,224.00) pesos. In the succeeding years, until
1979, petitioner reported a uniform income of two hundred thirty thousand, eight hundred
seventy-seven (P230,877.00) pesos as gain from sale of capital asset. In his 1980 income tax
amnesty return, petitioner also reported the same amount of P230,877.00 as the realized
gain on disposition of capital asset for the year. On April 11, 1978 then Revenue Director
Mauro Calaguio authorized their tax examiners, Rodolfo Tuazon and Procopio Talon to
examine the books and records of petitioner for the year 1976. They discovered that
petitioner had no outstanding receivable from the 1976 land sale to AYALA and concluded
that the sale was cash and the entire profit should have been taxable in 1976 since the
income was wholly derived in 1976. Meantime, respondent Aquilino Larin who succeeded as
Regional Director of Manila, Region IV-A, filed on June 17, 1981 a criminal complaint for
tax evasion against the petitioner. On July 1, 1981, news items appeared in the now defunct
Evening Express Evening Post and Bulletin Today, which mentioned petitioner's false
income tax return concerning the sale of land to AYALA. Reacting to the complaint for tax
evasion and the news reports, petitioner filed with the RTC of Manila an action for damages
against respondents Larin, Tuazon and Talon for extortion and malicious publication of the
BIR's tax audit report. The trial court decided in favor of the respondents and awarded Larin
damages. Respondent appellate court affirmed the trial court's decision. Hence, the present
petition.

The Supreme Court affirmed the decision of the Court of Appeals. The Court ruled that
although the proceeds of a discounted promissory note are not considered part of initial
payment, still it must be included as taxable income for the year it was converted to cash.
When petitioner had the promissory notes covering the succeeding installment payments of
the land issued by AYALA, discounted by AYALA itself, on the same day of the sale, he lost
entitlement to report the sale as a sale on installment, since, a taxable disposition resulted
and petitioner was required by law to report in his returns the income derived from the
discounting. According to the Court, what petitioner did is tantamount to an attempt to
circumvent the rule on payment of income taxes gained from the sale of the land to AYALA
for the year 1976. The Court deleted the award of actual damages to respondent Larin for
lack of basis because the records of the case contained no statement whatsoever of the
amount of the actual damages sustained by the respondents. The Court stressed that actual
damages cannot be allowed unless supported by evidence on the record. The Court, however,
agreed that there was sufficient basis for the award of moral and exemplary damages in
favor of respondent Larin. Petitioner's actions against Larin were found by the Court
"unwarranted and baseless," bolstered by the fact that the criminal charges filed against him
in the Tanodbayan and City Fiscal's Office were all dismissed.

SYLLABUS

1. TAXATION; TAX AMNESTY; MERE FILING OF TAX AMNESTY RETURN UNDER

P.D. 1740 AND P.D. 1840 DOES NOT IPSO FACTO SHIELD TAXPAYER FROM
IMMUNITY AGAINST PROSECUTION. Petitioner did not meet the twin requirements of
P.D. 1740 and 1840, declaration of his untaxed income and full payment of tax due thereon.
Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The mere
filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him from
immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want to
start a clean tax slate. It also gives the government a chance to collect uncollected tax from
tax evaders without having to go through the tedious process of a tax case. To avail of a tax
amnesty granted by the government, and to be immune from suit on its delinquencies, the
taxpayer must have voluntarily disclosed his previously untaxed income and must have paid
the corresponding tax on such previously untaxed income. It also bears noting that a tax
amnesty, much like a tax exemption, is never favoured nor presumed in law and if granted by
statute, the terms of the amnesty like that of a tax exemption must be construed strictly
against the taxpayer and liberally in favor of the taxing authority. Hence, on this matter, it is
our view that petitioner's claim of immunity from prosecution under the shield of availing tax
amnesty is untenable.

2. ID.; NATIONAL INTERNAL REVENUE CODE; ACCOUNTING PERIOD AND

METHODS OF ACCOUNTING; INCOME COMPUTED ON INSTALLMENT BASIS;
DISCOUNTING OF PROMISSORY NOTES DONE BY THE SELLER HIMSELF WILL
RESULT IN A TAXABLE DISPOSITION; INCOME DERIVED FROM SUCH
DISCOUNTING MUST BE REPORTED IN THE RETURNS. Where an installment
obligation is discounted at a bank or finance company, a taxable disposition results, even if
the seller guarantees its payment, continues to collect on the installment obligation, or
handles repossession of merchandise in case of default. This rule prevails in the United
States. Since our income tax laws are of American origin, interpretations by American courts
on our parallel tax laws have persuasive effect on the interpretation of these laws. Thus, by
analogy, all the more would a taxable disposition result when the discounting of the
promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is
discharged, while the seller acquires money for the settlement of his receivables. Logically
then, the income should be reported at the time of the actual gain. For income tax purposes,
income is an actual gain or an actual increase of wealth. Although the proceeds of a
discounted promissory note is not considered initial payment, still it must be included as
taxable income on the year it was converted to cash. When petitioner had the promissory
notes covering the succeeding installment payments of the land issued by AYALA, discounted
by AYALA itself, on the same day of the sale, he lost entitlement to report the sale as a sale
on installment since, a taxable disposition resulted and petitioner was required by law to
report in his returns the income derived from the discounting. What petitioner did is
tantamount to an attempt to circumvent the rule on payment of income taxes gained from the
sale of the land to AYALA for the year 1976.

3. CIVIL LAW; DAMAGES; ACTUAL OR COMPENSATORY; AWARD DELETED FOR

LACK OF BASIS. Lastly, petitioner questions the damages awarded to respondent Larin.
Any person who seeks to be awarded actual or compensatory damages due to acts of another
has the burden of proving said damages as well as the amount thereof. Larin says the
extortion cases filed against him hampered his immediate promotion, caused him strong
anxiety and social humiliation. The trial court awarded him two hundred thousand
(P200,000.00) pesos as actual damages. However, the appellate court stated that, despite
pendency of this case, Larin was given a promotion at the BIR. Said respondent court: "We
find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7, 11
December 1985), to show that he suffered loss of seniority that allegedly barred his
promotion. In fact, he was promoted to his present position despite the pendency of the
instant case (TSN, pp. 35-39, 04 November 1985)." Moreover, the records of the case
contain no statement whatsoever of the amount of the actual damages sustained by the
respondents. Actual damages cannot be allowed unless supported by evidence on the record.
The court cannot rely on speculation, conjectures or guesswork as to the fact and amount of
damages. To justify a grant of actual or compensatory damages, it is necessary to prove with
a reasonable degree of certainty, the actual amount of loss. Since we have no basis with
which to assess, with certainty, the actual or compensatory damages counter-claimed by
respondent Larin, the award of such damages should be deleted.

4. ID.; ID.; MORAL DAMAGES; BASIS FOR AWARD ESTABLISHED. We agree

that there is sufficient basis for the award of moral and exemplary damages in favor of
respondent Larin. The appellate court believed respondent Larin when he said he suffered
anxiety and humiliation because of the unfounded charges against him. Petitioner's actions
against Larin were found "unwarranted and baseless," and the criminal charges filed
against him in the Tanodbayan and City Fiscal's Office were all dismissed. Hence, there is
adequate support for respondent court's conclusion that moral damages have been proved.

5. ID.; ID.; ID.; AWARDING MORAL DAMAGES TO GOVERNMENT OFFICIALS IN

CONNECTION WITH THEIR OFFICIAL FUNCTIONS MUST BE EXERCISED BY THE
COURTS WITH CAUTION; REASON. Considering that here, the award is in favor of a
government official in connection with his official function, it is with caution that we affirm
granting moral damages, for it might open the floodgates for government officials counter-
claiming damages in suits filed against them in connection with their functions. Moreover,
we must be careful lest the amounts awarded make citizens hesitate to expose corruption in
the government, for fear of lawsuits from vindictive government officials. Thus, conformably
with our declaration that moral damages are not intended to enrich anyone, we hereby
reduce the moral damages award in this case from two hundred thousand (P200,000.00)
pesos to seventy five thousand (P75,000.00) pesos, while the exemplary damage is set at
P25,000.00 only.

DECISION

For review is the Decision of the Court of Appeals in CA-G.R. CV No. 17251 promulgated
on November 29, 1991. It affirmed in toto the judgment of the Regional Trial Court (RTC),
Branch 39, Manila, in Civil Case No. 82-12107. Said judgment disposed as follows:

"FOR ALL THE FOREGOING CONSIDERATIONS, this Court hereby renders judgment
DISMISSING the complaint against all the defendants and ordering plaintiff [herein
petitioner] to pay defendant Larin the amount of P200,000.00 (Two Hundred Thousand
Pesos) as actual and compensatory damages; P200,000.00 as moral damages; and
P50,000.00 as exemplary damages and attorneys fees of P100,000.00."

The facts, which we find supported by the records, have been summarized by the Court of
Appeals as follows:

On February 20, 1976, petitioner, Bibiano V. Baas Jr. sold to Ayala Investment
Corporation (AYALA), 128,265 square meters of land located at Bayanan, Muntinlupa, for
two million, three hundred eight thousand, seven hundred seventy (P2,308,770.00) pesos.
The Deed of Sale provided that upon the signing of the contract AYALA shall pay four
hundred sixty-one thousand, seven hundred fifty-four (P461,754.00) pesos. The balance of
one million, eight hundred forty-seven thousand and sixteen (P1,847,016.00) pesos was to be
paid in four equal consecutive annual installments, with twelve (12%) percent interest per
annum on the outstanding balance. AYALA issued one promissory note covering four equal
annual installments. Each periodic payment of P461,754.00 pesos shall be payable starting
on February 20, 1977, and every year thereafter, or until February 20, 1980.

The same day, petitioner discounted the promissory note with AYALA, for its face value of
P1,847,016.00, evidenced by a Deed of Assignment signed by the petitioner and AYALA.
AYALA issued nine (9) checks to petitioner, all dated February 20, 1976, drawn against
Bank of the Philippine Islands with the uniform amount of two hundred five thousand, two
hundred twenty-four (P205,224.00) pesos.

In his 1976 Income Tax Return, petitioner reported the P461,754 initial payment as income
from disposition of capital asset.
Selling Price of Land P2,308,770.00

Less Initial Payment 461,754.00 3

Unrealized Gain P1,847,016.00

1976 Declaration of Income on Disposition of Capital Asset subject to Tax:

Initial Payment P461,754.00

Less: Cost of Land and other incidental

Expenses (76,547.90)

Income P385,206.10

Income subject to tax (P385,206.10 x 50%) P192,603.65

In the succeeding years, until 1979, petitioner reported a uniform income of two hundred
thirty thousand, eight hundred seventy-seven (P230,877.00) pesos 4 as gain from sale of
capital asset. In his 1980 income tax amnesty return, petitioner also reported the same
amount of P230,877.00 as the realized gain on disposition of capital asset for the year.

On April 11, 1978, then Revenue Director Mauro Calaguio authorized tax examiners,
Rodolfo Tuazon and Procopio Talon to examine the books and records of petitioner for the
year 1976. They discovered that petitioner had no outstanding receivable from the 1976 land
sale to AYALA and concluded that the sale was cash and the entire profit should have been
taxable in 1976 since the income was wholly derived in 1976.

Tuazon and Talon filed their audit report and declared a discrepancy of two million, ninety-
five thousand, nine hundred fifteen (P2,095,915.00) pesos in petitioner's 1976 net income.
They recommended deficiency tax assessment for two million, four hundred seventy-three
thousand, six hundred seventy-three (P2,473,673.00) pesos.

Meantime, Aquilino Larin succeeded Calaguio as Regional Director of Manila Region IV-A.
After reviewing the examiners' report, Larin directed the revision of the audit report, with
instruction to consider the land as capital asset. The tax due was only fifty (50%) percent of
the total gain from sale of the property held by the taxpayer beyond twelve months pursuant
to Section 34 5 of the 1977 National Internal Revenue Code (NIRC). The deficiency tax
assessment was reduced to nine hundred thirty six thousand, five hundred ninety-eight pesos
and fifty centavos (P936,598.50), inclusive of surcharges and penalties for the year 1976.

On June 27, 1980, respondent Larin sent a letter to petitioner informing him of the income
tax deficiency that must be settled immediately.

On September 26, 1980, petitioner acknowledged receipt of the letter but insisted that the
sale of his land to AYALA was on installment.

On June 8, 1981, the matter was endorsed to the Acting Chief of the Legal Branch of the
National Office of the BIR. The Chief of the Tax Fraud Unit recommended the prosecution of
a criminal case for conspiring to file false and fraudulent returns, in violation of Section 51
of the Tax Code against petitioner and his accountants, Andres P. Alejandre and Conrado
Baas.

On June 17, 1981, Larin filed a criminal complaint for tax evasion against the petitioner.

On July 1, 1981, news items appeared in the now defunct Evening Express with the headline:
"BIR Charges Realtor" and another in the defunct Evening Post with a news item: "BIR raps
Realtor, 2 accountants." Another news item also appeared in the July 2, 1981, issue of the
Bulletin Today entitled: "3-face P1-M tax evasion raps." All news items mentioned
petitioner's false income tax return concerning the sale of land to AYALA.

On July 2, 1981, petitioner filed an Amnesty Tax Return under P.D. 1740 and paid the
amount of forty-one thousand, seven hundred twenty-nine pesos and eighty-one centavos
(P41,729.81). On November 2, 1981, petitioner again filed an Amnesty Tax Return under
P.D. 1840 and paid an additional amount of one thousand, five hundred twenty-five pesos
and sixty-two centavos (P1,525.62). In both, petitioner did not recognize that his sale of land
to AYALA was on cash basis.

Reacting to the complaint for tax evasion and the news reports, petitioner filed with the RTC
of Manila an action 6 for damages against respondents Larin, Tuazon and Talon for
extortion and malicious publication of the BIR's tax audit report. He claimed that the filing
of criminal complaints against him for violation of tax laws were improper because he had
already availed of two tax amnesty decrees, Presidential Decree Nos. 1740 and 1840.

The trial court decided in favor of the respondents and awarded Larin damages, as already
stated. Petitioner seasonably appealed to the Court of Appeals. In its decision of November
29, 1991, the respondent court affirmed the trial court's decision, thus:
"The finding of the court a quo that plaintiff-appellant's actions against defendant-appellee
Larin were unwarranted and baseless and as a result thereof, defendant-appellee Larin was
subjected to unnecessary anxiety and humiliation is therefore supported by the evidence on
record.

Defendant-appellee Larin acted only in pursuance of the authority granted to him. In fact,
the criminal charges filed against him in the Tanodbayan and in the City Fiscal's Office were
all dismissed.

WHEREFORE, the appealed judgment is hereby AFFIRMED in toto."

Hence this petition, wherein petitioner raises before us the following queries:

I. WHETHER THE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF

PERTINENT TAX LAWS, THUS IT FAILED TO APPRECIATE THE CORRECTNESS AND
ACCURACY OF PETITIONER'S RETURN OF THE INCOME DERIVED FROM THE SALE
OF THE LAND TO AYALA.

II. WHETHER THE RESPONDENT COURT ERRED IN NOT FINDING THAT THERE
WAS AN ALLEGED ATTEMPT TO EXTORT [MONEY FROM] PETITIONER BY PRIVATE
RESPONDENTS.

III. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF

PRESIDENTIAL DECREE NOS. 1740 AND 1840, AMONG OTHERS, PETITIONER'S
IMMUNITY FROM CRIMINAL PROSECUTION.

IV. WHETHER THE RESPONDENT COURT ERRED IN ITS INTERPRETATION OF

WELL-ESTABLISHED DOCTRINES OF THIS HONORABLE COURT AS REGARDS THE
AWARD OF ACTUAL, MORAL AND EXEMPLARY DAMAGES IN FAVOR OF
RESPONDENT LARIN.

In essence, petitioner asks the Court to resolve seriatim the following issues:

1. Whether respondent court erred in ruling that there was no extortion attempt by BIR
officials;

2. Whether respondent court erred in holding that P.D. 1740 and 1840 granting tax
amnesties did not grant immunity from tax suits;

3. Whether respondent court erred in finding that petitioner's income from the sale of
land in 1976 should be declared as a cash transaction in his tax return for the same year
(because the buyer discounted the promissory note issued to the seller on future installment
payments of the sale, on the same day of the sale);
4. Whether respondent court erred and committed grave abuse of discretion in awarding
damages to respondent Larin.

The first issue, on whether the Court of Appeals erred in finding that there was no extortion,
involves a determination of fact. The Court of Appeals observed,

"The only evidence to establish the alleged extortion attempt by defendants-appellees is the
plaintiff-appellant's self serving declarations.

As found by the court a quo, "said attempt was known to plaintiff-appellant's son-in-law and
counsel on record, yet, said counsel did not take the witness stand to corroborate the
testimony of plaintiff." 8

As repeatedly held, findings of fact by the Court of Appeals especially if they affirm factual
findings of the trial court will not be disturbed by this Court, unless these findings are not
supported by evidence. 9 Similarly, neither should we disturb a finding of the trial court and
appellate court that an allegation is not supported by evidence on record. Thus, we agree
with the conclusion of respondent court that herein private respondents, on the basis of
evidence, could not be held liable for extortion.

On the second issue of whether P.D. Nos. 1740 and 1840 which granted tax amnesties also
granted immunity from criminal prosecution against tax offenses, the pertinent sections of
these laws state:

P.D. No. 1740. CONDONING PENALTIES FOR CERTAIN VIOLATIONS OF THE

INCOME TAX LAW UPON VOLUNTARY DISCLOSURE OF UNDECLARED INCOME
FOR INCOME TAX PURPOSES AND REQUIRING PERIODIC SUBMISSION OF NET
WORTH STATEMENT.

xxx xxx xxx

SECTION 1. Voluntary Disclosure of Correct Taxable Income. Any individual who, for
any or all of the taxable years 1974 to 1979, had failed to file a return is hereby, allowed to
file a return for each of the aforesaid taxable years and accurately declare therein the true
and correct income, deductions and exemptions and pay the income tax due per return.
Likewise, any individual who filed a false or fraudulent return for any taxable year in the
period mentioned above may amend his return and pay the correct amount of tax due after
deducting the taxes already paid, if any, in the original declaration. (italics ours)

xxx xxx xxx

SECTION 5. Immunity from Penalties. Any individual who voluntarily files a return
under this Decree and pays the income tax due thereon shall be immune from the penalties,
civil or criminal, under the National Internal Revenue Code arising from failure to pay the
correct income tax with respect to the taxable years from which an amended return was filed
or for which an original return was filed in cases where no return has been filed for any of
the taxable years 1974 to 1979: Provided, however, That these immunities shall not apply in
cases where the amount of net taxable income declared under this Decree is understated to
the extent of 25% or more of the correct net taxable income. (italics ours)

P.D. NO. 1840 GRANTING A TAX AMNESTY ON UNTAXED INCOME AND/OR

WEALTH EARNED OR ACQUIRED DURING THE TAXABLE YEARS 1974 TO 1980 AND
REQUIRING THE FILING OF THE STATEMENT OF ASSETS, LIABILITIES, AND NET
WORTH.

SECTION 1. Coverage. In case of voluntary disclosure of previously untaxed income

and/or wealth such as earnings, receipts, gifts, bequests or any other acquisition from any
source whatsoever, realized here or abroad, by any individual taxpayer, which are taxable
under the National Internal Revenue Code, as amended, the assessment and collection of all
internal revenue taxes, including the increments or penalties on account of non-payment, as
well as all civil, criminal or administrative liabilities arising from or incident thereto under
the National Internal Revenue Code, are hereby condoned provided that the individual
taxpayer shall pay. (italics ours) . . .

SECTION 2. Conditions for Immunity. The immunity granted under Section one of this
Decree shall apply only under the following conditions:

a) Such previously untaxed income and/or wealth must have been earned or realized in
any of the years 1974 to 1980;

b) The taxpayer must file an amnesty return on or before November 30, 1981, and fully
pay the tax due thereon;

c) The amnesty tax paid by the taxpayer under this Decree shall not be less than
P1,000.00 per taxable year; and

d) The taxpayer must file a statement of assets, liabilities and net worth as of December
31, 1980, as required under Section 6 hereof.

It will be recalled that petitioner entered into a deed of sale purportedly on installment. On
the same day, he discounted the promissory note covering the future installments. The
discounting seems questionable because ordinarily, when a bill is discounted, the lender (e.g.
banks, financial institution) charges or deducts a certain percentage from the principal value
as its compensation. Here, the discounting was done by the buyer. On July 2, 1981, two
weeks after the filing of the tax evasion complaint against him by respondent Larin on June
17, 1981, petitioner availed of the tax amnesty under P.D. No. 1740. His amended tax return
for the years 1974 - 1979 was filed with the BIR office of Valenzuela, Bulacan, instead of
Manila where the petitioner's principal office was located. He again availed of the tax
amnesty under P.D. No. 1840. His disclosure, however, did not include the income from his
sale of land to AYALA on cash basis. Instead he insisted that such sale was on installment.
He did not amend his income tax return. He did not pay the tax which was considerably
increased by the income derived from the discounting. He did not meet the twin requirements
of P.D 1740 and 1840, declaration of his untaxed income and full payment of tax due
thereon. Clearly, the petitioner is not entitled to the benefits of P.D. Nos. 1740 and 1840. The
mere filing of tax amnesty return under P.D. 1740 and 1840 does not ipso facto shield him
from immunity against prosecution. Tax amnesty is a general pardon to taxpayers who want
to start a clean tax slate. It also gives the government a chance to collect uncollected tax
from tax evaders without having to go through the tedious process of a tax case. To avail of a
tax amnesty granted by the government, and to be immune from suit on its delinquencies, the
tax payer must have voluntarily disclosed his previously untaxed income and must have paid
the corresponding tax on such previously untaxed income.

It also bears noting that a tax amnesty, much like a tax exemption, is never favored nor
presumed in law and if granted by statute, the terms of the amnesty like that of a tax
exemption must be construed strictly against the taxpayer and liberally in favor of the taxing
authority. 11 Hence, on this matter, it is our view that petitioner's claim of immunity from
prosecution under the shield of availing tax amnesty is untenable.

On the third issue, petitioner asserts that his sale of the land to AYALA was not on cash basis
but on installment as clearly specified in the Deed of Sale which states:

"That for and in consideration of the sum of TWO MILLION THREE HUNDRED EIGHT
THOUSAND SEVEN HUNDRED SEVENTY (P2,308,770.00) PESOS Philippine Currency,
to be paid as follows:

1. P461,754.00, upon the signing of the Deed of Sale; and,

2. The balance of P1,847,016.00, to be paid in four (4) equal, consecutive, annual

installments with interest thereon at the rate of twelve percent (12%) per annum, beginning
on February 20, 1976, said installments to be evidenced by four (4) negotiable promissory
notes." 12

Petitioner resorts to Section 43 of the NIRC and Sec. 175 of Revenue Regulation No. 2 to
support his claim.

Section 43 of the 1977 NIRC states,

Installment basis. (a) Dealers in personal property. . . .

(b) Sales of realty and casual sales of personalty In the case (1) of a casual sale or
other casual disposition of personal property (other than property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the close of the taxable
year), for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real
property if in either case the initial payments do not exceed twenty-five percentum of the
selling price, the income may, under regulations prescribed by the Minister of Finance, be
returned on the basis and in the manner above prescribed in this section. As used in this
section the term "initial payment" means the payments received in cash or property other
than evidences of indebtedness of the purchaser during the taxable period in which the sale
or other disposition is made. . . .

Revenue Regulation No. 2, Section 175 provides,

Sale of real property involving deferred payments. Under Section 43 deferred-payment

sales of real property include (1) agreements of purchase and sale which contemplate that a
conveyance is not to be made at the outset, but only after all or a substantial portion of the
selling price has been paid, and (b) sales in which there is an immediate transfer of title, the
vendor being protected by a mortgage or other lien as to deferred payments. Such sales
either under (a) or (b), fall into two classes when considered with respect to the terms of
sale, as follows:

(1) Sales of property on the installment plan, that is, sales in which the payments received
in cash or property other than evidences of indebtedness of the purchaser during the taxable
year in which the sale is made do not exceed 25 per cent of the selling price;

(2) Deferred-payment sales not on the installment plan, that is sales in which the
payments received in cash or property other than evidences of indebtedness of the purchaser
during the taxable year in which the sale is made exceed 25 per cent of the selling price;

In the sale of mortgaged property the amount of the mortgage, whether the property is
merely taken subject to the mortgage or whether the mortgage is assumed by the purchaser,
shall be included as a part of the "selling price" but the amount of the mortgage, to the extent
it does not exceed the basis to the vendor of the property sold, shall not be considered as a
part of the "initial payments" or of the "total contract price," as those terms are used in
Section 43 of the Code, in sections 174 and 176 of these regulations, and in this section. The
term "initial payments" does not include amounts received by the vendor in the year of sale
from the disposition to a third person of notes given by the vendee as part of the purchase
price which are due and payable in subsequent years. Commissions and other selling
expenses paid or incurred by the vendor are not to be deducted or taken into account in
determining the amount of the "initial payments," the "total contract price," or the "selling
price." The term "initial payments" contemplates at least one other payment in addition to
the initial payment. If the entire purchase price is to be paid in a lump sum in a later year,
there being no payment during the year, the income may not be returned on the installment
basis. Income may not be returned on the installment basis where no payment in cash or
property, other than evidences of indebtedness of the purchaser, is received during the first
year, the purchaser having promised to make two or more payments, in later years.

Petitioner asserts that Sec. 43 allows him to return as income in the taxable years involved,
the respective installments as provided by the deed of sale between him and AYALA.
Consequently, he religiously reported his yearly income from sale of capital asset, subject to
tax, as follows:

Year 1977 (50% of P461,754) P 230,877.00

1978 230,877.00

1979 230,877.00

1980 230,877.00

Petitioner says that his tax declarations are acceptable modes of payment under Section 175
of the Revenue Regulations (RR) No. 2. The term "initial payment", he argues, does not
include amounts received by the vendor which are part of the complete purchase price, still
due and payable in subsequent years. Thus, the proceeds of the promissory notes, not yet due
which he discounted to AYALA should not be included as income realized in 1976. Petitioner
states that the original agreement in the Deed of Sale should not be affected by the
subsequent discounting of the bill.

On the other hand, respondents assert that taxation is a matter of substance and not of form.
Returns are scrutinized to determine if transactions are what they are and not declared to
evade taxes. Considering the progressive nature of our income taxation, when income is
spread over several installment payments through the years, the taxable income goes down
and the tax due correspondingly decreases. When payment is in lump sum the tax for the
year proportionately increases. Ultimately, a declaration that a sale is on installment
diminishes government taxes for the year of initial installment as against a declaration of
cash sale where taxes to the government is larger.

As a general rule, the whole profit accruing from a sale of property is taxable as income in
the year the sale is made. But, if not all of the sale price is received during such year, and a
statute provides that income shall be taxable in the year in which it is "received," the profit
from an installment sale is to be apportioned between or among the years in which such
installments are paid and received.

Section 43 and Sec. 175 says that among the entities who may use the above-mentioned
installment method is a seller of real property who disposes his property on installment,
provided that the initial payment does not exceed 25% of the selling price. They also state
what may be regarded as installment payment and what constitutes initial payment. Initial
payment means the payment received in cash or property excluding evidences of
indebtedness due and payable in subsequent years, like promissory notes or mortgages,
given of the purchaser during the taxable year of sale. Initial payment does not include
amounts received by the vendor in the year of sale from the disposition to a third person of
notes given by the vendee as part of the purchase price which are due and payable in
subsequent years. Such disposition or discounting of receivable is material only as to the
computation of the initial payment. If the initial payment is within 25% of total contract
price, exclusive of the proceeds of discounted notes, the sale qualifies as an installment sale,
otherwise it is a deferred sale.

Although the proceed of a discounted promissory note is not considered part of the initial
payment, it is still taxable income for the year it was converted into cash. The subsequent
payments or liquidation of certificates of indebtedness is reported using the installment
method in computing the proportionate income to be returned, during the respective year it
was realized. Non-dealer sales of real or personal property may be reported as income
under the installment method provided that the obligation is still outstanding at the close of
that year. If the seller disposes the entire installment obligation by discounting the bill or the
promissory note, he necessarily must report the balance of the income from the discounting
not only income from the initial installment payment.

Where an installment obligation is discounted at a bank or finance company, a taxable

disposition results, even if the seller guarantees its payment, continues to collect on the
installment obligation, or handles repossession of merchandise in case of default. This rule
prevails in the United States. Since our income tax laws are of American origin,
interpretations by American courts on our parallel tax laws have persuasive effect on the
interpretation of these laws. Thus, by analogy, all the more would a taxable disposition
result when the discounting of the promissory note is done by the seller himself. Clearly, the
indebtedness of the buyer is discharged, while the seller acquires money for the settlement of
his receivables. Logically then, the income should be reported at the time of the actual gain.
For income tax purposes, income is an actual gain or an actual increase of wealth. Although
the proceeds of a discounted promissory note is not considered initial payment, still it must
be included as taxable income on the year it was converted to cash. When petitioner had the
promissory notes covering the succeeding installment payments of the land issued by AYALA,
discounted by AYALA itself, on the same day of the sale, he lost entitlement to report the sale
as a sale on installment since, a taxable disposition resulted and petitioner was required by
law to report in his returns the income derived from the discounting. What petitioner did is
tantamount to an attempt to circumvent the rule on payment of income taxes gained from the
sale of the land to AYALA for the year 1976.

Lastly, petitioner questions the damages awarded to respondent Larin.

Any person who seeks to be awarded actual or compensatory damages due to acts of another
has the burden of proving said damages as well as the amount thereof. Larin says the
extortion cases filed against him hampered his immediate promotion, caused him strong
anxiety and social humiliation. The trial court awarded him two hundred thousand
(P200,000.00) pesos as actual damages. However, the appellate court stated that, despite
pendency of this case, Larin was given a promotion at the BIR. Said respondent court:

"We find nothing on record, aside from defendant-appellee Larin's statements (TSN, pp. 6-7,
11 December 1985), to show that he suffered loss of seniority that allegedly barred his
promotion. In fact, he was promoted to his present position despite the pendency of the
instant case (TSN, pp. 35-39, 04 November 1985)."

Moreover, the records of the case contain no statement whatsoever of the amount of the
actual damages sustained by the respondents. Actual damages cannot be allowed unless
supported by evidence on the record. The court cannot rely on speculation, conjectures or
guesswork as to the fact and amount of damages. To justify a grant of actual or
compensatory damages, it is necessary to prove with a reasonable degree of certainty, the
actual amount of loss. Since we have no basis with which to assess, with certainty, the
actual or compensatory damages counter-claimed by respondent Larin, the award of such
damages should be deleted.

Moral damages may be recovered in cases involving acts referred to in Article 21 of the
Civil Code. As a rule, a public official may not recover damages for charges of falsehood
related to his official conduct unless he proves that the statement was made with actual
malice. In Babst, et al. vs. National Intelligence Board, et al., 132 SCRA 316, 330 (1984), we
reiterated the test for actual malice as set forth in the landmark American case of New York
Times vs. Sullivan, which we have long adopted, in defamation and libel cases, viz.:

". . . with knowledge that it was false or with reckless disregard of whether it was false or
not."

We appreciate petitioner's claim that he filed his 1976 return in good faith and that he had
honestly believed that the law allowed him to declare the sale of the land, in installment. We
can further grant that the pertinent tax laws needed construction, as we have earlier done.
That petitioner was offended by the headlines alluding to him as tax evader is also fully
understandable. All these, however, do not justify what amounted to a baseless prosecution
of respondent Larin. Petitioner presented no evidence to prove Larin extorted money from
him. He even admitted that he never met nor talked to respondent Larin. When the tax
investigation against the petitioner started, Larin was not yet the Regional Director of BIR
Region IV-A, Manila. On respondent Larin's instruction, petitioner's tax assessment was
considered one involving a sale of capital asset, the income from which was subjected to only
fifty percent (50%) assessment, thus reducing the original tax assessment by half. These
circumstances may be taken to show that Larin's involvement in extortion was not
indubitable. Yet, petitioner went on to file the extortion cases against Larin in different fora.
This is where actual malice could attach on petitioner's part. Significantly, the trial court did
not err in dismissing petitioner's complaints, a ruling affirmed by the Court of Appeals.

Keeping all these in mind, we are constrained to agree that there is sufficient basis for the
award of moral and exemplary damages in favor of respondent Larin. The appellate court
believed respondent Larin when he said he suffered anxiety and humiliation because of the
unfounded charges against him. Petitioner's actions against Larin were found "unwarranted
and baseless," and the criminal charges filed against him in the Tanodbayan and City
Fiscal's Office were all dismissed Hence, there is adequate support for respondent court's
conclusion that moral damages have been proved.

Now, however, what would be a fair amount to be paid as compensation for moral damages
also requires determination. Each case must be governed by its own peculiar circumstances.
On this score, Del Rosario vs. Court of Appeals, cites several cases where no actual
damages were adjudicated, and where moral and exemplary damages were reduced for
being "too excessive," thus:

"In the case of PNB v. C.A., [256 SCRA 309 (1996)], this Court quoted with approval the
following observation from RCPI v. Rodriguez, viz.:

'. . . . Nevertheless, we find the award of P100,000.00 as moral damages in favor of

respondent Rodriguez excessive and unconscionable. In the case of Prudenciado v. Alliance
Transport System, Inc. (148 SCRA 440 [1987]) we said: ". . . [I]t is undisputed that the trial
courts are given discretion to determine the amount of moral damages (Alcantara v. Surro,
93 Phil. 472) and that the Court of Appeals can only modify or change the amount awarded
when they are palpably and scandalously excessive 'so as to indicate that it was the result of
passion, prejudice or corruption on the part of the trial court' (Gellada v. Warner Barnes &
Co., Inc., 57 O.G. [4] 7347, 7358; Sadie v. Bacharach Motors Co., Inc., 57 O.G. [4] 636 and
Adone v. Bacharach Motor Co., Inc., 57 O.G. 656). But in more recent cases where the
awards of moral and exemplary damages are far too excessive compared to the actual loses
sustained by the aggrieved party, this Court ruled that they should be reduced to more
reasonable amounts. . . . . (Italics ours.)'

'In other words, the moral damages awarded must be commensurate with the loss or injury
suffered.'

"In the same case (PNB v. CA), this Court found the amount of exemplary damages required
to be paid (P1,000,000.00) 'too excessive' and reduced it to an 'equitable level'
(P25,000.00)."

It will be noted that in above cases, the parties who were awarded moral damages were not
public officials. Considering that here, the award is in favor of a government official in
connection with his official function, it is with caution that we affirm granting moral
damages, for it might open the floodgates for government officials counter-claiming damages
in suits filed against them in connection with their functions. Moreover, we must be careful
lest the amounts awarded make citizens hesitate to expose corruption in the government, for
fear of lawsuits from vindictive government officials. Thus, conformably with our declaration
that moral damages are not intended to enrich anyone, we hereby reduce the moral
damages award in this case from two hundred thousand (P200,000.00) pesos to seventy five
thousand (P75,000.00) pesos, while the exemplary damage is set at P25,000.00 only. cdll

The law allows the award of attorney's fees when exemplary damages are awarded, and
when the party to a suit was compelled to incur expenses to protect his interest. Though
government officers are usually represented by the Solicitor General in cases connected with
the performance of official functions, considering the nature of the charges, herein
respondent Larin was compelled to hire a private lawyer for the conduct of his defense as
well as the successful pursuit of his counterclaims. In our view, given the circumstances of
this case, there is ample ground to award in his favor P50,000.00 as reasonable attorney's
fees.

WHEREFORE, the assailed decision of the Court of Appeals dated November 29, 1991, is
hereby AFFIRMED with MODIFICATION so that the award of actual damages are deleted;
and that petitioner is hereby ORDERED to pay to respondent Larin moral damages in the
amount of P75,000.00, exemplary damages in the amount of P25,000.00, and attorney's fees
in the amount of P50,000.00 only.

No pronouncement as to costs. SO ORDERED.

(2) Exception The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is
fully utilized in acquiring or constructing a new principal residence within eighteen
(18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost
or adjusted basis of the real property sold or disposed shall be carried over to the
new principal residence built or acquired: Provided, further, That the
Commissioner shall have been duly notified by the taxpayer within thirty (30) days
from the date of sale or disposition through a prescribed return of his intention to
avail of the tax exemption herein mentioned: Provided, still further, That the said
tax exemption can only be availed of once every ten (10) years: Provided, finally,
That if there is no full utilization of the proceeds of sale or disposition, the portion
of the gain presumed to have been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the gross selling price or fair market
value at the time of sale, whichever is higher, shall be multiplied by a fraction
which the unutilized amount bears to the gross selling price in order to determine
the taxable portion and the tax prescribed under paragraph (1) of this Subsection
shall be imposed thereon.

BIR ISSUANCES
REVENUE REGULATIONS NO. 14-00 November 20, 2000
Sale, Exchange or Disposition, by a Natural Person, of His "Principal Residence"
These regulations are hereby promulgated in order to streamline and make more efficient
the collection of the capital gains tax, if any, presumed to have been realized from the
sale, exchange or disposition, by a natural person, of his "Principal Residence."

REVENUE MEMORANDUM CIRCULAR NO. 45-02 October 14, 2002

Procedural Requirements for the Tax Exemption of Sale of Principal Residence.The

concerned Revenue District Officer shall see to it that if upon the lapse of thirty (30) days
following the end of the eighteen-month construction/acquisition period, there is no
showing that the seller has utilized the proceeds of sale, exchange or disposition of his
old principal residence to acquire or construct his new principal residence, said RDO
shall forthwith initiate the assessment of the deficiency capital gains tax and, thereafter,
apply the escrowed bank deposit account against the deficiency tax liability.

SECTION 25 Tax on Nonresident Alien Individual

(A)Nonresident Alien Engaged in Trade or Business Within the Philippines.

(1) In General. A nonresident alien individual engaged in trade or business in
the Philippines shall be subject to an income tax in the same manner as an
individual citizen and a resident alien individual, on taxable income received from
all sources within the Philippines. A nonresident alien individual who shall come
to the Philippines and stay therein for an aggregate period of more than one
hundred eighty (180) days during any calendar year shall be deemed a 'nonresident
alien doing business in the Philippines', Section 22(G) of this Code
notwithstanding.

CASES DIGEST
The important factor which determines the sources of income of personal services is the
place where the services were actually rendered.

Non-resident aliens, whether or not engaged in trade or business, are subject to

Philippine income taxation on their income received from all sources within the
Philippines. Thus, the keyword in determining the taxability of non-resident aliens is the
income's "source." The important factor therefore which determines the source of income
of personal services is not the residence of the payor, or the place where the contract for
service is entered into, or the place of payment, but the place where the services were
actually rendered.

Commissioner of Internal Revenue vs. JulianeBaier-Nickel,

G.R. No. 153793, August 29, 2006

The important factor which determines the sources of income of personal services is the
place where the services were actually rendered.

FACTS: Respondent JulianeBaier-Nickel, a non-resident German citizen, is the

President of JUBANITEX, Inc., a domestic corporation engaged in "manufacturing,
marketing on wholesale only, buying or otherwise acquiring, holding, importing and
exporting, selling and disposing embroidered textile products." Through JUBANITEX's
General Manager, Marina Q. Guzman, the corporation appointed and engaged the
services of respondent as commission agent. It was agreed that respondent will receive
10% sales commission on all sales actually concluded and collected through her efforts.

In 1995, respondent received the amount of P1,707,772.64, representing her sales

commission income from which JUBANITEX withheld the corresponding 10%
withholding tax amounting to P170,777.26, and remitted the same to the BIR. On
October 17, 1997, respondent filed her 1995 income tax return reporting a taxable
income of P1,707,772.64 and a tax due of P170,777.26. On April 14, 1998, respondent
filed a claim to refund the amount of P170,777.26 alleged to have been mistakenly
withheld and remitted by JUBANITEX to the BIR.

Respondent contended that her sales commission income is not taxable in the Philippines
because the same was a compensation for her services rendered in Germany and
therefore considered as income from sources outside the Philippines. Both the CTA and
the CIR contended that the commissions received by respondent were actually her
remuneration in the performance of her duties as President of JUBANITEX and not as a
mere sales agent thereof. The income derived by respondent is therefore an income
taxable in the Philippines because JUBANITEX is a domestic corporation.

ISSUE: Whether respondent's sales commission income is taxable in the Philippines.

HELD: Pursuant to Section 25 of the NIRC, non-resident aliens, whether or not engaged
in trade or business, are subject to Philippine income taxation on their income received
from all sources within the Philippines. Thus, the keyword in determining the taxability of
non-resident aliens is the income's "source." In construing the meaning of "source" in
Section 25 of the NIRC, resort must be had on the origin of the provision. Both the
petitioner and respondent cited the case of Commissioner of Internal Revenue v. British
Overseas Airways Corporation in support of their arguments, but the correct
interpretation of the said case favors the theory of respondent that it is the situs of the
activity that determines whether such income is taxable in the Philippines. The conflict
between the majority and the dissenting opinion in the said case has nothing to do with
the underlying principle of the law on sourcing of income. In fact, both applied the case
of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in
opinion centered on whether the sale of tickets in the Philippines is to be construed as the
"activity" that produced the income, as viewed by the majority, or merely the physical
source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent.
The majority, through Justice AmeurfinaMelencio-Herrera, as ponente, interpreted the
sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner
cannot therefore invoke said case to support its view that source of income is the physical
source of the money earned. If such was the interpretation of the majority, the Court
would have simply stated that source of income is not the business activity of BOAC but
the place where the person or entity disbursing the income is located or where BOAC
physically received the same. But such was not the import of the ruling of the Court. It
even explained in detail the business activity undertaken by BOAC in the Philippines to
pinpoint the taxable activity and to justify its conclusion that BOAC is subject to
Philippine income taxation.
Having disposed of the doctrine applicable in this case, we will now determine whether
respondent was able to establish the factual circumstances showing that her income is
exempt from Philippine income taxation. The decisive factual consideration here is not
the capacity in which respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany. Though not raised as
an issue, the Court is clothed with authority to address the same because the resolution
thereof will settle the vital question posed in this controversy.

The settled rule is that tax refunds are in the nature of tax exemptions and are to be
construed strictissimijuris against the taxpayer. To those therefore, who claim a refund
rest the burden of proving that the transaction subjected to tax is actually exempt from
taxation.

In the instant case, the appointment letter of respondent as agent of JUBANITEX

stipulated that the activity or the service which would entitle her to 10% commission
income, are "sales actually concluded and collected through [her] efforts." What she
presented as evidence to prove that she performed income producing activities abroad,
were copies of documents she allegedly faxed to JUBANITEX and bearing instructions as
to the sizes of, or designs and fabrics to be used in the finished products as well as
samples of sales orders purportedly relayed to her by clients. However, these documents
do not show whether the instructions or orders faxed ripened into concluded or collected
sales in Germany. At the very least, these pieces of evidence show that while respondent
was in Germany, she sent instructions/orders to JUBANITEX. As to whether these
instructions/orders gave rise to consummated sales and whether these sales were truly
concluded in Germany, respondent presented no such evidence. Neither did she establish
reasonable connection between the orders/instructions faxed and the reported monthly
sales purported to have transpired in Germany.

In sum, the faxed documents presented by respondent did not constitute substantial
evidence, or that relevant evidence that a reasonable mind might accept as adequate to
support the conclusion that it was in Germany where she performed the income
producing service which gave rise to the reported monthly sales in the months of March
and May to September of 1995. She thus failed to discharge the burden of proving that
her income was from sources outside the Philippines and exempt from the application of
our income tax law. Hence, the claim for tax refund should be denied. Commissioner of
Internal Revenue vs. JulianeBaier-Nickel, G.R. No. 153793,
August 29, 2006
(2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock
Company, or Insurance or Mutual Fund Company or Regional Operating
Headquarter of Multinational Company, or Share in the Distributable Net Income
of a Partnership (Except a General Professional Partnership), Joint Account, Joint
Venture Taxable as a Corporation or Association, Interests, Royalties, Prizes, and
Other Winnings Cash and/or property dividends from a domestic corporation,
or from a joint stock company, or from an insurance or mutual fund company or
from a regional operating headquarter of multinational company, or the share of a
nonresident alien individual in the distributable net income after tax of a
partnership (except a general professional partnership) of which he is a partner, or
the share of a nonresident alien individual in the net income after tax of an
association, a joint account, or a joint venture taxable as a corporation of which he
is a member or a co-venturer; interests; royalties (in any form); and prizes (except
prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to
tax under Subsection (B)(1) of Section 24); and other winnings (except Philippine
Charity Sweepstakes and Lotto winnings), shall be subject to an income tax of
twenty percent (20%) on the total amount thereof: Provided, however, That
royalties on books as well as other literary works, and royalties on musical
compositions shall be subject to a final tax of ten percent (10%) on the total
amount thereof: Provided, further, That cinematographic films and similar works
shall be subject to the tax provided under Section 28 of this Code: Provided,
furthermore, That interest income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit substitutes, investment
management accounts and other investments evidenced by certificates in such form
prescribed by the BangkoSentralngPilipinas (BSP) shall be exempt from the tax
imposed under this Subsection: Provided, finally, That should the holder of the
certificate pre-terminate the deposit or investment before the fifth (5th) year, a final
tax shall be imposed on the entire income and shall be deducted and withheld by
the depository bank from the proceeds of the long-term deposit or investment
certificate based on the remaining maturity thereof:

Four (4) years to less than five (5) years 5%;

Three (3) years to less than four (4) years 12%; and

Less than three (3) years 20%.

(3) Capital Gains Capital gains realized from sale, barter or exchange of shares
of stock in domestic corporations not traded through the local stock exchange, and
real properties shall be subject to the tax prescribed under Subsections (C) and (D)
of Section 24.

(B)Nonresident Alien Individual Not Engaged in Trade or Business Within the

Philippines There shall be levied, collected and paid for each taxable year upon
the entire income received from all sources within the Philippines by every
nonresident alien individual not engaged in trade or business within the Philippines
as interest, cash and/or property dividends, rents, salaries, wages, premiums,
annuities, compensation, remuneration, emoluments, or other fixed or determinable
annual or periodic or casual gains, profits, and income, and capital gains, a tax
equal to twenty-five percent (25%) of such income. Capital gains realized by a
nonresident alien individual not engaged in trade or business in the Philippines
from the sale of shares of stock in any domestic corporation and real property shall
be subject to the income tax prescribed under Subsections (C) and (D) of Section
24.

(C) Alien Individual Employed by Regional or Area Headquarters and Regional

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

BIR ISSUANCES
REVENUE REGULATIONS NO. 011-10 October 26, 2010
Clarifying the Term "Managerial and Technical Positions" Including Guidelines on
Availment of the Fifteen Percent (15%) Preferential Income Tax Rate for Qualified
Filipino Personnel Employed by Regional or Area Headquarters (RHQs) and Regional
Operating Headquarters (ROHQs) of Multinational Companies

Revenue Memorandum Circular 41-09 July 23, 2009

In the case of Philippine Appliance Corporation vs. Laguesma, 226 SCRA 730 (1993),
the Supreme Court held that a "managerial employee" is one who is vested with powers
or prerogatives to lay down and execute management policies and/or to hire, execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees. The test of "managerial status" depends on whether a person
possesses authority to act in the interest of his employer and whether such authority is
not merely routinary or clerical in nature, but requires the use of independent judgment.
Where such recommendatory powers are subject to evaluation, review and final action by
the department heads and other higher executives of the company, the person having
such recommendatory powers is not a managerial employee. The fact that his work
description is either manager or supervisor is of no moment considering that it is the
nature of his functions and not the said nomenclature of title which determines his status.
To be a managerial employee, the following elements must concur: (1) his primary duty
consists of performance of work directly related to management policies; (2) he
customarily and regularly exercises discretion and independent judgment in the
performance of his functions; (3) he regularly and directly assists in the management of
the establishment; and (4) he does not devote 20% of his time to work other than those
above prescribed. The test is whether the position requires use of independent judgment.
The employees are not managerial employees if they only execute approved and
established policies, leaving little or no discretion at all whether to implement said
policies or not. (Villuga vs. NLRC, 225 SCRA 537 )
On the other hand, the term "technical position" is limited only to positions which are
highly technical in nature or where there are no Filipinos who are competent, able and
willing to perform the services for which the aliens are desired.
In view thereof, only Filipinos employed and occupying managerial and highly technical
positions as defined above similar to the positions of the aliens employed by regional or
area headquarters and regional operating headquarters of multinational companies shall
be entitled to the option to be taxed at either 15% of gross income or at the regular
income tax rate on their taxable income in accordance with Section 25 (C) of the Tax
Code of 1997, as amended, if the employer, i.e., Regional Operating Headquarters,
Regional or Area Headquarters, is governed by Book III of E.O. 226, as amended by R.A.
8756.
(D) Alien Individual Employed by Offshore Banking Units There shall be
levied, collected and paid for each taxable year upon the gross income received by
every alien individual employed by offshore banking units established in the
Philippines as salaries, wages, annuities, compensation, remuneration and other
emoluments, such as honoraria and allowances, from such offshore banking units,
a tax equal to fifteen percent (15%) of such gross income: Provided, however, That
the same tax treatment shall apply to Filipinos employed and occupying the same
position as those of aliens employed by these offshore banking units.

(E) Alien Individual Employed by Petroleum Service Contractor and Subcontractor

An alien individual who is a permanent resident of a foreign country but who is
employed and assigned in the Philippines by a foreign service contractor or by a
foreign service subcontractor engaged in petroleum operations in the Philippines
shall be liable to a tax of fifteen percent (15%) of the salaries, wages, annuities,
compensation, remuneration and other emoluments, such as honoraria and
allowances, received from such contractor or subcontractor: Provided, however,
That the same tax treatment shall apply to a Filipino employed and occupying the
same position as an alien employed by petroleum service contractor and
subcontractor.

Any income earned from all other sources within the Philippines by the alien
employees referred to under Subsections (C), (D) and (E) hereof shall be subject to
the pertinent income tax, as the case may be, imposed under this Code.

SECTION 26 Tax Liability of Members of General Professional Partnerships

A general professional partnership as such shall not be subject to the income tax
imposed under this Chapter. Persons engaging in business as partners in a general
professional partnership shall be liable for income tax only in their separate and
individual capacities.

For purposes of computing the distributive share of the partners, the net income of
the partnership shall be computed in the same manner as a corporation.

Each partner shall report as gross income his distributive share, actually or
constructively received, in the net income of the partnership.

CASES DIGEST
Tax Liability of Members of General Professional Partnerships

Income tax is imposed on the partners, not on the professional partnership.

A general professional partnership, unlike an ordinary business partnership (which is
treated as a corporation for income tax purposes and so subject to the corporate income
tax), is not itself an income taxpayer. The income tax is imposed not on the professional
partnership, which is tax exempt, but on the partners themselves in their individual
capacity computed on their distributive shares of partnership profits. The general
professional partnership is deemed to be no more than a mere mechanism or a flow-
through entity in the generation of income by, and the ultimate distribution of such
income to, respectively, each of the individual partners.

Rufino R. Tan vs. Ramon R. del Rosario, Jr., et al.,

G.R. No. 109289, October 3, 1994

BIR ISSUANCES

February 18, 2010 REVENUE REGULATIONS NO. 002-10

SUBJECT : Amendment to Sections 6 and 7 of Revenue Regulations No. 16-2008

with Respect to the Determination of the Optional Standard Deduction (OSD) of General
Professional Partnerships (GPPs) and the Partners Thereof, as well as the Manner and
Period for Making the Election to Claim OSD in the Income Tax Returns

SECTION 1. Scope. Pursuant to the provisions of Sec. 244, in relation to Sec. 3 of

Republic Act No. 9504 (RA 9504) amending Sec. 34 (L) of the Tax Code of 1997 (Code), as
amended, these Regulations are hereby promulgated to amend certain provisions of Revenue
Regulations No. 16-2008 to further clarify the manner of claiming the OSD by General
Professional Partnerships and the partners comprising them and the manner of manifesting
the election to use OSD for the taxable year concerned by all taxpayers entitled to it.

SECTION 2. Sec. 6 of Revenue Regulations No. 16-2008 is hereby amended to read as

follows:

"SEC. 6. Determination of the Optional Standard Deduction for General Professional

Partnerships (GPPs) and Partners of GPPs. Pursuant to Sec. 26 of the Code, a GPP is
not subject to income tax imposed under Title II thereof. However, the partners shall be
liable to pay income tax on their separate and individual capabilities for their respective
distributive share in the net income of the GPP.

Sec. 26 of the Code likewise provides that "For purposes of computing the distributive
share of the partners, the net income of the GPP shall be computed in the same manner as a
corporation." As such, a GPP may claim either the itemized deductions allowed under
Section 34(A) to (J) of the Code or in lieu thereof, it can opt to avail of the OSD allowed to
corporations in claiming the deductions in an amount not exceeding forty percent (40%) of
its gross income. The net income determined by either claiming the itemized deduction or
OSD from the GPP's gross income is the distributable net income from which the share of
each partner is to be determined. Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the partnership.

The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-
through" entity where its income is ultimately taxed to the partners comprising it. In
computing taxable income defined under Section 31 of the Code, all expenses which are
ordinary and necessary, incurred or paid for the practice of profession, are allowed as
deductions. Since the taxable income is in the hands of the partner, as a rule apart from the
expenses claimed by the GPP in determining its net income, the individual partner can still
claim deductions incurred or paid by him that contributed to the earning of the income
taxable to him. The following rules shall govern the claim of the partners of deductions from
their share in the net income of the partnership, viz.:

1. If the GPP availed of the itemized deduction in computing its net income, the partners
may still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by the
GPP. In fine, if the GPP claimed itemized deductions the partners comprising it can only
claim itemized deductions which are in the nature of ordinary and necessary expenses for the
practice of profession which were not claimed by the GPP in computing its net income or
distributable net income during the year. Examples of these are representation expenses
incurred by the partner where the covering invoice or receipt is issued in his name;
travelling expenses while away from home, which were not liquidated by the partnership;
depreciation of a car used in the practice of profession where said car is registered in the
name of the partner; and similar expenses.

Hence, if the GPP availed of itemized deductions, the partners are not allowed to claim the
OSD from their share in the net income because the OSD is a proxy for all the items of
deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the
items of deductions claimed by the GPP and the items of deduction claimed by the partners.

2. If the GPP avails of OSD in computing its net income, the partners comprising it can
no longer claim further deduction from their share in the said net income for the following
reasons:

i. The partners' distributive share in the GPP is treated as his gross income not his
gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be
deducted not from his gross income but from his gross sales/receipts; and,
ii. The OSD being in lieu of the itemized deductions allowed in computing taxable
income as defined under Section 31 of the Tax Code, it will answer for both the items of
deduction allowed to the GPP and its partners.

3. Since one-layer of income tax is imposed on the income of the GPP and the individual
partners where the law had placed the statutory incidence of the tax in the hands of the
latter, the type of deduction chosen by the GPP must be the same type of deduction that can
be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items
of deduction allowed under Section 34 can be claimed both at the level of the GPP and at the
level of the partner in order to determine the taxable income. On the other hand, should the
GPP opt to claim the OSD, the individual partners are deemed to have availed also of the
OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing
taxable income.

4. If the partner also derives other gross income from trade, business or practice of
profession apart and distinct from his share in the net income of the GPP, the deduction that
he can claim from his other gross income would follow the same deduction availed of from
his partnership income as explained in the foregoing rules. Provided, however, that if the
GPP opts for the OSD, the individual partner may still claim 40% of its gross income from
trade, business or practice of profession but not to include his share from the net income of
the GPP.

SECTION 3. Sec. 7 of Revenue Regulations No. 16-2008 is hereby amended to read as

follows:

"SEC. 7. Other Implications of the Optional Standard Deduction. A taxpayer who

elected to avail of the OSD not exceeding forty percent (40%) of gross sales or gross
receipts, in case of an individual taxable under Secs. 24(A) and 25(A)(1) of the Tax Code,
or forty percent (40%) of gross income, in case of a corporation subject to tax under Sec.
27(A) or 28(A)(1) of the same Code shall signify in his/its return such intention, otherwise
he/it shall be considered as having availed himself of the itemized deductions allowed under
Sec. 34 of the Code. Once the election to avail of the OSD or itemized deduction is signified
in the return, it shall be irrevocable for the taxable year for which the return is made.

The election to claim either the OSD or the itemized deduction for the taxable year must be
signified by checking the appropriate box in the income tax return filed for the first quarter
of the taxable year adopted by the taxpayer. Once the election is made, the same type of
deduction must be consistently applied for all the succeeding quarterly returns and in the
final income tax return for the taxable year. Any taxpayer who is required but fails to file the
quarterly income tax return for the first quarter shall be considered as having availed of the
itemized deductions option for the taxable year.
Thus, a taxpayer who avails of the OSD in the first quarter of its/his taxable year shall have
to claim the same OSD in determining its/his taxable income for the rest of the year,
including the final income tax return which is due to be filed on or before the 15th day of the
fourth month, following the close of the taxable year. Likewise, a taxpayer who avails of the
itemized deduction in the first quarter of its/his taxable year or fails to file an income tax
return for the first quarter of the taxable year, shall have to claim the itemized deduction in
determining the taxable income for the rest of the year, including the final income tax return
which is due to be filed on or before the 15th day of the fourth month, following the close of
the taxable year.

An individual taxpayer who is entitled to and claimed the OSD shall not be required to
submit with his tax return such financial statements otherwise required under the Code.
Provided, that, except when the Commissioner otherwise permits, the said individual shall
keep such records pertaining to his gross sales or gross receipts. In the case of a
corporation, however, said corporation is still required to submit its financial statements
when it files its annual income tax return and to keep such records pertaining to its gross
income as herein defined."

SECTION 4. Repealing Clause. All revenue issuances or portions thereof which are
inconsistent with the provisions of these Regulations are hereby amended, modified or
repealed accordingly.

SECTION 5. Effectivity Clause. These regulations shall take effect 15 days following its
publication in newspaper of general circulation.

(SGD.) MARGARITO B. TEVES Secretary of Finance

Recommending Approval: (SGD.) JOEL L. TAN-TORRES Commissioner of Internal

Revenue

CHAPTER IV Tax on Corporations

SECTION 27 Rates of Income Tax on Domestic Corporations

(A) In General Except as otherwise provided in this Code, an income tax of

thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines by
every corporation, as defined in Section 22(B) of this Code and taxable under this
Title as a corporation, organized in, or existing under the laws of the Philippines:
Provided, That effective January 1, 2009, the rate of income tax shall be thirty
percent (30%).
In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when specific sales,
purchases and other transactions occur. Their income and expenses for the fiscal
year shall be deemed to have been earned and spent equally for each month of the
period.

The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year
by the taxable income of the corporation for the period, divided by twelve.

Provided, further, That the President, upon the recommendation of the Secretary of
Finance, may, effective January 1, 2000, allow corporations the option to be taxed
at fifteen percent (15%) of gross income as defined herein, after the following
conditions have been satisfied:

(1) A tax effort ratio of twenty percent (20%) of Gross National Product (GNP);

(2) A ratio of forty percent (40%) of income tax collection to total tax revenues;

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

(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP.

The option to be taxed based on gross income shall be available only to firms
whose ratio of cost of sales to gross sales or receipts from all sources does not
exceed fifty-five percent (55%).

The election of the gross income tax option by the corporation shall be irrevocable
for three (3) consecutive taxable years during which the corporation is qualified
under the scheme.

BIR ISSUANCES
REVENUE REGULATIONS NO. 07-03 December 27, 2002
Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an
Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of
1997 for Purposes of Imposing the Capital Gains Tax or the Minimum Corporate Income
Tax (MCIT)
The following terms shall be defined as follows:
a. Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the
real estate business for purposes of determining the applicable rate of withholding tax
imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98 , as amended.
Income Tax on Domestic Corporations

Income tax on domestic corporations is covered by Section 27 of the NIRC of 1997, . . .

Hence, a domestic corporation must pay whichever is higher of: (1) the income tax under
Section 27 (A) of the NIRC of 1997, computed by applying the tax rate therein to the
taxable income of the corporation; or (2) the MCIT under Section 27 (E), also of the
NIRC of 1997, equivalent to 2% of the gross income of the corporation. Although this
may be the general rule in determining the income tax due from a domestic corporation
under the NIRC of 1997, it can only be applied to PAL to the extent allowed by the
provisions in the franchise of PAL specifically governing its taxation.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

Income tax on Domestic Corporations

Under the Tax Code, the term 'gross income' derived from business shall be equivalent to
gross sales less sales returns, discounts and allowances and cost of goods sold. 'Cost of
goods sold' shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.

For a trading or merchandising concern, 'cost of goods sold' shall include the invoice
cost of the goods sold, plus import duties, freight in transporting the goods to the place
where the goods are actually sold, including insurance while the goods are in transit.
For a manufacturing concern, 'cost of goods manufactured and sold' shall include all
costs of production of finished goods, such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances and discounts.

Pursuant to the NIRC of 1997, the taxable income of a domestic corporation may be
arrived at by subtracting from gross income deductions authorized, not just by the NIRC
of 1997, but also by special laws. Presidential Decree No. 1590 may be considered as
one of such special laws authorizing PAL, in computing its annual net taxable income, on
which its basic corporate income tax shall be based, to deduct from its gross income the
following: (1) depreciation of assets at twice the normal rate; and (2) net loss carry-over
up to five years following the year of such loss. In comparison, the 2% MCIT under
Section 27 (E) of the NIRC of 1997 shall be based on the gross income of the domestic
corporation. The Court notes that gross income, as the basis for MCIT, is given a special
definition under Section 27 (E) (4) of the NIRC of 1997, different from the general one
under Section 34 of the same Code.

According to the last paragraph of Section 27 (E) (4) of the NIRC of 1997, gross income
of a domestic corporation engaged in the sale of service means gross receipts, less sales
returns, allowances, discounts and cost of services. "Cost of services" refers to all direct
costs and expenses necessarily incurred to provide the services required by the customers
and clients including (a) salaries and employee benefits of personnel, consultants, and
specialists directly rendering the service; and (b) cost of facilities directly utilized in
providing the service, such as depreciation or rental of equipment used and cost of
supplies. Noticeably, inclusions in and exclusions/deductions from gross income for
MCIT purposes are limited to those directly arising from the conduct of the taxpayer's
business. It is, thus, more limited than the gross income used in the computation of basic
corporate income tax.

In light of the foregoing, there is an apparent distinction under the NIRC of 1997 between
taxable income, which is the basis for basic corporate income tax under Section 27 (A);
and gross income, which is the basis for the MCIT under Section 27 (E). The two terms
have their respective technical meanings, and cannot be used interchangeably. The same
reasons prevent this Court from declaring that the basic corporate income tax, for which
PAL is liable under Section 13 (a) of Presidential Decree No. 1590, also covers MCIT
under Section 27 (E) of the NIRC of 1997, since the basis for the first is the annual net
taxable income, while the basis for the second is gross income.

Third, even if the basic corporate income tax and the MCIT are both income taxes under
Section 27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct
and separate taxes.

The Court again cites Commissioner of Internal Revenue v. Philippine Airlines, Inc.,
wherein it held that income tax on the passive income 21 of a domestic corporation,
under Section 27 (D) of the NIRC of 1997, is different from the basic corporate income
tax on the taxable income of a domestic corporation, imposed by Section 27 (A), also of
the NIRC of 1997. Section 13 of Presidential Decree No. 1590 gives PAL the option to
pay basic corporate income tax or franchise tax, whichever is lower; and the tax so paid
shall be in lieu of all other taxes, except real property tax. The income tax on the passive
income of PAL falls within the category of "all other taxes" from which PAL is exempted,
and which, if already collected, should be refunded to PAL.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

BIR ISSUANCES
REVENUE REGULATIONS NO. 004-11 March 15, 2011
Proper Allocation of Costs and Expenses Amongst Income Earnings of Banks and Other
Financial Institutions for Income Tax Reporting Purposes
REVENUE REGULATIONS NO. 11-05 April 25, 2005Regulations Defining "Gross
Income Earned" to Implement the Tax Incentive Provision in Section 24 of Republic Act
No. 7916, known as "The Special Economic Zone Act of 1995"

Gross Income Earned shall refer to gross sales or gross revenues derived from
business activity within the ECOZONE, net of sales discounts, sales returns and
allowances and minus costs of sales or direct costs but before any deduction is made for
administrative, marketing, selling and/or operating expenses or incidental losses during
a given taxable period.

For purposes of computing the total five percent (5%) tax rate imposed, the following
direct costs are included in the allowable deductions to arrive at gross income earned for
specific types of enterprises:

1. ECOZONE Export Enterprises, Free Trade Enterprises and Domestic Market

Enterprises:

Direct salaries, wages or labor expenses

 Production supervision salaries
Raw materials used in the manufacture of products
Decrease in Goods in Process Account (Intermediate goods)
Decrease in Finished Goods Account
Supplies and fuels used in production
Depreciation of machinery and equipment used in production, and of that portion
of the building owned or constructed that is used exclusively in the production of goods
Rent and utility charges associated with building, equipment and warehouses used
in production
Financing charges associated with fixed assets used in production the amount of
which were not previously capitalized
2. ECOZONE Developer/Operator, Facilities, Utilities and Tourism Enterprises:

Direct salaries, wages or labor expense

Service supervision salaries
Direct materials, supplies used
Depreciation of machineries and equipment used in the rendition of registered
services, and of that portion of the building owned or constructed that is used exclusively
in the rendition of registered service
Rent and utility charges for buildings and capital equipment used in the rendition
of registered services
Financing charges associated with fixed assets used in the registered service
business the amount of which were not previously capitalized.
(B)Proprietary Educational Institutions and Hospitals. Proprietary educational
institutions and hospitals which are nonprofit shall pay a tax of ten percent (10%)
on their taxable income except those covered by Subsection (D) hereof: Provided,
That if the gross income from unrelated trade, business or other activity exceeds
fifty percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in Subsection (A)
hereof shall be imposed on the entire taxable income. For purposes of this
Subsection, the term 'unrelated trade, business or other activity' means any trade,
business or other activity, the conduct of which is not substantially related to the
exercise or performance by such educational institution or hospital of its primary
purpose or function. A 'proprietary educational institution' is any private school
maintained and administered by private individuals or groups with an issued permit
to operate from the Department of Education, Culture and Sports (DECS), or the
Commission on Higher Education (CHED), or the Technical Education and Skills
Development Authority (TESDA), as the case may be, in accordance with existing
laws and regulations.
CASES DIGEST
Medical, dental, hospital and veterinary services, except those rendered by professionals,
are exempt from value-added tax (Section 109 (l), NIRC of 1997, as amended). The
maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and
essential service or facility rendered by any hospital for its patients. Thus, the facility of
making drugs and medicines available to in-patients of the hospital, whether for reasons
of life-threatening urgency or mere convenience, cannot but be viewed as a hospital
service that is covered by the broad and general exemption provided in Section 109 (l) of
the NIRC of 1997, as amended, for "hospital services". C.T.A. CASE NO. 7304.
December 1, 2010
PERPETUAL SUCCOUR HOSPITAL, INC. and THE SISTERS OF ST. PAUL DE
CHARTERS vs. COMMISSIONER OF INTERNAL REVENUE

CHARGING MEDICAL AND HOSPITAL FEES. The mere charging of medical and
hospital fees from those who can afford to pay does not make the institution one
established for profit or gain. The fact that a hospital charges fees for paying beds does
not make it lose its character as a charitable institution if the same were used to partly
finance the expenses of the free wards maintained by the hospital.
A corporation organized for 'charitable, educational and religious purposes; that no part
of its net income inures to the benefit of any private individual is exempted from paying
income tax; that it operates a hospital in which medical assistance is given to destitute
persons free of charge; that it maintains a pharmacy department within the premises of
said hospital, to supply drugs and medicines only to charity and paying patients confined
therein; and that only the paying patients are required to pay the medicines supplied to
them, for which they are charged the cost of medicines, plus an additional 10% thereof,
to partly offset the cost of medicines supplied free of charge to charity patients. Under
these facts, we are of the opinion, and so hold, that the Hospital may not be regarded as
engaged in 'business' by reason of said sale of medicines to its paying patients.
It has been held that the mere charging of medical and hospital fees from those who
could afford to pay, did not make the institution one established for profit or gain.
HOSPITAL DE SAN JUAN DE DIOS, INC. vs. PASAY CITY, PABLO CUNETA City
MayorG.R. No. L-19371 February 28, 1966

BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency Oct 25, 2012
The Supreme Court has ordered St. Lukes Medical Center Inc. to pay the Bureau of
Internal Revenue P63.9 million in deficiency income tax, value added tax and
withholding tax on compensation for 1998, based on the 10-percent preferential income
tax as stipulated in the 1997 Tax Code.

According to BIR head revenue executive assistant Claro Ortiz, this means that all
hospitals that claim to be non-profit but are proprietary will now have to pay income tax.
In 2002, St. Luke's disputed the BIRs assessment that it should be paying income taxes,
saying that it is a non-profit hospital. The case eventually reached the Supreme Court. In
a decision penned by Associate Justice Antonio Carpio on Sept. 26 and received by the
BIR on Oct. 17, the SC reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRs assessment. The appellate court had argued that St. Lukes was not
subject to income tax because non-stock corporations are exempt from paying income
tax.

However, the SC ruled that St. Lukes services that patients pay for are subject to income
tax.

St. Lukes Medical Center is ordered to pay the deficiency income tax in 1998 based on
the 10 percent preferential income tax rate under Section 27(B) of the National Internal
Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the NIRC, the decision stated. The
BIR claimed that St. Lukes had total revenues of P1.73 billion in 1998 alone. St. Lukes
refuted the assessment, saying that its free services to patients amounted to P218 million
in 1998.

The Supreme Court ruled that while there is no dispute that St. Lukes is organized as a
non-stock and non-profit charitable institution, this does not automatically exempt it from
paying taxes. For a charitable institution to be exempt from income taxes, Section 30(E)
of the NIRC requires that [it] must be organized and operated exclusively for charitable
purposes, the SC said in its decision.

Taxation of non-stock, non-profit hospitals

17 October 2012 by Atty. Anthony G. Prestoza / Tax Law for Business

TAXATION of non-stock, non-profit organizations had always been a controversy. There

are a number of types or classes of organizations or associations exempted from income
taxes by the Tax Code. So these types of organizations are the usual channel through
which activities are pursued if the intention is not for profit. But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organizations is not that
clear after all.

Among the types of organizations exempted from income taxes are non-stock
corporations organized for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare. For one to invoke exemption from
income tax, it must be organized as non-stock and operated for the purposes in which it
was organized. That classification itself had been an issue in the area of income taxation.
The Court had repeatedly defined what a non-stock organization is but its relevance
crops up every time a tax-related issue is involved. So what really constitutes a non-stock
corporation? Once again, the Supreme Court, in GR 195909 and 195960, September 26,
2012, referred to the definition in the Corporation Code of a non-stock corporation as
one where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.

That case involves the income taxation of a non-stock and non-profit hospital organized
for charitable and for social welfare purposes. The institution claims that it is exempt
from income taxation under Section 30 of the Tax Code, which exempts this kind of
institution from income taxation. The tax authority, on the other hand, claims that it
should be subject to income tax under Section 27(B) of the Tax Code, which imposes 10-
percent income tax on proprietary and nonprofit hospitals. As decided by the Court, a
non-stock, non-profit corporation is indeed exempt from income taxation. That
exemption, however, is intended solely for the activities of a non-stock, non-profit entity
which are operated exclusively for charitable or social welfare purposes. Any other
income that may be generated by these entities shall be subject to the 10-percent
preferential tax rate the tax imposed on proprietary non-profit hospitals.

Apparently, according to the Court, proprietary means private, and when applied to
a hospital means private hospital. On the other hand, non-profit means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutions purposes and all its activities conducted not for profit.

Thus, if a hospital not organized for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of 10
percent. Simply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non-related activities in furtherance of its
purposes, the same shall still be taxable at a rate of 10 percent.

The implication of this is that a non-stock, non-profit organization, including a hospital,

organized for charitable and/or for purposes of promoting the general welfare is not
subject to income tax. The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not-for-profit activities. That exemption is not lost
even if said entity involves itself in activities conducted for profit. But these revenues
derived from profit- generating activities will be subject to income tax. With respect to
hospitals, that income tax shall not be the regular income tax rate of 30 percent but the
special income tax rate of 10 percent imposed on proprietary and nonprofit hospitals.

TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _

EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL
PURPOSES

FACTS: The petitioner Lung Center of the Philippines is a non-stock and non-profit
entity established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the
registered owner of a parcel of land located at Quezon Avenue, Quezon City. Erected in
the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines.
A big space at the ground floor is being leased to private parties, for canteen and small
store spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon Avenue is vacant
and idle, while a big portion on the right side, at the corner of Quezon Avenue and
Elliptical Road, is being leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.
The petitioner accepts paying and non-paying patients. It also renders medical services
to out-patients, both paying and non-paying. Aside from its income from paying patients,
the petitioner receives annual subsidies from the government. On June 7, 1993, both the
land and the hospital building of the petitioner were assessed for real property taxes by
the City Assessor of Quezon City.
Petitioner filed a Claim for Exemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. Petitioner contends that under
Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used
for charity patients and that the major thrust of its hospital operation is to serve charity
patients. It argues that it is a charitable institution and, as such, exempt from real
property taxes.
ISSUES:
1. Whether the petitioner is a charitable institution within the context of Presidential
Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic
Act No. 7160.
2. Whether the real properties of petitioner are exempt from real property taxes.
HELD:
1. Yes.
To determine whether an enterprise is a charitable institution/entity or not, the elements
which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.
Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the President
of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It
was organized for the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the Philippines.
As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution. (Congregational Sunday School, etc. v. Board of
Review; Lutheran Hospital Association of South Dakota v. Baker)
Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in
the form of subsidies granted by the government. (Yorgason v. County Board of
Equalization of Salt Lake County)
In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients and for
the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its
operations.
2. Notwithstanding the finding that petitioner is a charitable institution, those
portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable
purposes.
The settled rule is that laws granting exemption from tax are construed strictissimijuris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation.
Hence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. (Salvation Army v. Hoehn)
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges. However, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax
exempt privileges under Section 2.
It is a settled rule of statutory construction that the express mention of one person, thing,
or consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressiouniusestexclusioalterius.
The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution
covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the
1986 Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes."
Consequently, the constitutional provision is implemented by Section 234(b) of Republic
Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:
(Note the following substantial changes in the Constitution: Under the 1935 Constitution,
". . . all lands, buildings, and improvements used 'exclusively' for charitable . . .
purposes shall be exempt from taxation." However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be
considered exempt, the same should not only be "exclusively" used for charitable
purposes; it is required that such property be used "actually" and "directly" for such
purposes.)
Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that
(a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed
and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If
real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation. The words "dominant use" or "principal
use" cannot be substituted for the words "used exclusively" without doing violence to the
Constitutions and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the use of the income from the
real property that is determinative of whether the property is used for tax-exempt
purposes.
The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes. While portions of the
hospital are used for the treatment of patients and the dispensation of medical services to
them, whether paying or non-paying, other portions thereof are being leased to private
individuals for their clinics and a canteen. Further, a portion of the land is being leased
to a private individual for her business enterprise under the business name "Elliptical
Orchids and Garden Center." Indeed, the petitioner's evidence shows that it collected
P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.
Accordingly, the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt from real property taxes.
LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P.
ROSAS, as City Assessor of Quezon City [G.R. No. 144104. June 29, 2004.]
(C) Government-owned or Controlled Corporations, Agencies or
InstrumentalitiesThe provisions of existing special or general laws to the contrary
notwithstanding, all corporations, agencies, or instrumentalities owned or
controlled by the Government, except the Government Service and Insurance
System (GSIS), the Social Security System (SSS), the Philippine Health
Insurance Corporation (PHIC), the local water districts (LWD) and the Philippine
Charity Sweepstakes Office (PCSO), 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.
PHILIPPINE AMUSEMENT AND GAMING CORPORATION (PAGCOR), petitioner, vs.
THE BUREAU OF INTERNAL REVENUE (BIR), represented herein by HON. JOSE MARIO
BUAG, in his official capacity as COMMISSIONER OF INTERNAL REVENUE, public
respondent, [G.R. No. 172087. March 15, 2011.]

DECISION

For resolution of this Court is the Petition for Certiorari and Prohibition with prayer for the
issuance of a Temporary Restraining Order and/or Preliminary Injunction, dated April 17,
2006, of petitioner Philippine Amusement and Gaming Corporation (PAGCOR), seeking the
declaration of nullity of Section 1 of Republic Act (R.A.) No. 9337 insofar as it amends
Section 27 (c) of the National Internal Revenue Code of 1997, by excluding petitioner from
exemption from corporate income tax for being repugnant to Sections 1 and 10 of Article III
of the Constitution. Petitioner further seeks to prohibit the implementation of Bureau of
Internal Revenue (BIR) Revenue Regulations No. 16-2005 for being contrary to law.

The undisputed facts follow.

PAGCOR was created pursuant to Presidential Decree (P.D.) No. 1067-A on January 1,
1977. Simultaneous to its creation, P.D. No. 1067-B (supplementing P.D. No. 1067-A) was
issued exempting PAGCOR from the payment of any type of tax, except a franchise tax of five
percent (5%) of the gross revenue. Thereafter, on June 2, 1978, P.D. No. 1399 was issued
expanding the scope of PAGCOR's exemption.

To consolidate the laws pertaining to the franchise and powers of PAGCOR, P.D. No. 1869
was issued. Section 13 thereof reads as follows:

Sec. 13. Exemptions. . . .

(1) Customs Duties, taxes and other imposts on importations. All importations of
equipment, vehicles, automobiles, boats, ships, barges, aircraft and such other gambling
paraphernalia, including accessories or related facilities, for the sole and exclusive use of
the casinos, the proper and efficient management and administration thereof and such other
clubs, recreation or amusement places to be established under and by virtue of this
Franchise shall be exempt from the payment of duties, taxes and other imposts, including all
kinds of fees, levies, or charges of any kind or nature.

Vessels and/or accessory ferry boats imported or to be imported by any corporation having
existing contractual arrangements with the Corporation, for the sole and exclusive use of the
casino or to be used to service the operations and requirements of the casino, shall likewise
be totally exempt from the payment of all customs duties, taxes and other imposts, including
all kinds of fees, levies, assessments or charges of any kind or nature, whether National or
Local.

(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income
or otherwise, as well as fees, charges, or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a
Franchise Tax of five percent (5%) of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established, or collected by any
municipal, provincial or national government authority.

(b) Others: The exemption herein granted for earnings derived from the operations
conducted under the franchise, specifically from the payment of any tax, income or
otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation(s), association(s), agency(ies), or individual(s) with whom the
Corporation or operator has any contractual relationship in connection with the operations
of the casino(s) authorized to be conducted under this Franchise and to those receiving
compensation or other remuneration from the Corporation as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

The fee or remuneration of foreign entertainers contracted by the Corporation or operator in

pursuance of this provision shall be free of any tax.

(3) Dividend Income. Notwithstanding any provision of law to the contrary, in the
event the Corporation should declare a cash dividend income corresponding to the
participation of the private sector shall, as an incentive to the beneficiaries, be subject only
to a final flat income rate of ten percent (10%) of the regular income tax rates. The dividend
income shall not in such case be considered as part of the beneficiaries' taxable income;
provided, however, that such dividend income shall be totally exempted from income or other
form of taxes if invested within six (6) months from the date the dividend income is received
in the following:

(a) operation of the casino(s) or investments in any affiliate activity that will ultimately
redound to the benefit of the Corporation; or any other corporation with whom the
Corporation has any existing arrangements in connection with or related to the operations of
the casino(s);

(b) Government bonds, securities, treasury notes, or government debentures; or

(c) BOI-registered or export-oriented corporation(s).

PAGCOR's tax exemption was removed in June 1984 through P.D. No. 1931, but it was later
restored by Letter of Instruction No. 1430, which was issued in September 1984.

On January 1, 1998, R.A. No. 8424, otherwise known as the National Internal Revenue Code
of 1997, took effect. Section 27 (c) of R.A. No. 8424 provides that government-owned and
controlled corporations (GOCCs) shall pay corporate income tax, except petitioner
PAGCOR, the Government Service and Insurance Corporation, the Social Security System,
the Philippine Health Insurance Corporation, and the Philippine Charity Sweepstakes
Office, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities.

The provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies or instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business, industry, or activity.

With the enactment of R.A. No. 9337 on May 24, 2005, certain sections of the National
Internal Revenue Code of 1997 were amended. The particular amendment that is at issue in
this case is Section 1 of R.A. No. 9337, which amended Section 27 (c) of the National
Internal Revenue Code of 1997 by excluding PAGCOR from the enumeration of GOCCs that
are exempt from payment of corporate income tax, thus:

(c) Government-owned or Controlled Corporations, Agencies or Instrumentalities.

The provisions of existing special general laws to the contrary notwithstanding, all
corporations, agencies, or instrumentalities owned and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), and the Philippine Charity
Sweepstakes Office (PCSO), shall pay such rate of tax upon their taxable income as are
imposed by this Section upon corporations or associations engaged in similar business,
industry, or activity.

Different groups came to this Court via petitions for certiorari and prohibition assailing the
validity and constitutionality of R.A. No. 9337, in particular:

1) Section 4, which imposes a 10% Value Added Tax (VAT) on sale of goods and
properties; Section 5, which imposes a 10% VAT on importation of goods; and Section 6,
which imposes a 10% VAT on sale of services and use or lease of properties, all contain a
uniform proviso authorizing the President, upon the recommendation of the Secretary of
Finance, to raise the VAT rate to 12%. The said provisions were alleged to be violative of
Section 28 (2), Article VI of the Constitution, which section vests in Congress the exclusive
authority to fix the rate of taxes, and of Section 1, Article III of the Constitution on due
process, as well as of Section 26 (2), Article VI of the Constitution, which section provides
for the "no amendment rule" upon the last reading of a bill;

2) Sections 8 and 12 were alleged to be violative of Section 1, Article III of the

Constitution, or the guarantee of equal protection of the laws, and Section 28 (1), Article VI
of the Constitution; and

3) other technical aspects of the passage of the law, questioning the manner it was
passed.

On September 1, 2005, the Court dismissed all the petitions and upheld the constitutionality
of R.A. No. 9337. On the same date, respondent BIR issued Revenue Regulations (RR) No.
16-2005, specifically identifying PAGCOR as one of the franchisees subject to 10% VAT
imposed under Section 108 of the National Internal Revenue Code of 1997, as amended by
R.A. No. 9337. The said revenue regulation, in part, reads:

Sec. 4. 108-3. Definitions and Specific Rules on Selected Services.

xxx xxx xxx

(h) ...

Gross Receipts of all other franchisees, other than those covered by Sec. 119 of the Tax
Code, regardless of how their franchisees may have been granted, shall be subject to the
10% VAT imposed under Sec. 108 of the Tax Code. This includes, among others, the
Philippine Amusement and Gaming Corporation (PAGCOR), and its licensees or
franchisees.

Hence, the present petition for certiorari.

PAGCOR raises the following issues:

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR
BEING REPUGNANT TO THE EQUAL PROTECTION [CLAUSE] EMBODIED IN
SECTION 1, ARTICLE III OF THE 1987 CONSTITUTION.

II

WHETHER OR NOT RA 9337, SECTION 1 (C) IS NULL AND VOID AB INITIO FOR
BEING REPUGNANT TO THE NON-IMPAIRMENT [CLAUSE] EMBODIED IN SECTION
10, ARTICLE III OF THE 1987 CONSTITUTION.

III

WHETHER OR NOT RR 16-2005, SECTION 4.108-3, PARAGRAPH (H) IS NULL AND

VOID AB INITIO FOR BEING BEYOND THE SCOPE OF THE BASIC LAW, RA 8424,
SECTION 108, INSOFAR AS THE SAID REGULATION IMPOSED VAT ON THE
SERVICES OF THE PETITIONER AS WELL AS PETITIONER'S LICENSEES OR
FRANCHISEES WHEN THE BASIC LAW, AS INTERPRETED BY APPLICABLE
JURISPRUDENCE, DOES NOT IMPOSE VAT ON PETITIONER OR ON PETITIONER'S
LICENSEES OR FRANCHISEES.

The BIR, in its Comment dated December 29, 2006, counters:

SECTION 1 OF R.A. NO. 9337 AND SECTION 13 (2) OF P.D. 1869 ARE BOTH VALID
AND CONSTITUTIONAL PROVISIONS OF LAWS THAT SHOULD BE HARMONIOUSLY
CONSTRUED TOGETHER SO AS TO GIVE EFFECT TO ALL OF THEIR PROVISIONS
WHENEVER POSSIBLE.

II

SECTION 1 OF R.A. NO. 9337 IS NOT VIOLATIVE OF SECTION 1 AND SECTION 10,
ARTICLE III OF THE 1987 CONSTITUTION.

III

BIR REVENUE REGULATIONS ARE PRESUMED VALID AND CONSTITUTIONAL

UNTIL STRICKEN DOWN BY LAWFUL AUTHORITIES.
The Office of the Solicitor General (OSG), by way of Manifestation in Lieu of Comment,
concurred with the arguments of the petitioner. It added that although the State is free to
select the subjects of taxation and that the inequity resulting from singling out a particular
class for taxation or exemption is not an infringement of the constitutional limitation, a tax
law must operate with the same force and effect to all persons, firms and corporations
placed in a similar situation. Furthermore, according to the OSG, public respondent BIR
exceeded its statutory authority when it enacted RR No. 16-2005, because the latter's
provisions are contrary to the mandates of P.D. No. 1869 in relation to R.A. No. 9337.

The main issue is whether or not PAGCOR is still exempt from corporate income tax and
VAT with the enactment of R.A. No. 9337.

After a careful study of the positions presented by the parties, this Court finds the petition
partly meritorious.

Under Section 1 of R.A. No. 9337, amending Section 27 (c) of the National Internal Revenue
Code of 1977, petitioner is no longer exempt from corporate income tax as it has been
effectively omitted from the list of GOCCs that are exempt from it. Petitioner argues that
such omission is unconstitutional, as it is violative of its right to equal protection of the laws
under Section 1, Article III of the Constitution:

Sec. 1. No person shall be deprived of life, liberty, or property without due process of law,
nor shall any person be denied the equal protection of the laws.

In City of Manila v. Laguio, Jr., this Court expounded the meaning and scope of equal
protection, thus:

Equal protection requires that all persons or things similarly situated should be treated
alike, both as to rights conferred and responsibilities imposed. Similar subjects, in other
words, should not be treated differently, so as to give undue favor to some and unjustly
discriminate against others. The guarantee means that no person or class of persons shall be
denied the same protection of laws which is enjoyed by other persons or other classes in like
circumstances. The "equal protection of the laws is a pledge of the protection of equal laws."
It limits governmental discrimination. The equal protection clause extends to artificial
persons but only insofar as their property is concerned.

xxx xxx xxx

Legislative bodies are allowed to classify the subjects of legislation. If the classification is
reasonable, the law may operate only on some and not all of the people without violating the
equal protection clause. The classification must, as an indispensable requisite, not be
arbitrary. To be valid, it must conform to the following requirements:
1) It must be based on substantial distinctions.

2) It must be germane to the purposes of the law.

3) It must not be limited to existing conditions only.

4) It must apply equally to all members of the class.

It is not contested that before the enactment of R.A. No. 9337, petitioner was one of the five
GOCCs exempted from payment of corporate income tax as shown in R.A. No. 8424, Section
27 (c) of which, reads:

(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 and controlled by the Government, except
the Government Service and Insurance Corporation (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the Philippine Charity
Sweepstakes Office (PCSO), and the Philippine Amusement and Gaming Corporation
(PAGCOR), shall pay such rate of tax upon their taxable income as are imposed by this
Section upon corporations or associations engaged in similar business, industry, or activity.

A perusal of the legislative records of the Bicameral Conference Meeting of the Committee
on Ways on Means dated October 27, 1997 would show that the exemption of PAGCOR from
the payment of corporate income tax was due to the acquiescence of the Committee on Ways
on Means to the request of PAGCOR that it be exempt from such tax. The records of the
Bicameral Conference Meeting reveal:

HON. R. DIAZ.

The other thing, sir, is we I noticed we imposed a tax on lotto winnings.

CHAIRMAN ENRILE.

Wala na, tinanggal na namin yon.

HON. R. DIAZ.

Tinanggal na ba natin yon?

CHAIRMAN ENRILE.

Oo.

HON. R. DIAZ.
 Because I was wondering whether we covered the tax on Whether on a universal
basis, we included a tax on cockfighting winnings.

CHAIRMAN ENRILE.

No, we removed the

HON. R. DIAZ.

I . . . (inaudible) natin yong lotto?

CHAIRMAN ENRILE.

Pati PAGCOR tinanggal upon request.

CHAIRMAN JAVIER.

Yeah, Philippine Insurance Commission.

CHAIRMAN ENRILE.

Philippine Insurance Health, health ba. Yon ang request ng Chairman, I will
accept. (laughter) Pag-Pag-ibig yon, maliliit na sa tao yon.

HON. ROXAS.

Mr. Chairman, I wonder if in the revenue gainers if we factored in an amount that

would reflect the VAT and other sales taxes

CHAIRMAN ENRILE.

No, we're talking of this measure only. We will not (discontinued)

HON. ROXAS.

No, no, no, no, from the arising from the exemption. Assuming that when we
release the money into the hands of the public, they will not use that to for wallpaper.
They will spend that eh, Mr. Chairman. So when they spend that

CHAIRMAN ENRILE.

There's a VAT.

HON. ROXAS.

There will be a VAT and there will be other sales taxes no. Is there a quantification?
Is there an approximation?
CHAIRMAN JAVIER.

Not anything.

HON. ROXAS.

So, in effect, we have sterilized that entire seven billion. In effect, it is not circulating
in the economy which is unrealistic.

CHAIRMAN ENRILE.

It does, it does, because this is taken and spent by government, somebody receives it
in the form of wages and supplies and other services and other goods. They are not being
taken from the public and stored in a vault.

CHAIRMAN JAVIER.

That 7.7 loss because of tax exemption. That will be extra income for the taxpayers.

HON. ROXAS.

Precisely, so they will be spending it.

The discussion above bears out that under R.A. No. 8424, the exemption of PAGCOR from
paying corporate income tax was not based on a classification showing substantial
distinctions which make for real differences, but to reiterate, the exemption was granted
upon the request of PAGCOR that it be exempt from the payment of corporate income tax.

With the subsequent enactment of R.A. No. 9337, amending R.A. No. 8424, PAGCOR has
been excluded from the enumeration of GOCCs that are exempt from paying corporate
income tax. The records of the Bicameral Conference Meeting dated April 18, 2005, of the
Committee on the Disagreeing Provisions of Senate Bill No. 1950 and House Bill No. 3555,
show that it is the legislative intent that PAGCOR be subject to the payment of corporate
income tax, thus:

THE CHAIRMAN (SEN. RECTO).

Yes, Osmea, the proponent of the amendment.

SEN. OSMEA.

Yeah. Mr. Chairman, one of the reasons why we're even considering this VAT bill is
we want to show the world who our creditors, that we are increasing official revenues that
go to the national budget. Unfortunately today, Pagcor is unofficial.
 Now, in 2003, I took a quick look this morning, Pagcor had a net income of 9.7
billion after paying some small taxes that they are subjected to. Of the 9.7 billion, they claim
they remitted to national government seven billion. Pagkatapos, there are other specific
remittances like to the Philippine Sports Commission, etc., as mandated by various laws, and
then about 400 million to the President's Social Fund. But all in all, their net profit today
should be about 12 billion. That's why I am questioning this two billion. Because while
essentially they claim that the money goes to government, and I will accept that just for the
sake of argument. It does not pass through the appropriation process. And I think that at
least if we can capture 35 percent or 32 percent through the budgetary process, first, it is
reflected in our official income of government which is applied to the national budget, and
secondly, it goes through what is constitutionally mandated as Congress appropriating and
defining where the money is spent and not through a board of directors that has absolutely
no accountability.

REP. PUENTEBELLA.

Well, with all due respect, Mr. Chairman, follow up lang.

There is wisdom in the comments of my good friend from Cebu, Senator Osmea.

SEN. OSMEA.

And Negros.

REP. PUENTEBELLA.

And Negros at the same time ay Kasimanwa. But I would not want to put my friends
from the Department of Finance in a difficult position, but may we know your comments on
this knowing that as Senator Osmea just mentioned, he said, "I accept that that a lot of it is
going to spending for basic services," you know, going to most, I think, supposedly a lot or
most of it should go to government spending, social services and the like. What is your
comment on this? This is going to affect a lot of services on the government side.

THE CHAIRMAN (REP. LAPUS).

Mr. Chair, Mr. Chair.

SEN. OSMEA.

It goes from pocket to the other, Monico.

REP. PUENTEBELLA.
 I know that. But I wanted to ask them, Mr. Senator, because you may have your own
pre-judgment on this and I don't blame you. I don't blame you. And I know you have your
own research. But will this not affect a lot, the disbursements on social services and other?

REP. LOCSIN.

Mr. Chairman. Mr. Chairman, if I can add to that question also. Wouldn't it be easier
for you to explain to, say, foreign creditors, how do you explain to them that if there is a
fiscal gap some of our richest corporations has [been] spared [from] taxation by the
government which is one rich source of revenues. Now, why do you save, why do you spare
certain government corporations on that, like Pagcor? So, would it be easier for you to make
an argument if everything was exposed to taxation?

REP. TEVES.

Mr. Chair, please.

THE CHAIRMAN (REP. LAPUS).

Can we ask the DOF to respond to those before we call Congressman Teves?

MR. PURISIMA.

Thank you, Mr. Chair.

Yes, from definitely improving the collection, it will help us because it will then enter
as an official revenue although when dividends declare it also goes in as other income.

xxx xxx xxx

REP. TEVES.

Mr. Chairman. DCcIaE

xxx xxx xxx

THE CHAIRMAN (REP. LAPUS).

Congressman Teves.

REP. TEVES.

Yeah. Pagcor is controlled under Section 27, that is on income tax. Now, we are
talking here on value-added tax. Do you mean to say we are going to amend it from income
tax to value-added tax, as far as Pagcor is concerned?
THE CHAIRMAN (SEN. RECTO).

No. We are just amending that section with regard to the exemption from income tax
of Pagcor.

xxx xxx xxx

REP. NOGRALES.

Mr. Chairman, Mr. Chairman. Mr. Chairman.

THE CHAIRMAN (REP. LAPUS).

Congressman Nograles.

REP. NOGRALES.

Just a point of inquiry from the Chair. What exactly are the functions of Pagcor that
are VATable? What will we VAT in Pagcor?

THE CHAIRMAN (REP. LAPUS).

This is on own income tax. This is Pagcor income tax.

REP. NOGRALES.

No, that's why. Anong i-va-Vat natin sa kanya. Sale of what?

xxx xxx xxx

REP. VILLAFUERTE.

Mr. Chairman, my question is, what are we VATing Pagcor with, is it the . . .

REP. NOGRALES.

Mr. Chairman, this is a secret agreement or the way they craft their contract, which
basis?

THE CHAIRMAN (SEN. RECTO).

Congressman Nograles, the Senate version does not discuss a VAT on Pagcor but it
just takes away their exemption from non-payment of income tax.

Taxation is the rule and exemption is the exception. The burden of proof rests upon the party
claiming exemption to prove that it is, in fact, covered by the exemption so claimed. As a
rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown
to exist clearly and categorically, and supported by clear legal provision.

In this case, PAGCOR failed to prove that it is still exempt from the payment of corporate
income tax, considering that Section 1 of R.A. No. 9337 amended Section 27 (c) of the
National Internal Revenue Code of 1997 by omitting PAGCOR from the exemption. The
legislative intent, as shown by the discussions in the Bicameral Conference Meeting, is to
require PAGCOR to pay corporate income tax; hence, the omission or removal of PAGCOR
from exemption from the payment of corporate income tax. It is a basic precept of statutory
construction that the express mention of one person, thing, act, or consequence excludes all
others as expressed in the familiar maxim expressio unius est exclusio alterius. Thus, the
express mention of the GOCCs exempted from payment of corporate income tax excludes all
others. Not being excepted, petitioner PAGCOR must be regarded as coming within the
purview of the general rule that GOCCs shall pay corporate income tax, expressed in the
maxim: exceptio firmat regulam in casibus non exceptis.

PAGCOR cannot find support in the equal protection clause of the Constitution, as the
legislative records of the Bicameral Conference Meeting dated October 27, 1997, of the
Committee on Ways and Means, show that PAGCOR's exemption from payment of corporate
income tax, as provided in Section 27 (c) of R.A. No. 8424, or the National Internal Revenue
Code of 1997, was not made pursuant to a valid classification based on substantial
distinctions and the other requirements of a reasonable classification by legislative bodies,
so that the law may operate only on some, and not all, without violating the equal protection
clause. The legislative records show that the basis of the grant of exemption to PAGCOR
from corporate income tax was PAGCOR's own request to be exempted.

Petitioner further contends that Section 1 (c) of R.A. No. 9337 is null and void ab initio for
violating the non-impairment clause of the Constitution. Petitioner avers that laws form part
of, and is read into, the contract even without the parties expressly saying so. Petitioner
states that the private parties/investors transacting with it considered the tax exemptions,
which inure to their benefit, as the main consideration and inducement for their decision to
transact/invest with it. Petitioner argues that the withdrawal of its exemption from corporate
income tax by R.A. No. 9337 has the effect of changing the main consideration and
inducement for the transactions of private parties with it; thus, the amendatory provision is
violative of the non-impairment clause of the Constitution.

Petitioner's contention lacks merit.

The non-impairment clause is contained in Section 10, Article III of the Constitution, which
provides that no law impairing the obligation of contracts shall be passed. The non-
impairment clause is limited in application to laws that derogate from prior acts or contracts
by enlarging, abridging or in any manner changing the intention of the parties. There is
impairment if a subsequent law changes the terms of a contract between the parties, imposes
new conditions, dispenses with those agreed upon or withdraws remedies for the
enforcement of the rights of the parties.

As regards franchises, Section 11, Article XII of the Constitution provides that no franchise
or right shall be granted except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the common good so requires.

In Manila Electric Company v. Province of Laguna, the Court held that a franchise partakes
the nature of a grant, which is beyond the purview of the non-impairment clause of the
Constitution. The pertinent portion of the case states:

While the Court has, not too infrequently, referred to tax exemptions contained in special
franchises as being in the nature of contracts and a part of the inducement for carrying on
the franchise, these exemptions, nevertheless, are far from being strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are those agreed to by the
taxing authority in contracts, such as those contained in government bonds or debentures,
lawfully entered into by them under enabling laws in which the government, acting in its
private capacity, sheds its cloak of authority and waives its governmental immunity. Truly,
tax exemptions of this kind may not be revoked without impairing the obligations of
contracts. These contractual tax exemptions, however, are not to be confused with tax
exemptions granted under franchises. A franchise partakes the nature of a grant which is
beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII,
Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973
Constitutions, is explicit that no franchise for the operation of a public utility shall be
granted except under the condition that such privilege shall be subject to amendment,
alteration or repeal by Congress as and when the common good so requires.

In this case, PAGCOR was granted a franchise to operate and maintain gambling casinos,
clubs and other recreation or amusement places, sports, gaming pools, i.e., basketball,
football, lotteries, etc., whether on land or sea, within the territorial jurisdiction of the
Republic of the Philippines. Under Section 11, Article XII of the Constitution, PAGCOR's
franchise is subject to amendment, alteration or repeal by Congress such as the amendment
under Section 1 of R.A. No. 9377. Hence, the provision in Section 1 of R.A. No. 9337,
amending Section 27 (c) of R.A. No. 8424 by withdrawing the exemption of PAGCOR from
corporate income tax, which may affect any benefits to PAGCOR's transactions with private
parties, is not violative of the non-impairment clause of the Constitution.
Anent the validity of RR No. 16-2005, the Court holds that the provision subjecting PAGCOR
to 10% VAT is invalid for being contrary to R.A. No. 9337. Nowhere in R.A. No. 9337 is it
provided that petitioner can be subjected to VAT. R.A. No. 9337 is clear only as to the
removal of petitioner's exemption from the payment of corporate income tax, which was
already addressed above by this Court.

As pointed out by the OSG, R.A. No. 9337 itself exempts petitioner from VAT pursuant to
Section 7 (k) thereof, which reads:

Sec. 7. Section 109 of the same Code, as amended, is hereby further amended to read as
follows:

Section 109. Exempt Transactions. (1) Subject to the provisions of Subsection (2) hereof,
the following transactions shall be exempt from the value-added tax:

xxx xxx xxx

(k) Transactions which are exempt under international agreements to which the
Philippines is a signatory or under special laws, except Presidential Decree No. 529.

Petitioner is exempt from the payment of VAT, because PAGCOR's charter, P.D. No. 1869, is
a special law that grants petitioner exemption from taxes.

Moreover, the exemption of PAGCOR from VAT is supported by Section 6 of R.A. No. 9337,
which retained Section 108 (B) (3) of R.A. No. 8424, thus:

[R.A. No. 9337], SEC. 6. Section 108 of the same Code (R.A. No. 8424), as amended, is
hereby further amended to read as follows:

SEC. 108. Value-Added Tax on Sale of Services and Use or Lease of Properties.

(A) Rate and Base of Tax. There shall be levied, assessed and collected, a value-added
tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of
services, including the use or lease of properties: . . .

xxx xxx xxx

(B) Transactions Subject to Zero Percent (0%) Rate. The following services performed
in the Philippines by VAT-registered persons shall be subject to zero percent (0%) rate;

xxx xxx xxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero percent (0%) rate;

xxx xxx xxx 38

As pointed out by petitioner, although R.A. No. 9337 introduced amendments to Section 108
of R.A. No. 8424 by imposing VAT on other services not previously covered, it did not amend
the portion of Section 108 (B) (3) that subjects to zero percent rate services performed by
VAT-registered persons to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to 0% rate.

Petitioner's exemption from VAT under Section 108 (B) (3) of R.A. No. 8424 has been
thoroughly and extensively discussed in Commissioner of Internal Revenue v. Acesite
(Philippines) Hotel Corporation. Acesite was the owner and operator of the Holiday Inn
Manila Pavilion Hotel. It leased a portion of the hotel's premises to PAGCOR. It incurred
VAT amounting to P30,152,892.02 from its rental income and sale of food and beverages to
PAGCOR from January 1996 to April 1997. Acesite tried to shift the said taxes to PAGCOR
by incorporating it in the amount assessed to PAGCOR. However, PAGCOR refused to pay
the taxes because of its tax-exempt status. PAGCOR paid only the amount due to Acesite
minus VAT in the sum of P30,152,892.02. Acesite paid VAT in the amount of P30,152,892.02
to the Commissioner of Internal Revenue, fearing the legal consequences of its non-payment.
In May 1998, Acesite sought the refund of the amount it paid as VAT on the ground that its
transaction with PAGCOR was subject to zero rate as it was rendered to a tax-exempt entity.
The Court ruled that PAGCOR and Acesite were both exempt from paying VAT, thus:

xxx xxx xxx

PAGCOR is exempt from payment of indirect taxes

It is undisputed that P.D. 1869, the charter creating PAGCOR, grants the latter an
exemption from the payment of taxes. Section 13 of P.D. 1869 pertinently provides:

Sec. 13. Exemptions.

xxx xxx xxx

(2) Income and other taxes. (a) Franchise Holder: No tax of any kind or form, income
or otherwise, as well as fees, charges or levies of whatever nature, whether National or
Local, shall be assessed and collected under this Franchise from the Corporation; nor shall
any form of tax or charge attach in any way to the earnings of the Corporation, except a
Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the
Corporation from its operation under this Franchise. Such tax shall be due and payable
quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or
assessments of any kind, nature or description, levied, established or collected by any
municipal, provincial, or national government authority.

(b) Others: The exemptions herein granted for earnings derived from the operations
conducted under the franchise specifically from the payment of any tax, income or otherwise,
as well as any form of charges, fees or levies, shall inure to the benefit of and extend to
corporation(s), association(s), agency(ies), or individual(s) with whom the Corporation or
operator has any contractual relationship in connection with the operations of the casino(s)
authorized to be conducted under this Franchise and to those receiving compensation or
other remuneration from the Corporation or operator as a result of essential facilities
furnished and/or technical services rendered to the Corporation or operator.

Petitioner contends that the above tax exemption refers only to PAGCOR's direct tax liability
and not to indirect taxes, like the VAT.

We disagree.

A close scrutiny of the above provisos clearly gives PAGCOR a blanket exemption to taxes
with no distinction on whether the taxes are direct or indirect. We are one with the CA ruling
that PAGCOR is also exempt from indirect taxes, like VAT, as follows:

Under the above provision [Section 13 (2) (b) of P.D. 1869], the term "Corporation" or
operator refers to PAGCOR. Although the law does not specifically mention PAGCOR's
exemption from indirect taxes, PAGCOR is undoubtedly exempt from such taxes because the
law exempts from taxes persons or entities contracting with PAGCOR in casino operations.
Although, differently worded, the provision clearly exempts PAGCOR from indirect taxes. In
fact, it goes one step further by granting tax exempt status to persons dealing with PAGCOR
in casino operations. The unmistakable conclusion is that PAGCOR is not liable for the
P30,152,892.02 VAT and neither is Acesite as the latter is effectively subject to zero percent
rate under Sec. 108 B (3), R.A. 8424. (Emphasis supplied.)

Indeed, by extending the exemption to entities or individuals dealing with PAGCOR, the
legislature clearly granted exemption also from indirect taxes. It must be noted that the
indirect tax of VAT, as in the instant case, can be shifted or passed to the buyer, transferee,
or lessee of the goods, properties, or services subject to VAT. Thus, by extending the tax
exemption to entities or individuals dealing with PAGCOR in casino operations, it is
exempting PAGCOR from being liable to indirect taxes.

The manner of charging VAT does not make PAGCOR liable to said tax.
It is true that VAT can either be incorporated in the value of the goods, properties, or
services sold or leased, in which case it is computed as 1/11 of such value, or charged as an
additional 10% to the value. Verily, the seller or lessor has the option to follow either way in
charging its clients and customer. In the instant case, Acesite followed the latter method, that
is, charging an additional 10% of the gross sales and rentals. Be that as it may, the use of
either method, and in particular, the first method, does not denigrate the fact that PAGCOR
is exempt from an indirect tax, like VAT.

VAT exemption extends to Acesite

Thus, while it was proper for PAGCOR not to pay the 10% VAT charged by Acesite, the
latter is not liable for the payment of it as it is exempt in this particular transaction by
operation of law to pay the indirect tax. Such exemption falls within the former Section 102
(b) (3) of the 1977 Tax Code, as amended (now Sec. 108 [b] [3] of R.A. 8424), which
provides:

Section 102. Value-added tax on sale of services. (a) Rate and base of tax There shall
be levied, assessed and collected, a value-added tax equivalent to 10% of gross receipts
derived by any person engaged in the sale of services . . .; Provided, that the following
services performed in the Philippines by VAT-registered persons shall be subject to 0%.

xxx xxx xxx

(3) Services rendered to persons or entities whose exemption under special laws or
international agreements to which the Philippines is a signatory effectively subjects the
supply of such services to zero (0%) rate (emphasis supplied).

The rationale for the exemption from indirect taxes provided for in P.D. 1869 and the
extension of such exemption to entities or individuals dealing with PAGCOR in casino
operations are best elucidated from the 1987 case of Commissioner of Internal Revenue v.
John Gotamco & Sons, Inc., where the absolute tax exemption of the World Health
Organization (WHO) upon an international agreement was upheld. We held in said case that
the exemption of contractee WHO should be implemented to mean that the entity or person
exempt is the contractor itself who constructed the building owned by contractee WHO, and
such does not violate the rule that tax exemptions are personal because the manifest
intention of the agreement is to exempt the contractor so that no contractor's tax may be
shifted to the contractee WHO. Thus, the proviso in P.D. 1869, extending the exemption to
entities or individuals dealing with PAGCOR in casino operations, is clearly to proscribe
any indirect tax, like VAT, that may be shifted to PAGCOR.

Although the basis of the exemption of PAGCOR and Acesite from VAT in the case of The
Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation was Section
102 (b) of the 1977 Tax Code, as amended, which section was retained as Section 108 (B) (3)
in R.A. No. 8424, it is still applicable to this case, since the provision relied upon has been
retained in R.A. No. 9337.

It is settled rule that in case of discrepancy between the basic law and a rule or regulation
issued to implement said law, the basic law prevails, because the said rule or regulation
cannot go beyond the terms and provisions of the basic law. 43 RR No. 16-2005, therefore,
cannot go beyond the provisions of R.A. No. 9337. Since PAGCOR is exempt from VAT
under R.A. No. 9337, the BIR exceeded its authority in subjecting PAGCOR to 10% VAT
under RR No. 16-2005; hence, the said regulatory provision is hereby nullified.

WHEREFORE, the petition is PARTLY GRANTED. Section 1 of Republic Act No. 9337,
amending Section 27 (c) of the National Internal Revenue Code of 1997, by excluding
petitioner Philippine Amusement and Gaming Corporation from the enumeration of
government-owned and controlled corporations exempted from corporate income tax is valid
and constitutional, while BIR Revenue Regulations No. 16-2005 insofar as it subjects
PAGCOR to 10% VAT is null and void for being contrary to the National Internal Revenue
Code of 1997, as amended by Republic Act No. 9337.

No costs. SO ORDERED.

Footnotes

CREATING THE PHILIPPINE AMUSEMENTS AND GAMING CORPORATION,

DEFINING ITS POWERS AND FUNCTIONS, PROVIDING FUNDS THEREFOR, AND
FOR OTHER PURPOSES.

GRANTING THE PAGCOR A FRANCHISE TO ESTABLISH, OPERATE AND MAINTAIN

GAMBLING CASINOS ON LAND OR WATER WITHIN THE TERRITORIAL
JURISDICTION OF THE REPUBLIC OF THE

Section 4. Exemptions. . . .

(1) Duties, taxes and other imposts on importation. . . .

(2) Income and other taxes.

(a) Franchise Holder: No tax of any kind or form, income or otherwise, as

well as fees, charges, or levies of whatever nature, shall be assessed and collected under this
Franchise from the Franchise Holder; nor shall any form of tax or charge attach in any way
to the earnings of the Franchise Holder, except a Franchise Tax of five percent (5%) of the
gross revenue or earnings derived by the Franchise Holder form its operation under this
Franchise. Such tax shall be due and payable to the National Government and shall be in
lieu of all taxes, levies, fees or assessments of any kind, nature or description, levied,
established, or collected by any municipal, provincial or national authority.

(b) Others: The exemption herein granted for earnings derived from the
operations conducted under the franchise, specifically from the payment of any tax, income
or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and
extend to corporation/s, association/s, agency/ies, or individual/s with whom the Franchise
has any contractual relationship in connection with the operations of the casino/s authorized
to be conducted under the franchise and to those receiving compensation or other
remuneration from the Franchise Holder as a result of essential facilities furnished and/or
technical services rendered to the Franchise Holder. (Emphasis supplied.)

The Constitution, Art. XII, Sec. 11. No franchise, certificate, or any other form of
authorization for the operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws of the Philippines at
least sixty per centum of whose capital is owned by such citizens, nor shall such franchise,
certificate or authorization be exclusive in character or for a longer period than fifty years.
Neither shall any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the common good so
requires. The State shall encourage equity participation in public utilities by the general
public. The participation of foreign investors in the governing body of any public utility
enterprise shall be limited to their proportionate share in its capital, and all the executive
and managing officers of such corporation or association must be citizens of the Philippines.
(Emphasis supplied.)

BIR ISSUANCES
REPUBLIC ACT NO. 10026 March 11, 2010
AN ACT GRANTING INCOME TAX EXEMPTION TO LOCAL WATER DISTRICTS BY
AMENDING SECTION 27 (C) OF THE NATIONAL INTERNAL REVENUE CODE
(NIRC) OF 1997, AS AMENDED
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 Government Service and Insurance System (GSIS), the Social Security System
(SSS), the Philippine Health Insurance Corporation (PHIC), the local water districts
(LWD) and the Philippine Charity Sweepstakes Office (PCSO), 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.

REVENUE REGULATIONS NO. 006-10 June 29, 2010

Regulations Providing for the Policies, Guidelines and Procedures in the Implementation
of the Tax Subsidy Granted Under Section 17 (c) of Republic Act No. 3591 (Philippine
Deposit Insurance Corporation [PDIC] Charter), as Amended by Republic Act No. 9576
promulgated to implement:

(1) the tax expenditure subsidy provided for under Section 17 (c) of Republic Act
(R.A.) No. 3591 (Philippine Deposit Insurance Corporation [PDIC] Charter), as
amended by R.A. No. 9576, in favor of PDIC charging all of its tax obligations to the
Tax Expenditure Fund (TEF) in the annual General Appropriation Act pursuant to the
provisions of Executive Order No. 93, series of 1986 for a period of five (5) years
reckoned from the date of effectivity of R.A. 9576;

(2) the tax exemption of PDIC starting on the 6th year and thereafter, from income
tax, final withholding tax, and value-added tax on assessments collected from member
banks.

CASES DIGEST
Tax exemptions should be strictly construed against those claiming to be qualified
thereto.

The Philippine Casino Operators Corporation (PCOC) is not exempt from the payment of
duties, taxes and other imposts on importations despite its concessionaire's contract with
the Philippine Amusement and Gaming Corporation (PAGCOR). Under B.P. Blg. 1067-
B, as amended, full exemption from the payment of importation-related taxes is granted
to PAGCOR and no other irrespective of the type of article imported. While it grants
exemption not only to PAGCOR but also to "any corporation having existing contractual
arrangements with it," the exemption covers only the importation of vessels and/or
accessory ferry boats. It is settled that tax exemptions should be strictly construed against
those claiming to be qualified thereto.

Commissioner of Customs vs. Court of Tax Appeals, et al.,

G.R. No. 132929, March 27, 2000

(D) Rates of Tax on Certain Passive Incomes

(1) Interest from Deposits and Yield or Any Other Monetary Benefit from
Deposit Substitutes and from Trust Funds and Similar Arrangements, and
Royalties A final tax at the rate of twenty percent (20%) is hereby imposed
upon the amount of interest on currency bank deposit and yield or any other
monetary benefit from deposit substitutes and from trust funds and similar
arrangements received by domestic corporations, and royalties, derived from
sources within the Philippines: Provided, however, That interest income derived by
a domestic corporation from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of seven
and one-half percent (7 1/2%) of such interest income.

CASES DIGEST
Interest income, whether actually received or merely accrued, form part of a bank's
taxable gross receipts.

There is an implied repeal of Section 4(e) of Revenue Regulations No. 12-80 as there
exists a disparity between Section 4(e) which imposes the GRT only on all items of
income actually received (as opposed to their mere accrual) and Section 7(c) of Revenue
Regulations No. 17-84 which includes all interest income (whether actual or accrued) in
computing the GRT. The exception having been eliminated, the clear intent is that the
later R.R. No. 17-84 includes the exception within the scope of the general rule. Clearly,
then, the current Revenue Regulations require interest income, whether actually received
or merely accrued, to form part of the bank's taxable gross receipts.

Commissioner of Internal Revenue v. Solidbank Corporation,

G.R. No. 148191, November 25, 2003

The imposition of the 20% FWT and 5% GRT does not constitute double taxation.

Double taxation means taxing for the same tax period the same thing or activity twice,
when it should be taxed but once, for the same purpose and with the same kind of
character of tax. This is not the situation in the case at bar. The GRT is a percentage tax
under Title V of the Tax Code ([Section 121], Other Percentage Taxes), while the FWT is
an income tax under Title II of the Code (Tax on Income). The two concepts are different
from each other. In Solidbank Corporation, this Court defined that a percentage tax is a
national tax measured by a certain percentage of the gross selling price or gross value in
money of goods sold, bartered or imported; or of the gross receipts or earnings derived
by any person engaged in the sale of services. It is not subject to withholding. An income
tax, on the other hand, is a national tax imposed on the net or the gross income realized
in a taxable year. It is subject to withholding. Thus, there can be no double taxation here
as the Tax Code imposes two different kinds of taxes.
Commissioner of Internal Revenue vs. Citytrust Investment Phils., Inc.,
G.R. Nos. 139786-140857, September 27, 2006

Exemption of Cooperatives

Given that petitioner is a credit cooperative duly registered with the Cooperative
Development Authority (CDA), the provision of Section 24 (B) (1) of the NIRC must be
read together with RA 6938, as amended by RA 9520 on the exemptions given to these
entities.

FACTS: Dumaguete Cathedral Credit Cooperative received Pre-Assessment Notices for

deficiency withholding taxes for taxable years 1999 and 2000. It then availed of BIRs
Voluntary Assessment and Abatement Program and paid withholding taxes on the
payments for the compensation, honorarium of the Board of Directors, security and
janitorial services, and legal and professional services. After receiving Letters of
Demand to pay the deficiency withholding taxes, inclusive of penalties, petitioner filed a
protest before the Commissioner of Internal Revenue. When the protest remained unacted
upon, it filed a petition for review before the CTA. The CTA First Division ruled against
petitioner, ordering it to pay deficiency withholding taxes on interests from savings and
time deposits of its members and 20% delinquency interest. Through a Petition for
Review, the case reached the CTA En Banc.

The CTA En Banc affirmed the CTA First Divisions ruling, holding that Section 57 of the
NIRC requires the withholding of tax at source and that Revenue Regulations No. 2-98
enumerated the income payments subject to final withholding tax, among which is
"interest from any peso bank deposit and yield, or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements . . .". According to the
CTA En Banc, petitioner's business falls under the phrase "similar arrangements;" as
such, it should have withheld the corresponding 20% final tax on the interest from the
deposits of its members. Through a Petition for Review on Certiorari with the Supreme
Court, petitioner sought to set aside the CTA decision.

ISSUE: Whether petitioner is liable to pay the deficiency withholding taxes on interest
from savings and time deposits of its members for the taxable years 1999 and 2000, as
well as the delinquency interest of 20% per annum.

RULING: Petitioner is not liable to pay the assessed deficiency withholding taxes on
interest from the savings and time deposits of its members, as well as the delinquency
interest of 20% per annum.
BIR Ruling No. 551-88 clearly states, without any qualification, that since interest from
any Philippine currency bank deposit and yield or any other monetary benefit from
deposit substitutes are paid by banks, cooperatives are not required to withhold the
corresponding tax on the interest from savings and time deposits of their members. The
legislative intent to give cooperatives a preferential tax treatment is apparent in Articles
61 and 62 of RA 6938. This exemption extends to members of cooperatives. It must be
emphasized that cooperatives exist for the benefit of their members. In fact, the primary
objective of every cooperative is to provide goods and services to its members to enable
them to attain increased income, savings, investments, and productivity. Therefore,
limiting the application of the tax exemption to cooperatives would go against the very
purpose of a credit cooperative. Extending the exemption to members of cooperatives, on
the other hand, would be consistent with the intent of the legislature. Thus, although the
tax exemption only mentions cooperatives, this should be construed to include the
members, pursuant to Article 126 of RA 6938.

The amendment in Article 61 of RA 9520, specifically providing that members of

cooperatives are not subject to final taxes on their deposits, affirms the interpretation of
the BIR that Section 24 (B) (1) of the NIRC does not apply to cooperatives and confirms
that such ruling carries out the legislative intent.

DUMAGUETE CATHEDRAL CREDIT COOPERATIVE vs. COMMISSIONER OF

INTERNAL REVENUE [G.R. No. 182722, January 22, 2010]

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Stock
Exchange A final tax at the rates prescribed below shall be imposed on net
capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:

Not over P100,000 5%

Amount in excess of P100,000 10%

COMPAGNIE FINANCIERE SUCRES ET DENREES, petitioner, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent. [G.R. No. 133834. August 28, 2006.]

DECISION

For our resolution is the instant Petition for Review on Certiorari assailing the Decision of
the Court of Appeals dated October 27, 1997 in CA-G.R. SP No. 39501.
Compagnie Financiere Sucres et Denrees, petitioner, is a non-resident private corporation
duly organized and existing under the laws of the Republic of France.

On October 21, 1991, petitioner transferred its eight percent (8%) equity interest in the
Makati Shangri-La Hotel and Resort, Incorporated to Kerry Holdings Ltd. (formerly Sligo
Holdings Ltd), as shown by a Deed of Sale and Assignment of Subscription and Right of
Subscription of the same date. Transferred were (a) 107,929 issued shares of stock valued at
P100.00 per share with a total par value of P10,792,900.00; (b) 152,031 with a par value of
P100.00 per share with a total par value of P15,203,100.00; (c) deposits on stock
subscriptions amounting to P43,147,630.28; and (d) petitioner's right of subscription.

On November 29, 1991, petitioner paid the documentary stamps tax and capital gains tax on
the transfer under protest.

On October 21, 1993, petitioner filed with the Commissioner of Internal Revenue, herein
respondent, a claim for refund of overpaid capital gains tax in the amount of P107,869.00
and overpaid documentary stamps taxes in the sum of P951,830.00 or a total of
P1,059,699.00. Petitioner alleged that the transfer of deposits on stock subscriptions is not a
sale/assignment of shares of stock subject to documentary stamps tax and capital gains tax.

However, respondent did not act on petitioner's claim for refund. Thus, on November 19,
1993, petitioner filed with the Court of Tax Appeals (CTA) a petition for review, docketed as
CTA Case No. 5042.

In its Decision dated October 6, 1995, the CTA denied petitioner's claim for refund. The
CTA held that it is clear from Section 176 of the Tax Code that sales "to secure the future
payment of money or for the future transfer of any bond, due-bill, certificates of obligation or
stock" are taxable. Furthermore, petitioner admitted that it profited from the sale of shares
of stocks. Such profit is subject to capital gains tax.

Petitioner filed a motion for reconsideration, but in a Resolution dated December 26, 1995,
the CTA denied the same. This prompted petitioner to file with the Court of Appeals a
petition for review, docketed as CA-G.R. SP No. 39501.

On October 27, 1997, the Court of Appeals denied the petition and affirmed the Decision of
the CTA. The appellate court ruled that a taxpayer has the onus probandi of proving
entitlement to a refund or deduction, following the rule that tax exemptions are strictly
construed against the taxpayer and liberally in favor of the State. Petitioner failed to meet
the requisite burden of proof to support its claim.

Hence, petitioner's recourse to this Court by way of a Petition for Review on Certiorari.
The sole issue for our resolution is whether the Court of Appeals erred in holding that the
assignment of deposits on stock subscriptions is subject to documentary stamps tax and
capital gains tax.

Along with police power and eminent domain, taxation is one of the three basic and
necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential
power and attribute of sovereignty by vague implications of law. Rather, being derogatory of
sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi
juris against the taxpayer and liberally in favor of the taxing authority; and he who claims
an exemption must be able to justify his claim by the clearest grant of statute.

In the instant case, petitioner seeks a refund. Tax refunds are a derogation of the State's
taxing power. Hence, like tax exemptions, they are construed strictly against the taxpayer
and liberally in favor of the State. Consequently, he who claims a refund or exemption from
taxes has the burden of justifying the exemption by words too plain to be mistaken and too
categorical to be misinterpreted. Significantly, petitioner cannot point to any specific
provision of the National Internal Revenue Code authorizing its claim for an exemption or
refund. Rather, Section 176 of the National Internal Revenue Code applicable to the issue
provides that the future transfer of shares of stocks is subject to documentary stamp tax,
thus:

SEC. 176. Stamp tax on sales, agreements to sell, memoranda of sales, deliveries or transfer
of due-bills, certificates of obligation, or shares or certificates of stock. On all sales, or
agreements to sell, or memoranda of sales, or deliveries, or transfer of due-bills, certificates
of obligation, or shares or certificates of stock in any association, company, or corporation,
or transfer of such securities by assignment in blank, or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale whether entitling the
holder in any manner to the benefit of such due bills, certificates of obligation or stock, or to
secure the future payment of money, or for the future transfer of any due-bill, certificates of
obligation or stock, there shall be collected a documentary stamp tax of fifty centavos
(P1.50) on each two hundred pesos(P200.00), or fractional part thereof, of the par value of
such due-bill, certificates of obligation or stock: Provided, That only one tax shall be
collected on each sale or transfer of stock or securities from one person to another,
regardless of whether or not a certificate of stock or obligation is issued, indorsed, or
delivered in pursuance of such sale or transfer; and Provided, further, That in case of stock
without par value the amount of the documentary stamp tax herein prescribed shall be
equivalent to twenty-five percentum (25%) of the documentary stamp tax paid upon the
original issue of the said stock. (Emphasis supplied).
Clearly, under the above provision, sales to secure "the future transfer of due-bills,
certificates of obligation or certificates of stock" are liable for documentary stamp tax. No
exemption from such payment of documentary stamp tax is specified therein.

Petitioner contends that the assignment of its "deposits on stock subscription" is not subject
to capital gains tax because there is no gain to speak of. In the Capital Gains Tax Return on
Stock Transaction, which petitioner filed with the Bureau of Internal Revenue, the
acquisition cost of the shares it sold, including the stock subscription is P69,143,630.28. The
transfer price to Kerry Holdings, Ltd. is P70,332,869.92. Obviously, petitioner has a net
gain in the amount of P1,189,239.64. As the CTA aptly ruled, "a tax on the profit of sale on
net capital gain is the very essence of the net capital gains tax law. To hold otherwise will
ineluctably deprive the government of its due and unduly set free from tax liability persons
who profited from said transactions."

Verily, the Court of Appeals committed no error in affirming the CTA Decision.

We reiterate the well-established doctrine that as a matter of practice and principle, this
Court will not set aside the conclusion reached by an agency, like the CTA, especially if
affirmed by the Court of Appeals. By the very nature of its function, it has dedicated itself to
the study and consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of authority on its part,
which is not present here.

WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP
No. 39501 is AFFIRMED IN TOTO. Costs against petitioner. SO ORDERED.

(3) Tax on Income Derived under the Expanded Foreign Currency Deposit System.
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including branches of foreign
banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact
business with foreign currency deposit system units and other depository banks
under the expanded foreign currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however, That interest income from
foreign currency loans granted by such depository banks under said expanded
system to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at the
rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt
from income tax.

BIR ISSUANCES
REVENUE MEMORANDUM CIRCULAR NO. 14-02 April 10, 2002Prescribing the
Procedures for the Manner of Filing of Tax Returns for Income derived by Foreign
Currency Deposit Units from Foreign Currency and other Transactions and the Manner
of Reporting Their Income for Income Tax Purposes pursuant to Section 27(D)(3) and
28(A)(7)(b) of the Tax Code.

(4)Intercorporate Dividends Dividends received by a domestic corporation from

another domestic corporation shall not be subject to tax.

(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands
and/or Buildings A final tax of six percent (6%) is hereby imposed on the gain
presumed to have been realized on the sale, exchange or disposition of lands and/or
buildings which are not actually used in the business of a corporation and are
treated as capital assets, based on the gross selling price or fair market value as
determined in accordance with Section 6(E) of this Code, whichever is higher, of
such lands and/or buildings.

BIR ISSUANCES
REVENUE REGULATIONS NO. 005-09 March 16, 2009

Reverting the Venue for the Filing of Returns and Payment of Capital Gains Tax,
Creditable Withholding Tax and Documentary Stamp Tax Due on Sale, Transfer or
Exchange of Real Property of Large Taxpayers to the Place Where the Property is
Located

REVENUE REGULATIONS NO. 07-03 December 27, 2002

Guidelines in Determining Whether a Particular Real Property is a Capital Asset or an
Ordinary Asset Pursuant to Section 39(A)(1) of the National Internal Revenue Code of
1997 for Purposes of Imposing the Capital Gains Tax or the Minimum Corporate Income
Tax (MCIT)
The following terms shall be defined as follows:
a. Capital assets shall refer to all real properties held by a taxpayer, whether or not
connected with his trade or business, and which are not included among the real
properties considered as ordinary assets under Sec. 39(A)(1) of the Code.
b. Ordinary assets shall refer to all real properties specifically excluded from the
definition of capital assets under Sec. 39(A)(1) of the Code, namely:
1. Stock in trade of a taxpayer or other real property of a kind which would properly
be included in the inventory of the taxpayer if on hand at the close of the taxable year; or
2. Real property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business; or
3. Real property used in trade or business (i.e., buildings and/or improvements) of a
character which is subject to the allowance for depreciation provided for under Sec.
34(F) of the Code; or
4. Real property used in trade or business of the taxpayer.
Real properties acquired by banks through foreclosure sales are considered as their
ordinary assets. However, banks shall not be considered as habitually engaged in the
real estate business for purposes of determining the applicable rate of withholding tax
imposed under Sec. 2.57.2(J) of Revenue Regulations No. 2-98 , as amended.

CASES DIGESTDisposition of Lands and/or Buildings

Rev.Reg. 2-98 imposes a graduated Creditable Withholding Tax on income based on the
Gross Selling Price or Fair Market Value of the real property categorized as ordinary
assets. On the other hand, Section 27 (D) (5) of RA 8424 imposes a final tax and flat rate
of 6% on the gain presumed to be realized from the sale of a capital asset based on its
GSP or FMV. This final tax is also withheld at source.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R.
No. 160756, March 9, 2010

(E) Minimum Corporate Income Tax on Domestic Corporations

(1) Imposition of Tax A minimum corporate income tax of two percent (2%)
of the gross income as of the end of the taxable year, as defined herein, is hereby
imposed on a corporation taxable under this Title, beginning on the fourth taxable
year immediately following the year in which such corporation commenced its
business operations, when the minimum income tax is greater than the tax
computed under Subsection (A) of this Section for the taxable year.

BIR ISSUANCES
REVENUE REGULATIONS NO. 09-98 August 25, 1998
The Imposition of the Minimum Corporate Income Tax (MCIT) of Two (2%) percent on
Domestic Corporations and Resident Foreign Corporations
MINIMUM CORPORATE INCOME TAX (MCIT) ON DOMESTIC CORPORATIONS
(1) Imposition of the Tax A minimum corporate income tax (MCIT) of two percent
(2%) of the gross income as of the end of the taxable year (whether calendar or fiscal
year, depending on the accounting period employed) is hereby imposed upon any
domestic corporation beginning the fourth (4th) taxable year immediately following the
taxable year in which such corporation commenced its business operations. The MCIT
shall be imposed whenever such corporation has zero or negative taxable income or
whenever the amount of minimum-corporate income tax is greater than the normal
income tax due from such corporation.
Accordingly, the minimum corporate income tax shall not be imposed upon any of the
following:
(a) Domestic corporations operating as proprietary educational institutions subject to tax
at ten percent (10%) on their taxable income; or
(b) Domestic corporations engaged in hospital operations which are non-profit subject to
tax at ten percent (10%) on their taxable income; and
(c) Domestic corporations engaged in business as depository banks under the expanded
foreign currency deposit system, otherwise known as Foreign Currency Deposit Units
(FCDUs), on their income from foreign currency transactions with local commercial
banks, including branches of foreign banks, authorized by the BangkoSentralngPilipinas
(BSP) to transact business with foreign currency deposit system units and other
depository banks under the foreign currency deposit system, including their interest
income from foreign currency loans granted to residents of the Philippines under the
expanded foreign currency deposit system, subject to final income tax at ten percent
(10%) of such income.
(d) Firms that are taxed under a special income tax regime such as those in
accordance with RA 7916 and 7227 (the PEZA law and the Bases Conversion
Development Act, respectively).

REVENUE MEMORANDUM CIRCULAR NO. 04-03 December 31, 2002

Clarifying Items that would Constitute Gross Receipts and Costs in Determining "Gross
Income" on Services for the Purpose of Computing the Minimum Corporate Income Tax
(MCIT) Pursuant to Sections 27(E) and 28(A)(2) of the National Internal Revenue Code
of 1997of the following: Banks and non-bank financial intermediaries performing quasi-
banking activities;Insurance and pension funding companies;Finance companies and
other financial intermediaries not performing quasi-banking activities;Brokers of
securities (excluding banks);Customs, insurance, real estate, immigration and
commercial brokers;General engineering and/or building contractors;Common carriers
or transportation contractors;Hotel, motel, rest/pension/lodging house and resort
operators;Food service establishments;Lessors of property;Telephone and telegraph,
electric, gas, and water utilities;andRadio and/or television broadcasting
CASES DIGEST

Minimum Corporate Income Tax on DomesticCorporations

CHAMBER OF REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC., petitioner, vs.
THE HON. EXECUTIVE SECRETARY ALBERTO ROMULO, THE HON. ACTING
SECRETARY OF FINANCE JUANITA D. AMATONG, and THE HON. COMMISSIONER
OF INTERNAL REVENUE GUILLERMO PARAYNO, JR., respondents. [G.R. No. 160756.
March 9, 2010.]

DECISION: CORONA, J p:

In this original petition for certiorari and mandamus, petitioner Chamber of Real Estate and
Builders' Associations, Inc. is questioning the constitutionality of Section 27 (E) of Republic
Act (RA) 8424 and the revenue regulations (RRs) issued by the Bureau of Internal Revenue
(BIR) to implement said provision and those involving creditable withholding taxes.

Petitioner is an association of real estate developers and builders in the Philippines. It

impleaded former Executive Secretary Alberto Romulo, then acting Secretary of Finance
Juanita D. Amatong and then Commissioner of Internal Revenue Guillermo Parayno, Jr. as
respondents.

Petitioner assails the validity of the imposition of minimum corporate income tax (MCIT) on
corporations and creditable withholding tax (CWT) on sales of real properties classified as
ordinary assets.

Section 27 (E) of RA 8424 provides for MCIT on domestic corporations and is implemented
by RR 9-98. Petitioner argues that the MCIT violates the due process clause because it levies
income tax even if there is no realized gain.

Petitioner also seeks to nullify Sections 2.57.2 (J) (as amended by RR 6-2001) and 2.58.2 of
RR 2-98, and Section 4 (a) (ii) and (c) (ii) of RR 7-2003, all of which prescribe the rules and
procedures for the collection of CWT on the sale of real properties categorized as ordinary
assets. Petitioner contends that these revenue regulations are contrary to law for two
reasons: first, they ignore the different treatment by RA 8424 of ordinary assets and capital
assets and second, respondent Secretary of Finance has no authority to collect CWT, much
less, to base the CWT on the gross selling price or fair market value of the real properties
classified as ordinary assets.

Petitioner also asserts that the enumerated provisions of the subject revenue regulations
violate the due process clause because, like the MCIT, the government collects income tax
even when the net income has not yet been determined. They contravene the equal protection
clause as well because the CWT is being levied upon real estate enterprises but not on other
business enterprises, more particularly those in the manufacturing sector.

The issues to be resolved are as follows:

(1) whether or not this Court should take cognizance of the present case;

(2) whether or not the imposition of the MCIT on domestic corporations is

unconstitutional and

(3) whether or not the imposition of CWT on income from sales of real properties
classified as ordinary assets under RRs 2-98, 6-2001 and 7-2003, is unconstitutional.

OVERVIEW OF THE ASSAILED PROVISIONS

Under the MCIT scheme, a corporation, beginning on its fourth year of operation, is
assessed an MCIT of 2% of its gross income when such MCIT is greater than the normal
corporate income tax imposed under Section 27 (A). If the regular income tax is higher than
the MCIT, the corporation does not pay the MCIT. Any excess of the MCIT over the normal
tax shall be carried forward and credited against the normal income tax for the three
immediately succeeding taxable years. Section 27 (E) of RA 8424 provides:

Section 27 (E). [MCIT] on Domestic Corporations.

(1) Imposition of Tax. A [MCIT] of two percent (2%) of the gross income as of the end
of the taxable year, as defined herein, is hereby imposed on a corporation taxable under this
Title, beginning on the fourth taxable year immediately following the year in which such
corporation commenced its business operations, when the minimum income tax is greater
than the tax computed under Subsection (A) of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the [MCIT] over the
normal income tax as computed under Subsection (A) of this Section shall be carried forward
and credited against the normal income tax for the three (3) immediately succeeding taxable
years.

(3) Relief from the [MCIT] under certain conditions. The Secretary of Finance is
hereby authorized to suspend the imposition of the [MCIT] on any corporation which suffers
losses on account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that shall define
the terms and conditions under which he may suspend the imposition of the [MCIT] in a
meritorious case.

(4) Gross Income Defined. For purposes of applying the [MCIT] provided under
Subsection (E) hereof, the term 'gross income' shall mean gross sales less sales returns,
discounts and allowances and cost of goods sold. "Cost of goods sold" shall include all
business expenses directly incurred to produce the merchandise to bring them to their
present location and use.

For trading or merchandising concern, "cost of goods sold" shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods to the
place where the goods are actually sold including insurance while the goods are in transit.

For a manufacturing concern, "cost of goods manufactured and sold" shall

include all costs of production of finished goods, such as raw materials used, direct labor
and manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, "gross income" means
gross receipts less sales returns, allowances, discounts and cost of services. "Cost of
services" shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients including (A) salaries and employee benefits
of personnel, consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or rental of equipment
used and cost of supplies: Provided, however, that in the case of banks, "cost of services"
shall include interest expense.

On August 25, 1998, respondent Secretary of Finance (Secretary), on the recommendation of

the Commissioner of Internal Revenue (CIR), promulgated RR 9-98 implementing Section 27
(E). The pertinent portions thereof read:

Sec. 2.27(E). [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. A [MCIT] of two percent (2%) of the gross income as of the
end of the taxable year (whether calendar or fiscal year, depending on the accounting period
employed) is hereby imposed upon any domestic corporation beginning the fourth (4th)
taxable year immediately following the taxable year in which such corporation commenced
its business operations. The MCIT shall be imposed whenever such corporation has zero or
negative taxable income or whenever the amount of minimum corporate income tax is
greater than the normal income tax due from such corporation.
 For purposes of these Regulations, the term, "normal income tax" means the
income tax rates prescribed under Sec. 27 (A) and Sec. 28 (A) (1) of the Code xxx at 32%
effective January 1, 2000 and thereafter.

xxxxxxxxx

(2) Carry forward of excess [MCIT]. Any excess of the [MCIT] over the normal
income tax as computed under Sec. 27(A) of the Code shall be carried forward on an annual
basis and credited against the normal income tax for the three (3) immediately succeeding
taxable years.

xxxxxxxxx

Meanwhile, on April 17, 1998, respondent Secretary, upon recommendation of respondent

CIR, promulgated RR 2-98 implementing certain provisions of RA 8424 involving the
withholding of taxes. 6 Under Section 2.57.2 (J) of RR No. 2-98, income payments from the
sale, exchange or transfer of real property, other than capital assets, by persons residing in
the Philippines and habitually engaged in the real estate business were subjected to CWT:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxxxxxxxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of. Real property, other than capital assets,
sold by an individual, corporation, estate, trust, trust fund or pension fund and the
seller/transferor is habitually engaged in the real estate business in accordance with the
following schedule

Those which are exempt from a Exempt xxx xxxxxx

withholding tax at source as

prescribed in Sec. 2.57.5 of Gross selling price shall mean

these regulations. the consideration stated in the

sales document or the fair

With a selling price of five 1.5% market value determined in

hundred thousand pesos accordance with Section 6 (E)

(P500,000.00) or less. of the Code, as amended,

 whichever is higher. In an

With a selling price of more 3.0% exchange, the fair market

than five hundred thousand value of the property received

pesos (P500,000.00) but not in exchange, as determined

more than two million pesos in the Income Tax

(P2,000,000.00). Regulations shall be used.

With selling price of more 5.0% Where the consideration or part

than two million pesos thereof is payable on installment,

(P2,000,000.00) no withholding tax is required to

be made on the periodic installment

payments where the buyer is an

individual not engaged in trade or

business. In such a case, the

applicable rate of tax based on

the entire consideration shall be

withheld on the last installment

orinstallments to be paid to the

seller.

However, if the buyer is engaged

in trade or business, whether a

corporation or otherwise, the tax

shall be deducted and withheld

by the buyer on every installment.

This provision was amended by RR 6-2001 on July 31, 2001:

Sec. 2.57.2. Income payment subject to [CWT] and rates prescribed thereon:

xxxxxxxxx

(J) Gross selling price or total amount of consideration or its equivalent paid to the
seller/owner for the sale, exchange or transfer of real property classified as ordinary asset.
A [CWT] based on the gross selling price/total amount of consideration or the fair market
value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to
the seller/owner for the sale, transfer or exchange of real property, other than capital asset,
shall be imposed upon the withholding agent,/buyer, in accordance with the following
schedule:

Where the seller/transferor is exempt from [CWT] in accordance with Sec. 2.57.5 of these
regulations. Exempt

Upon the following values of real property, where the seller/transferor is habitually engaged
in the real estate business.

With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less. 1.5%

With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more
than Two Million Pesos (P2,000,000.00). 3.0%

With a selling price of more than two Million Pesos (P2,000,000.00). 5.0%

xxxxxxxxx

Gross selling price shall remain the consideration stated in the sales document or the fair
market value determined in accordance with Section 6 (E) of the Code, as amended,
whichever is higher. In an exchange, the fair market value of the property received in
exchange shall be considered as the consideration.

xxxxxxxxx

However, if the buyer is engaged in trade or business, whether a corporation or otherwise,

these rules shall apply:

(i) If the sale is a sale of property on the installment plan (that is, payments in the year of
sale do not exceed 25% of the selling price), the tax shall be deducted and withheld by the
buyer on every installment.

(ii) If, on the other hand, the sale is on a "cash basis" or is a "deferred-payment sale not
on the installment plan" (that is, payments in the year of sale exceed 25% of the selling
price), the buyer shall withhold the tax based on the gross selling price or fair market value
of the property, whichever is higher, on the first installment.

In any case, no Certificate Authorizing Registration (CAR) shall be issued to the buyer
unless the [CWT] due on the sale, transfer or exchange of real property other than capital
asset has been fully paid. (Underlined amendments in the original)

Section 2.58.2 of RR 2-98 implementing Section 58 (E) of RA 8424 provides that any sale,
barter or exchange subject to the CWT will not be recorded by the Registry of Deeds until
the CIR has certified that such transfers and conveyances have been reported and the taxes
thereof have been duly paid:

Sec. 2.58.2. Registration with the Register of Deeds. Deeds of conveyances of land or
land and building/improvement thereon arising from sales, barters, or exchanges subject to
the creditable expanded withholding tax shall not be recorded by the Register of Deeds
unless the [CIR] or his duly authorized representative has certified that such transfers and
conveyances have been reported and the expanded withholding tax, inclusive of the
documentary stamp tax, due thereon have been fully paid . . . .

On February 11, 2003, RR No. 7-2003 was promulgated, providing for the guidelines in
determining whether a particular real property is a capital or an ordinary asset for purposes
of imposing the MCIT, among others. The pertinent portions thereof state:

Section 4. Applicable taxes on sale, exchange or other disposition of real property.

Gains/Income derived from sale, exchange, or other disposition of real properties shall,
unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending
on whether the subject properties are classified as capital assets or ordinary assets;

a. In the case of individual citizen (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

xxxxxxxxx

(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57.2(J) of [RR 2-98], as amended,
based on the gross selling price or current fair market value as determined in accordance
with Section 6(E) of the Code, whichever is higher, and consequently, to the ordinary income
tax imposed under Sec. 24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net
taxable income.

xxxxxxxxx

c. In the case of domestic corporations.

xxxxxxxxx

(ii) The sale of land and/or building classified as ordinary asset and other real property
(other than land and/or building treated as capital asset), regardless of the classification
thereof, all of which are located in the Philippines, shall be subject to the [CWT] (expanded)
under Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax
under Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic
corporations may become subject to the [MCIT] under Sec. 27(E) of the Code, whichever is
applicable.

xxxxxxxxx

We shall now tackle the issues raised.

EXISTENCE OF A JUSTICIABLE CONTROVERSY

Courts will not assume jurisdiction over a constitutional question unless the following
requisites are satisfied: (1) there must be an actual case calling for the exercise of judicial
review; (2) the question before the court must be ripe for adjudication; (3) the person
challenging the validity of the act must have standing to do so; (4) the question of
constitutionality must have been raised at the earliest opportunity and (5) the issue of
constitutionality must be the very lismota of the case.

Respondents aver that the first three requisites are absent in this case. According to them,
there is no actual case calling for the exercise of judicial power and it is not yet ripe for
adjudication because

[petitioner] did not allege that CREBA, as a corporate entity, or any of its members, has
been assessed by the BIR for the payment of [MCIT] or [CWT] on sales of real property.
Neither did petitioner allege that its members have shut down their businesses as a result of
the payment of the MCIT or CWT. Petitioner has raised concerns in mere abstract and
hypothetical form without any actual, specific and concrete instances cited that the assailed
law and revenue regulations have actually and adversely affected it. Lacking empirical data
on which to base any conclusion, any discussion on the constitutionality of the MCIT or
CWT on sales of real property is essentially an academic exercise.

Perceived or alleged hardship to taxpayers alone is not an adequate justification for

adjudicating abstract issues. Otherwise, adjudication would be no different from the giving
of advisory opinion that does not really settle legal issues.

An actual case or controversy involves a conflict of legal rights or an assertion of opposite

legal claims which is susceptible of judicial resolution as distinguished from a hypothetical
or abstract difference or dispute. On the other hand, a question is considered ripe for
adjudication when the act being challenged has a direct adverse effect on the individual
challenging it.

Contrary to respondents' assertion, we do not have to wait until petitioner's members have
shut down their operations as a result of the MCIT or CWT. The assailed provisions are
already being implemented. As we stated in Didipio Earth-Savers' Multi-Purpose
Association, Incorporated (DESAMA) v. Gozun:

By the mere enactment of the questioned law or the approval of the challenged act, the
dispute is said to have ripened into a judicial controversy even without any other overt act.
Indeed, even a singular violation of the Constitution and/or the law is enough to awaken
judicial duty.

If the assailed provisions are indeed unconstitutional, there is no better time than the present
to settle such question once and for all.

Respondents next argue that petitioner has no legal standing to sue:

Petitioner is an association of some of the real estate developers and builders in the
Philippines. Petitioners did not allege that [it] itself is in the real estate business. It did not
allege any material interest or any wrong that it may suffer from the enforcement of [the
assailed provisions].

Legal standing or locus standi is a party's personal and substantial interest in a case such
that it has sustained or will sustain direct injury as a result of the governmental act being
challenged. In Holy Spirit Homeowners Association, Inc. v. Defensor, we held that the
association had legal standing because its members stood to be injured by the enforcement of
the assailed provisions:

Petitioner association has the legal standing to institute the instant petition . . . . There is no
dispute that the individual members of petitioner association are residents of the NGC. As
such they are covered and stand to be either benefited or injured by the enforcement of the
IRR, particularly as regards the selection process of beneficiaries and lot allocation to
qualified beneficiaries. Thus, petitioner association may assail those provisions in the IRR
which it believes to be unfavorable to the rights of its members. . . . Certainly, petitioner and
its members have sustained direct injury arising from the enforcement of the IRR in that they
have been disqualified and eliminated from the selection process.

In any event, this Court has the discretion to take cognizance of a suit which does not satisfy
the requirements of an actual case, ripeness or legal standing when paramount public
interest is involved. The questioned MCIT and CWT affect not only petitioners but practically
all domestic corporate taxpayers in our country. The transcendental importance of the issues
raised and their overreaching significance to society make it proper for us to take
cognizance of this petition.

CONCEPT AND RATIONALE OF THE MCIT

The MCIT on domestic corporations is a new concept introduced by RA 8424 to the

Philippine taxation system. It came about as a result of the perceived inadequacy of the self-
assessment system in capturing the true income of corporations. It was devised as a
relatively simple and effective revenue-raising instrument compared to the normal income
tax which is more difficult to control and enforce. It is a means to ensure that everyone will
make some minimum contribution to the support of the public sector. The congressional
deliberations on this are illuminating:

Senator Enrile.

Mr. President, we are not unmindful of the practice of certain corporations of

reporting constantly a loss in their operations to avoid the payment of taxes, and thus avoid
sharing in the cost of government. In this regard, the Tax Reform Act introduces for the first
time a new concept called the [MCIT] so as to minimize tax evasion, tax avoidance, tax
manipulation in the country and for administrative convenience. . . . This will go a long way
in ensuring that corporations will pay their just share in supporting our public life and our
economic advancement.

Domestic corporations owe their corporate existence and their privilege to do business to the
government. They also benefit from the efforts of the government to improve the financial
market and to ensure a favorable business climate. It is therefore fair for the government to
require them to make a reasonable contribution to the public expenses.

Congress intended to put a stop to the practice of corporations which, while having large
turn-overs, report minimal or negative net income resulting in minimal or zero income taxes
year in and year out, through under-declaration of income or over-deduction of expenses
otherwise called tax shelters.

Mr. Javier (E.)

. . . [This] is what the Finance Dept. is trying to remedy, that is why they have
proposed the [MCIT]. Because from experience too, you have corporations which have been
losing year in and year out and paid no tax. So, if the corporation has been losing for the
past five years to ten years, then that corporation has no business to be in business. It is
dead. Why continue if you are losing year in and year out? So, we have this provision to
avoid this type of tax shelters, Your Honor.
The primary purpose of any legitimate business is to earn a profit. Continued and repeated
losses after operations of a corporation or consistent reports of minimal net income render
its financial statements and its tax payments suspect. For sure, certain tax avoidance
schemes resorted to by corporations are allowed in our jurisdiction. The MCIT serves to put
a cap on such tax shelters. As a tax on gross income, it prevents tax evasion and minimizes
tax avoidance schemes achieved through sophisticated and artful manipulations of
deductions and other stratagems. Since the tax base was broader, the tax rate was lowered.

To further emphasize the corrective nature of the MCIT, the following safeguards were
incorporated into the law:

First, recognizing the birth pangs of businesses and the reality of the need to recoup initial
major capital expenditures, the imposition of the MCIT commences only on the fourth
taxable year immediately following the year in which the corporation commenced its
operations. This grace period allows a new business to stabilize first and make its ventures
viable before it is subjected to the MCIT.

Second, the law allows the carrying forward of any excess of the MCIT paid over the normal
income tax which shall be credited against the normal income tax for the three immediately
succeeding years.

Third, since certain businesses may be incurring genuine repeated losses, the law authorizes
the Secretary of Finance to suspend the imposition of MCIT if a corporation suffers losses
due to prolonged labor dispute, force majeure and legitimate business reverses.

Even before the legislature introduced the MCIT to the Philippine taxation system, several
other countries already had their own system of minimum corporate income taxation. Our
lawmakers noted that most developing countries, particularly Latin American and Asian
countries, have the same form of safeguards as we do. As pointed out during the committee
hearings:

[Mr.Medalla:] Note that most developing countries where you have of course quite a bit of
room for underdeclaration of gross receipts have this same form of safeguards.

In the case of Thailand, half a percent (0.5%), there's a minimum of income tax of half a
percent (0.5%) of gross assessable income. In Korea a 25% of taxable income before
deductions and exemptions. Of course the different countries have different basis for that
minimum income tax.

The other thing you'll notice is the preponderance of Latin American countries that employed
this method. Okay, those are additional Latin American countries.
At present, the United States of America, Mexico, Argentina, Tunisia, Panama and Hungary
have their own versions of the MCIT.

MCIT IS NOT VIOLATIVE OF DUE PROCESS

Petitioner claims that the MCIT under Section 27 (E) of RA 8424 is unconstitutional because
it is highly oppressive, arbitrary and confiscatory which amounts to deprivation of property
without due process of law. It explains that gross income as defined under said provision
only considers the cost of goods sold and other direct expenses; other major expenditures,
such as administrative and interest expenses which are equally necessary to produce gross
income, were not taken into account. 31 Thus, pegging the tax base of the MCIT to a
corporation's gross income is tantamount to a confiscation of capital because gross income,
unlike net income, is not "realized gain."

We disagree.

Taxes are the lifeblood of the government. Without taxes, the government can neither exist
nor endure. The exercise of taxing power derives its source from the very existence of the
State whose social contract with its citizens obliges it to promote public interest and the
common good.

Taxation is an inherent attribute of sovereignty. It is a power that is purely legislative. 35

Essentially, this means that in the legislature primarily lies the discretion to determine the
nature (kind), object (purpose), extent (rate), coverage (subjects) and situs (place) of
taxation. It has the authority to prescribe a certain tax at a specific rate for a particular
public purpose on persons or things within its jurisdiction. In other words, the legislature
wields the power to define what tax shall be imposed, why it should be imposed, how much
tax shall be imposed, against whom (or what) it shall be imposed and where it shall be
imposed.

As a general rule, the power to tax is plenary and unlimited in its range, acknowledging in
its very nature no limits, so that the principal check against its abuse is to be found only in
the responsibility of the legislature (which imposes the tax) to its constituency who are to pay
it. Nevertheless, it is circumscribed by constitutional limitations. At the same time, like any
other statute, tax legislation carries a presumption of constitutionality.

The constitutional safeguard of due process is embodied in the fiat "[no] person shall be
deprived of life, liberty or property without due process of law." In Sison, Jr. v. Ancheta, et
al., we held that the due process clause may properly be invoked to invalidate, in
appropriate cases, a revenue measure when it amounts to a confiscation of property. But in
the same case, we also explained that we will not strike down a revenue measure as
unconstitutional (for being violative of the due process clause) on the mere allegation of
arbitrariness by the taxpayer. There must be a factual foundation to such an
unconstitutional taint. This merely adheres to the authoritative doctrine that, where the due
process clause is invoked, considering that it is not a fixed rule but rather a broad standard,
there is a need for proof of such persuasive character.

Petitioner is correct in saying that income is distinct from capital. Income means all the
wealth which flows into the taxpayer other than a mere return on capital. Capital is a fund
or property existing at one distinct point in time while income denotes a flow of wealth
during a definite period of time. Income is gain derived and severed from capital. For
income to be taxable, the following requisites must exist:

(1) there must be gain;

(2) the gain must be realized or received and

(3) the gain must not be excluded by law or treaty from taxation.

Certainly, an income tax is arbitrary and confiscatory if it taxes capital because capital is
not income. In other words, it is income, not capital, which is subject to income tax.
However, the MCIT is not a tax on capital.

The MCIT is imposed on gross income which is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and other direct expenses from
gross sales. Clearly, the capital is not being taxed.

Furthermore, the MCIT is not an additional tax imposition. It is imposed in lieu of the
normal net income tax, and only if the normal income tax is suspiciously low. The MCIT
merely approximates the amount of net income tax due from a corporation, pegging the rate
at a very much reduced 2% and uses as the base the corporation's gross income.

Besides, there is no legal objection to a broader tax base or taxable income by eliminating
all deductible items and at the same time reducing the applicable tax rate.

Statutes taxing the gross "receipts," "earnings," or "income" of particular corporations are
found in many jurisdictions. Tax thereon is generally held to be within the power of a state to
impose; or constitutional, unless it interferes with interstate commerce or violates the
requirement as to uniformity of taxation.

The United States has a similar alternative minimum tax (AMT) system which is generally
characterized by a lower tax rate but a broader tax base. Since our income tax laws are of
American origin, interpretations by American courts of our parallel tax laws have persuasive
effect on the interpretation of these laws. Although our MCIT is not exactly the same as the
AMT, the policy behind them and the procedure of their implementation are comparable. On
the question of the AMT's constitutionality, the United States Court of Appeals for the Ninth
Circuit stated in Okin v. Commissioner:

In enacting the minimum tax, Congress attempted to remedy general taxpayer distrust of the
system growing from large numbers of taxpayers with large incomes who were yet paying no
taxes.

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We thus join a number of other courts in upholding the constitutionality of the [AMT]. . . .
[It] is a rational means of obtaining a broad-based tax, and therefore is constitutional.

The U.S. Court declared that the congressional intent to ensure that corporate taxpayers
would contribute a minimum amount of taxes was a legitimate governmental end to which
the AMT bore a reasonable relation.

American courts have also emphasized that Congress has the power to condition, limit or
deny deductions from gross income in order to arrive at the net that it chooses to tax. This is
because deductions are a matter of legislative grace.

Absent any other valid objection, the assignment of gross income, instead of net income, as
the tax base of the MCIT, taken with the reduction of the tax rate from 32% to 2%, is not
constitutionally objectionable.

Moreover, petitioner does not cite any actual, specific and concrete negative experiences of
its members nor does it present empirical data to show that the implementation of the MCIT
resulted in the confiscation of their property.

In sum, petitioner failed to support, by any factual or legal basis, its allegation that the
MCIT is arbitrary and confiscatory. The Court cannot strike down a law as unconstitutional
simply because of its yokes. Taxation is necessarily burdensome because, by its nature, it
adversely affects property rights. The party alleging the law's unconstitutionality has the
burden to demonstrate the supposed violations in understandable terms.

RR 9-98 MERELY CLARIFIES

SECTION 27 (E) OF RA 8424

Petitioner alleges that RR 9-98 is a deprivation of property without due process of law
because the MCIT is being imposed and collected even when there is actually a loss, or a
zero or negative taxable income:

Sec. 2.27(E). [MCIT] on Domestic Corporations.

(1) Imposition of the Tax. . . . The MCIT shall be imposed whenever such corporation
has zero or negative taxable income or whenever the amount of [MCIT] is greater than the
normal income tax due from such corporation. (Emphasis supplied)

RR 9-98, in declaring that MCIT should be imposed whenever such corporation has zero or
negative taxable income, merely defines the coverage of Section 27 (E). This means that even
if a corporation incurs a net loss in its business operations or reports zero income after
deducting its expenses, it is still subject to an MCIT of 2% of its gross income. This is
consistent with the law which imposes the MCIT on gross income notwithstanding the
amount of the net income. But the law also states that the MCIT is to be paid only if it is
greater than the normal net income. Obviously, it may well be the case that the MCIT would
be less than the net income of the corporation which posts a zero or negative taxable income.

We now proceed to the issues involving the CWT.

The withholding tax system is a procedure through which taxes (including income taxes) are
collected. Under Section 57 of RA 8424, the types of income subject to withholding tax are
divided into three categories: (a) withholding of final tax on certain incomes; (b)
withholding of creditable tax at source and (c) tax-free covenant bonds. Petitioner is
concerned with the second category (CWT) and maintains that the revenue regulations on
the collection of CWT on sale of real estate categorized as ordinary assets are
unconstitutional.

Petitioner, after enumerating the distinctions between capital and ordinary assets under RA
8424, contends that Sections 2.57.2 (J) and 2.58.2 of RR 2-98 and Sections 4 (a) (ii) and (c)
(ii) of RR 7-2003 were promulgated "with grave abuse of discretion amounting to lack of
jurisdiction" and "patently in contravention of law" because they ignore such distinctions.
Petitioner's conclusion is based on the following premises: (a) the revenue regulations use
gross selling price (GSP) or fair market value (FMV) of the real estate as basis for
determining the income tax for the sale of real estate classified as ordinary assets and (b)
they mandate the collection of income tax on a per transaction basis, i.e., upon
consummation of the sale via the CWT, contrary to RA 8424 which calls for the payment of
the net income at the end of the taxable period.

Petitioner theorizes that since RA 8424 treats capital assets and ordinary assets differently,
respondents cannot disregard the distinctions set by the legislators as regards the tax base,
modes of collection and payment of taxes on income from the sale of capital and ordinary
assets.

Petitioner's arguments have no merit.

AUTHORITY OF THE SECRETARY OF FINANCE TO ORDER THE COLLECTION OF
CWT ON SALES OF REAL PROPERTY CONSIDERED AS ORDINARY ASSETS

The Secretary of Finance is granted, under Section 244 of RA 8424, the authority to
promulgate the necessary rules and regulations for the effective enforcement of the
provisions of the law. Such authority is subject to the limitation that the rules and
regulations must not override, but must remain consistent and in harmony with, the law they
seek to apply and implement. It is well-settled that an administrative agency cannot amend
an act of Congress.

We have long recognized that the method of withholding tax at source is a procedure of
collecting income tax which is sanctioned by our tax laws. The withholding tax system was
devised for three primary reasons: first, to provide the taxpayer a convenient manner to meet
his probable income tax liability; second, to ensure the collection of income tax which can
otherwise be lost or substantially reduced through failure to file the corresponding returns
and third, to improve the government's cash flow. This results in administrative savings,
prompt and efficient collection of taxes, prevention of delinquencies and reduction of
governmental effort to collect taxes through more complicated means and remedies.

Respondent Secretary has the authority to require the withholding of a tax on items of
income payable to any person, national or juridical, residing in the Philippines. Such
authority is derived from Section 57 (B) of RA 8424 which provides:

SEC. 57. Withholding of Tax at Source.

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(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year.

The questioned provisions of RR 2-98, as amended, are well within the authority given by
Section 57(B) to the Secretary, i.e., the graduated rate of 1.5%-5% is between the 1%-32%
range; the withholding tax is imposed on the income payable and the tax is creditable
against the income tax liability of the taxpayer for the taxable year.

EFFECT OF RRS ON THE TAX BASE FOR THE INCOME TAX OF INDIVIDUALS OR
CORPORATIONS ENGAGED IN THE REAL ESTATE BUSINESS
Petitioner maintains that RR 2-98, as amended, arbitrarily shifted the tax base of a real
estate business' income tax from net income to GSP or FMV of the property sold.

Petitioner is wrong.

The taxes withheld are in the nature of advance tax payments by a taxpayer in order to
extinguish its possible tax obligation. They are installments on the annual tax which may be
due at the end of the taxable year.

Under RR 2-98, the tax base of the income tax from the sale of real property classified as
ordinary assets remains to be the entity's net income imposed under Section 24 (resident
individuals) or Section 27 (domestic corporations) in relation to Section 31 of RA 8424, i.e.
gross income less allowable deductions. The CWT is to be deducted from the net income tax
payable by the taxpayer at the end of the taxable year. 71 Precisely, Section 4 (a) (ii) and (c)
(ii) of RR 7-2003 reiterate that the tax base for the sale of real property classified as
ordinary assets remains to be the net taxable income:

Section 4. Applicable taxes on sale, exchange or other disposition of real property.

Gains/Income derived from sale, exchange, or other disposition of real properties shall
unless otherwise exempt, be subject to applicable taxes imposed under the Code, depending
on whether the subject properties are classified as capital assets or ordinary assets;

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a. In the case of individual citizens (including estates and trusts), resident aliens, and
non-resident aliens engaged in trade or business in the Philippines;

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(ii) The sale of real property located in the Philippines, classified as ordinary assets,
shall be subject to the [CWT] (expanded) under Sec. 2.57.2(j) of [RR 2-98], as amended,
based on the [GSP] or current [FMV] as determined in accordance with Section 6(E) of the
Code, whichever is higher, and consequently, to the ordinary income tax imposed under Sec.
24(A)(1)(c) or 25(A)(1) of the Code, as the case may be, based on net taxable income.

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c. In the case of domestic corporations.

The sale of land and/or building classified as ordinary asset and other real property (other
than land and/or building treated as capital asset), regardless of the classification thereof,
all of which are located in the Philippines, shall be subject to the [CWT] (expanded) under
Sec. 2.57.2(J) of [RR 2-98], as amended, and consequently, to the ordinary income tax under
Sec. 27(A) of the Code. In lieu of the ordinary income tax, however, domestic corporations
may become subject to the [MCIT] under Sec. 27(E) of the same Code, whichever is
applicable. (Emphasis supplied)

Accordingly, at the end of the year, the taxpayer/seller shall file its income tax return and
credit the taxes withheld (by the withholding agent/buyer) against its tax due. If the tax due is
greater than the tax withheld, then the taxpayer shall pay the difference. If, on the other
hand, the tax due is less than the tax withheld, the taxpayer will be entitled to a refund or tax
credit. Undoubtedly, the taxpayer is taxed on its net income.

The use of the GSP/FMV as basis to determine the withholding taxes is evidently for
purposes of practicality and convenience. Obviously, the withholding agent/buyer who is
obligated to withhold the tax does not know, nor is he privy to, how much the taxpayer/seller
will have as its net income at the end of the taxable year. Instead, said withholding agent's
knowledge and privity are limited only to the particular transaction in which he is a party. In
such a case, his basis can only be the GSP or FMV as these are the only factors reasonably
known or knowable by him in connection with the performance of his duties as a withholding
agent.

NO BLURRING OF DISTINCTIONS BETWEEN ORDINARY ASSETS AND CAPITAL

ASSETS

RR 2-98 imposes a graduated CWT on income based on the GSP or FMV of the real
property categorized as ordinary assets. On the other hand, Section 27 (D) (5) of RA 8424
imposes a final tax and flat rate of 6% on the gain presumed to be realized from the sale of a
capital asset based on its GSP or FMV. This final tax is also withheld at source.

The differences between the two forms of withholding tax, i.e., creditable and final, show that
ordinary assets are not treated in the same manner as capital assets. Final withholding tax
(FWT) and CWT are distinguished as follows:

FWT CWT

a) The amount of income tax a) Taxes withheld on certain

withheld by the withholding income payments are intended

agent is constituted as a full to equal or at least approximate

and final payment of the the tax due of the payee on

income tax due from the said income.

payee on the said income.

b) The liability for payment of b) Payee of income is required to

the tax rests primarily on the report the income and/or pay

payor as a withholding agent. the difference between the tax

withheld and the tax due on the

income. The payee also has the

right to ask for a refund if the tax

withheld is more than the tax due.

c) The payee is not required to c) The income recipient is still required

file an income tax return for to file an income tax return, as

the particular income. prescribed in Sec. 51 and Sec. 52

of the NIRC, as amended.

As previously stated, FWT is imposed on the sale of capital assets. On the other hand, CWT
is imposed on the sale of ordinary assets. The inherent and substantial differences between
FWT and CWT disprove petitioner's contention that ordinary assets are being lumped
together with, and treated similarly as, capital assets in contravention of the pertinent
provisions of RA 8424.

Petitioner insists that the levy, collection and payment of CWT at the time of transaction are
contrary to the provisions of RA 8424 on the manner and time of filing of the return, payment
and assessment of income tax involving ordinary assets.

The fact that the tax is withheld at source does not automatically mean that it is treated
exactly the same way as capital gains. As aforementioned, the mechanics of the FWT are
distinct from those of the CWT. The withholding agent/buyer's act of collecting the tax at the
time of the transaction by withholding the tax due from the income payable is the essence of
the withholding tax method of tax collection.

NO RULE THAT ONLY PASSIVE

INCOMES CAN BE SUBJECT TO CWT

Petitioner submits that only passive income can be subjected to withholding tax, whether
final or creditable. According to petitioner, the whole of Section 57 governs the withholding
of income tax on passive income. The enumeration in Section 57 (A) refers to passive income
being subjected to FWT. It follows that Section 57 (B) on CWT should also be limited to
passive income:

SEC. 57. Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and regulations, the
[Secretary] may promulgate, upon the recommendation of the [CIR], requiring the filing of
income tax return by certain income payees, the tax imposed or prescribed by Sections
24(B)(1), 24(B)(2), 24(C), 24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E);
27(D)(1), 27(D)(2), 27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b),
28(A)(7)(c), 28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c);
33; and 282 of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same conditions
as provided in Section 58 of this Code.

(B) Withholding of Creditable Tax at Source. The [Secretary] may, upon the
recommendation of the [CIR], require the withholding of a tax on the items of income
payable to natural or juridical persons, residing in the Philippines, by payor-
corporation/persons as provided for by law, at the rate of not less than one percent (1%) but
not more than thirty-two percent (32%) thereof, which shall be credited against the income
tax liability of the taxpayer for the taxable year. (Emphasis supplied)

This line of reasoning is non sequitur.

Section 57 (A) expressly states that final tax can be imposed on certain kinds of income and
enumerates these as passive income. The BIR defines passive income by stating what it is
not:

. . . if the income is generated in the active pursuit and performance of the corporation's
primary purposes, the same is not passive income. . .

It is income generated by the taxpayer's assets. These assets can be in the form of real
properties that return rental income, shares of stock in a corporation that earn dividends or
interest income received from savings.

On the other hand, Section 57 (B) provides that the Secretary can require a CWT on "income
payable to natural or juridical persons, residing in the Philippines." There is no requirement
that this income be passive income. If that were the intent of Congress, it could have easily
said so.

Indeed, Section 57 (A) and (B) are distinct. Section 57 (A) refers to FWT while Section 57
(B) pertains to CWT. The former covers the kinds of passive income enumerated therein and
the latter encompasses any income other than those listed in 57 (A). Since the law itself
makes distinctions, it is wrong to regard 57 (A) and 57 (B) in the same way.

To repeat, the assailed provisions of RR 2-98, as amended, do not modify or deviate from the
text of Section 57 (B). RR 2-98 merely implements the law by specifying what income is
subject to CWT. It has been held that, where a statute does not require any particular
procedure to be followed by an administrative agency, the agency may adopt any reasonable
method to carry out its functions. Similarly, considering that the law uses the general term
"income," the Secretary and CIR may specify the kinds of income the rules will apply to
based on what is feasible. In addition, administrative rules and regulations ordinarily
deserve to be given weight and respect by the courts 78 in view of the rule-making authority
given to those who formulate them and their specific expertise in their respective fields.

NO DEPRIVATION OF PROPERTY

WITHOUT DUE PROCESS

Petitioner avers that the imposition of CWT on GSP/FMV of real estate classified as
ordinary assets deprives its members of their property without due process of law because, in
their line of business, gain is never assured by mere receipt of the selling price. As a result,
the government is collecting tax from net income not yet gained or earned.

Again, it is stressed that the CWT is creditable against the tax due from the seller of the
property at the end of the taxable year. The seller will be able to claim a tax refund if its net
income is less than the taxes withheld. Nothing is taken that is not due so there is no
confiscation of property repugnant to the constitutional guarantee of due process. More
importantly, the due process requirement applies to the power to tax. The CWT does not
impose new taxes nor does it increase taxes. It relates entirely to the method and time of
payment.

Petitioner protests that the refund remedy does not make the CWT less burdensome because
taxpayers have to wait years and may even resort to litigation before they are granted a
refund. 81 This argument is misleading. The practical problems encountered in claiming a
tax refund do not affect the constitutionality and validity of the CWT as a method of
collecting the tax.

Petitioner complains that the amount withheld would have otherwise been used by the
enterprise to pay labor wages, materials, cost of money and other expenses which can then
save the entity from having to obtain loans entailing considerable interest expense.
Petitioner also lists the expenses and pitfalls of the trade which add to the burden of the
realty industry: huge investments and borrowings; long gestation period; sudden and
unpredictable interest rate surges; continually spiraling development/construction costs;
heavy taxes and prohibitive "up-front" regulatory fees from at least 20 government agencies.

Petitioner's lamentations will not support its attack on the constitutionality of the CWT.
Petitioner's complaints are essentially matters of policy best addressed to the executive and
legislative branches of the government. Besides, the CWT is applied only on the amounts
actually received or receivable by the real estate entity. Sales on installment are taxed on a
per-installment basis. Petitioner's desire to utilize for its operational and capital expenses
money earmarked for the payment of taxes may be a practical business option but it is not a
fundamental right which can be demanded from the court or from the government.

NO VIOLATION OF EQUAL PROTECTION

Petitioner claims that the revenue regulations are violative of the equal protection clause
because the CWT is being levied only on real estate enterprises. Specifically, petitioner
points out that manufacturing enterprises are not similarly imposed a CWT on their sales,
even if their manner of doing business is not much different from that of a real estate
enterprise. Like a manufacturing concern, a real estate business is involved in a continuous
process of production and it incurs costs and expenditures on a regular basis. The only
difference is that "goods" produced by the real estate business are house and lot units.

Again, we disagree.

The equal protection clause under the Constitution means that "no person or class of persons
shall be deprived of the same protection of laws which is enjoyed by other persons or other
classes in the same place and in like circumstances." Stated differently, all persons
belonging to the same class shall be taxed alike. It follows that the guaranty of the equal
protection of the laws is not violated by legislation based on a reasonable classification.
Classification, to be valid, must (1) rest on substantial distinctions; (2) be germane to the
purpose of the law; (3) not be limited to existing conditions only and (4) apply equally to all
members of the same class.

The taxing power has the authority to make reasonable classifications for purposes of
taxation. Inequalities which result from a singling out of one particular class for taxation, or
exemption, infringe no constitutional limitation. The real estate industry is, by itself, a class
and can be validly treated differently from other business enterprises.

Petitioner, in insisting that its industry should be treated similarly as manufacturing

enterprises, fails to realize that what distinguishes the real estate business from other
manufacturing enterprises, for purposes of the imposition of the CWT, is not their production
processes but the prices of their goods sold and the number of transactions involved. The
income from the sale of a real property is bigger and its frequency of transaction limited,
making it less cumbersome for the parties to comply with the withholding tax scheme.

On the other hand, each manufacturing enterprise may have tens of thousands of
transactions with several thousand customers every month involving both minimal and
substantial amounts. To require the customers of manufacturing enterprises, at present, to
withhold the taxes on each of their transactions with their tens or hundreds of suppliers may
result in an inefficient and unmanageable system of taxation and may well defeat the purpose
of the withholding tax system.

Petitioner counters that there are other businesses wherein expensive items are also sold
infrequently, e.g., heavy equipment, jewelry, furniture, appliance and other capital goods yet
these are not similarly subjected to the CWT. As already discussed, the Secretary may adopt
any reasonable method to carry out its functions. Under Section 57 (B), it may choose what
to subject to CWT.

A reading of Section 2.57.2 (M) of RR 2-98 will also show that petitioner's argument is not
accurate. The sales of manufacturers who have clients within the top 5,000 corporations, as
specified by the BIR, are also subject to CWT for their transactions with said 5,000
corporations.

SECTION 2.58.2 OF RR NO. 2-98 MERELY IMPLEMENTS SECTION 58 OF RA 8424

Lastly, petitioner assails Section 2.58.2 of RR 2-98, which provides that the Registry of
Deeds should not effect the registration of any document transferring real property unless a
certification is issued by the CIR that the withholding tax has been paid. Petitioner proffers
hardly any reason to strike down this rule except to rely on its contention that the CWT is
unconstitutional. We have ruled that it is not. Furthermore, this provision uses almost
exactly the same wording as Section 58 (E) of RA 8424 and is unquestionably in accordance
with it:

Sec. 58. Returns and Payment of Taxes Withheld at Source.

(E) Registration with Register of Deeds. No registration of any document transferring

real property shall be effected by the Register of Deeds unless the [CIR] or his duly
authorized representative has certified that such transfer has been reported, and the capital
gains or [CWT], if any, has been paid: . . . any violation of this provision by the Register of
Deeds shall be subject to the penalties imposed under Section 269 of this Code. (Emphasis
supplied)

CONCLUSION
The renowned genius Albert Einstein was once quoted as saying "[the] hardest thing in the
world to understand is the income tax." When a party questions the constitutionality of an
income tax measure, it has to contend not only with Einstein's observation but also with the
vast and well-established jurisprudence in support of the plenary powers of Congress to
impose taxes. Petitioner has miserably failed to discharge its burden of convincing the Court
that the imposition of MCIT and CWT is unconstitutional.

WHEREFORE, the petition is hereby DISMISSED. Costs against petitioner.SO

ORDERED.

Puno, C.J., Carpio, Carpio Morales, Velasco, Jr., Nachura, Leonardo-de Castro, Brion,
Bersamin, Abad, Peralta, Del Castillo, Villarama, Jr., Perez and Mendoza, JJ., concur.

Minimum Corporate Income Tax on DomesticCorporations

FACTS: Chamber of Real Estate and Builders' Associations, an association of real
estate developers and builders, challenges the validity of the imposition of minimum
corporate income tax (MCIT) on corporations. Arguing that MCIT violates the due
process clause because it levies income tax even if there is no realized gain, petitioner
explains that gross income as defined under Section 27 (E) of RA 8424 only considers the
cost of goods sold and other direct expenses and does not take into account
administrative and interest expenses which are also necessary to produce gross income.
Pegging the tax base of the MCIT to a corporation's gross income is tantamount to a
confiscation of capital because gross income, unlike net income, is not "realized gain."

Petitioner further alleges that RR 9-98 is a deprivation of property without due process of
law because the MCIT is being imposed and collected even when there is actually a loss,
or a zero or negative taxable income.

ISSUES: 1. Whether or not the imposition of the MCIT on domestic corporations is

unconstitutional.

2. Whether or not the imposition of CWT on income from sales of real properties
classified as ordinary assets is unconstitutional.

RULING:

1. The MCIT is not a tax on capital. It is imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale of its goods, i.e., the cost of goods
and other direct expenses from gross sales. In addition, the MCIT is not an additional tax
imposition. It is imposed in lieu of the normal net income tax, and only if the normal
income tax is suspiciously low. The MCIT merely approximates the amount of net income
tax due from a corporation, pegging the rate at only 2% and uses as the base the
corporation's gross income. Besides, there is no legal objection to a broader tax base or
taxable income by eliminating all deductible items and at the same time reducing the
applicable tax rate. Thus, the assignment of gross income, instead of net income, as the
tax base of the MCIT, taken with the reduced rate of 2%, is not constitutionally
objectionable.

2. The CWT is creditable against the tax due from the seller of the property at the end of
the taxable year. The seller will be able to claim a tax refund if its net income is less than
the taxes withheld. Nothing is taken that is not due so there is no confiscation of property
repugnant to the constitutional guarantee of due process. More importantly, the due
process requirement applies to the power to tax. The CWT does not impose new taxes nor
does it increase taxes. It relates entirely to the method and time of payment. The practical
problems encountered in claiming a tax refund do not affect the constitutionality and
validity of the CWT as a method of collecting the tax.

The real estate industry cannot be treated similarly as manufacturing enterprises because
what distinguishes the real estate business from other manufacturing enterprises, for
purposes of the imposition of the CWT, is not their production processes but the prices of
their goods sold and the number of transactions involved. The income from the sale of a
real property is bigger and its frequency of transaction limited, making it less
cumbersome for the parties to comply with the withholding tax scheme.CHAMBER OF
REAL ESTATE AND BUILDERS' ASSOCIATIONS, INC. vs. ALBERTO ROMULO, ET
AL [G.R. No. 160756, March 9, 2010]

Legislative intent relative to the minimum corporate income tax

FACTS: Petitioner, Manila Banking Corporation, was incorporated in 1961 and since
then had engaged in the commercial banking industry until 1987 when the Monetary
Board of the BangkoSentralngPilipinas (BSP) issued Resolution No. 505, pursuant to
Section 29 of Republic Act (R.A.) No. 265 (the Central Bank Act), prohibiting petitioner
from engaging in business by reason of insolvency. Thus, petitioner ceased operations
that year and its assets and liabilities were placed under the charge of a government-
appointed receiver. Meanwhile, R.A. No. 8424, otherwise known as the Comprehensive
Tax Reform Act of 1997, became effective on January 1, 1998. One of the changes
introduced by this law is the imposition of the minimum corporate income tax on
domestic and resident foreign corporations. Implementing this law is Revenue
Regulations No. 9-98 stating that the law allows a four (4) year period from the time the
corporations were registered with the Bureau of Internal Revenue (BIR) during which the
minimum corporate income tax should not be imposed. On June 23, 1999, after 12 years
since petitioner stopped its business operations, the BSP authorized it to operate as a
thrift bank. The following year, specifically on April 7, 2000, it filed with the BIR its
annual corporate income tax return and paid P33,816,164.00 for taxable year 1999.

Prior to the filing of its income tax return, petitioner sent a letter to the BIR requesting a
ruling on whether it is entitled to the four (4)-year grace period reckoned from 1999. In
other words, petitioner's position is that since it resumed operations in 1999, it will pay
its minimum corporate income tax only after four (4) years thereafter. On February 22,
2001, the BIR issued BIR Ruling No. 007-2001 stating that petitioner is entitled to the
four (4)-year grace period. Since it reopened in 1999, the minimum corporate income tax
may be imposed "not earlier than 2002, i.e. the fourth taxable year beginning 1999."

Pursuant to the above Ruling, petitioner filed with the BIR a claim for refund of the sum
of P33,816,164.00 erroneously paid as minimum corporate income tax for taxable year
1999.

ISSUE: Whether petitioner is entitled to a refund of its minimum corporate income tax
paid to the BIR for taxable year 1999.

HELD: Yes, under RR 4-95 (but NOT under RR 9-98 implementing RA 8424).

Section 27(E) of the Tax Code provides:

Sec. 27. Rates of Income Tax on Domestic Corporations. . . .

(E) Minimum Corporate Income Tax on Domestic Corporations.

(1) Imposition of Tax. A minimum corporate income tax of two percent (2%) of the
gross income as of the end of the taxable year, as defined herein, is hereby imposed on a
corporation taxable under this Title, beginning on the fourth taxable year immediately
following the year in which such corporation commenced its business operations, when
the minimum corporate income tax is greater than the tax computed under Subsection (A)
of this Section for the taxable year.

(2) Carry Forward of Excess Minimum Tax. Any excess of the minimum corporate
income tax over the normal income tax as computed under Subsection (A) of this Section
shall be carried forward and credited against the normal income tax for the three (3)
immediately succeeding taxable years.
xxxxxxxxx

On the other hand, Revenue Regulation No. 9-98 specifies the period when a corporation
becomes subject to the minimum corporate income tax, thus:

(5) Specific Rules for Determining the Period When a Corporation Becomes Subject
to the MCIT (minimum corporate income tax)

For purposes of the MCIT, the taxable year in which business operations commenced
shall be the year in which the domestic corporation registered with the Bureau of
Internal Revenue (BIR).

Firms which were registered with BIR in 1994 and earlier years shall be covered by the
MCIT beginning January 1, 1998.

The intent of Congress relative to the minimum corporate income tax is to grant a four
(4)-year suspension of tax payment to newly formed corporations. Corporations still
starting their business operations have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a surprise then when many companies
reported losses in their initial years of operations. Thus, in order to allow new
corporations to grow and develop at the initial stages of their operations, the lawmaking
body saw the need to provide a grace period of four years from their registration before
they pay their minimum corporate income tax.

Significantly, on February 23, 1995, Congress enacted R.A. No. 7906, otherwise known
as the "Thrift Banks Act of 1995." It took effect on March 18, 1995. This law provides for
the regulation of the organization and operations of thrift banks. Under Section 3, thrift
banks include savings and mortgage banks, private development banks, and stock savings
and loans associations organized under existing laws. On June 15, 1999, the BIR issued
Revenue Regulation No. 4-95 implementing certain provisions of the said R.A. No. 7906.
Section 6 provides:

Sec. 6. Period of exemption. All thrift banks created and organized under the
provisions of the Act shall be exempt from the payment of all taxes, fees, and charges of
whatever nature and description, except the corporate income tax imposed under Title II
of the NIRC and as specified in Section 2(A) of these regulations, for a period of five (5)
years from the date of commencement of operations; while for thrift banks which are
already existing and operating as of the date of effectivity of the Act (March 18, 1995),
the tax exemption shall be for a period of five (5) years reckoned from the date of such
effectivity.
For purposes of these regulations, "date of commencement of operations" shall be
understood to mean the date when the thrift bank was registered with the Securities and
Exchange Commission or the date when the Certificate of Authority to Operate was
issued by the Monetary Board of the BangkoSentralngPilipinas, whichever comes later.

Petitioner bank was registered with the BIR in 1961. However, in 1987, it was found
insolvent by the Monetary Board of the BSP and was placed under receivership. After
twelve (12) years, or on June 23, 1999, the BSP issued to it a Certificate of Authority to
Operate as a thrift bank. Earlier, or on January 21, 1999, it registered with the BIR.
Then it filed with the SEC its Articles of Incorporation which was approved on June 22,
1999.

It is clear from the above-quoted provision of Revenue Regulations No. 4-95 that the date
of commencement of operations of a thrift bank is the date it was registered with the SEC
or the date when the Certificate of Authority to Operate was issued to it by the Monetary
Board of the BSP, whichever comes later. Revenue Regulations No. 9-98, implementing
R.A. No. 8424 imposing the minimum corporate income tax on corporations, provides
that for purposes of this tax, the date when business operations commence is the year in
which the domestic corporation registered with the BIR. However, under Revenue
Regulations No. 4-95, the date of commencement of operations of thrift banks, such as
herein petitioner, is the date the particular thrift bank was registered with the SEC or the
date when the Certificate of Authority to Operate was issued to it by the Monetary Board
of the BSP, whichever comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies
to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4)
years counted from June 23, 1999 when it was authorized by the BSP to operate as a
thrift bank. Consequently, it should only pay its minimum corporate income tax after four
(4) years from 1999.

The intent of Congress relative to the minimum corporate income tax is to grant a four
(4)-year suspension of tax payment to newly formed corporations. Corporations still
starting their business operations have to stabilize their venture in order to obtain a
stronghold in the industry. It does not come as a surprise then when many companies
reported losses in their initial years of operations.

Manila Banking Corp. vs. Commissioner of Internal Revenue,

G.R. No. 168118, August 28, 2006
A thrift bank is entitled to a grace period of four years from the time it is authorized by
the BSP to operate as a thrift bank.

Revenue Regulations No. 9-98, implementing R.A. No. 8424 imposing the minimum
corporate income tax on corporations, provides that for purposes of this tax, the date
when business operations commence is the year in which the domestic corporation
registered with the BIR. However, under Revenue Regulations No. 4-95, the date of
commencement of operations of thrift banks is the date the particular thrift bank was
registered with the SEC or the date when the Certificate of Authority to Operate was
issued to it by the Monetary Board of the BSP, whichever comes later. Clearly then,
Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies to petitioner,
being a thrift bank. It is, therefore, entitled to a grace period of four (4) years counted
from June 23, 1999 when it was authorized by the BSP to operate as a thrift bank.
Consequently, it should only pay its minimum corporate income tax after four (4) years
from 1999.

Manila Banking Corp. vs. Commissioner of Internal Revenue,

G.R. No. 168118, August 28, 2006

Minimum Corporate Income Tax

It is clear from the provision of Revenue Regulations No. 4-95 that the date of
commencement of operations of a thrift bank is the date it was registered with the SEC or
the date when the Certificate of Authority to Operate was issued to it by the Monetary
Board of the BSP, whichever comes later.

Let it be stressed that Revenue Regulations No. 9-98, implementing R.A. No. 8424
imposing the minimum corporate income tax on corporations, provides that for purposes
of this tax, the date when business operations commence is the year in which the domestic
corporation registered with the BIR. However, under Revenue Regulations No. 4-95, the
date of commencement of operations of thrift banks, such as herein petitioner, is the date
the particular thrift bank was registered with the SEC or the date when the Certificate of
Authority to Operate was issued to it by the Monetary Board of the BSP, whichever
comes later.

Clearly then, Revenue Regulations No. 4-95, not Revenue Regulations No. 9-98, applies
to petitioner, being a thrift bank. It is, therefore, entitled to a grace period of four (4)
years counted from June 23, 1999 when it was authorized by the BSP to operate as a
thrift bank. Consequently, it should only pay its minimum corporate income tax after four
(4) years from 1999.
THE MANILA BANKING CORPORATION vs. COMMISSIONER OF INTERNAL
REVENUE G.R. No. 168118. August 28, 2006

Legislative intent relative to the minimum corporate income tax

FACTS: For fiscal year 2000-2001, PAL allegedly incurred zero taxable income, which
left it with unapplied creditable withholding tax. It did not pay any MCIT for the period
and requested for the refund of its unapplied creditable withholding tax for FY 2000-
2001. BIR denied the claim for refund and assessed PAL for deficiency MCIT. PAL
protested. Upon Petition for Review, the CTA Second Division ruled in favor of PAL, a
decision affirmed by the CTA en banc. Hence, this Petition for Review on Certiorari.

ISSUE: Whether PAL is liable for deficiency MCIT for FY 2000-2001.

RULING: PAL cannot be subjected to MCIT for FY 2000-2001.

First, Sec. 13 (a) of P.D. No. 1590, the franchise of PAL, refers to "basic corporate
income tax." It is already settled that the "basic corporate income tax", under this
provision relates to the general rate of 35% (reduced to 32% by the year 2000) as
stipulated in Sec. 27 (A) of the NIRC of 1997.

Second, Sec. 13 (a) of P.D. No. 1590 further provides that the basic corporate income tax
of PAL shall be based on its annual net taxable income. This is consistent with Sec. 27
(A) of the NIRC of 1997, which provides that the rate of basic corporate income tax,
which is 32% beginning 1 January 2000, shall be imposed on the taxable income of the
domestic corporation. There is an apparent distinction under the NIRC of 1997 between
taxable income, which is the basis for basic corporate income tax under Sec. 27 (A); and
gross income, which is the basis for the MCIT under Section 27 (E). The two terms have
their respective technical meanings, and cannot be used interchangeably.

Third, even if the basic corporate income tax and the MCIT are both income taxes under
Section 27 of the NIRC of 1997, and one is paid in place of the other, the two are distinct
and separate taxes. The MCIT is different from the basic corporate income tax, not just in
the rates, but also in the bases for their computation. Not being covered by Sec. 13 (a) of
P.D. No. 1590, which makes PAL liable only for basic corporate income tax, then MCIT
is included in "all other taxes" from which PAL is exempted. That, under general
circumstances, the MCIT is paid in place of the basic corporate income tax, when the
former is higher than the latter, does not mean that these two income taxes are one and
the same. The said taxes are merely paid in the alternative, giving the Government the
opportunity to collect the higher amount between the two.
Fourth, the evident intent of Sec. 13 of P.D. No. 1520 is to extend to PAL tax concessions
not ordinarily available to other domestic corporations. It permits PAL to pay whichever
is lower of the basic corporate income tax or the franchise tax; and the tax so paid shall
be in lieu of all other taxes, except only real property tax. Hence, under its franchise,
PAL is to pay the least amount of tax possible.

Fifth, as ruled in Commissioner of Internal Revenue v. PAL, G.R. No. 160528, October 9,
2006: A careful reading of Section 13 rebuts the argument of the CIR that the "in lieu of
all other taxes" proviso is a mere incentive that applies only when PAL actually pays
something. It is clear that PD 1590 intended to give respondent the option to avail itself
of Subsection (a) or (b) as consideration for its franchise. Either option excludes the
payment of other taxes and dues imposed or collected by the national or the local
government. PAL has the option to choose the alternative that results in lower taxes. It is
not the fact of tax payment that exempts it, but the exercise of its
option.COMMISSIONER OF INTERNAL REVENUE vs. PAL
[G.R. No. 180066.July 7, 2009.]

(2) Carry Forward of Excess Minimum Tax Any excess of the minimum
corporate income tax over the normal income tax as computed under Subsection
(A) of this Section shall be carried forward and credited against the normal income
tax for the three (3) immediately succeeding taxable years.

(3) Relief from the Minimum Corporate Income Tax Under Certain
ConditionsThe Secretary of Finance is hereby authorized to suspend the imposition
of the minimum corporate income tax on any corporation which suffers losses on
account of prolonged labor dispute, or because of force majeure, or because of
legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, the necessary rules and regulations that
shall define the terms and conditions under which he may suspend the imposition
of the minimum corporate income tax in a meritorious case.

(4)Gross Income Defined For purposes of applying the minimum corporate

income tax provided under Subsection (E) hereof, the term 'gross income' shall
mean gross sales less sales returns, discounts and allowances and cost of goods
sold. 'Cost of goods sold' shall include all business expenses directly incurred to
produce the merchandise to bring them to their present location and use.
For a trading or merchandising concern, 'cost of goods sold' shall include the
invoice cost of the goods sold, plus import duties, freight in transporting the goods
to the place where the goods are actually sold including insurance while the goods
are in transit.

For a manufacturing concern, 'cost of goods manufactured and sold' shall include
all costs of production of finished goods, such as raw materials used, direct labor
and manufacturing overhead, freight cost, insurance premiums and other costs
incurred to bring the raw materials to the factory or warehouse.

In the case of taxpayers engaged in the sale of service, 'gross income' means gross
receipts less sales returns, allowances, discounts and cost of services. 'Cost
ofservices' shall mean all direct costs and expenses necessarily incurred to provide
the services required by the customers and clients including (A) salaries and
employee benefits of personnel, consultants and specialists directly rendering the
service and (B) cost of facilities directly utilized in providing the service such as
depreciation or rental of equipment used and cost of supplies: Provided, however,
That in the case of banks, 'cost of services' shall include interest expense.

CASES DIGEST
Proper computation of senior citizens' discount as deduction from gross income

For purposes of reimbursement, the law states that the cost of the discount shall be
deducted from gross income, the amount of income derived from all sources before
deducting allowable expenses, which will result in net income. Here, petitioners tried to
show a loss on a per transaction basis, which should not be the case. An income
statement, showing an accounting of petitioners' sales, expenses, and net profit (or loss)
for a given period could have accurately reflected the effect of the discount on their
income. Absent any financial statement, petitioners cannot substantiate their claim that
they will be operating at a loss should they give the discount. In addition, the
computation was erroneously based on the assumption that their customers consisted
wholly of senior citizens. Lastly, the 32% tax rate is to be imposed on income, not on the
amount of the discount.

Carlos Superdrug Corp. vs. DSWD, et al., G.R. No. 166494, June 29, 2007

SECTION 28 Rates of Income Tax on Foreign Corporations

(A) Tax on Resident Foreign Corporations

(1) In General Except as otherwise provided in this Code, a corporation

organized, authorized, or existing under the laws of any foreign country, engaged
in trade or business within the Philippines, shall be subject to an income tax
equivalent to thirty-five percent (35%) of the taxable income derived in the
preceding taxable year from all sources within the Philippines: Provided, That
effective January 1, 2009, the rate of income tax shall be thirty percent (30%).

In the case of corporations adopting the fiscal-year accounting period, the taxable
income shall be computed without regard to the specific date when sales, purchases
and other transactions occur. Their income and expenses for the fiscal year shall be
deemed to have been earned and spent equally for each month of the period.

The corporate income tax rate shall be applied on the amount computed by
multiplying the number of months covered by the new rate within the fiscal year
by the taxable income of the corporation for the period, divided by twelve.

Provided, however, That a resident foreign corporation shall be granted the option
to be taxed at fifteen percent (15%) on gross income under the same conditions, as
provided in Section 27, (A).

CASES DIGEST
What constitutes "residence" of a corporation.

The same principle is recognized in American law: that the "residence of a corporation,
if it can be said to have a residence, is necessarily where it exercises corporate functions
. . ;" that it is considered as dwelling "in the place where its business is done . . ," as
being "located where its franchises are exercised . . ," and as being "present where it is
engaged in the prosecution of the corporate enterprise;" that a "foreign corporation
licensed to do business in a state is a resident of any country where it maintains an office
or agent for transaction of its usual and customary business for venue purposes;" and
that the "necessary element in its signification is locality of existence." Courts have held
that "a domestic corporation is regarded as having a residence within the state at any
place where it is engaged in the particulars of the corporate enterprise, and not only at
its chief place or home office;" that "a corporation may be domiciled in one state and
resident in another; its legal domicile in the state of its creation presents no impediment
to its residence in a real and practical sense in the state of its business activities." The
foregoing propositions are in accord with the dictionary concept of residence as applied
to juridical persons, a term which appears to comprehend permanent as well as
temporary residence.

State Investment House, Inc., et al. vs. Citibank, et al.,

G.R. Nos. 79926-27, October 17, 1991

What constitutes "doing" or "engaging in" or "transacting" business

There is no specific criterion as to what constitutes "doing" or "engaging in" or

"transacting" business. Each case must be judged in the light of its peculiar
environmental circumstances. The term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and in progressive prosecution of
commercial gain or for the purpose and object of the business organization. "In order
that a foreign corporation may be regarded as doing business within a State, there must
be continuity of conduct and intention to establish a continuous business, such as the
appointment of a local agent, and not one of a temporary character.'

Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al. , G.R. Nos.
L-65773-74, April 30, 1987

Place of activity prevails over place of business of the foreign corporation.

Business implies continuity and progression of transactions while activity may consist of
only a single transaction. An activity may occur outside the place of business. Section 24
of the Tax Code does not require a foreign corporation to engage in business in the
Philippines in subjecting its income to tax. It suffices that the activity creating the income
is performed or done in the Philippines. What is controlling, therefore, is not the place of
business but the place of activity that created an income.

The Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R. No.
L-22074, April 30, 1965

Business transactions of a foreign corporation must be continuous.

In order that a foreign corporation may be considered engaged in trade or business, its
business transactions must be continuous. A casual business activity in the Philippines by
a foreign corporation, as in the present case, does not amount to engaging in trade or
business in the Philippines for income tax purposes.
N.V. Reederij "Amsterdam", et al. vs. Commissioner of Internal Revenue, G.R. No. L-
46029, June 23, 1988

Foreign airline company selling ticket in the Philippines through local agent is
considered a resident foreign corporation doing business in the Philippines.

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets,
there can be no conclusion other than that JAL is a resident foreign corporation, doing
business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline
business, the generation of sales being the paramount objective.

Commissioner of Internal Revenue vs. Japan Air Lines, et al., G.R. No. 60714, October 4,
1991

A single corporation cannot be both a resident and a non-resident corporation.

A single corporate entity cannot be both a resident and a non-resident corporation

depending on the nature of the particular transaction involved. Accordingly, whether the
dividends are paid directly to the head office or coursed through its local branch is of no
moment for after all, the head office and the office branch constitute but one corporate
entity, the Marubeni Corporation, which, under both Philippine tax and corporate laws,
is a resident foreign corporation because it is transacting business in the Philippines.

Marubeni Corp. vs. Commissioner of Internal Revenue, et al., G.R. No.

76573, September 14, 1989

Grant of license to foreign corporation merely gives legitimacy to its doing business here.

It is not really the grant of a license to a foreign corporation to do business in this

country that makes it a resident; the license merely gives legitimacy to its doing business
here. What effectively makes such a foreign corporation a resident corporation in the
Philippines is its actually being in the Philippines and licitly doing business here.

State Investment House, Inc., et al. vs. Citibank, et al.,

G.R. Nos. 79926-27, October 17, 1991

Sec. 28 (A) (1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28 (A) (3) is an
exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision from
which it is excepted. It is a clause which exempts something from the operation of a
statute by express words." Further, "an exception need not be introduced by the words
'except' or 'unless.' An exception will be construed as such if it removes something from
the operation of a provision of law."

In the instant case, the general rule is that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines, except for resident
foreign corporations that are international carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating from the Philippines" which shall
be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international
carrier with no flights originating from the Philippines, does not fall under the exception.
As such, petitioner must fall under the general rule. This principle is embodied in the
Latin maxim, exceptiofirmatregulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule.

To reiterate, the correct interpretation of the above provisions is that, if an international

air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.

South African Airways vs. Commissioner of Internal Revenue, G.R. No. 180356,
February 16, 2010

COMMISSIONER OF INTERNAL REVENUE vs. AIR INDIA and THE COURT OF TAX
APPEALS [G.R. No. 72443. January 29, 1988.]

SYLLABUS

1. TAXATION; REVENUE DERIVED BY AN INTERNATIONAL AIRLINE, HAVING

NO LANDING RIGHTS, FROM SALES OF AIRLINE TICKETS THROUGH IT AGENT,
TAXABLE AS INCOME. Revenue derived by an international air carrier from sales of
tickets in the Philippines for air transportation, while having no landing rights in the
country, constitutes income of the said international air carrier from Philippine sources and,
accordingly, taxable under Section 24 (b) (2) of the National Internal Revenue Code as ruled
in Commissioner of Internal Revenue v. British Overseas Airways Corporation, 149 SCRA
395 (1987).

2. ID.; WILLFUL NEGLECT TO FILE REQUIRED TAX RETURN OR FRAUDULENT

INTENT TO EVADE PAYMENT OF TAXES, NOT PRESUMED. The willful neglect to file
the required tax return or the fraudulent intent to evade the payment of taxes, considering
that the same is accompanied by legal consequences, cannot be presumed. The fraud
contemplated by law is actual and not constructive. It must be intentional fraud, consisting of
deception willfully and deliberately done or resorted to in order to induce another to give up
some legal right. Negligence, whether slight or gross, is not equivalent to the fraud with
intent to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by the law. It must amount to intentional
wrongdoing with the sole object of avoiding the tax.

3. ID.; IMPOSITION OF LESSER PENALTY IN THE ABSENCE OF WILLFUL

NEGLECT TO FILE THE REQUIRED TAX RETURN. There being no cogent basis to find
willful neglect to file the required tax return on the part of the private respondent, the 50%
surcharge or fraud penalty imposed upon it is improper. Nonetheless, such failure subjects
the private respondent to a 25% penalty pursuant to Section 72 of the tax code cited earlier.
P74,203.90 constitutes the tax deficiency of the private respondent. 25% of this amount is
P37,101.95.

4. ID.; TAX DEFICIENCY; INTEREST COLLECTIBLE NOT TO EXCEED 3 YEARS.

We find the 42% interest assessed by the petitioner to be in order. At the time the tax liability
of the private respondent accrued, Section 51 (d) of the tax code, before it was amended by
Presidential Decree No. 1705 prescribed an interest rate of 14% per annum, provided that
the maximum amount that could be collected as interest on the tax deficiency will not exceed
the amount corresponding to a period of three years. Thus, the maximum interest rate then
was 42%. This maximum interest rate is applicable to the private respondent inasmuch as
the period between March 31, 1976 (the end of the fiscal year in question) and February 20,
1981 (the time when the petitioner made the assessment in question) exceeds three years.
P74,203.90 constitutes the tax deficiency of the private respondent. 42% of this amount is
P31,165.64.

5. ID.; ID.; ADDITIONAL INTEREST COLLECTIBLE NOT TO EXCEED THREE

YEARS. Pursuant to Section 51 (e) (2) of the tax code, as amended by Presidential Decree
No. 1705, the private respondent is liable to pay additional interest of 20% per annum
(computed from February 20, 1981, the date when the Commissioner sought the payment of
the tax deficiency) on the total amount unpaid. A careful reading of Section 51 (e) (2) shows
that this interest is in addition to the interest provided in Section 51 (d). This view can be
gleaned from the use of the phrase "Where a deficiency, or any interest assessed in
connection therewith under paragraph (d) of this section" in Section 51 (e) (2). The
additional interest is to be computed upon the entire amount of the tax liability (previous
interest included) which remains unpaid. This is manifested by the use of the phrase "there
shall be collected upon the unpaid amount as part of the tax" in Section 51 (e) (2). However,
the same Section provides that the maximum amount that may be collected as interest cannot
exceed the amount corresponding to a period of three years. In this case, the maximum rate
would be 60%.

6. ID.; ID.; ADDITIONAL SURCHARGE, MANDATORY. Pursuant to Section 51 (e)

(3) of the same code, as amended by the said Decree, the private respondent is likewise
liable to pay an additional surcharge of 10% (flat rate) of the total amount of tax unpaid. An
examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late payment
of the unpaid tax deficiency and/or unpaid interest assessed in connection therewith, in
addition to all other charges. This is confirmed by the use of the words "there shall be
collected in addition to the interest prescribed herein [referring to the entire Section 51 (e)]
and in paragraph (d) above [referring to Section 51 (d)]." The additional surcharge is
computed on the amount of tax unpaid, exclusive of all other impositions. This is confirmed
by the phrase "ten per centum of the amount of tax unpaid." The failure to pay the tax
deficiency within the required period of time upon demand is penalized by this additional
surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is
mandatory.

DECISION

This is a Petition which seeks the review of a Decision of the Court of Tax Appeals.

The private respondent Air India is a foreign corporation organized under the laws of India.
It is not licensed to do business in the Philippines as an international carrier. Its airplanes
do not operate within Philippine territory nor service passengers embarking from Philippine
ports. The firm is represented in the Philippines by its general sales agent, Philippine
AirLines, Inc., a corporate entity duly organized under the laws of the Philippines. Air India
sells airplane tickets in the Philippine through this agent. These tickets are serviced by Air
India airplanes outside the Philippines. In sum, Air India's status in the Philippines is that of
an off-line international carrier not engaged in the business of air transportation in the
Philippines.

The total sales of airplane tickets transacted by Philippine Air Lines, Inc. for the private
respondent during the fiscal year ending March 31, 1976 amounted to P2,968,156.00. On
account of the same, the herein petitioner Commissioner of Internal Revenue held the private
respondent liable for the payment of P142,471.68. 1 The amount represents the 2.5% income
tax on the private respondent's gross Philippine billings for the said fiscal year pursuant to
Section 24 (b) (2) of the National Internal Revenue Code, as amended, inclusive of the 50%
surcharge and interest for willful neglect to file a return as provided under Section 72 of the
same code. The computation is as follows

Gross Philippine billings P2,968,156.00

Income Tax due thereon at 2.5% 74,204.00

Add: 50% surcharge 37,102.00

14% interest per annum (42% maximum) 31,165.68

Total Amount Due and Collectible P142,471.68

From the action taken by the petitioner, the private respondent brought an Appeal to the
Court of Tax Appeals. The thrust of the Appeal is, inter alia, that the private respondent
cannot be held liable to pay the said imposition because it did not derive any income from
sources within the Philippines during the said fiscal year and that the amount of
P2,968,156.00 mentioned in the assessment made by the petitioner was derived exclusively
from sources outside the Philippines.

On the other hand, the petitioner argued that the amount of P2,968,156.00 was realized in
the Philippines and was, therefore, derived from sources within the Philippines. Petitioner
also stressed that in case of any doubt, the presumption is that the tax assessment is correct.

In its Decision dated June 27, 1985, the Court of Tax Appeals ruled in favor of the private
respondent and set aside the decision of the petitioner. The tax court likewise held that the
surcharge and interest imposed upon the private respondent are improper. The pertinent
portions of the Decision are as follows:

"Under the law, the situs of the income derived from labor or performance of service is
determined by the place where the labor is performed or the service rendered, not by the
place where payment is made (Sec. 37, Nat. Int. Rev. Code.) It follows that the situs of the
income derived by foreign international carriers from the business of air transportation is
the place where the airplane service is rendered or performed. Accordingly, to tax the
income derived by petitioner (Air India) from the transportation service rendered or
performed outside the Philippines would violate not only the National Internal Revenue Code
but also the due process clause of the Constitution.

"xxx xxx xxx

". . . we fully agree with petitioner (Air India) that it is not liable for surcharge of 50%, . . .

". . .The surcharge of 50% of the unpaid tax or deficiency tax is sought to be imposed in this
case under Section 72 of the Revenue Code which provides that the said surcharge is to be
imposed
"In case of willful neglect to file the return or list required under this Title within the time
prescribed by law, or in case a false or fraudulent return or list is willfully made . . ."

"There is no claim or pretense that herein petitioner (Air India) willfully failed to file an
income tax return for the fiscal year 1976. Neither the report of the examiner nor the
Amended Answer filed by respondent (the Commissioner) makes mention of any fact or
circumstance to prove that the failure of petitioner (Air India) to file the return was willful.
Petitioner is charged with failure to file a return.

"Willful failure to file an income tax return which justifies the imposition of the 50%
surcharge, or what is commonly called the fraud penalty, requires that the failure to file a
return was due to an intent to evade payment of tax legally due, in other words an intention
to defraud the Government of lawful revenue. Mere failure to file are turn is not in itself,
standing alone, evidence of fraud . . .(Citing Aznar v. Court of Tax Appeals, 58 SCRA 519.)

"Petitioner (Air India) can not be charged with an intention to defraud the Government
because it honestly and sincerely believes that it is not liable for the tax sought to be imposed
upon it."

Hence, this Petition for Review. The Petition is anchored on the argument that the private
respondent is liable for the imposition in question.

Complying with the instructions of this Court, the private respondent submitted its Comment
on the Petition.

After subsequent pleadings were filed by the parties, the case was deemed submitted for
decision.

We find merit in the Petition.

The principal issue raised in this Petition is whether or not the revenue derived by an
international air carrier from sales of tickets in the Philippines for air transportation, while
having no landing rights in the country, constitutes income of the said international air
carrier from Philippine sources and, accordingly, taxable under Section 24 (b) (2) of the
National Internal Revenue Code.

This issue has been settled in the affirmative in Commissioner of Internal Revenue v. British
Overseas Airways Corporation This Court, speaking, through Mme. Justice Ameurfina A.
Melencio-Herrera, held that such revenue constitutes taxable income. The pertinent portions
of the said Decision are as follows

"The Tax Code defines 'gross income' thus:

"'Gross Income' includes gains, profits, and income derived from salaries, wages or
compensation for personal service of whatever kind and in whatever form paid, or from
profession, vocations, trades, business, commerce, sales, or dealings in property, whether
real or personal, growing out of the ownership or use of or interest in such property; also
from interests, rents, dividends, securities, or the transactions of any business carried on for
gain or profit, or gains, profits, and income derived from any source whatever. . .

"The definition is broad and comprehensive to include proceeds from sales of transport
documents. 'The words income from any source whatever' disclose a legislative policy to
include all income not expressly exempted within the class of taxable income under our
laws.' Income means 'cash received or its equivalent'; it is the amount of money coming to a
person within a specific time . . . ; it means something distinct from principal or capital. For,
while capital is a fund, income is a flow. As used in our income tax law, 'income' refers to the
flow of wealth.

xxx xxx xxx

"The source of an income is the property, activity or service that produced the income. For
the source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in
the Philippines is the activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency. The situs of the source
of payments is the Philippines. The flow of wealth proceeded from, and occurred within,
Philippine territory, enjoying the protection accorded by the Philippine government. In
consideration of such protection, the flow of wealth should share the burden of supporting
the government.

xxx xxx xxx

"BOAC, however, would impress upon this Court that income derived from transportation is
income for services, with the result that the place where the services are rendered determines
the source and since BOAC's service of transportation is performed outside the Philippines,
the income derived is from sources without the Philippines and, therefore, not taxable under
income tax laws, . . .

"The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. Admittedly, BOAC was an off-line
international airline at the time pertinent to this case. The test of taxability is the 'source';
and the source of an income is that activity . . . which produced the income. Unquestionably,
the passage documentations in these cases were sold in the Philippines and the revenue
therefrom was derived from a business activity regularly pursued within the Philippines. And
even if the BOAC tickets sold covered the 'transport of passengers and cargo to and from
foreign cities,' it cannot alter the fact that income from the sale of tickets was derived from
the Philippines. The word source' conveys one essential idea, that of origin, and the origin of
the income herein is the Philippines."

Moreover, the taxable income involved in this case is for the fiscal year ending March 31,
1976. In the concurring opinion of Chief Justice Teehankee in aforesaid case he made the
following observations:

"I just wish to point out that the conflict between the majority opinion penned by Mme.
Justice Melencio-Herrera and the dissenting opinion penned by Mr. Justice Feliciano as to
the proper characterization of the taxable income derived by respondent BOAC from the
sales in the Philippines of tickets for BOAC flights as sold and issued by its general sales
agent in the Philippines has become moot after November 24, 1972. Both opinions state that
by amendment through P.D. No. 69, promulgated on November 24, 1972, of section 24 (b)(2)
of the Tax Code providing for the rate of income tax on foreign corporations, international
carriers such as respondent BOAC, have since then been taxed at a reduced rate of 2-1/2%
on their gross Philippine billings. There is, therefore, no longer any source of substantial
conflict between the two opinions as to the present 2-1/2% tax on their gross Philippine
billings charged against such international carriers as herein respondent foreign
corporation."

On the basis of the doctrine announced in British Overseas Airways Corporation, the
revenue derived by the private respondent Air India from the sales of airplane tickets
through its agent Philippine Air Lines, Inc., here in the Philippines, must be considered
taxable income. As correctly assessed by the petitioner, such income is subject to a 2.5% tax
pursuant to Presidential Decree No. 1355, amending Section 24 (b)(2) of the tax code. The
total Philippine billings of the private respondent for the taxable year in question amounts to
P2,968,156.00. 2.5% of this amount or P74,203.90 constitutes the income tax due from the
private respondent.

The tax liability of the private respondent thus settled, We come now to the propriety of the
50% surcharge and the interest imposed upon it by the Commissioner of Internal Revenue.

The 50% surcharge or fraud penalty provided in Section 72 of the National Internal Revenue
Code is imposed on a delinquent taxpayer who willfully neglects to file the required tax
return within the period prescribed by the law, or who willfully files a false or fraudulent tax
return, to wit

"Sec. 72. Surcharges for failure to render returns and for rendering false and fraudulent
returns. In case of willful neglect to file the return or list required under this Title within
the time prescribed by law, or in case a false or fraudulent return or list is willfully made,
the Commissioner of Internal Revenue shall add to the tax or to the deficiency tax, in case
any payment has been made on the basis of such return before the discovery of the falsity or
fraud, a surcharge of fifty per centum of the amount of such tax or deficiency tax. In case of
any failure to make and file a return or list within the time prescribed by law or by the
Commissioner or other internal revenue officer, not due to willful neglect, the Commissioner
of Internal Revenue shall add to the tax twenty-five per centum of its amount, except that,
when a return is voluntarily and without notice from the Commissioner or other officer filed
after such time, and it is shown that the failure to file it was due to a reasonable cause, no
such addition shall be made to the tax. The amount so added to any tax shall be collected at
the same time in the same manner and as part of the tax unless the tax has been paid before
the discovery of the neglect, falsity, or fraud, in which case the amount so added shall be
collected in the same manner as the tax."

On the other hand, the same Section provides that if the failure to file the required tax return
is not due to willful neglect, a penalty of 25% is to be added to the amount of the tax due
from the taxpayer.

We have gone through the allegations of the petitioner as well as the Memorandum
submitted by the Solicitor General on behalf of the Commissioner and on the basis of the
same. We are not convinced that the private respondent can be considered to have willfully
neglected to file the required tax return thereby warranting the imposition of the 50% fraud
penalty provided in Section 72. At the most, there is the barren claim that such failure was
fraudulent in character, without any evidence or justification for the same. The willful
neglect to file the required tax return or the fraudulent intent to evade the payment of taxes,
considering that the same is accompanied by legal consequences, cannot be presumed. At
this point, We call attention to the pronouncement of this Court in Aznar v. Court of Tax
Appeals, to wit

"The lower court's conclusion regarding the existence of fraudulent intent to evade payment
of taxes was based merely on a presumption and not on evidence establishing a willful filing
of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The
fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to give up some legal right. Negligence, whether slight or gross, is not
equivalent to the fraud with intent to evade the tax contemplated by the law. It must amount
to intentional wrongdoing with the sole object of avoiding the tax. It necessarily follows that
a mere mistake cannot be considered as fraudulent intent, and if both petitioner and
respondent Commissioner of Internal Revenue committed mistakes in making entries in the
returns and in the assessment, respectively, under the inventory method of determining tax
liability, it would be unfair to treat the mistakes of the petitioner as tainted with fraud and
those of the respondent as made in good faith."

There being no cogent basis to find willful neglect to file the required tax return on the part
of the private respondent, the 50% surcharge or fraud penalty imposed upon it is improper.
Nonetheless, such failure subjects the private respondent to a 25% penalty pursuant to
Section 72 of the tax code cited earlier. P74,203.90 constitutes the tax deficiency of the
private respondent. 25% of this amount is P37,101.95.

As for the interest which the private respondent is liable to pay, We find the 42% interest
assessed by the petitioner to be in order. At the time the tax liability of the private respondent
accrued, Section 51 (d) of the tax code, before it was amended by Presidential Decree No.
1705 prescribed an interest rate of 14% per annum, provided that the maximum amount that
could be collected as interest on the tax deficiency will not exceed the amount corresponding
to a period of three years. Thus, the maximum interest rate then was 42%. This maximum
interest rate is applicable to the private respondent inasmuch as the period between March
31, 1976 (the end of the fiscal year in question) and February 20, 1981 (the time when the
petitioner made the assessment in question) exceeds three years. P74,203.90 constitutes the
tax deficiency of the private respondent. 42% of this amount is P31,165.64.

We will now look into the propriety of the other impositions.

The petitioner prays that pursuant to Section 51 (e) (2) of the tax code, as amended by
Presidential Decree No. 1705, the private respondent is liable to pay additional interest of
20% per annum (computed from February 20, 1981, the date when the Commissioner sought
the payment of the tax deficiency) on the total amount unpaid, to wit

"(2) Deficiency. Where a deficiency, or any interest assessed in connection therewith

under paragraph (d) of this section, or any addition to the taxes provided for in Section
seventy-two of this Code is not paid in full within thirty days from the date of notice and
demand from the Commissioner of Internal Revenue, there shall be collected upon the
unpaid amount as part of the tax, interest at the rate of twenty per centum per annum from
the date of such notice and demand until it is paid: Provided, That the maximum amount that
may be collected as interest on deficiency shall in no case exceed the amount corresponding
to a period of three years, the present provisions regarding prescription to the contrary
notwithstanding."

A careful reading of Section 51 (e) (2) shows that this interest is in addition to the interest
provided in Section 51 (d). This view can be gleaned from the use of the phrase "Where a
deficiency, or any interest assessed in connection therewith under paragraph (d) of this
section" in Section 51 (e) (2). The additional interest is to be computed upon the entire
amount of the tax liability (previous interest included) which remains unpaid. This is
manifested by the use of the phrase "there shall be collected upon the unpaid amount as part
of the tax" in Section 51 (e) (2). However, the same Section provides that the maximum
amount that may be collected as interest cannot exceed the amount corresponding to a
period of three years. In this case, the maximum rate would be 60%.

The petitioner also prays that pursuant to Section 51 (e) (3) of the same code, as amended by
the said Decree, the private respondent is likewise liable to pay an additional surcharge of
10% (flat rate) of the total amount of tax unpaid to wit

"(3) Surcharge. If any amount of tax shown on the return is not paid in full on or before
the date prescribed for its payment under paragraph (a) of this Section, or any amount of
deficiency, and any interest assessed in connection therewith, is not paid in full within the
period prescribed in the assessment notice and demand required under paragraph (b) of this
Section, there shall be collected in addition to the interest prescribed herein and in
paragraph (d) above and as part of the tax a surcharge of ten per centum of the amount of
tax unpaid."

An examination of Section 51 (e)(3) reveals that this surcharge is imposed for the late
payment of the unpaid tax deficiency and/or unpaid interest assessed in connection
therewith, in addition to all other charges. This is confirmed by the use of the words "there
shall be collected in addition to the interest prescribed herein [referring to the entire Section
51 (e)] and in paragraph (d) above [referring to Section 51 (d)]." The additional surcharge
is computed on the amount of tax unpaid, exclusive of all other impositions. This is
confirmed by the phrase "ten per centum of the amount of tax unpaid." The failure to pay the
tax deficiency within the required period of time upon demand is penalized by this additional
surcharge. Upon such failure to pay, the surcharge is automatically due; its imposition is
mandatory.

Under the aforementioned provisions of the tax code, the private respondent became liable to
pay the additional interest provided in Section 51 (e) (2) and the 10% surcharge provided in
Section 51 (e) (3) thirty days after February 20, 1981, the date when the Commissioner of
Internal Revenue sought the payment of the deficiency. More than three years have passed
since and yet the account remains unsettled. Thus, the additional interest and surcharge can
be imposed on the private respondent as asserted by the petitioner. Presidential Decree No.
1705 took effect on August 1, 1980. It was, therefore, the law in effect when the additional
interest and surcharge could be legally imposed on the private respondent.

Let Us now apply the additional interest to the tax liability of the private respondent. The
income tax due from the private respondent for the taxable year ending March 31, 1976 is
P74,204.00. The 25% surcharge under Section 72 is P37,101.95. The 42% interest under
Section 51 (d) is P31,165.64. The sum of these figures is P142,471.59.

More than three years have passed since February 20, 1981. Hence, the three-year or 60%
maximum interest provided in Section 51 (e) (2) calls for application. It is computed against
the total amount unpaid by the private respondent - P142,471.59. 60% of this amount is
P85,482.95. The tax liability of the private respondent, exclusive of interest and surcharge is
P74,204.00. 10% of this amount is P7,420.40, representing the 10% surcharge provided in
Section 51 (e) (3).

In sum, the following schedule illustrates the total tax liability of the private respondent

Income Tax for Fiscal year

ending March 31, 1976 P74,204.00

Add: 25% surcharge

under Section 72 37,101.95

42% maximum interest

under Section 51 (d) 31,165.64

Total P142,471.59

Add: 60% maximum additional

interest under Presidential

Decree No. 1705 (computed

on P142,471.59) 85,482.95

Total P227,954.54

Add: 10% additional surcharge

under Presidential Decree

No. 1705 (computed on

unpaid tax of P74,204.00) P7,420.40



TOTAL TAX DUE FROM THE

PRIVATE RESPONDENT P235,374.94

Accordingly, We hold that the private respondent is liable for unpaid taxes and charges in
the total amount of Two Hundred Thirty-Five Thousand, Three Hundred Seventy-Four Pesos
and Ninety-Four Centavos (P235,374.94).

WHEREFORE, in view of the foregoing, the Decision of the Court of Tax Appeals in CTA
Case No. 3441 is hereby SET ASIDE. The private respondent Air India is hereby ordered to
pay the amount of P235,374.94 as deficiency tax, inclusive of interest and surcharges. We
make no pronouncement as to costs.

SO ORDERED.

(2) Minimum Corporate Income Tax on Resident Foreign Corporations - A

minimum corporate income tax of two percent (2%) of gross income, as
prescribed. under Section 27(E) of this Code, shall be imposed, under the same
conditions, on a resident foreign corporation taxable under paragraph (1) of this
Subsection.

BIR ISSUANCES
REVENUE REGULATIONS NO. 09-98 August 25, 1998
The Imposition of the Minimum Corporate Income Tax (MCIT) of Two (2%) percent on
Domestic Corporations and Resident Foreign Corporations
MINIMUM CORPORATE INCOME TAX (MCIT) ON RESIDENT FOREIGN
CORPORATION A minimum corporate income tax of two percent (2%) of the gross
income from sources within the Philippines is hereby imposed upon any resident foreign
corporation, beginning on the fourth (4th) taxable year (whether calendar or fiscal year,
depending on the accounting period employed) immediately following the taxable year in
which the corporation commenced its business operations, whenever the amount of the
minimum corporate income tax is greater than the normal income tax due for such year.
In computing for the minimum corporate income tax due from a resident foreign
corporation, the rules prescribed under Sec. 2.27(E) of these Regulations shall apply:
Provided, however, that only the gross income from sources within the Philippines shall
be considered for such purposes.
Exceptions The minimum corporate income tax shall only apply to resident foreign
corporations which are subject to normal income tax. Accordingly, the minimum
corporate income tax shall not apply to the following resident foreign corporations:
(a) Resident foreign corporations engaged in business as "international carrier" subject
to tax at two and one-half percent (2 %) of their "Gross Philippine Billings";
(b) Resident foreign corporations engaged in business as Offshore Banking Units (OBUs)
on their income from foreign currency transactions with local commercial banks,
including branches of foreign banks, authorized by the BangkoSentralngPilipinas (BSP)
to transact business with Offshore Banking Units (OBUs), including interest income from
foreign currency loans granted to residents of the Philippines, subject to a final income
tax at ten percent (10%) of such income; and
(c) Resident foreign corporations engaged in business as regional operating
headquarters subject to tax at ten percent (10%) of their taxable income.
(d) Firms that are taxed under a special income tax regime such as those in accordance
with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act,
respectively).
(3) International Carrier An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 %) on its 'Gross
Philippine Billings' as defined hereunder:

(a) International Air Carrier 'Gross Philippine Billings' refers to the amount of
gross revenue derived from carriage of persons, excess baggage, cargo and mail
originating from the Philippines in a continuous and uninterrupted flight,
irrespective of the place of sale or issue and the place of payment of the ticket or
passage document: Provided, That tickets revalidated, exchanged and/or indorsed
to another international airline form part of the Gross Philippine Billings if the
passenger boards a plane in a port or point in the Philippines: Provided, further,
That for a flight which originates from the Philippines, but transshipment of
passenger takes place at any port outside the Philippines on another airline, only
the aliquot portion of the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross Philippine
Billings.

CASES DIGEST
The test of taxability is the source or that activity which produced the income
The test of taxability is the "source" or that activity which produced the income. The
source of an income is the property, activity or service that produced the income. For the
source of income to be considered as coming from the Philippines, it is sufficient that the
income is derived from activity within the Philippines. The sale of tickets in the
Philippines is the activity that produces the income. The tickets exchanged hands here
and payments for fares were also made here in Philippine currency. The situs of the
source of payments is the Philippines. The flow of wealth proceeded from, and occurred
within, Philippine territory, enjoying the protection accorded by the Philippine
government. In consideration of such protection, the flow of wealth should share the
burden of supporting the government.

Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos.
L-65773-74, April 30, 1987
Commissioner of Internal Revenue vs. Air India, et al.,
G.R. No. L-72443, January 29, 1988
Commissioner of Internal Revenue vs. American Airlines, Inc., et al.,
G.R. No. 67938, December 19, 1989

CIR vs. Japan Air Lines, Inc. G.R No. 60714 October 4, 1991
South African Airways vs. CIR CTA 6760 June 09, 2005
National Dev. Co. vs. CIR G.R. No. L-53961 June 30, 1987
CIR vs. S.C. Jonhson and Sons, Inc. 309 SCRA 102

The absence of flight operations to and from the Philippines is not determinative of the
source of income or the situs of income taxation. The test of taxability is the "source";
and the source of an income is that activity which produced the income. Unquestionably,
the passage documentations were sold in the Philippines and the revenue therefrom was
derived from a business activity regularly pursued within the Philippines. And even if the
tickets sold covered the "transport of passengers and cargo to and from foreign cities," it
cannot alter the fact that income from the sale of tickets was derived from the
Philippines. The word "source" conveys one essential idea, that of origin, and the origin
of the income herein is the Philippines.
Commissioner of Internal Revenue vs. British Overseas Airways Corp., et al., G.R. Nos.
L-65773-74, April 30, 1987
Commissioner of Internal Revenue vs. Air India, et al., G.R. No. L-72443, January 29,
1988
Commissioner of Internal Revenue vs. American Airlines, Inc., et al., G.R. No. 67938,
December 19, 1989

Sec. 28 (A) (1) of the 1997 NIRC is a general rule that resident foreign corporations are
liable for 32% tax on all income from sources within the Philippines. Sec. 28 (A) (3) is an
exception to this general rule.

An exception is defined as "that which would otherwise be included in the provision from
which it is excepted. It is a clause which exempts something from the operation of a
statute by express words." Further, "an exception need not be introduced by the words
'except' or 'unless.' An exception will be construed as such if it removes something from
the operation of a provision of law."
In the instant case, the general rule is that resident foreign corporations shall be liable
for a 32% income tax on their income from within the Philippines, except for resident
foreign corporations that are international carriers that derive income "from carriage of
persons, excess baggage, cargo and mail originating from the Philippines" which shall
be taxed at 2 1/2% of their Gross Philippine Billings. Petitioner, being an international
carrier with no flights originating from the Philippines, does not fall under the exception.
As such, petitioner must fall under the general rule. This principle is embodied in the
Latin maxim, exceptiofirmatregulam in casibus non exceptis, which means, a thing not
being excepted must be regarded as coming within the purview of the general rule.

To reiterate, the correct interpretation of the above provisions is that, if an international

air carrier maintains flights to and from the Philippines, it shall be taxed at the rate of 2
1/2% of its Gross Philippine Billings, while international air carriers that do not have
flights to and from the Philippines but nonetheless earn income from other activities in
the country will be taxed at the rate of 32% of such income.
South African Airways vs. Commissioner of Internal Revenue,
G.R. No. 180356, February 16, 2010

Exemption from the general rule that resident foreign corporations are liable for 32% tax
on all income from sources within the Philippines

We point out that Sec. 28 (A) (3) (a) of the 1997 NIRC does not, in any categorical term,
exempt all international air carriers from the coverage of Sec. 28 (A) (1) of the 1997
NIRC. Certainly, had legislature's intentions been to completely exclude all international
air carriers from the application of the general rule under Sec. 28 (A) (1), it would have
used the appropriate language to do so; but the legislature did not. Thus, the logical
interpretation of such provisions is that, if Sec. 28 (A) (3) (a) is applicable to a taxpayer,
then the general rule under Sec. 28 (A) (1) would not apply. If, however, Sec. 28 (A) (3)
(a) does not apply, a resident foreign corporation, whether an international air carrier or
not, would be liable for the tax under Sec. 28 (A) (1).

South African Airways vs. Commissioner of Internal Revenue,

G.R. No. 180356, February 16, 2010

Foreign airline company selling ticket in the Philippines through local agent is
considered a resident foreign corporation doing business in the Philippines.

There being no dispute that JAL constituted PAL as local agent to sell its airline tickets,
there can be no conclusion other than that JAL is a resident foreign corporation, doing
business in the Philippines. Indeed, the sale of tickets is the very lifeblood of the airline
business, the generation of sales being the paramount objective.

Commissioner of Internal Revenue vs. Japan Air Lines, et al.,

G.R. No. 60714, October 4, 1991

BIR ISSUANCES
REVENUE REGULATIONS NO. 15-02 May 30, 2002
Revenue Regulations Governing the Imposition of Income Tax on the Gross Philippine
Billings, Other Income of International Air Carriers and Common Carrier's Tax
Pursuant to Sections 28(A)(3)(a) , 28(A)(1) , and 118 of the National Internal Revenue
Code of 1997 as well as the Manner of Claiming Deductions on Travel Expenses and
Freight Charges Incurred Pursuant to Section 34 of the Same Code.

(b) International Shipping ''Gross Philippine Billings' means gross revenue

whether for passenger, cargo or mail originating from the Philippines up to final
destination, regardless of the place of sale or payments of the passage or freight
documents.
CASES DIGESTIncome of foreign corporation engaged in transport of cargo must be
sourced from the Philippines.

A resident foreign corporation engaged in the transport of cargo is liable for taxes
depending on the amount of income it derives from sources within the Philippines. Thus,
before such a tax liability can be enforced the taxpayer must be shown to have earned
income sourced from the Philippines.

Commissioner of Internal Revenue vs. Tokyo Shipping Co. Ltd., et al.,

G.R. No. 68252, May 26, 1995

(4) Offshore Banking Units The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized by the
BangkoSentralngPilipinas (BSP), from foreign currency transactions with
nonresidents, other offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the BangkoSentralngPilipinas
(BSP) to transact business with offshore banking units shall be exempt from all
taxes except net income from such transactions as may be specified by the
Secretary of Finance, upon recommendation of the Monetary Board which shall be
subject to the regular income tax payable by banks: Provided, however, That any
interest income derived from foreign currency loans granted to residents other than
offshore banking units or local commercial banks, including local branches of
foreign banks that may be authorized by the BSP to transact business with offshore
banking units, shall be subject only to a final tax at the rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from

transactions with said offshore banking units shall be exempt from income tax.

(5) Tax on Branch Profits Remittances Any profit remitted by a branch to its
head office shall be subject to a tax of fifteen percent (15%) which shall be based
on the total profits applied or earmarked for remittance without any deduction for
the tax component thereof (except those activities which are registered with the
Philippine Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code: Provided, That
interests, dividends, rents, royalties, including remuneration for technical services,
salaries, wages, premiums, annuities, emoluments or other fixed or determinable
annual, periodic or casual gains, profits, income and capital gains received by a
foreign corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are effectively
connected with the conduct of its trade or business in the Philippines.

CASES DIGEST
Rationale for imposition of tax on branch profits remittances.

The remittance tax was conceived in an attempt to equalize the income tax burden on
foreign corporations maintaining, on the one hand, local branch offices and organizing,
on the other hand, subsidiary domestic corporations where at least a majority of all the
latter's shares of stock are owned by such foreign corporations.

Bank of America NT & SA vs. Court of Appeals, et al.,

G.R. No. 103092, July 21, 1994

Branch Profit Remittance

FACTS: Burroughs Limited, a foreign corporation authorized to engage in trade or

business in the Philippines, applied with the Central Bank for authority to remit branch
profit to its parent company abroad and paid the 15% branch profit remittance tax.
Claiming that the 15% profit remittance tax should have been computed on the basis of
the amount actually remitted and not on the amount before profit remittance tax,
Burroughs Ltd. filed a written claim for the refund or tax credit of the amount
representing alleged overpaid branch profit remittance tax. The CTA ordered to grant a
tax credit in favor of Burroughs Ltd.

Unable to obtain a reconsideration from the said decision, the CIR filed the instant
petition before the Supreme Court.

ISSUE: Is Burroughs Limited legally entitled to a refund?

RULING: The pertinent provision of the National Revenue Code is Sec. 24 (b) (2) (ii) of
the NIRC, the pertinent provision under consideration, had been interpreted by the BIR
Ruling of January 21, 1980 to mean that "the tax base upon which the 15% branch profit
remittance tax . . . shall be imposed . . . (is) the profit actually remitted abroad and not on
the total branch profits out of which the remittance is to be made." Applying the said
ruling, the claim of Burroughs Ltd. that it made an overpayment in the amount of
P172,058.90 which is the difference between the remittance tax actually paid of
P1,147,058.70 and the remittance tax that should have been paid of P974,999.89 is well-
taken. C I R vs. Burroughs Ltd., et al., G.R. No. L-66653, June 19, 1986

(6) Regional or Area Headquarters and Regional Operating Headquarters of

Multinational Companies

(a) Regional or area headquarters as defined in Section 22(DD) shall not be

subject to income tax.

(b) Regional operating headquarters as defined in Section 22(EE) shall pay a tax
of ten percent (10%) of their taxable income.

(7) Tax on Certain Incomes Received by a Resident Foreign Corporation

(a) Interest from Deposits and Yield or any other Monetary Benefit from
Deposit Substitutes, Trust Funds and Similar Arrangements and Royalties.
Interest from any currency bank deposit and yield or any other monetary benefit
from deposit substitutes and from trust funds and similar arrangements and
royalties derived from sources within the Philippines shall be subject to a final
income tax at the rate of twenty percent (20%) of such interest: Provided, however,
That interest income derived by a resident foreign corporation from a depository
bank under the expanded foreign currency deposit system shall be subject to a final
income tax at the rate of seven and one-half percent (7 1/2%) of such interest
income.

(b) Income Derived under the Expanded Foreign Currency Deposit System
Income derived by a depository bank under the expanded foreign currency deposit
system from foreign currency transactions with nonresidents, offshore banking
units in the Philippines, local commercial banks including branches of foreign
banks that may be authorized by the BangkoSentralngPilipinas (BSP) to transact
business with foreign currency deposit system units and other depository banks
under the expanded foreign currency deposit system shall be exempt from all taxes,
except net income from such transactions as may be specified by the Secretary of
Finance, upon recommendation by the Monetary Board to be subject to the regular
income tax payable by banks: Provided, however, That interest income from
foreign currency loans granted by such depository banks under said expanded
system to residents other than offshore banking units in the Philippines or other
depository banks under the expanded system shall be subject to a final tax at the
rate of ten percent (10%).

Any income of nonresidents, whether individuals or corporations, from

transactions with depository banks under the expanded system shall be exempt
from income tax.

(c) Capital Gains from Sale of Shares of Stock Not Traded in the Stock Exchange.
A final tax at the rates prescribed below is hereby imposed upon the net capital
gains realized during the taxable year from the sale, barter, exchange or other
disposition of shares of stock in a domestic corporation except shares sold or
disposed of through the stock exchange:

Not over P100,000 5%

On any amount in excess of P100,000 10%

(d) Intercorporate Dividends Dividends received by a resident foreign

corporation from a domestic corporation liable to tax under this Code shall not be
subject to tax under this Title.

(B) Tax on Nonresident Foreign Corporation

(1) In General Except as otherwise provided in this Code, a foreign
corporation not engaged in trade or business in the Philippines shall pay a tax equal
to thirty-five percent (35%) of the gross income received during each taxable year
from all sources within the Philippines, such as interests, dividends, rents,
royalties, salaries, premiums (except reinsurance premiums), annuities,
emoluments or other fixed or determinable annual, periodic or casual gains, profits
and income, and capital gains, except capital gains subject to tax under
subparagraph 5(c): Provided, That effective January 1, 2009, the rate of income tax
shall be thirty percent (30%).
REINSURANCE PREMIUMS CEDED TO FOREIGN REINSURERS CONSIDERED
INCOME FROM PHILIPPINE SOURCES; PLACE OF ACTIVITY CREATING INCOME
CONTROLLING
Reinsurance premiums on local risks ceded by domestic insurers to foreign reinsurers not
doing business in the Philippines are subject to withholding tax. Where the reinsurance
contracts show that the activities that constituted the undertaking to reinsure a domestic
insurer against losses arising from the original insurances in the Philippines were
performed in the Philippines, the reinsurance premiums are considered as coming from
sources within the Philippines and are subject to Philippine income tax.
Section 24 (now Sec 28b) of the Tax Code does not require a foreign corporation to
engage in business in the Philippines in subjecting its income to tax. It suffices that the
activity creating the income is performed or done in the Philippines. What is controlling,
therefore, is not the place of business but the place of activity that created an income.
THE PHILIPPINE GUARANTY CO., INC. vs. COMMISSIONER OF INTERNAL
REVENUE and THE COURT OF TAX APPEALS, ET AL.,

(2) Nonresident Cinematographic Film Owner, Lessor or Distributor A

cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five
percent (25%) of its gross income from all sources within the Philippines.

(3) Nonresident Owner or Lessor of Vessels Chartered by Philippine Nationals

A nonresident owner or lessor of vessels shall be subject to a tax of four and
one-half percent (4 1/2%) of gross rentals, lease or charter fees from leases or
charters to Filipino citizens or corporations, as approved by the Maritime Industry
Authority.

(4) Nonresident Owner or Lessor of Aircraft, Machineries and Other Equipment

Rentals, charters and other fees derived by a nonresident lessor of aircraft,
machineries and other equipment shall be subject to a tax of seven and one-half
percent (7 1/2%) of gross rentals or fees.

(5) Tax on Certain Incomes Received by a Nonresident Foreign Corporation

(a) Interest on Foreign Loans A final withholding tax at the rate of twenty
percent (20%) is hereby imposed on the amount of interest on foreign loans
contracted on or after August 1, 1986;

(b) Intercorporate Dividends A final withholding tax at the rate of fifteen

percent (15%) is hereby imposed on the amount of cash and/or property dividends
received from a domestic corporation, which shall be collected and paid as
provided in Section 57(A) of this Code, subject to the condition that the country in
which the nonresident foreign corporation is domiciled, shall allow a credit against
the tax due from the nonresident foreign corporation taxes deemed to have been
paid in the Philippines equivalent to twenty percent (20%), which represents the
difference between the regular income tax of thirty-five percent (35%) and the
fifteen percent (15%) tax on dividends as provided in this subparagraph: Provided,
That effective January 1, 2009, the credit against the tax due shall be equivalent to
fifteen percent (15%), which represents the difference between the regular income
tax of thirty percent (30%) and the fifteen percent(15%) tax on dividends;

(c) Capital Gains from Sale of Shares of Stock not Traded in the Stock
Exchange A final tax at the rates prescribed below is hereby imposed upon the
net capital gains realized during the taxable year from the sale, barter, exchange or
other disposition of shares of stock in a domestic corporation, except shares sold,
or disposed of through the stock exchange:

Not over P100,000 5%

On any amount in excess of P100,000 10%"

SECTION 29 Imposition of Improperly Accumulated Earnings Tax

(A) In General. In addition to other taxes imposed by this Title, there is hereby
imposed for each taxable year on the improperly accumulated taxable income of
each corporation described in Subsection B hereof, an improperly accumulated
earnings tax equal to ten percent (10%) of the improperly accumulated taxable
income.

CASES DIGEST
Tax on improper accumulation of surplus is essentially a penalty tax.

The provision discouraged tax avoidance through corporate surplus accumulation. When
corporations do not declare dividends, income taxes are not paid on the undeclared
dividends received by the shareholders. The tax on improper accumulation of surplus is
essentially a penalty tax designed to compel corporations to distribute earnings so that
the said earnings by shareholders could, in turn, be taxed.

Cyanamid Philippines, Inc. vs. Court of Appeals, et al.,

G.R. No. 108067, January 20, 2000

"Immediacy Test" may be used to determine the "reasonable needs" of the business.

To determine the "reasonable needs" of the business in order to justify an accumulation

of earnings, the Courts of the United States have invented the so-called "Immediacy Test"
which construed the words "reasonable needs of the business" to mean the immediate
needs of the business, and it was generally held that if the corporation did not prove an
immediate need for the accumulation of the earnings and profits, the accumulation was
not for the reasonable needs of the business, and the penalty tax would apply.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue,

G.R. No. L-26145, February 20, 1984

Touchstone of liability is the purpose behind the accumulation of the income and not the
consequences of the accumulation.

A prerequisite to the imposition of the tax has been that the corporation be formed or
availed of for the purpose of avoiding the income tax (or surtax) on its shareholders, or
on the shareholders of any other corporation by permitting the earnings and profits of the
corporation to accumulate instead of dividing them among or distributing them to the
shareholders. If the earnings and profits were distributed, the shareholders would be
required to pay an income tax thereon whereas, if the distribution were not made to them,
they would incur no tax in respect to the undistributed earnings and profits of the
corporation. The touchstone of liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation. Thus, if the failure to pay
dividends is due to some other cause, such as the use of undistributed earnings and
profits for the reasonable needs of the business, such purpose does not fall within the
interdiction of the statute.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No.
L-26145, February 20, 1984

Taxpayer's intention at the time of accumulation is controlling.

In order to determine whether profits are accumulated for the reasonable needs of the
business as to avoid the surtax upon shareholders, the controlling intention of the
taxpayer is that which is manifested at the time of accumulation not subsequently
declared intentions which are merely the product of afterthought. A speculative and
indefinite purpose will not suffice. The mere recognition of a future problem and the
discussion of possible and alternative solutions is not sufficient. Definiteness of plan
coupled with action taken towards its consummation are essential.

Manila Wine Merchants, Inc. vs. Commissioner of Internal Revenue, G.R. No. L-
26145, February 20, 1984

Undistributed earnings or profits of prior years are taken into consideration in

determining unreasonable accumulation for purposes of surtax.

Previous accumulations should be considered in determining unreasonable accumulation

for the year concerned. In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation, it is necessary to take
into account prior accumulations, since accumulations prior to the year involved may
have been sufficient to cover the business needs and additional accumulations during the
year involved would not reasonably be necessary

Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-
22492, September 5, 1967

(B) Tax on Corporations Subject to Improperly Accumulated Earnings Tax

(1) In General The improperly accumulated earnings tax imposed in the

preceding Section shall apply to every corporation formed or availed for the
purpose of avoiding the income tax with respect to its shareholders or the
shareholders of any other corporation by permitting earnings and profits to
accumulate instead of being divided or distributed.
(2) Exceptions The improperly accumulated earnings tax as provided for under
this Section shall not apply to:

(a) Publicly-held corporations;

(b) Banks and other nonbank financial intermediaries; and

(c) Insurance companies.

(C) Evidence of Purpose to Avoid Income Tax.

(1) Prima Facie Evidence The fact that any corporation is a mere holding
company or investment company shall be prima facie evidence of a purpose to
avoid the tax on its shareholders or members.

(2) Evidence Determinative of Purpose The fact that the earnings or profits of a
corporation are permitted to accumulate beyond the reasonable needs of the
business shall be determinative of the purpose to avoid the tax upon its
shareholders or members unless the corporation, by the clear preponderance of
evidence, shall prove to the contrary.

BIR ISSUANCES
REVENUE REGULATIONS No. 2 SECTION 19Purpose to avoid tax; evidence; burden
of proof; definitions of holding or investment company The Collector of Internal
Revenue's determination that a corporation was formed or availed of for the purpose of
avoiding the tax on its shareholders or members is subject to disproof by competent
evidence. The existence or non-existence of the purpose may be indicated by
circumstances other than the evidence specified in Section 25(b), (now Section 29c
NIRC) and whether or not such purpose was present depends upon the particular
circumstances of each case. In other words, a corporation is subject to taxation under
Section 25 ( now Section 29) if it is formed or availed of for the purpose of preventing the
imposition of the progressive rates of tax upon shareholders through the medium of
permitting earnings or profits to accumulate, even though the corporation is not a mere
holding or investment company 50 per cent or more of the outstanding stock of which is
owned directly or indirectly by one person, and does not have an unreasonable
accumulation of earnings or profits; and on the other hand, the fact that a corporation is
such a company or has an accumulation is not absolutely conclusive against it if, by clear
and convincing evidence, the taxpayer satisfies the Commissioner of Internal Revenue
that the corporation was neither formed nor availed of for the purpose of avoiding the tax
on individuals. All the other circumstances which might be construed as evidence of the
purpose to avoid the tax on shareholders cannot be outlined, but among other things the
following will be considered: (1) Dealings between the corporation and its shareholders,
such as withdrawal by the shareholders as personal loans or the expenditure of funds by
corporation for the personal benefit of the shareholders, and (2) the investment by the
corporation of undistributed earnings in assets having no reasonable connection with the
business. The mere fact that the corporation distributed a large part of its earnings for
the year in question does not necessarily prove that earnings were not permitted to
accumulate beyond reasonable needs or that the corporation was not formed or availed
of to avoid the tax upon shareholders.

If the Commissioner of Internal Revenue determined that the corporation was formed or
availed of for the purpose of avoiding the progressive rates of tax on individuals through
the medium of permitting earnings or profits to accumulate, and the taxpayer contests
such determination of fact by litigation, the burden of proving the determination wrong
by a preponderance of evidence, together with the corresponding burden of first going
forward with evidence, is on the taxpayer under principles applicable to income tax cases
generally, and this is so even though the corporation is not a mere holding or investment
company and does not have an unreasonable accumulation of earnings or profits.
However, if the corporation is a mere holding or investment company, then the law gives
further weight to the presumption of correctness already arising from the Commissioner
of Internal Revenue's determination by expressly providing an additional presumption of
the existence of a purpose to avoid the tax upon shareholders, while if earnings or profits
are permitted to accumulate beyond the reasonable needs of the business then the law
adds still more weight to the Commissioner of Internal Revenue's determination by
providing that irrespective of whether or not the corporation is a mere holding or
investment company, the existence of such an accumulation is determinative of the
purpose to avoid the tax upon shareholders unless the taxpayer proves the contrary by
such a clear preponderance of all the evidence that the absence of such a purpose is
unmistakable.

SECTION 21 Unreasonable accumulation of profits An accumulation of earnings or

profits (including the undistributed earnings or profits of prior years) is unreasonable if
it is not required for the purposes of the business, considering all the circumstances of
the case. It is not intended, however, to prevent accumulations of surplus for the
reasonable needs of the business if the purpose is not to prevent the imposition of the tax
upon shareholders. No attempt is here made to enumerate all the ways in which earnings
or profits of a corporation may be accumulated for the reasonable needs of the business.
Undistributed income is properly accumulated if retained for working capital needed by
the business; or if invested in additions to plant reasonably required by the business; or if
in accordance with contract obligations placed to the credit of a sinking fund for the
purpose of retiring bonds issued by the corporation. The nature of the investment of
earnings or profits is immaterial if they are not in fact needed in the business. Among
other things, the nature of the business, the financial condition of the corporation at the
close of the taxable year, and the use of the undistributed earnings or profits will be
considered in determining the reasonableness of the accumulations.

The business of a corporation is not merely that which it has previously carried on, but
includes in general any line of business which it may undertake. However, a radical
change of business when a considerable surplus has been accumulated may afford
evidence of a purpose to avoid the tax. If one corporation owns the stock of another
corporation in the same or a related line of business and in effect operates the other
corporation, the business of the latter may be considered in substance although not in
legal form the business of the first corporation. Earnings or profits of the first
corporation put into the second through the purchase of stock or otherwise may,
therefore, if a subsidiary relationship is established, constitute employment of the income
in its own business. Investment by a corporation of its income in stock and securities of
another corporation is not of itself to be regarded as employment of the income in its
business. The business of one corporation may not be regarded as including the business
of another unless the other corporation is a mere instrumentality of the first; to establish
this it is ordinarily essential that the first corporation own all or substantially all of the
stock of the second.

The Commissioner of Internal Revenue may require any corporation to furnish a

statement of its accumulated earnings and profits, the name and address of, and number
of share held by each of its shareholders or members, and the amounts that would be
payable to each, if the income of the corporation were distributed.

CASES DIGEST
Rationale for imposition of improperly accumulated earnings tax.

The underlying purpose of the additional tax on a corporation's improperly accumulated

profits or surplus is to avoid the situation where a corporation unduly retains its surplus
earnings instead of declaring and paying dividends to its shareholders or members who
would then have to pay the income tax due on such dividends received by them.

Commissioner of Internal Revenue vs. Ayala Securities Corp., et al.,

G.R. No. L-29485, November 21, 1980

Presumption of tax avoidance applies where corporation is a mere holding company.

The prima facie evidence and presumption set up by law is applicable where the record
shows that respondent corporation is a mere holding company of its shareholders
through its mother company, a registered co-partnership then set up by the individual
shareholders belonging to the same family

Commissioner of Internal Revenue vs. Ayala Securities Corp., et al.,

G.R. No. L-29485, November 21, 1980

(D) Improperly Accumulated Taxable Income For purposes of this Section, the
term 'improperly accumulated taxable income' means taxable income adjusted by:

(1) Income exempt from tax;

(2) Income excluded from gross income;

(3) Income subject to final tax; and

(4) The amount of net operating loss carry-over deducted;

And reduced by the sum of:

(1) Dividends actually or constructively paid; and

(2) Income tax paid for the taxable year.

Provided, however, That for corporations using the calendar year basis, the
accumulated earnings tax shall not apply on improperly accumulated income as of
December 31, 1997. In the case of corporations adopting the fiscal year accounting
period, the improperly accumulated income not subject to this tax, shall be
reckoned, as of the end of the month comprising the twelve (12)-month period of
fiscal year 1997-1998.
(E) Reasonable Needs of the Business For purposes of this Section, the term
'reasonable needs of the business' includes the reasonably anticipated needs of the
business.

SECTION 30 Exemptions from Tax on Corporations The following

organizations shall not be taxed under this Title in respect to income received by
them as such:

(A)Labor, agricultural or horticultural organization not organized principally for

profit;

(B) Mutual savings bank not having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual purposes
and without profit;

(C) A beneficiary society, order or association, operating for the exclusive benefit
of the members such as a fraternal organization operating under the lodge system,
or a mutual aid association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other benefits exclusively
to the members of such society, order, or association, or nonstock corporation or
their dependents;

(D) Cemetery company owned and operated exclusively for the benefit of its
members;

(E)Nonstock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall belong to or inure
to the benefit of any member, organizer, officer or any specific person;

CASES DIGEST
Medical, dental, hospital and veterinary services, except those rendered by professionals,
are exempt from value-added tax (Section 109 (l), NIRC of 1997, as amended). The
maintenance and operation of a pharmacy or drugstore by a hospital is a necessary and
essential service or facility rendered by any hospital for its patients. Thus, the facility of
making drugs and medicines available to in-patients of the hospital, whether for reasons
of life-threatening urgency or mere convenience, cannot but be viewed as a hospital
service that is covered by the broad and general exemption provided in Section 109 (l) of
the NIRC of 1997, as amended, for "hospital services".
C.T.A. CASE NO. 7304. December 1, 2010
PERPETUAL SUCCOUR HOSPITAL, INC. and THE SISTERS OF ST. PAUL DE
CHARTERS vs. COMMISSIONER OF INTERNAL REVENUE

CHARGING MEDICAL AND HOSPITAL FEES. The mere charging of medical and
hospital fees from those who can afford to pay does not make the institution one
established for profit or gain. The fact that a hospital charges fees for paying beds does
not make it lose its character as a charitable institution if the same were used to partly
finance the expenses of the free wards maintained by the hospital.
A corporation organized for 'charitable, educational and religious purposes; that no part
of its net income inures to the benefit of any private individual is exempted from paying
income tax; that it operates a hospital in which medical assistance is given to destitute
persons free of charge; that it maintains a pharmacy department within the premises of
said hospital, to supply drugs and medicines only to charity and paying patients confined
therein; and that only the paying patients are required to pay the medicines supplied to
them, for which they are charged the cost of medicines, plus an additional 10% thereof,
to partly offset the cost of medicines supplied free of charge to charity patients. Under
these facts, we are of the opinion, and so hold, that the Hospital may not be regarded as
engaged in 'business' by reason of said sale of medicines to its paying patients.
It has been held that the mere charging of medical and hospital fees from those who
could afford to pay, did not make the institution one established for profit or gain.

HOSPITAL DE SAN JUAN DE DIOS, INC. vs. PASAY CITY, PABLO CUNETA City
Mayor G.R. No. L-19371 February 28, 1966

Educational and Charitable Non-Profit corporation

FACTS: YMCA, a welfare, educational and charitable non-profit corporation, earned an

income from leasing out a portion of its premises to small shop owners and from parking
fees collected from non-members. The CIR issued an assessment to YMCA including
surcharge and interest, for deficiency income tax, deficiency expanded withholding taxes
on rentals and professional fees and deficiency withholding tax on wages. YMCA
formally protested the assessment but the CIR denied its claims. Contesting the denial of
its protest, the YMCA filed a petition for review at the CTA which ruled in its favor.
Dissatisfied with the CTA ruling, the CIR elevated the case to the CA. The CA initially
decided in favor of the CIR but upon motion for reconsideration by YMCA the CA
reversed itself. A denial of the CIRs motion for reconsideration prompted this petition
for review.

ISSUE: Is the income derived from rentals of real property owned by YMCA subject to
income tax under the NIRC and the Constitution?
RULING: The exemption claimed by the YMCA is expressly disallowed by the very
wording of the last paragraph of then Section 27 of the NIRC which mandates that the
income of exempt organizations (such as the YMCA) from any of their properties, real or
personal, be subject to the tax imposed by the same Code. Because the last paragraph of
said section unequivocally subjects to tax the rent income of the YMCA from its real
property, the Court is duty-bound to abide strictly by its literal meaning and to refrain
from resorting to any convoluted attempt at construction. The income from any property
of exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities conducted for profit" does not qualify the
word "properties." This makes income from the property of the organization taxable,
regardless of how that income is used whether for profit or for lofty non-profit
purposes. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of. Where the law does not
distinguish, neither should we.

For the YMCA to be granted the exemption it claims under Article XIV, Section 4, par. 3
of the Constitution, it must prove with substantial evidence that (1) it falls under the
classification non-stock, non-profit educational institution; and (2) the income it seeks to
be exempted from taxation is used actually, directly, and exclusively for educational
purposes. However, the term "educational institution," when used in laws granting tax
exemptions, refers to a ". . . school seminary, college or educational establishment . . ."
Therefore, YMCA cannot be deemed one of the educational institutions covered by the
said constitutional provision.
COMMISSIONER OF INTERNAL REVENUE vs. COURT OF APPEALS,
[G.R. No. 124043 October 14, 1998.]

BIR wins vs St. Lukes hospital ordered to pay P63.9M tax deficiency Oct 25, 2012
The Supreme Court has ordered St. Lukes Medical Center Inc. to pay the Bureau of
Internal Revenue P63.9 million in deficiency income tax, value added tax and
withholding tax on compensation for 1998, based on the 10-percent preferential income
tax as stipulated in the 1997 Tax Code.

According to BIR head revenue executive assistant Claro Ortiz, this means that all
hospitals that claim to be non-profit but are proprietary will now have to pay income tax.
In 2002, St. Luke's disputed the BIRs assessment that it should be paying income taxes,
saying that it is a non-profit hospital. The case eventually reached the Supreme Court. In
a decision penned by Associate Justice Antonio Carpio on Sept. 26 and received by the
BIR on Oct. 17, the SC reversed an earlier decision by the Court of Tax Appeals, which
dismissed the BIRs assessment. The appellate court had argued that St. Lukes was not
subject to income tax because non-stock corporations are exempt from paying income
tax.

However, the SC ruled that St. Lukes services that patients pay for are subject to income
tax.

St. Lukes Medical Center is ordered to pay the deficiency income tax in 1998 based on
the 10 percent preferential income tax rate under Section 27(B) of the National Internal
Revenue Code [NIRC]. However, it is not liable for surcharges and interest on such
deficiency income tax under Sections 248 and 249 of the NIRC, the decision stated. The
BIR claimed that St. Lukes had total revenues of P1.73 billion in 1998 alone. St. Lukes
refuted the assessment, saying that its free services to patients amounted to P218 million
in 1998.

The Supreme Court ruled that while there is no dispute that St. Lukes is organized as a
non-stock and non-profit charitable institution, this does not automatically exempt it from
paying taxes. For a charitable institution to be exempt from income taxes, Section 30(E)
of the NIRC requires that [it] must be organized and operated exclusively for charitable
purposes, the SC said in its decision.

Taxation of non-stock, non-profit hospitals

17 October 2012 by Atty. Anthony G. Prestoza / Tax Law for Business

TAXATION of non-stock, non-profit organizations had always been a controversy. There

are a number of types or classes of organizations or associations exempted from income
taxes by the Tax Code. So these types of organizations are the usual channel through
which activities are pursued if the intention is not for profit. But despite the clear
exemption from income taxes, the number of cases pursued administratively and litigated
in the courts would indicate that the taxation of these class of organizations is not that
clear after all.

Among the types of organizations exempted from income taxes are non-stock
corporations organized for charitable purposes and not for profit, but operated
exclusively for the promotion of the general welfare. For one to invoke exemption from
income tax, it must be organized as non-stock and operated for the purposes in which it
was organized. That classification itself had been an issue in the area of income taxation.
The Court had repeatedly defined what a non-stock organization is but its relevance
crops up every time a tax-related issue is involved. So what really constitutes a non-stock
corporation? Once again, the Supreme Court, in GR 195909 and 195960, September 26,
2012, referred to the definition in the Corporation Code of a non-stock corporation as
one where no part of its income is distributable as dividends to its members, trustees, or
officers and that any profit obtained as an incident to its operations shall whenever
necessary or proper, be used for the furtherance of the purpose or purposes for which the
corporation was organized.

That case involves the income taxation of a non-stock and non-profit hospital organized
for charitable and for social welfare purposes. The institution claims that it is exempt
from income taxation under Section 30 of the Tax Code, which exempts this kind of
institution from income taxation. The tax authority, on the other hand, claims that it
should be subject to income tax under Section 27(B) of the Tax Code, which imposes 10-
percent income tax on proprietary and nonprofit hospitals. As decided by the Court, a
non-stock, non-profit corporation is indeed exempt from income taxation. That
exemption, however, is intended solely for the activities of a non-stock, non-profit entity
which are operated exclusively for charitable or social welfare purposes. Any other
income that may be generated by these entities shall be subject to the 10-percent
preferential tax rate the tax imposed on proprietary non-profit hospitals.

Apparently, according to the Court, proprietary means private, and when applied to
a hospital means private hospital. On the other hand, non-profit means no net income
or asset accrues to or benefits any member or person, with all net income or asset
devoted to the institutions purposes and all its activities conducted not for profit.

Thus, if a hospital not organized for profit, generates income not in relation to its
charitable or social welfare purposes, it shall be taxed at the preferential rate of 10
percent. Simply put, even if a hospital does not distribute income to its members or
trustees and uses the income proceeds from non-related activities in furtherance of its
purposes, the same shall still be taxable at a rate of 10 percent.

The implication of this is that a non-stock, non-profit organization, including a hospital,

organized for charitable and/or for purposes of promoting the general welfare is not
subject to income tax. The exemption, however, extends only to the activities pursued
exclusively for such purposes, that is, not-for-profit activities. That exemption is not lost
even if said entity involves itself in activities conducted for profit. But these revenues
derived from profit- generating activities will be subject to income tax. With respect to
hospitals, that income tax shall not be the regular income tax rate of 30 percent but the
special income tax rate of 10 percent imposed on proprietary and nonprofit hospitals.
(F) Business league, chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stockholder or individual;

(G) Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare;

(H) A nonstock and nonprofit educational institution;

(I) Government educational institution;

(J) Farmers' or other mutual typhoon or fire insurance company, mutual ditch or
irrigation company, mutual or cooperative telephone company, or like organization
of a purely local character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of meeting its
expenses; and

(K) Farmers', fruit growers', or like association organized and operated as a sales
agent for the purpose of marketing the products of its members and turning back to
them the proceeds of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them;

Notwithstanding the provisions in the preceding paragraphs, the income of

whatever kind and character of the foregoing organizations from any of their
properties, real or personal, or from any of their activities conducted for
profitregardless of the disposition made of such income, shall be subject to tax
imposed under this Code.

BIR ISSUANCES
REVENUE MEMORANDUM CIRCULAR NO. 76-03 November 14, 2003

Tax Exemptions of Non-Stock, Non-Profit Corporations under Section 30, Tax Code of
1997 and Non-stock, Non-Profit Educational Institutions under Paragraph 3, Section 4,
Article XIV of the Constitution

The exemption of non-stock, non-profit educational institutions refers to internal revenue

taxes imposed by the National Government on all revenues and assets used actually,
directly and exclusively for educational purposes (Paragraph 3, Section 4, Article XIV of
the Constitution).
Furthermore, revenues derived from assets used in the operation of cafeterias/canteens
and bookstores are exempt from taxation provided they are owned and operated by the
educational institution as ancillary activities and the same are located within the school
premises.

Pursuant to Section 109(m) of the Tax Code of 1997, private educational institutions
shall be exempt from value-added tax provided they are accredited as such either by the
Department of Education, Culture and Sports or by the Commission on Higher
Education. However, this exemption does not extend to their other activities involving
sale of goods and services.

However, they shall be subject to internal revenue taxes on income from trade, business
or other activity, the conduct of which is not related to the exercise or performance by
such educational institutions of their educational purposes or functions (Sec. 2, Finance
Department Order No. 137-87 as amended by Finance Department Order No. 92-88) i. e.
rental payment from their building/premises.

REVENUE REGULATIONS NO. 14-07 December 11, 2007

Tax on Non-governmental Organizations (NGOs) and Cooperatives Engaged in

Microfinance Activities

Tax Treatment of Microfinance Services Rendered by Non-governmental Organizations

All NGOs falling under the enumeration of Section 30 of the Tax Code of 1997, as
amended, are exempt from income taxes, in respect of income received by them as such.
However, income of such NGOs from microfinance activities, and which are not in
respect of their registered activities covered by Section 30 of the Tax Code of 1997,
regardless of the disposition made of such income, shall be subject to tax under the Tax
Code of 1997, as amended.

Similarly, non-stock, non-profit NGOs, whether or not engaged in microfinance

activities, are still also required to file withholding tax returns and remit withholding
taxes on all income payments that are subject to withholding as specified in Revenue
Memorandum Circular No. 76-2003.

CASES DIGEST

TAX EXEMPTION OF PROPERTIES ACTUALLY, DIRECTLY AND _

EXCLUSIVELY USED FOR RELIGIOUS, CHARITABLE AND EDUCATIONAL
PURPOSES
FACTS: The petitioner Lung Center of the Philippines is a non-stock and non-profit
entity established on January 16, 1981 by virtue of Presidential Decree No. 1823. It is the
registered owner of a parcel of land located at Quezon Avenue, Quezon City. Erected in
the middle of the aforesaid lot is a hospital known as the Lung Center of the Philippines.
A big space at the ground floor is being leased to private parties, for canteen and small
store spaces, and to medical or professional practitioners who use the same as their
private clinics for their patients whom they charge for their professional services. Almost
one-half of the entire area on the left side of the building along Quezon Avenue is vacant
and idle, while a big portion on the right side, at the corner of Quezon Avenue and
Elliptical Road, is being leased for commercial purposes to a private enterprise known as
the Elliptical Orchids and Garden Center.

The petitioner accepts paying and non-paying patients. It also renders medical services
to out-patients, both paying and non-paying. Aside from its income from paying patients,
the petitioner receives annual subsidies from the government. On June 7, 1993, both the
land and the hospital building of the petitioner were assessed for real property taxes by
the City Assessor of Quezon City.

Petitioner filed a Claim for Exemption from real property taxes with the City Assessor,
predicated on its claim that it is a charitable institution. Petitioner contends that under
Section 28, paragraph 3 of the 1987 Constitution, the property is exempt from real
property taxes. It averred that a minimum of 60% of its hospital beds are exclusively used
for charity patients and that the major thrust of its hospital operation is to serve charity
patients. It argues that it is a charitable institution and, as such, exempt from real
property taxes.

ISSUES:

1. Whether the petitioner is a charitable institution within the context of Presidential

Decree No. 1823 and the 1973 and 1987 Constitutions and Section 234(b) of Republic
Act No. 7160.

2. Whether the real properties of petitioner are exempt from real property taxes.

HELD:

1. Yes.

To determine whether an enterprise is a charitable institution/entity or not, the elements

which should be considered include the statute creating the enterprise, its corporate
purposes, its constitution and by-laws, the methods of administration, the nature of the
actual work performed, the character of the services rendered, the indefiniteness of the
beneficiaries, and the use and occupation of the properties.

Under P.D. No. 1823, the petitioner is a non-profit and non-stock corporation which,
subject to the provisions of the decree, is to be administered by the Office of the President
of the Philippines with the Ministry of Health and the Ministry of Human Settlements. It
was organized for the welfare and benefit of the Filipino people principally to help
combat the high incidence of lung and pulmonary diseases in the Philippines.

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution. (Congregational Sunday School, etc. v. Board of
Review; Lutheran Hospital Association of South Dakota v. Baker)

Under P.D. No. 1823, the petitioner is entitled to receive donations. The petitioner does
not lose its character as a charitable institution simply because the gift or donation is in
the form of subsidies granted by the government. (Yorgason v. County Board of
Equalization of Salt Lake County)

In this case, the petitioner adduced substantial evidence that it spent its income,
including the subsidies from the government for 1991 and 1992 for its patients and for
the operation of the hospital. It even incurred a net loss in 1991 and 1992 from its
operations.

2. Notwithstanding the finding that petitioner is a charitable institution, those

portions of its real property that are leased to private entities are not exempt from real
property taxes as these are not actually, directly and exclusively used for charitable
purposes.

The settled rule is that laws granting exemption from tax are construed strictissimijuris
against the taxpayer and liberally in favor of the taxing power. Taxation is the rule and
exemption is the exception. The effect of an exemption is equivalent to an appropriation.
Hence, a claim for exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. (Salvation Army v. Hoehn)
Section 2 of Presidential Decree No. 1823, relied upon by the petitioner, specifically
provides that petitioner shall enjoy tax exemptions and privileges. However, it is plain as
day that under the decree, petitioner does not enjoy any property tax exemption
privileges for its real properties as well as the building constructed thereon. If the
intentions were otherwise, the same should have been among the enumeration of tax
exempt privileges under Section 2.

It is a settled rule of statutory construction that the express mention of one person, thing,
or consequence implies the exclusion of all others. The rule is expressed in the familiar
maxim, expressiouniusestexclusioalterius.

The tax exemption under Section 28(3), Article VI of the 1987 Philippine Constitution
covers property taxes only. As Chief Justice Hilario G. Davide, Jr., then a member of the
1986 Constitutional Commission, explained: ". . . what is exempted is not the institution
itself . . .; those exempted from real estate taxes are lands, buildings and improvements
actually, directly and exclusively used for religious, charitable or educational purposes."

Consequently, the constitutional provision is implemented by Section 234(b) of Republic

Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

(Note the following substantial changes in the Constitution: Under the 1935 Constitution,
". . . all lands, buildings, and improvements used 'exclusively' for charitable . . .
purposes shall be exempt from taxation." However, under the 1973 and the present
Constitutions, for "lands, buildings, and improvements" of the charitable institution to be
considered exempt, the same should not only be "exclusively" used for charitable
purposes; it is required that such property be used "actually" and "directly" for such
purposes.)

Under the 1973 and 1987 Constitutions and Rep. Act No. 7160 in order to be entitled to
the exemption, the petitioner is burdened to prove, by clear and unequivocal proof, that
(a) it is a charitable institution; and (b) its real properties are ACTUALLY, DIRECTLY
and EXCLUSIVELY used for charitable purposes. "Exclusive" is defined as possessed
and enjoyed to the exclusion of others; debarred from participation or enjoyment; and
"exclusively" is defined, "in a manner to exclude; as enjoying a privilege exclusively." If
real property is used for one or more commercial purposes, it is not exclusively used for
the exempted purposes but is subject to taxation. The words "dominant use" or "principal
use" cannot be substituted for the words "used exclusively" without doing violence to the
Constitutions and the law. Solely is synonymous with exclusively.
What is meant by actual, direct and exclusive use of the property for charitable purposes
is the direct and immediate and actual application of the property itself to the purposes
for which the charitable institution is organized. It is not the use of the income from the
real property that is determinative of whether the property is used for tax-exempt
purposes.

The petitioner failed to discharge its burden to prove that the entirety of its real property
is actually, directly and exclusively used for charitable purposes. While portions of the
hospital are used for the treatment of patients and the dispensation of medical services to
them, whether paying or non-paying, other portions thereof are being leased to private
individuals for their clinics and a canteen. Further, a portion of the land is being leased
to a private individual for her business enterprise under the business name "Elliptical
Orchids and Garden Center." Indeed, the petitioner's evidence shows that it collected
P1,136,483.45 as rentals in 1991 and P1,679,999.28 for 1992 from the said lessees.

Accordingly, the portions of the land leased to private entities as well as those parts of
the hospital leased to private individuals are not exempt from such taxes. On the other
hand, the portions of the land occupied by the hospital and portions of the hospital used
for its patients, whether paying or non-paying, are exempt from real property taxes.
LUNG CENTER OF THE PHILIPPINES vs. QUEZON CITY and CONSTANTINO P.
ROSAS, as City Assessor of Quezon City [G.R. No. 144104. June 29, 2004.]

Construction of last paragraph of Sec. 30 NIRC

Income derived from its property by a tax exempt organization is not absolutely taxable.
Taken in solitude, a word or phrase such as, in this case, "the income of whatever kind
and character . . . from any of their properties" might easily convey a meaning quite
different from the one actually intended and evident when a word or phrase is considered
with those with which it is associated. It is a rule in statutory construction that every part
of the statute must be interpreted with reference to the context, that every part of the
statute must be considered together with the other parts and kept subservient to the
general intent of the whole enactment. A close reading of the last paragraph of Sec. 27 of
the National Internal Revenue Code, in relation to the whole section on tax exemption of
the organizations enumerated therein, shows that the phrase "conducted for profit" in the
last paragraph of Sec. 27 qualifies, limits and describes "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" in order to make such income taxable. It is the
exception to Sec. 27 pars. (g) and (h) providing for the tax exemptions of the income of
said organizations. Hence, if such income from property or any other property is not
conducted for profit, then it is not taxable.
Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998

Income from any property of exempt organizations is taxable.

A reading of the last paragraph ineludibly shows that the income from any property of
exempt organizations, as well as that arising from any activity it conducts for profit, is
taxable. The phrase "any of their activities conducted for profit" does not qualify the
word "properties." This makes income from the property of a non-profit organization
taxable, regardless of how that income is used whether for profit or for lofty non-profit
purposes. The law does not make a distinction. The rental income is taxable regardless of
whence such income is derived and how it is used or disposed of.

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998

Definition of "income"

The word "income" which is derived from property, real or personal, provided in the last
paragraph of Sec. 27 means the amount of money coming to a person or corporation
within a specified time as profit from investment; the return in money from one's business
or capital invested. Income from property also means gains and profits derived from the
sale or other disposition of capital assets; the money which any person or corporation
periodically receives either as profits from business, or as returns from investments. The
word "income" as used in tax statutes is to be taken in its ordinary sense as gain or
profit.

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998

YMCA is exempt from payment of property tax but not income tax on its property rentals.

What is exempted is not the institution itself . . .; those exempted from real estate taxes
are lands, buildings and improvements actually, directly and exclusively used for
religious, charitable or educational purposes YMCA is exempt from the payment of
property tax, but not income tax on the rentals from its property.

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998

Definition of "educational institution"

The term "educational institution" or "institution of learning" refers to schools. The
school system is synonymous with formal education, which "refers to the hierarchically
structured and chronologically graded learnings organized and provided by the formal
school system and for which certification is required in order for the learner to progress
through the grades or move to the higher levels." Even non-formal education is
understood to be school-based and "private auspices such as foundations and civic-
spirited organizations" are ruled out. It is settled that the term "educational institution,"
when used in laws granting tax exemptions, refers to a ". . . school seminary, college or
educational establishment . . ."

Commissioner of Internal Revenue vs. Court of Appeals, et al., G.R. No. 124043, October
14, 1998

CHAPTER V Computation of Taxable Income

SECTION 31 Taxable Income Defined The term 'taxable income' means

the pertinent items of gross income specified in this 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.

CASES DIGEST
Taxable Income Defined

Taxable income is defined under Section 31 of the NIRC of 1997 as the pertinent items of
gross income specified in the said Code, less the deductions and/or personal and
additional exemptions, if any, authorized for such types of income by the same Code or
other special laws. The gross income, referred to in Section 31, is described in Section 32
of the NIRC of 1997 as income from whatever source, including compensation for
services; the conduct of trade or business or the exercise of profession; dealings in
property; interests; rents; royalties; dividends; annuities; prizes and winnings; pensions;
and a partner's distributive share in the net income of a general professional partnership.

Commissioner of Internal Revenue vs. PAL, Inc., G.R. No. 180066, July 7, 2009

CHAPTER VI Computation of Gross Income

SECTION 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;

CASES DIGEST
Gross Income: Gains derived from dealings in property

The tax consequences arising from gains from a sale of property are not to be determined
solely by the means employed to transfer legal title.

Generally, a sale or exchange of assets will have an income tax incidence only when it is
consummated. The incidence of taxation depends upon the substance of a transaction.
The tax consequences arising from gains from a sale of property are not finally to be
determined solely by the means employed to transfer legal title. Rather, the transaction
must be viewed as a whole, and each step from the commencement of negotiations to the
consummation of the sale is relevant. A sale by one person cannot be transformed for tax
purposes into a sale by another by using the latter as a conduit through which to pass
title. To permit the true nature of the transaction to be disguised by mere formalisms,
which exist solely to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.

Commissioner of Internal Revenue vs. The Estate of Benigno P. Toda, Jr., et al., G.R. No.
147188, September 14, 2004

(4) Interests;

(5) Rents;

(6) Royalties;

(7) Dividends;

(8) Annuities;
(9) Prizes and winnings;

(10) Pensions; and

(11) Partner's distributive share from the net income of the general professional
partnership.

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

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

(2) Amount Received by Insured as Return of Premium. The amount received

by the insured, as a return of premiums paid by him under life insurance,
endowment, or annuity contracts, either during the term or at the maturity of the
term mentioned in the contract or upon surrender of the contract.

(3) Gifts, Bequests, and Devises. The value of property acquired by gift,
bequest, devise, or descent: Provided, however, That income from such property,
as well as gift, bequest, devise, or descent of income from any property, in cases of
transfers of divided interest, shall be included in gross income.

(4) Compensation for Injuries or Sickness. Amounts received, through Accident

or Health Insurance or under Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any damages received, whether
by suit or agreement, on account of such injuries or sickness.

(5) Income Exempt under Treaty. Income of any kind, to the extent required by
any treaty obligation binding upon the Government of the Philippines.

(6) Retirement Benefits, Pensions, Gratuities, etc.

(a) Retirement benefits received under Republic Act No. 7641 and those received
by officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer:
Provided, That the retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age at the
time of his retirement: Provided, further, That the benefits granted under this
subparagraph shall be availed of by an official or employee only once. For
purposes of this Subsection, the term 'reasonable private benefit plan' means a
pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for
the benefit of some or all of his officials or employees, wherein contributions are
made by such employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the fund
thus accumulated, and wherein it is provided in said plan that at no time shall any
part of the corpus or income of the fund be used for, or be diverted to, any purpose
other than for the exclusive benefit of the said officials and employees.

CASES DIGEST
Retirement Benefits, Pensions, Gratuities, etc; Elements for exemption of retirement
benefits from withholding tax

Under the NIRC, the retirement benefits of respondents are part of their gross income
subject to taxes. For the retirement benefits to be exempt from the withholding tax, the
taxpayer is burdened to prove the concurrence of the following elements: (1) a
reasonable private benefit plan is maintained by the employer; (2) the retiring official or
employee has been in the service of the same employer for at least 10 years; (3) the
retiring official or employee is not less than 50 years of age at the time of his retirement;
and (4) the benefit had been availed of only once.

Ma. Isabel T. Santos vs. Servier Phil., Inc., et al.,

G.R. No. 166377, November 28, 2008

Intercontinental Broadcasting Corp. vs. Noemi B. Amarilla, et al.,

G.R. No. 162775, October 27, 2006

(b) Any amount received by an official or employee or by his heirs from the
employer as a consequence of separation of such official or employee from the
service of the employer because of death, sickness or other physical disability or
for any cause beyond the control of the said official or employee.

CASES DIGEST

RETIREMENT BENEFITS
FACTS: Petitioner PLDT terminated in 1995 the employment of several rank-and-file,
supervisory, and executive employees due to redundancy. In compliance with labor law
requirements, PLDT paid those separated employees separation pay and other benefits
but deducted from the separation pay withholding taxes in the total amount of
P23,707,909.20 which it remitted to the BIR. PLDT filed with the BIR a claim for tax
credit or refund of the P23,707,909.20, invoking Section 28 (b) (7) (B) ( now sec 32B6b )
of the 1977 National Internal Revenue Code which excluded from gross income [a]ny
amount received by an official or employee or by his heirs from the employer as a
consequence of separation of such official or employee from the service of the employer
due to death, sickness or other physical disability or for any cause beyond the control of
the said official or employee.

The CTA denied PLDT's claim on the ground that it "failed to sufficiently prove that the
terminated employees received separation pay and that taxes were withheld therefrom
and remitted to the BIR. PLDT filed a Motion for New Trial/Reconsideration, praying for
an opportunity to present the receipts and quitclaims executed by the employees and
prove that they received their separation pay. The CTA denied PLDT's motion. PLDT
thus filed a Petition for Review before the Court of Appeals which dismissed the same.
Hence, this petition.

ISSUE: PLDT faulted the appellate court to have committed grave abuse of discretion:

(a) When it held that proof of payment of separation pay to the employees is required in
order to avail of refund of taxes erroneously paid to the Bureau of Internal Revenue.

(b) When it held that petitioner failed to establish that petitioner's employees received
their separation pay.

(c) In disregarding the certification/report of SGV & Co., which certified that petitioner
is entitled to a refund of the amount of P6,679,167.72.

(d) In not ordering a new trial to allow petitioner to present additional evidence in
support thereof.

HELD: The Supreme Court denied the petition.

PLDT must prove that the employees received the income payments as part of gross
income and the fact of withholding. The CTA found that PLDT failed to establish that the
redundant employees actually received separation pay and that it withheld taxes
therefrom and remitted the same to the BIR. This finding was affirmed by the CA. While
SGV certified that it had "been able to trace the remittance of the withheld taxes
summarized in the C[ash] S[alary] V[ouchers] to the Monthly Remittance Return of
Income Taxes Withheld for the appropriate period covered by the final payment made to
the concerned executives, supervisors, and rank and file staff members of PLDT," the
same cannot be appreciated in PLDT's favor as the courts cannot verify such claim.
While the records of the case contain the Alphabetical List of Employee from Whom
Taxes Were Withheld for the year 1995 and the Monthly Remittance Returns of Income
Taxes Withheld for December 1995, the documents from which SGV "traced" the former
to the latter have not been presented. Failure to present these documents is fatal to
PLDT's case under CTA Circular 1-95.

On the denial of PLDT's motion for new trial, the Court held that newly discovered
evidence as a basis of a motion for new trial should be supported by affidavits of the
witnesses by whom such evidence is expected to be given, or by duly authenticated
documents which are proposed to be introduced in evidence. And the grant or denial of a
new trial is, generally speaking, addressed to the sound discretion of the court which
cannot be interfered with unless a clear abuse thereof is shown. PLDT has not shown any
such abuse, however.

The affirmance by the appellate court of the CTA's denial of PLDT's motion for new trial
on the ground of "newly discovered evidence," is in order. At all events, the alleged
"newly discovered evidence" that PLDT seeks to offer does not suffice to establish its
claim for refund, as it would still have to comply with Revenue Regulation 6-85 by
proving that the redundant employees, on whose behalf it filed the claim for refund,
declared the separation pay received as part of their gross income.Philippine Long
Distance Telephone Company vs. Commissioner of Internal Revenue, G.R. No. 157264,
January 31, 2008

BIR ISSUANCES

REVENUE MEMORANDUM ORDER NO. 25-91 July 18, 1991

Guidelines for the determination of the tax treatment of Separation Benefits received by
officials and employees on account of their separation from the service of government
and private entities due to sickness or other physical disability.

It has come to the attention of this Office that officials/employees of government and
private entities who resign/retire from their service of the employers allegedly for
reasons of ill-health or sickness, submit medical certification from their physicians in
order to avail of the tax exemption of their separation benefits, pursuant to Section 28 (b)
7 (B) of the National Internal Revenue Code. As to whether or not the certification issued
by attending physician truly reflects the seriousness of the disease suffered by the
employee concerned, and in order to erase doubts on the representation that the retiring
or resigning official or employee is actually suffering from any disease, such that to
continue working would be detrimental to his life, the following guidelines are hereby set
to facilitate the processing of the request.

Pursuant to Section 28 (b) 7 (B) of the National Internal Revenue Code, as amended, any
amount received by an official or employee or by his heirs from the employer (whether
government or private) as a consequence of separation by such official or employee from
the service of the employer, due to death, sickness or other physical disability, or for any
cause beyond the control of said official or employee is exempt from taxes regardless of
age or length of service.

In order to facilitate the processing of requests for tax exemption of separation benefits
received by officials and employees as a result of their separation from the service of
their employers due to health reasons, the following documents are required to be
submitted to the Legislative, Ruling & Research Division to support such requests:

1. Sworn Affidavits to be executed by the Employer's physician and the Head of

Office/Entity, attesting to the fact that the retiring/separated official or employee is
suffering from a serious illness that affects the performance of his duties and endangers
his life, if he continues working; and

2. Clinical Record of the employee/official concerned indicating the history of illness

and initial diagnosis; and

3. Laboratory examination confirming the illness suffered by such employee/official.

Submission of the foregoing documents shall be without prejudice to further medical

examination as may be necessary, to be conducted by the BIR Medical Officers in the
National Office, and/or by specialists of identified government hospitals on the official or
employee concerned, if he lives in Metro Manila; or by the Medical Officers of the
Government Service and Insurance System or the Social Security System, as the case may
be, in the Regional Office nearest to his residence, if outside Metro Manila.

(c) The provisions of any existing law to the contrary notwithstanding, social
security benefits, retirement gratuities, pensions and other similar benefits received
by resident or nonresident citizens of the Philippines or aliens who come to reside
permanently in the Philippines from foreign government agencies and other
institutions, private or public.
(d) Payments of benefits due or to become due to any person residing in the
Philippines under the laws of the United States administered by the United States
Veterans Administration.

(e) Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of Republic Act No. 8282.

(f) Benefits received from the GSIS under Republic Act No. 8291, including
retirement gratuity received by government officials and employees.

(7) Miscellaneous Items

(a) Income Derived by Foreign Government Income derived from investments

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

(b) Income Derived by the Government or its Political Subdivisions Income

derived from any public utility or from the exercise of any essential governmental
function accruing to the Government of the Philippines or to any political
subdivision thereof.

(c) 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.

(d) Prizes and Awards in Sports Competition All prizes and awards granted to
athletes in local and international sports competitions and tournaments whether
held in the Philippines or abroad and sanctioned by their national sports
associations.
(e) 13th Month Pay and Other Benefits Gross benefits received by officials and
employees of public and private entities: Provided, however, That the total
exclusion under this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:

(i) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;

(ii) Benefits received by employees pursuant to Presidential Decree No. 851, as

amended by Memorandum Order No. 28, dated August 13, 1986;

(iii) Benefits received by officials and employees not covered by Presidential

Decree No. 851, as amended by Memorandum Order No. 28, dated August 13,
1986; and

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

(f) GSIS, SSS, Medicare and Other Contributions - GSIS, SSS, Medicare andPag-
Ibig contributions, and union dues of individuals.

(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness
Gains realized from the sale or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund Gains realized by the
investor upon redemption of shares of stock in a mutual fund company as defined
in Section 22(BB) of this Code.

BIR ISSUANCES
REVENUE REGULATIONS NO. 002-11 March 1, 2011
Filing of Income Tax Return and/or Annual Information Return by Individuals, Including
Estates and Trusts shall include in the Account Information Return (AIR) such income
subject to final withholding tax and those exclusions from gross income.
SECTION 33 Special Treatment of Fringe Benefit

(A) Imposition of Tax A final tax of thirty-four percent (34%) effective January
1, 1998; thirty-three percent (33%) effective January 1, 1999; and thirty-two
percent (32%) effective January 1, 2000 and thereafter, is hereby imposed on the
grossed-up monetary value of fringe benefit furnished or granted to the employee
(except rank and file employees as defined herein) by the employer, whether an
individual or a corporation (unless the fringe benefit is required by the nature of, or
necessary to the trade, business or profession of the employer, or when the fringe
benefit is for the convenience or advantage of the employer). The tax herein
imposed is payable by the employer which tax shall be paid in the same manner as
provided for under Section 57(A) of this Code. The grossed-up monetary value of
the fringe benefit shall be determined by dividing the actual monetary value of the
fringe benefit by sixty-six percent (66%) effective January 1, 1998; sixty-seven
percent (67%) effective January 1, 1999; and sixty-eight percent (68%) effective
January 1, 2000 and thereafter: Provided, however, That fringe benefit furnished to
employees and taxable under Subsections (B), (C), (D) and (E) of Section 25 shall
be taxed at the applicable rates imposed thereat: Provided, further, That the
grossed-up value of the fringe benefit shall be determined by dividing the actual
monetary value of the fringe benefit by the difference between one hundred
percent (100%) and the applicable rates of income tax under Subsections (B), (C),
(D) and (E) of Section 25.

(B) Fringe Benefit Defined For purposes of this Section, the term 'fringe benefit'
means any good, service or other benefit furnished or granted in cash or in kind by
an employer to an individual employee (except rank and file employees as defined
herein) such as, but not limited to, the following:

(1) Housing;

(2) Expense account;

(3) Vehicle of any kind;

(4) Household personnel, such as maid, driver and others;

(5) Interest on loan at less than market rate to the extent of the difference between
the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the employer for the
employee in social and athletic clubs or other similar organizations;

(7) Expenses for foreign travel;

(8) Holiday and vacation expenses;

(9) Educational assistance to the employee or his dependents; and

(10) Life or health insurance and other non-life insurance premiums or similar
amounts in excess of what the law allows.

(C) Fringe Benefits Not Taxable. The following fringe benefits are not taxable
under this Section:

(1) Fringe benefits which are authorized and exempted from tax under special
laws;

(2) Contributions of the employer for the benefit of the employee to retirement,
insurance and hospitalization benefit plans;

(3) Benefits given to the rank and file employees, whether granted under a
collective bargaining agreement or not; and

(4) De minimis benefits as defined in the rules and regulations to be promulgated

by the Secretary of Finance, upon recommendation of the Commissioner.

The Secretary of Finance is hereby authorized to promulgate, upon

recommendation of the Commissioner, such rules and regulations as are necessary
to carry out efficiently and fairly the provisions of this Section, taking into account
the peculiar nature and special need of the trade, business or profession of the
employer.

BIR ISSUANCES
Revenue Memorandum Circular 41-09 July 23, 2009
In the case of Philippine Appliance Corporation vs. Laguesma, 226 SCRA 730 (1993),
the Supreme Court held that a "managerial employee" is one who is vested with powers
or prerogatives to lay down and execute management policies and/or to hire, execute
management policies and/or to hire, transfer, suspend, lay-off, recall, discharge, assign
or discipline employees. The test of "managerial status" depends on whether a person
possesses authority to act in the interest of his employer and whether such authority is
not merely routinary or clerical in nature, but requires the use of independent judgment.
Where such recommendatory powers are subject to evaluation, review and final action by
the department heads and other higher executives of the company, the person having
such recommendatory powers is not a managerial employee. The fact that his work
description is either manager or supervisor is of no moment considering that it is the
nature of his functions and not the said nomenclature of title which determines his status.
To be a managerial employee, the following elements must concur: (1) his primary duty
consists of performance of work directly related to management policies; (2) he
customarily and regularly exercises discretion and independent judgment in the
performance of his functions; (3) he regularly and directly assists in the management of
the establishment; and (4) he does not devote 20% of his time to work other than those
above prescribed. The test is whether the position requires use of independent judgment.
The employees are not managerial employees if they only execute approved and
established policies, leaving little or no discretion at all whether to implement said
policies or not. Villuga vs. NLRC, 225 SCRA 537

REVENUE REGULATIONS NO. 03-98May 21, 1998

Implementing Section 33 of the National Internal Revenue Code, as Amended by

Republic Act No. 8424 Relative to the Special Treatment of Fringe Benefits

SPECIAL TREATMENT OF FRINGE BENEFITS

(A) Imposition of Fringe Benefits Tax A final withholding tax is hereby imposed on
the grossed-up monetary value of fringe benefit furnished, granted or paid by the
employer to the employee, except rank and file employees as defined in these
Regulations, whether such employer is an individual, professional partnership or a
corporation, regardless of whether the corporation is taxable or not, or the government
and its instrumentalities except when: (1) the fringe benefit is required by the nature of or
necessary to the trade, business or profession of the employer; or (2) when the fringe
benefit is for the convenience or advantage of the employer. The fringe benefit tax shall
be imposed at the following rates:

Effective January 1, 1998 - 34%

Effective January 1, 1999 - 33%

Effective January 1, 2000 - 32%

The tax imposed under Sec. 33 of the Code shall be treated as a final income tax on the
employee which shall be withheld and paid by the employer on a calendar quarterly basis
as provided under Sec. 57 (A) (Withholding of Final Tax on certain Incomes) and Sec. 58
A (Quarterly Returns and Payments of Taxes Withheld) of the Code.

The grossed-up monetary value of the fringe benefit shall be determined by dividing the
monetary value of the fringe benefit by the following percentages and in accordance with
the following schedule:

Effective January 1, 1998 - 66%

Effective January 1, 1999 - 67%

Effective January 1, 2000 - 68%

The grossed-up monetary value of the fringe benefit represents the whole amount of
income realized by the employee which includes the net amount of money or net monetary
value of property which has been received plus the amount of fringe benefit tax thereon
otherwise due from the employee but paid by the employer for and in behalf of his
employee

REVENUE REGULATIONS NO. 005-11 March 16, 2011

Updated De Minimis Benefits

The following shall be considered as "de minimis" benefits not subject to income tax as
well as withholding tax on compensation income of both managerial and rank and file
employees:

(a) Monetized unused vacation leave credits of private employees not exceeding ten
(10) days during the year;

(b) Monetized value of vacation and sick leave credits paid to government officials
and employees;

(c) Medical cash allowance to dependents of employees, not exceeding P750 per
employee per semester or P125 per month;

(d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not
more than P1,500;

(e) Uniform and Clothing allowance not exceeding P4,000 per annum;
(f) Actual medical assistance, e.g., medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity assistance, and routine
consultations, not exceeding P10,000.00 per annum;

(g) Laundry allowance not exceeding P300 per month;

(h) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;

(i) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000 per employee per annum;

(j) Daily meal allowance for overtime work and night/graveyard shift not exceeding
twenty-five percent (25%) of the basic minimum wage on a per region basis;

All other benefits given by employers which are not included in the above enumeration
shall not be considered as "de minimis" benefits, and hence, shall be subject to income
tax as well as withholding tax on compensation income.

REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. The following income payments

are exempted from the requirements of withholding tax on compensation:

XXX XXXXXX

XXX XXXXXX

Facilities and privileges of relatively small value Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on
purchases), otherwise known as "de minimis benefits," furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to
not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%)
of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the
'de minimis' benefits over their respective ceilings prescribed by these regulations shall
be considered as part of 'other benefits' and the employee receiving it will be subject to
tax only on the excess over the P30,000.00 ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as "de
minimis" benefits or fringe benefits, shall constitute as deductible expense upon such
employer.

Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.

CHAPTER VII Allowable Deductions

SECTION 34 Deductions from Gross Income Except for taxpayers

earning compensation income arising from personal services rendered under an
employer-employee relationship where no deductions shall be allowed under this
Section other than under Subsection (M) hereof, in computing taxable income
subject to income tax under Sections 24(A); 25(A); 26; 27(A), (B) and (C); and
28(A)(1), there shall be allowed the following deductions from gross income:

(A) Expenses

(1) Ordinary and Necessary Trade, Business or Professional Expenses

(a) In General. There shall be allowed as deduction from gross income all the
ordinary and necessary expenses paid or incurred during the taxable year in
carrying on or which are directly attributable to, the development, management,
operation and/or conduct of the trade, business or exercise of a profession,
including:

(i) A reasonable allowance for salaries, wages, and other forms of

compensation for personal services actually rendered, including the grossed-up
monetary value of fringe benefit furnished or granted by the employer to the
employee: Provided, That the final tax imposed under Section 33 hereof has been
paid;
(ii) A reasonable allowance for travel expenses, here and abroad, while away
from home in the pursuit of trade, business or profession;

(iii) A reasonable allowance for rentals and/or other payments which are required
as a condition for the continued use or possession, for purposes of the trade,
business or profession, of property to which the taxpayer has not taken or is not
taking title or in which he has no equity other than that of a lessee, user or
possessor;

(iv) A reasonable allowance for entertainment, amusement and recreation

expenses during the taxable year, that are directly connected to the development,
management and operation of the trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the conduct of his or its trade,
business or exercise of a profession not to exceed such ceilings as the Secretary of
Finance may, by rules and regulations prescribe, upon recommendation of the
Commissioner, taking into account the needs as well as the special circumstances,
nature and character of the industry, trade, business, or profession of the taxpayer:
Provided, That any expense incurred for entertainment, amusement or recreation
that is contrary to law, morals, public policy or public order shall in no case be
allowed as a deduction.

(b) Substantiation Requirements. No deduction from gross income shall be

allowed under Subsection (A) hereof unless the taxpayer shall substantiate with
sufficient evidence, such as official receipts or other adequate records: (i) the
amount of the expense being deducted, and (ii) the direct connection or relation of
the expense being deducted to the, development, management, operation and/or
conduct of the trade, business or profession of the taxpayer.

CASES DIGEST
Guiding principles in determining "ordinary and necessary" expenses.

This Court has never attempted to define with precision the terms "ordinary and
necessary." There are however, certain guiding principles worthy of serious
consideration in the proper adjudication of conflicting claims. Ordinarily, an expense
will be considered "necessary" where the expenditure is appropriate and helpful in the
development of the taxpayers business. It is "ordinary" when it connotes a payment which
is normal in relation to the business of the taxpayer and the surrounding circumstances.
The term "ordinary" does not require that the payments be habitual or normal in the
sense that the same taxpayer will have to make them often; the payment may be unique or
non-recurring to the particular taxpayer affected.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Intention of taxpayer may be the controlling factor in determining deductibility of

ordinary and necessary expenditures.

There is no hard and fast rule on the right to a deduction which depends in each case on
the particular facts and the relation of the payment to the type of business in which the
taxpayer is engaged. The intention of the taxpayer often may be the controlling fact in
making the determination. Assuming that the expenditure is ordinary and necessary in
the operation of the taxpayer's business, the answer to the question as to whether the
expenditure is an allowable deduction as a business expense must be determined from the
nature of the expenditure itself, which in turn depends on the extent and permanency of
the work accomplished by the expenditure.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Expenses incurred by charitable institution for handling its dividends and interests are
not deductible as business expenses.

As the principle of allocating expenses is grounded on the premise that the taxable
income was derived from carrying on a trade or business, as distinguished from mere
receipt of interests and dividends from ones investments, said income should not share in
the allocation of administrative expenses. Thus, expenses incurred by a charitable
institution for handling its funds or income consisting solely of dividends and interests,
are not expenses incurred in "carrying on any trade or business," hence, not deductible
as business or administrative expenses.

Hospital de San Juan de Dios, Inc. vs. Commissioner of Internal Revenue,

G.R. No. 31305, May 10, 1990

What constitutes capital expenditures

Expenses relating to recapitalization and reorganization of the corporation, the cost of

obtaining stock subscription, promotions expenses and commission of fees paid for the
sale of stock reorganization are capital expenditures.
Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Questions in determining deductibility of compensation of corporate officers

Whenever a controversy arises on the deductibility, for purposes of income tax, of certain
items for alleged compensation of officers of the taxpayer, two (2) questions become
material, namely: (a) Have 'personal services been actually rendered' by said officers?
(b) In the affirmative case, what is the 'reasonable allowance' thereof?

Alhambra Cigar & Cigarette Manufacturing Company vs. Commissioner of Internal

Revenue, G.R. No. L-23226, November 28, 1967

Compensation to directors without relation to actual services cannot be regarded as

ordinary and necessary expenses.

The extraordinary and unusual amounts paid by the taxpayer to its directors in the guise
and form of compensation for their supposed services as such, without any relation to the
measure of their actual services, cannot be regarded as ordinary and necessary expenses
within the meaning of the law. This posture is in line with the doctrine in the law of
taxation that the taxpayer must show that its claimed deductions clearly come within the
language of the law since allowances, like exemptions, are matters of legislative grace.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Improper payments of royalty are not deductible as legitimate business expenses.

Although the Tax Code allows payments of royalty to be deducted from gross income as
business expenses, it is CB Circular No. 393 that defines what royalty payments are
proper. Improper payments of royalty are not deductible as legitimate business expenses.

3M Philippines, Inc. vs. Commissioner of Internal Revenue, G.R. No. 82833, September
26, 1988

Conditions for deductibility of business expense

The statutory test of deductibility requires that to be deductible as a business expense,

three conditions are imposed, namely: (1) the expense must be ordinary and necessary,
(2) it must be paid or incurred within the taxable year, and (3) it must be paid or
incurred in carrying on a trade or business. In addition, not only must the taxpayer meet
the business test, he must substantially prove by evidence or records the deductions
claimed under the law, otherwise, the same will be disallowed. The mere allegation of the
taxpayer that an item of expense is ordinary and necessary does not justify its deduction.

Esso Standard Eastern, Inc. vs. Commissioner of Internal Revenue, G.R. Nos. 28508-9,
July 7, 1989

Requisites for deductibility of advertising expense.

To be deductible from gross income, advertising expense must comply with the following
requisites: (a) the expense must be ordinary and necessary; (b) it must have been paid or
incurred during the taxable year; (c) it must have been paid or incurred in carrying on
the trade or business of the taxpayer; and (d) it must be supported by receipts, records or
other pertinent papers.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672,
April 24, 2003

Factors to consider in determining the reasonableness of an advertising expense

There is yet to be a clear-cut criteria or fixed test for determining the reasonableness of
an advertising expense. There being no hard and fast rule on the matter, the right to a
deduction depends on a number of factors such as but not limited to: the type and size of
business in which the taxpayer is engaged; the volume and amount of its net earnings;
the nature of the expenditure itself; the intention of the taxpayer and the general
economic conditions. It is the interplay of these, among other factors and properly
weighed, that will yield a proper evaluation.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672,
April 24, 2003

Two kinds of advertising.

Advertising is generally of two kinds: (1) advertising to stimulate the current sale of
merchandise or use of services and (2) advertising designed to stimulate the future sale of
merchandise or use of services. The second type involves expenditures incurred, in whole
or in part, to create or maintain some form of goodwill for the taxpayer's trade or
business or for the industry or profession of which the taxpayer is a member. If the
expenditures are for the advertising of the first kind, then, except as to the question of the
reasonableness of amount, there is no doubt such expenditures are deductible as business
expenses. If, however, the expenditures are for advertising of the second kind, then
normally they should be spread out over a reasonable period of time.
Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R. No. 143672,
April 24, 2003

Protection of brand franchise is akin to acquisition of capital assets and therefore not
business expense.

The protection of brand franchise is analogous to the maintenance of goodwill or title to

one's property. This is a capital expenditure which should be spread out over a
reasonable period of time. Respondent corporation's venture to protect its brand
franchise was tantamount to efforts to establish a reputation. This was akin to the
acquisition of capital assets and therefore expenses related thereto were not to be
considered as business expenses but as capital expenditures.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc.,

G.R. No. 143672, April 24, 2003

To be considered ordinary, an expense must be reasonable in amount.

True, it is the taxpayer's prerogative to determine the amount of advertising expenses it

will incur and where to apply them. Said prerogative, however, is subject to certain
considerations. The first relates to the extent to which the expenditures are actually
capital outlays; this necessitates an inquiry into the nature or purpose of such
expenditures. The second, which must be applied in harmony with the first, relates to
whether the expenditures are ordinary and necessary. Concomitantly, for an expense to
be considered ordinary, it must be reasonable in amount.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc. G.R.

No. 143672, April 24, 2003

Conditions for deductibility of employee bonuses

It is a general rule that bonuses to employees made in good faith and as additional
compensation for the services actually rendered by the employees are deductible,
provided such payments, when added to the stipulated salaries, do not exceed a
reasonable compensation for the services rendered. The conditions precedent to the
deduction of bonuses to employees are: (1) the payment of the bonuses is in fact
compensation; (2) it must be for personal services actually rendered; and (3) the
bonuses, when added to the salaries, are 'reasonable . . . when measured by the amount
and quality of the services performed with relation to the business of the particular
taxpayer'
C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue,
G.R. No. L-24059, November 28, 1969

Factors in determining reasonableness of bonus as compensation

There is no fixed test for determining the reasonableness of a given bonus as

compensation. This depends upon many factors, one of them being 'the amount and
quality of the services performed with relation to the business.' Other tests suggested are:
payment must be 'made in good faith'; 'the character of the taxpayer's business, the
volume and amount of its net earnings, its locality, the type and extent of the services
rendered, the salary policy of the corporation'; 'the size of the particular business'; 'the
employees' qualifications and contributions to the business venture'; and 'general
economic conditions'. However, 'in determining whether the particular salary or
compensation payment is reasonable, the situation must be considered as a whole.
Ordinarily, no single factor is decisive. . . . it is important to keep in mind that it seldom
happens that the application of one test can give satisfactory answer, and that ordinarily
it is the interplay of several factors, properly weighted for the particular case, which
must furnish the final answer."

C. M. Hoskins & Co., Inc. vs. Commissioner of Internal Revenue,

G.R. No. L-24059, November 28, 1969

Tax deductions must also be strictly construed.

It is a governing principle in taxation that tax exemptions must be construed in

strictissimijuris against the taxpayer and liberally in favor of the taxing authority; and he
who claims an exemption must be able to justify his claim by the clearest grant of organic
or statute law. An exemption from the common burden cannot be permitted to exist upon
vague implications. Deductions for income tax purposes partake of the nature of tax
exemptions; hence, if tax exemptions are strictly construed, then deductions must also be
strictly construed.

Commissioner of Internal Revenue vs. General Foods (Phils.), Inc., G.R.

No. 143672, April 24, 2003

Expenses to establish reputation are capital expenditures.

An expense incurred to create a favorable image of the corporation in order to gain or

maintain the publics and its stockholders patronage, does not make it deductible as
business expense. Efforts to establish reputation are akin to acquisition of capital assets
and, therefore, expenses related thereto are not business expense but capital
expenditures.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Listing fee is an ordinary and necessary business expense.

A listing fee is an ordinary and necessary business expense for the privilege of having its
stock listed.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

Litigation expenses incurred in defense or protection of title are capital in nature and not
deductible.

It is well settled that litigation expenses incurred in defense or protection of title are
capital in nature and not deductible, likewise, it was ruled by the U.S. Tax Court that
expenditures in defense of title property constitute a part of the cost of the property, are
not deductible as expense.

Atlas Consolidated Mining &Devt. Corp. vs. Commissioner of Internal Revenue, G.R. No.
L-26911, January 27, 1981

BIR ISSUANCES

REVENUE REGULATIONS NO. 10-02 July 10, 2002

Implementing the Provisions of Section 34(A)(1)(a)(iv) of the Tax Code of 1997,

Authorizing the Imposition of a Ceiling on "Entertainment, Amusement and Recreational
Expenses" claimed by individual taxpayers engaged in business or in the practice of their
profession and of domestic or resident foreign corporations, to arrive at the taxable
income subject to income tax under Sections 24(A); 25(A)(1); 26; 27(A), (B) and (C);
28(A)(1); 28(A)(6)(b) and Section 61 , of the Tax Code of 1997.

These regulations shall cover entertainment, amusement and recreation expenses of the
following taxpayers:

a. Individuals engaged in business, including taxable estates and trusts;

b. Individuals engaged in the practice of profession;
c. Domestic corporations;
d. Resident foreign corporations;
e. General professional partnerships, including its members.
"Entertainment, Amusement and Recreation Expenses" includes representation expenses
and/or depreciation or rental expense relating to entertainment facilities, as described
below.

The term "Representation Expenses" shall refer to expenses incurred by a taxpayer in

connection with the conduct of his trade, business or exercise of profession, in
entertaining, providing amusement and recreation to, or meeting with, a guest or guests
at a dining place, place of amusement, country club, theater, concert, play, sporting
event, and similar events or places. For purposes of these Regulations, representation
expenses shall not refer to fixed representation allowances that are subject to
withholding tax on wages pursuant to appropriate revenue regulations. CSAaDE

In the case particularly of a country, golf, sports club, or any other similar club where
the employee or officer of the taxpayer is the registered member and the expenses
incurred in relation thereto are paid for by the taxpayer, there shall be a presumption
that such expenses are fringe benefits subject to fringe benefits tax unless the taxpayer
can prove that these are actually representation expenses. For purposes of proving that
said expense is a representation expense and not fringe benefits, the taxpayer should
maintain receipts and adequate records that indicate the (a) amount of expense (b) date
and place of expense (c) purpose of expense (d) professional or business relationship of
expense (e) name of person and company entertained with contact details.

The term "Entertainment Facilities" shall refer to (1) a yacht, vacation home or
condominium; and (2) any similar item of real or personal property used by the taxpayer
primarily for the entertainment, amusement, or recreation of guests or employees. To be
considered an entertainment facility, such yacht, vacation home or condominium, or item
of real or personal property must be owned or form part of the taxpayer's trade, business
or profession, or rented by such taxpayer, for which the taxpayer claims a depreciation
or rental expense. A yacht shall be considered an entertainment facility under these
Regulations if its use is in fact not restricted to specified officers or employees or
positions in such a manner as to make the same a fringe benefit for purposes of imposing
the fringe benefits tax.

The term "Guests" shall mean persons or entities with which the taxpayer has direct
business relations, such as but not limited to, clients/customers or prospective
clients/customers. The term shall not include employees, officers, partners, directors,
stockholders, or trustees of the taxpayer.
Exclusions The following expenses are not considered entertainment, amusement and
recreation expenses as defined under Section 2 hereof.

a. Expenses which are treated as compensation or fringe benefits for services

rendered under an employer-employee relationship, pursuant to Revenue Regulations 2-
98 , 3-98 and amendments thereto;
b. Expenses for charitable or fund raising events;
c. Expenses for bonafide business meeting of stockholders, partners or directors;
d. Expenses for attending or sponsoring an employee to a business league or
professional organization meeting;
e. Expenses for events organized for promotion, marketing and advertising including
concerts, conferences, seminars, workshops, conventions, and other similar events;
f. Other expenses of a similar nature.
Notwithstanding the foregoing, such items of exclusions may, nonetheless, qualify as
items of deduction under Section 34 of the Tax Code of 1997, subject to conditions for
deductibility stated therein.

Requisites of Deductibility of "Entertainment, Amusement and Recreation Expense".

The following are the requisites for deductibility of entertainment, amusement and
recreation expense as defined above subject to the ceiling prescribed under Section 5 of
these Regulations:

a. It must be paid or incurred during the taxable year;

b. It must be: (i) directly connected to the development, management and operation
of the trade, business or profession of the taxpayer; or (ii) directly related to or in
furtherance of the conduct of his or its trade, business or exercise of a profession;
c. It must not be contrary to law, morals, good customs, public policy or public
order;
d. It must not have been paid, directly or indirectly, to an official or employee of the
national government, or any local government unit, or of any government-owned or
controlled corporation (GOCC), or of a foreign government, or to a private individual,
or corporation, or general professional partnership (GPP), or a similar entity, if it
constitutes a bribe, kickback or other similar payment;
e. It must be duly substantiated by adequate proof. The official receipts, or invoices,
or bills or statements of accounts should be in the name of the taxpayer claiming the
deduction; and
f. The appropriate amount of withholding tax, if applicable, should have been
withheld therefrom and paid to the Bureau of Internal Revenue.
SECTION 5. Ceiling on Entertainment, Amusement, and Recreation Expense. There
shall be allowed a deduction from gross income for entertainment, amusement and
recreation expense, as defined in Section 2 of these Regulations, in an amount equivalent
to the actual entertainment, amusement and recreation expense paid or incurred within
the taxable year by the taxpayer, but in no case shall such deduction exceed 0.50 percent
(%) of net sales (i.e., gross sales less sales returns/allowances and sales discounts) for
taxpayers engaged in sale of goods or properties; or 1.00 percent (%) of net revenue
(i.e., gross revenue less discounts) for taxpayers engaged in sale of services, including
exercise of profession and use or lease of properties. However, if the taxpayer is deriving
income from both sale of goods/properties and services, the allowable entertainment,
amusement and recreation expense shall in all cases be determined based on an
apportionment formula taking into consideration the percentage of the net sales/net
revenue to the total net sales/net revenue, but which in no case shall exceed the maximum
percentage ceiling provided in these Regulations.

(c) Bribes, Kickbacks and Other Similar Payments No deduction from gross
income shall be allowed under Subsection (A) hereof for any payment made,
directly or indirectly, to an official or employee of the national government, or to
an official or employee of any local government unit, or to an official or employee
of a government-owned or -controlled corporation, or to an official or employee or
representative of a foreign government, or to a private corporation, general
professional partnership, or a similar entity, if the payment constitutes a bribe or
kickback.

(2) Expenses Allowable to Private Educational Institutions In addition to the

expenses allowable as deductions under this Chapter, a private educational
institution, referred to under Section 27(B) of this Code, may at its option elect
either: (a) to deduct expenditures otherwise considered as capital outlays of
depreciable assets incurred during the taxable year for the expansion of school
facilities, or (b) to deduct allowance for depreciation thereof under Subsection (F)
hereof.

(B) Interest

(1) In General The amount of interest paid or incurred within a taxable year
on indebtedness in connection with the taxpayer's profession, trade or business
shall be allowed as deduction from gross income: Provided, however, That the
taxpayer's otherwise allowable deduction for interest expense shall be reduced by
forty-two percent (42%) of the interest income subjected to final tax: Provided,
That effective January 1, 2009, the percentage shall be thirty-three percent (33%).

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%) beginning January 1, 2000.

(2) Exceptions. No deduction shall be allowed in respect of interest under the

succeeding subparagraphs:

(a) If within the taxable year an individual taxpayer reporting income on the cash
basis incurs an indebtedness on which an interest is paid in advance through
discount or otherwise: Provided, That such interest shall be allowed as a deduction
in the year the indebtedness is paid: Provided, further, That if the indebtedness is
payable in periodic amortizations, the amount of interest which corresponds to the
amount of the principal amortized or paid during the year shall be allowed as
deduction in such taxable year;

(b) If both the taxpayer and the person to whom the payment has been made or is
to be made are persons specified under Section 36(B); or

(c) If the indebtedness is incurred to finance petroleum exploration.

(3) Optional Treatment of Interest Expense. At the option of the taxpayer,

interest incurred to acquire property used in trade, business or exercise of a
profession may be allowed as a deduction or treated as a capital expenditure.

CASES DIGESTS
Interest paid for late payment of tax is deductible from gross income.

The term "indebtedness" as used in the Tax Code of the United States has been defined as
an unconditional and legally enforceable obligation for the payment of money. Within the
meaning of that definition, it is apparent that a tax may be considered an indebtedness. It
follows that the interest paid for the late payment of donor's tax is deductible from
taxpayers gross income.

Commissioner of Internal Revenue vs. Consuelo L. vda.dePrieto,

G.R. No. L-13912, September 30, 1960

Definition of "theoretical interest"

"Theoretical interest" refers to interest "calculated" or computed (and not incurred or

paid) for the purpose of determining the "opportunity cost" of investing funds in a given
business. Such "theoretical" or imputed interest does not arise from a legally demandable
interest-bearing obligation incurred by the taxpayer who however wishes to find out, e.g.,
whether he would have been better off by lending out his funds and earning interest
rather than investing such funds in his business.

Paper Industries Corp. of the Phil. vs. Court of Appeals, et al.,

G.R. Nos. 106949-50, December 1, 1995

"Carrying charges" may be capitalized or deducted from gross income at the option of
taxpayer

The "carrying charges" which may be capitalized under the U.S. Internal Revenue Code
include, interest on a loan "(but not theoretical funds)." Such "carrying charges" may, at
the election of the taxpayer, either be (a) capitalized in which case the cost basis of the
capital assets, e.g., machinery and equipment, will be adjusted by adding the amount of
such interest payments or, alternatively, be (b) deducted from gross income of the
taxpayer. Should the taxpayer elect to deduct the interest payments against its gross
income, the taxpayer cannot at the same time capitalize the interest payments.In other
words, the taxpayer is not entitled to both the deduction from gross income and the
adjusted (increased) basis for determining gain or loss and the allowable depreciation
charge. The U.S. Internal Revenue Code does not prohibit the deduction of interest on a
loan obtained for purchasing machinery and equipment against gross income, unless the
taxpayer has also or previously capitalized the same interest payments and thereby
adjusted the cost basis of such assets. prem08cd

Paper Industries Corp. of the Phil. vs. Court of Appeals, et al.,

G.R. Nos. 106949-50, December 1, 1995

BIR ISSUANCES

REVENUE REGULATIONS NO. 13-00 November 20, 2000

Implementing Section 34(B) of the Tax Code of 1997 on the Requirements for
Deductibility of Interest Expense from the Gross Income of a Taxpayer for deductibility
of interest expense from the gross income of a corporation or an individual engaged in
trade, business or in the practice of profession.

Requisites for Deductibility of Interest Expense. In general, subject to certain

limitations, the following are the requisites for the deductibility of interest expense from
gross income, viz:
(a) There must be an indebtedness;
(b) There should be an interest expense paid or incurred upon such indebtedness;
(c) The indebtedness must be that of the taxpayer,
(d) The indebtedness must be connected with the taxpayer's trade, business or
exercise of profession;
(e) The interest expense must have been paid or incurred during the taxable year;
(f) The interest must have been stipulated in writing;
(g) The interest must be legally due;
(h) The interest payment arrangement must not be between related taxpayers as
mandated in Sec. 34(B)(2)(b), in relation to Sec. 36(B), both of the Tax Code of 1997 ;
(i) The interest must not be incurred to finance petroleum operations; and
(j) In case of interest incurred to acquire property used in trade, business or exercise
of profession, the same was not treated as a capital expenditure.
Rules on the Deductibility of Interest Expense.

(a) General Rule. In general, the amount of interest expense paid or incurred
within a taxable year on indebtedness in connection with the taxpayer's trade, business or
exercise of profession shall be allowed as a deduction from the taxpayer's gross income.

(b) Limitation. The amount of interest expense paid or incurred by a taxpayer in

connection with his trade, business or exercise of a profession from an existing
indebtedness shall be reduced by an amount equal to the following percentages of the
interest income earned which had been subjected to final withholding tax depending on
the year when the interest income was earned, viz:

Forty-one percent (41%) beginning January 1, 1998;

Thirty-nine percent (39%) beginning January 1, 1999; and

Thirty-eight percent (38%).beginning January 1, 2000 and thereafter.

This limitation shall apply regardless of whether or not a tax arbitrage scheme was
entered into by the taxpayer or regardless of the date when the interest bearing loan and
the date when the investment was made for as long as, during the taxable year, there is
an interest expense incurred on one side and an interest income earned on the other side,
which interest income had been subjected to final withholding tax. This rule shall be
observed irrespective of the currency the loan was contracted and/or in whatever
currency the investments or deposits were made.

(C)Taxes
(1) In General Taxes paid or incurred within the taxable year in connection with
the taxpayer's profession, trade or business, shall be allowed as deduction, except:

(a) The income tax provided for under this Title;

(b) Income taxes imposed by authority of any foreign country; but this deduction
shall be allowed in the case of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph (3) of this Subsection
(relating to credits for taxes of foreign countries);

(c) Estate and donor's taxes; and

(d) Taxes assessed against local benefits of a kind tending to increase the value of
the property assessed.

Provided, That taxes allowed under this Subsection, when refunded or credited,
shall be included as part of gross income in the year of receipt to the extent of the
income tax benefit of said deduction.

(2) Limitations on Deductions In the case of a nonresident alien individual

engaged in trade or business in the Philippines and a resident foreign corporation,
the deductions for taxes provided in paragraph (1) of this Subsection (C) shall be
allowed only if and to the extent that they are connected with income from sources
within the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries If the taxpayer signifies
in his return his desire to have the benefits of this paragraph, the tax imposed by
this Title shall be credited with:

(a) Citizen and Domestic Corporation In the case of a citizen of the Philippines
and of a domestic corporation, the amount of income taxes paid or incurred during
the taxable year to any foreign country; and

(b) Partnerships and Estates In the case of any such individual who is a member
of a general professional partnership or a beneficiary of an estate or trust, his
proportionate share of such taxes of the general professional partnership or the
estate or trust paid or incurred during the taxable year to a foreign country, if his
distributive share of the income of such partnership or trust is reported for taxation
under this Title.
An alien individual and a foreign corporation shall not be allowed the credits
against the tax for the taxes of foreign countries allowed under this paragraph.

(4) Limitations on Credit The amount of the credit taken under this Section
shall be subject to each of the following limitations:

(a) The amount of the credit in respect to the tax paid or incurred to any country
shall not exceed the same proportion of the tax against which such credit is taken,
which the taxpayer's taxable income from sources within such country under this
Title bears to his entire taxable income for the same taxable year; and

(b) The total amount of the credit shall not exceed the same proportion of the tax
against which such credit is taken, which the taxpayer's taxable income from
sources without the Philippines taxable under this Title bears to his entire taxable
income for the same taxable year.

(5) Adjustments on Payment of Incurred Taxes If accrued taxes when paid

differ from the amounts claimed as credits by the taxpayer, or if any tax paid is
refunded in whole or in part, the taxpayer shall notify the Commissioner, who shall
redetermine the amount of the tax for the year or years affected, and the amount of
tax due upon such redetermination, if any, shall be paid by the taxpayer upon
notice and demand by the Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the case of such a tax incurred but
not paid, the Commissioner as a condition precedent to the allowance of this credit
may require the taxpayer to give a bond with sureties satisfactory to and to be
approved by the Commissioner in such sum as he may require, conditioned upon
the payment by the taxpayer of any amount of tax found due upon any such
redetermination. The bond herein prescribed shall contain such further conditions
as the Commissioner may require.

(6) Year in Which Credit Taken The credits provided for in Subsection (C)(3)
of this Section may, at the option of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken in the year in which the taxes
of the foreign country were incurred, subject, however, to the conditions prescribed
in Subsection (C)(5) of this Section. If the taxpayer elects to take such credits in
the year in which the taxes of the foreign country accrued, the credits for all
subsequent years shall be taken upon the same basis, and no portion of any such
taxes shall be allowed as a deduction in the same or any succeeding year.

(7) Proof of Credits The credits provided in Subsection (C)(3) hereof shall be
allowed only if the taxpayer establishes to the satisfaction of the Commissioner the
following:

(a) The total amount of income derived from sources without the Philippines;

(b) The amount of income derived from each country, the tax paid or incurred to
which is claimed as a credit under said paragraph, such amount to be determined
under rules and regulations prescribed by the Secretary of Finance; and

(c) All other information necessary for the verification and computation of such
credits.

CASES DIGEST
Deductions from Gross Income

Fines and penalties paid for late payment of taxes are not deductible

Deductions from gross income are matters of legislative grace; what is not expressly
granted by Congress is withheld. Moreover, when acts are condemned by law and their
commission is made punishable by fines or forfeitures, to allow them to be deducted from
the wrongdoer's gross income, reduces, and so in part defeats, the prescribed punishment
for the mandatory and timely payment of taxes.

Lino Gutierrez, et al. vs. Collector of Internal Revenue,

G.R. No. L-19537, May 20, 1965

When distinction between "taxes" and "debts" are inconsequential

While "taxes" and "debt" are distinguishable legal concepts, in certain cases, on account
of their nature, the distinction becomes inconsequential. This qualification is recognized
even in the United States. Thus, the term debt is properly used in a comprehensive
sense as embracing not merely money due by contract, but whatever one is bound to
render to another, either for contract or the requirements of the law. Although what is
involved in the Prieto case was donor's tax while the present suit pertains to interest paid
on the estate and inheritance tax, interpretation placed upon the law was predicated on
the congressional intent, not on the nature of the tax for which the interest was paid.
Commissioner of Internal Revenue vs. Carlos Palanca, Jr.,
G.R. No. L-16626, October 29, 1966

(D) Losses

(1) In General Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be allowed as
deductions:

(a) If incurred in trade, profession or business;

(b) Of property connected with the trade, business or profession, if the loss arises
from fires, storms, shipwreck, or other casualties, or from robbery, theft or
embezzlement.

The Secretary of Finance, upon recommendation of the Commissioner, is hereby

authorized to promulgate rules and regulations prescribing, among other things, the
time and manner by which the taxpayer shall submit a declaration of loss sustained
from casualty or from robbery, theft or embezzlement during the taxable year:
Provided, however, That the time limit to be so prescribed in the rules and
regulations shall not be less than thirty (30) days nor more than ninety (90) days
from the date of discovery of the casualty or robbery, theft or embezzlement giving
rise to the loss.

(c) No loss shall be allowed as a deduction under this Subsection if at the time of
the filing of the return, such loss has been claimed as a deduction for estate tax
purposes in the estate tax return.

(2) Proof of Loss In the case of a nonresident alien individual or foreign

corporation, the losses deductible shall be those actually sustained during the year
incurred in business, trade or exercise of a profession conducted within the
Philippines, when such losses are not compensated for by insurance or other forms
of indemnity. The Secretary of Finance, upon recommendation of the
Commissioner, is hereby authorized to promulgate rules and regulations
prescribing, among other things, the time and manner by which the taxpayer shall
submit a declaration of loss sustained from casualty or from robbery, theft or
embezzlement during the taxable year: Provided, That the time to be so prescribed
in the rules and regulations shall not be less than thirty (30) days nor more than
ninety (90) days from the date of discovery of the casualty or robbery, theft or
embezzlement giving rise to the loss; and

(3) Net Operating Loss Carry-over The net operating loss of the business or
enterprise for any taxable year immediately preceding the current taxable year,
which had not been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3) consecutive
taxable years immediately following the year of such loss: Provided, however,
That any net loss incurred in a taxable year during which the taxpayer was exempt
from income tax shall not be allowed as a deduction under this Subsection:
Provided, further, That a net operating loss carry-over shall be allowed only if
there has been no substantial change in the ownership of the business or enterprise
in that

(i) Not less than seventy-five percent (75%) in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is held by or on behalf of the
same persons; or

(ii) Not less than seventy-five percent (75%) of the paid up capital of the
corporation, if the business is in the name of a corporation, is held by or on behalf
of the same persons.

For purposes of this Subsection, the term 'net operating loss' shall mean the excess
of allowable deduction over gross income of the business in a taxable year:

Provided, That for mines other than oil and gas wells, a net operating loss without
the benefit of incentives provided for under Executive Order No. 226, as amended,
otherwise known as the Omnibus Investments Code of 1987, incurred in any of the
first ten (10) years of operation may be carried over as a deduction from taxable
income for the next five (5) years immediately following the year of such loss. The
entire amount of the loss shall be carried over to the first of the five (5) taxable
years following the loss, and any portion of such loss which exceeds the taxable
income of such first year shall be deducted in like manner from the taxable income
of the next remaining four (4) years.

BIR ISSUANCES
REVENUE REGULATIONS NO. 14-01 August 27, 2001
Implementing Section 34(D)(3) of the National Internal Revenue Code of 1997 Relative
to the Allowance of Net Operating Loss Carry-Over (NOLCO) as a Deduction from
Gross Income to govern the deduction from gross income of the Net Operating Loss
Carry-Over (NOLCO) pursuant to Section 34 (D) (3) of the Code, which provides:

"Net Operating Loss Carry-Over The net operating loss of the business or enterprise
for any taxable year immediately preceding the current taxable year which had not been
previously offset as deduction from gross income shall be carried over as a deduction
from gross income for the next three (3) consecutive taxable years immediately following
the year of such loss: Provided, however, That any net loss incurred in a taxable year
during which the taxpayer was exempt from income tax shall not be allowed as a
deduction under this Subsection. Provided, further, That a net operating loss carry-over
shall be allowed only if there has been no substantial change in the ownership of the
business or enterprise in that

(i) Not less than seventy percent (75%) in nominal value of outstanding issued shares
if the business is in the name of a corporation is held by or on behalf of the same
persons; or
(ii) Not less than seventy-five percent (75%) of the paid up capital of the corporation
if the business is in the name of a corporation, is held by or on behalf of the same
persons.

For purposes of this Subsection the term 'net operating loss' shall mean the excess of
allowable deduction over gross income of the business in a taxable year.

(4) Capital Losses

(a) Limitation Losses from sales or exchanges of capital assets shall be allowed
only to the extent provided in Section 39.

CASES DIGEST
Capital losses are deductible only to the extent of capital gains.

Capital losses are allowed to be deducted only to the extent of capital gains, i.e., gains
derived from the sale or exchange of capital assets, and not from any other income of the
taxpayer.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000
(5) Losses From Wash Sales of Stock or Securities Losses from 'wash sales' of
stock or securities as provided in Section 38.

(6) Wagering Losses Losses from wagering transactions shall be allowed only
to the extent of the gains from such transactions.

(7) Abandonment Losses

(a) In the event a contract area where petroleum operations are undertaken is
partially or wholly abandoned, all accumulated exploration and development
expenditures pertaining thereto shall be allowed as a deduction: Provided, That
accumulated expenditures incurred in that area prior to January 1, 1979 shall be
allowed as a deduction only from any income derived from the same contract area.
In all cases, notices of abandonment shall be filed with the Commissioner.

(b) In case a producing well is subsequently abandoned, the unamortized costs

thereof, as well as the undepreciated costs of equipment directly used therein, shall
be allowed as a deduction in the year such well, equipment or facility is abandoned
by the contractor: Provided, That if such abandoned well is reentered and
production is resumed, or if such equipment or facility is restored into service, the
said costs shall be included as part of gross income in the year of resumption or
restoration and shall be amortized or depreciated, as the case may be.

(E) Bad Debts

(1) In General. Debts due to the taxpayer actually ascertained to be worthless

and charged off within the taxable year except those not connected with profession,
trade or business and those sustained in a transaction entered into between parties
mentioned under Section 36(B) of this Code: Provided, That recovery of bad debts
previously allowed as deduction in the preceding years shall be included as part of
the gross income in the year of recovery to the extent of the income tax benefit of
said deduction.

CASES DIGEST
Requisites for deductibility of "bad debts"

For debts to be considered as "worthless," and thereby qualify as "bad debts" making
them deductible, the taxpayer should show that (1) there is a valid and subsisting debt;
(2) the debt must be actually ascertained to be worthless and uncollectible during the
taxable year; (3) the debt must be charged off during the taxable year; and (4) the debt
must arise from the business or trade of the taxpayer. Additionally, before a debt can be
considered worthless, the taxpayer must also show that it is indeed uncollectible even in
the future.

Philippine Refining Company vs. Court of Appeals, et al., G.R.

No. 118794, May 8, 1996

Criteria for ascertaining worthlessness of debts

The requirement of ascertainment of worthlessness requires proof of two facts: (1) that
the taxpayer did in fact ascertain the debt to be worthless, in the year for which the
deduction is sought; and (2) that, in so doing, he acted in good faith.

Collector of Internal Revenue vs. Goodrich International Rubber Co., G.R. No.
L-22265, December 22, 1967

BIR ISSUANCES

REVENUE REGULATIONS NO. 25-02 November 19, 2002

Implementing Section 34(E) of the Tax Code of 1997 on the Requirements for
Deductibility of Bad Debts from Gross Income on the requirements for deductibility of
bad debts from the gross income of a corporation, including banks and insurance
companies, or an individual, estate and trust that is engaged in trade or business or a
professional engaged in the practice of his profession.
Requisites for valid deduction of bad debts from gross income The requisites for
deductibility of bad debts are:
(1) There must be an existing indebtedness due to the taxpayer which must be valid
and legally demandable;
(2) The same must be connected with the taxpayer's trade, business or practice of
profession;
(3) The same must not be sustained in a transaction entered into between related
parties enumerated under Sec. 36(B) of the Tax Code of 1997;
(4) The same must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year; and
(5) The same must be actually ascertained to be worthless and uncollectible as of the
end of the taxable year.
"Before a taxpayer may charge off and deduct a debt, he must ascertain and be able to
demonstrate with reasonable degree of certainty the uncollectibility of the debt. The
Commissioner of Internal Revenue will consider all pertinent evidence, including the
value of the collateral, if any, securing the debt and the financial condition of the debtor
in determining whether a debt is worthless, or the assigning of the case for collection to
an independent collection lawyer who is not under the employ of the taxpayer and who
shall report on the legal obstacle and the virtual impossibility of collecting the same from
the debtor and who shall issue a statement under oath showing the propriety of the
deductions thereon made for alleged bad debts. Thus, where the surrounding
circumstances indicate that a debt is worthless and uncollectible and that legal action to
enforce payment would in all probability not result in the satisfaction of execution on a
judgment, a showing of those facts will be sufficient evidence of the worthlessness of the
debt for the purpose of deduction.
In the case of banks, the Commissioner of Internal Revenue shall determine whether or
not bad debts are worthless and uncollectible in the manner provided in the immediately
preceding paragraph. Without prejudice to the Commissioner's determination of the
worthlessness and uncollectibility of debts, the taxpayer shall submit a
BangkoSentralngPilipinas/Monetary Board written approval of the writing off of the
indebtedness from the banks' books of accounts at the end of the taxable year.
"Also, in no case may a receivable from an insurance or surety company be written-off
from the taxpayer's books and claimed as bad debts deduction unless such company has
been declared closed due to insolvency or for any such similar reason by the Insurance
Commissioner."

(2) Securities Becoming Worthless If securities, as defined in Section 22(T), are

ascertained to be worthless and charged off within the taxable year and are capital
assets, the loss resulting therefrom shall, in the case of a taxpayer other than a bank
or trust company incorporated under the laws of the Philippines a substantial part
of whose business is the receipt of deposits, for the purpose of this Title, be
considered as a loss from the sale or exchange, on the last day of such taxable year,
of capital assets.
Requisites for capital gain or capital loss on securities transactions

Securities Becoming Worthless. If securities as defined in Section 22(T) become

worthless during the taxable year and are capital assets, the loss resulting therefrom
shall, for purposes of this Title, be considered as a loss from the sale or exchange, on the
last day of such taxable year, of capital assets.

The loss sustained by the holder of the securities, which are capital assets (to him), is to
be treated as a capital loss as if incurred from a sale or exchange transaction. A capital
gain or a capital loss normally requires the concurrence of two conditions for it to result:
(1) There is a sale or exchange; and (2) the thing sold or exchanged is a capital asset.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000
When securities become worthless, the law deems the loss as "a loss from the sale or
exchange of capital assets"

When securities become worthless, there is strictly no sale or exchange but the law deems
the loss anyway to be "a loss from the sale or exchange of capital assets." A similar kind
of treatment is given by the NIRC on the retirement of certificates of indebtedness with
interest coupons or in registered form, short sales and options to buy or sell property
where no sale or exchange strictly exists. In these cases, the NIRC dispenses, in effect,
with the standard requirement of a sale or exchange for the application of the capital
gain and loss provisions of the code.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(F) Depreciation

(1) General Rule There shall be allowed as a depreciation deduction a

reasonable allowance for the exhaustion, wear and tear (including reasonable
allowance for obsolescence) of property used in the trade or business. In the case
of property held by one person for life with remainder to another person, the
deduction shall be computed as if the life tenant were the absolute owner of the
property and shall be allowed to the life tenant. In the case of property held in trust,
the allowable deduction shall be apportioned between the income beneficiaries and
the trustees in accordance with the pertinent provisions of the instrument creating
the trust, or in the absence of such provisions, on the basis of the trust income
allowable to each.

(2) Use of Certain Methods and Rates The term 'reasonable allowance' as used
in the preceding paragraph shall include, but not limited to, an allowance computed
in accordance with rules and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner, under any of the following methods:

(a) The straight-line method;

(b) Declining-balance method, using a rate not exceeding twice the rate which
would have been used had the annual allowance been computed under the method
described in Subsection (F)(1);

(c) The sum-of-the-years-digit method; and

(d) Any other method which may be prescribed by the Secretary of Finance upon
recommendation of the Commissioner.

(3) Agreement as to Useful Life on Which Depreciation Rate is Based Where

under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, the taxpayer and the Commissioner have
entered into an agreement in writing specifically dealing with the useful life and
rate of depreciation of any property, the rate so agreed upon shall be binding on
both the taxpayer and the National Government in the absence of facts and
circumstances not taken into consideration during the adoption of such agreement.
The responsibility of establishing the existence of such facts and circumstances
shall rest with the party initiating the modification. Any change in the agreed rate
and useful life of the depreciable property as specified in the agreement shall not
be effective for taxable years prior to the taxable year in which notice in writing by
certified mail or registered mail is served by the party initiating such change to the
other party to the agreement:

Provided, however, That where the taxpayer has adopted such useful life and
depreciation rate for any depreciable asset and claimed the depreciation expenses
as deduction from his gross income, without any written objection on the part of
the Commissioner or his duly authorized representative, the aforesaid useful life
and depreciation rate so adopted by the taxpayer for the aforesaid depreciable asset
shall be considered binding for purposes of this Subsection.

CASES DIGEST
Definition of "depreciation"

Depreciation is the gradual diminution in the useful value of tangible property resulting
from wear and tear and normal obsolescence. The term is also applied to amortization of
the value of intangible assets, the use of which in the trade or business is definitely
limited in duration.

Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al., G.R. No. L-22492,
September 5, 1967

Depreciation commences with the acquisition of the property.

Depreciation commences with the acquisition of the property and its owner is not bound
to see his property gradually waste, without making provision out of earnings for its
replacement. It is entitled to see that from earnings the value of the property invested is
kept unimpaired, so that at the end of any given term of years, the original investment
remains as it was in the beginning. It is not only the right of a company to make such a
provision, but it is its duty to its bond and stockholders, and, in the case of a public
service corporation, at least, its plain duty to the public. Accordingly, the law permits the
taxpayer to recover gradually his capital investment in wasting assets free from income
tax.

Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al.,

G.R. No. L-22492, September 5, 1967

The law does not authorize depreciation of an asset beyond its acquisition cost.

The income tax law does not authorize the depreciation of an asset beyond its acquisition
cost. Hence, a deduction over and above such cost cannot be claimed and allowed. The
reason is that deductions from gross income are privileges, not matters of right. They are
not created by implication but upon clear expression in the law. Moreover, the recovery,
free of income tax, of an amount more than the invested capital in an asset will
transgress the underlying purpose of a depreciation allowance. For then what the
taxpayer would recover will be, not only the acquisition cost, but also some profit.
Recovery in due time thru depreciation of investment made is the philosophy behind
depreciation allowance; the idea of profit on the investment made has never been the
underlying reason for the allowance of a deduction for depreciation.

Basilan Estates, Inc. vs. Commissioner of Internal Revenue, et al.,

G.R. No. L-22492, September 5, 1967

Depreciation of building is based on construction cost, not on its assessed value.

Where a building acquired by a corporation from the vendors in exchange for shares of
its stocks is revalued on the basis of its construction cost, which revaluation imports an
obligation of the corporation to pay the vendors the difference between the assessed
value and the revalued construction cost, it is held that the depreciation logically has to
be on the basis of the construction cost and not on the assessed value of the building,
since the corporate investment would ultimately be the construction cost.

Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al.,

G.R. No. L-18282, May 29, 1964
Findings of tax court on depreciation of assets should not be disturbed.

Depreciation is a question of fact, and where the appellant does not claim that the tax
court, in applying certain rates and basis to arrive at the allowed amounts of
depreciation, was arbitrary or had abused its discretion, the findings of the tax court on
the depreciation of assets should not be disturbed.

Commissioner of Internal Revenue vs. Priscila Estate, Inc., et al.,

G.R. No. L-18282, May 29, 1964

Depreciation of residence not used in trade or business is not deductible.

The claim for depreciation of taxpayer's residence is not deductible where such residence
was not used in his trade or business. A taxpayer may deduct from gross income
reasonable allowance for deterioration of property arising out of its use or employment
in business or trade.

Lino Gutierrez, et al. vs. Collector of Internal Revenue,

G.R. No. L-19537, May 20, 1965

When purchase of domestic goods and services considered as "capital goods or

properties"

For petitioner's purchases of domestic goods and services to be considered as "capital

goods or properties," three requisites must concur. First, useful life of goods or
properties must exceed one year; second, said goods or properties are treated as
depreciable assets under Section 34 (f) and; third, goods or properties must be used
directly or indirectly in the production or sale of taxable goods and services. From
petitioner's evidence, the account vouchers specifically indicate that the disallowed
purchases were recorded under inventory accounts, instead of depreciable accounts.
That petitioner failed to indicate under its fixed assets or depreciable assets account,
goods and services allegedly purchased pursuant to the rehabilitation and maintenance
of Malaya Power Plant Complex, militates against its claim for refund. As correctly
found by the CTA, the goods or properties must be recorded and treated as depreciable
assets under Section 34 (F) of the NIRC.

Kepco Phil. Corp. vs. Commissioner of Internal Revenue, G.R.

No. 179356, December 14, 2009

(4) Depreciation of Properties Used in Petroleum Operations An allowance for

depreciation in respect of all properties directly related to production of petroleum
initially placed in service in a taxable year shall be allowed under the straight-line
or declining-balance method of depreciation at the option of the service contractor.

However, if the service contractor initially elects the declining-balance method, it

may at any subsequent date, shift to the straight-line method.

The useful life of properties used in or related to production of petroleum shall be

ten (10) years or such shorter life as may be permitted by the Commissioner.

Properties not used directly in the production of petroleum shall be depreciated

under the straight-line method on the basis of an estimated useful life of five (5)
years.

(5) Depreciation of Properties Used in Mining Operations An allowance for

depreciation in respect of all properties used in mining operations other than
petroleum operations, shall be computed as follows:

(a) At the normal rate of depreciation if the expected life is ten (10) years or less;
or

(b) Depreciated over any number of years between five (5) years and the expected
life if the latter is more than ten (10) years, and the depreciation thereon allowed as
deduction from taxable income: Provided, That the contractor notifies the
Commissioner at the beginning of the depreciation period which depreciation rate
allowed by this Section will be used.

(6) Depreciation Deductible by Nonresident Aliens Engaged in Trade or Business

or Resident Foreign Corporations In the case of a nonresident alien individual
engaged in trade or business or resident foreign corporation, a reasonable
allowance for the deterioration of property arising out of its use or employment or
its non-use in the business, trade or profession shall be permitted only when such
property is located in the Philippines.

(G) Depletion of Oil and Gas Wells and Mines

(1) In General In the case of oil and gas wells or mines, a reasonable allowance
for depletion or amortization computed in accordance with the cost-depletion
method shall be granted under rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner: Provided, That
when the allowance for depletion shall equal the capital invested no further
allowance shall be granted: Provided, further, That after production in commercial
quantities has commenced, certain intangible exploration and development drilling
costs: (a) shall be deductible in the year incurred if such expenditures are incurred
for non-producing wells and/or mines, or (b) shall be deductible in full in the year
paid or incurred or, at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for producing wells and/or mines in the
same contract area.

Intangible costs in petroleum operations' refers to any cost incurred in petroleum

operations which in itself has no salvage value and which is incidental to and
necessary for the drilling of wells and preparation of wells for the production of
petroleum: Provided, That said costs shall not pertain to the acquisition or
improvement of property of a character subject to the allowance for depreciation
except that the allowances for depreciation on such property shall be deductible
under this Subsection.

Any intangible exploration, drilling and development expenses allowed as a

deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion.

(2) Election to Deduct Exploration and Development Expenditures In

computing taxable income from mining operations, the taxpayer may, at his option,
deduct exploration and development expenditures accumulated as cost or adjusted
basis for cost depletion as of date of prospecting, as well as exploration and
development expenditures paid or incurred during the taxable year: Provided, That
the total amount deductible for exploration and development expenditures shall not
exceed twenty-five percent (25%) of the net income from mining operations
computed without the benefit of any tax incentives under existing laws. The actual
exploration and development expenditures minus twenty-five percent (25%) of the
net income from mining shall be carried forward to the succeeding years until fully
deducted.

The election by the taxpayer to deduct the exploration and development

expenditures is irrevocable and shall be binding in succeeding taxable years.
"'Net income from mining operations', as used in this Subsection, shall mean gross
income from operations less 'allowable deductions' which are necessary or related
to mining operations. 'Allowable deductions' shall include mining, milling and
marketing expenses, and depreciation of properties directly used in the mining
operations. This paragraph shall not apply to expenditures for the acquisition or
improvement of property of a character which is subject to the allowance for
depreciation.

In no case shall this paragraph apply with respect to amounts paid or incurred for
the exploration and development of oil and gas.

The term 'exploration expenditures' means expenditures paid or incurred for the
purpose of ascertaining the existence, location, extent, or quality of any deposit of
ore or other mineral, and paid or incurred before the beginning of the development
stage of the mine or deposit.

The term 'development expenditures' means expenditures paid or incurred during

the development stage of the mine or other natural deposits. The development
stage of a mine or other natural deposit shall begin at the time when deposits of ore
or other minerals are shown to exist in sufficient commercial quantity and quality
and shall end upon commencement of actual commercial extraction.

(3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
Individual or Foreign Corporation. In the case of a nonresident alien individual
engaged in trade or business in the Philippines or a resident foreign corporation,
allowance for depletion of oil and gas wells or mines under paragraph (1) of this
Subsection shall be authorized only in respect to oil and gas wells or mines located
within the Philippines.

CASES DIGEST
The burden of justifying the allowance of deduction based on depletion rests on taxpayer.

As an income tax concept, depletion is wholly a creation of the statute "solely a matter
of legislative grace." Hence, the taxpayer has the burden of justifying the allowance of
any deduction claimed. As in connection with all other tax controversies, the burden of
proof to show that a disallowance of depletion by the Commissioner is incorrect or that
an allowance made is inadequate is upon the taxpayer, and this is true with respect to the
value of the property constituting the basis of the deduction. This burden-of-proof rule
has been frequently applied and a value claimed has been disallowed for lack of
evidence.

Consolidated Mines, Inc. vs. Court of Tax Appeals, et al., G.R.

Nos. L-18843 & 18844, August 29, 1974

Differences between "depletion" and "depreciation"

Both depletion and depreciation are predicated on the same basic premise of avoiding a
tax on capital. The allowance for depletion is based on the theory that the extraction of
minerals gradually exhausts the capital investment in the mineral deposit. The purpose of
the depletion deduction is to permit the owner of a capital interest in mineral in place to
make a tax-free recovery of that depleting capital asset. A depletion is based upon the
concept of the exhaustion of a natural resource whereas depreciation is based upon the
concept of the exhaustion of the property, not otherwise a natural resource, used in a
trade or business or held for the production of income. Thus, depletion and depreciation
are made applicable to different types of assets. And a taxpayer may not deduct that
which the Code allows as a deduction of another.

Consolidated Mines, Inc. vs. Court of Tax Appeals, et al.,

G.R. Nos. L-18843 & 18844, August 29, 1974

(H) Charitable and Other Contributions

(1) In General Contributions or gifts actually paid or made within the taxable
year to, or for the use of the Government of the Philippines or any of its agencies
or any political subdivision thereof exclusively for public purposes, or to
accredited domestic corporations or associations organized and operated
exclusively for religious, charitable, scientific, youth and sports development,
cultural or educational purposes or for the rehabilitation of veterans, or to social
welfare institutions, or to nongovernment organizations, in accordance with rules
and regulations promulgated by the Secretary of Finance, upon recommendation of
the Commissioner, no part of the net income of which inures to the benefit of any
private stockholder or individual in an amount not in excess of ten percent (10%)
in the case of an individual, and five percent (5%) in the case of a corporation, of
the taxpayer's taxable income derived from trade, business or profession as
computed without the benefit of this and the following subparagraphs.
(2) Contributions Deductible in Full Notwithstanding the provisions of the
preceding subparagraph, donations to the following institutions or entities shall be
deductible in full:

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

Philippines or to any of its agencies or political subdivisions, including fully-
owned government corporations, exclusively to finance, to provide for, or to be
used in undertaking priority activities in education, health, youth and sports
development, human settlements, science and culture, and in economic
development according to a National Priority Plan determined by the National
Economic and Development Authority (NEDA), in consultation with appropriate
government agencies, including its regional development councils and private
philanthropic persons and institutions: Provided, That any donation which is made
to the Government or to any of its agencies or political subdivisions not in
accordance with the said annual priority plan shall be subject to the limitations
prescribed in paragraph (1) of this Subsection;

(b) Donations to Certain Foreign Institutions or International Organizations

Donations to foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties, or
commitments entered by the Government of the Philippines and the foreign
institutions or international organizations or in pursuance of special laws;

(c) Donations to Accredited Nongovernment Organizations The term

'nongovernment organization' means a nonprofit domestic corporation:

(1) Organized and operated exclusively for scientific, research, educational,

character-building and youth and sports development, health, social welfare,
cultural or charitable purposes, or a combination thereof, no part of the net income
of which inures to the benefit of any private individual;

BIR ISSUANCES
REVENUE REGULATIONS NO. 13-98 December 8, 1998

Deductibility of Contributions or Gifts Actually Paid or Made to Accredited Donee

Institutions in Computing Taxable Income.
Donations to accredited non-stock, non-profit corporations/NGOs shall be entitled to the
following benefits:

(1) Limited Deductibility. Donations, contributions or gifts actually paid or made

within the taxable year to accredited non-stock, non-profit corporations shall be allowed
limited deductibility in an amount not in excess of ten percent (10%) for an individual
donor, and five percent (5%) for a corporate donor, of the donor's income derived from
trade, business or profession as computed without the benefit of this deduction.

(2) Full Deductibility. Donations, contributions or gifts actually paid or made

within the taxable year to accredited NGOs shall be allowed full deductibility, subject to
the following conditions:

(i) The accredited NGO shall make utilization directly for the active conduct of the
activities constituting the purpose or function for which it is organized and operated, not
later than the fifteenth (15th) day of the third month after the close of the accredited
NGOs taxable year in which contributions are received, unless an extended period is
granted by the Secretary of Finance, upon recommendation of the Commissioner.

For this purpose, the term "utilization" shall have the meaning as defined under Sec. 1(c)
of these Regulations.

(ii) The level of administrative expenses of the accredited NGO, shall, on an annual
basis, not exceed thirty percent (30%) of the total expenses for the taxable year;

(iii) In the event of dissolution, the assets of the accredited NGO, would be distributed
to another accredited NGO organized for similar purpose or purposes, or to the State for
public purpose, or purposes, or to the state for public purpose, or would be distributed by
a competent court of justice to another accredited NGO to be used in such manner as in
the judgment of said court shall best accomplished the general purpose for which the
dissolved organization was organized.

(iv) The amount of any charitable contribution of property other than money shall be
based on the acquisition cost of said property

(v) All the members of the Board of Trustees of the non-stock, non-profit corporation,
organization or NGO do not receive compensation or remuneration for their service to
the aforementioned organization.

(3) Exemption from Donor's Tax Donations and gifts made in favor of accredited
non-stock, non-profit corporations/NGOs shall be exempt from donor's tax: Provided,
however, That not more than thirty percent (30%) of the said donations and gifts for the
taxable year shall be used by such accredited non-stock, non-profit corporations/NGOs
institutions qualified-donee institution for administration purposes pursuant to the
provisions of Section 101 (A)(3) and (B)(2) of the Tax Code .

(2) Which, not later than the 15th day of the third month after the close of the
accredited nongovernment organizations taxable year in which contributions are
received, makes utilization directly for the active conduct of the activities
constituting the purpose or function for which it is organized and operated, unless
an extended period is granted by the Secretary of Finance in accordance with the
rules and regulations to be promulgated, upon recommendation of the
Commissioner;

(3) The level of administrative expense of which shall, on an annual basis, conform
with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, but in no case to exceed thirty percent
(30%) of the total expenses; and

(4) The assets of which, in the event of dissolution, would be distributed to another
nonprofit domestic corporation organized for similar purpose or purposes, or to the
state for public purpose, or would be distributed by a court to another organization
to be used in such manner as in the judgment of said court shall best accomplish
the general purpose for which the dissolved organization was organized.

Subject to such terms and conditions as may be prescribed by the Secretary of

Finance, the term 'utilization' means:

(i) Any amount in cash or in kind (including administrative expenses) paid or

utilized to accomplish one or more purposes for which the accredited
nongovernment organization was created or organized.

(ii) Any amount paid to acquire an asset used (or held for use) directly in carrying
out one or more purposes for which the accredited nongovernment organization
was created or organized.

An amount set aside for a specific project which comes within one or more
purposes of the accredited nongovernment organization may be treated as a
utilization, but only if at the time such amount is set aside, the accredited
nongovernment organization has established to the satisfaction of the
Commissioner that the amount will be paid for the specific project within a period
to be prescribed in rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner, but not to exceed five (5)
years, and the project is one which can be better accomplished by setting aside
such amount than by immediate payment of funds.

(3) Valuation The amount of any charitable contribution of property other than
money shall be based on the acquisition cost of said property.

(4) Proof of Deductions Contributions or gifts shall be allowable as deduction

only if verified under the rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.

CASES DIGEST
Charitable institution remains tax-exempt although it derives income from paying
patients for its hospital operations

As a general principle, a charitable institution does not lose its character as such and its
exemption from taxes simply because it derives income from paying patients, whether
out-patient, or confined in the hospital, or receives subsidies from the government, so
long as the money received is devoted or used altogether to the charitable object which it
is intended to achieve; and no money inures to the private benefit of the persons
managing or operating the institution.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004

Rationale for tax exemption of charitable institutions

An institution does not lose its charitable character, and consequent exemption from
taxation, by reason of the fact that those recipients of its benefits who are able to pay are
required to do so, where no profit is made by the institution and the amounts so received
are applied in furthering its charitable purposes, and those benefits are refused to none
on account of inability to pay therefor. The fundamental ground upon which all
exemptions in favor of charitable institutions are based is the benefit conferred upon the
public by them, and a consequent relief, to some extent, of the burden upon the state to
care for and advance the interests of its citizens.

Lung Center of the Phil. vs. Quezon City, et al., G.R. No. 144104, June 29, 2004
(I) Research and Development.

(1) In General A taxpayer may treat research or development expenditures

which are paid or incurred by him during the taxable year in connection with his
trade, business or profession as ordinary and necessary expenses which are not
chargeable to capital account. The expenditures so treated shall be allowed as
deduction during the taxable year when paid or incurred.

(2) Amortization of Certain Research and Development Expenditures At the

election of the taxpayer and in accordance with the rules and regulations to be
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, the following research and development expenditures may be
treated as deferred expenses:

(a) Paid or incurred by the taxpayer in connection with his trade, business or
profession;

(b) Not treated as expenses under paragraph (1) hereof; and

(c) Chargeable to capital account but not chargeable to property of a character

which is subject to depreciation or depletion.

In computing taxable income, such deferred expenses shall be allowed as

deduction ratably distributed over a period of not less than sixty (60) months as
may be elected by the taxpayer (beginning with the month in which the taxpayer
first realizes benefits from such expenditures).

The election provided by paragraph (2) hereof may be made for any taxable year
beginning after the effectivity of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable year. The method so
elected, and the period selected by the taxpayer, shall be adhered to in computing
taxable income for the taxable year for which the election is made and for all
subsequent taxable years unless, with the approval of the Commissioner, a change
to a different method is authorized with respect to a part or all of such
expenditures. The election shall not apply to any expenditure paid or incurred
during any taxable year prior to the taxable year for which the taxpayer makes the
election.
(3) Limitations on Deduction This Subsection shall not apply to:

(a) Any expenditure for the acquisition or improvement of land, or for the
improvement of property to be used in connection with research and development
of a character which is subject to depreciation and depletion; and

(b) Any expenditure paid or incurred for the purpose of ascertaining the existence,
location, extent, or quality of any deposit of ore or other mineral, including oil or
gas.

(J) Pension Trusts An employer establishing or maintaining a pension trust to

provide for the payment of reasonable pensions to his employees shall be allowed
as a deduction (in addition to the contributions to such trust during the taxable year
to cover the pension liability accruing during the year, allowed as a deduction
under Subsection (A)(1) of this Section) a reasonable amount transferred or paid
into such trust during the taxable year in excess of such contributions, but only if
such amount: (1) has not theretofore been allowed as a deduction, and (2) is
apportioned in equal parts over a period of ten (10) consecutive years beginning
with the year in which the transfer or payment is made.

CASES DIGEST
Income of pension trust is likewise tax-exempt

It is evident that tax exemption is likewise to be enjoyed by the income of the pension
trust. Otherwise, taxation of those earnings would result in a diminution of accumulated
income and reduce whatever the trust beneficiaries would receive out of the trust fund.
This would run afoul of the very intendment of the law. The tax advantage in Rep. Act No.
1983, Section 56(b), was conceived in order to encourage the formation and
establishment of such private Plans for the benefit of laborers and employees outside of
the Social Security Act.

Commissioner of Internal Revenue vs. Court of Appeals, et al.,

G.R. No. 95022, March 23, 1992

(K) Additional Requirements for Deductibility of Certain Payments Any

amount paid or payable which is otherwise deductible from, or taken into account
in computing gross income or for which depreciation or amortization may be
allowed under this Section, shall be allowed as a deduction only if it is shown that
the tax required to be deducted and withheld therefrom has been paid to the Bureau
of Internal Revenue in accordance with this Section, Sections 58 and 81 of this
Code.

(L) Optional Standard Deduction In lieu of the deductions allowed under the
preceding Subsections, an individual subject to tax under Section 24, other than a
nonresident alien, may elect a standard deduction in an amount not exceeding forty
percent (40%) of his gross sales or gross receipts, as the case may be. In the case of
a corporation subject to tax under Sections 27(A) and 28(A)(1), it may elect a
standard deduction in an amount not exceeding forty percent (40%) of its gross
income as defined in Section 32 of this Code. Unless the taxpayer signifies in his
return his intention to elect the optional standard deduction, he shall be considered
as having availed himself of the deductions allowed in the preceding Subsections.
Such election when made in the return shall be irrevocable for the taxable year for
which the return is made: Provided, That an individual who is entitled to and
claimed for the optional standard deduction shall not be required to submit with his
tax return such financial statements otherwise required under this Code: Provided,
further, That except when the Commissioner otherwise permits, the said individual
shall keep such records pertaining to his gross sales or gross receipts, or the said
corporation shall keep such records pertaining to his gross income as defined in
Section 32 of this Code during the taxable year, as may be required by the rules
and regulations promulgated by the Secretary of Finance, upon recommendation of
the Commissioner.

BIR ISSUANCES
February 18, 2010 REVENUE REGULATIONS NO. 002-10

SUBJECT : Amendment to Sections 6 and 7 of Revenue Regulations No. 16-2008

with Respect to the Determination of the Optional Standard Deduction (OSD) of General
Professional Partnerships (GPPs) and the Partners Thereof, as well as the Manner and
Period for Making the Election to Claim OSD in the Income Tax Returns

TO : All Revenue Officers and Others Concerned

SECTION 1. Scope. Pursuant to the provisions of Sec. 244, in relation to Sec. 3 of

Republic Act No. 9504 (RA 9504) amending Sec. 34 (L) of the Tax Code of 1997 (Code), as
amended, these Regulations are hereby promulgated to amend certain provisions of Revenue
Regulations No. 16-2008 to further clarify the manner of claiming the OSD by General
Professional Partnerships and the partners comprising them and the manner of manifesting
the election to use OSD for the taxable year concerned by all taxpayers entitled to it.

SECTION 2. Sec. 6 of Revenue Regulations No. 16-2008 is hereby amended to read as

follows:

"SEC. 6. Determination of the Optional Standard Deduction for General Professional

Partnerships (GPPs) and Partners of GPPs. Pursuant to Sec. 26 of the Code, a GPP is
not subject to income tax imposed under Title II thereof. However, the partners shall be
liable to pay income tax on their separate and individual capabilities for their respective
distributive share in the net income of the GPP.

Sec. 26 of the Code likewise provides that "For purposes of computing the distributive
share of the partners, the net income of the GPP shall be computed in the same manner as a
corporation." As such, a GPP may claim either the itemized deductions allowed under
Section 34(A) to (J) of the Code or in lieu thereof, it can opt to avail of the OSD allowed to
corporations in claiming the deductions in an amount not exceeding forty percent (40%) of
its gross income. The net income determined by either claiming the itemized deduction or
OSD from the GPP's gross income is the distributable net income from which the share of
each partner is to be determined. Each partner shall report as gross income his distributive
share, actually or constructively received, in the net income of the partnership.

The GPP is not a taxable entity for income tax purposes since it is only acting as a "pass-
through" entity where its income is ultimately taxed to the partners comprising it. In
computing taxable income defined under Section 31 of the Code, all expenses which are
ordinary and necessary, incurred or paid for the practice of profession, are allowed as
deductions. Since the taxable income is in the hands of the partner, as a rule apart from the
expenses claimed by the GPP in determining its net income, the individual partner can still
claim deductions incurred or paid by him that contributed to the earning of the income
taxable to him. The following rules shall govern the claim of the partners of deductions from
their share in the net income of the partnership, viz.:

1. If the GPP availed of the itemized deduction in computing its net income, the partners
may still claim itemized deductions from said share, provided, that, in claiming itemized
deductions, the partner is precluded from claiming the same expenses already claimed by the
GPP. In fine, if the GPP claimed itemized deductions the partners comprising it can only
claim itemized deductions which are in the nature of ordinary and necessary expenses for the
practice of profession which were not claimed by the GPP in computing its net income or
distributable net income during the year. Examples of these are representation expenses
incurred by the partner where the covering invoice or receipt is issued in his name;
travelling expenses while away from home, which were not liquidated by the partnership;
depreciation of a car used in the practice of profession where said car is registered in the
name of the partner; and similar expenses.

Hence, if the GPP availed of itemized deductions, the partners are not allowed to claim the
OSD from their share in the net income because the OSD is a proxy for all the items of
deductions allowed in arriving at taxable income. This means that the OSD is in lieu of the
items of deductions claimed by the GPP and the items of deduction claimed by the partners.

2. If the GPP avails of OSD in computing its net income, the partners comprising it can
no longer claim further deduction from their share in the said net income for the following
reasons:

i. The partners' distributive share in the GPP is treated as his gross income not his
gross sales/receipts and the 40% OSD allowed to individuals is specifically mandated to be
deducted not from his gross income but from his gross sales/receipts; and,

ii. The OSD being in lieu of the itemized deductions allowed in computing taxable
income as defined under Section 31 of the Tax Code, it will answer for both the items of
deduction allowed to the GPP and its partners.

3. Since one-layer of income tax is imposed on the income of the GPP and the individual
partners where the law had placed the statutory incidence of the tax in the hands of the
latter, the type of deduction chosen by the GPP must be the same type of deduction that can
be availed of by the partners. Accordingly, if the GPP claims itemized deductions, all items
of deduction allowed under Section 34 can be claimed both at the level of the GPP and at the
level of the partner in order to determine the taxable income. On the other hand, should the
GPP opt to claim the OSD, the individual partners are deemed to have availed also of the
OSD because the OSD is in lieu of the itemized deductions that can be claimed in computing
taxable income.

4. If the partner also derives other gross income from trade, business or practice of
profession apart and distinct from his share in the net income of the GPP, the deduction that
he can claim from his other gross income would follow the same deduction availed of from
his partnership income as explained in the foregoing rules. Provided, however, that if the
GPP opts for the OSD, the individual partner may still claim 40% of its gross income from
trade, business or practice of profession but not to include his share from the net income of
the GPP.

SECTION 3. Sec. 7 of Revenue Regulations No. 16-2008 is hereby amended to read as

follows:

"SEC. 7. Other Implications of the Optional Standard Deduction. A taxpayer who

elected to avail of the OSD not exceeding forty percent (40%) of gross sales or gross
receipts, in case of an individual taxable under Secs. 24(A) and 25(A)(1) of the Tax Code,
or forty percent (40%) of gross income, in case of a corporation subject to tax under Sec.
27(A) or 28(A)(1) of the same Code shall signify in his/its return such intention, otherwise
he/it shall be considered as having availed himself of the itemized deductions allowed under
Sec. 34 of the Code. Once the election to avail of the OSD or itemized deduction is signified
in the return, it shall be irrevocable for the taxable year for which the return is made.

The election to claim either the OSD or the itemized deduction for the taxable year must be
signified by checking the appropriate box in the income tax return filed for the first quarter
of the taxable year adopted by the taxpayer. Once the election is made, the same type of
deduction must be consistently applied for all the succeeding quarterly returns and in the
final income tax return for the taxable year. Any taxpayer who is required but fails to file the
quarterly income tax return for the first quarter shall be considered as having availed of the
itemized deductions option for the taxable year.

Thus, a taxpayer who avails of the OSD in the first quarter of its/his taxable year shall have
to claim the same OSD in determining its/his taxable income for the rest of the year,
including the final income tax return which is due to be filed on or before the 15th day of the
fourth month, following the close of the taxable year. Likewise, a taxpayer who avails of the
itemized deduction in the first quarter of its/his taxable year or fails to file an income tax
return for the first quarter of the taxable year, shall have to claim the itemized deduction in
determining the taxable income for the rest of the year, including the final income tax return
which is due to be filed on or before the 15th day of the fourth month, following the close of
the taxable year.
An individual taxpayer who is entitled to and claimed the OSD shall not be required to
submit with his tax return such financial statements otherwise required under the Code.
Provided, that, except when the Commissioner otherwise permits, the said individual shall
keep such records pertaining to his gross sales or gross receipts. In the case of a
corporation, however, said corporation is still required to submit its financial statements
when it files its annual income tax return and to keep such records pertaining to its gross
income as herein defined."

SECTION 4. Repealing Clause. All revenue issuances or portions thereof which are
inconsistent with the provisions of these Regulations are hereby amended, modified or
repealed accordingly.

SECTION 5. Effectivity Clause. These regulations shall take effect 15 days following its
publication in newspaper of general circulation.

(SGD.) MARGARITO B. TEVES

Secretary of Finance

Recommending Approval:

(SGD.) JOEL L. TAN-TORRES

Commissioner of Internal Revenue

REVENUE REGULATIONS NO. 016-08 November 26, 2008

Implementing the Provisions of Republic Act No. 9504 (Minimum Wage Law), Dealing
on the Optional Standard Deduction (OSD) Allowed to Individuals and Corporations in
Computing Their Taxable Income in lieu of the itemized deductions.

Determination of the Amount of Optional Standard Deduction for Individuals The

OSD allowed to individual taxpayers shall be a maximum of forty percent (40%) of gross
sales or gross receipts during the taxable year. If the individual is on the accrual basis of
accounting for his income and deductions, the OSD shall be based on the gross sales
during the taxable year. On the other hand, if the individual employs the cash basis of
accounting for his income and deductions, the OSD shall be based on his gross receipts
during the taxable year.

It should be emphasized that the "cost of sales" in case of individual seller of goods, or
the "cost of services" in the case of individual seller of services, are not allowed to be
deducted for purposes of determining the basis of the OSD inasmuch as the law (RA
9504) is specific as to the basis thereof which states that for individuals, the basis of the
40% OSD shall be the "gross sales" or "gross receipts" and not the "gross income".For
other individual taxpayers allowed by law to report their income and deductions under a
different method of accounting (e.g. percentage of completion basis, etc.) other than cash
and accrual method of accounting, the "gross sales" or "gross receipts" pursuant to this
Section shall be determined in accordance with said acceptable method of accounting.

Determination of the Amount of Optional Standard Deduction for Corporations In the

case of corporate taxpayers subject to tax under Sections 27 (A) and 28 (A) (1) of the
Code, as amended, the OSD allowed shall be in an amount not exceeding forty percent
(40%) of their gross income.

For purposes of these Regulations, "Gross Income" shall mean the gross sales less sales
returns, discounts and allowances and cost of goods sold. "Gross sales" shall include
only sales contributory to income taxable under Sec. 27 (A) of the Code. "Cost of goods
sold" shall include the purchase price or cost to produce the merchandise and all
expenses directly incurred in bringing them to their present location and use.

For trading or merchandising concern, "cost of goods sold" means the invoice cost of
goods sold, plus import duties, freight in transporting the goods to the place where the
goods are actually sold, including insurance while the goods are in transit.

For manufacturing concern, "cost of goods sold" means all costs incurred in the
production of the finished goods such as raw materials used, direct labor and
manufacturing overhead, freight cost, insurance premiums and other costs incurred to
bring the raw materials to the factory or warehouse. The term may be used
interchangeably with "cost of goods manufactured and sold".

In the case of sellers of services, the term "gross income" means the "gross receipts" less
sales returns, allowances, discounts and cost of services. "Cost of services" means all
direct costs and expenses necessarily incurred to provide the services required by the
customers and clients including (a) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service, and (b) cost of facilities
directly utilized in providing the service such as depreciation or rental of equipment used
and cost of supplies: Provided, however, that "cost of services" shall not include interest
expense except in the case of banks and other financial institutions. The term "gross
receipts" as used herein means amounts actually or constructively received during the
taxable year. However, for taxpayers engaged as sellers of services but employing the
accrual basis of accounting for their income, the term "gross receipts" shall mean
amounts earned as gross revenue during the taxable year.

The items of gross income under Section 32 (A) of the Code, as amended, which are
required to be declared in the income tax return of the taxpayer for the taxable year are
part of the gross income against which the OSD may be deducted in arriving at taxable
income. Passive incomes which have been subjected to a final tax at source shall not
form part of the gross income for purposes of computing the forty percent (40%) optional
standard deduction.

(M) Premium Payments on Health and/or Hospitalization Insurance of an

Individual Taxpayer The amount of premiums not to exceed Two thousand
four hundred pesos (P2,400) per family or Two hundred pesos (P200) a month paid
during the taxable year for health and/or hospitalization insurance taken by the
taxpayer for himself, including his family, shall be allowed as a deduction from his
gross income: Provided, That said family has a gross income of not more than Two
hundred fifty thousand pesos (P250,000) for the taxable year: Provided, finally,
That in the case of married taxpayers, only the spouse claiming the additional
exemption for dependents shall be entitled to this deduction.

Notwithstanding the provisions of the preceding Subsections, the Secretary of

Finance, upon recommendation of the Commissioner, after a public hearing shall
have been held for this purpose, may prescribe by rules and regulations, limitations
or ceilings for any of the itemized deductions under Subsections (A) to (J) of this
Section: Provided, That for purposes of determining such ceilings or limitations,
the Secretary of Finance shall consider the following factors: (1) adequacy of the
prescribed limits on the actual expenditure requirements of each particular
industry; and (2) effects of inflation on expenditure levels: Provided, further, That
no ceilings shall further be imposed on items of expense already subject to ceilings
under present law.

SECTION 35 Allowance of Personal Exemption for Individual Taxpayer

(A) In General For purposes of determining the tax provided in Section 24(A)
of this Title, there shall be allowed a basic personal exemption amounting to Fifty
thousand pesos (P50,000) for each individual taxpayer.
In the case of married individuals where only one of the spouses is deriving gross
income, only such spouse shall be allowed the personal exemption.

(B) Additional Exemption for Dependents. There shall be allowed an

additional exemption of Twenty-five thousand pesos (P25,000) for each dependent
not exceeding four (4).

The additional exemption for dependents shall be claimed by only one of the
spouses in the case of married individuals.

In the case of legally separated spouses, additional exemptions may be claimed

only by the spouse who has custody of the child or children: Provided, That the
total amount of additional exemptions that may be claimed by both shall not
exceed the maximum additional exemptions herein allowed.

For purposes of this Subsection, a 'dependent' means a legitimate, illegitimate or

legally adopted child chiefly dependent upon and living with the taxpayer if such
dependent is not more than twenty-one (21) years of age, unmarried and not
gainfully employed or if such dependent, regardless of age, is incapable of self-
support because of mental or physical defect.

(C) Change of Status If the taxpayer marries or should have additional

dependent(s) as defined above during the taxable year, the taxpayer may claim the
corresponding additional exemption, as the case may be, in full for such year.

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.

If the spouse or any of the dependents dies or if any of such dependents marries,
becomes twenty-one (21) years old or becomes gainfully employed during the
taxable year, the taxpayer may still claim the same exemptions as if the spouse or
any of the dependents died, or as if such dependents married, became twenty-one
(21) years old or became gainfully employed at the close of such year.

CASES DIGEST
Tax due is determined by the individual taxpayer's status and qualified dependents at the
close of the taxable year.
What the law should consider for the purpose of determining the tax due from an
individual taxpayer is his status and qualified dependents at the close of the taxable year
and not at the time the return is filed and the tax due thereon is paid. Emphasis must be
made that Section 35 (C) of the NIRC allows a taxpayer to still claim the corresponding
full amount of exemption for a taxable year, e.g. if he marries; have additional
dependents; he, his spouse, or any of his dependents die; and if any of his dependents
marry, turn 21 years old; or become gainfully employed. It is as if the changes in his or
his dependents' status took place at the close of the taxable year.

Carmelino F. Pansacola vs. CIR, G.R. No. 159991, November 16, 2006

Tax due is determined by the individual taxpayer's status and qualified dependents at the
close of the taxable year.

FACTS: On April 13, 1998, petitioner Carmelino F. Pansacola filed his income tax
return for the taxable year 1997 that reflected an overpayment of P5,950. In it he claimed
the increased amounts of personal and additional exemptions under Section 35 4 of the
NIRC, although his certificate of income tax withheld on compensation indicated the
lesser allowed amounts on these exemptions. He claimed a refund of P5,950 with the
BIR, which was denied. Later, the CTA also denied his claim because according to the
tax court, "it would be absurd for the law to allow the deduction from a taxpayer's gross
income earned on a certain year of exemptions availing on a different taxable year. . ."
Petitioner sought reconsideration, but the same was denied.

On appeal, the Court of Appeals denied his petition for lack of merit. The appellate court
ruled that the NIRC took effect on January 1, 1998, thus the increased exemptions were
effective only to cover taxable year 1998 and cannot be applied retroactively.

ISSUE: Could the exemptions under Section 35 of the NIRC, which took effect on
January 1, 1998, be availed of for the taxable year 1997?

HELD: No. Prefatorily, personal and additional exemptions under Section 35 of the
NIRC are fixed amounts to which certain individual taxpayers (citizens, resident aliens)
12 are entitled. Personal exemptions are the theoretical personal, living and family
expenses of an individual allowed to be deducted from the gross or net income of an
individual taxpayer. These are arbitrary amounts which have been calculated by our
lawmakers to be roughly equivalent to the minimum of subsistence, taking into account
the personal status and additional qualified dependents of the taxpayer. They are fixed
amounts in the sense that the amounts have been predetermined by our lawmakers as
provided under Section 35 (A) and (B). Unless and until our lawmakers make new
adjustments on these personal exemptions, the amounts allowed to be deducted by a
taxpayer are fixed as predetermined by Congress.

A careful scrutiny of the provisions of the NIRC specifically shows that Section 79 (D)
provides that the personal and additional exemptions shall be determined in accordance
with the main provisions in Title II of the NIRC. Its main provisions pertain to Section 35
(A) and (B).

Section 35 (A) and (B) allow the basic personal and additional exemptions as deductions
from gross or net income, as the case may be, to arrive at the correct taxable income of
certain individual taxpayers. Section 24 (A) (1) (a) imposed income tax on a resident
citizen's taxable income derived for each taxable year.

Section 31 defines "taxable income" as the pertinent items of gross income specified in
the NIRC, less the deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the NIRC or other special laws. As defined in
Section 22 (P), "taxable year" means the calendar year, upon the basis of which the net
income is computed under Title II of the NIRC. Section 43 also supports the rule that the
taxable income of an individual shall be computed on the basis of the calendar year. In
addition, Section 45 provides that the deductions provided for under Title II of the NIRC
shall be taken for the taxable year in which they are "paid or accrued" or "paid or
incurred."

Moreover, Section 79 (H) requires the employer to determine, on or before the end of the
calendar year but prior to the payment of the compensation for the last payroll period,
the tax due from each employee's taxable compensation income for the entire taxable
year in accordance with Section 24 (A). This is for the purpose of either withholding from
the employee's December salary, or refunding to him not later than January 25 of the
succeeding year, the difference between the tax due and the tax withheld.

Therefore, as provided in Section 24 (A) (1) (a) in relation to Sections 31 and 22 (P) and
Sections 43, 45 and 79 (H) of the NIRC, the income subject to income tax is the
taxpayer's income as derived and computed during the calendar year, his taxable year.

Clearly from the abovequoted provisions, what the law should consider for the purpose of
determining the tax due from an individual taxpayer is his status and qualified
dependents at the close of the taxable year and not at the time the return is filed and the
tax due thereon is paid. Now comes Section 35 (C) of the NIRC which allows a taxpayer
to still claim the corresponding full amount of exemption for a taxable year, e.g. if he
marries; have additional dependents; he, his spouse, or any of his dependents die; and if
any of his dependents marry, turn 21 years old; or become gainfully employed. It is as if
the changes in his or his dependents' status took place at the close of the taxable year.

Consequently, his correct taxable income and his corresponding allowable deductions
e.g. personal and additional deductions, if any, had already been determined as of the
end of the calendar year.

In the case of petitioner, the availability of the aforementioned deductions if he is thus

entitled, would be reflected on his tax return filed on or before the 15th day of April 1999
as mandated by Section 51 (C) (1). Since the NIRC took effect on January 1, 1998, the
increased amounts of personal and additional exemptions under Section 35, can only be
allowed as deductions from the individual taxpayer's gross or net income, as the case
may be, for the taxable year 1998 to be filed in 1999. The NIRC made no reference that
the personal and additional exemptions shall apply on income earned before January 1,
1998. Carmelino F. Pansacola vs. C I R, G.R. No. 159991, November 16, 2006

(D) Personal Exemption Allowable to Nonresident Alien Individual A

nonresident alien individual engaged in trade, business or in the exercise of a
profession in the Philippines shall be entitled to a personal exemption in the
amount equal to the exemptions allowed in the income tax law in the country of
which he is a subject or citizen, to citizens of the Philippines not residing in such
country, not to exceed the amount fixed in this Section as exemption for citizens or
residents of the Philippines: Provided, That said nonresident alien should file a true
and accurate return of the total income received by him from all sources in the
Philippines, as required by this Title.

SECTION 36 Items not Deductible

(A) General Rule In computing net income, no deduction shall in any case be
allowed in respect to

(1) Personal, living or family expenses;

(2) Any amount paid out for new buildings or for permanent improvements, or
betterments made to increase the value of any property or estate;

This Subsection shall not apply to intangible drilling and development costs
incurred in petroleum operations which are deductible under Subsection (G)(1) of
Section 34 of this Code.
(3) Any amount expended in restoring property or in making good the exhaustion
thereof for which an allowance is or has been made; or

(4) Premiums paid on any life insurance policy covering the life of any officer or
employee, or of any person financially interested in any trade or business carried
on by the taxpayer, individual or corporate, when the taxpayer is directly or
indirectly a beneficiary under such policy.

(B) Losses from Sales or Exchanges of Property. In computing net income, no

deduction shall in any case be allowed in respect of losses from sales or exchanges
of property directly or indirectly

(1) Between members of a family. For purposes of this paragraph, the family of an
individual shall include only his brothers and sisters (whether by the whole or half-
blood), spouse, ancestors, and lineal descendants; or

(2) Except in the case of distributions in liquidation, between an individual and a

corporation more than fifty percent (50%) in value of the outstanding stock of
which is owned, directly or indirectly, by or for such individual; or

(3) Except in the case of distributions in liquidation, between two corporations

more than fifty percent (50%) in value of the outstanding stock of each of which is
owned, directly or indirectly, by or for the same individual, if either one of such
corporations, with respect to the taxable year of the corporation preceding the date
of the sale or exchange was, under the law applicable to such taxable year, a
personal holding company or a foreign personal holding company;

(4) Between the grantor and a fiduciary of any trust; or

(5) Between the fiduciary of a trust and the fiduciary of another trust if the same
person is a grantor with respect to each trust; or

(6) Between a fiduciary of a trust and a beneficiary of such trust.

CASES DIGEST
When loss is deemed to be a loss from the sale or exchange of capital assets
In the hands of another who holds the shares of stock by way of an investment, the shares
to him would be capital assets. When the shares held by such investor become worthless,
the loss is deemed to be a loss from the sale or exchange of capital assets. prem05cd
China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

SECTION 37Special Provisions Regarding Income and Deductions of Insurance

Companies, Whether Domestic or Foreign

(A) Special Deductions Allowed to Insurance Companies In the case of

insurance companies, whether domestic or foreign doing business in the
Philippines, the net additions, if any, required by law to be made within the year to
reserve funds and the sums other than dividends paid within the year on policy and
annuity contracts may be deducted from their gross income: Provided, however,
That the released reserve be treated as income for the year of release.

(B) Mutual Insurance Companies In the case of mutual fire and mutual
employers' liability and mutual workmen's compensation and mutual casualty
insurance companies requiring their members to make premium deposits to
provide for losses and expenses, said companies shall not return as income any
portion of the premium deposits returned to their policyholders, but shall return as
taxable income all income received by them from all other sources plus such
portion of the premium deposits as are retained by the companies for purposes
other than the payment of losses and expenses and reinsurance reserves.

(C) Mutual Marine Insurance Companies Mutual marine insurance companies

shall include in their return of gross income, gross premiums collected and
received by them less amounts paid for reinsurance, but shall be entitled to include
in the deductions from gross income amounts repaid to policyholders on account of
premiums previously paid by them and interest paid upon those amounts between
the ascertainment and payment thereof.

(D) Assessment Insurance Companies Assessment insurance companies,

whether domestic or foreign, may deduct from their gross income the actual
deposit of sums with the officers of the Government of the Philippines pursuant to
law, as additions to guarantee or reserve funds.

SECTION 38 Losses from Wash Sales of Stock or Securities

(A) In the case of any loss claimed to have been sustained from any sale or other
disposition of shares of stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale or disposition and ending
thirty (30) days after such date, the taxpayer has acquired (by purchase or by
exchange upon which the entire amount of gain or loss was recognized by law), or
has entered into a contract or option so to acquire, substantially identical stock or
securities, then no deduction for the loss shall be allowed under Section 34 unless
the claim is made by a dealer in stock or securities and with respect to a transaction
made in the ordinary course of the business of such dealer.

(B) If the amount of stock or securities acquired (or covered by the contract or
option to acquire) is less than the amount of stock or securities sold or otherwise
disposed of, then the particular shares of stock or securities, the loss from the sale
or other disposition of which is not deductible, shall be determined under rules and
regulations prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

(C) If the amount of stock or securities acquired (or covered by the contract or
option to acquire) is not less than the amount of stock or securities sold or
otherwise disposed of, then the particular shares of stock or securities, the
acquisition of which (or the contract or option to acquire which) resulted in the
non-deductibility of the loss, shall be determined under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner.

SECTION 39 Capital Gains and Losses

(A) Definitions - As used in this Title

(1) Capital Assets. The term 'capital assets' means property held by the taxpayer
(whether or not connected with his trade or business), but does not include stock in
trade of the taxpayer or other property of a kind which would properly be included
in the inventory of the taxpayer if on hand at the close of the taxable year, or
property held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Subsection (F) of
Section 34; or real property used in trade or business of the taxpayer.
BIR ISSUANCES
REVENUE REGULATIONS NO. 006-08 April 22, 2008Consolidated Regulations
Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of
Shares of Stock of domestic corporation that are listed and traded through the Local
Stock Exchange, or disposition of shares through Initial Public Offering (IPO) or
disposition of shares not traded through the Local Stock Exchange andHeld as Capital
Assets

CASES DIGEST
Liquidation test is not acceptable in determining whether or not a taxpayer is carrying on
a trade or business.

The fact that property is sold for purposes of liquidation does not foreclose a
determination that a "trade or business" is being conducted by the seller. The sole
question is were the taxpayers in the business of subdividing real estate? If they were,
then it seems indisputable that the property sold falls within the exception in the
definition of capital assets; that is, that it constituted `property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or business.'"
Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al.,
G.R. No. L-26284, October 9, 1986

Gains from sale of subdivided lots are ordinary income.

One may, of course, liquidate a capital asset. To do so, it is necessary to sell. The sale
may be conducted in the most advantageous manner to the seller and he will not lose the
benefits of the capital gain provision of the statute unless he enters the real estate
business and carries on the sale in the manner in which such a business is ordinarily
conducted. In that event, the liquidation constitutes a business and a sale in the ordinary
course of such a business and the preferred tax status is lost.
Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al.
G.R. No. L-26284, October 9, 1986

If the asset is not among the exceptions provided the NIRC, it is a capital asset.

The statutory definition of capital assets is negative in nature. If the asset is not among
the exceptions, it is a capital asset; conversely, assets falling within the exceptions are
ordinary assets. And necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the kind of asset involved in the
transaction.
Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R.
No. L-26284, October 9, 1986

There is no rigid rule in determining with finality whether property sold by a taxpayer is
held primarily for sale to customers in the ordinary course of his trade or business or as
capital asset.

There is no rigid rule or fixed formula by which it can be determined with finality
whether property sold by a taxpayer was held primarily for sale to customers in the
ordinary course of his trade or business or whether it was sold as a capital asset.
Although several factors or indices have been recognized as helpful guides in making a
determination, none of these is decisive; neither is the presence nor the absence of these
factors conclusive. Each case must in the last analysis rest upon its own peculiar facts
and circumstances.

Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al.,

G.R. No. L-26284, October 9, 1986

Inherited property is deemed primarily for sale in the ordinary course of business if it is
substantially improved or/and very actively sold.

Also a property initially classified as a capital asset may thereafter be treated as an

ordinary asset if a combination of the factors indubitably tend to show that the activity
was in furtherance of or in the course of the taxpayer's trade or business. Thus, a sale of
inherited real property usually gives capital gain or loss even though the property has to
be subdivided or improved or both to make it salable. However, if the inherited property
is substantially improved or very actively sold or both it may be treated as held primarily
for sale to customers in the ordinary course of the heir's business.
Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al.,
G.R. No. L-26284, October 9, 1986

Property ceases to be a capital asset if the amount expended to improve it is double its
original cost.
A property ceases to be a capital asset if the amount expended to improve it is double its
original cost, for the extensive improvement indicates that the seller held the property
primarily for sale to customers in the ordinary course of his business.

Tomas Calasanz, et al. vs. Commissioner of Internal Revenue, et al., G.R. No. L-26284,
October 9, 1986
(2) Net Capital Gain The term 'net capital gain' means the excess of the gains
from sales or exchanges of capital assets over the losses from such sales or
exchanges.

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

(B) Percentage Taken into Account In the case of a taxpayer, other than a
corporation, only the following percentages of the gain or loss recognized upon the
sale or exchange of a capital asset shall be taken into account in computing net
capital gain, net capital loss, and net income:

(1) One hundred percent (100%) if the capital asset has been held for not more than
twelve (12) months; and

(2) Fifty percent (50%) if the capital asset has been held for more than twelve (12)
months;

(C) Limitation on Capital Losses Losses from sales or exchanges of capital

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

CASES DIGEST
Losses on equity investments are not deductible as bad debts.
The exclusionary clause found in the law does not include all forms of securities but
specifically covers only bonds, debentures, notes, certificates or other evidence of
indebtedness, with interest coupons or in registered form, which are the instruments of
credit normally dealt with in the usual lending operations of a financial institution.
Equity holdings cannot come close to being within the purview of "evidence of
indebtedness".Verily, it is for a like thesis that the loss of petitioner bank in its equity
investment in the Hongkong subsidiary cannot also be deductible as a bad debt. The
shares of stock in question do not constitute a loan extended by it to its subsidiary (First
CBC Capital) or a debt subject to obligatory repayment by the latter, essential elements
to constitute a bad debt, but a long term investment made by CBC.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

BIR ISSUANCES
REVENUE REGULATIONS NO. 18-01 November 13, 2001
Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received,
Pursuant to a Tax-Free Exchange of Property for Shares under Section 40(C)(2) of the
National Internal Revenue Code of 1997, Prescribing the Penalties for Failure to Comply
with such Guidelines, and Authorizing the Imposition of Fees for the Monitoring Thereof.

(D) Net Capital Loss Carry-over If any taxpayer, other than a corporation,
sustains in any taxable year a net capital loss, such loss (in an amount not in excess
of the net income for such year) shall be treated in the succeeding taxable year as a
loss from the sale or exchange of a capital asset held for not more than twelve (12)
months.

(E) Retirement of Bonds, Etc For purposes of this Title, amounts received by
the holder upon the retirement of bonds, debentures, notes or certificates or other
evidences of indebtedness issued by any corporation (including those issued by a
government or political subdivision thereof) with interest coupons or in registered
form, shall be considered as amounts received in exchange therefor.

(F) Gains and Losses from Short Sales, Etc. For purposes of this Title

(1) Gains or losses from short sales of property shall be considered as gains or
losses from sales or exchanges of capital assets; and

(2) Gains or losses attributable to the failure to exercise privileges or options to

buy or sell property shall be considered as capital gains or losses.

CASES DIGEST
Two conditions for a capital gain or a capital loss to result
Section 29(d)(4)(B) of the NIRC conveys that the loss sustained by the holder of the
securities, which are capital assets (to him), is to be treated as a capital loss as if
incurred from a sale or exchange transaction. A capital gain or a capital loss normally
requires the concurrence of two conditions for it to result: (1) There is a sale or
exchange; and (2) the thing sold or exchanged is a capital asset. When securities become
worthless, there is strictly no sale or exchange but the law deems the loss anyway to be
"a loss from the sale or exchange of capital assets". A similar kind of treatment is given
by the NIRC on the retirement of certificates of indebtedness with interest coupons or in
registered form, short sales and options to buy or sell property where no sale or
exchange strictly exists. In these cases, the NIRC dispenses, in effect, with the standard
requirement of a sale or exchange for the application of the capital gain and loss
provisions of the code.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

SECTION 40Determination of Amount and Recognition of Gain or Loss

(A)Computation of Gain or Loss The gain from the sale or other disposition of
property shall be the excess of the amount realized therefrom over the basis or
adjusted basis for determining gain, and the loss shall be the excess of the basis or
adjusted basis for determining loss over the amount realized. The amount realized
from the sale or other disposition of property shall be the sum of money received
plus the fair market value of the property (other than money) received;

CASES DIGEST
Instances when no recognition of gain or loss is made in sale or exchange of property.
The law should be taken within the context on the general subject of the determination
and recognition of gain or loss. It is not preclusive of, let alone renders completely
inconsequential, the more specific provisions of the code. Thus, no such recognition shall
be made if the sale or exchange is made in pursuance of a plan of corporate merger or
consolidation or, if as a result of an exchange of property for stocks, the exchanger,
alone or together with others not exceeding four, gains control of the corporation.

China Banking Corp. vs. Court of Appeals, et al., G.R. No. 125508, July 19, 2000

(B) Basis for Determining Gain or Loss from Sale or Disposition of Property
The basis of property shall be

(1) The cost thereof in the case of property acquired on or after March 1, 1913, if
such property was acquired by purchase; or

(2) The fair market price or value as of the date of acquisition, if the same was
acquired by inheritance; or
(3) If the property was acquired by gift, the basis shall be the same as if it would be
in the hands of the donor or the last preceding owner by whom it was not acquired
by gift, except that if such basis is greater than the fair market value of the property
at the time of the gift then, for the purpose of determining loss, the basis shall be
such fair market value; or

(4) If the property was acquired for less than an adequate consideration in money
or money's worth, the basis of such property is the amount paid by the transferee
for the property; or

(5) The basis as defined in paragraph (C)(5) of this Section, if the property was
acquired in a transaction where gain or loss is not recognized under
paragraph(C)(2) of this Section.

(C) Exchange of Property

(1) General Rule Except as herein provided, upon the sale or exchange of
property, the entire amount of the gain or loss, as the case may be, shall be
recognized.

(2) Exception No gain or loss shall be recognized if in pursuance of a plan of

merger or consolidation

(a) A corporation, which is a party to a merger or consolidation, exchanges

property solely for stock in a corporation, which is a party to the merger or
consolidation; or

(b) A shareholder exchanges stock in a corporation, which is a party to the merger

or consolidation, solely for the stock of another corporation also a party to the
merger or consolidation; or

(c) A security holder of a corporation, which is a party to the merger or

consolidation, exchanges his securities in such corporation, solely for stock or
securities in another corporation, a party to the merger or consolidation.

No gain or loss shall also be recognized if property is transferred to a corporation

by a person in exchange for stock or unit of participation in such a corporation of
which as a result of such exchange said person, alone or together with others, not
exceeding four (4) persons, gains control of said corporation: Provided, That stocks
issued for services shall not be considered as issued in return for property.

BIR ISSUANCES
REVENUE REGULATIONS no. 18-2001 November 13, 2001
Guidelines on the Monitoring of the Basis of Property Transferred and Shares Received,
pursuant to a Tax-Free Exchange of Property for Shares under Sec.40 (c) (2) of the NIRC
of 1997, Prescribing the Penalties for Failure to Comply with such Guidelines, and
Authorizing the imposition of Fees for the Monitoring Thereof.

(3) Exchange not Solely in Kind

(a) If, in connection with an exchange described in the above exceptions, an

individual, a shareholder, a security holder or a corporation receives not only stock
or securities permitted to be received without the recognition of gain or loss, but
also money and/or property, the gain, if any, but not the loss, shall be recognized
but in an amount not in excess of the sum of the money and the fair market value
of such other property received: Provided, That as to the shareholder, if the money
and/or other property received has the effect of a distribution of a taxable dividend,
there shall be taxed as dividend to the shareholder an amount of the gain
recognized not in excess of his proportionate share of the undistributed earnings
and profits of the corporation; the remainder, if any, of the gain recognized shall be
treated as a capital gain.

(b) If, in connection with the exchange described in the above exceptions, the
transferor corporation receives not only stock permitted to be received without the
recognition of gain or loss but also money and/or other property, then (i) if the
corporation receiving such money and/or other property distributes it in pursuance
of the plan of merger or consolidation, no gain to the corporation shall be
recognized from the exchange, but (ii) if the corporation receiving such other
property and/or money does not distribute it in pursuance of the plan of merger or
consolidation, the gain, if any, but not the loss to the corporation shall be
recognized but in an amount not in excess of the sum of such money and the fair
market value of such other property so received, which is not distributed.

(4) Assumption of Liability

(a) If the taxpayer, in connection with the exchanges described in the foregoing
exceptions, receives stock or securities which would be permitted to be received
without the recognition of the gain if it were the sole consideration, and as a part of
the consideration, another party to the exchange assumes a liability of the taxpayer,
or acquires from the taxpayer property, subject to a liability, then such assumption
or acquisition shall not be treated as money and/or other property, and shall not
prevent the exchange from being within the exceptions.

"(b) If the amount of the liabilities assumed plus the amount of the liabilities to
which the property is subject exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such excess shall be considered as a
gain from the sale or exchange of a capital asset or of property which is not a
capital asset, as the case may be.

(5) Basis.

(a) The basis of the stock or securities received by the transferor upon the
exchange specified in the above exception shall be the same as the basis of the
property, stock or securities exchanged, decreased by (1) the money received, and
(2) the fair market value of the other property received, and increased by (a) the
amount treated as dividend of the shareholder and (b) the amount of any gain that
was recognized on the exchange: Provided, That the property received as 'boot'
shall have as basis its fair market value: Provided, further, That if as part of the
consideration to the transferor, the transferee of property assumes a liability of the
transferor or acquires from the latter property subject to a liability, such
assumption or acquisition (in the amount of the liability) shall, for purposes of this
paragraph, be treated as money received by the transferor on the exchange:
Provided, finally, That if the transferor receives several kinds of stock or securities,
the Commissioner is hereby authorized to allocate the basis among the several
classes of stocks or securities.

(b) The basis of the property transferred in the hands of the transferee shall be the
same as it would be in the hands of the transferor increased by the amount of the
gain recognized to the transferor on the transfer.

(6) Definitions.
(a) The term 'securities' means bonds and debentures but not 'notes' of whatever
class or duration.

(b) The term 'merger' or 'consolidation', when used in this Section, shall be
understood to mean: (i) the ordinary merger or consolidation, or (ii) the acquisition
by one corporation of all or substantially all the properties of another corporation
solely for stock: Provided, That for a transaction to be regarded as a merger or
consolidation within the purview of this Section, it must be undertaken for a bona
fide business purpose and not solely for the purpose of escaping the burden of
taxation: Provided, further, That in determining whether a bona fide business
purpose exists, each and every step of the transaction shall be considered and the
whole transaction or series of transactions shall be treated as a single unit:
Provided, finally, That in determining whether the property transferred constitutes
a substantial portion of the property of the transferor, the term 'property' shall be
taken to include the cash assets of the transferor.

(c) The term 'control', when used in this Section, shall mean ownership of stocks in
a corporation possessing at least fifty-one percent (51%) of the total voting power
of all classes of stocks entitled to vote.

(d) The Secretary of Finance, upon recommendation of the Commissioner, is

hereby authorized to issue rules and regulations for the purpose of determining the
proper amount of transferred assets which meet the standard of the phrase
'substantially all' and for the proper implementation of this Section.

SECTION 41. Inventories. Whenever in the judgment of the

Commissioner, the use of inventories is necessary in order to determine clearly the
income of any taxpayer, inventories shall be taken by such taxpayer upon such
basis as the Secretary of Finance, upon recommendation of the Commissioner,
may, by rules and regulations, prescribe as conforming as nearly as may be to the
best accounting practice in the trade or business and as most clearly reflecting the
income.

If a taxpayer, after having complied with the terms and conditions prescribed by
the Commissioner, uses a particular method of valuing its inventory for any taxable
year, then such method shall be used in all subsequent taxable years unless:
(i) with the approval of the Commissioner, a change to a different method is
authorized; or

(ii) the Commissioner finds that the nature of the stock on hand (e.g., its scarcity,
liquidity, marketability and price movements) is such that inventory gains should
be considered realized for tax purposes and, therefore, it is necessary to modify the
valuation method for purposes of ascertaining the income, profits, or loss in a more
realistic manner: Provided, however, That the Commissioner shall not exercise his
authority to require a change in inventory method more often than once every three
(3) years: Provided, further, That any change in an inventory valuation method
must be subject to approval by the Secretary of Finance.

SECTION 42. Income from Sources Within the Philippines

(A) Gross Income From Sources Within the Philippines. The following items of
gross income shall be treated as gross income from sources within the Philippines:

(1) Interests. Interests derived from sources within the Philippines, and interests
on bonds, notes or other interest-bearing obligations of residents, corporate or
otherwise;

CASES DIGEST
Residence of obligor who pays the interest determines the source of interest income.
The law does not speak of activity but of "source". Even if all the related activities such
as the signing of the contract, the construction of the vessels, the payment of the
stipulated price, and their delivery to the NDC were done in Tokyo, it is the residence of
the obligor who pays the interest which is the determining factor of the source of interest
income.

National Development Company vs. Commissioner of Internal Revenue,

G.R. No. L-53961, June 30, 1987

(2) Dividends. The amount received as dividends:

(a) From a domestic corporation; and

(b) From a foreign corporation, unless less than fifty percent (50%) of the gross
income of such foreign corporation for the three-year period ending with the close
of its taxable year preceding the declaration of such dividends (or for such part of
such period as the corporation has been in existence) was derived from sources
within the Philippines as determined under the provisions of this Section; but only
in an amount which bears the same ratio to such dividends as the gross income of
the corporation for such period derived from sources within the Philippines bears
to its gross income from all sources.

(3) Services. Compensation for labor or personal services performed in the

Philippines;

(4) Rentals and Royalties. Rentals and royalties from property located in the
Philippines or from any interest in such property, including rentals or royalties for

(a) The use of or the right or privilege to use in the Philippines any copyright,
patent, design or model, plan, secret formula or process, goodwill, trademark, trade
brand or other like property or right;

(b) The use of, or the right to use in the Philippines any industrial, commercial or
scientific equipment;

(c) The supply of scientific, technical, industrial or commercial knowledge or

information;

(d) The supply of any assistance that is ancillary and subsidiary to, and is furnished
as a means of enabling the application or enjoyment of, any such property or right
as is mentioned in paragraph (a), any such equipment as is mentioned in paragraph
(b) or any such knowledge or information as is mentioned in paragraph (c);

(e) The supply of services by a nonresident person or his employee in connection

with the use of property or rights belonging to, or the installation or operation of
any brand, machinery or other apparatus purchased from such nonresident person;

(f) Technical advice, assistance or services rendered in connection with technical

management or administration of any scientific, industrial or commercial
undertaking, venture, project or scheme; and

(g) The use of or the right to use:

(i) Motion picture films;

(ii) Films or video tapes for use in connection with television; and

(iii) Tapes for use in connection with radio broadcasting.

(5) Sale of Real Property. Gains, profits and income from the sale of real
property located in the Philippines; and

(6) Sale of Personal Property. Gains, profits and income from the sale of
personal property, as determined in Subsection (E) of this Section.

(B) Taxable Income From Sources Within the Philippines.

(1) General Rule. From the items of gross income specified in Subsection (A) of
this Section, there shall be deducted the expenses, losses and other deductions
properly allocated thereto and a ratable part of expenses, interests, losses and other
deductions effectively connected with the business or trade conducted exclusively
within the Philippines which cannot definitely be allocated to some items or class
of gross income: Provided, That such items of deductions shall be allowed only if
fully substantiated by all the information necessary for its calculation. The
remainder, if any, shall be treated in full as taxable income from sources within the
Philippines.

(2) Exception. No deductions for interest paid or incurred abroad shall be

allowed from the item of gross income specified in Subsection (A) unless
indebtedness was actually incurred to provide funds for use in connection with the
conduct or operation of trade or business in the Philippines.

(C) Gross Income From Sources Without the Philippines. The following items
of gross income shall be treated as income from sources without the Philippines:

(1) Interests other than those derived from sources within the Philippines as
provided in paragraph (1) of Subsection (A) of this Section;

(2) Dividends other than those derived from sources within the Philippines as
provided in paragraph (2) of Subsection (A) of this Section;

(3) Compensation for labor or personal services performed without the Philippines;

(4) Rentals or royalties from property located without the Philippines or from any
interest in such property including rentals or royalties for the use of or for the
privilege of using without the Philippines, patents, copyrights, secret processes and
formulas, goodwill, trademarks, trade brands, franchises and other like properties;
and

(5) Gains, profits and income from the sale of real property located without the
Philippines.

(D) Taxable Income From Sources Without the Philippines. From the items of
gross income specified in Subsection (C) of this Section there shall be deducted the
expenses, losses, and other deductions properly apportioned or allocated thereto
and a ratable part of any expense, loss or other deduction which cannot definitely
be allocated to some items or classes of gross income. The remainder, if any, shall
be treated in full as taxable income from sources without the Philippines.

(E) Income From Sources Partly Within and Partly Without the Philippines.
Items of gross income, expenses, losses and deductions, other than those specified
in Subsections (A) and (C) of this Section, shall be allocated or apportioned to
sources within or without the Philippines, under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. Where items of gross income are separately allocated to sources
within the Philippines, there shall be deducted (for the purpose of computing the
taxable income therefrom) the expenses, losses and other deductions properly
apportioned or allocated thereto and a ratable part of other expenses, losses or
other deductions which cannot definitely be allocated to some items or classes of
gross income. The remainder, if any, shall be included in full as taxable income
from sources within the Philippines. In the case of gross income derived from
sources partly within and partly without the Philippines, the taxable income may
first be computed by deducting the expenses, losses or other deductions
apportioned or allocated thereto and a ratable part of any expense, loss or other
deduction which cannot definitely be allocated to some items or classes of gross
income; and the portion of such taxable income attributable to sources within the
Philippines may be determined by processes or formulas of general apportionment
prescribed by the Secretary of Finance. Gains, profits and income from the sale of
personal property produced (in whole or in part) by the taxpayer within and sold
without the Philippines, or produced (in whole or in part) by the taxpayer without
and sold within the Philippines, shall be treated as derived partly from sources
within and partly from sources without the Philippines.

Gains, profits and income derived from the purchase of personal property within
and its sale without the Philippines, or from the purchase of personal property
without and its sale within the Philippines shall be treated as derived entirely from
sources within the country in which sold: Provided, however, That gain from the
sale of shares of stock in a domestic corporation shall be treated as derived entirely
from sources within the Philippines regardless of where the said shares are sold.
The transfer by a nonresident alien or a foreign corporation to anyone of any share
of stock issued by a domestic corporation shall not be effected or made in its book
unless: (1) the transferor has filed with the Commissioner a bond conditioned upon
the future payment by him of any income tax that may be due on the gains derived
from such transfer, or (2) the Commissioner has certified that the taxes, if any,
imposed in this Title and due on the gain realized from such sale or transfer have
been paid. It shall be the duty of the transferor and the corporation the shares of
which are sold or transferred, to advise the transferee of this requirement.

(F) Definitions. As used in this Section the words 'sale' or 'sold' include
'exchange' or 'exchanged'; and the word 'produced' includes 'created,' 'fabricated,
'manufactured,' 'extracted,' 'processed,' 'cured' or 'aged'.

CHAPTER VIIIAccounting Periods and Methods of Accounting

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

CASES DIGEST
Under the accrual method of accounting, the taxpayer bears the burden of proof of
establishing the accrual of an item of income or deduction.
The correctness or propriety of an accrual must be judged by the facts that a taxpayer
knew, or could reasonably be expected to have known, at the closing of its books for the
taxable year. Accrual method of accounting presents largely a question of fact; such that
the taxpayer bears the burden of proof of establishing the accrual of an item of income or
deduction.

C I R vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007

Income realized within taxpayer's annual accounting period becomes the basis for
computation of the gross income and the tax liability.
Under the withholding tax system, income is viewed as a flow and is measured over a
period of time known as an "accounting period." An accounting period covers twelve
months, subdivided into four equal segments known as "quarters." Income realized within
the taxpayer's annual accounting period (fiscal or calendar year) becomes the basis for
the computation of the gross income and the tax liability.

Citibank, N.A. vs. Court of Appeals, et al., G.R. No. 107434, October 10, 1997

Accounting methods for tax purposes differentiated from methods for accounting
purposes.
While taxable income is based on the method of accounting used by the taxpayer, it will
almost always differ from accounting income. This is so because of a fundamental
difference in the ends the two concepts serve. Accounting attempts to match cost against
revenue. Tax law is aimed at collecting revenue. It is quick to treat an item as income,
slow to recognize deductions or losses. Thus, the tax law will not recognize deductions
for contingent future losses except in very limited situations. Good accounting, on the
other hand, requires their recognition. Once this fundamental difference in approach is
accepted, income tax accounting methods can be understood more easily.

Consolidated Mines, Inc. vs. Court of Tax Appeals, et al.,

G.R. Nos. L-18843 & 18844, August 29, 1974

SECTION 44. Period in which Items of Gross Income Included. The

amount of all items of gross income shall be included in the gross income for the
taxable year in which received by the taxpayer, unless, under methods of
accounting permitted under Section 43, any such amounts are to be properly
accounted for as of a different period. In the case of the death of a taxpayer, there
shall be included in computing taxable income for the taxable period in which falls
the date of his death, amounts accrued up to the date of his death if not otherwise
properly includible in respect of such period or a prior period.

SECTION 45. Period for which Deductions and Credits Taken. The
deductions provided for in this Title shall be taken for the taxable year in which
'paid or accrued' or 'paid or incurred', dependent upon the method of accounting
upon the basis of which the net income is computed, unless in order to clearly
reflect the income, the deductions should be taken as of a different period. In the
case of the death of a taxpayer, there shall be allowed as deductions for the taxable
period in which falls the date of his death, amounts accrued up to the date of his
death if not otherwise properly allowable in respect of such period or a prior
period.

CASES DIGEST
ACCRUAL METHOD OF ACCOUNTING
FACTS: The BIR disallowed respondent's claimed expense deductions for professional
and security services for the taxable year 1986; hence, it issued Assessment Notices for
deficiency income tax. The BIR contended that, since respondent uses the accrual
method of accounting, expenses for professional services which accrued in 1984 and
1985, should have been declared as deductions during said years and failure of
respondent to do so bars it from claiming said expenses as deduction for the taxable year
1986. Both the CTA and the CA cancelled the Assessment Notices holding that the
claimed deductions were properly claimed in 1986 because it was only in said year when
the bills demanding payment were sent to respondent; hence, even if these professional
services were rendered in 1984 or 1985, respondent could not declare the same as
deduction for said years as the amount thereof could not be determined at that time

ISSUE: For taxpayers adopting the accrual method of accounting, when is an expense
deemed to have accrued for purposes of availing the deduction allowed therefor under
Sec. 34 of the Tax Code?

HELD: The accrual method relies upon the taxpayer's RIGHT TO RECEIVE amounts or
its OBLIGATION TO PAY them, in opposition to actual receipt or payment, which
characterizes the cash method of accounting. Amounts of income ACCRUE where the
right to receive them become FIXED; where there is created an ENFORCEABLE
liability. Similarly, liabilities are accrued when fixed and determinable in amount,
without regard to indeterminacy merely of time of payment. The accrual of income and
expense is permitted when the ALL-EVENTS TEST has been met. This test requires: (1)
fixing of a right to income or liability to pay; and (2) the availability of the reasonable
accurate determination of such income or liability.

The test does not demand that the amount of income or liability be known absolutely, only
that a taxpayer has at his disposal the information necessary to compute the amount with
reasonable accuracy In the instant case, the expenses for legal services pertain to the
1984 and 1985 legal and retainer fees of the law firm
BengzonZarragaNarcisoCudalaPecsonAzcuna&Bengson. The firm has been
respondents counsel since the 1960s. Respondent can be expected to have reasonably
known the retainer fees charged by the firm as well as the compensation for its legal
services. Failure to determine the exact amount of the expense during the taxable year
when they could have been claimed as deductions cannot thus be attributed solely to the
delayed billing of these liabilities by the firm. For one, respondent, in the exercise of due
diligence, could have inquired into the amount of their obligation to the firm, especially
so that it is using the accrual method of accounting. For another, it could have
reasonably determined the amount of legal and retainer fees owing to its familiarity with
the rates charged by their long time legal consultant Similarly, the professional fees of
SGV & Co. for auditing the financial statements of respondent for the year 1985 cannot
be validly claimed as expense deductions in 1986 because respondent failed to present
evidence showing that even with only "reasonable accuracy," as the standard to
ascertain its liability to SGV & Co. in the year 1985, it cannot determine the professional
fees which said company would charge for its services.

The accrual method presents largely a question of fact and the taxpayer bears the burden
of establishing the accrual of an expense or income. Respondent failed to discharge this
burden.

Hence, per Revenue Audit Memorandum Order No. 1-2000, they cannot be validly
deducted from respondent's gross income for 1986 and were therefore properly
disallowed by the BIR.
C I R vs. Isabela Cultural Corp., G.R. No. 172231, February 12, 2007

[CA-G.R. SP No. 70025. April 19, 2004.] COMMISSIONER OF INTERNAL REVENUE, vs.
AYALA HOTELS, INC.

DECISION
May the Bureau of Internal Revenue (BIR) still assess a taxpayer for alleged deficiency
income taxes despite the expiration of the three-year period provided for by law 1 as the
period of limitation for assessment of taxes?

The Case

Petitioner, as the official of the Republic of the Philippines charged with the duty of
assessing and collecting internal revenue taxes, seeks a review of the Decision, dated 10
January 2002, of the Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala
Hotels, Inc. vs. Commissioner of Internal Revenue, the dispositive portion of which reads:

IN THE LIGHT OF ALL THE FOREGOING, the instant Petition for Review is hereby
GRANTED. Accordingly, the subject assessment issued by the Respondent against Petitioner
for the year 1993 is hereby ORDERED CANCELLED AND WITHDRAWN.

SO ORDERED.

and from the Resolution, dated 12 March 2002, denying petitioner's motion for
reconsideration of the above-mentioned Decision, the dispositive portion of which reads:

WHEREFORE, Motion for Reconsideration is hereby DENIED for lack of merit.

SO ORDERED.

The Facts

The facts are undisputed. 4 Private respondent Ayala Hotels, Inc. (hereinafter referred to as
respondent) entered into two (2) separate contracts of lease with two (2) lessees, namely,
Manila Mandarin Hotel and Manila Peninsula Hotel, covering two (2) parcels of land in
Makati. Both lease contracts similarly provide:

a) that each of the Lessees, with the consent of Petitioner, will erect a building on the
parcels of land, to be used as a hotel;

b) the duration of the contract is twenty-five (25) years starting from the date of actual
occupancy of the hotel by the first paying guest;

c) that the Petitioner represents that the leased property forms an essential part of a
commercial center is an integrated and controlled development project, and all buildings
and improvements thereon shall be exclusively used and occupied by commercial businesses
of a type and quality that will fit into the pattern of development of the surrounding area;

d) that the Lessees have an option to renew the lease for an additional period of 25
years under the same terms and conditions as those obtaining during the last year of such
lease, the Lessees agree to promptly notify the Petitioner in writing within ninety (90) days
before the termination of the original term of the lease; and

e) that the Lessees shall own the hotel building and all the improvements.

For the taxable year ending 31 December 1993, respondent duly filed on 15 April 1994 its
Corporate Annual Income Tax Return (ITR) with the BIR.

On 7 October 1999 or 5 years from the time respondent filed its ITR, respondent received
from petitioner a Formal Assessment Notice (FAN) dated 17 September 1999, which FAN
alleged that respondent had deficiency income taxes dues to the Government for the taxable
year 1993 total amount of P19,779,385.50, broken down as flows:

Net income per return P59,297,967.00

Add: Unreported income for the year 1993

on improvements by Lessees:

Manila Mandarin Hotel: P7,546,227.00

Manila Peninsula Hotel: 8,600,210.00

P16,146,437.00

Net income per investigation P75,444,404.00

===========

Income tax due thereon P26,405,541.00

Less: Income tax already paid 20,754,288.00

Deficiency income tax 5,651,253.00

Add: 50% Surcharge 2,825,626.50

25% Surcharge 1,412,813.25

 9,889,692.75

Add: 20% interest per annum from

4-15-94 to 10-15-99 9,889,692.75

Total Amount Due P19,779,385.50

===========

The deficiency assessment arose from the finding of the petitioner that the respondent should
have reported as part of its income for taxable year 1993, the total amount of
P16,146,437.00 representing a portion of the total value of the leasehold improvements
introduced by the two lessees of respondent, namely, Manila Mandarin Hotel and Manila
Peninsula Hotel.

Petitioner's findings were premised mainly on the application of Section 49 of Revenue

Regulations No. 2 (Income Tax Regulations) which provides:

Section 49. Improvements by Lessees. When buildings are erected or improvements

made by a lessee in pursuance of an agreement with the lessor, and such buildings or
improvements are not subject to removal by the lessee, the lessor may at his option report the
income therefrom upon either of the following bases:

(a) The lessor may report as income at the time when such buildings or improvements are
completed the fair market value of such buildings or improvements subject to the lease.

(b) The lessor may spread over the life of the lease the estimated depreciated value of
such buildings or improvements at the termination of the lease and report as income for each
year of the lease an aliquot part thereof.

Specifically, petitioner posits that the improvements introduced by respondent's lessees are
not subject to removal and hence, must be reported by respondent as income based on either
of the two rules under Section 49, that is, to report the fair market value of the buildings or
improvements as income at the time when such buildings or improvements are completed, or
to report as income for each year of the lease an aliquot part of the estimated depreciated
value of such buildings or improvements at the termination of the lease.

Pursuant to the Audit Report sent to the respondent by petitioner through the revenue
officers who conducted the examination of respondent's books, the following calculations
were made to establish the amounts alleged as "unreported income" subject of the instant
deficiency assessment:
 Manila Mandarin Manila Peninsula

Hotel (in Pesos) Hotel (in Pesos)

COST OF IMPROVEMENTS

Site Improvement 4,084,259.00 314,905,352.00

Building and Building

Equipment 398,949,466.00 120,738,873.00

APPRAISAL INCREASE

Site Improvement 329,005.00 121,320,807.00

Building and Building

Equipment 99,719,098.0016,382,293.00

Total Value

(Estimated useful life

@ 40 years) (a) 503,081,828.00 573,347,325.00

NET BOOK VALUE

AFTER 25 YEARS (b) 188,655,686.00 215,005,247.00

ANNUAL REPORTABLE

INCOME FOR 25 YEARS (c) 7,546,227.00 8,600,210.00

TAXABLE INCOME
FOR 1993 7,546,227.00 8,600,210.00

The amount of alleged unreported income for 1993 was arrived at by

(i) taking the total value of the improvements (including the building equipment) in (a)
above;

(ii) dividing the same by 40 years representing estimated useful life to arrive at the
annual depreciation over 40 years;

(iii) multiplying the annual depreciation over 40 years by 25 years (representing the
original 25-year term of the lease) to arrive at the total depreciation expense to be claimed
by the lessee for the first 25-year term of the lease;

(iv) deducting the total depreciation expense for 25 years arrived at in (iii) above from the
total value of the improvements in (a) above to arrive at the net depreciated value of the
improvements after 25 years in (b) above; and

(v) dividing the net depreciated value after 25 years in (b) above by 25 years to arrive at
the aliquot part of the net depreciated value of the improvements at the end of the original
25-year term of the lease which should allegedly be reported as income for each year of the
original 25-year term of the lease.

On 5 November 1999, respondent, through its external auditors, filed with petitioner its
protest letter dated 4 November 1999, pursuant to Section 228 of the Tax Code, as amended.
Said protest letter specified the factual and legal bases of the protest against said alleged
deficiency income tax assessment, and further requested that the deficiency tax assessment
be withdrawn and cancelled.

On 27 December 1999, petitioner's letter, dated 6 December 1999, was received by

respondent's external auditors, denying the protest filed on 5 November 1999.

The denial of respondent's protest is based on the following grounds:

(i) the respondent's failure to report alleged rental income in the amount of
P16,146,437.00 can be legally considered a fraudulent act with intent to evade tax; hence,
the ten-year and not the three-year, prescriptive period should apply;

(ii) even granting that there was no willful intent on the part of the respondent to
understate its rental income for purpose of evading its corporate income, tax, the Supreme
case, of Aznar vs. Commissioner of Internal Revenues 5 that the filing of a false tax return,
even without any intent to evade tax, is likewise embraced under the ten-year statute of
limitations;
(iii) that Section 49 of Revenue Regulations No. 2, upon which the assessment issued
against respondent is based, is legal and has the force and effect of law;

(iv) that the 50% surcharge is being imposed in the assessment against the respondent by
reason of the finding of petitioner that respondent failed to report its income from the
leasehold improvements introduced by the lessees which amounts were considered
substantial; and

(v) that the imposition of the 25% surcharge in addition to the 50% surcharge is justified
considering that, since the assessment against the Petitioner pertains to calendar year 1993,
the provisions of the old NIRC should apply, and not those of the Tax Reform Act of 1997
and Revenue Regulations No. 12-99.

On 26 January 2000, respondent filed with the CTA a petition for review, which prayed for
the cancellation and termination of the alleged deficiency income tax assessment for the
taxable year 1993 in the amount of P19,779,385.50.

After the presentation of evidence by the parties, the CTA ruled in favor of respondents,
ordering the cancellation of the subject assessment issued by petitioner against respondent.

In upholding respondent's stance, the CTA ruled that petitioner's right to assess has already
prescribed for having been issued beyond the three-year prescriptive period and that there is
no basis to apply the extended ten-year prescriptive period considering that there was no
willful intention to evade tax on the part of respondent in failing to report as income the
amount of improvements introduced by its lessees.

The CTA is of the view that for the ten-year prescriptive period to apply, the must be, apart
from the element of mistake, a clear, unequivocal and willful intention to evade tax.
Considering that no evidence was presented to show the existence of fraud, no "false return"
was filed to justify the application of the ten-year period. Petitioner's reliance on the Aznar
Case, according to the CTA, was misplaced. Citing Packaging Products Corporation vs.
Commissioner of Internal Revenue, CTA Case No. 4464, dated 11 January 1995, the court
ruled that there must appear, if not a design to mislead or deceive on the part of the taxpayer
at least culpable negligence. A mistake, not culpable in respect of its value would not
constitute such false return.

From the said Decision of the CTA, petitioner filed a motion for reconsideration 6 which was
denied in a Resolution dated 12 March 2002 7. With regard to petitioner's argument that
Section 49 of Revenue Regulation No. 2 is still valid and applicable in the instant case, the
CTA ruled that Section 49 of Revenue Regulation No. 2, which served as basis for the
issuance of the subject assessment was declared without force and effect by the United States
Supreme Court (USSC). The BIR recognizes this fact when on 6 May 1975, it issued a BIR
Ruling addressed to Mr. Antonio M. de Ynchausti adopting the said ruling. Considering that
the interpretation of the USSC of our tax law carries great weight and respect, having
patterned our own law after the US Tax Code, the basis for which the subject assessment was
issued become doubtful.

The Petition

Petitioner is now before this Court seeking a review of the said Decision and Resolution
issued by the CTA.

Petitioner argues that respondent's failure to report in its 1993 income tax return the rental
income from improvements introduced by its lessees, although unintentional, makes the 1993
return a false return, therefore, the ten-year prescriptive period applies as prescribed by
Section 223 of the Tax Code (now Section 222 of the 1997 NIRC 8 ). Petitioner, again cites
the Aznar Case where the Supreme Court ruled that the law should be interpreted to mean a
separation of the three different situations of false return, fraudulent return with intent to
evade tax, and failure to file a return. This view is strengthened by the last portion of the
provision which segregates the situations into three different classes, namely "falsity",
"fraud" and "omission". That there is a difference between "false return" and "fraudulent
return" cannot be denied. While the first merely implies deviation from the truth, whether
intentional or not, the second implies intentional or deceitful entry with intent to evade the
taxes due.

Petitioner further argues that Section 49 of Revenue Regulation No. 2 has the force and
effect of law having been promulgated by the Secretary of Finance, upon recommendation of
the Commissioner of Internal Revenue, in the exercise of his power under Section 244 of the
1997 NIRC to "promulgate all needful rules and regulations in connection with the
implementation of the provisions of internal revenue laws." Not having been modified or
revoked, it is still valid and legal until declared otherwise.

The surcharges thus imposed on the deficiency income tax assessment against respondent
finds basis in the fact that the said return was considered as a "false return," thus making the
respondent liable for the 50% surcharge. The 25% surcharge, on the other hand, was
imposed applying the old NIRC considering that the case pertains to deficiency income tax
for the calendar year 1993.

Respondent, on the other hand, maintains that petitioner's right to assess deficiency income
taxes has prescribed considering that the FAN was issued only after 5 years from the time
respondent filed its ITR, way beyond the three-year prescriptive period provided for under
Section 203 of the 1997 NIRC. To bolster its argument, respondent cites CTA case San
Miguel Corporation vs. Commissioner of Internal Revenue (6 January 1995) which ruled
that there is nothing in the Aznar Case which establishes a hard and fast rule that every
"deviation" from the truth necessarily brings a particular return under the coverage of
Section 223 of the Tax Code. It is only where the falsity or "deviation" would place the
government at a disadvantage so as to prevent the assessment and collection of the correct
amount of taxes that the ordinary prescriptive period provided under Section 331 (now
Section 203) of the Tax Code should not be applied.

Respondent further argues, by citing the case of Commissioner of Internal Revenue vs. B.F.
Goodrich Phils., Inc., 10 that mere falsity of a return does not merit the application of the
ten-year prescriptive period. The element of fraud, as in the case of the taxpayer's intent to
evade the payment of the correct amount of tax, must be clearly established. In the absence
of proof that there exists fraudulent intent on the part of respondent in failing to report as
income the improvements introduced by its lessees, there is no basis for the application of the
ten-year prescriptive period.

On the validity of Section 49 of Revenue Regulation No. 2, respondent posits that the said
revenue regulation should no longer be enforced considering that in the 12 March 2002
Resolution of the CTA, the court mentioned the fact that its counterpart provision in the US
Revenue Regulations was declared without force and effect by the US Supreme Court and the
BIR itself adopted this ruling in its 6 May 1975 ruling issued to Mr. Antonio M. de Ynchausti
stating that, Section 49 of Revenue Regulation No. 2, which was patterned after the US
Revenue Regulations, should no longer be enforced.

The Issue

The central issue that needs to be resolved in this case is whether or not petitioner's right to
assess herein deficiency income taxes has indeed prescribed as ruled by the CTA.

The Court's Ruling

The petition has no merit.

Petitioner mainly argues that respondent, in failing to report as part of its income the
improvements introduced by its lessees in its ITR, filed a "false return" as defined in the
Aznar Case and consequently, the assessment made 5 years after the ITR was filed on 15
April 1994 was still within the ten-year prescriptive period provided for in Section 222 of the
1997 NIRC.

What, therefore, constitutes "false return" to warrant the application of the ten-year
prescriptive period?

Section 222 of the 1997 NIRC provides:

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be filed without assessment, at any time within ten (10) years after the discovery of the
falsity, fraud or omission; provided, that in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof.

In interpreting the above provision, it is important to note that commentaries 11 consider

two (2) groups of exceptions provided for in Section 222: The first, where there is a failure to
file the required return; and the second, where there is a return filed but the same is false or
fraudulent and made with intent to evade tax. It appears that the phrase "with intent to evade
tax" qualifies not only the word "fraudulent" but also the word "false", having been grouped
together as one category under the exceptions.

Under the rules of statutory construction, the qualifying words "with intent to evade tax"
should refer to both the words "false" and "fraudulent" since these words are not separated
by a comma. If it was the intent of the lawmakers to qualify only the word "fraudulent" then
the same should have been treated separately or at the very least, the words "false" and
"fraudulent" should have been separated by a comma to show separate treatment of the two.

In the case of Florentino and Zandueta vs. P.N.B., 12 the Supreme Court ruled in this wise:

Grammatically, the qualifying clause refers only to the last antecedent; that is, "any citizen
of the Philippines or any association or corporation organized under the laws of the
Philippines." It should be noted that there is a comma before the words "or to any citizen,
etc.," which separates said phrase from the preceding ones.

The words "false" and "fraudulent" can therefore be treated as one category of exception
qualified by the phrase "with intent to evade tax."

But even if We disregard the grammatical construction, there are still persuasive reasons
why the qualifying phrase should refer to both the words "false" and "fraudulent."

It is more logical to follow such interpretation considering that our tax law provides a
statute of limitations in the collection of taxes for the purpose of safeguarding taxpayers
from any unreasonable examination, investigation or assessment. Thus, the law on
prescription should be liberally construed in order to afford such protection. Consequently,
the exceptions to the law on prescription should be strictly construed. 13 To allow a different
interpretation of the said provision would be unfair for the taxpayer and would negate the
purpose for which said periods were intended.
Reliance on the Aznar Case with regard to the issue of prescription is misplaced. Although in
the said case, the Supreme Court ruled that a "false return" merely implies a deviation from
the truth, whether intentional or not, such pronouncement should not be given a sweeping
application in all cases where a mistake in ITR entries are made by taxpayers. Otherwise,
any mistake, however slight, in a return filed by a taxpayer in good faith would justify the
application of the ten-year prescriptive period for assessment. Consequently, the protection
provided for under Section 203 of the 1997 NIRC is rendered nugatory. Logically therefore,
not all "false returns" would call for an application of Section 222 of the 1997 NIRC. Only
"false returns" which are filed by a taxpayer with intent to evade tax should warrant an
application of the ten-year prescriptive period.

In order to render a return made by a taxpayer a "false return" within the meaning of
Section 222, of the Tax Code, there must appear, a design to mislead or deceive on the part
of the taxpayer, or at least culpable negligence. A mistake, not culpable in respect of its
value would not constitute a false return.

Moreover, the factual setting of the Aznar Case is entirely different from that of the case at
bar. In the said case, the taxpayer was assessed deficiency income taxes for the years 1946 to
1951, covering more than five taxable years. On the other hand, in this case, respondent was
assessed deficiency income taxes only for the year 1993.

There is a false or fraudulent return if any of the following are present:

1. There is intentional substantial under declaration of income.

2. There is intentional substantial overstatement of deductions.

3. There is intentional under declaration of selling price and overvaluation of cost or

property sold.

4. Recurrence of the understatement of income or overstatement of deductions for more

than one taxable year. (emphasis supplied)

In the Aznar Case the taxpayer undoubtedly filed several false tax returns warranting the
application of the ten-year prescriptive period. Clearly, in this case, even if respondent made
an understatement of income in its ITR, the same cannot constitute a "false" or "fraudulent"
return, since the subject deficiency assessment pertains only to one taxable year. Moreover,
no proof was presented to show that such understatement of income was done intentionally
to evade taxes.

The CTA correctly ruled that,

There is no basis for the application of the ten-year prescriptive period based on the ground
that there is no "willful intention to evade tax" on the part of the Petitioner (respondent
herein).

An indispensable ingredient that must be proven to exist for the 10-year prescriptive period
to apply is that there must be, apart from the element of mistake, a clear, unequivocal and
willful intention to evade tax.

In this case, the failure of respondent to report as part of its income the improvements
introduced by its lessees was omission done in good faith and not intentionally to evade taxes
due to the government, considering that Section 49 of Revenue Regulation No. 2 admits of
different interpretations.

In one commentary, the authors recognize that with respect to improvements introduced by
the lessee, several rules may be followed, thus,

In the case of lease agreements where the improvements introduced by the lessee would
thereby or later become the lessor's property, the following rules have been offered:

(a) BIR Rule (Rev. Reg. No. 2): At his option, the lessor may consider the property as
income

(1) Upon the completion of the improvement; or

(2) By spreading the value of the improvement over the life of the lease.

(b) United States Rule (Blatt vs. U.S., 308 U.S. 267):

(1) If the improvements are in the concept of rents, the lessor must treat the property as
income upon completion of the improvement; but

(2) If the introduction of improvement is merely an incidental element of the contract,

then the lessor must treat the property as income upon the termination of the lease.

The problem being indeed one of accounting, due consideration should be given to the
taxpayer's own accounting preference. Equally acceptable perhaps would be the following
approaches to a lessor who is

(a) On cash basis The lessor may consider the improvements as income upon the
effective transfer of legal and beneficial ownership to him, i.e., fulfillment of all conditions
therefore. If such transfer were to take place prior to the termination of the lease it shall be
its fair market value at the time of transfer minus its expected depreciation for the balance of
the period (such remaining value being what the improvement would be worth to the
taxpayer). If the transfer were to take place upon the termination of the lease then the
taxable income would be the fair market value of the property at that time. This remaining
value, having been earned, may then serve as a basis for possible depreciation allowance
over the further useful life of the improvement.

(b) On accrual basis The value of the improvement may be spread over the life of the
lease and the value allocated over each taxable year is the portion that is deemed earned. If,
for any reason, the improvement suffers a loss or is totally lost, then to that extent, not
exceeding what has been earned, this may become a deductible loss.

It appears, therefore, that in applying Section 49 of Revenue Regulation No. 2, the choice is
given to the lessor on when to treat the said improvements as income and when to report the
same in its ITR. There is no hard and fast rule with respect to the application of the said
provision. The lessor may opt to apply the BIR Rule or the U.S. Rule since no fixed guideline
with respect to reporting such improvements as income has been provided for. It cannot be
said, therefore, that in failing to report as income the improvements introduced by the lessee,
respondent was motivated by ill will with intent to evade taxes. Differences in interpretation
of the law between the Commissioner and the taxpayer (do) not necessarily make the
taxpayer's return false.

The burden of proving fraud is with the BIR. One of the disputable presumptions provided in
Section 3 (ff), Rule 131 of the Revised Rules of Court is that the law has been obeyed. If the
three-year period for assessment has expired at the time of the mailing of the notice of
deficiency, the burden is on the BIR to show that the ten (10) year period is applicable.

The Supreme Court has ruled,

On the issue of whether Sec 331 or Sec. 332 (a) of the National Internal Revenue Code
should apply to this case, there is no iota of evidence presented by the petitioner as to any
fraud or falsity on the return with intent to evade payment of tax. . . . Petitioner merely relies
on the provisions of Section 25 of the National Internal Revenue Code, violation of which,
according to petitioner, presupposes the existence of fraud. But this is begging the question
and We do not subscribe to the view of the petitioner.

Fraud is a question of fact and the circumstances constituting fraud must be alleged and
proved in the court below. . . . Fraud is never lightly presumed because it is a serious
charge. (emphasis supplied) 20

In the above quoted case of Commissioner of Internal Revenue vs. Ayala Securities
Corporation, 21 the Supreme Court applied the Aznar doctrine (on false and fraudulent
return in relation to the fraud penalty) to the prescriptive period, stating that fraud must be
alleged and proved and never lightly presumed. The Aznar Case provided thus,
The lower court's conclusion regarding the existence of fraudulent intent to evade payment
of taxes was based merely on a presumption and not on evidence establishing a willful filing
of false and fraudulent returns so as to warrant the imposition of the fraud penalty. The
fraud contemplated by law is actual and not constructive. It must be intentional fraud,
consisting of deception willfully and deliberately done or resorted to in order to induce
another to give up some legal right. Negligence, whether slight or gross, is not equivalent to
the fraud with intent to evade the tax contemplated by the law. It must amount to intentional
wrong-doing with the sole object of avoiding the tax. It necessarily follows that a mere
mistake cannot be considered fraudulent intent, and if both petitioner and respondent
Commissioner of Internal Revenue committed mistakes in making entries in the returns and
in the assessment, respectively, under the inventory method of determining tax liability, it
would be unfair to treat the mistakes of the petitioner as tainted with fraud and those of the
respondent as made in good faith. (emphasis supplied)

Considering the foregoing, there is no basis to disregard the three-year prescriptive period.
Since the petitioner failed to present proof that respondent filed a false return with intent to
evade tax, the period for assessment that should apply is the three-year period provided in
Section 203 of the 1997 NIRC and not the ten-year period provided in Section 222 of the
Code. Therefore, petitioner's right to assess respondent the subject deficiency income taxes
has already prescribed considering that the assessment notice was issued more than three
years, or five and a half years to be exact, after respondent filed its ITR.

WHEREFORE, the petition is DISMISSED. The Decision, dated 10 January 2002, of the
Court of Tax Appeals (CTA) in C.T.A. Case No. 6002 entitled Ayala Hotels, Inc. vs.
Commissioner of Internal Revenue, is hereby AFFIRMED in toto. SO ORDERED.

Footnotes

SEC. 203. Period of limitation upon assessment and collection. Except as provided in
Section 222, internal revenue taxes shall be assessed within three (3) years after the last day
prescribed by law for the filing of the return, and no proceeding in court without assessment
for the collection of such taxes shall be begun after the expiration of such period; provided,
that in a case where a return is filed beyond the period prescribed by law, the three-year
period shall be counted from the day the return was filed. For purposes of this Section, a
return filed before the last day prescribed by law for the filing thereof shall be considered as
filed on such last day. (The National Internal Revenue Code [NIRC] of 1997).

SEC. 222. Exceptions as to period of limitation of assessment and collection of taxes.

(a) In the case of a false or fraudulent return with intent to evade tax or of failure to file a
return, the tax may be assessed, or a proceeding in court for the collection of such tax may
be filed without assessment, at any time within ten (10) years after the discovery of the
falsity, fraud or omission; provided, that in a fraud assessment which has become final and
executory, the fact of fraud shall be judicially taken cognizance of in the civil or criminal
action for the collection thereof. (1997 NIRC).

SECTION 46 Change of Accounting Period If a taxpayer, other than an

individual, changes his accounting period from fiscal year to calendar year, from
calendar year to fiscal year, or from one fiscal year to another, the net income
shall, with the approval of the Commissioner, be computed on the basis of such
new accounting period, subject to the provisions of Section 47.

BIR ISSUANCES
REVENUE REGULATIONS NO. 003-11 March 7, 2011

Policies, Guidelines and Procedures on the Application for Change in Accounting Period
of a Taxpayer

Change of Accounting Period Pursuant to Section 46 of the NIRC of 1997, as

amended, if a taxpayer, other than an individual, changes his accounting period from
fiscal year to calendar year, from calendar year to fiscal year, or from one fiscal year to
another, the net income shall, with the approval of the Bureau of Internal Revenue (BIR),
be computed on the basis of such new accounting period. Whenever a taxpayer changes
its accounting period, the taxpayer is required to file with the BIR a separate final or
adjustment return for the period between the close of the original accounting period and
the date designated as the close of the new accounting period.

SECTION 47 Final or Adjustment Returns for a Period of Less than Twelve

(12) Months.

(A) Returns for Short Period Resulting from Change of Accounting Period. If a
taxpayer, other than an individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to calendar year, a separate
final or adjustment return shall be made for the period between the close of the last
fiscal year for which return was made and the following December 31. If the
change is from calendar year to fiscal year, a separate final or adjustment return
shall be made for the period between the close of the last calendar year for which
return was made and the date designated as the close of the fiscal year. If the
change is from one fiscal year to another fiscal year, a separate final or adjustment
return shall be made for the period between the close of the former fiscal year and
the date designated as the close of the new fiscal year.

(B) Income Computed on Basis of Short Period. Where a separate final or

adjustment return is made under Subsection (A) on account of a change in the
accounting period, and in all other cases where a separate final or adjustment
return is required or permitted by rules and regulations prescribed by the Secretary
of Finance, upon recommendation of the Commissioner, to be made for a
fractional part of a year, then the income shall be computed on the basis of the
period for which separate final or adjustment return is made.

SECTION 48. Accounting for Long-term Contracts. Income from long-

term contracts shall be reported for tax purposes in the manner as provided in this
Section. As used herein, the term 'long-term contracts' means building, installation
or construction contracts covering a period in excess of one (1) year. Persons
whose gross income is derived in whole or in part from such contracts shall report
such income upon the basis of percentage of completion. The return should be
accompanied by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work performed
under contract. There should be deducted from such gross income all expenditures
made during the taxable year on account of the contract, account being taken of the
material and supplies on hand at the beginning and end of the taxable period for
use in connection with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable net income arising thereunder
has not been clearly reflected for any year or years, the Commissioner may permit
or require an amended return.

SECTION 49 InstallmentBasis.

(A) Sales of Dealers in Personal Property. Under rules and regulations

prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of personal
property on the installment plan may return as income therefrom in any taxable
year that proportion of the installment payments actually received in that year,
which the gross profit realized or to be realized when payment is completed, bears
to the total contract price.

(B) Sales of Realty and Casual Sales of Personalty. In the case (1) of a casual
sale or other casual disposition of personal property (other than property of a kind
which would properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year), for a price exceeding One thousand pesos (P1,000), or
(2) of a sale or other disposition of real property, if in either case the initial
payments do not exceed twenty-five percent (25%) of the selling price, the income
may, under rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, be returned on the basis and in the manner
above prescribed in this Section. As used in this Section, the term 'initial payments'
means the payments received in cash or property other than evidences of
indebtedness of the purchaser during the taxable period in which the sale or other
disposition is made.

(C) Sales of Real Property Considered as Capital Asset by Individuals. An

individual who sells or disposes of real property, considered as capital asset, and is
otherwise qualified to report the gain therefrom under Subsection (B) may pay the
capital gains tax in installments under rules and regulations to be promulgated by
the Secretary of Finance, upon recommendation of the Commissioner.

(D) Change from Accrual to Installment Basis. If a taxpayer entitled to the

benefits of Subsection (A) elects for any taxable year to report his taxable income
on the installment basis, then in computing his income for the year of change or
any subsequent year, amounts actually received during any such year on account of
sales or other dispositions of property made in any prior year shall not be excluded.

SECTION 50 Allocation of Income and Deductions. In the case of two or

more organizations, trades or businesses (whether or not incorporated and whether
or not organized in the Philippines) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to distribute, apportion or
allocate gross income or deductions between or among such organization, trade or
business, if he determines that such distribution, apportionment or allocation is
necessary in order to prevent evasion of taxes or clearly to reflect the income of
any such organization, trade or business.
CHAPTER IXReturns and Payment of Tax

SECTION 51 Individual Return.

(A) Requirements.

(1) Except as provided in paragraph (2) of this Subsection, the following

individuals are required to file an income tax return:

(a) Every Filipino citizen residing in the Philippines;

(b) Every Filipino citizen residing outside the Philippines, on his income from
sources within the Philippines;

(c) Every alien residing in the Philippines, on income derived from sources within
the Philippines; and

(d) Every nonresident alien engaged in trade or business or in the exercise of

profession in the Philippines.

(2) The following individuals shall not be required to file an income tax return:

(a) An individual whose gross income does not exceed his total personal and
additional exemptions for dependents under Section 35: Provided, That a citizen of
the Philippines and any alien individual engaged in business or practice of
profession within the Philippines shall file an income tax return, regardless of the
amount of gross income;

(b) An individual with respect to pure compensation income, as defined in Section

32(A)(1), derived from sources within the Philippines, the income tax on which
has been correctly withheld under the provisions of Section 79 of this Code:
Provided, That an individual deriving compensation concurrently from two or
more employers at any time during the taxable year shall file an income tax return;

(c) An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A) of this Code; and

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

individual who is exempt from income tax pursuant to the provisions of this Code
and other laws, general or special.
BIR ISSUANCES
REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. The following income payments

are exempted from the requirements of withholding tax on compensation:

XXX XXXXXXCompensation income of Minimum Wage Earners (MWEs) who work

in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and
Productivity Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
form income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.
For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.

XXX XXXXXX

Facilities and privileges of relatively small value Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on
purchases), otherwise known as "de minimis benefits," furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to
not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;
(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%)
of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the
'de minimis' benefits over their respective ceilings prescribed by these regulations shall
be considered as part of 'other benefits' and the employee receiving it will be subject to
tax only on the excess over the P30,000.00 ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as "de
minimis" benefits or fringe benefits, shall constitute as deductible expense upon such
employer.

Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.

(3) The foregoing notwithstanding, any individual not required to file an income
tax return may nevertheless be required to file an information return pursuant to
rules and regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.

(4) The income tax return shall be filed in duplicate by the following persons:

(a) A resident citizen on his income from all sources;

(b) A nonresident citizen on his income derived from sources within the
Philippines;

(c) A resident alien on his income derived from sources within the Philippines;
and
(d) A nonresident alien engaged in trade or business in the Philippines on his
income derived from sources within the Philippines.

(B) Where to File. Except in cases where the Commissioner otherwise permits,
the return shall be filed with an authorized agent bank, Revenue District Officer,
Collection Agent or duly authorized Treasurer of the city or municipality in which
such person has his legal residence or principal place of business in the
Philippines, or if there be no legal residence or place of business in the Philippines,
with the Office of the Commissioner.

BIR ISSUANCES
REVENUE REGULATIONS NO. 003-10 February 24, 2010
Submission of the Statement of Management Responsibility

REVENUE REGULATIONS NO. 02-06 December 1, 2005

Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income
Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns With Claimed Tax
Credits due to Creditable Tax Withheld at Source and of the Monthly Alphalist of Payees
(MAP) Whose Income Received Have Been Subjected to Withholding Tax to the
Withholding Tax Remittance Return Filed by the Withholding Agent/Payor of Income
Payments

REVENUE REGULATIONS NO. 002-11 March 1, 2011

Filing of Income Tax Return and/or Annual Information Return by Individuals, Including
Estates and Trusts shall include in the Account Information Return (AIR) such income
subject to final withholding tax and those exclusions from gross income.
Filing of ITR with AIR. Starting with taxable year 2010, individuals, estates and trusts
required under the law and existing issuances to file an ITR should file said ITR together
with the AIR (BIR Form No. 1705) Said individuals, estates and trusts shall include in the
AIR such income subject to final withholding tax and those exclusions from gross income
under Section 32 (B) of the Tax Code, as amended. Individuals not required to file
income tax returns or those qualified for substituted filing, may file an ITR for purposes
of loans, foreign travel requirements, etc. However, if they file an ITR, they should
likewise attach a duly accomplished AIR.

REVENUE REGULATIONS NO. 015-10 November 25, 2010

Notes to Financial Statements in the Income Tax Returns shall include information on
taxes, duties and license fees paid or accrued during the taxable year, particularly the
following:
1. The amount of VAT output tax declared during the year and the account title and
amount/s upon which the same was based. If there are zero-rated sales/receipts and/or
exempt sales/receipts, a statement to that effect and the legal basis therefor;
2. The amount of VAT Input taxes claimed broken down into:
a. Beginning of the year;
b. Current year's domestic purchases/payments for:
i. Goods for resale/manufacture or further processing
ii. Goods other than for resale or manufacture
iii. Capital goods subject to amortization
iv. Capital goods not subject to amortization
v. Services lodged under cost of goods sold
vi. Services lodged under other accounts;
c. Claims for tax credit/refund and other adjustments; and
d. Balance at the end of the year.
3. The landed cost of imports and the amount of customs duties and tariff fees paid
or accrued thereon;
4. The amount of excise tax/es, classified per major product category, i.e., tobacco
products, alcohol products, automobiles, minerals, oil and petroleum, etc. paid on
a. Locally produced excisable items, and
b. Imported excisable items.
5. Documentary stamp tax (DST) on loan instruments, shares of stock and other
transactions subject thereto;
6. All other taxes, local and national, including real estate taxes, license and permit
fees lodged under the Taxes and Licenses account both under the Cost of Sales and
Operating Expense accounts;
7. The amount of withholding taxes categorized into:
i. Tax on compensation and benefits
ii. Creditable withholding tax/es
iii. Final withholding tax/es
8. Periods covered and amount/s of deficiency tax assessments, whether protested or
not;
9. Tax cases, and amounts involved, under preliminary investigation, litigation
and/or prosecution in courts or bodies outside the BIR."

CASES DIGEST
Failure to file a return by the taxpayer
The "failure to file an income tax return" is not a crime involving moral turpitude as the
mere omission is already a violation regardless of the fraudulent intent or willfulness of
the individual. This conclusion is supported by the provisions of the NIRC as well as
previous Court decisions which show that with regard to the filing of an income tax
return, the NIRC considers three distinct violations: (1) a false return, (2) a fraudulent
return with intent to evade tax, and (3) failure to file a return.
The same is illustrated in Section 51 (b) of the NIRC which reads:
(b) Assessment and payment of deficiency tax
In case a person fails to make and file a return or list at the time prescribed by law, or
makes willfully or otherwise, false or fraudulent return or list .

Republic of the Phil. vs. Ferdinand R. Marcos II, et al.,

G.R. Nos. 130371 & 130855, August 4, 2009

(C) When to File.

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

(2) Individuals subject to tax on capital gains:

(a) From the sale or exchange of shares of stock not traded thru a local stock
exchange as prescribed under Section 24(C) shall file a return within thirty (30)
days after each transaction and a final consolidated return on or before April 15 of
each year covering all stock transactions of the preceding taxable year; and

(b) From the sale or disposition of real property under Section 24(D) shall file a
return within thirty (30) days following each sale or other disposition.

(D) Husband and Wife. Married individuals, whether citizens, resident or

nonresident aliens, who do not derive income purely from compensation, shall file
a return for the taxable year to include the income of both spouses, but where it is
impracticable for the spouses to file one return, each spouse may file a separate
return of income but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.

(E) Return of Parent to Include Income of Children. The income of unmarried

minors derived from property received from a living parent shall be included in the
return of the parent, except (1) when the donor's tax has been paid on such
property, or (2) when the transfer of such property is exempt from donor's tax.

(F) Persons Under Disability. If the taxpayer is unable to make his own return,
the return may be made by his duly authorized agent or representative or by the
guardian or other person charged with the care of his person or property, the
principal and his representative or guardian assuming the responsibility of making
the return and incurring penalties provided for erroneous, false or fraudulent
returns.

(G) Signature Presumed Correct. The fact that an individual's name is signed to
a filed return shall be prima facie evidence for all purposes that the return was
actually signed by him.

The People vs Gloria Kintanar tax evasion case wherein the respondent was a sales
agent of Forever Living products who did not report proper income taxes is a landmark
case because the Supreme Court upheld the Court of Tax Appeals willful blindness
doctrine that requires taxpayers to be responsible for their tax returns and that they
could not just blame their accountants for fraudulent tax returns that they signed and
filed with the Bureau of Internal Revenue.

REVENUE REGULATIONS NO. 003-10 February 24, 2010

Submission of the Statement of Management Responsibility

SECTION 52 Corporation Returns.

(A) Requirements. Every corporation subject to the tax herein imposed, except
foreign corporations not engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly income tax return and final or
adjustment return in accordance with the provisions of Chapter XII of this Title.
The return shall be filed by the president, vice-president or other principal officer,
and shall be sworn to by such officer and by the treasurer or assistant treasurer.

BIR ISSUANCES
REVENUE REGULATIONS NO. 003-09 February 9, 2009

Regulations Expanding the Electronic Filing and Payment System (EFPS) Coverage to
Include the Top 20,000 Private Corporations Duly Identified Under RR No. 14-2008

REVENUE REGULATIONS NO. 003-10 February 24, 2010

Submission of the Statement of Management Responsibility

(B) Taxable Year of Corporation. A corporation may employ either calendar

year or fiscal year as a basis for filing its annual income tax return: Provided, That
the corporation shall not change the accounting period employed without prior
approval from the Commissioner in accordance with the provisions of Section 47
of this Code.

BIR ISSUANCES
REVENUE REGULATIONS NO. 017-10 November 26, 2010
Consolidated Regulations Implementing Republic Act No. 7646, An Act Authorizing the
Commissioner of Internal Revenue to Prescribe the Place for Payment of Internal
Revenue Taxes by Large Taxpayers and Prescribing the Coverage and Criteria for
Determining Large Taxpayers

REVENUE REGULATIONS NO. 017-10 November 26, 2010

Consolidated Regulations Implementing Republic Act No. 7646, An Act Authorizing the
Commissioner of Internal Revenue to Prescribe the Place for Payment of Internal
Revenue Taxes by Large Taxpayers and Prescribing the Coverage and Criteria for
Determining Large Taxpayers

(C) Return of Corporation Contemplating Dissolution or Reorganization. Every

corporation shall, within thirty (30) days after the adoption by the corporation of a
resolution or plan for its dissolution, or for the liquidation of the whole or any part
of its capital stock, including a corporation which has been notified of possible
involuntary dissolution by the Securities and Exchange Commission, or for its
reorganization, render a correct return to the Commissioner, verified under oath,
setting forth the terms of such resolution or plan and such other information as the
Secretary of Finance, upon recommendation of the Commissioner, shall, by rules
and regulations, prescribe.

The dissolving or reorganizing corporation shall, prior to the issuance by the

Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, secure a
certificate of tax clearance from the Bureau of Internal Revenue which certificate
shall be submitted to the Securities and Exchange Commission.

CASES DIGEST
Return of Corporation Contemplating Dissolution or Reorganization
A tax clearance from the BIR is required before the SEC could approve the dissolution of
a corporation. Section 52(C) of the Tax Code of 1997 and the BIR-SEC Regulations No.
1 regulate the relations only as between the SEC and the BIR, making a certificate of tax
clearance a prior requirement before the SEC could approve the dissolution of a
corporation. Section 30 of the New Central Bank Act lays down the proceedings for
receivership and liquidation of a bank. The said provision is silent as regards the
securing of a tax clearance from the BIR.

In Re: Rural Bank of Bokod (Benguet), Inc., PDIC vs. BIR, G.R.
No. 158261, December 18, 2006

The PDIC, as receiver and liquidator, is duty-bound to file a final return.

The first paragraph of Section 30(C) of the Tax Code of 1997, read in conjunction with
Section 54 of the same Code, clearly imposes upon PDIC, as the receiver and liquidator
of RBBI, the duty to file a final return.

In Re: Rural Bank of Bokod (Benguet), Inc., PDIC vs. BIR,

G.R. No. 158261, December 18, 2006

(D) Return on Capital Gains Realized from Sale of Shares of Stock not Traded in
the Local Stock Exchange. Every corporation deriving capital gains from the
sale or exchange of shares of stock not traded thru a local stock exchange as
prescribed under Sections 24(C), 25(A)(3), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c)
shall file a return within thirty (30) days after each transaction and a final
consolidated return of all transactions during the taxable year on or before the
fifteenth (15th) day of the fourth (4th) month following the close of the taxable
year.

SECTION 53. Extension of Time to File Returns. The Commissioner may,

in meritorious cases, grant a reasonable extension of time for filing returns of
income (or final and adjustment returns in case of corporations), subject to the
provisions of Section 56 of this Code.

SECTION 54. Returns of Receivers, Trustees in Bankruptcy or Assignees.

In cases wherein receivers, trustees in bankruptcy or assignees are operating the
property or business of a corporation, subject to the tax imposed by this Title, such
receivers, trustees or assignees shall make returns of net income as and for such
corporation, in the same manner and form as such organization is hereinbefore
required to make returns, and any tax due on the income as returned by receivers,
trustees or assignees shall be assessed and collected in the same manner as if
assessed directly against the organizations of whose businesses or properties they
have custody or control.

SECTION 55. Returns of General Professional Partnerships. Every general

professional partnership shall file, in duplicate, a return of its income, except
income exempt under Section 32(B) of this Title, setting forth the items of gross
income and of deductions allowed by this Title, and the names, Taxpayer
Identification Numbers (TIN), addresses and shares of each of the partners.

SECTION 56. Payment and Assessment of Income Tax for Individuals and
Corporations.

(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. In the case of tramp
vessels, the shipping agents and/or the husbanding agents, and in their absence, the
captains thereof are required to file the return herein provided and pay the tax due
thereon before their departure. Upon failure of the said agents or captains to file the
return and pay the tax, the Bureau of Customs is hereby authorized to hold the
vessel and prevent its departure until proof of payment of the tax is presented or a
sufficient bond is filed to answer for the tax due.

(2) Installment Payment. When the tax due is in excess of Two thousand pesos
(P2,000), the taxpayer other than a corporation may elect to pay the tax in two (2)
equal installments in which case, the first installment shall be paid at the time the
return is filed and the second installment, on or before July 15 following the close
of the calendar year. If any installment is not paid on or before the date fixed for its
payment, the whole amount of the tax unpaid becomes due and payable, together
with the delinquency penalties.

BIR ISSUANCES
REVENUE REGULATIONS NO. 001-10 January 21, 2010

Expanding the Coverage of Taxpayers Required to File Returns and Pay Taxes Through
the Electronic Filing and Payment System (EFPS) of the Bureau of Internal Revenue
REVENUE REGULATIONS NO. 002-08 January 10, 2008

Amending Certain Rules and Regulations Relative to the Collection and Remittance of
Taxes Paid to Authorized Agent Banks (AABs) thru Over-the-Counter (OTC) and
Electronic Filing and Payment System (EFPS) and Amending Further the Memorandum
of Agreement Relative to the Accreditation of the AABs

(3) Payment of Capital Gains Tax. The total amount of tax imposed and
prescribed under Sections 24(C), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c)
shall be paid on the date the return prescribed therefor is filed by the person liable
thereto: Provided, That if the seller submits proof of his intention to avail himself
of the benefit of exemption of capital gains under existing special laws, no such
payments shall be required: Provided, further, That in case of failure to qualify for
exemption under such special laws and implementing rules and regulations, the tax
due on the gains realized from the original transaction shall immediately become
due and payable, and subject to the penalties prescribed under applicable
provisions of this Code: Provided, finally, That if the seller, having paid the tax,
submits such proof of intent within six (6) months from the registration of the
document transferring the real property, he shall be entitled to a refund of such tax
upon verification of his compliance with the requirements for such exemption.

In case the taxpayer elects and is qualified to report the gain by installments under
Section 49 of this Code, the tax due from each installment payment shall be paid
within thirty (30) days from the receipt of such payments.

No registration of any document transferring real property shall be effected by the

Register of Deeds unless the Commissioner or his duly authorized representative
has certified that such transfer has been reported, and the tax herein imposed, if
any, has been paid.

(B) Assessment and Payment of Deficiency Tax. After the return is filed, the
Commissioner shall examine it and assess the correct amount of the tax. The tax or
deficiency income tax so discovered shall be paid upon notice and demand from
the Commissioner.

As used in this Chapter, in respect of a tax imposed by this Title, the term
'deficiency' means:
(1) The amount by which the tax imposed by this Title exceeds the amount shown
as the tax by the taxpayer upon his return; but the amount so shown on the return
shall be increased by the amounts previously assessed (or collected without
assessment) as a deficiency, and decreased by the amount previously abated,
credited, returned or otherwise repaid in respect of such tax; or

(2) If no amount is shown as the tax by the taxpayer upon his return, or if no return
is made by the taxpayer, then the amount by which the tax exceeds the amounts
previously assessed (or collected without assessment) as a deficiency; but such
amounts previously assessed or collected without assessment shall first be
decreased by the amounts previously abated, credited, returned or otherwise repaid
in respect of such tax.

SECTION 57 Withholding of Tax at Source.

(A) Withholding of Final Tax on Certain Incomes. Subject to rules and

regulations the Secretary of Finance may promulgate, upon the recommendation of
the Commissioner, requiring the filing of income tax return by certain income
payees, the tax imposed or prescribed by Sections 24(B)(1), 24(B)(2), 24(C),
24(D)(1); 25(A)(2), 25(A)(3), 25(B), 25(C), 25(D), 25(E); 27(D)(1), 27(D)(2),
27(D)(3), 27(D)(5); 28(A)(4), 28(A)(5), 28(A)(7)(a), 28(A)(7)(b), 28(A)(7)(c),
28(B)(1), 28(B)(2), 28(B)(3), 28(B)(4), 28(B)(5)(a), 28(B)(5)(b), 28(B)(5)(c); 33;
and 282 of this Code on specified items of income shall be withheld by payor-
corporation and/or person and paid in the same manner and subject to the same
conditions as provided in Section 58 of this Code.

BIR ISUANCES
REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation Income and Other Concerns

REVENUE REGULATIONS NO. 02-06 December 1, 2005

Mandatory Attachments of the Summary Alphalist of Withholding Agents of Income
Payments Subjected to Tax Withheld at Source (SAWT) to Tax Returns With Claimed Tax
Credits due to Creditable Tax Withheld at Source and of the Monthly Alphalist of Payees
(MAP) Whose Income Received Have Been Subjected to Withholding Tax to the
Withholding Tax Remittance Return Filed by the Withholding Agent/Payor of Income
Payments
CASES DIGEST

Section 57 (A) expressly states that final tax can be imposed on certain kinds of income
and enumerates these as passive income. The BIR defines passive income by stating what
it is not: if the income is generated in the active pursuit and performance of the
corporation's primary purposes, the same is not passive income. It is income generated
by the taxpayer's assets. These assets can be in the form of real properties that return
rental income, shares of stock in a corporation that earn dividends or interest income
received from savings.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R.
No. 160756, March 9, 2010

(B) Withholding of Creditable Tax at Source The Secretary of Finance may,

upon the recommendation of the Commissioner, require the withholding of a tax
on the items of income payable to natural or juridical persons, residing in the
Philippines, by payor-corporation/persons as provided for by law, at the rate of not
less than one percent (1%) but not more than thirty-two percent (32%) thereof,
which shall be credited against the income tax liability of the taxpayer for the
taxable year.

BIR ISSUANCES
REVENUE REGULATIONS NO. 006-09 June 3, 2009

Additional Criteria in the Determination of Top 20,000 Private Corporations, Including

the Threshold on Their Purchases of Agricultural Products, and Additional Transactions
Subject to Creditable Withholding Tax on Income Payments Made by the Top Five
Thousand (5,000) Individual Taxpayers Engaged in Trade/Business or Practice of
Profession

REVENUE REGULATIONS NO. 014-08 November 26, 2008

Amending Further Section 2.57.2 (M) of Revenue Regulations No. 2-98, as Amended,
Increasing the Coverage of Withholding Tax Agents Required to Withhold 1% from
Regular Suppliers of Goods and 2% from Regular Suppliers of Services from the Top
10,000 Private Corporations to Top 20,000 Private Corporations
REVENUE REGULATIONS NO. 03-02 March 22, 2002

Submission of the Alphabetical Lists of Employees/Payees in Diskette Form and the

Substituted Filing of Income Tax Returns of Payees/Employees Receiving Purely
Compensation Income from Only One Employer for One Taxable Year Whose Tax Due is
Equal to Tax Withheld and Individual-Payees Whose Compensation Income is Subject to
Final Withholding Tax.

REVENUE REGULATIONS NO. 008-09 October 22, 2009

Amending Further Secs. 2.57.2 and 2.57.3 of Revenue Regulations No. 2-98, as Amended,
Subjecting to Creditable Withholding Tax the Income Payments Made by Political
Parties and Candidates of Local and National Elections of All Their Campaign
Expenditures and Income Payments Made by an Individual or Juridical Person Forming
Part of Their Campaign Contributions to Candidates of Local and National Elections
and to Political Parties

CASES DIGEST

Withholding of Creditable Tax at Source

Respondent Secretary has the authority to require the withholding of a tax on items of
income payable to any person, national or juridical, residing in the Philippines. Such
authority is derived from Section 57 (B) of RA 8424.The questioned provisions of RR 2-
98, as amended, are well within the authority given by Section 57(B) to the Secretary,
i.e., the graduated rate of 1.5%-5% is between the 1%-32% range; the withholding tax is
imposed on the income payable and the tax is creditable against the income tax liability
of the taxpayer for the taxable year.
Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al.,
G.R. No. 160756, March 9, 2010

Income Payments to Natural or Juridical Persons

Section 57 (B) provides that the Secretary can require a Creditable Withholding Tax on
"income payable to natural or juridical persons, residing in the Philippines." There is no
requirement that this income be passive income. If that were the intent of Congress, it
could have easily said so. Indeed, Section 57 (A) and (B) are distinct. Section 57 (A)
refers to FWT while Section 57 (B) pertains to CWT. The former covers the kinds of
passive income enumerated therein and the latter encompasses any income other than
those listed in 57 (A). Since the law itself makes distinctions, it is wrong to regard 57 (A)
and 57 (B) in the same way.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al.,
G.R. No. 160756, March 9, 2010
(C) Tax-free Covenant Bonds. In any case where bonds, mortgages, deeds of
trust or other similar obligations of domestic or resident foreign corporations,
contain a contract or provision by which the obligor agrees to pay any portion of
the tax imposed in this Title upon the obligee or to reimburse the obligee for any
portion of the tax or to pay the interest without deduction for any tax which the
obligor may be required or permitted to pay thereon or to retain therefrom under
any law of the Philippines, or any state or country, the obligor shall deduct and
withhold a tax equal to thirty percent (30%) of the interest or other payments upon
those bonds, mortgages, deeds of trust or other obligations, whether the interest or
other payments are payable annually or at shorter or longer periods, and whether
the bonds, securities or obligations had been or will be issued or marketed, and the
interest or other payment thereon paid, within or without the Philippines, if the
interest or other payment is payable to a nonresident alien or to a citizen or resident
of the Philippines.

CASES DIGEST
Reasons for devising the withholding tax system
The withholding tax system was devised for two main reasons: first, to provide the
taxpayer a convenient manner to meet his probable income tax liability; and second, to
ensure the collection of the income tax which could otherwise be lost or substantially
reduced through failure to file the corresponding returns. To these, a third reason may be
added to improve the government's cash flow.
Citibank, N.A. vs. Court of Appeals, et al., G.R. No. 107434, October 10, 1997

Taxes withheld are in the nature of payment by a taxpayer in order to extinguish his
possible tax obligation.
A taxpayer, resident or non-resident who contributes to the withholding tax system, does
not really deposit an amount to the Commissioner of Internal Revenue, but, in truth, to
perform and extinguish his tax obligation for the year concerned. In other words, he is
paying his tax liabilities for that year. Consequently, a taxpayer whose income is
withheld at the source will be deemed to have paid his tax liability when the same falls
due at the end of the tax year.

Finley J. Gibbs, et al. vs. Commissioner of Internal Revenue, et al., G.R.

No. L-17406, November 29, 1965

The withholding agent is the agent of both the Government and the taxpayer.
The law sets no condition for the personal liability of the withholding agent to attach. The
reason is to compel the withholding agent to withhold the tax under all circumstances. In
effect, the responsibility for the collection of the tax as well as the payment thereof is
concentrated upon the person over whom the Government has jurisdiction. Thus, the
withholding agent is constituted the agent of both the Government and the taxpayer. With
respect to the collection and/or withholding of the tax, he is the Government's agent. In
regard to the filing of the necessary income tax return and the payment of the tax to the
Government, he is the agent of the taxpayer. The withholding agent, therefore, is no
ordinary government agent especially because under Section 53(c) he is held personally
liable for the tax he is duty bound to withhold; whereas, the Commissioner of Internal
Revenue and his deputies are not made liable by law.

Philippine Guaranty Co., Inc. vs. Commissioner of Internal Revenue, et al., G.R.
No. L-22074, September 6, 1965

Withholding agent has implied authority to file claim for refund.

If the withholding agent is also an agent of the beneficial owner of the dividends with
respect to the filing of the necessary income tax return and with respect to actual
payment of the tax to the government, such authority may reasonably be held to include
the authority to file a claim for refund and to bring an action for recovery of such claim.
This implied authority is especially warranted where the withholding agent is the wholly
owned subsidiary of the parent-stockholder and therefore, at all times, under the effective
control of such parent-stockholder.

Commissioner of Internal Revenue vs. Procter & Gamble Philippine Mfg. Corp., G.R.
No. 66838, December 2, 1991

Types of income subject to withholding tax

Under Section 57 of RA 8424, the types of income subject to withholding tax are divided
into three categories: (a) withholding of final tax on certain incomes; (b) withholding of
creditable tax at source and (c) tax-free covenant bonds.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R.
No. 160756, March 9, 2010

SECTION 58 Returns and Payment of Taxes Withheld at Source

(A) Quarterly Returns and Payments of Taxes Withheld. Taxes deducted and
withheld under Section 57 by withholding agents shall be covered by a return and
paid to, except in cases where the Commissioner otherwise permits, an authorized
agent bank, Revenue District Officer, Collection Agent, or duly authorized
Treasurer of the city or municipality where the withholding agent has his legal
residence or principal place of business, or where the withholding agent is a
corporation, where the principal office is located.

The taxes deducted and withheld by the withholding agent shall be held as a
special fund in trust for the government until paid to the collecting officers.

The return for final withholding tax shall be filed and the payment made within
twenty-five (5) days from the close of each calendar quarter, while the return for
creditable withholding taxes shall be filed and the payment made not later than the
last day of the month following the close of the quarter during which withholding
was made: Provided, That the Commissioner, with the approval of the Secretary of
Finance, may require these withholding agents to pay or deposit the taxes deducted
or withheld at more frequent intervals when necessary to protect the interest of the
government.

CASES DIGEST
Commissioner may require withholding agents to regularly pay or deposit the taxes
withheld.
It is said that taxes are what we pay for civilized society. Without taxes, the government
would be paralyzed for lack of the motive power to activate and operate it. It is the
lifeblood of the government and so should be collected without unnecessary hindrance.
In line with this principle, the Tax Code provides that "the Commissioner of Internal
Revenue may, with the approval of the Secretary of Finance, require the withholding
agents to pay or deposit the taxes deducted and withheld at more frequent intervals when
necessary to protect the interest of the government. The return shall be filed and the
payment made within 25 days from the close of each calendar quarter".

Commissioner of Internal Revenue vs. Wyeth Suaco Laboratories, Inc., et al., G.R. No.
76281, September 30, 1991

(B) Statement of Income Payments Made and Taxes Withheld. Every

withholding agent required to deduct and withhold taxes under Section 57 shall
furnish each recipient, in respect to his or its receipts during the calendar quarter or
year, a written statement showing the income or other payments made by the
withholding agent during such quarter or year, and the amount of the tax deducted
and withheld therefrom, simultaneously upon payment at the request of the payee,
but not later than the twentieth (20th) day following the close of the quarter in the
case of corporate payee, or not later than March 1 of the following year in the case
of individual payee for creditable withholding taxes. For final withholding taxes,
the statement should be given to the payee on or before January 31 of the
succeeding year.

(C) Annual Information Return. Every withholding agent required to deduct and
withhold taxes under Section 57 shall submit to the Commissioner an annual
information return containing the list of payees and income payments, amount of
taxes withheld from each payee and such other pertinent information as may be
required by the Commissioner. In the case of final withholding taxes, the return
shall be filed on or before January 31 of the succeeding year, and for creditable
withholding taxes, not later than March 1 of the year following the year for which
the annual report is being submitted. This return, if made and filed in accordance
with the rules and regulations approved by the Secretary of Finance, upon
recommendation of the Commissioner, shall be sufficient compliance with the
requirements of Section 68 of this Title in respect to the income payments. cdtai

The Commissioner may, by rules and regulations, grant to any withholding agent a
reasonable extension of time to furnish and submit the return required in this
Subsection.

(D) Income of Recipient. Income upon which any creditable tax is required to
be withheld at source under Section 57 shall be included in the return of its
recipient but the excess of the amount of tax so withheld over the tax due on his
return shall be refunded to him subject to the provisions of Section 204; if the
income tax collected at source is less than the tax due on his return, the difference
shall be paid in accordance with the provisions of Section 56.

All taxes withheld pursuant to the provisions of this Code and its implementing
rules and regulations are hereby considered trust funds and shall be maintained in a
separate account and not commingled with any other funds of the withholding
agent.

(E) Registration with Register of Deeds. No registration of any document

transferring real property shall be effected by the Register of Deeds unless the
Commissioner or his duly authorized representative has certified that such transfer
has been reported, and the capital gains or creditable withholding tax, if any, has
been paid: Provided, however, That the information as may be required by rules
and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be annotated by the Register of Deeds
in the Transfer Certificate of Title or Condominium Certificate of Title: Provided,
further, That in cases of transfer of property to a corporation, pursuant to a merger,
consolidation or reorganization, and where the law allows deferred recognition of
income in accordance with Section 40, the information as may be required by rules
and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, shall be annotated by the Register of Deeds
at the back of the Transfer Certificate of Title or Condominium Certificate of Title
of the real property involved: Provided, finally, That any violation of this provision
by the Register of Deeds shall be subject to the penalties imposed under Section
269 of this Code.

CASES DIGEST
Registration with Register of Deeds
Petitioner assails Section 2.58.2 of Rev. Reg. 2-98, which provides that the Registry of
Deeds should not effect the registration of any document transferring real property
unless a certification is issued by the CIR that the withholding tax has been paid.
Petitioner proffers hardly any reason to strike down this rule except to rely on its
contention that the Creditable Withholding Tax is unconstitutional. We have ruled that it
is not. Furthermore, this provision uses almost exactly the same wording as Section 58
(E) of RA 8424 and is unquestionably in accordance with it.

Chamber of Real Estate and Builders' Associations, Inc. vs. Alberto Romulo, et al., G.R.
No. 160756, March 9, 2010

SECTION 59. Tax on Profits Collectible from Owner or Other Persons.

The tax imposed under this Title upon gains, profits, and income not falling under
the foregoing and not returned and paid by virtue of the foregoing or as otherwise
provided by law shall be assessed by personal return under rules and regulations to
be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner. The intent and purpose of the Title is that all gains, profits and
income of a taxable class, as defined in this Title, shall be charged and assessed
with the corresponding tax prescribed by this Title, and said tax shall be paid by
the owners of such gains, profits and income, or the proper person having the
receipt, custody, control or disposal of the same. For purposes of this Title,
ownership of such gains, profits and income or liability to pay the tax shall be
determined as of the year for which a return is required to be rendered.

CHAPTER X Estates and Trusts

SECTION 60 Imposition of Tax.

(A) Application of Tax. The tax imposed by this Title upon individuals shall
apply to the income of estates or of any kind of property held in trust, including:

(1) Income accumulated in trust for the benefit of unborn or unascertained person
or persons with contingent interests, and income accumulated or held for future
distribution under the terms of the will or trust;

(2) Income which is to be distributed currently by the fiduciary to the beneficiaries,

and income collected by a guardian of an infant which is to be held or distributed
as the court may direct;

(3) Income received by estates of deceased persons during the period of

administration or settlement of the estate; and

(4) Income which, in the discretion of the fiduciary, may be either distributed to
the beneficiaries or accumulated.

(B) Exception. The tax imposed by this Title shall not apply to employee's trust
which forms part of a pension, stock bonus or profit-sharing plan of an employer
for the benefit of some or all of his employees (1) if contributions are made to the
trust by such employer, or employees, or both for the purpose of distributing to
such employees the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and (2) if under the trust instrument it is impossible, at
any time prior to the satisfaction of all liabilities with respect to employees under
the trust, for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive benefit of
his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent
that it exceeds the amount contributed by such employee or distributee.
CASES DIGEST
Exception from Income Tax - Estates and Trusts
A Gratuity Plan will lose its tax-exempt status if the retirement benefits are released prior
to the retirement of the employees. Under the law, the trust funds of employees other than
those of private employers are qualified for certain tax exemptions pursuant to Section
60(B) of the National Internal Revenue Code. The Gratuity Plan provides that the
gratuity benefits of a qualified DBP employee shall be released only "upon retirement
under the Plan." If the earnings and principal of the Fund are distributed to DBP
employees prior to their retirement, the Gratuity Plan will no longer qualify for
exemption under Section 60(B). If DBP insists that its employees may receive the
dividends, the necessary consequence will be the non-qualification of the Gratuity Plan
as a tax-exempt plan.

Dev't. Bank of the Phil. vs. Commission on Audit,

G.R. No. 144516, February 11, 2004

(C) Computation and Payment.

(1) In General. The tax shall be computed upon the taxable income of the estate
or trust and shall be paid by the fiduciary, except as provided in Section 63
(relating to revocable trusts) and Section 64 (relating to income for the benefit of
the grantor).

(2) Consolidation of Income of Two or More Trusts. Where, in the case of two
or more trusts, the creator of the trust in each instance is the same person, and the
beneficiary in each instance is the same, the taxable income of all the trusts shall
be consolidated and the tax provided in this Section computed on such
consolidated income, and such proportion of said tax shall be assessed and
collected from each trustee which the taxable income of the trust administered by
him bears to the consolidated income of the several trusts.

SECTION 61. Taxable Income. The taxable income of the estate or trust
shall be computed in the same manner and on the same basis as in the case of an
individual, except that:

(A) There shall be allowed as a deduction in computing the taxable income of the
estate or trust the amount of the income of the estate or trust for the taxable year
which is to be distributed currently by the fiduciary to the beneficiaries, and the
amount of the income collected by a guardian of an infant which is to be held or
distributed as the court may direct, but the amount so allowed as a deduction shall
be included in computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction under this
Subsection shall not be allowed as a deduction under Subsection (B) of this Section
in the same or any succeeding taxable year.

(B) In the case of income received by estates of deceased persons during the period
of administration or settlement of the estate, and in the case of income which, in
the discretion of the fiduciary, may be either distributed to the beneficiary or
accumulated, there shall be allowed as an additional deduction in computing the
taxable income of the estate or trust the amount of the income of the estate or trust
for its taxable year, which is properly paid or credited during such year to any
legatee, heir or beneficiary but the amount so allowed as a deduction shall be
included in computing the taxable income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions

mentioned in Subsections (A) and (B) of this Section shall not be allowed:
Provided, That the amount of any income included in the return of said trust shall
not be included in computing the income of the beneficiaries.

SECTION 62 Exemption Allowed to Estates and Trusts. For the purpose

of the tax provided for in this Title, there shall be allowed an exemption of Twenty
thousand pesos (P20,000) from the income of the estate or trust.

SECTION 63 Revocable Trusts. Where at any time the power to revest in

the grantor title to any part of the corpus of the trust is vested (1) in the grantor
either alone or in conjunction with any person not having a substantial adverse
interest in the disposition of such part of the corpus or the income therefrom, or (2)
in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom, the income of such part of the trust
shall be included in computing the taxable income of the grantor.

SECTION 64 Income for Benefit of Grantor.

(A) Where any part of the income of a trust (1) is, or in the discretion of the grantor
or of any person not having a substantial adverse interest in the disposition of such
part of the income may be held or accumulated for future distribution to the
grantor; or (2) may, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the income, be
distributed to the grantor; or (3) is, or in the discretion of the grantor or of any
person not having a substantial adverse interest in the disposition of such part of
the income may be applied to the payment of premiums upon policies of insurance
on the life of the grantor, such part of the income of the trust shall be included in
computing the taxable income of the grantor.

(B) As used in this Section, the term 'in the discretion of the grantor' means in the
discretion of the grantor, either alone or in conjunction with any person not having
a substantial adverse interest in the disposition of the part of the income in
question.

SECTION 65 Fiduciary Returns. Guardians, trustees, executors,

administrators, receivers, conservators and all persons or corporations, acting in
any fiduciary capacity, shall render, in duplicate, a return of the income of the
person, trust or estate for whom or which they act, and be subject to all the
provisions of this Title, which apply to individuals in case such person, estate or
trust has a gross income of Twenty thousand pesos (P20,000) or over during the
taxable year. Such fiduciary or person filing the return for him or it, shall take oath
that he has sufficient knowledge of the affairs of such person, trust or estate to
enable him to make such return and that the same is, to the best of his knowledge
and belief, true and correct, and be subject to all the provisions of this Title which
apply to individuals: Provided, That a return made by or for one or two or more
joint fiduciaries filed in the province where such fiduciaries reside; under such
rules and regulations as the Secretary of Finance, upon recommendation of the
Commissioner, shall prescribe, shall be a sufficient compliance with the
requirements of this Section.

BIR ISSUANCES
REVENUE REGULATIONS NO. 002-11 March 1, 2011
Filing of Income Tax Return and/or Annual Information Return by Individuals, Including
Estates and Trusts shall include in the Account Information Return (AIR) such income
subject to final withholding tax and those exclusions from gross income.
SECTION 66 Fiduciaries Indemnified Against Claims for Taxes Paid.
Trustees, executors, administrators and other fiduciaries are indemnified against
the claims or demands of every beneficiary for all payments of taxes which they
shall be required to make under the provisions of this Title, and they shall have
credit for the amount of such payments against the beneficiary or principal in any
accounting which they make as such trustees or other fiduciaries.

CHAPTER XI Other Income Tax Requirements

SECTION 67 Collection of Foreign Payments. All persons, corporations,

duly registered general co-partnerships (companiascolectivas) undertaking for
profit or otherwise the collection of foreign payments of interests or dividends by
means of coupons, checks or bills of exchange shall obtain a license from the
Commissioner, and shall be subject to such rules and regulations enabling the
government to obtain the information required under this Title, as the Secretary of
Finance, upon recommendation of the Commissioner, shall prescribe. cdtai

SECTION 68 Information at Source as to Income Payments. All persons,

corporations or duly registered co-partnerships (companiascolectivas), in whatever
capacity acting, including lessees or mortgagors of real or personal property,
trustees, acting in any trust capacity, executors, administrators, receivers,
conservators and employees making payment to another person, corporation or
duly registered general co-partnership (companiacolectiva), of interests, rents,
salaries, wages, premiums, annuities, compensations, remunerations, emoluments
or other fixed or determinable gains, profits and income, other than payment
described in Section 69, in any taxable year, or in the case of such payments made
by the Government of the Philippines, the officers or employees of the
Government having information as to such payments and required to make returns
in regard thereto, are authorized and required to render a true and accurate return to
the Commissioner, under such rules and regulations, and in such form and manner
as may be prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, setting forth the amount of such gains, profits and income and the
name and address of the recipient of such payments: Provided, That such returns
shall be required, in the case of payments of interest upon bonds and mortgages or
deeds of trust or other similar obligations of corporations, and in the case of
collections of items, not payable in the Philippines, of interest upon the bonds of
foreign countries and interest from the bonds and dividends from the stock of
foreign corporations by persons, corporations or duly registered general co-
partnerships (companiascolectivas), undertaking as a matter of business or for
profit or otherwise the collection of foreign payments of such interests or dividends
by means of coupons or bills of exchange.

SECTION 69. Return of Information of Brokers. Every person, corporation

or duly registered general co-partnership (companiacolectiva), doing business as a
broker in any exchange or board or other similar place of business, shall, when
required by the Commissioner, render a correct return duly verified under oath,
under such rules and regulations as the Secretary of Finance, upon
recommendation of the Commissioner, may prescribe, showing the names of
customers for whom such person, corporation or duly registered general co-
partnership (companiacolectiva) has transacted any business, with such details as
to the profits, losses or other information which the Commissioner, may require as
to each of such customers as will enable the Commissioner to determine whether
all income tax due on profits or gains of such customers has been paid.

SECTION 70 Returns of Foreign Corporations.

(A) Requirements Under rules and regulations prescribed by the Secretary of

Finance, upon the recommendation of the Commissioner, any attorney, accountant,
fiduciary, bank, trust company, financial institution or other person, who aids,
assists, counsels or advises in, or with respect to, the formation, organization or
reorganization of any foreign corporation, shall, within thirty (30) days thereafter,
file with the Commissioner a return.

(B) Form and Contents of Return Such return shall be in such form and shall set
forth, under oath, in respect of each such corporation, to the full extent of the
information within the possession or knowledge or under the control of the person
required to file the return, such information as the Secretary of Finance, upon
recommendation of the Commissioner, shall prescribe by rules and regulations as
necessary for carrying out the provisions of this Title. Nothing in this Section shall
be construed to require the divulging of privileged communications between
attorney and client.
SECTION 71 Disposition of Income Tax Returns, Publication of Lists of
Taxpayers and Filers After the assessment shall have been made, as provided in
this Title, the returns, together with any corrections thereof which may have been
made by the Commissioner, shall be filed in the Office of the Commissioner and
shall constitute public records and be open to inspection as such upon the order of
the President of the Philippines, under rules and regulations to be prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.

The Commissioner may, in each year, cause to be prepared and published in any
newspaper the lists containing the names and addresses of persons who have filed
income tax returns.

Income tax returns of specific taxpayers subject of a request for exchange of

information by a foreign tax authority pursuant to an international convention or
agreement on tax matters to which the Philippines is a signatory or a party of, shall
be open to inspection upon the order of the President of the Philippines, under rules
and regulations as may be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.

SECTION 72 Suit to Recover Tax Based on False or Fraudulent Returns

When an assessment is made in case of any list, statement or return, which in the
opinion of the Commissioner was false or fraudulent or contained any
understatement or undervaluation, no tax collected under such assessment shall be
recovered by any suit, unless it is proved that the said list, statement or return was
not false nor fraudulent and did not contain any understatement or undervaluation;
but this provision shall not apply to statements or returns made or to be made in
good faith regarding annual depreciation of oil or gas wells and mines.

SECTION 73 Distribution of Dividends or Assets by Corporations

(A) Definition of Dividends The term 'dividends' when used in this Title means
any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property.

"Where a corporation distributes all of its assets in complete liquidation or

dissolution, the gain realized or loss sustained by the stockholder, whether
individual or corporate, is a taxable income or a deductible loss, as the case may
be.

(B) Stock Dividend A stock dividend representing the transfer of surplus to

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

(C) Dividends Distributed are Deemed Made from Most Recently Accumulated
Profits Any distribution made to the shareholders or members of a corporation
shall be deemed to have been made from the most recently accumulated profits or
surplus, and shall constitute a part of the annual income of the distributee for the
year in which received.

(D) Net Income of a Partnership Deemed Constructively Received by Partners

The taxable income declared by a partnership for a taxable year which is subject to
tax under Section 27(A) of this Code, after deducting the corporate income tax
imposed therein, shall be deemed to have been actually or constructively received
by the partners in the same taxable year and shall be taxed to them in their
individual capacity, whether actually distributed or not.

CHAPTER XIIQuarterly Corporate Income Tax Annual Declaration and Quarterly

Payments of Income Taxes

SECTION 74 Declaration of Income Tax for Individuals.

(A) In General Except as otherwise provided in this Section, every individual

subject to income tax under Sections 24 and 25(A) of this Title, who is receiving
self-employment income, whether it constitutes the sole source of his income or in
combination with salaries, wages and other fixed or determinable income, shall
make and file a declaration of his estimated income for the current taxable year on
or before April 15 of the same taxable year. In general, self-employment income
consists of the earnings derived by the individual from the practice of profession or
conduct of trade or business carried on by him as a sole proprietor or by a
partnership of which he is a member. Nonresident Filipino citizens, with respect to
income from without the Philippines, and nonresident aliens not engaged in trade
or business in the Philippines, are not required to render a declaration of estimated
income tax. The declaration shall contain such pertinent information as the
Secretary of Finance, upon recommendation of the Commissioner, may, by rules
and regulations prescribe. An individual may make amendments of a declaration
filed during the taxable year under the rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner.

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

(C) Definition of Estimated Tax In the case of an individual, the term 'estimated
tax' means the amount which the individual declared as income tax in his final
adjusted and annual income tax return for the preceding taxable year minus the
sum of the credits allowed under this Title against the said tax. If, during the
current taxable year, the taxpayer reasonably expects to pay a bigger income tax,
he shall file an amended declaration during any interval of installment payment
dates.

SECTION 75 Declaration of Quarterly Corporate Income Tax Every

corporation shall file in duplicate a quarterly summary declaration of its gross
income and deductions on a cumulative basis for the preceding quarter or quarters
upon which the income tax, as provided in Title II of this Code, shall be levied,
collected and paid. The tax so computed shall be decreased by the amount of tax
previously paid or assessed during the preceding quarters and shall be paid not
later than sixty (60) days from the close of each of the first three (3) quarters of the
taxable year, whether calendar or fiscal year.
SECTION 76 Final Adjustment Return Every corporation liable to tax
under Section 27 shall file a final adjustment return covering the total taxable
income for the preceding calendar or fiscal year. If the sum of the quarterly tax
payments made during the said taxable year is not equal to the total tax due on the
entire taxable income of that year, the corporation shall either:

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

(B) Carry-over the excess credit; or

(C) Be credited or refunded with the excess amount paid, as the case may be.

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

CASES DIGEST
Changes brought by Section 76 of the 1997 NIRC and its purpose.
Section 76 of the 1997 NIRC wrought two changes to its predecessor, Section 69 of the
1977 NIRC: first, it mandates that the taxpayer's exercise of its option to either seek
refund or crediting is irrevocable; and second, the taxpayer's decision to carry-over and
apply its current overpayment to future tax liability continues until the overpayment has
been fully applied, no matter how many tax cycles it takes.
Section 76 of the 1997 NIRC is, like its predecessor Section 69 of the 1977 NIRC, a tax
administration measure crafted to ease tax collection. By requiring corporate taxpayers
to indicate in their final adjustment return whether, in case of overpayment, they wish to
have the excess amount refunded or carried-over and applied to their future tax liability,
the provision aims to properly manage claims for refund or tax credit. Administratively
speaking, Section 76 serves the same purpose as its companion provisions in Title II,
Chapter XII of the 1997 NIRC, namely, Section 74 on the declaration of income tax by
individuals, Section 75 on the declaration of quarterly corporate income tax, and Section
77 on the place and time of filing and payment of quarterly corporate income tax they
are all tools designed to promote rational and efficient functioning of the tax system.
These provisions should be distinguished from the provisions in Title II, Chapter IV (Tax
on Corporations) and Chapter VII (Allowable Deductions), among others, relating to the
question on the intrinsic taxability of corporate transactions.
Commissioner of Internal Revenue vs. McGeorge Food Industries, Inc.,
G.R. No. 174157, October 20, 2010
Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue,
G.R. No. 171766, July 29, 2010

Irrevocability rule
Section 79 of the NIRC of 1985 was reproduced as Section 76 of the NIRC of 1997, with
the addition of one important sentence, which laid down the irrevocability rule: . . .
Philam Asset Management, Inc. vs. Commissioner of Internal Revenue,
G.R. Nos. 156637/162004, December 14, 2005

Two options offered by Section 76 of the NIRC of 1997

The Supreme Court, recognized the two options offered by Section 76 of the NIRC of
1997 to a taxable corporation whose total quarterly income tax payments in a given
taxable year exceeds its total income tax due. These options are: (1) filing for a tax
refund or (2) availing of a tax credit. The Court further explained:

The Court categorically declared in Philam that: "Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or constructively, it becomes
irrevocable." It mentioned no exception or qualification to the irrevocability rule.

The Court of Appeals mistakenly understood the phrase "for that taxable period" as a
prescriptive period for the irrevocability rule. This would mean that since the tax credit
in this case was acquired in 1998, and BPI opted to carry it over to 1999, then the
irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to
again take another option as regards its 1998 excess income tax credit. This construal
effectively renders nugatory the irrevocability rule. The evident intent of the legislature,
in adding the last sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer
from flip-flopping on its options, and avoid confusion and complication as regards said
taxpayer's excess tax credit. The interpretation of the Court of Appeals only delays the
flip-flopping to the end of each succeeding taxable period.Commissioner of Internal
Revenue vs. BPI, G.R. No. 178490, July 7, 2009

A corporation entitled to a refund of excess creditable withholding tax may either obtain
the refund or credit the amount to the succeeding taxable year.
The Court, in Philam, recognized the two options offered by Section 76 of the NIRC of
1997 to a taxable corporation whose total quarterly income tax payments in a given
taxable year exceeds its total income tax due. These options are: (1) filing for a tax
refund or (2) availing of a tax credit. The Court further explained:
The Court categorically declared in Philam that: "Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or constructively, it becomes
irrevocable." It mentioned no exception or qualification to the irrevocability rule.
Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009
Philam Asset Management, Inc. vs. Commissioner of Internal Revenue,
G.R. Nos. 156637/162004, December 14, 2005

The controlling factor for the operation of the irrevocability rule

The controlling factor for the operation of the irrevocability rule is that the taxpayer
chose an option; and once it had already done so, it could no longer make another one.
Consequently, after the taxpayer opts to carry-over its excess tax credit to the following
taxable period, the question of whether or not it actually gets to apply said tax credit is
irrelevant. Section 76 of the NIRC of 1997 is explicit in stating that once the option to
carry over has been made, "no application for tax refund or issuance of a tax credit
certificate shall be allowed therefor".
The last sentence of Section 76 of the NIRC of 1997 reads: "Once the option to carry-
over and apply the excess quarterly income tax against income tax due for the taxable
quarters of the succeeding taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for tax refund or issuance of a tax
credit certificate shall be allowed therefor." The phrase "for that taxable period" merely
identifies the excess income tax, subject of the option, by referring to the taxable period
when it was acquired by the taxpayer. In the present case, the excess income tax credit,
which BPI opted to carry over, was acquired by the said bank during the taxable year
1998. The option of BPI to carry over its 1998 excess income tax credit is irrevocable; it
cannot later on opt to apply for a refund of the very same 1998 excess income tax credit.
Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009

Option to carry-over excess creditable tax extends to the next succeeding taxable year.

Under Section 76 of the NIRC of 1997, the application of the option to carry-over the
excess creditable tax is not limited only to the immediately following taxable year but
extends to the next succeeding taxable years. The clear intent in the amendment under
Section 76 is to make the option, once exercised, irrevocable for the "succeeding taxable
years." Thus, once the taxpayer opts to carry-over the excess income tax against the taxes
due for the succeeding taxable years, such option is irrevocable for the whole amount of
the excess income tax, thus, prohibiting the taxpayer from applying for a refund for that
same excess income tax in the next succeeding taxable years. The unutilized excess tax
credits will remain in the taxpayer's account and will be carried over and applied against
the taxpayer's income tax liabilities in the succeeding taxable years until fully utilized.
Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No.
171766, July 29, 2010

A corporation entitled to a refund of excess the creditable withholding tax may either
obtain the refund or credit the amount to the succeeding taxable year.
The amount being claimed as a refund would remain in the account of the taxpayer until
utilized in succeeding taxable years, as provided in Section 76 of the NIRC of 1997. It is
worthy to note that unlike the option for refund of excess income tax, which prescribes
after two years from the filing of the FAR, there is no prescriptive period for the carrying
over of the same. Therefore, the excess income tax credit of BPI, which it acquired in
1998 and opted to carry over, may be repeatedly carried over to succeeding taxable
years, i.e., to 1999, 2000, 2001, and so on and so forth, until actually applied or credited
to a tax liability of BPI.Under Section 69 (now Section 76) of the Tax Code then in force,
a corporation entitled to a refund of excess creditable withholding tax may either obtain
the refund or credit the amount to the succeeding taxable year.The Court of Appeals
mistakenly understood the phrase "for that taxable period" as a prescriptive period for
the irrevocability rule. This would mean that since the tax credit in this case was
acquired in 1998, and BPI opted to carry it over to 1999, then the irrevocability of the
option to carry over expired by the end of 1999, leaving BPI free to again take another
option as regards its 1998 excess income tax credit. This construal effectively renders
nugatory the irrevocability rule. The evident intent of the legislature, in adding the last
sentence to Section 76 of the NIRC of 1997, is to keep the taxpayer from flip-flopping on
its options, and avoid confusion and complication as regards said taxpayer's excess tax
credit. The interpretation of the Court of Appeals only delays the flip-flopping to the end
of each succeeding taxable period.

Commissioner of Internal Revenue vs. BPI, G.R. No. 178490, July 7, 2009

Final Adjustment Return

Section 69(now Sec 76) Final Adjustment Return. Every corporation liable to tax
under Section 24 shall file a final adjustment return covering the total net income for the
preceding calendar or fiscal year. If the sum of the quarterly tax payments made during
the said taxable year is not equal to the total tax due on the entire taxable net income of
that year the corporation shall either:
(a) Pay the excess tax still due; or
(b) Be refunded the excess amount paid, as the case may be.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding taxable year.
It is well-defined from the said provision that if the total tax due is less than the quarterly
tax payments made during the year, a taxpayer is entitled to a refund or credit for the
excess amount paid. Petitioner's 1997 income tax due amounted to P9,703,165.54. After
applying its tax excess credits for 1996 in the amount of P9,289,084.00, the net income
tax payable for 1997 was only P414,081.54. However, based on the quarterly income tax
payments of petitioner, the total creditable withholding tax for the year 1997 amounted to
P14,343,875.05. Thus, the amount of overpayment of tax as of 1997 was P13,929,793.51
(after deducting P414,081.54 from P14,343,875.05). In the final adjustment return filed
for the same taxable year, petitioner indicated its option to apply the said overpayment as
tax credit for the succeeding taxable year 1998, not 1999. There still remains a
considerable excess payment in the amount of P9,742,270.51 after petitioners payment
of tax due for the year 1998 in the sum of P4,187,523.00. Section 69 (now Sec 76) clearly
provides that a taxable corporation is entitled to a tax refund when the sum of the
quarterly income taxes it paid during a taxable year exceeds its total income tax due also
for that year. Consequently, the refundable amount that is shown on its final adjustment
return may be credited, at its option, against its quarterly income tax liabilities for the
next taxable year. Excess income taxes paid in a year that could not be applied to taxes
due the following year may be refunded the next year. Thus, if the excess income taxes
paid in a given taxable year have not been entirely used by a taxable corporation against
its quarterly income tax liabilities for the next taxable year, the unused amount of the
excess may still be refunded, provided that the claim for such a refund is made within two
years after payment of the tax.
State Land Investment Corp. vs. Commissioner of Internal Revenue,
G.R. No. 171956, January 18, 2008

Without the tax return, it is error to grant a refund.

The grant of a refund is founded on the assumption that the tax return is valid, i.e., that
the facts stated therein are true and correct. Without the tax return, it is error to grant a
refund since it would be virtually impossible to determine whether the proper taxes have
been assessed and paid. In this case, petitioner's failure to present sufficient evidence to
prove its claim for refund is fatal to its cause. After all, it is axiomatic that a claimant has
the burden of proof to establish the factual basis of his or her claim for tax credit or
refund. Tax refunds, like tax exemptions, are construed strictly against the taxpayer.
Paseo Realty & Development Corp. vs. Court of Appeals, et al.,
G.R. No. 119286, October 13, 2004

The carrying forward of any excess or overpaid income tax for a given taxable year is
limited to the succeeding taxable year only.
In case the corporation is entitled to a refund of the excess estimated quarterly income
taxes paid, the refundable amount shown on its final adjustment return may be credited
against the estimated quarterly income tax liabilities for the taxable quarters of the
succeeding year. The carrying forward of any excess or overpaid income tax for a given
taxable year is limited to the succeeding taxable year only.
Paseo Realty & Development Corp. vs. Court of Appeals, et al., G.R.
No. 119286, October 13, 2004

IRREVOCABILITY RULE
Facts: For the taxable year ending Dec. 31, 1998, respondent BPI filed with the BIR its
final adjusted Corporate Annual Income Tax Return. It credited certain amounts against
the total tax due from it at the end of 1998 and computed an overpayment of income taxes
to the BIR. This excess tax credit was carried over by BPI to the succeeding taxable year.
However, for 1999, BPI ended up with a net loss; its still unapplied excess tax credit
carried over from 1998; and more excess tax credit acquired in 1999. Thus, the total
excess tax credits of BPI increased to P46,922,851.00 in 1999, which it chose again to
carry over to the following taxable year.

For the taxable year ending Dec. 31, 2000, BPI declared in its Corporate Annual ITR:
(1) zero taxable income; (2) excess tax credit carried over from 1998 and 1999; and (3)
even more excess tax credit, gained in 2000. This time, BPI failed to indicate in its ITR its
choice of whether to carry over its excess tax credits or to claim the refund of or issuance
of a tax credit certificate for the said amounts. BPI then filed a claim for refund in the
amount of P33,947,101.00, representing its excess creditable income tax for 1998. When
the petitioner CIR failed to act on its claim, BPI filed a Petition for Review before the
CTA. Relying on the irrevocability rule, the CTA ruled that BPI was barred from filing a
claim for refund because it had opted to carry over its 1998 excess tax credit to 1999 and
2000. After its Motion for Reconsideration was denied by the CTA, BPI filed an appeal
with the Court of Appeals which reversed the CTAs decision based on BPI-Family
Savings Bank, Inc. v. CA, 386 Phil. 719 (2000). The CIR then filed a Motion for
Reconsideration which was denied; hence, this Petition for Review.

ISSUE: Whether the irrevocability rule under Sec. 76 of the Tax Code bars petitioner
from asking for a tax refund.

RULING: BPIs choice to carry over its 1998 excess income tax credit to succeeding
taxable years is irrevocable, regardless of whether it was able to actually apply the said
amount to a tax liability. The reiteration by BPI of the carry over option in its ITR for
1999 was already a superfluity, as far as its 1998 excess income tax credit was
concerned, given the irrevocability of the initial choice made by the bank to carry over
the said amount. The Court categorically declared in Philam Asset Management, Inc. v.
CIR (G.R. Nos. 156637 and 162004, Dec. 14, 2005) that: "Section 76 remains clear and
unequivocal. Once the carry-over option is taken, actually or constructively, it becomes
irrevocable." It mentioned no exception or qualification to the irrevocability rule. The
Court of Appeals erred in relying on BPI-Family Savings Bank, Inc. v. CA, because when
the case was decided by this Court, it did not yet have the irrevocability rule to consider.
This case involved tax credit acquired by the bank in 1989, which it initially opted to
carry over to 1990. The prevailing tax law then was the NIRC of 1985, Sec. 79, later
reproduced as Sec. 76 of the NIRC of 1997, with the addition of one important sentence,
which laid down the irrevocability rule.

The Court of Appeals mistakenly understood the phrase "for that taxable period" as a
prescriptive period for the irrevocability rule. This would mean that since the tax credit
in this case was acquired in 1998, and BPI opted to carry it over to 1999, then the
irrevocability of the option to carry over expired by the end of 1999, leaving BPI free to
again take another option as regards its 1998 excess income tax credit. This construal
effectively renders nugatory the irrevocability rule. The evident intent of the legislature,
in adding the last sentence to Sec. 76 of the NIRC of 1997, is to keep the taxpayer from
flip-flopping on its options, and avoid confusion and complication as regards said
taxpayer's excess tax credit.COMMISSIONER OF INTERNAL REVENUE vs. BPI
[G.R. No. 178490.July 7, 2009.]

Option to carry-over excess creditable tax extends to the next succeeding taxable year.

Under Section 76 of the NIRC of 1997, the application of the option to carry-over the
excess creditable tax is not limited only to the immediately following taxable year but
extends to the next succeeding taxable years. The clear intent in the amendment under
Section 76 is to make the option, once exercised, irrevocable for the "succeeding taxable
years." Thus, once the taxpayer opts to carry-over the excess income tax against the taxes
due for the succeeding taxable years, such option is irrevocable for the whole amount of
the excess income tax, thus, prohibiting the taxpayer from applying for a refund for that
same excess income tax in the next succeeding taxable years. The unutilized excess tax
credits will remain in the taxpayer's account and will be carried over and applied against
the taxpayer's income tax liabilities in the succeeding taxable years until fully utilized.
Asiaworld Properties Phil. Corp. vs. Commissioner of Internal Revenue, G.R. No.
171766, July 29, 2010

Two alternative options of a corporate taxpayer

In Philam Asset Management, Inc. v. Commissioner of Internal Revenue, the Court
expounds on the two alternative options of a corporate taxpayer whose total quarterly
income tax payments exceed its tax liability, and on how the choice of one option
precludes the other, viz.:

The first option is relatively simple. Any tax on income that is paid in excess of the
amount due the government may be refunded, provided that a taxpayer properly applies
for the refund.

The second option works by applying the refundable amount, as shown on the FAR of a
given taxable year, against the estimated quarterly income tax liabilities of the
succeeding taxable year.

These two options under Section 76 are alternative in nature. The choice of one
precludes the other. Indeed, in Philippine Bank of Communications v. Commissioner of
Internal Revenue, the Court ruled that a corporation must signify its intention whether
to request a tax refund or claim a tax credit by marking the corresponding option box
provided in the FAR. While a taxpayer is required to mark its choice in the form provided
by the BIR, this requirement is only for the purpose of facilitating tax collection.

One cannot get a tax refund and a tax credit at the same time for the same excess income
taxes paid. . . .Commissioner of Internal Revenue vs. PL Management International Phil.,
Inc., et al., G.R. No. 160949, April 4, 2011

Availment of one remedy still precludes the other.

Under the new law (Section 76 of the 1997 NIRC), in case of overpayment of income
taxes, the remedies are still the same; and the availment of one remedy still precludes the
other. But unlike Section 69 of the old NIRC, the carry-over of excess income tax
payments is no longer limited to the succeeding taxable year. Unutilized excess income
tax payments may now be carried over to the succeeding taxable years until fully utilized.
In addition, the option to carry-over excess income tax payments is now irrevocable.
Hence, unutilized excess income tax payments may no longer be refunded. To repeat,
under the new law, once the option to carry-over excess income tax payments to the
succeeding years has been made, it becomes irrevocable. Thus, applications for refund of
the unutilized excess income tax payments may no longer be allowed.Belle Corp. vs.
Commissioner of Internal Revenue, G.R. No. 181298, January 10, 2011

SECTION 77 Place and Time of Filing and Payment of Quarterly Corporate

Income Tax
(A) Place of Filing Except as the Commissioner otherwise permits, the quarterly
income tax declaration required in Section 75 and the final adjustment return
required in Section 76 shall be filed with the authorized agent banks or Revenue
District Officer or Collection Agent or duly authorized Treasurer of the city or
municipality having jurisdiction over the location of the principal office of the
corporation filing the return or place where its main books of accounts and other
data from which the return is prepared are kept.

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

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

CHAPTER XIII Withholding on Wages

SECTION 78 Definitions. As used in this Chapter:

(A) Wages The term 'wages' means all remuneration (other than fees paid to a
public official) for services performed by an employee for his employer, including
the cash value of all remuneration paid in any medium other than cash, except that
such term shall not include remuneration paid:

(1) For agricultural labor paid entirely in products of the farm where the labor is
performed, or

(2) For domestic service in a private home, or

(3) For casual labor not in the course of the employer's trade or business, or

(4) For services by a citizen or resident of the Philippines for a foreign government
or an international organization.
If the remuneration paid by an employer to an employee for services performed
during one-half () or more of any payroll period of not more than thirty-one (31)
consecutive days constitutes wages, all the remuneration paid by such employer to
such employee for such period shall be deemed to be wages; but if the
remuneration paid by an employer to an employee for services performed during
more than one-half () of any such payroll period does not constitute wages, then
none of the remuneration paid by such employer to such employee for such period
shall be deemed to be wages.

(B) Payroll Period The term 'payroll period' means a period for which payment
of wages is ordinarily made to the employee by his employer, and the term
'miscellaneous payroll period' means a payroll period other than, a daily, weekly,
biweekly, semi-monthly, monthly, quarterly, semi-annual, or annual period.

(C) Employee The term 'employee' refers to any individual who is the recipient
of wages and includes an officer, employee or elected official of the Government
of the Philippines or any political subdivision, agency or instrumentality thereof.
The term 'employee' also includes an officer of a corporation.

(D) Employer The term 'employer' means the person for whom an individual
performs or performed any service, of whatever nature, as the employee of such
person, except that:

(1) If the person for whom the individual performs or performed any service does
not have control of the payment of the wages for such services, the term 'employer'
(except for the purpose of Subsection A) means the person having control of the
payment of such wages; and

(2) In the case of a person paying wages on behalf of a nonresident alien

individual, foreign partnership or foreign corporation not engaged in trade or
business within the Philippines, the term 'employer' (except for the purpose of
Subsection A) means such person.

SECTION 79 Income Tax Collected at Source

(A) Requirement of Withholding Except in the case of a minimum wage earner

as defined in Section 22(HH) of this Code, every employer making payment of
wages shall deduct and withhold upon such wages a tax determined in accordance
with the rules and regulations to be prescribed by the Secretary of Finance, upon
recommendation of the Commissioner.

BIR ISSUANCES
REVENUE REGULATIONS NO. 010-08 July 8, 2008

Implementing Pertinent Provisions of Republic Act No. 9504, "An Act Amending Sections
22, 24, 34, 35, 51, and 79 of Republic Act No. 8424, as Amended, Otherwise Known as
The National Internal Revenue Code" Relative to the Withholding of Income Tax on
Compensation and Other Concerns

Exemptions from Withholding Tax on Compensation. The following income payments

are exempted from the requirements of withholding tax on compensation:

XXX XXXXXXCompensation income of Minimum Wage Earners (MWEs) who work

in the private sector and being paid the Statutory Minimum Wage (SMW), as fixed by
Regional Tripartite Wage and Productivity Board (RTWPB)/National Wages and
Productivity Commission (NWPC), applicable to the place where he/she is assigned.

The aforesaid income shall likewise be exempted from income tax.

'Statutory Minimum Wage' (SMW) shall refer to the rate fixed by the Regional Tripartite
Wage and Productivity Board (RTWPB), as defined by the Bureau of Labor and
Employment Statistics (BLES) of the Department of Labor and Employment (DOLE). The
RTWPB of each region shall determine the wage rates in the different regions based on
established criteria and shall be the basis of exemption from income tax for this purpose.

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the
aforementioned MWE shall likewise be covered by the above exemption. Provided,
however, that an employee who receives/earns additional compensation such as
commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory
amount of P30,000.00, taxable allowances and other taxable income other than the
SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not
enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt
form income tax, and consequently, from withholding tax.

MWEs receiving other income, such as income from the conduct of trade, business, or
practice of profession, except income subject to final tax, in addition to compensation
income are not exempted from income tax on their entire income earned during the
taxable year. This rule, notwithstanding, the SMW, Holiday pay, overtime pay, night shift
differential pay and hazard pay shall still be exempt from withholding tax.

For purposes of these regulations, hazard pay shall mean the amount paid by the
employer to MWEs who were actually assigned to danger or strife-torn areas, disease-
infested places, or in distressed or isolated stations and camps, which expose them to
great danger of contagion or peril to life. Any hazard pay paid to MWEs which does not
satisfy the above criteria is deemed subject to income tax and consequently, to
withholding tax.

XXX XXXXXX

Facilities and privileges of relatively small value Ordinarily, facilities, and privileges
(such as entertainment, medical services, or so-called "courtesy" discounts on
purchases), otherwise known as "de minimis benefits," furnished or offered by an
employer to his employees, are not considered as compensation subject to income tax and
consequently to withholding tax, if such facilities or privileges are of relatively small
value and are offered or furnished by the employer merely as means of promoting the
health, goodwill, contentment, or efficiency of his employees.

The following shall be considered as "de minimis" benefits not subject to income tax,
hence, not subject to withholding tax on compensation income of both managerial and
rank and file employees:

(a) Monetized unused vacation leave credits of employees not exceeding ten (10) days
during the year and the monetized value of leave credits paid to government officials and
employees;

(b) Medical cash allowance to dependents of employees not exceeding P750.00 per
employee per semester or P125 per month;

(c) Rice subsidy of P1,500.00 or one (1) sack of 50-kg. rice per month amounting to
not more than P1,500.00;

(d) Uniforms and clothing allowance not exceeding P4,000.00 per annum;

(e) Actual yearly medical benefits not exceeding P10,000.00 per annum;

(f) Laundry allowance not exceeding P300.00 per month;

(g) Employees achievement awards, e.g., for length of service or safety achievement,
which must be in the form of a tangible personal property other than cash or gift
certificate, with an annual monetary value not exceeding P10,000.00 received by the
employee under an established written plan which does not discriminate in favor of
highly paid employees;

(h) Gifts given during Christmas and major anniversary celebrations not exceeding
P5,000.00 per employee per annum;

(i) Flowers, fruits, books, or similar items given to employees under special
circumstances, e.g., on account of illness, marriage, birth of a baby, etc.; and

(j) Daily meal allowance for overtime work not exceeding twenty five percent (25%)
of the basic minimum wage.

The amount of 'de minimis' benefits conforming to the ceiling herein prescribed shall not
be considered in determining the P30,000.00 ceiling of 'other benefits' excluded from
gross income under Section 32 (b) (7) (e) of the Code. Provided that, the excess of the
'de minimis' benefits over their respective ceilings prescribed by these regulations shall
be considered as part of 'other benefits' and the employee receiving it will be subject to
tax only on the excess over the P30,000.00 ceiling. Provided, further, that MWEs
receiving 'other benefits' exceeding the P30,000.00 limit shall be taxable on the excess
benefits, as well as on his salaries, wages and allowances, just like an employee
receiving compensation income beyond the SMW.

Any amount given by the employer as benefits to its employees, whether classified as "de
minimis" benefits or fringe benefits, shall constitute as deductible expense upon such
employer.

Where compensation is paid in property other than money, the employer shall make
necessary arrangements to ensure that the amount of the tax required to be withheld is
available for payment to the Bureau of Internal Revenue.

(B) Tax Paid by Recipient If the employer, in violation of the provisions of this
Chapter, fails to deduct and withhold the tax as required under this Chapter, and
thereafter the tax against which such tax may be credited is paid, the tax so
required to be deducted and withheld shall not be collected from the employer; but
this Subsection shall in no case relieve the employer from liability for any penalty
or addition to the tax otherwise applicable in respect of such failure to deduct and
withhold.

(C) Refunds or Credits

(1) Employer When there has been an overpayment of tax under this Section,
refund or credit shall be made to the employer only to the extent that the amount of
such overpayment was not deducted and withheld hereunder by the employer.

(2) Employees The amount deducted and withheld under this Chapter during
any calendar year shall be allowed as a credit to the recipient of such income
against the tax imposed under Section 24(A) of this Title. Refunds and credits in
cases of excessive withholding shall be granted under rules and regulations
promulgated by the Secretary of Finance, upon recommendation of the
Commissioner.

Any excess of the taxes withheld over the tax due from the taxpayer shall be
returned or credited within three (3) months from the fifteenth (15th) day of April.
Refunds or credits made after such time shall earn interest at the rate of six percent
(6%) per annum, starting after the lapse of the three-month period to the date the
refund of credit is made.

Refunds shall be made upon warrants drawn by the Commissioner or by his duly
authorized representative without the necessity of counter-signature by the
Chairman, Commission on Audit or the latter's duly authorized representative as an
exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title
I of Book V of Executive Order No. 292, otherwise known as the Administrative
Code of 1987.

(D) Personal Exemptions

(1) In General Unless otherwise provided by this Chapter, the personal and
additional exemptions applicable under this Chapter shall be determined in
accordance with the main provisions of this Title.

(2) Exemption Certificates.

(a) When to File On or before the date of commencement of employment with

an employer, the employee shall furnish the employer with a signed withholding
exemption certificate relating to the personal and additional exemptions to which
he is entitled.
(b) Change of Status In case of change of status of an employee as a result of
which he would be entitled to a lesser or greater amount of exemption, the
employee shall, within ten (10) days from such change, file with the employer a
new withholding exemption certificate reflecting the change.

(c) Use of Certificates. The certificates filed hereunder shall be used by the
employer in the determination of the amount of taxes to be withheld.

(d) Failure to Furnish Certificate. Where an employee, in violation of this

Chapter, either fails or refuses to file a withholding exemption certificate, the
employer shall withhold the taxes prescribed under the schedule for zero
exemption of the withholding tax table determined pursuant to Subsection (A)
hereof.

(E) Withholding on Basis of Average Wages The Commissioner may, under

rules and regulations promulgated by the Secretary of Finance, authorize
employers to:

(1) estimate the wages which will be paid to an employee in any quarter of the
calendar year;

(2) determine the amount to be deducted and withheld upon each payment of
wages to such employee during such quarter as if the appropriate average of the
wages so estimated constituted the actual wages paid; and

(3) deduct and withhold upon any payment of wages to such employee during such
quarter such amount as may be required to be deducted and withheld during such
quarter without regard to this Subsection.

(F) Husband and Wife. When a husband and wife each are recipients of wages,
whether from the same or from different employers, taxes to be withheld shall be
determined on the following bases:

(1) The husband shall be deemed the head of the family and proper claimant of the
additional exemption in respect to any dependent children, unless he explicitly
waives his right in favor of his wife in the withholding exemption certificate.
(2) Taxes shall be withheld from the wages of the wife in accordance with the
schedule for zero exemption of the withholding tax table prescribed in Subsection
(D)(2)(d) hereof.

(G) Nonresident Aliens. Wages paid to nonresident alien individuals engaged in

trade or business in the Philippines shall be subject to the provisions of this
Chapter.

(H) Year-end Adjustment. On or before the end of the calendar year but prior to
the payment of the compensation for the last payroll period, the employer shall
determine the tax due from each employee on taxable compensation income for the
entire taxable year in accordance with Section 24(A). The difference between the
tax due from the employee for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his salary in December of the
current calendar year or refunded to the employee not later than January 25 of the
succeeding year.

SECTION 80 Liability for Tax.

(A) Employer The employer shall be liable for the withholding and remittance
of the correct amount of tax required to be deducted and withheld under this
Chapter. If the employer fails to withhold and remit the correct amount of tax as
required to be withheld under the provision of this Chapter, such tax shall be
collected from the employer together with the penalties or additions to the tax
otherwise applicable in respect to such failure to withhold and remit.

(B) Employee Where an employee fails or refuses to file the withholding

exemption certificate or willfully supplies false or inaccurate information
thereunder, the tax otherwise required to be withheld by the employer shall be
collected from him including penalties or additions to the tax from the due date of
remittance until the date of payment. On the other hand, excess taxes withheld
made by the employer due to:

(1) failure or refusal to file the withholding exemption certificate; or

(2) false and inaccurate information shall not be refunded to the employee but shall
be forfeited in favor of the Government.
SECTION 81 Filing of Return and Payment of Taxes Withheld Except as
the Commissioner otherwise permits, taxes deducted and withheld by the employer
on wages of employees shall be covered by a return and paid to an authorized
agent bank, Collection Agent, or the duly authorized Treasurer of the city or
municipality where the employer has his legal residence or principal place of
business, or in case the employer is a corporation, where the principal office is
located.

The return shall be filed and the payment made within twenty-five (25) days from
the close of each calendar quarter: Provided, however, That the Commissioner
may, with the approval of the Secretary of Finance, require the employers to pay or
deposit the taxes deducted and withheld at more frequent intervals, in cases where
such requirement is deemed necessary to protect the interest of the Government.

The taxes deducted and withheld by employers shall be held in a special fund in
trust for the Government until the same are paid to the said collecting officers.

SECTION 82 Return and Payment in Case of Government Employees - If the

employer is the Government of the Philippines or any political subdivision, agency
or instrumentality thereof, the return of the amount deducted and withheld upon
any wage shall be made by the officer or employee having control of the payment
of such wage, or by any officer or employee duly designated for the purpose.

SECTION 83 Statements and Returns

(A) Requirements. Every employer required to deduct and withhold a tax shall
furnish to each such employee in respect of his employment during the calendar
year, on or before January thirty-first (31st) of the succeeding year, or if his
employment is terminated before the close of such calendar year, on the same day
of which the last payment of wages is made, a written statement confirming the
wages paid by the employer to such employee during the calendar year, and the
amount of tax deducted and withheld under this Chapter in respect of such wages.
The statement required to be furnished by this Section in respect of any wage shall
contain such other information, and shall be furnished at such other time and in
such form as the Secretary of Finance, upon the recommendation of the
Commissioner may, by rules and regulations, prescribe.
(B) Annual Information Returns Every employer required to deduct and
withhold the taxes in respect of the wages of his employees shall, on or before
January thirty-first (31st) of the succeeding year, submit to the Commissioner an
annual information return containing a list of employees, the total amount of
compensation income of each employee, the total amount of taxes withheld
therefrom during the year, accompanied by copies of the statement referred to in
the preceding paragraph, and such other information as may be deemed necessary.
This return, if made and filed in accordance with rules and regulations promulgated
by the Secretary of Finance, upon recommendation of the Commissioner, shall be
sufficient compliance with the requirements of Section 68 of this Title in respect of
such wages.

(C) Extension of Time The Commissioner, under such rules and regulations as
may be promulgated by the Secretary of Finance, may grant to any employer a
reasonable extension of time to furnish and submit the statements and returns
required under this Section.