Table of Contents

Chapters
I.

II.

Page

Basic Principle of Taxation

8
a. Inherent limitation of Taxation
b. Constitutional limitation of Taxation
c. Exemption from Estate Tax of by Virtue of Incidental purpose
17
d. International Juridical Taxation
e. Doctrine of Equitable Recoupment

8
12

Taxable Persons

32

a. Individual
b. Corporations
c. Trust and Estate
III.

32
37
41

Kinds of Income

a. NIT
b. GIT
c. FIT
d. MCIT
e. OPCIT
f. IAET
IV.

V.

21
25

43
45
46
47
48
48

Sources of Income

49

a. Interest
b. Sale of Shares and Dividend
c. Services
d. Royalties and Rentals
e. Sale of Real Property
f. Sale of Personal Property

49
51
53
54
56

Capital and Ordinary Asset

CHAPTER 1

Basic Principles in Taxation

The power to tax is an inherent prerogative of sovereignty; it can be
exercised and enforced even without constitutional or statutory provision. This
power is inherent in the national government but not in the local government units
(LGUs). Since LGUs have no inherent power to tax, it cannot impose taxes upon
their respective inhabitants unless the power to tax is expressly granted to them by
them by the Constitutional by law passed by Congress.
The power to tax depends on the existence of the State; the moment the State exist,
automatically, the power of taxation also exists.
Inherent Limitation of Taxation
The following are inherent limitation of taxation:
1.
2.
3.
4.
5.

It should be for public purpose;

It is inherently legislative;
Government is tax exempt;
Territoriality; and
International comity.

Q. What if Congress appropriate money for development of a property belonging to

a private person, is the appropriation valid?
A. The SC ruled in Pascual vs. Secretary of Public Work and Highways (G.R. No. L10405, December 29, 1960) that It is general rule that the legislative is without
power to appropriate public revenue for anything but a public purpose. It is the
essential character of the direct object of expenditure, which must determine its
validity as justifying a tax, and not the magnitude of the interest to be affected nor
the degree to which the general advantage of the community, and, thus the public
welfare may be ultimately benefited by their promotion. Incident to the public or to
the State, which results from the promotion of private interest and the property of
private enterprises or business, does not justify their aid by the public money.
Q. May the government tax itself?
A. First determine who the taxing authority is. If the taxing authority are LGUs,
the answer is no RA 7160, the local Government Code (LGC), expressly prohibits
LGUs from levying tax from the national government, its agencies and
instrumentalities and other LGUs
Under Sec. 133 (o) of the LGC, the taxing power of the LGUs shall not extend to
taxes, fees, charges of any kind, on the national government, its agencies and
instrumentalities (except income from public utility under their jurisdiction).

Basco vs. PAGCOR

197 SCRA 52
The city of Manila, being a mere Municipal Corporation, has no inherent power to
tax. LGUs have no power to tax instrumentalities of the national government.
PAGCOR, being an instrumentality of the national government, is therefore exempt
from local taxes, otherwise, its operations might be burdened, impeded, or
subjected to control by a mere LGU.
Mactan Cebu International Airport vs. Marcos
261 SCRA 667
Mactan cannot invoke Sec 133 (o), LGC; it refers to local taxation, And since the
last par of Sec 234 unequivocally withdrew upon the effectivity of the LGC
exemption from payment of real property taxes granted to natural person and
juridical person including Government-Owned and Controlled Corporations
(GOCCs) except as provided in the said section, and the petitioner is, undoubtedly
a GOCC, it is necessarily follows that its exemption from tax granted in sec 14 of its
charter, RA 6958, has been withdrawn.
Take note that if the taxing authority is the national government the answer to the
previous question is yes. Pursuant to the provisions of National Internal Revenue
Code (NIRC), RA 8424, it can levy tax upon GOCCs (see Section 27C NIRC),
agencies and instrumentalities although income derived from the exercised of
essential government functions are exempt (see Section 32B7b of NIRC).
Q. What is the source of power to tax of LGUs outside the Autonomous Region
and those within the Autonomous Region?
A. Those LGUs outside the Autonomous Region derive its power to tax from the
1987 Constitution, Section 5 of Article X states that Each local government unit
shall have the power to create its own sources of revenues and to levy taxes, fees
and charges subject to such guidelines and limitations as the Congress may
provide, consistent with the basic policy of local autonomy. Such taxes, fees and
charges shall accrue exclusively to the local governments. This Constitutional
provision is a self-executing provision.
However, this rule is applicable only to LGUs outside the Autonomous Regions
(Muslim Mindanao and the Cordilleras). The authority to tax of LGUs within
Autonomous Region is not delegated by the constitutional provision but by the
organic act creating the LGUs with autonomous region. This is implied under
Article X, Section 20 second number of the 1987 Constitution. It states that
Within its territorial jurisdiction and subject to the provision of this Constitution

and national laws, the organic act of autonomous regions shall provide for
legislative powers over: xxx) (2) Creation of sources of revenues.
This constitutional provision merely authorizes the Congress to pass the Organic
act of Autonomous Region, which shall provide for legislative powers to levy taxes
upon their inhabitants. Section 20, Article X of the 1987 Constitution is not a selfexecuting provision as compared to Article X section 5 of the Constitution.
Therefore, the LGUs power to tax is based on 1987 constitution subject only to
such guidelines and limitation as the Congress may provide. The power to tax
LGUs within Autonomous Region is based on the Organic act, which the 1987
Constitution authorizes Congress to pass The limitation and guidelines under LGC
is applicable only to LGUs outside the Autonomous Region.
Q. The LGC embodies local taxation, is it not the source of authority of the
LGUs to levy taxes?
A. No, as stated, the 1987 Constitution is the source of the taxing power of the
LGUs (Except the autonomous region); it serves only as a guidelines and limitation
provided for the Congress in the exercise of LGUs power to tax.
Territoriality
Taxation is territorial in such a manner that the taxing authority cannot impose
taxes on subject beyond its territorial jurisdiction. However, taxing authority may
determine the tax situs.
Philippine Match Co. vs. The City of Cebu
G.R. No.L-30745 January 18, 1978
The sales in the instant case were in the city and the matches sold were stored in
the city. The fact that the matches were delivered to customers, whose places of
business were outside of the city, would not place those sales beyond the citys
taxing power. Those sales formed part of the merchandising business being
assigned on by the company in the city. In essence, they are the same as the sled
of matches fully consummated in the city.
Furthermore, because the sellers place of business is in Cebu City, it cannot be
sensibly argued that such sales sold be considered as transactions subject to the
taxing power of political subdivisions where the customers resided and accepted
delivery of the matches sold.
International Comity
State must recognize the generally accepted tenets of international law.
CIR vs. Lednicky
G.R. Nos. L-18169, L-18262 & L-21434, July 31, 1964

To allow an alien resident to deduct from his gross income whatever taxes he pays
to his own government amounts to conferring on the latter the power to reduce the
tax income of the Philippine government simply by increasing the tax rates on the
alien resident. Every time the rate of taxation imposed upon an alien resident is
increased by his government, his deduction, from Philippine taxes would
correspondingly increase and the proceeds for the Philippines diminished, thereby
subordinating our own taxes to those levied by a foreign government. Such a result
is incompatible with the status of the Philippines as an independent and sovereign
state.
Constitutional Limitations on Power to Tax
The constitutional limitation on the power to tax are the following:
1.
2.
3.
4.
5.

Due process;
Equal protection;
Non-impairment of contract;
Non-imprisonment for non-payment of poll tax; and
Freedom of religion.

Due process
This prohibition refers to Section 1 of Article III of 1987 Constitution which states
that :No persons shall be deprived of life, liberty, or property without due process of
law, xxx. The due process clause as a limitation to the power to tax refers both to
substantive and procedural due process.
Substantive due process requires that a tax statute must be within the
constitutional authority to pass, and that it must be reasonable, fair, and just.
For instance, when the Congress passes a law exempting the 13 th moth pay from
tax but with the concurrence of only majority of the quorum, the law would be
invalid because the Constitution requires that any grant of tax exemption shall be
passed with the concurrence of the majority of all the members of the Congress.
Hence, the constitutional provision is violated by not following the required
majority.
Procedural due process, on the other hand, requires notice and hearing or at least
the opportunity to be heard.
Q. If procedural due process requires notice and hearing, does it follow that the
adverse party in a proceeding must always be notified?
A. No. As a rule, notice and hearing or opportunity to be heard is necessary only
when expressly required by law. Where there is no such requirement, notice and
opportunity to be heard are dispensable.

Example:
Before October 1, 1995, one can serve temporary restraining order without
notifying the adverse party. If a person is a suspect in a criminal case, he has the
right to have an opportunity to be heard if there is a law requiring such process:
otherwise, it is dispensable.
Another example is in case of search warrants: a person to be searched is not
notified. The person searched cannot claim that there is violation of due process
because there is no law requiring a person to be searched should be notified.
Fortunately, majority of proceedings requires
Equal Protection Clause
This is also based on Section 1 of Article III of 1987 Constitution. It states xxx nor
any person shall be denied of equal protection of the laws. As a rule taxpayers of
the same footing are treated alike, both as to privileges conferred and liabilities
imposed. Difference in treatment is allowed only when based on substantial
distinction. Difference in treatment not based on substantial distinction is frowned,
upon as class legislation.
The equal protection clause is violated when taxpayers belonging to the same
classification are treated differently from one another, and when taxpayers
belonging to different classifications are treated alike.
Q. If a tax ordinance is applied to only one entity or taxpayer, is there a
violation of the equal protection clause?
A. It depends. If the ordinance is intended to apply to a specific taxpayer and to no
one else regardless of whether or not other entities belonging to the same class are
established in the future, it is a violation of the equal protection clause. But if the
ordinance is intended to apply also in the future, then the tax ordinance is valid
even if in the meantime it applies only to an entity or taxpayer for the simple
reason that there is so far only one member of the class subject to the tax
measure.
Ormoc Sugar Company vs. Ormoc City
GRN L-23794 February 17, 1968
When the taxing ordinance was enacted, Ormoc Sugar Co., Inc. was the only sugar
central in the City. A reasonable classification should be in terms applicable to
future conditions as well. The taxing ordinance should not be singular and
exclusive as to exclude any subsequently established sugar central.
Q. What are the requirements of reasonable classification?
A. Equal protection clause applies only to persons or things identically situated
and do not bar a reasonable classification of the subject of legislation. A

classification is reasonable where (1) it is based on substantial distinctions which

make real differences; (2) these are germane to the purpose of the law; (3) the
classification applies not only to present conditions but also to future conditions
which are substantially identical to those of the present; (4) the classification applies
only to those who long to the same class (Ormoc sugar,supra).
Non-Impairment of Contract Clause
This prohibition is based on Section 10 Article III of the 1987 Constitution which
states that No law impairing the obligation of contracts shall be passed.
Obligations arise from law contracts quasi-contracts, acts or omissions punishable
by law (delicts) and quasi-delict. The Constitution prohibits impairment only when
the obligation is based on contracts; hence it is not applicable to franchise.
Franchise is granted by congress always under a condition that it can be amended,
altered or repealed anytime if public interest so requires. Considering that the nonimpairment clause does not apply to franchise, such provision for amendment,
alteration or repeal is not a violation of said constitutional injunction.
In addition, it applies only where one party is the government and the other is a
private individual. Therefore, this prohibition does not apply when both parties are
private individuals.
Q. How can sources of obligation be determined?
A. When the law established the obligation the law itself is the source of the
obligation. However, when the law merely recognizes or acknowledge the existence
of an obligation generated by an act which may constitute a contract, quasicontract or delict and its only purpose is to regulate such obligation, then the act
itself is the source of the obligation and not the law.
Q. Considering that the obligation to pat tax is based on law, how does then
the non-impairment clasue server s a limitation on the power to tax?
A. As a rule, the obligation to tax is based on law. But when, for instance, a
taxpayer enters into a compromise with the bureau of Internal Revenue (BIT), the
obligation of the tax payer becomes one based on contract. This is an instance
where the non-impairment clause may be invoked. A law which changes the term of
this compromise agreement by making new conditions, or change those in the
contract or dispenses with those expressed impairs the obligation; consequently, it
impairs the contract between BIR and the taxpayer.
Non-Imprisonment for Non-payment of Poll Tax
Poll Tax is imposed on persons without qualification. Hence, a tax based on
property, ownership, income or age is not a poll tax. A good example of this tax is
community tax under Sec 162 of the LGC.

Q. Why is non-imprisonment for non-payment of a poll tax a limitation on the

power to tax?
A. Because payment is optional, it is not mandatory or obligatory. The only penalty
for non-payment of a poll tax is fine not imprisonment thereby limiting the power to
tax.
Freedom of Religion
Section 5 of Article III of the 1987, Constitution states that No law shall be made
respecting an establishment of religion xxx. If respecting an establishment of
religion is prohibited with much more reason that a creation of religious
establishment is prohibited. Corollary, Section 5 of Article II of the 1987
Constitution observes the separation of Church and State.
Q. What happens if the government establishes a religion?
A. If it will establish a religion, it will require a special appropriation from the
National Treasury; therefore, it will violate Section 5 of Article III of the 1987
Constitution.
Exemption from Real Estate Tax by Virtue of Incident Purpose
To fully understand this concept, four Supreme Court decisions should be fully
scrutinized:
1.
2.
3.
4.

Herrera vs. QC Board of Assessment Appeals;

Abra Valley College vs. Aquino;
Province of Abra vs. Hernando; and
Philippine Lung Center vs. QC Board of assessment Appeal.

In these four cases we have to know the governing constitution at the time the
cause of action arouses; otherwise, we will not understand the relevance of these
cases.
In Herrera vs. QC, the governing constitution is the 1935 Constitution ; in Province
of Abra vs. Hernando, the 1973 Constitution, Abra Valley vs. Aquino, the 1935
Constitution; and in Philippine Lung Center vs. QC, the 1987 Constitution.
Q. What is the importance of determining the prevailing Constitution at the
time the cause of action arises?
A. The requirements for exemption of the entity involved are different. In 1935
Constitution, the exemption from real estate tax requires that the real property
should be exclusively used for the entity exempted. In 1987, and 1973
Constitutions, the requirements is exclusively, actually and directly.
Q . Who are the entities covered under these constitutions?

A. in 1987 and 1935 Constitutions, the entities covered of such exemption are
religious, charitable and education. In 1973 Constitution, it only provides for
charitable and religious institutions.
Take note that under NIRC or in any other Philippine statutes, there is no such
thing as exemption by virtue of incidental purpose. This principle refers only to one
and only tax; the real property tax. This principle originated in the Supreme Court
decision in the case of Herrera vs. QC.
Herrera vs. QCBAA
GRN L-15270, September 30, 1961
The entity involve here is a charitable institution. QC wanted to collect real
property tax because St, Catherine hospital sometime collects fees from certain
patients. It also operates midwifery and nursing school, and dormitory. Quezon
City contends that the real property must be used exclusively using the land from
charitable purpose; hence, liable for real property tax.
The Supreme Court ruled the exemption from real property tax by virtue of
incidental purpose. The exemption granted was to all properties of St, Catherine
whether for paying or non-paying patient, whether it is used by the nursing school,
midwifery school and dormitory.
This is the case were the SC coined the term exemption by virtue of incidental
purpose from real property tax.
The provincial prosecutor filled a petition declaratory relief. The issue is whether or
not the property of the Roman Catholic in Bangued, Abra is exempt or not exempt
from real property tax. In this case, the judge merely stated that the Roman
Catholic of Bangued is exempt without conducting a hearing. Take notice that this
case is under the 1973 Constitution. The petitioner went to SC and filed certiorari
for violation of the procedural process on the part of the Province of Abra.
The SC stated that if only the judge had read the 1973 Constitution, he should
have known the difference between the 1935 and the 1973 Constitution and he
could not have summarily dismissed the case. There is a substantial distinction
between the 1935 nag 1973 Constitution. In the 1935 institution, the requirement
for exemption for real property is exclusively while the 1973 Constitution requires
actually, directly and exclusively. The SC remanded to the court of origin for
further hearing.
The important thing in this case is that the SC had already noticed the great
difference of the substantial distinction between exemptions from real property
taxes.
Abra Valley College vs. Aquino
GRN L-49336, August 31, 1981

The entity involve in this case is an educational institution and the cause of action
arouse under the 1935 Constitution. The school entered into a contract of lease as
a lessor. The lessees are Northern Marketing Corporation in the ground floor and
the director of school in the second floor. The Province of Abra contended that the
property was not exclusively used for educational purposes and it tried to collect
real property tax.
The SC ruled that the provincial government of Abra is partially correct. With
regard to the lease where the lessee is a domestic corporation, it is not exempt
because it has nothing to do with the operation of the entity of the school. But with
regard with the lease to the director of the school, it is still exempt based on
exemption by virtue of incidental purpose. In other words, it merely reiterated its
prior ruling in the Herrera case.
However, the ruling here is not the same as Herrera, the exemption granted in
Herrera is total while in this case, the exemption is partial. Take note that both
cases arouse under the 1935 constitution.
Philippine Lung Center vs. QC
G.R. No. 144104, June 29, 2004
The cause of action arouses under 1987 Constitution. The petitioner is a charitable
institution. QC contended that the petitioner is liable for real property tax because
the ground floor was leased to drugstore, clinic, and grocery and the vacant land
was leased planters of orchid. QC further contended that under the 1987
Constitution, the real property exemption entities must be used actually, directly
and exclusively. For charitable purpose and the petitioner failed to fall within the
exemption because of leases to private entities and the acceptance of paying
patients. The Lung Center invoked the SC ruling in the case of Herrera.
The SC ruled that the Herrera ruling is no longer applicable because the cause of
action arouse under the 1935 Constitution. However, the SC ruled that the
property leased to private entities should be assessed real estate tax but those
which are used by patient paying or non-paying is exempt from tax.
Analysis
When the SC rejected the Herrera ruling, it is correct. But when it ruled that the
property leased to private entities should be assessed real estate tax but those
which are used by patient, paying or non-paying, are exempt from tax, it impliedly
reiterated its ruling in Abra Valley vs. Aquino where the SC reiterated the
exemption by virtue of incidental purpose enunciated in Herrera.
Q. Is exemption by virtue of incidental purpose still applicable in this case?
A. It may be answered in two ways:

1. Yes. In Philippine Lung Center vs. QC, the SC adhered to this policy.
Implied, it goes back to the principle of exemption by virtue of incidental
purpose. The SC adopted the case of Abra Valley vs. Aquino where it reiterated
the ruling in Herrera on exemption by virtue of incidental purpose.
2. No. This principle originated from a SC decision in the case of Herrera
during the time where the 1935 Constitution says that real property must be
exclusively used for educational, religious or charitable purposes. With the
additional requirement under the 1987 Constitution, it must be used
actually, directly and exclusively. The Herrera ruling is no longer controlling
because of the principle that the governing law in an action is the law or
constitution t the time the cause of action arouse. The Herrera ruling was
decided under the 1935 Constitution while the Phil. Lung Center is under the
1987 Constitution. In addition, Philippine Lung Centers expressly reject the
Herrera ruling in which the principle of exemption by virtue of incidental
purpose originated.
International Juridical Double Taxation
The principle of international juridical double taxation is enunciated by the
Supreme Court in the case of Commissioner of Internal Revenue vs. Johnson and
Johnson, infra. The discussion of this principle has been incorporated in the
digested case below.
CIR vs. Johnson and Johnson (Philippines)
GRN 127605, June 25, 1999
This is a landmark decision because the SC enunciated, for the first time, the
principle of international juridical double taxation.
In this case, Johnson and Johnson (Philippines) and Johnson and Johnson (USA),
a non-resident foreign corporation (NRFC), entered into a agreement allowing
Johnson and Johnson Philippines to use its trademark, trade name, goodwill and
the secret formula. In turn, the domestic corporation (DC) will pay a certain sum of
money known in law as royalty. The income earner in this case is SC Johnson and
Johnson USA. This income is subjected to income tax in the Philippines and US.
In this case, the SC coined the term international juridical double taxation because
a particular income is subjected to two income taxes; the Philippine income tax law
and the income tax law under Federal Revenue Code of US.
The income earned by SC Johnson USA was subjected to Philippine income tax
law. Johnson withheld income tax of 25% of the royalties transmitted to the
Johnson USA. After payment, the SC Johnson discovered that under the subtitle
the Most Favored Nation, the rate of income tax is 10% if it was paid under similar
circumstances they filed a claim of refund.

According to Court of Appeals (CA) and Court of Tax Appeals (CT), the meaning of
under similar circumstances includes the receipt of royalty in the payment of
income tax. There is also similar provision in the RP-Germany Tax Treaty was they
are paying 10%. Hence, they are only liable for 10% tax.
The SC reversed the ruling. The payment under similar circumstance under the
most favored nation shall be construed as about matching tax credit.
Q. What is the tax credit provided for in this case?
A. The German nationals and corporations earning income with the Philippines
pay income tax in the Philippines. In the RP-Germany Tax Treaty, German
nationals and corporation pays income tax in the Philippines as well as in they
home country. They will pay income tax in the Philippines for the royalty or any
income they earned from sources within the Philippines. As agreed, in the RPGermany Tax Treaty, whatever income tax they had paid in the Philippines, 20%
will constitute as tax credit in the payment of income tax in Germany. Take note
that tax credits are deducted from the tax due and not from gross income.
The German nationals and corporations under the treaty, are allowed to pay 10%
income tax. The SC explained that in RP-US treaty, there is no such matching tax
credit system provide for in that treaty. The claim for refund of the Johnson and
Johnson USA was denied because the Most Favored Clause does not apply to
them; this clause refers to the tax credit system as agreed upon in the treaty. There
is no tax credit system agreed upon between the Philippines and the United States
in the RP-US tax treaty.
Necessity of Tax Treaty
The SC declared that there is a necessity to enter into a tax treaty in order to
minimize the burden of international juridical double taxation. In a treaty, what
could be agreed upon are the following;
1. Tax exemption;
2. Tax credit and
3. The rate may be lowered (as opined by Prof. Francis Sababan) (Tax
Deduction)
A taxpayer may be liable because of the provision of the statue. But by the virtue of
a treaty, the states can agree that a party or a taxpayer of either or both country
may be exempt from tax.
In this case, the gross come tax (GIT) on NRFC is 30% (see 28B1 as amended by
RA 9337).by virtue of the treaty, it may be lowered to 25%, or they could agree on
exemption. In tax credit, a tax paid in source country may be credited to the tax
paid in their residence country.

We have to remember that the tax credit should be deducted after the tax had
been computed. This is different from deduction; it is deducted from the
gross income not from the tax due.

Existence of Juridical Double Taxation

For purposes of income taxation, there are two kinds of taxability of income in
international precept: an income of citizen, or domestic corporation is subject to
income tax not only in their own country but also in another country where the
income came from. The best example is Philippines and United State. Therefore, a
resident citizen of Philippine is taxable, under Philippine law as well as USA law if
the income is derived in the latter (see section 23A of NIRC) and vice versa.
For instance, if an American earned income from sources within the Philippines
,like in this case, they will pay not only income tax in the Philippines by also in the
United States. Also, if a resident citizen of the Philippines earned income in United
State, in the Philippines, they are still subject to Philippine tax law.
We have the second group; the income tax of a citizen and domestic corporation is
only limited on income within its country, and if they earn income from outside the
country, they are not liable; hence, exempt. One good example is the country of
Switzerland. To illustrate, if Switzerland entitles earned income from sources in the
Philippines, under our law, they will have to pay income tax in the Philippines, but
in Switzerland, they are exempt. In this case, double taxation is not possible
because when they go on their own country, they are exempt.
International juridical double taxation happens only if both countries are within
the first group where an entity is taxable from its home country and the country of
where the income is earned. Usually, countries which tax its citizens and domestic
corporation within and without its countries are Philippines, USA, Germany and
Japan. They belong to the same class as far as application of income tax. Hence,
juridical double taxation will apply. For the second group, this principle is unlikely
to happen.
Doctrine of Equitable Recoupment and Set-Of
As a rule, do not interchange the doctrine of set off or compensation in taxation
with the doctrine of equitable recoupment.
Doctrines of set-off or compensation in taxation was taken from the New Civil
Code and was changed to compensation or set-off in taxation. In this doctrine, the
taxpayer has a claim against the government but the government is claiming a tax
from the taxpayer.

For instance, the government initiated an expropriation proceeding.

The
government is obliged to pay the taxpayer for just compensation, for example
500,000.00 pesos. On the other hand, the taxpayer is obliged to pay tax, for
instance, an income tax amount to 100,000.00 pesos. The government will collect
the income tax of 100,000.00 pesos, and then the taxpayer may say, Why not pay
me not 500,000.00 pesos but 400,000.00 pesos. The taxpayer, in this example, is
requesting the application of compensation under the New Civil Code.
The doctrine of equitable recoupment is different from doctrine of set-off. Under
the doctrine of equitable recoupment, the taxpayer is entitled to claim for a
refund which was already barred by law on prescription, and subsequently, he was
obliged again to pay income tax.
To illustrate, a taxpayer is liable only to pay income tax of 10,000.00 pesos, instead
of paying such income tax, he paid an income tax of 100,000.00 pesos. Therefore,
he is entitled to a claim for 90,000.00 pesos refund. For failure to claim the
refund, his right to claim has prescribed.
Subsequently, the taxpayer is being obliged again to pay income tax of 100,000.00
pesos. Can the taxpayer tell the BIR, I do not deny my liability for this year of
100,000.00 pesos income tax but I have a claim of 90,000.00 pesos tax refund
which I failed to recover because of prescription, may I request that the 90,000.00
pesos be credited so that I am going to pay only 10,000.00 pesos? If doctrine of
equitable of recoupment is applicable, the request will probably be granted.
Take note that the doctrine of equitable recoupment is not allowed in our country.
The prohibition is an absolute prohibition. The reason is that to allow such
prohibition, the government will be tempted to delay the collection of tax and the
taxpayer will be also tempted to delay payment of their tax liability. Secondly, if
this doctrine will become applicable in our jurisdiction, the government will be
bombarded with so many claims for tax credit.
The study of set off in taxations is best illustrated in the following cases:
1.
2.
3.
4.
5.

Republic vs, Mambulao Lumber;

Domingo vs. Garlitos;
Francia vs.CIR;
CALTEX vs. CIR; and
Philex Mining vs. COA.
Republic vs. Mambulao
GRN L-177725, February 28, 1962

The tax being claimed by the government against Mambulao is forest charges (Take
note that by virtue of E.O. 37 issued by Pres. Aquino, forest charges was abolished in
1987). Mambulao lumber refused to pay the forest charges alleging that the
government did not use reforestation charges under RA 115 for reforestation which

they had consistently paid in past year. Mambulao contended that their liability to
pay forest charges should be offset from the reforestation charges they had paid
considering that the government did not spend it for reforestation. In summary,
Mambulao is claiming the application of the principle set-off or compensation
under the New Civil Code.
The SC did not agree on the contention of Mambulao. According to SC, the
government and Mambulao are not mutually debtors and creditors with one
another and that a tax is not a debt to be a subject matter of set off or
compensation.
Q. What do we mean by the word mutual?
A. Mutual means that the cause of action must arouse from the same source.
Considering the causes of action of the parties in this case came from different
sources, it is not a proper subject matter of a set off. Moreover, tax is not a debt.
The subject matter of a compensation or set-off under the Civil Code should be a
debt; therefore, set off or compensation was not allowed in this case.
Domingo vs. Garlitos
GRN L-18994, June 29, 1963
The government is trying to collect from the estate of the decedent inheritance tax
and estate tax. (Take note that we do not have inheritance tax as well as donees
tax. These were abolished in 1974 by virtue of PD 6_). The surviving spouse is the
administratrix of the estate and contended that her late husband has a claim
against the government for the services rendered as cadastral surveyor. The
administratrix, in turn is invoking the application of doctrine of set-off or
compensation in taxation under the New Civil Code.
The SC ruled that set off is allowed in this case on the ground that both demands
are due, demandable and fully liquidated. Fully liquidated means that the amount
is already determined up to the last centavo. Why is it fully liquidated? The
amount due is already determined because the Congress enacts RA 2700 for the
appropriation of sum of money to the estate of the decedent for his service
rendered as cadastral surveyor.
Take note that inheritance tax is not a debt. Normally, this would not have been a
subject matter of compensation or set-off. Also, the causes of action arouse from
different sources.
Q. Why did the SC ruled otherwise although the facts of the case are almost
identical with the case of Mambulao? What is the compelling reason why the
SC ruled in this manner?

A. This is because of the enactment of RA 2700 appropriating money to be paid to

the estate of the decedent as compensation.
The compensation is around
200,000.00 pesos, but the one claimed by the government for estate and
inheritance tax was only 40,000.00 pesos. The SC ruled that since both demands
are due, demandable and fully liquidated, compensation or set-off by operation of
law should be applied pursuant to 1279 article and 1290 of the Civil Code.
Remember the very unique circumstance and the compelling reason in this case is
the act of Congress enacting RA 2700 which appropriated certain sum of money to
be paid as compensation to the estate of the deceased.
Francis vs. CIR
GRN L-67649, June 28, 1988
The tax collected by Pasay City in this case is a real estate tax. A portion of the
petitioners parcel of land was expropriated for the expansion of the street. He
contended that principle of set-off automatically applies in his real estate tax
liability and just compensation he will receive as payment of the expropriation of
his land by invoking the case of Domingo vs. Garlitos.
The SC ruled in the negative reiterating its prior ruling in Mambulao case. In
addition, the SC ruled that the just compensation had been deposited to this PNB
account in Pasay City. Impliedly, the SC is saying that if he had just withdrawn the
money and pays his real estate tax, then, he would not have his property sold in
the auction.
This case was asked in the 1996 bar.
California Texas (CALTEX) vs. COA
GRN 92385 May 8, 1988
The government claimed the remittance of the contribution for the Oil Price
stabilization fund (OPSF) in which the purpose is to stabilize the price of petroleum
product. Under RA 6952, all petroleum companies in the Philippines are obliged to
remit a certain sum of money with OPSF. CALTEX contended that they have a
pending claim for refund against the OPSF because of the oil price fluctuation in
Europe and Middle East.
CALTEX does not deny the liability to contribute a
certain sum of money but claims that it is entitled for a refund in OPSF. In sum,
CALTEX is requesting the application of principle of compensation or set-off under
the New Civil Code.
The SC did not allow the set-off. The SC reiterated its prior ruling in Mambulao
and Francia stating the government and CALTEX are not mutually creditors and
debtors with each other. The SC added that the fund of OPSF is not subject to

compensation because RA 6952 expressly states that set-off or compensation

should not be made against the funds of OPSF. With this reasoning, the claim for
set-off was rejected by SC.
Philex Mining vs. CIR
GRN 125704, August 28, 1998
The tax being collected in this case is excise tax under title VI of NIRC (Take note
that excise tax is not covered in the bar exam for the simple reason that most of this
provision are about the rates. During this time, forest charges were abolished
because under the excise tax law one of the subject matters is mining companies like
Philex Mining). Philex, on the other hand, alleged that they have a pending claim
for refund under the VAT law. In sum, Philex do not deny their liability to pay
excise tax but invokes the principle of set-off or compensation in taxation.
The SC did not agree with Philex. The SC reiterated its prior pronouncement in
Mambulao, Francia and CALTEX where government and taxpayer are not mutually
creditors and debtors with each other. In addition, the SC added that the demand
must be due and demandable. In this case, the claim for refund of Philex is not
yet granted, hence, it cannot be determined how much is the actual amount to be
refunded. It cannot be a subject matter of set off or compensation simply because
the amount is not yet determined.
Philex mining invoked the application of Itogon case.
However, nowadays, the
claim for refund with the BIR is not automatic. It has to be assessed and studied
before it will be granted. Unlike in old days, it would seem refund is automatic. If
the refund is not yet granted, then the amount is not yet fully liquidated. Corollary,
the claim for application of set off is denied.
This was asked in the 2000 bar.
Discussions
We will notice that in these five cases, with the exception of Domingo vs. Garlitos,
compensation or set off was denied. In all these cases where compensation was
denied, there is a common ground; a tax is not a debt because the subject matters
under the Civil Code of compensation must be a debt. Secondly, the SC keeps on
repeating that the taxpayer and the government are not mutually creditors and
debtors with each other.
However, in all of these cases where set off was denied by the government, there is
always a second reason after reiterating the rule in the case of Mambulao. To
begin with, in the case of Francia, the SC, after reiterating the Mambulao ruling, it
ruled the money was already paid in the PNB account of Francia. In CALTEX, we
have the same reason. In addition, the SC states that RA 6952 do not allow set off

or compensation to be made against the fund of OPSF. Lastly, in Philex mining, we

have the same ruling, but in addition, the SC added that the claim for refund is not
yet granted. In the application of principle of set off or compensation, the amount
must be fully liquidated. It follows that set-off or compensation should be denied
because the refund is not yet granted.
In Domingo vs. Garlitos, although the parties are not mutually creditors and
debtors, yet, the SC ruled otherwise simply because of the very unique
circumstance that Congress enacted RA 2700 appropriating money to the estate of
decedent.

CHAPTER II
Taxable Persons
In the study of income tax, we have to familiarize the following:
1.
2.
3.
4.

Different kinds of income taxpayers;

Different kinds of income taxes;
Sources of income; and
Capital and ordinary assets.

Generally, there are three taxable persons under Section 22A (if the section number
is not followed by a certain law, it refers to NIRC), they are the following:
1. Individuals;
2. Corporation; and
3. Estates and Trusts.
There are only three taxable persons because estates and trusts are similarly
situated. Although under Civil Code, they are not similar, for purposes of income
tax, these two are similarly situated or in the same footing.
To sum up, there are seven individuals and there are three corporations.
and trusts are like individuals so there are also seven estates and trusts.
Individuals
The seven individuals are the following:
1.
2.
3.
4.

Resident citizen (RC);

Nonresident citizen (NRC);
OFW and seaman;
Resident alien(RA);

Estates

5. Nonresident alien engaged in trade or business (NRAE);

6. Nonresident alien not engaged in trade or business (NRANB); and
7. Aliens employed by MOPs:
a. Multinational companies, either regional area or regional operating
headquarters;
b. Offshore banking; and
c. Petroleum Service Contractor or subcontractor (AEMOP).
Take note that the first three individuals are Filipinos and the last four are all
foreigners.
Q. What is the relevance of the classification?
A. It is important to determine the classification of income taxpayer to know
whether he is liable to pay income tax or not. The only income taxpayer out of the
individuals who is liable to pay taxes within and without is the RC; the other six
are liable only for income derived within the Philippines.

Resident Citizen
We go to the first one; the RC. There are two categories:
1. A Filipino citizen residing in the Philippines; and
2. Filipinos abroad without the intention to reside permanently in abroad.
This is implied under 22E1. Included in the term are Filipinos abroad with
the intention to reside permanently abroad but failed to establish to the
Satisfaction of the CIR of their intention to reside permanently in abroad.
Q. Is a Filipino living abroad a NRC? What is the determining factor?
A. No. The determining factor is whether he has the intention to reside there
permanently.
Q. If a Filipino is living abroad, is it possible that he is still a RC for purposes
of tax?
A. Yes, if he does not have the intention to stay permanently.
Nonresident Citizen
With the advent of OCWs, Section 22E number 3 and 4 and certain portion of
number 2 are no longer controlling. Therefore, there are only two groups of NRC:

1. Filipino citizen who is in abroad who establishes to the satisfaction of the

commissioner (CIR) of his intention to reside permanently in abroad; and
2. Filipino citizen who is an immigrant of another country.
OCW and Seaman
OCWs refer to land-based Filipino citizens working abroad with the benefit of a
contract. Of course, seamen are sea-based.
If we will read labor statutes, it
speaks of OFWs and not OCWs to give protection for those working without the
benefit of a working contract.
Q. Are the provisions on NIRC referring to OCWs applicable to Filipinos
working abroad without a working contract?
A. No. NIRC speaks of OCWs and not of OFWs.
There are two groups in this category; one is the land-based worker. The only
requirement is that they have a working permit or contract. But if the Filipino is
working abroad as seaman, the additional requirement is that the seaman must be
a member of a complement of an international vessel engaged exclusively in
international travel. Underscore this phrase in Section 23C, 29A1b
Q. Suppose the Filipino is working without a working contract, of course, he
is not an OCW, what will be the status then?
A.
________________________
importance
is
that
a
resident
_____________________________ within and without nonresident citizen and OCW are
taxable only o sources within.
A Filipino seaman is deemed to be a OCW for purposes of taxation if he receives
compensation for services rendered abroad as a member of a complement of a
vessel engaged exclusively in international trade.
Consequently, if he is not a member of the complement or even if he is, but the
vessel where he works is not exclusively engage in international trade, said seaman
is not deemed an OCW. He is either RC or NRC depending on where he stays most
of the time during the taxable year. If he stays in the Philippines most of the time
during the taxable year, he is considered a RC, otherwise, a NRC.
Resident Alien
Resident aliens are those individuals whose residence is within the Philippines and
who is not a citizen thereof (Section 22F).
Q. Is the intention of the foreigner to reside I the Philippines necessary?

A. No. What is necessary is that he resides in the Philippines because Section 5

of RR-2 provides that RA is neither a traveller nor a sojourner, meaning a tourist.
Nonresident Alien Engaged in Trade or Business

The terms nonresident alien means an individual whose residence is not within
the Philippines ad who is not a citizen thereof (Section 22G).
When we say engage or not engaged, we are referring to an individual taxpayer.
Use this phrase to NRA because there is no RA engaged in trade. As far as
individuals are concerned, when we say engaged or not engaged in trade, this
refers only to NRA. We do not use this terms to other individuals. Why as far as
individuals? We have another concept when it comes to corporation.
There are three kinds of NRAE stated in Section 25A1 and RR-2-98.
1. NRA engaged in trade or business in the Philippines;
2. NRA who stay in the Philippines an aggregate of more than 180 days in one
calendar year; and
3. NRA who exercise profession here in the Philippines (see RR 2-98).
Foreigners who stay in the Philippines for an aggregate period of more than 180 in
one calendar year are deemed to be NRAE; underscore the 180 in one calendar
year in Section 25A1.
Q. Supposed a foreigner stayed in the Philippines for 100 days in 2005 and
100 days in 1006, is he NRAE?
A. No. The stay of the foreigner of more than 180 days must be within the same
calendar year.
Nonresident Alien not Engaged in Trade or Business
NRANE is included in income tax simply because there is a possibility that they
may derive income from sources within the Philippines. NRANE is subject to tax,
on their gross income received from sources within the Philippines. This is the
only individual subject to gross income tax (GIT).
Aliens Employed in Multinational Organization Ofshore Banking Units,
Petroleum Service Contractor

AEMOP are subject to final income tax (FIT) of 15% on their gross income received
from the employer.
RR-2-98 requires that only alien individuals occupying
managerial and technical positions are required to pay FIT of 15%.
However, if AEMOP derives income from other sources within the Philippines, it
shall be subject to NIT. Why? This is because of second paragraph of Section 25E
which states 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.
Alien employed in multinational organizations and offshore baking may be
classified as RA, NRAE or NRANE if they derived income other than their
compensation from their employers. In case of alien employed I petroleum serve,
they are either NRAE or NRANE because Section 22E, first sentence, states that
they are permanent resident of a foreign country.
Take note that the same treatment applies to the Filipinos employed and occupying
the same position as those aliens employed and occupying the same position as
those AEMOPs.
Corporations
There are three kinds of corporations as a taxable person:
1. Domestic Corporations (DC);
2. Resident Foreign Corporations (RFC); and
3. Nonresident Foreign Corporation (NRFC).
Domestic Corporations
Section 22C states The term domestic, when applied to a corporation, means
created or organized, in the Philippines or under its law. DCs are those created or
organized in the Philippines or under its laws. It is taxable on all income derived
from sources within and without the Philippines (see Section 23E). Corollary, its
counterpart is the RC, which is also taxable from sources within and without (see
Section23A).

Resident Foreign Corporation

The terms resident foreign corporation applies to a foreign corporation engaged in
trade or business within the Philippines (Section 22H).
RFCs are taxable only
from sources within.

Nonresident Foreign Corporations

The terms nonresident foreign corporation applies to a foreign corporation not
engaged in trade or business within the Philippines (Section 221).
NRFCs are
taxable only from sources within.
Take note that the corporation the terms engaged or not engaged in trade or
business refers to RFC, NREC, it is never applicable to DC if the foreign
corporation is engaged in business, it becomes an RFC; if not, it is a NRFC. In
relation to individuals , the term engaged or not engaged in trade or business
refers to RAE or NRANE.
Meaning of Corporation
Section 22B states that Corporation shall include:
1.
2.
3.
4.
5.

Partnership;
Joint stock companies;
Joint accounts;
Associations; or
Insurance companies.
CIR vs. Batang
102 PHIL 823

The Tax Code defines the term corporation as including partnership no matter
how created or organized, thereby indicating a joint venture need not be
undertaken in any of the standards forms, or in conformity with the usual
requirements of the law on partnership, in order that one could be deemed
constituted for the purposes of the tax on corporations.
In the case at bar, while the two respondent companies were registered and
operating separately, they were placed under one sole management called the
Joint Emergency Operation for the purpose of economizing in overhead expenses.
Although no legal personality may have been created by the Joint Emergency
Operation, nevertheless, said joint management operated the business affairs of
the two companies as though they constituted a single entity, company or
partnership, thereby obtaining substantial economy and profits in the operation.
The joint venture, therefore, falls under the provisions of Section 84 (b) of the
Internal Revenue Code, and consequently, it is liable to income tax provided for in
Section 24 of the same Code.

The definition of corporation, under NIRC, is broader that the definition of the
Corporation Code. Nonetheless, this definition is for taxation purposes only. The
interpretations of the term no matter how created in Section 22B is not limited to
partnership; this applies also to corporations.
Q. Is a corporations whose purpose is against the law, a corporation within
the purview of NIRC?
A. Yes. Under the NIRC, any corporations no matter how created is considered a
corporation for taxation purposes.
Q. How about a corporation created under foreign law, is this corporation in
terms of the definition in Section 22B?
A. Yes. Section 22B includes all corporation no matter how created; either by local
law or a foreign law.
Q. How about an organization, can we consider it as a corporation?
A. Yes, although the NIRC is limited to the terms association, organization is
similar to association and operates lie an association. It is considered as an
association which is included I the definition of corporation under Section 22B.
Q. How about a non-stock, non-profit corporation, is this subject to income
tax?
A. Yes. Although a corporation is a non-stock and a non-profit, it may still incur
profit that could be subject to tax. The SC in this case of CIR vs. CTA, 329 SCRA
237, explained this issue.
Q. Is a GPP a corporation in the concept of taxation?
A. No. GPP is not a deemed corporation under NIRC. GPPs 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.
There are two kinds of GPP as enunciated by the SC in the case of Tan vs. Del
Rosario, 237 SCRA 324.
1. GPP which is not deemed corporation under section 22B; and
2. GPP which is deemed corporation. These are GPPs which derived income
from engaging in any trade or business.
The definition of GPPs is not interpreted literally.

Q. A GPP composed of lawyers deposited their attorneys fee I a bank.

Though some time, it earned income. Can we consider the GPP as deemed
corporation for earning income, hence, liable to income tax?
A. No. Although the GPP earned income, it is still exempt from tax. It does not
earned income by engaging to trade or business. Additionally, the bank interest is
already subject to tax ad this income is not mentioned in the income tax return
(ITR) of the GPP because the bank had already filed another return for the interest.
Hence, the income derived is not within the meaning of engaging in any trade or
business.
Remember that a partner in a GPP, which is exempt from taxation, has to file a
return in their individual capacity. Any interest derived by the GPP, which was
given to the partners, shall be subjected to net income tax (NIT) (see Section 26).
In GPPs which are deemed corporation, the interest earned by the shareholder
shall be subject to FIT (section 24B2).
Q. How about joint venture, as a rule, is it tax-exempt?
A. No. As a rule, joint venture are not tax exempt; unlike GPPs, which as a rule,
is tax exempt. However, if the joint venture is engaged in public construction and
projects engaging in petroleum, coal, geothermal ad other energy operation, then
such joint venture is tax exempt (see Section 22B).
Q. How many individuals are present in a joint venture?
A. There are three persons involved in a joint venture: the two corporations which
combine for a particular purpose, and the joint venture itself. This was discussed
in Batangas vs. Collector, 102 Phil. 822.
Trust and Estate
Although trust and estate is separate thing under the Civil Code, they are
considered the same for purposes of taxation. They are of same category; hence,
they are taxed the same.
Estate is the property of the decedent whether located within or without the
Philippines.
During the pendency of the settlement of the estate, there is a
possibility that it may earn income, hence, it shall be liable for income tax. Take
note, tax on the income of the estate and estate tax are two separate taxes. The
first one is discussed under Chapter XI which refers to income tax and the other
one is on Chapter XIX which refers to estate tax.

The status of the estate is the same as the status of the individuals immediately
after his death whether he is a RA, RC, NRA or any of the seven individual. The
tax to be imposed on the income of the estate should be distinguished from the
estate itself which is subject to estate tax.
We go tax on trust.
The status of a trust depends upon the status of the grantor or trustor or creator of
the trust, hence, a trust ca also be a citizen or an alien. The parties of a trust
include the trustor, or creator or grantor; the trustee or the fiduciary; and the
beneficiary.
The trust can be created by the following:
1. Will;
2. Contract; and
3. Agreemet.
Q. Where the trust earns income and such income is not passive, who among
the parties mentioned is liable for the payment of the income tax thereto?
A. It depends. If the trust is irrevocable, the trust itself is liable for the payment of
income tax. The trustee is liable in behalf of the trust.
If the trust is irrevocable, the liability for the payment of income tax devolves upon
the trustor himself in his capacity as individual taxpayer.

CHAPTER III
KINDS OF INCOME TAX
The kinds of income tax are the following:
1. Net Income Tax (NIT) under Section 24A, 25a1, 26, 27ABC, 28A1-3 rd par, 31,
32;
2. Gross Income Tax (GIT) under Section 25B 1st par, 28B1;
3. Final Income Tax (FIT) under 57A, 24B;
4. Minimum Corporation Income Tax (MCIT) of 2% of gross income under
Section 27E, 28A2;
5. Improperly Accumulated Earning Tax (IAET) of 10% under Section 29, RR-22001; and
6. Optional Corporation Income Tax (OPCIT) of 15% of gross income (27 par 8,
4th, 10th par, 28A and last par.

Net Income Tax

The term net income tax was not mentioned in NIRC. However, this kind of tax
was referred to as the taxable income or the gross income. Section 31 states 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 type of income by this Code or other special law.
Section 31 does not state NIT; however, only NIT allows deductions and exemptions.
No other tax allows the same. Thus, taxable income refers to NIT.
Under revenue regulations, NIT is referred to as the ordinary way of paying income
tax or the normal way of paying income tax.
Accountants use the phrase
includable in the gross income or payment by the net.
In computing the NIT, it is important to determine whether there is actual gain or
loss. Gain is the flow of wealth to the taxpayer. NIT is applicable only if there is
gain or profit.
If there is no profit, NIT is not applicable; otherwise, it is
tantamount to taxing the capital.
Formula
[(Gross Income Deductions/Exemptions) x rate] tax credit = NIT
For individuals, tax is progressive.
amended by RA 9337).

For corporations, tax is fixed at 35% (as

Q. Who are liable to pay NIT?

A. The following are liable to pay the NIT:
1.
2.
3.
4.
5.
6.
7.
8.

RC Section 24A1a and 31;

RC Section 24A1b and 31;
OCW and Seamen Section 24A1b and 31;
RA Section 24A1c ad 31;
NRAE Section 25A1 (same manner as citizen);
DC Section 27 and 31;
RFC Section 28a1; and
AEMOP Section 25CDE for other income.

NRANE and NRFC are the only person not liable to by way of et; the rule is
absolute. NRANE and NRFC are liable for the payment of GIT. They are not liable
for the payment of NIT.

Take note that aliens who come and stay I the Philippines for a aggregate period of
more than 180 days during the taxable calendar year are considered NRAE.
Therefore, if his stay is only 180 days or less, he becomes NRANE, which is taxable
by way of GIT.
AEMOR as a general rule are not liable for NIT but FIT of 15% under Section
25CDE except if they receive income from sources other than from their respective
employers.
If they receive income other than those which came from their
employers, the same may be subject to NIT (see second paragraph of Section 25E).
Take note that aliens employed in multinational company and onshore banking
may be classified as RA or NRAE if they receive income other than those received
from their employer, his income may be subject to NIT (see Section 25E of NIRC).
Aliens employed in petroleum contractor and subcontractor is always a permanent
resident of foreign country, hence, he may be classified as NRAE or NRANE. If he is
an NRAE his income may be subject to NIT. If NRANE, then GIT of 35%.
It is a rule that when an income is subjected to GIT, it shall not be subjected
to NIT.
The withholding system for NIT is the Creditable Withholding System.
following are creditable I the withholding of tax:
1.
2.
3.
4.

The

Income tax of foreign countries Section 34C3;

Excess input or output tax Section 110B; and
Tax credit certificate Section 204.
Sales discounted granted to senior citizens

Q. What are the requisite in the withholding of NIT of the taxpayer?

A. Withholding of NIT depends on whether there is a law explicitly stating that the
NIT should be withheld. Absence of such law or if the law is silent with regard to
withholding, the income is not subject to withholding of NIT.
Q. Suppose the taxpayer is RC, he derives income, is he going to included it I
filing of ITR?
A. Determine first if the income is passive. If the income is passive and was
already subjected to FIT, then, the income would no longer appear in the annual
ITR, otherwise, there would be obnoxious double taxation. If the income is not
passive, he should include it in the filing of the ITR.
Gross Income Tax

There are only two taxable persons who are subject to GIT: the NRANE and NRFC.
Formula:
Gross Income
X
(Rate)
_______________
GIT (35%)
Q. What is the similarity of GIT and FIT?
A. No deductions ad exemptions are allowed in both cases.
To reiterate, if a taxpayer pays by way of the GIT, he should not pay by way
of the NIT. The rule is absolute.
Distinction

GIT
Applicable
NRANE

and

only
NRFC

to

FIT
Applicable to all taxpayers
without distinction

30%
There is only one rate

Rate varies

35%
GIT is derived by adding

FIT

up all income multiplied

multiplying

by 35%

with the tax rate

is

derived
the

by

amount

Final Income Tax

In FIT, gain is presumed. An income subject to FIT is known as passive income
because nothing is done to receive this income; taxpayer does not exert effort. All
incomes subject to FIT are income within the Philippines provided the law provides
its application. We do not apply FIT in income from sources without because we do
not have withholding agents abroad.
Formula:
Income subject to FIT

X
(Rate)
_______________________
FIT
The provisions of FIT is scattered in NIRC.
following:

Some applications of FIT are the

1.
2.
3.
4.
5.
6.
7.

Tax on Cash and Property Dividends;

Interest (ban interests);
Royalties;
Prizes;
Winnings;
Capital gains from the sale of shares of stock not traded;
Capital gains from the sale/exchange/dispositions of lands and/or buildings
(6%); and
8. Salaries of AEMOP (15%).
In FIT, deductions and exemptions do not apply. If an income is already subject to
FIT, it is no longer subject to GIT or NIT. If the FIT is not paid by the taxpayer, it is
not his liability but of the withholding agent. The exception is in the sale of shares
of stock, which is subject to FIT. Under
RR 17-03, the buyer is the final
withholding agent; he pays the FIT. (See Proctor & Gamble vs. COMMISSIONER,
204 SCRA 377)
Q. If an income is not subject to FIT, is the taxpayer tax-exempt?
A. No. It is included I the NIT or GIT.
Minimum Corporate Income Tax
MCIT is applicable to DC and RFC only. (See Sections 27E and 28A2). It cannot
be applied simultaneously with the NIT because MCIT is paid in lieu of the NIT, it is
either one or the other whichever is higher. The rationale in the imposition of
MCIT is to discourage corporations from claiming too many deductions.
Formula:
Gross Income
x
2%
MCIT
Optional Corporate Income Tax
OPCIT is not yet applicable because of the failure of the President of the Philippines
to implement the same.

Improperly Accumulated Earnings

IAET is imposed on corporations with improperly accumulated earnings and profit.
The purpose for its imposition is to discourage the practice of accumulating
earnings and profits in order to avoid the payment of tax on the part of the
shareholders ad to oblige and compel the corporation to declare dividends. The DC
is the only corporation liable for IAET (RR-2-2001).

Kinds of Withholding Tax System

1. Final Withholding System (FIT) it is final because it is no longer credited to
the net income tax due; ad
2. Creditable Withholding System (Tax Credit) [IT] it still included to the
income tax due.
3. Substitutive way of filing the return.

CHAPTER IV
SOURCES OF INCOME
The relevance of Section 42 is to identify whether the income is within or without.
Q. Is Section 42 relevant to all taxpayer?
A. No. It is not relevant to RC and DC. But to the rest of taxpayer, it is material
because they are only liable when the income is derived within the Philippines
under Section 23.
So, to all of them, Section 42 is material, but for RC and DC, Section 42 is not
important.
Why?
Because whether the income is within or without the
Philippines, they are liable for tax. But to the rest, it is important because they are
liable only for income derived within, but for income derived outside the
Philippines, they are exempt.
Interest
Let us go to Section 42 par. A1. I 42A1, there are two income: first, interest from
sources within the Philippines (bank interest derived in the Philippines); and
second, interest on bonds, notes or other interest bearing obligations of residents,
corporate or otherwise, meaning corporation or individual.

Take note of the very broad sweeping statement. What matter here is the status of
the obligor. In an interest and other interest-bearing obligations or any kind of
obligations that yields interest, we have to determine the status of the debtor like in
a interest I a contract of loan.
An interest is an income within provided that
obligor-debtor is a President of the Philippines.
Q. Coronally to that debtor, if he is not a resident according to Section 42A1,
what is the interest then?
A. The interest is an income from sources without. So, if the debtor is a resident
of the Philippines, whether a DC or individual, it is an income within. But when
the debtor is non-resident, it is an income without.
NDC vs. CIR
151 SCRA 472
In this case, the NDC, a domestic corporation, entered into contract with several
Japanese corporations, which are NRFCs engaged I construction of several ocean
vessels. After the construction of the ship, NDC paid interest of the promissory
notes to the Japanese corporations. The BIR states that Japanese firm is liable to
pay income tax for the interest, received from NDC.
The SC ruled that the source of income is a income within because the NDC, the
obligor in this case, is a resident of the Philippines. SC said that the income is an
income within because the debtor-obligor is a DC whose domicile is within the
Philippines, therefore, it is a resident of the Philippines.
Take note that the petitioner, at first, did not want to pay because the contract is
perfected ad consummated in Japan. The ships were built I Japan ad the down
payment was made I Japan. But, SC stated that the determining factor here is the
status of the residence of the obligor. Who is the obligor? The RC, so it means its
residence is in the Philippines. That is an income within.
Therefore, in the payment of interest like forbearance of money, is an income within
if the debtor is a resident of the Philippines, whether individual or corporation,
because the law says xxx and other interest-bearing obligation xxx. This was
asked already in the bar.
So, it is not the place of the perfection of the contract, it is the place of residence of
the obligor. If it is a nonresident, under 42C1, it is an income without the
Philippines. It is important because a NRFC is only liable to pay income tax on
income derived within the Philippines.
Sale of Shares of Stock ad Dividend

Q. In the sale of share of stock, is it a income within or without?

A. It is an income within provided it is shares of stock in a DC. This sale of share
of stock in a DC is classified as income from within regardless of where the said
shares are sold.
Section 42E, second paragraph after the fourth sentence, states that provided,
however, that the sale of shares in a DC it is always an income from sources within
regardless of the place of the sale of the shares. So, it is going to be automatic if it
is a share in a DC.
Q. Supposed it is from a FC?
A. If the shares were sold outside the Philippines, the income is a source without.
If sold within the Philippines, then it is a source from within.
With regard to personal property, which will include shares of stock, it is an income
in that place where it has been sold. Hence, if it is sold in the Philippines, it is
without. This is with regard to shares in a FC because the shares I a DC are
always sources within.
This was already asked in the 1999 bar. If you will be asked in the bar, is the
taxpayer liable? With regard DC ad RC, you do not determine whether the income
is within or without because, for sure, they are always liable whether the income is
within or without.
For taxpayers other than these two, you have to determine
whether the income is a income within or without, because if the income is
without, they are exempt.

1999 Bar
Q. An individual is a stockholder in two corporations, one is DC and the
other one is RFC. He sold his shares in both corporations. Is he liable for
the sale of shares in both corporations?
A. For the sale of shares in DC, he is always liable because it is always an income
within. But for the sale of share in a FC, we have to distinguish if it is an income
within or without. Fortunately, in the 1999 bar, the facts of the case say the share
was sold in Manila the one issued by FC. Therefore, the taxpayer is liable.
Q. If before the sale, there DC ad the RFC declared dividends.
receiver liable for the receipt of the dividend declared by the DC?

Is the

A. Yes.
within.
Q.

Because the dividend declared by DC is a automatic one, it is a income

What about the one declared by the RFC?

A. It depends, if 50% of the gross income of such FC for the three-year period
ending with the close of its taxable year preceding the declaration of such
dividends was derived from spuroes within the Philippines, then it is an income
within.
Q. If one or two of the elements are absent, is it an income within?
A. It is a income without the Philippines. Corollarily, either of the two is absent
or both of the elements absent, then it is a income from sources without.
Hence, if the income is a source within, the receiver is liable; if it is an income
without, he is not liable.
It is not a matter of whether the money was received in abroad or in the
Philippines. For DC, it is automatic.
For FC declaring divided may be a income within or without depending if the
elements are present.
Services
Now we go o 42A3. This was asked in the 2000 and 1999 bar. Normally in the bar,
the example is a FC with a branch in the Philippines. But in the 1999 bar, the
example was reversed.
1999 Bar
A Co., a Philippine corporation, has an executive (P) who is a Filipino citizen. A Co.
has a subsidiary in HK (HK Co.) and will assign P for a indefinite period to work full
time for HK Co. P will bring his family to reside in HK and will lease out his
residence in the Philippines. The salary of P will be shouldered 50% by A Co.
while the other 50% plus housing, cost of living and educational allowances of Ps
dependents will be shouldered by HK Co. will credit the 50% of Ps sales to Ps
Philippines bank account. P will also sign the contract of the employment in the
Philippines. P will also be receiving rental income for the lease of his Philippine
residence.
Q. Is that Filipino branch manager in HK liable to pay income tax in the
Philippines?

A. It is not taxable. The taxpayer is a OCW. Under Section 23, the liability of
OCWs are only those income derived from sources within. Under section 42, the
income is an income without the Philippines, therefore, he is not liable for income
tax.
In the 1991 bar, the example is a DC, San Miguel manufacturing equipment. It
hired a Singaporean from a NRFC.
The Singapore firm will advertise all the
products in Singapore, and as a result, the Singaporean Corporation received a
compensation from San Miguel.
Q. is the compensation to be paid by San Miguel subject to withholding tax
system?
A. No, because that income is exempt from income tax. The income earner is a
NRFC. It rendered services in Singapore. Being a NRFC, tax liability can only be
from income within, but the income here is an income without because the
payment and the performance were in Singapore.
This is applicable not only to workers but also to entertainers so long as it if
personal or organized service.
Q. Supposed the examiner as, a performer lives in Australia before she
performs in Manila. Can she refuse payment of income tax?
A. No, because the performance was made within the Philippines.
Q. David Pomeranz manifested to reside in the Philippines, hence, a resident
alien. Supposed he will be hired in Guam, can he refuse to pay tax in the
Philippines for the performance made in Guam?
A. Yes, because that is an income without and being a foreigner, his liability is
only from sources within.
In conclusion, the place of the performance of the service for personal or labor
services depends on the place of the service.
Royalties & Rentals
We go on number 4 on royalties and rentals.
following are sources within:
1.

Because of Section 42A4, the

The use of the right or privilege to use in the Philippines any copy right,
patent, design or model or plan, secret formula or process, goodwill,
trademark, trade brand, or other like property or right.

2. The use, or, or the right to use in the Philippines any industrial, commercial
or scientific equipments.
For example, McDonald: the one granting the royalty is a NRFC. It authorized a
Filipino proprietor, DC and partnership. It authorizes to use the trademark.
They established a restaurant using the name McDonald. The agreement is that
the Filipino will pay a certain sum of money, may be 5% of the gross or 2% of the
net. That is known under law as royalty.
Who is obliged to file the return? The Filipino proprietor is the one obliged to file
the return. What is the income tax of a NRFC? Gross income tax. How much is
the withholding then? It is 35% because the income earner is a NRFC.
Supposed we are franchise owners of Jollibee. The one granting the franchise is a
DC. Under RR 12-2002, the DC pays by way of the net income tax of 35%. How
much is the withholding tax?
It is much lower than 35% because the
computations of NIT there are deductions. In the computation, nowadays, it was
decreased to 15%. Take note of that defense. The reason behind the law is that
after the deductions, the tax rate of 35% will be more or less equivalent to 15%.
Let us go to secret formula. For example KFC, it authorizes the use of the secret
formula for cooing chicken this is subject also to tax.
Rubber World (?) was
authorized by Adidas to manufacture shoes. This is also covered. But the most
important is the last phrase, and other like property or rights.
Now we go on letter b; the use of, or the right to use in the Philippines any
industrial, commercial or scientific equipments; revenue from Philippines from the
privilege to use scientific, commercial and industrial equipment. One example is
the privilege to use the cellular site in the Philippines by foreign companies.
Now we go to the third one, the supply of scientific, technical, industrial or
commercial knowledge or information.
Whatever scientific and technical
knowledge, it is also an income from sources within. Therefore, whatever supplies
of scientific or technical knowledge of a cellular site is an income from sources
within.
We go letter D of number 4. The supply or 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 in 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).
Letter 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 purchase from such

nonresident person. For example, a nonresident had sold a machine or equipment

in the Philippines and supplied services including his workers that are an income
from sources within.
Paragraph 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.

Paragraph G. The use of or the right to use.

a. Motion picture films;
b. Films or video tapes for the use in connection with television; and
c. Tapes for use in connection with radio broadcasting.
So the use or the right to use of foreign movies, videos and tapes, whenever used, it
is an income from the Philippines.
Sale of Real Property
Now we go to Section 42A5, the sale of real property.
Q. When do we consider sale of real property an income from sources within?
Without?
A. It is an income within, if the property is located in the Philippines. Therefore,
if it is located abroad, it is an income without. This is the very simple rule with
regard to sale of real property.
Sale of Personal Property
Let us see in the sale of personal property. It is covered by Section 42E.
Q. In the sale of personal property, is it income within or without?
A. It depends. If the sale of personal property was produced or manufactured in
the Philippines and sold in abroad or manufactured abroad and sold within, it is
an income partly within and partly without and that is under Section 42E.
Q. How about personal property purchased within and sold abroad and vice
versa?
A. It shall be treated as derived entirely from sources within the country in which
it was sold.

So those are the determining factor whether an income is a source within or

without.
But let us see the case of CIR vs. CTA, 127 SCRA 9. The taxpayer is RFC because
it is a FC that has branch in the Philippines. The issue here is the refund for the
overpayment of tax due to erroneous computation of expenses to be as deduction.
The contention is that the business expenses should have been determined of
where it was expend.
In DC, the expense is deductible even the income is within or without. For RFC,
deductions are important because it can only claim deduction that must be related
to the trade or business in the Philippines on income within. If it is NRFC, we do
not discuss deductions also because there are no deductions because the tax is
GIT.
In this case, the taxpayer is RFC that is why they are claiming deduction on
expenses. The trouble here is that it is unknown whether it is the expense abroad
or in the Philippines?
The SC ruled that where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations that expense can be deducted
from the gross income acquired in the Philippines without resorting to
apportionment.
The SC ruled that the overhead expense can be deducted from gross income
acquired in the Philippines by the parent company in connection with the finance,
administration and RND all of which directly benefit its branches all over the world
cannot be allocated with the operation of the Philippines. However, the RFC can
claim as its deductible share a reasonable part of such expense based upon the
ratio of the local or alien gross income versus gross income worldwide.
To illustrate:
Income derived from sources within X 100
Gross income in the whole world
= Percentage of allowed deduction from the worldwide
Section 42B refers to taxable income from sources within the Philippines, meaning,
after all the deductions.

CHAPTER V
CAPITAL AND ORDINARY ASSETS
Now we go to Section 39.
Q. Let us see the 2003 BQ, what is a capital asset? 2005 BQ, do you iclude it
in your ITR, the capital gains?
A. Capital asset is an asset or property, which is not an ordinary asset.
In Section 39A1, cross our the phrase whether or not connected in trade or
business. If the property is used in business, it is usually included in the
inventory at the close of the taxable year, hence, it becomes an ordinary asset.
In Section 39A1, cross out the phrase whether or not connected in trade or
business. If the property is used in business, it is usually included in the
inventory at the close of the taxable year; hence, it becomes an ordinary asset.
The following are ordinary asset:

1. Stock in trade of the taxpayers or other property of a kind which would

properly be included in the inventory of the taxpayer if on hand at the close
of taxable year.
2. Property held by the taxpayer primarily for sale to customers in the ordinary
course of his trade or business.
3. Property used in the trade or business of a character which is subject to the
allowance for depreciation, provided in Subsection F of Section 34; and
4. Real property used in trade or business of the taxpayer.
All of these are related to business. Hence, those properties that are not
mentioned in the exceptions are classified as capital asset. The capital asset does
not have something to do with the business of the taxpayer.
However, there are examples of capital assets that have something to do with trade
or business; examples are Section 39E, retirement of bonds and short sales under
paragraph F. These are capital assets but it has something to do with business.
However, ordinary asset has always something to do with trade or business.
Q. What do we mean by capital loss, capital gain, and ordinary loss and
ordinary gain?
A. When we say capital gain, it is a gain incurred from sale or exchange of the
taxpayers property classified as capital asset. Capital loss are those loss incurred
from sale or exchange from the taxpayers property classified as capital asset.
Ordinary loss is a loss incurred from sale or exchange of taxpayers property
classified as ordinary asset. Ordinary gains are gains from sale or exchange from
the taxpayers property classified as ordinary asset.
Q. What is the relevance of knowing it the property is capital or ordinary
asset?
A. The relevance of knowing whether the property is capital or ordinary is for the
proper application of the following:
1. Holding period under Sect5ion 39B;
2. Section 39C, capital loss shall be to the extent of the capital gain or the
loss limitation rule; and
3. The application of the net capital loss carry-over rule under 39D.
This principle can only be applied if the property is a capital asset. This principle
does not apply if the property is an ordinary asset.
This is the relevance of
knowing whether the property is capital asset or ordinary asset.

Holding Period/Percentage taken into account

We go to Section 39B, percentage taken into account popularly known as holding
period.
Q. What is the holding period or percentage taken into account?
A. It is the length of time or the duration of a period by which a capital asset has
been held by an individual taxpayer.
First, the property must be a capital asset. Second, the taxpayer must be an
individual. Why individual? Because 39Bstates in case of a taxpayer, other than
a corporation, so it must be an individual. There are two holding period under
39B: the long-term holding period and the short-term holding period.
Q. What do we mean by long-term period? Short-term?
A. The long-term holding period is where an individual taxpayer held the capital
asset for more than 12 months.
The short-term holding period is where an individual taxpayer held the capital
asset not exceeding 12 months.
Q. What is the consequence of these periods?
A. Under the long-term holding period, only or 50% of the net capital gains is
subject to income tax. The remaining is exempt from income tax.
Q. Suppose it is a loss, will this rule apply the 50%?
A. Yes, because the law says gain or loss.
Q. What about the short-term?
A. 100% of the net capital gains are subject to income tax. If it is a loss, 100% is
subject to deduction.
Q. Do you ignore in your ITR the capital gains, because in short-term, only
is subject to income tax? What kinds of income tax?
A. It is the NIT because capital gains shall be included in the ITR in gross income.
The exception, is income with regard to capital asset with the sale of shares and
sale of real property which will not be included in the annual ITR because they are
subject to FIT. Normally, therefore, a capital gain is subject to NIT and there are

only two capital gains that are subject to FIT:

property.

sale of shares and share of real

Q. It is safe to say that capital gains are subject to FIT?

A. No.
Ordinarily, capital gains shall be included in the annual ITR because
these are subject to NIT.
If the asset is an ordinary one, regardless of whether it was held for more than or
not exceeding twelve months, 100% shall be ordinarily subject to income tax. The
holding period do not apply.
It is worthy to remember that there are kinds of capital asset of which are subject
of holding period. First, capital asset held by corporation because the law says
this is only applicable to a taxpayer other than a corporation.
Second, sale of
shares of stock and sale of real property which are subject to FIT; the holding
period does not apply also.
Loss Limitations Rule
Now we go to 39C, the limitation on capital losses, capital loss or the losslimitation rule.
All these three terms are only synonyms but what are the effects? Capital loss
can only be deducted from capital gains but not from ordinary gain while an
ordinary loss may be deducted from either capital gain or ordinary gain. That is
the very simple meaning of that.
Q. Is this applicable to corporation?
A. Yes. For two reasons: the phrase to taxpayer other than a corporation is not
in 39C, and, second, because the wording of the law itself. It states if a bank or
trust company incorporation under the laws of the Philippines, meaning to say, a
bank or trust company, which are domestic because they are incorporated under
Philippines laws, a substantial part of whose business receive deposits, sells bond,
debenture, note or certificate or other indebtedness.
Section 39C, last portions of this paragraph states the foregoing rule does not
apply, and what rule? It is the limitation on capital loss rule. Meaning to say, to
other corporations other than this two, limitation on capital losses is still
applicable. So, it is applicable to individual and corporation on two grounds.

Q. Why is it that the capital loss can be deducted from capital gain but not in
ordinary gain? Why is it that the ordinary loss is deducted from capital gains
and ordinary gains?
A. It has something to do with Section 34D. Supposed the deduction in Section
34D is required, the deducted must be connected or directly connected with the
trade or business of the taxpayer. If the capital loss isnot connected with the trade
or business, then it must not be allowed to be deducted from the gross income of
the ordinary gain. It is the reason why a capital loss cannot be deducted from an
ordinary gain because in ordinary gain, the law requires under Section 34D that it
must be connected with the trade or business of the taxpayer. In capital loss, it
has nothing to do with the trade or business.
Q. Do we include in our annual ITR in gross income the capital gains?
A. As rule, yes. If the taxpayer is a businessman, he shall include in this gross
income the capital gains. Together with the capital gain, he needs to include in
the gross income the ordinary gains.
The taxpayer, of course, will claim the deductions. In crediting and applying the
deduction on ordinary losses, it will cover all those mentioned in gross income then
he will deduct all the deduction.
Q. So what are included in the gross income?
A. Capital gains and ordinary gains. And that is the reason why an ordinary loss
is deductible from either capital gains or ordinary gains because you include in the
gross income not only the ordinary gain but also the capital gains.
Net Capital Carry-Over Rule
Let us say, in year 2000, sometime we are not allowed to deduct capital loss
because there was no capital gains. Is there a remedy because of that? There is a
remedy. We have to apply the net capital loss carry over rule.
Meaning to say, in the following year of 2001, we will be allowed to deduct,
provided, in2001, we have capital gains, provided further, that the capital loss
incurred in 2000 should not exceed the amount of net income in 2000. So if the
capital loss in2000 is P100,000.00 and the net income was P75,000.00, in 2001,
assuming there is capital gain, we are only allowed up to P75,000.00 deductions,
provided finally, that the holding period shall be under the short-term holding
period.
Q. Is it possible that in 2000 we will not be allowed to claim ordinary loss

A. Normally, that is quite impossible because it is deductible from either ordinary

gain or capital gain. But there is a possibility in two instances: first, if you do not
have any gain (big), or number two, the ordinary loss is more than the gross
income.
Q.

If that is the case, what is the carry over there?

A. The answer is found under Section 34D3, the Net Operation Loss Carry-Over
rule (NOLCO). The carry over there shall lapse for three years except in two cases
that the carry over shall be for five years. The carry over for five year could be
either for oil drilling corporations or a mining corporation.
In short, we go to
NOLO, net operation loss carry over rule.
Q. Why it has to be distinguished?
A. First, the carry over in a capital loss shall only be up to the extent of the next
year, so that, if next year, they do not have any capital gain, it will be barred
forever.
Q. How about in an ordinary loss?
A. The carry-over will not be barred as a rule because its prescription is three
years. For instance in 2000, we can claim that in 2001; if not, in 2002; if not, in
2003; certainly, in the fourth and the fifth, but only with respect to oil drilling and
mining corporation, and, provided further, that next year, there is no substantial
change in the ownership of the business.

CHAPTER VI
TAX ON INDIVIDUALS
We go now to Section 22, 23 and 24.
will go to that as we go along.
Q.

In Section 22, these are the definitions.

We

What is the income tax under Section 24A?

A. NIT.
In the Tax Code we will never see the phrase NIT.
The net income is
always been referred to as, generally, the taxable income and the other
one, the minority, gross income. In this section, it states, An income tax
shall be imposed on the taxable income defined in Section 31.
Q. What do you mean by taxable income?
A. 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 the Tax Code or other special laws.
Q. Why is it correct to say that it is about NIT?

A. Because the NIT is the only tax which allows deduction to be deducted from
the gross income. Therefore, Section 24A is about the NIT.
This section states that an income tax shall be imposed on the taxable income as
defined under Section 31 but it continuous to state other than income subject to
tax under Subsection B, C and D of this section.
Q. What do you mean by that phrase?

Are they still subject to NIT?

A. No. It is subject to FIT provided the elements are present.

So, let us go to Letter B. They are subject to FIT because under Subsection A
other that income subject to tax under Subsection B, C, and D, if the elements are
present.
It would depend on the surrounding circumstances. It may be the
subject matter of FIT, GIT or the NIT.
Let us go to 24A.
Q. Who are liable by way of the net under 24A1?
A. The following are liable by way of the net:
1.
2.
3.
4.
5.

RC;
NRC;
OCW; and
RA;
NRAE (25a1)

Q. What about the NRAE? Are they also liable by way of the net?
what section?

Under

A. Yes, Under 25A1.

Q. Why?
A. Because 25A1 states that an NRAE is liable to pay income tax in the same
manner as RC on their taxable income. Then again, it mentioned taxable income.
Q. What about NRANE, what is their tax liability?
A. Under 25B. They are subject GIT.
Q. What about alien employed in MOPs?

A. Normally they pay the FIT of 15%.

However, if they received income from other sources, then we will have to follow the
procedure in 25E second paragraph which states that, Any income earned from all
other sources within the Philippines by the alien employee referred to under Section
C,D,E hereof, shall be subject to the pertinent income tax, as the case may be,
imposed under this Code. We have to determine whether the taxpayer is RA,NRAE
or NRANE.
If they are RA, normally they pay by way of the NIT because they will fall under
24A1c. When they will be classified as NRAE, they will be classified under 25A1,
which they are liable by way of the net. If they will be classified as NRANE, they
will pay way of gross income tax.
Q. What about the DC, will they pay by way of the net?
A. Yes. Because Section 27A states, An income tax xxx is hereby imposed upon
the taxable income xxx.
Q. How about RFC?
A. Also by way of the net. Section 28A1 states xxx shall be subject to an income
tax xxx of the taxable income derived xxx.
Q. What about NRFC?
A. It pays by way of GIT under Section 28B1.
So those were the correlation in payment by way of the net.

Filing of ITR of Husband and the Wife

Now we go on the last paragraph of Section 24A. This rule is applicable for legally
married individual. Read this in relation to Section 51D.
Q. What is the rule in legally married individual, are they going tofile net
income tax return separately or jointly?
A. If the income is pure compensation, Section 24A last paragraph says that they
have to file the return separately.

Let us go to Section 51D, it states about the not pure compensation.

Q. What is the income included under Section 51D?
A. It includes business compensation and compensation income.
Q. How about business income, is it included in the phrase derived income
purely from compensation
A. No. It is not pure compensation.
Q. If one is purely compensation and the other one is business income, how
will you file the return?
A. They should file the return jointly under Section 51D.
Tax on Passive Income
The rates of tax on certain passive income are mentioned under Section 24B.
Q. What are the rates on the passive income received by individuals?
A. Interest, royalties, prizes and other winnings shall be subjected to20% FIT
except to the following:
1. Royalties on books, literary works and musical compositions which shall be
subjected to 10% FIT;
2. Prizes of less than P10,000.00 which shall be subject to NIT;
3. Winnings from Lotto and Sweepstake, which shall be subject to NIT.
Bank Interest
In ban interest, for FIT of 20% to be applied, the recipient must be RC, NRC, OCW
or RA except on the following:
1. Interest from long term ban deposit (time deposit) or investments of
individuals it is exempt but if deposit is pre-terminated;
a. 4 years to less than 5 years 5%;
b. 3 years to less than 4 years 12%; and
c. Less than 3 years 20%.
2. Bank interest from depository bank under EFCDS is subject to 7.5% of such
income.

If the depositor is a corporation, the long-term deposit is not applicable.

The interest must be derived from sources within the Philippines to be considered
passive. This tax applies not only to ban interests but also to deposit substitutes
and trust funds.
Take note that bank interests are not included in the filing of ITR because thrre is a
separate return for bank interests.
Q. If RC or DC deposited money abroad and it earned interest, are they liable
to pay FIT of 20%?
A. An RC or DC depositing money abroad is not liable to pay FIT because the
Philippines has no withholding agent abroad; RC/DC is therefore liable for NIT.
Q. What about NRAE, is he liable for 20% FIT on interest?
A. Yes. Under Section 25A2.
Q. How about the NRANE?
A. He shall be liable for 15% GIT (in accordance to Sec. 25B).
Q. What if the depositors is alien employed in MOPs?
A. It depends on whether the alien is classified as RA, NRAE or NRANE.
For alien employed in multinational companies and offshore banking, they may be
classified as the following:
1. RA FIT 20%
2. NRAE FIT 20%
3. NRANE GIT 35%
For aliens employed in petroleum constructor, it can only be NRAE or NRANE
because the law says xxx permanent resident of foreign corporation; hence, the
following rates:
1. NRAE - FIT 20%
2. NRANE GIT 35%

Summary

INDIVIDUAL
RC
NRC
OCW
RA
NRAE
NRANE
MOPs

TAX RATE
FIT 20%
FIT 20%
FIT 20%
FIT 20%
FIT 20%
GIT 30%
If RA, NRAE FIT 20%
If NRANE GIT 25%

Prizes
Prizes are those derived from contests and promotions. If individuals receive it, it
is passive income; hence, FIT applies.
FIT on prizes applies to individuals only
because if it is received by a corporation, it is no longer passive.
Q. What if the prize is received by corporation, is it exempt from tax?
A. Not really. Since, the law is silent, it shall be included in the NIT for DC and
RFC or GIT for NRFC.
Q.

What are the requisites for application of 20% FIT on prizes?

A.

The following are the requisites:

1. It must be an income derived from the Philippines; and
2. It must be more than P10,000.00.

If the prize is less than P10,000.00, NIT applies.

Q. Are all prizes subject to income tax?
A. No. There are prizes, which are exempt from income tax, namely: (excluded
from gross income)

1. Under Section 32B7c, prizes and awards made primarily in recognition of

religious, charitable, scientific, educational, artistic, literary or civic
achievement are exclusion from the gross income if the following conditions
concur:
i.

If the recipient was selected without action on his part to enter

the contract or proceeding; and

ii.

The recipient is not required to render substantial future

services as a condition to receiving the prize or award.

2. RA 7549 says: All prizes and awards granted to athletes in local and
international sports competition and local tournaments, whether held in the
Philippines or abroad and sanctioned by their national sports association are
likewise exclusions from the gross income.
Winnings
The requirement for FIT of 20% to apply is that the income must be derived from
sources within. Take note that the P10,000.00 requirement on prizes does not
apply in winnings. Winnings from lotto and sweepstake are not subject to FIT;
however, that income shall be included in the NIT.
If the recipient is a corporation, the income is not passive; hence, NIT or GIT
applies. Also, the law is silent as to this kind of income, hence, DC and RFC will
be liable for NIT and NRFC will be liable for GIT.
Royalties
For the FIT of 20% to apply, the royalty must come from sources within. However,
royalties received by RC,NRC, OCW and RA on boos, literary and musical
compositions the rate of 10% FIT apply. For NRAE, it is always 20% regardless if it
royalties on books, literary and musical compositions as mentioned under Section
25A2. It says in any form, so the 10% rate is not applicable. For NRANE, the
35% GIT is applicable.
If aliens employed in MOPs, we have to classify them whether they are RA,NRAE or
NRANE. Once classified, apply the rule above.
If the recipient of royalties is a DC, the 20% FIT also applies as mentioned in
Section 27D1. Preferential rate of 10% is also not applicable. For RFC, we have
Section 28A7a, 20% FIT is applicable. The 10% preferential rate also does not
apply. For NRFC, 35% GIT is applicable.

Tax on Dividend
Tax on dividends includes the topic under Section 73. The dividend must come
only from the surplus profits of the corporation.
A dividend is defined under
Section 73 formerly Section 66, paragraph A and explained in case of Manning vs.
CIR.
Q. What is dividend?
A. Dividend is any distribution made by a corporation to its shareholders out of its
earnings or profits and payable to its shareholders whether in money or property.
[Sec 73A].
Q.

What are the kinds of dividends?

A.

Dividends are classified as the following:

1.
2.
3.
4.

Stock dividend;
Cash;
Property;
Disguised; and

The last two are not relevant to NIRC.

Q. What is a disguised dividend?
A. It is the amount paid by a DC to NRFC for the services rendered by the latter
to the former, when the amount paid exceeds the value of the services rendered.

Manning vs. CIR

66 SCRA 14

The company claimed to have declared stock dividend. The shares of stock of one
of the stockholders were redistributed to the remaining stockholders and they are
claiming that it was a stock dividend. The SC rules that it was not a dividend
because it came not from the profit of the corporation but from the share of stock
from one of stock of the stockholders. It was not a dividend because a dividend
should come from the profit of the corporation.
Q.

How can a corporation transfer its profits to the stockholders?

A. Thru stock dividend, cash dividend and property dividend.

Q.

In the 2003 bar, it was asked: What do you mean by stock dividend?

A. Stock dividend is a mode of transfer of surplus profit to the authorized capital

stock of the corporation.
Assuming there are five incorporators. Each of them contributed 10 million pesos.
After successful operation, the DC earned a surplus profit of 1 million. How ca
the corporation divide the profits? There are only three: cash, property and stock
dividend. Liquidating dividend was not included here. Under Section 24B2, it
refers to cash dividend and property dividend.
Let us go to stock dividend. There are five incorporators and the surplus profit is
one million.
Dividing the profit, each incorporator will receive P200,000.00
because they own same share of stock. If property dividend, they will also receive
the same property, let us say, motor vehicle.
In stock dividend, the one million will be transferred to the authorized capital of 50
million to make it 51 million.
Q. In 2003 bar, the question is what is a stock dividend?
income tax?

Is it subject to

A. No. It is not subject to income tax because the profits did not go to the hands
of the stockholders.
Second, the controlling interests before and after the
declaration of the stock dividend remains the same.
Before the declaration of the stock dividend, the controlling interest of each
incorporator is 20%. After the declaration of the stock dividend, the controlling
interest of each stockholder is still 20%.
Pursuant to the rule that stock dividend is not subject to income, there is an
exemption of payment of FIT under Section 73B; if the issuance of stock dividend
is equivalent to redemption or cancellation.
In simple language, when the
corporation purchased the stock dividend, Section 73B says it is subject to income
tax to be paid as taxable income.
Q. Who is now liable?
A. The stockholder because it is the seller.
We have to remember that in a
common term, normally, it is the creditor or the oblige that is the one liable to pay
income tax unless there is agreement to the contrary.
So tht stockholder is the one liable and that is the subject matter in the case of
ANSCOR vs. CIR 301 SCRA 152. The SC ruled that in case of redemption, the
stockholder cannot escape the payment of income tax.

We go not to cash dividend and property dividend. We will notice that under
Section 24B2, the one subject to FIT is either cash dividend or property dividend.
Q. Stock dividend was never mentioned under Section 24B2, why?
A. Because it is not subject to FIT.
Q. Why is it not in the exceptional instance under Section 73B that it is
subject to income tax yet it was not mentioned there?
A. { It was not mentioned in exceptional circumstance under Section 73B because
the income tax liability of the stockholder shall be based on the taxable income, so
the income tax is NIT.}
(Because the general rule is that, it is not subject to income tax by way of
exemption 73B states) stock dividend is not included in Section 24B2 because it
refers to FIT while Section 73B refers to NIT. When the provision of NIRC speaks of
the NIT and FIT, on the same income, these taxes cannot be imposed
simultaneously; hence, it has to be separated.
Going back to Section 24B2, the FIT on taxable dividend: this refers either to cash
dividend or property dividend.
In stock dividend, it is not a taxable divided
because as a rule it is exempt from income tax.
Q.

What is the requirement for the imposition of FIT under Section 24B2?

A. One requirement for the imposition of FIT on dividend is that it must be issued
by a DC. (Exemption: Regional operating headquarters because it is a RFC.)
Q.
Is the term dividend limited to the dividend mentioned under the
Corporation Code?
A.
No.
It may include a share of a partner in a partnership, or a unit of
participation in an association.
So the term dividend is not limited to the
definition under the corporation code. So it may include the share of partner in a
partnership, including the share of members of an association.
Q. Who is now liable to pay the FIT of 10%?
A.

They are mentioned under Section 24A: RC, NRCF, OCW and RA.

Q.

How about NRAE?

A. According to Section 25A2, NRAE is also subject to FIT on dividends but not of
10% but of 20%.
Q. Supposed the stockholder is NRANE?
A. It is the GIT of 30% under Section 25B.
Q. Supposed the stockholder is MOPs?
A. We have to consult Section 25E last paragraph. If these aliens create income
from other sources, the law says these incomes shall be subject to the pertinent
income tax. So, we have to determine whether the MOPs are NRAE or NRANE. If
NRAE they will be subject under Section 25A2; if NRANE, GIT of 35% under
Section 25B.
Q.

What about if the stockholder is a DC?

A.
According to Section 27D4, it is not subject to income tax and, therefore,
exempt.
Q.

W hat if the stockholder is RFC?

A.

According to Section 28A7d, it is not subject to income tax, therefore, exempt.

Q.

How about NRFC?

A. According to Section 28B5b, the FIT of 30% or maybe, if the tax-deemed paid
credit rule is present, the rate of 15%.
Now these are the tax rate for cash and property dividend.
But for stock
dividends, they are exempt except only on cancellation or redemption.
Supposed the one issuing a dividend is a foreign corporation, it does not matter
whether it is a resident or nonresident. For the dividend issued by DC, according
to Section 42A2a it is always an income within. But if is issued by a foreign
corporation, take note that under Section 42A2b there is no further distinction, so
long as it was issued by foreign corporation, it may be an income within or an income
without.
If the one issuing a dividend is a foreign corporation, we have to determine whether
it is an income within or without because most of the taxpayers are exempt from
income tax.
Q.

When can it be an income within or without?

A. The answer is found under Section 42A2b. If the two elements are present at
least 50% of the foreign corporation declaring dividend is an income from sources
within from the three-year period preceding the declaration of dividend, it is a
source within. If one or both of these two elements, the 50% and the three-year
period, is not present, then the dividend issued by the FC is an income without.
If it is an income without, most of the taxpayers mentioned under Section 23
are example except the RC and DC. If it is an income within because the two
elements are present all of them are liable to pay by way of the net except NRFC
and NRANE, which pays by way of the gross income tax.
Q. What about the MCIT. Is it possible to pay the MCIT in dividends?
A. Yes. For DC receiving dividend from a foreign corporation they are liable to pay
by way of the net whether it is an income within or without. If the NIT is lower the
MCIT, the DC has to pay MCIT.
For RFC receiving taxable dividend from sources without it is exempt, so we do not
apply the MCIT. If the taxable dividend is from sources within, the RFC is liable
by way of the NIT, and if it is lower than the MCIT, then the latter shall be applied.
In 24B2, it speaks that if the taxable dividend was earned before January 1, 1998,
nonetheless, it is exempt because beginning 1987 down to 1998; individuals are
exempt from FIT from the receipt of a taxable dividend from a DC.
Dividend:

DC to Individual
ISSUER
DC
DC
DC
DC
DC
DC
DC
DC
DC

RECIPIENT
RC
NRC
OCW
RA
NRAE
NRANE
AEMOP
RA/NRAE
NRANE

APPLICABLE TAX
FIT 10%
FIT 10%
FIT 10%
FIT 10%
FIT 20%
GIT 25%

RECIPIENT
DC
RFC
NRFC
DC

APPLICABLE TAX
Exempt
Exempt
FIT 15%/30%
NIT 30%

FIT 10%/20%
GIT 30%

Intercorporate Dividend
ISSUER
DC
DC
DC
FC

FC
FC

RFC

If income within, NIT; if

NRFC

without, exempt
If income within, GIT; if
without, exempt

Tax on Sale of Shares

We go to Section 24C. The first to be understood under Section 24C is the phrase:
The provisions of the section 39B notwithstanding xxx.
Q.

What is Section 39B all about?

A.

It is about the holding period entitled: Percentage taken into account.

Q.

What is the relevance of that?

A. Because both 39B and 24C speaks of a capital assets.

asset, the holding period applies.

When it is a capital

However, we have to remember that the holding period do not apply in the
following:
1. Sale of shares which are capital assets;
2. Sale of real property which are capital assets;
3. Capital assets of corporation.
Q.
Why does the capital assets of a corporation not subject to holding
period?
A. Section 39B states: taxpayer other than the corporation.
Q.

What is holding period?

A. It is the length of time where the taxpayer held the property. If it is held more
than 12 months and if the elements are present, 50% of the net capital gains are
exempt; the remaining is subject to income tax. So that is why the holding
period does not apply to the sale of shares because the basis there is not the
holding period but rather how much is the gain.
Q.

How much is the rate?

A. For the first P100,000.00 (of the net capital gain) it is 5% and in excess of
P100,000.00 it is 10%. So the basis here is not the holding period but the net
capital gains.
Income tax to be applied to sale of shares:
1.
2.
3.
4.
5.

FIT depending upon the elements;

NIT;
GIT;
MCIT;
Percentage tax to be based on gross income.

Now, the trouble here is that the law is only explicit about the application of the
percentage tax under Section 127 and also the application of FIT.
Let us go to the elements of the application of the FIT:
1. The share of the stock being sold as shares in a DC;
2. These shares are classified as capital asset;
3. These shares are not listed and transacted under the local stock exchange;
and
4. The seller is the stockholder itself.
If these elements are present, the FIT applies regardless of who is the taxpayer.
And as a matter of fact, it is the only income tax where the FIT applies even if the
taxpayer is a NRFC or NRANE.
Q. Who are liable to the FIT considering that Section 24C does not mention
any taxpayer?
A.

Those mentioned under Section 24A: RC, NRC, OCW and RA.

Q. How about the NRAE?

A. We have Section 25A3.
Q.

How about NRANE?

A. In the last portion of Section 25B says it shall be subject to the 5%/10% tax
prescribed under Section 24C.
If that is the case, all the individuals will pay a uniform income tax of 5%/10% in
share of stocks sold by DC, if the elements are present.

Q. What happen now to alien employed in MOPs? Are we going to determine

whether they are not RA, NRAE, or NRANE?
A. No more because whether they are engaged or not, they will be liable for the
same rate.
Q.

How about DC?

A. For DC, we have Section 27D2; we have the same rate.

Q.

How about RFC?

A.

We have Section 27A7c.

Q.

NRFC?

A. We have Section 28B5c.

In other words, all income taxpayers will be liable for the FIT of 5% or the 10%.
That is if the elements are present.
Let us see the first element: It must be shares in a DC.
Q. What if the share is owned by a foreign corporation, whether resident or
non-resident?
A.

We have to determine whether it is an income within or without.

If it is a sale from a DC, it is always an income from sources within and that is
according to Section 42E second paragraph saying that gain from the sale of
shares of stock in a DC shall be treated as derived entirely from sources within the
Philippines regardless of where the said shares are sold.
Q. What about the shares of stock in a foreign corporation?
A. We see Section 42E second paragraph saying Gains, profits and income derived
from the purchase of personal property within ad 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 it was sold.
So if the shares in foreign corporation are sold in the Philippines, it is an income
within; if sold outside, it is an income without.

If it is an income without because the shares in a foreign corporation were sold

outside the Philippines, most of the taxpayer is exempt from income tax under
Section 23. Only two taxpayers are liable: the RC and DC, they have to pay by
way of the NIT.
With regard to whether it is an income within or without, most of the taxpayer pays
by way of the net except the NRANE and NRFC which pays by way of the gross. So
if one of the elements is not present and the gains are still an income within, most
of the taxpayer pays by way of the net except the two which pays by way of the
gross.
Second element, the shares of stock must be a capital asset.
Q.

When is a share considered a capital asset?

A. It was answered in China Bank vs. CIR, 336 SCRA 178. The shares of stock
can only be classified as ordinary asset if it is being sold by dealers or brokers of
shares that is an ordinary asset.
It means to say that those shares not being sold by dealers, those shares are
capital assets.
If the share is classified as capital assets, assuming all other
elements are present, the FIT of 5% or the 10% will be applied.
Q.

Suppose it is an ordinary asset, what will be the rule?

A. The rule will be the same, if it is an income within, (the share in a DC), most of
the taxpayers will be liable for NIT except only to NRFC and NRANE, which will be
liable for GIT.
If it is an ordinary but an income without (shares in a foreign corporation), most of
the taxpayers are exempt except only the DC and RC which will be liable for NIT.
Let us go to the third elements: the sale of shares are not transacted and listed in
a local stock exchange..
Q.

Supposed it is listed, what tax should be applied?

A. It is the percentage tax under Section 127.

Under RA 7717, if it is listed and transacted in the local stock market, the
percentage tax, which is a nature of a business tax under Section 127, will apply.
Q. If Section 127 will be applied, is the percentage tax in lieu of the other
income tax?

A.
Yes.
Because RA 7717 says that percentage tax shall be in lieu of all
corporate and individual income tax.
Therefore, if the shares are transacted and listed in a local stock exchange the FIT
of 5% or 10% will not apply but the percentage tax under Section 127. If it is not
transacted and listed in a local stock exchange, the 5% or 10% FIT will apply.

Tax on Distributive Shares in a GPP

We go now to distribution of shares to a partner in a GPP. In the first paragraph of

Section 26, it says that GPP is exempt from corporate income tax. Take note of the
phrase as such.
Q.

What happens to the shares of profits of a partner in a GPP, is it exempt?

A. Accordingly, the law says the distributive shares shall be included in the gross
income; the partner will be liable for NIT.
Q.

If the GPP is deemed to be a corporation, what tax should be applied?

A.

The FIT mentioned under Section 24B2.

Tax on Sale on Realty

Again, the provision begins with the phrase The provisions of the Section 29B
notwithstanding xxx, meaning the provision on holding period does not apply to
the sale of realty which is subject to FIT.
Q.

Why is that phrase mentioned?

A. Because both Section 24D1 and 39B speak of capital assets, and for the sale of
realty, it is not subject to the holding period because the basis of the income tax is
not for how long was the property possessed by the taxpayer but of how much of
the 6% of the gross selling price or the fair market value of the realty. Hence, the
holding period does not apply.
Holding period applies only to personal property which is capital asset except sale
of shares for real property whether it is capital asset or ordinary asset the holding
period does not apply. There is no way that the holding period will be applied to a

real property.
property.
Q.

Therefore, the holding period applies only to personal

What are the elements of payment of the FIT on sale of real property?

A. These were enumerated under Section 24D1:

1. The real property must be located in the Philippines;
2. The real property must be capital assets; and
3. The seller is any kind of individual.
According to Section 27D5, DC is also subject to this tax.
If all the elements are present, the FIT will apply except for RFC and NRFC. Even
if the elements are present, the FIT will not apply to RFC and NRFC because the
law is silent, hence, the NIT (for RFC) or GIT (for NRFC) will be applied.
Therefore, if all the elements are present, the general rule is that the FIT of 6% will
be applied except when the taxpayer is RFC or a NRFC.
Going back to the first element, the realty must be located in the Philippines.
Q.

Supposed the real property was located abroad, does a FIT apply?

A. No. According to Section 42, it is an income without. If it is an income

without, in line with Section 23, most of the taxpayers are exempt except the RC
and the DC, which will be liable for NIT.
We do not apply the FIT outside the
country.
If it is located in the Philippines and the other elements are present, the FIT of 6%
will be applied except the RFC and the NRFC, which will be liable for NIT and GIT
respectively.
We go on the second element: it must be a capital asset. Assuming all other
elements are present, the FIT will apply. Again, except the RFC and NRFC.
Q.

When can we consider the real property a capital asset?

A. RR 7-2003 says that realty is capital asset if not ordinary. The following are
ordinary assets (the BIR merely copies Section 39A1 but added the phrase real
property):
1. Real property held by the taxpayer property included in the inventory of the
taxpayer if on hand at the close of a taxable year;

2. Real property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business. It refers also to realtors;
3. Real property, which is a subject matter of depreciation except a parcel of
land. Depreciation do not apply in parcel of land, we apply it other than the
parcel of land;
4. Real property used in trade or business of the taxpayer.
Those are the ordinary assets.
enumerations are capital assets.

Other real properties not included in these

Q.
If the realty is an ordinary asset and located abroad, what tax will be
applied?
A. If the real property is located abroad, it is necessary to determine whether the
real property is an ordinary or capital assets. Most of the taxpayers are exempt
from income tax except RC and DC, which will be liable by way of the net.
Q. What if it is an ordinary asset, assuming it is located in the Philippines,
what tax should be applied?
A. Most of the taxpayer will be liable by way of the net except the NRANE and
NRFC, which will be liable by way of the gross.
Q. How about the NRANE, is it also liable for the FIT of 6% for sale of realty,
assuming all the elements are present?
A. Yes. Section 25B last sentence says, Capital gains realized by NRANE xxx
real property shall be subject to the income tax prescribed under Subsection D of
Section 24. The GIT will not apply but the FIT 6%.
Hence, for NRANE if the elements are not present and the income from sale of real
property is an income within, the GIT will apply.
We go to the last elements: the seller must be any kind of individual. As stated
earlier, any kind of individual shall be liable for FIT of 6%, assuming other elements
are present. For corporations, the DC is the only liable for this tax under Section
27D5. For RFC and NRFC, the FIT of 6% do not apply. RFC is liable for NIT and
NRFC will be liable for GIT even if all the elements are present as long it is an
income within.
Q.

What is the diference if the seller is an individual or a corporation?

A. Section 27D5 says that the FIT will be applied on real property which refers to
land or building. For any kind of individual, it includes any kinds of real property
enumerated under Article 415 of the Civil Code.
Q. Assuming all the elements are present and the seller is a RC, is there a
possibility that the NIT will be applied?
A. Yes. If the buyer is the government, or any of its political subdivisions or
agencies or to GOCC, taxpayer is given the choice to pay the FIT of 6% or the NIT.
Q. If you are the lawyer of an individual who is selling his real property to
the government which is located in the Philippines, will you advise the
payment of the FIT of 6% or the NIT?
A. It depends. Determine whether there is substantial profit or not. If sale of
realty will incur loss, e.g. the price of the land is one million and the government
bought it for P750,000.00, then it is better to apply the NIT because there is no
profit; hence, the NIT will not apply simply because NIT presupposes that there is
profit. If there is a substantial profit, e.g. the land was sold for two million pesos,
the rate will be the 32%; therefore, it is advisable to pay the 6% FIT.
If the buyer is government, the option can only be exercised by those enumerated
under Section 24A. It cannot be exercised other than those mentioned under 24A.
Q.

Who can exercise such options?

A.

Under Section 24A, it says RC,NRC, OCW and RA.

For NRAE, it can only be taxed for FIT, assuming the elements are present, under
Section 25A3. For NRANE, if the elements are present, it is still the FIT as
mentioned in the last portion of Section 25B. For aliens employed in MOPs, there
is no need to distinguish whether they are resident alien or not, they have to pay
____.
For DC under 27D5, we have the same elements except that it is only limited to
lands and building. For RFC, it is the NIT because the law is silent. For NRFC, it
is the GIT of 35%.
Q.

What about in involuntary sale, like auction sale, do we apply this tax?

A.
Yes.
Because the law says, sale, barter or other modes of disposition.
However, while it is true that auction sale is considered in the phrase, and other
modes of disposition, RR-4-99 says that if the mortgagee is a ban or a financing

institution, the property was sold to an auction and the elements are present, the
FIT does not apply because the owner has the right of redemption.
Q.
Supposed the owner did not redeem the property and the title was
transferred to the buyer at the auction sale, is he now liable to pay FIT?
A. From the time the title was transferred, the seller is now liable to pay the FIT
because there is now a sale or a disposition of the real property and there is
change of ownership..
If the property was redeemed, then, this tax does not apply because there is no
change of ownership. If the mortgagee is not the bank, the FIT will apply because
the law says xxx and other modes of disposition.
This tax must be correlated with Section 100 of the Tax Code; the donors tax will
apply provided the real property is not the one mentioned in 24D1.
Q. A parcel of land located in Metro Manila worth one million pesos for only
P600,000.00 was sold to a relative. Can we apply the donors tax?
A. Yes. If the realty is other than the one mentioned in 24D1.
If the real property is located in the Philippines, it is a capital asset and the seller
is any individual, the donors tax do not apply.
Q.

Why?

A. Because Section 100 says xxx other than real property referred to in Section
24D1 xxx. Clearly, the FIT of 6% is preferred than the donors tax, if the elements
are present.
Q.

Is sale of real property subject to VAT?

A.
The answer is provided for in Section 106A1a.
That the sale of realty is
subject to VAT provided it is the one held by the taxpayer primarily for sale to
customers or held for lease in the ordinary course of business. This is no other
than if the seller is a realtor.
Q. If a taxpayer receives a real property from a relative and he resells that,
is he liable to VAT?
A.
No.
The realty must be for sale to customer in the ordinary course of
business. In other words, VAT is only applicable if the seller is a realtor.
Q.

When it is subject to VAT, do we apply the FIT of 6%?

A.

No, because the elements there is conflicting.

Q.

Why is it conflicting?

A. If the seller is a realtor, the realty property is not a capital asset but rather an
ordinary asset because it belongs to the same enumeration under RR 7-2003 as
copies under Section 39A1. Hence, if it is an ordinary asset, the FIT of 6% will not
apply.
Q. If it is not subject to FIT, does it mean it is exempt from income tax?
A.

No. It is subject to NIT.

Q.

Is it a violation of the equal protection clause?

A. No. If it is subject to FIT because it is a capital asset, there is no way that VAT
will be imposed. The rule is absolute. It is no longer subject to VAT the moment it
is subject to FIT.
Q.

But is the other way around true?

A. No. If the VAT has been applied although FIT does not apply, the NIT will be
applied. However, if the FIT of 6% applies, it will not be subject to VAT. The rule is
absolute.
We go to Section 24D2.
If the purpose of selling the real property is to acquire new principal residence, if
the elements are present, there is a chance that the taxpayer may be exempt from
FIT of 6%.
The elements are as follows:
1. The real property being sold is a residential property;
2. The seller must inform the BIR within 30 days from the date of the
transaction;
3. The proceeds of the sale is fully utilized in acquiring or construction a new
principal residence within eighteen months from date of sale/disposal;
4. The historical cost will be carried over to the real property;
5. The privileged can only be availed once on every 10 years;
6. Exemption available to those with principal residence in Philippines.
Let us say an individual sold his residential place worth 10 million pesos but he
had purchased a new realty for a total cost of six million used for residential
purposes. The balance of four million will be subject to FIT.

Q.
Supposed it is a contract of barter or exchange, do we apply the FIT of
6%?
A.

Yes.

Q.

Who is the one liable for FIT?

A. Both parties will be liable for FIT because both of the parties are considered
seller and buyer at the same time.
Under RR 13-99, the Barangay Captain must certify that the property being sold
was used for residential purposes.
Summary:

Seller
Individ

Imposable Tax
If elements are present; FIT

ual
Corporations

If not NIT or GIT

DC
RFC
NRFC

FIT
FIT
FIT

CHAPTER VII
TAX ON DOMESTIC CORPORATIONS

Q.

What are the income taxes to be paid by DC?

A.
Supposedly there are five income taxes.
However, the OPCIT is not yet
implemented. The GIT will also not be applied because GIT is only applicable to
NRFC. Therefore, the following shall be applied to DC:
1. NIT under Section 27 A, B and C.
Under Section 27A, it refers to taxable
income, so it refers to the NIT;
2. FIT under Section 27 D1, D2, D3 and D5;
3. MCIT under Section 27E; and
4. IAET.
So there are four income taxes.
Q. But do we apply these income taxes simultaneously?
A.
No, because the MCIT and the NIT cannot be applied simultaneously.
should be either of the two, whichever is higher.

It

Tax on Educational Institutions

In Section 27B, it speaks of a DC which is a nonprofit proprietary educational
institution, and because it speaks of educational institution, we have to go over to
other tax statutes providing for the tax liability of educational institutions from a
particular tax. We have the following:
1.
2.
3.
4.
5.
6.
7.

Article XIV Section 4 paragraph 3 of the 1987 Constitution;

Article VI of Section 28 paragraph 3 of the 1987 Constitution;
Section 234B of LGC;
Section 30H and I of NIRC;
Section 101A3 of NIRC;
Section 109 (m) now paragraph (H) of NIRC as amended by RA 9337; and
Section 193 of LGC.

All of these provisions speak about educational institution.

Article XIV, Section 3 of 1987 Constitution states that All revenues and assets of
non-stock and non-profit educational institutions used actually, directly, and
exclusively for educational purposes shall be exempt from taxes and duties.
First, the provision is redundant. It is enough to say that it exempt from all kind
of taxes because when you say all kinds of taxes, automatically, it includes the
exemption from custom duties because custom duties is a form of tax.
Q.
A non-profit, non-stock educational institution earns profit from the
operation of drugstore, hospital and dormitory.
Is this educational
institution exempt from tax?

A.
No.
It must be proven that the revenue was used actually, directly and
exclusively for educational purpose.
In addition, of Section 30 says that
educational institution is exempt from income tax received by them as such.
Meaning, the exemption of the school shall only with regard to an income received
by them as an educational institution. Further, the last paragraph qualifies that
income of whatever kind and character from any sale of real or personal property or
from any of their activities conducted for profit regardless of the disposition made
of such income is subject to income tax.
This income should be subject to income tax because it is an activity conducted for
profit, and it is not an income received by the educational institution as such.
Q. Other commentator says that the last paragraph of Section 30 of NIRC is
unconstitutional; does it mean that in the given problem the educational
institutional is now exempt from tax?
A. No. Assuming arguendo that Section 30 is unconstitutional, nonetheless, a
law is presumed constitutional until it has been invalidated by the SC. There is a
need for declaration of unconstitutionality of the SC before the law may become
inoperative. A law may be unconstitutional but still valid until there is a final
decision by SC that the said law is null and void. Therefore, Section 30 is very
much enforceable.
There is no conflict between Section 30 of NIRC and Article XIV of the 1987
Constitution; the former speaks in particular, the income tax, while the latter
speaks in general.
Therefore, if we are lawyer of a non-stock and non-profit educational institution, we
must invoke Section 30 of NIRC because we do not have to prove that the income is
actually, directly and exclusively used for educational purposes.
Let us go now to tax on proprietary education institutions embodied under
Section 27B.
Q.

What is the income tax being referred to in Section 27B?

A.
NIT because it speaks of taxable income. It refers to NIT, not of 35%, but
10%. So schools, if the elements are present, are not liable to pay NIT of 30%, but
10%. The requirements are the following:
1. The school must be non-profit, proprietary educational institution;
2. The gross income from unrelated trade, business or other activity does not
exceed 50%; meaning exactly 50% or more of the gross income must not
come from unrelated activities. So, if the school earned 51% of its gross
income from selling balut, then it cannot avail the 10% NIT;

3. It must be duly accredited by CHED, TESDA and DECS.

4. Private institution.
If these elements are present, the non-profit, proprietary institution will only be
liable for 10% tax and not 30% NIT.
Q.

What does the term unrelated trade or business mean?

A. Unrelated trade or business means any trade or business of other activity, the
conduct of which is not substantially related to the exercise of or performance by
such educational institution and hospital of its primary purpose or functions.
Guide
1. Stock, profit educational institution 30% NIT, it is a regular DC, Section
27A;
2. Stock, non-profit educational institution 10% Section 27 B;
3. Non-stock, Non-profit education institution 3exempt (Section 30 H & I);
and
4. Non-stock, profit educational institution There is no such animal.
Q. But if the school wants to be exempt from real estate tax, what are the
requirements?
A.
The real property must be actually, directly and exclusively used for
educational purposes as stated under Section 28 paragraph 3 of Article VI of 1987
Constitution. It has an identical provision under Section 234b of LGC. But this
Section 234b is more specific; it speaks of exemption from real property tax. This
was asked in the 2006 bar.
2006 Bar
Q.
The Constitution provides charitable institutions, churches, parsonages or
convents appurtenant thereto, mosques, and non-profit cemeteries and all lands,
buildings, and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation. This provision
exempts charitable institution and religious institutions from what kind of taxes?
Choose the best answer. Explain 5%
1. From all kinds of taxes, i.e., income, VAT, customs duties, local taxes and
real property tax;
2. From income tax only;
3. From value-added tax only;
4. From real property tax only; and

5. From capital gains tax only.

A. Obviously, the answer is real property tax only.
In exemption from real property tax, we claim Section 28 paragraph 3 of Article VI
of 1987 Constitution or Section 234b of the LGC. We do not invoke Section 4
paragraph 3 of Article XIV of the Constitution because the former is more specific;
it refers to real property tax.
We go to Section 101 (3); donors tax on gifts in favour of an educational institution.
This is in the nature of a deduction but this also refers to the exemption of the
educational institution with regard to the donor.
But strictly speaking, this
section refers to deductions.
Q. If a donor donated a real property to educational institution, what are the
requirements for its deductibility?
In short, what are the grounds for
exemption?
A.

The following are the requirements:

1. Not more than 30% of said gifts shall be used by such done for
administration purposes;
2. It is a non-stock, non-profit educational institution;
3. It pays no dividend;
4. Governed by trustees who received no compensation;
5. It devotes all its income to accomplishment and promotion of the purposes
enumerated in its Article of Incorporation.

In taxation, when law says: exemption or exclusion, they are the same because
tax will not apply.
So strictly speaking, this section refers to deduction; the
donors tax does not apply, so it is exempt from donors tax.
Q.

Is an educational institution exempt from VAT?

A.
It depends.
For government educational institutions, it is automatically
exempt from VAT. There is no requirement at all.
With respect to private educational institution, under paragraph (h), formerly
paragraph (m), of Section 109 of NIRC as amended by RA 9337, educational
services rendered by a private education institution must be duly accredited by
DECS, CHED and TESDA before it can be exempt from VAT. The accreditation is
necessary for private educational institution while it is not necessary for
government educational institution.
For private educational institution, the
amendatory laws says it must be duly accredited by DECS, CHED and TESDA.

Q.

What is the amendment:

A. It includes TESDA. But for government education institutional like PUP and
UP, there is no further requirement. It is going to be automatic; it is exempt from
tax.
Q.

Are schools exempt from local tax?

A.

Section 193 of LGC says it is exempt provided it is non-stock and non-profit.

In the exemption from income tax, donors tax, VAT, real estate tax, including local
tax, we do not invoke Article XIV Section 4 paragraph 3 of the 1987 Constitution.
We invoke other statutes.
Q.
Does it mean that Article XIV Section 4 paragraph 3 is already an
obsolete or a dead law? Where can we apply this provision?
A.
It is very much applicable. If the tax statute is totally silent about the
exemption of the educational institution for a particular tax, and then we could
invoke Article XIV Section 4 paragraph 3 of the 1987 Constitution.

Tax on GOCCs

We go to Section 27C, GOCCs are now subject to income tax except the following:
1.
2.
3.
4.

GSIS
SSS
PHIC
PCSO

RA 9337 now removed PAGCOR from exemption; hence, it is now taxable. So the
general rule is that GOCC are liable to pay NIT
except the four mentioned
above.
Q.

Is PUP subject to income tax?

A. No. The governing rule on government educational institution is Section 30

paragraph I.
Q. Supposed you are the lawyer of a GOCC, which is not exempt from tax
under Section 27C, are you going to allow the BIR to collect?

A. Not really. We have to determine the nature of the income of the GOCC. We
have Section 32B7b, which states that 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. This is about exclusions from
gross income, and, thus, exempt.
This is exclusion in the computation of the
gross income.

For GOCC, the net income from the exercise of governmental function or from any
public utility like telephone and water, the income is exempt from income tax
because it is exclusion.
The best example is the case of NAPOCOR found in BIR ruling in November 2000.
In this case of NAPOCOR, the BIR wants to impose income tax to NAPOCOR simply
because it is not one of those enumerated under Section 27C. The BIR officer
argued that that it is not exempt from income tax under Section 27C. However,
NAPOCRO was able to prove that 100% of its income came from the exercise of
public utility, which is the electricity.
Subsequently, the Office of the
Commissioner ruled that it is exempt notwithstanding it is not one of those exempt
those under 27C because all of its income are exclusion in the gross income.
The second one is the exercise of essential governmental function. It is also
exclusion, and, therefore, exempt.
That is applicable for GOCCs which has
proprietary function.
However, those GOCCs under Section 27C, it is always
exempt whether it is exercising its essential government functions or earning as a
public utility.
Those GOCC which are normally liable for income tax, the
determination of whether an income came from proprietary or governmental
function is relevant.
That will answer the question, May the government tax itself? This is with regard
to the national government imposing tax on itself.
Q.

What about the LGUs, can the national government tax the LGUs?

A. Yes. There is no prohibition with regard to that.

Q.
How about the other way around, the LGUs taxing the national
government or another LGUs?
A.
No.
Section 133 paragraph (o) of LGC prohibits LGUs from taxing the
national government.
Q.

Is that prohibition absolute?

A. Not really because Section 154 of the LGC states that LGUs may fix the rates
for the operation of public utilities owned, operated and maintained by them within
their jurisdiction.
We have numerous cases about this topic.
Basco vs. PAGCOR
G.R. No. 91649 May 14, 1991
The City of Manila imposes tax on PAGCOR. PAGCOR objected the tax on so
many grounds and one of these objections is that PAGCOR is a government agency.
It invoked Section 133 paragraph (o) of Local Tax Code PD 231. The SC agreed
with PAGCOR that Manila being a LGU cannot impose tax on PAGCOR because it
is prohibited by the Local Tax Code and also of so many grounds. Hence, the SC
declared the tax ordinance of City of Manila null and void for being contrary to law.
Mactan Cebu International Airport vs. City of Cebu
GRN 120082 September 11, 1996
The City Government of Cebu tried to collect real property tax from Mactan Cebu
International Airport. Mactan Cebu invoked Section 133 paragraph (o) of LGC and
also invoked the SC ruling in Basco vs. PAGCOR. Unfortunately, the SC was
misled. But fortunately, it has a correct conclusion: Mactan Airport should pay
real estate tax.
The argument of lawyers of City of Cebu was not discussed by the SC. That is why
the ruling of the MIAA vs. City of Paranaque, the SC was misled again.
Q.

Was the argument of Mactan Cebu correct?

A. Absolutely no. We cannot invoke the case of Basco because it is not about
real property tax; it is about local tax. We cannot invoke Section 133 paragraph
(o) because it governs only local taxation. It does not apply to real estate taxation.
LRT vs. CBAA
GRN 127316 October 12, 2000
The City Government of Manila tried to collect real property tax from LRT because
the stations of LRT have railroads and stations. These are real property because
these are attached to the immovable. The LRT did not argue that the government
owns the real property; it argues that it exclusively used for public use.
Q. Did the SC agreed with that?

A. No. Because the SC ruled that those real properties are not exclusively used
for public use because if we want to use the same, we have to pay; it is not for
public use. Hence, it is subject to real estate tax.

MIAA vs. City of Paranaque

July 20, 2006
The City of Paranaque was trying to collect real property tax from MIAA.
ruled in favor of the City of Paranaque that it should pay real property tax.

CTA

The SC ruled that MIAA is not owned by the government; it is not controlled by
government; the airport is not an agency of the government; the airport is a mere
instrumentality of the government.
The SC declared that the MIAA is exempt
invoking Section 133 (0) of LGC. The City of Paranaque, being an LGU, cannot
impose tax on instrumentality of the government.
Before the LGC, we should look at PD 231, Revised Local Autonomy Act and PD
464, Principles under local taxation cannot apply to real estate tax. But the other
commentator will say, it is now within the LGC. Nonetheless, although they are in
the same law, these two books are well separated from each other. It means to say
that the law wants to preserve the old principle that whatever governs the local
taxation cannot apply to real property tax.
See the dissenting opinion of Justice Tinga, which point out the correct answer.
Q.

Is it correct to say that GOCCs is not liable real property tax?

A. The SC said in MIAA case that there is no debate that GOCCs are liable to pay
real property tax. But in the instant case, they ruled otherwise because the one
taxed is not owned by the government but it is an instrumentality of the
government; hence, it isnot taxable applying Section 133 (o) of LGC (which is
erroneous because laws on local tax under LGC is not applicable in laws on tax on
real properties under LGC).

Tax on Bank Interest

Section 27D1 is about ban interest earned by DC and royalty. We have to compare
this to 24B1; the one earned by individuals.
Q.

What are the diferences between the two?

A. On bank interest, the long-term holding period under Section 24B1 does not
apply if the depositor is a DC. With respect to royalty, the lower rate of 10% on
individual does not apply if the income earner is a DC.

Tax Under Expanded Foreign Currency Deposit System

Section 27D3, tax on income under expanded foreign currency deposit system, was
substantially amended by RA 9337; we do not read Section 27D3 but we have to
read RA 9337. Section 27D3 is identical paragraph in Section 28A7b which is
amended by RA 9337. But even under RA 9337, it is worded identically.
Q.

Who is liable for this tax?

A. In income tax derived under EFCDS, it is the ban which could be either a DC
or RFC. For DC 27D3; for RFC it is 28A7b. It is a bank, which is either a DC or
RFC authorized by the Banko Sentral ng Pilipinas to transact business not only in
the Philippine currency but also in acceptable foreign currency.
Q.

Normally what is the income tax imposed on the bank?

A. It is the NIT because it is under the topic of DC which normally pays by way of
the net and also it under the topic of RFC Section 28A which nor5mally pays also
by 3way of the NIT.
The first paragraph nowadays, unlike before, provides for two things; it provides
exemption from income tax.
The first paragraph under RA 9337 speaks of
exemption but the latter portion of the first paragraph speaks also of income tax
liability.
Q.

What now is the first portion?

A. The first portion of the first paragraph speaks now of exemption and the last
paragraph speaks of the income liability of the excluded foreign currency deposit,
the bank itself, whether the DC or RFC, if transacting business of acceptable
foreign currency because it is also allowed to transact Philippine currency. When
it transacts business in acceptable foreign currency and it earns income, referring
to the expanded, the bank, it earns income from the following:
1. Nonresident;
2. Local commercial bank;
3. Branches of foreign ban authorized by the Banko Sentral ng Pilipinas to
transact business in the Philippines;
4. Other offshore banking units;
5. Other depositary banks under the EFCDS.

When the bank earns income from these five entities, and it must be an acceptable
foreign currency transaction, the bank is exempt.
However, in the last portion, of the second paragraph, in foreign currency loans,
where the creditor is the ban, the expanded, and the borrower is a resident, the
income tax is FIT of 10% when the borrower is resident except to offshore banking
unit and expanded because an offshore is also a resident because it is RFC.
Now, to the expanded, it is also a resident because it is doing business in the
Philippines, and it is a RFC the FIT of 10% will not apply.
Q.

And what did the RA 9337 says?

A. The Secretary of Finance will determine on whether it is subject to income tax

or it will be exempt. He has the discretion to determine if the foreign currency loan
is on offshore or expanded.
So if the Secretary of Finance says Oh, exempt yan because it is a foreign
currency loan, it is also a foreign currency transaction.
In short, in the first
paragraph, it is always the expanded, the bank itself, which is the income earner
in transacting business with the abovementioned:
Second paragraph, the incomer earner is no longer the bank but the nonresidents.
If the nonresident earn income in the expanded and the law says it is exempt from
income tax, it is exempt from income tax.

Intercorporate Dividend
We go to Section 27D4.
The stockholder here is a DC, it earns dividend from
another DC, the law is clear, and it is exempt from income tax because the law
says it is not subject to income tax.
Q.
What if stockholder is a DC ad it earned income by receiving taxable
dividends from a RFC?
A.
It is not exempt because it is not the one mentioned under Section 28A7d; it
is liable for NIT.
Q. What if it is the other way around, it is the RFC, which is the stockholder
in a DC?
A.

It is exempt under Section 28A7d.

Minimum Corporate Income Tax

MCIT under Section 27E and 28A2 is applicable only to DC and RFC. This tax is
applied in lieu of the NIT if it is lower than 2% of the gross income; we apply the
2% and not the NIT. For NRFC, it is not applicable because it pays way of the
gross.
Q.

What is the ratio decidendi of the enactment of MCIT?

A.
To discourage, prohibit or prevent the corporations from claiming too much
deductions.
If we are officer of a DC or RFC and we claim too much deduction, the probability
is that the 2% of the gross income will be higher than the NIT. Hence, it prevents
the DC or RFC from claiming too much deductions.
This is applicable for DC and RFC operating already for a period of four years. The
formula for this tax is shown below:
Gross Income x 2% = MCIT
But the most important thing here is MCIT carry-over rule. This is the third
carry-over under income tax law: the first one is under 39D, the Net Capital Loss
Carry-Over Rule, and the second one is under Section 34D3, the Net Operating
Loss Carry-Over Rule.
For example, in 2000, the net income tax of a DC which is already operating for
four years is higher than the MCIT, we do not begin computing the carry over
(assuming the corporation is adopting a calendar year).
We begin computing the
carry-over, if in 2000 the MCIT of 2% is higher than the NIT. Now, if in 2000, the
MCIT is P200,000.00, the NIT is P120,000.00.
So, the tax liability will be the
MCIT of 2%, which is P200,000.00.
Q.

What is the carry over there?

A.
The carry-over is the difference of P200,000.00 andP120,000.00 which is
P80,000.00. In 2001, the DC can claim credit or the so-called carry-over.
Q.

How?

A. If in 2001, the NIT is higher than the MCIT, e.g. NIT is P300,000.00 and MCIT
of 2% is P200,000.00.
So, the DC pays the NIT because it is higher than the
MCIT.
Q. Do you pay exactly P300,000.00?
A. No. It will be P300,000.00 minus P80,000.00; that is the so-called carry-over.
Therefore, the DC will pay not P300,000.00 but only P220,000.00.
But if in 2001, if the one, which is higher, is the MCIT, the DC cannot claim carryover credit. But the credit can be applied in 2002 because the carry over is up to
three years. But if in 2002 MCIT is higher than the NIT, still, the DC will not be
allowed to the carry-over. In 2003, supposed the MCIT is still higher than the NIT,
the DC cannot claim the carry over.
Q. In 2004, if the NIT is higher than the MCIT, can the DC claim the carry
over?
A. No, simply because that is beyond the three-year period. However, the carryover from 2001, 2002 and 2003 on a cumulative basis may be claimed as a credit
but not the one in 2000.
Improperly Accumulated Earnings Tax
This is only income tax that does not mention gross income.
Q.

This tax is applicable to what kind of corporation?

A.

It is only applicable only to DC.

Q.

How would you justify that Section 29 does not distinguish?

A. It is provided for in RR 2-2001 that it is only applicable to DC.

We do not
apply rule if the law does not distinguish, the court should not distinguish because
of RR 2-2001.
This tax was abolished in 1987 by virtue of EO 37.
Why is it abolished?
Because the FIT on dividend received by individual from DC was also abolished in
1987. This tax was abolished because it is more of a sanction than of an income
tax.
Q.

Why is this tax more of a sanction than of an income tax?

A.

Because corporations are obliged to declare dividends.

The tax on taxable dividend was revived in 1998. Together with this revival, IAET
was also revived. On the revival on the FIT on dividend, the IAET was also revived
so that DC will be obliged to issue dividends.
Q. Are there instances where corporations liable to pay IAET exempt from
this tax?
A. Yes. Those corporations who accumulated profits for reasonable needs of the
business are exempt from this tax. This is the first group exempt from this kind
of tax under
RR 2-2001.
Q.

Give example of reasonable needs of the business?

A.

Example is expenses for expansion of business.

In other words, there are two groups of exemption. The first one is that DC ca
prove that the accumulation of profits was used for reasonable needs of the
business. In relation to this is the case of CYAMIDE vs. CIR, 322 SCRA 639
saying that the failure to declare dividend is not justified if the corporation merely
asserted that the earnings was withheld for reasonable needs of the business
without any documentary evidence to prove the same.
In other words, normally the DC will be liable for IAET. But if the was able to
prove that it used the earnings for reasonable needs of the business they are
exempt for this tax.
Under the second group, these are the DCs that are totally exempt regardless of
whether or not it will be for reasonable needs of the business. These are the
following:
1. Publicly held corporations;
2. Banks and other nonbank financial intermediaries; and
3. Insurance companies.
Q. What is the antonym of publicly-held corporation?
A.

Closely-held corporations (hindi privately-held corporation).

Q.

What is the distinction between the two?

A. It is closely-held when at least 50% of stocks are owned by not more than 20
stockholders under RR 2-2001, if it exceeds20 stockholders, then it is publicly-held
corporation.

Q. Aside from those mention under Section 29, what are the other exempt
from this tax?
A.

Under RR 2-2001, it provides for additional entities exempt from this tax:
1.
2.
3.
4.

Taxable partnership;
Non-taxable partnership;
GPP; and
Enterprise under PEZA.

Q. Suppose until now 2006, the DC did not declare dividend for the calendar
year of 2005, can it be compelled to declare dividend?
A.
No. RR 2-2001 provides for 1-year grace period.
compelled to declare dividend only on January 2007.

Hence, the DC will be

Q. Assuming the DC is not exempt under the first and the second group, are
you going to allow the BIR to collect this tax assuming the grace period had
lapsed already?
A.

Not really.
1.
2.
3.
4.

We have to determine whether the taxable income is adjusted by:

Income exempt from tax;

Income excluded from gross income;
Income subject to final tax;
The amount of net operating loss carry-over deducted;

And reduced by the sum of:

1. Dividends actually or constructively paid;
2. Income tax paid for the taxable year.
Consequently, even if the grace period had lapsed but if the income was already
subjected to FIT, or exempt from tax or excluded from the gross income deducted
from the carry-over, the IAET may be adjusted. Strictly speaking, Section 29D are
deductions although the law says adjusted by from the imposition of IAET.
There are cases which are already embodied under RR 2-2001 such as Manila
Merchant Wine 127 SCRA 483 and Tuason vs. CIR 173 SCRA 397.
Q.
Suppose the profits to be declared as dividend was invested to US
treasury bills, is the DC liable for IAET?
A.
Yes.
When the profit was invested for another investment, which is not
considered reasonable needs (Manila Merchant Wine case).

Q.
If the profits were invested with the same line of business, e.g. from
realty to another realty corporation, is the DC liable for IAET?
A. No. The SC ruled in Tuason vs. CIR that since the profit was invested in the
same line of business; that is included in the meaning reasonable needs.
However, if it was proven that merely of the profit was not used for the
investment, the balance was subjecte3d to this tax.
These doctrines are now embodied under RR 2-2001.

CHAPTER VIII
TAX ON RESIDENT FOREIGN CORPORTIONS
RFCs are foreign corporation engaged in trade or business within the Philippines.
Normally, all paragraphs under 28A speak about RFC simply because the title of
Section 28A speak is Resident Foreign Corporation. In other words, all the
sentences under 28A from 1-7, refers to RFC and under 28B from 1-5, refers to
NRFC.
Q.

Normally, what is the income tax to be paid by RFC?

A. Section 28A1 says that it subject to income tax xxx of the taxable income xxx.
Normally, it is liable by way of the net.
RFC pays three income taxes out of the six income taxes: NIT, MCIT and FIT.
RFC is liable for NIT of 35% as amended by RA 9337 under Section28A1 up to the
third paragraph, and the second NIT is 28A6b which speaks of 10% NIT on
regional operating headquarters.
Second kind of income tax to be paid is the
MCIT and that is under 28A2, and third the FIT under Sections 28A3, 28A4, 28A5
and 28A7 small letters a, b and c; letter d is an exemption. It is not liable for
OPCIT under Section 28A1 last paragraph because of the failure of this one.
So out the three, it can only pay simultaneously the NIT and FIT, or MCIT and FIT
because the NIT and MCIT cannot be applied simultaneously.

Gross Philippine Billing

We go to 28A3 in relation to RR 15-2002, the Gross Philippine Billing that is the
nature of Fit of 2-1/2%. This is only applicable to common carriers, which are
RFC; it could only be either a ship or an airplane. When a common carrier is an
international one but it is a DC, we do not apply this tax. If the common carrier is
NRFC, they also do not pay this tax, the 2 %.

Normally, since this is under the topic of RFC, it pays by way of the NIT. Now, the
law says, the RFC pays the 2 %, which is the nature of FIT if the following
elements are present.
If the following elements are not present, the income tax to be paid by RFC is NIT of
35% if it is an income within.
If it is an income without, then it is exempt.
Hence, the application of 2 % occurs only when the elements are present and it
depends on whether it is an airplane or a ship. For an airline company, it should
be classified as RFC. But RR 15-2002 says the RFC can only be a RFC if it has a
landing rights and it is known as online airline company.
If it has no landing
rights, it is an offline, and if it is an offline, it is a NRFC not liable to pay this tax
but liable to pay the gross income of 30%.
RR 15-2002 and Section 28A3 superseded and abrogated the old cases of BOAC,
Air India, American Airline and Japan Airline.
These jurisprudence are now
substantially modified. Why? In these old cases, the airlines have no landing
rights in the Philippines but have office in the Philippines selling tickets and
documents. The ruling in this cases is that the 2 % can still be applied in Gross
Philippine Billings because the law says then that Gross Philippine Billings
includes gross revenue realized from uplifts anywhere in the world by any
international carrier doing business in the Philippines of passage documents sold
therein, whether for passenger, excess baggage or mail provided the cargo or mail
originates from the Philippines.
Q.

Is the rulings in these cases were totally abrogated?

A. No. Because the ruling here which says that if the ticket were sold in the
Philippines is an income within that follows from the provision under Section 42A3,
the place of the performance of the service. Since the place of the performance of
service is in Manila, it is an income within. To that certain extent, those ruling is
still applicable.
But those decisions are no longer controlling. It is only controlling with respect to
the application of Section 42A3. With regard to the Philippine Gross Billing, those
decisions are substantially abrogated. The new law now says that the trip must
originate from the Philippines; in this case it originated in foreign port. That is
why RR 15-2002 clarified it; to be considered as a RFC, which will be liable to 2
%; it must have landing rights which is known as online.

If the airline has no landing rights it will not be considered RFC but NRFC which
will be liable for 30% GIT.
The Gross Philippine Billings, which is the nature of a FIT, is applicable on
international common carrier, either a ship or an airplane, provided the elements

are present.
30%.

But normally, since they are RFC, they are liable by way of the NIT of

The Gross Philippine Billing will be applicable in the following instances:

1. The gross revenue from carriage of passenger, excess baggage, cargo and
mail originating from the Philippines in a continuous and uninterrupted
flight irrespective of place of tickets or documents;
2. In cases of revalidation, endorsement and exchange to another international
airline and the flight is originating in the Philippines, we have to apply the 2
%; and
3. In cases of transshipment that occurred in any point outside the Philippines
from trips originating from the Philippines the 2 % shall only be applied to
the proportion of the trip as to the place of transshsipment.
Lets go to the first instance: the carriage of persons, excess baggage, cargo and
mail.
Q. What are the elements for the application? Are RFCs engaged in carrying
passengers, excess baggage, cargo and mail liable to pay the 21/2%?
A. No. We have to determine the following elements:
1. The trip must be originated from the Philippines;
2. It must be continuous and uninterrupted;
3. Irrespective of the sale of ticket and passage documents.
Q.
The airline is RFC, meaning it has landing rights in the Philippines;
normally the requirement is that the trip originated in the Philippines.
Suppose the passengers did not board in the NAIA in Paranaque but in
Singapore. What happen now in the sale of ticket if if this airline is RFC, do
we apply the 2 %?
A. No. It has to comply with the requirement that the passenger must originate
from the Philippines.
Q.

Why is it not liable for 2 %?

A. Because the passenger boarded in Singapore. Since, it is an international

common carrier, although a RFC, it has also branch in other countries other than
the Philippines.
Q. What happens now to the income of sale of ticket to the passenger, is it
subject to 2 %?

A.

No. Because it fail to comply with the requirement.

Q.

Is it liable to any income tax?

A. Yes. If the source of income is within the Philippines, meaning the sale of the
ticket commenced in the Philippines, then the RFC will be liable for NIT of 30%.
Q. Supposed it boarded, the airplane of RFC, from foreign country but the
ticket was purchased in Hong Kong, is the RFC liable for any tax?
A. No. It should be exempt in line of Section 23F in relation to Section 42, that
the place of performance of the sale of ticket without the Philippines, it is an
income without. RFC are only liable for income within.
Q. Suppose the ticket was soled in the City of Makati, where the passenger
boarded in Singapore, is the RFC liable for 2 %?
A.

No. The 30% NIT will be applied.

Q. What do we mean by the provision irrespective of the place of sale or

issue and the place of payment of the ticket or passage document?
A. When the passenger boarded in the city of Paranaque and the sale of ticket
was made in the City of Manila, the 2 % will be applied.
That goes also with excess baggage, cargo and the mail.
elements:

We have the same

1. The trip must be originated from the Philippines;

2. It must be continuous and uninterrupted;
3. Irrespective of the sale of ticket and passage documents.
RR 15-2002 says that if the stopover does not exceed 48 hours, nonetheless, the
flight is still continuous and uninterrupted.
Assuming the other elements are
present, the 2 % will be applied.
Q. If the stopover is more than 48 hours, and other elements are present, do
we apply the 2 %?
A. No. RR 15-2002 says the flight is interrupted, and even if the other elements
are present, we do not apply the 2 %.
Q. Is the RFC exempt from any tax?

A.
It depends.
If it is an income within, the RFC will be liable for 30% NIT
because it is a RFC.
If it is an income without, meaning the ticket was sold
outside the Philippines, it is exempt in view of Section 23F.
Q. What do you mean by the element irrespective of the sale of ticket and
passage documents?
A.
If the other elements are present, the 2 % will be applied. If one or all the
elements is not present, then place of sale of ticket now becomes material.
We go on the second instance, revalidation, exchange and endorsement.
Exchange:
Two passengers going to abroad, the other one will go on December, the other will
be on January.
P1. Palit tayo.
P2. Okay lang.
P3. Oryt.
That is exchange. But the exchange must beto another airline because if it is with
the3 same airline, the 2 % will not apply.
Endorsement:
P1. Di na ko babalik sa tate, ayoko na , o ikaw pinsan babalik ka ron?
P2. Oo, pero wala pa kong ticket,
P1. (Nagendorse, parang tsee). Sa yon na to.
But it must be to another airline.
Revalidation:
Yung mga nahuli ng byahe, o wala, irevalidate, but to another airline.
The 2 % will apply but it must be to another airline and the trip must be
originated from the Philippines because the passenger must originate from a port
within the Philippines.
We go the third one, transshipment. For example, Philippines to USA, halfway of
the trip is Guam before going to California. The transhipment occurred in Guam
but the law says to another airline and that the trip must originate from the
Philippines. So the passenger must originate from the Philippines.

Q.

So where is the application of 2 %?

A. It must apply only from the cost of ticket from the Philippines to Guam before
the transhipment to another airline.
Q.

What happen to the proportionate cost of ticket from Guam to USA?

A.

Of course, the 2 % will not be applied.

Q.

Is it subject to income tax?

A. If it is an income within, NIT of 30%. If it is income without because the ticket

was purchased outside the Philippines, the it is exempt.
Q.
What if the port of origin is NAIA and the port of transhipment is in
Cebu, do we apply the 2 %?
A.

No. Because the transhipment did not occur outside the Philippines.

With regard to the shipping lines, there is only one instance of application of the 2
% the gross revenue from carriage of passenger, cargo and mail originating from
the Philippines up to final destination, regardless of the place of sale or payments
of the passenger or freight documents.

Ofshore Banking Units

Section 28A4 is ame3nded by RA 9337. An offshore banking unit is always a RFC
because it is a branch of a foreign corporation authorized by the Banko Sentral ng
Pilipinas to transact business but only in acceptable foreign currencies. They do
not transaction Philippine money. We will notice that whether it is the expanded
or offshore, it refers only to acceptable foreign currencies. We have two foreign
currencies: first, acceptable foreign currencies and second, unacceptable foreign
currencies. Nowadays, all banks in the entire world accept Philippine currency.
Q.

Why do we not accept other foreign currencies?

A. For practical reasons. For example, currencies from nations of former USSR,
we do not accept their money. P1,000.00 worth of money will be equivalent to
around 6 trucks of their money. It is not practical to carry one truck of money.
Since offshore bank is a RFC, it is always subject to income tax. The laws says, as
amended by RA 9337, in the first paragraph under the amendatory law, where the

offshore bank earns income, it is exempt from income tax provided the other parties
to which the offshore bank earned income, are the following(see below), but only
limited to acceptable foreign currency. For expanded unauthorized to transact
business in Philippine money, are they exempt? No. They are not exempt when
earning income from income tax from transacting business even assuming the
parties are those enumerated below:
1. Nonresidents;
2. Local commercial banks author5ized by Banko Sentral to operate in the
Philippines;
3. Braches of foreign banks authorized by Banko Sentral to transact in the
Philippines;
4. Other offshore banks.
We will notice that there are only four here; for expanded there are five. What is
missing here is other depositary bank under expanded. But the last portion of the
first paragraph is very much similar to expanded where it says where the offshore
ban is the lender of money, the borrower is a resident of the Philippines, except the
offshore and expanded, the income tax is FIT of 10%.
In second paragraph, if a non-resident, whether individual or corporation, earned
income from transacting business with the offshore bank, it is exempt
Tax on Branch Profits Remittances
Foreign corporations have the following choices in conducting business in the
Philippines:
1. Establish a branch and the governing statute as far as income taxation is
concern is Section 28A5; or
2. The foreign corporation may purchase stock in a DC and be a stockholder;
or
3. It might establish a subsidiary in the Philippines.
Q.

What do we mean to establish a subsidiary in the Philippines?

A.
The foreign corporation will organize a corporation in the Philippines and
become a stockholder of that corporation. Since it is established under the
Philippine laws, the said corporation is a DC.
For the second and third options, being a stockholder or creating a subsidiary, the
governing statute will be Section 28B5b, the intercorporate dividend.
If the foreign corporation chooses to establish a branch, the law says that the
branch is always a RFC simply because it is under the topic of RFC in Section 28A.

Now, if this foreign corporation establishes a branch in the Philippines and the
branch now remits income in the foreign corporation in abroad, this is the income
subject to this income tax.
Q. Is this in lieu of the NIT of 30%?
A. No. This is in addition to the corporation income tax of 30% being a RFC.
Q. What is the 15% FIT to be paid by the branch to the mother company in
abroad?
A.

This is the profit remitted by a branch to its head office in abroad.

Q.

How do we multiply the 15% FIT?

A. The proper procedure is to go to Banko Sentral ng Pilipinas and apply for a

form of remittance and multiply 15% in the total profits applied or earmarked for
remittance without any deduction for the tax component thereof. For example, the
branch will remit one million pesos to its head office, thenP150,000.00 will be paid
as branch profit remittance tax.
Q.

What are the branches that are not subject to this income tax?

A. Branches registered under Philippine Economic Zone Authority are not subject
to branch profit remittance tax. However, the law says it must be connected with
the conduct of its trade or business in the Philippines.
We have two interpretations here.
First, if the mother foreign corporation is
selling motor vehicle, the branch must also be selling motor vehicle; otherwise, if
the foreign corporation abroad is selling motor vehicle and the branch here in the
Philippines is selling hopia this income tax does not apply.
Another interpretation is the case of Marubeni.
Marubeni Corporation vs. CIR
G.R. No. 76573 September 14, 1989
Marubeni Corporation established a branch in the Philippines.
But Marubeni
later on entered into a contract with AG&P Corporation where the former bought
shares of stock to latter and Marubeni became a stockholder of AG&P.
Although Marubeni had branch in the Philippines, this branch does not participate
in any capacity whatsoever in the said contract. Hence, the transaction is totally
independent of its branch in the Philippines. When AG&P declared the dividend, it

paid the following income taxes: 10% intercorporate dividend under the old law,
intercorporate dividend is taxable, not it is exempt and the branch profit remittance
of 15% arguing that Marubeni is a RFC because it has a branch in the Philippines.
Issue:

Is the payment of branch profits remittances of 15% correct?

Ruling: The SC says it is not correct because the branch did not participate in any
capacity so it is erroneous to pay the 15% branch profits remittance tax because
the law says, it must be effective connected with the conduct of its trade or business
in the Philippines.
These interpretations are both correct. Hence, if the mother corporation abroad is
selling motor vehicle and establishes a branch here in the Philippines and sells
balut and one-day old chick, this income tax will not apply. Therefore, they are
exempt.

CHAPTER IX

TAX ON NONRESIDENT FOREIGN CORPORATIONS

Paragraph B of Section28 speaks of NRFC and, according to Section 221, these are
foreign corporation not engaged in trade or business in the Philippines.
Q.

What are the income taxes to be paid by NRFC?

A. GIT and FIT. There are only two income taxes out of six income taxes. FIT is
mentioned in Section 28B2, 3, 4 and 5 paragraph a, b and c.
First in the list is Section 28B2; lessor in movies.
Q.

Who is the lessor here?

A.

The NRFC, which will be liable for FIT of 25%.

Q. Supposed the lessor is DC, what will be the income tax?

A.

NIT of 30% under Section 27A.

Lets go to Section 28B3; the lessor of vessels chartered by Philippine nationals.

Q.

Who is the lessor here?

A.

The NRFC.

Q.

Supposed the lessor of the vessel is a DC, what will be the income tax?

A.

The NIT of 30%.

Q.

What if the lessor is a RFC, what will be the income tax?

A.

The NIT of 30% under Section 28A.

Let us go to Section28B4, the lessor of the aircraft, machines and other equipment.
Q.

Who is the lessor here?

A.

The NRFC.

Q.

If the lessor is a DC or RFC, what is the income tax?

A.

The NIT of 30%.

That is the way to understand that.

Let us go to Section28B5: interest on foreign loans.
Section 32B7a.
Q. Who is the lender of money here?
A.

We have to correlate this to

The NRFC.

Q. What about the lender in Section 32B7a?

A.
It is the foreign government, financing institutions owned, controlled or
enjoying refinancing from foreign governments and international or regional
financial institution established by foreign government.
Q. So if the lender of money is a plain and simple NRFC, is the interest on
loans subject to income tax?
A.

Yes. FIT of 20% under Section 28B5a.

Q. If the lender of the money is a foreign government, is the interest subject

to income tax?
A.

No, because it is exclusion under Section 32B7a; thus, exempt.

Mitsubishi vs. CIR

181 SCRA 214
The borrower of the money here is Atlas Mining Corp. a DC. The lender of money
is Mitsubishi but sine the money borrowed by Atlas was substantial, the former
obtained a loan from Exim Bank. The trouble arouse when Mitsubishi claims that
it is tax-exempt because Exim Bank under the present law, Section 32B7a, it is
exempt. But Mitsubishi is governed nowadays by Section 28B5a because it is a
plan and simple NRFC. However, BIR claimed that interest of loans is subject to
income tax because the lender of the money is Mitsubishi. However, Mitsubishi
claims tht the real lender of money was Exim Bank because they only borrowed
money from the latter, which is tax-exempt because the latter is owned by
Japanese government.
The SC invoked the principle of res inter alios acta (the contract is only binding
between the parties), under the provision of Article 1311 of Civil Code.
The
contract is only between Atlas and Mitsubishi. The fact that Mitsubishi borrowed
money from Exim Bank is of no moment because it was not mentioned in the
contract.
When Mitsubishi secured the loans, it was in its own independent
capacity as a private entity and not as a conduit of Exim Bank.
That is material because if the parties are those mentioned in Section 32B7a, the
interest is foreign loans is considered to be exclusion from gross income, hence,
exempt.
Intercorporate Dividend
Let us go to Section 28B5b.
Q.

What are the intercorporate dividends mentioned under the NIRC?

A.

We have the following:

1. DC to DC under Section 27D4;
2. DC to RFC, meaning the stockholder is the RFC, under Section 28A7d;
3. DC to NRFC under 28B5b.

The first two are exempt while in number three it is not. When a NRFC received
dividend from a DC, it is now subject to FIT of 30% as increased by RA 9337 from
32% to 25%, subject to a lower rate of 15%.
In this topic, we must visit the case of Marubeni, Proctor and Gamble and Wander
cases.
Marubeni Corporation vs. CIR

G.R. No. 76573 September 14, 1989

Marubeni paid a FIT of 10% for intercorporate dividend having in mind that
Marubeni is a RFC.
At that time, RFC is liable for FIT of 10% for intercorporate
dividend but now it is exempt under Section 28A7d.
The SC ruled that the payment is not correct because Marubeni is not RFC but a
NRFC.
Since it is a NRFC, it is liable for 35%. The claim for tax refund by
Marubeni, the 10% intercorporate dividend and branch profit tax of 15% with a
total of 25%, was indirectly granted by SC. However, in the ultimate analysis it
was denied because it was not given to them because the 25% was applied by the
SC to the payment of FIT on dividend pursuant to the tax treaty between Japan
and Philippines; the rate of 35% has been lowered to 25%.
The moral lesson here is that although Marubeni has a branch here in the
Philippines, but the fact that the branch did not participate in the transaction,
Marubeni is still considered a NRFC.
Q.

What is the significance of determination whether it is a RFC or NRFC?

A.

Under the present law, RFC is exempt for intercorproate dividend.

Q.

When do we apply the 30% and the 15%?

CIR

vs. Proctor and Gamble

160 SCRA 560

PGC Philippines is a corporation duly organized and existing under Philippines

laws; it is engaged in business in the Philippines and is wholly-owned subsidiary
of PGC USA, a NRFC, PGC Philippines declared cash dividends in favour of its
parent corporation, PGC USA, which was subjected to 35% tax. PGC Philippines
discovered that there was an overpayment because only 15% should be paid based
on the tax-sparing rule, so it filed a refund of 20%.
The SC denied the claim on two grounds:
1. PGC Philippines is not the proper party to claim reimbursement of the
alleged overpaid taxes. The real party in interest is PGC USA because PGC
Philippines is a mere withholding agent; and
2. No complete requirements were submitted in order that the tax-sparing rule
may be applied. PGC Philippines failed to present income tax return to its
mother corporation when the dividends were received.
The tax-sparing rule is also known as the tax-deemed paid credit rule or
the reciprocity rule.
There is only tax credit by virtue of the technical

provision of the Internal Federal Revenue Code of USA; a tax-deemed paid credit
of 20%. Do not forget the word deemed.
Under USA law, a DC and its citizen in USA is liable to pay income tax for income
derived within and without USA. On this particular, PGC USA will pay income tax
in the Philippines as well as in the USA for that same income, and the laws in USA
considers that the tax is deemed paid.
Since there is such provision, the NRFC (PGC USA) will not be liable for 30% under
the Philippines laws but only 15% for the intercorporate dividend.
Q.

When will the 30% intercorporate dividend apply?

A. If the laws of the NRFC does not provide for the tax deemed paid credit rule,
the 30% will be applied. If there is such provision under the foreign laws, then the
15% will be applied.

CIR vs. Proctor and Gamble

204 SCRA 377 (On MR)
The SC reversed itself on two grounds:
1. The withholding agent is the proper party to claim refund because it is who
is liable to pay tax (who is required to deduct and withholding any tax).
PGC Philippines will be liable for the tax as withholding agent. If it failed to
withhold the tax; hence, the withholding agent having sufficient legal
interest can bring a suit for refund of taxes if it believed were illegally
collected from it; and
2. NIRC does not require actual proof of payment as long as there is payment.
What is necessary is that the other country recognized or allows tax credit
in the amount equivalent to 20%.
It requires that USA shall allows a credit against the tax due. PGC USA is deemed
to have paid tax credit in an amount equivalent to 20% waived by the Philippines.
The US Tax Code shows that it grants PGC USA a tax credit for the amount of
dividend tax actually paid from the dividend remittances to PGC USA; hence, the
15% shall be applicable.
Q. What if the law of residence of the NRFC is totally silent about the taxdeemed credit rule, what should be the tax rate, 35% or 15%?

CIR

vs. Wander Philippines, Inc.

G.R. No. L-68375 April 15, 1988

Wander Philippines, Inc. is a DC organized under Philippine laws, which is wholly
owned subsidiary of the Glaro S.A. Ltd., a NRFC. Wander declared dividend and
withheld 35% FIT for intercorporate dividend. Subsequently, it filed a claim for
refund contending Switzerland does not impose tax on its citizen on income earned
from sources abroad. BIR contended that the law in Switzerland is silent as to
existence of tax-deemed paid credit rule. Hence, the 25% should be applied.
The SC did not agree with the BIR and applied the 15%. There is no tax-deemed
paid credit rule because there is no law on the matter.
Switzerland does not tax
its DC for income derived from sources without. Hence, with more reason that the
15% preferential rate should be applied.
There are two reasons why there is no tax-deemed paid credit rule: first, there is
a law, but law is silent, and second, there is no law at all requiring payment of tax
from sources without.
Guide on applicability of 35% and 15%
There are two types of country with respect to _________: first, countries where its
citizens and DCs are liable from sources within and without like USA,
Philippines ,Germany and Japan, and second, countries where its citizens and DCs
are liable only for income earned from sources within, lie Switzerland, but for
_______ without, they are exempt.
Q. If the country belongs to the second _______ is there a possibility that the
35% will be applied?
A.

None.

Q.

When can we therefore apply the 35%?

A. When the corporations belong the first group, meaning, that the country of the
NRFC tax it ________ from sources within and without, and that their country does
not provide for the tax-deemed paid credit rule as stated in Proctor and Gamble.
Q.

When can we apply the 15% rate?

A. We can apply the 15% in both groups. On the first group, if there is taxdeemed paid credit on the foreign law, we apply 15%; the second group, we apply
the 15% rate because of the Wonder case.
Q. So which is better for a foreign corporation, establish a branch, establish
a subsidiary or become a stockholder of a DC?

A. It depends. The first one to consider is the rate of 35% or 15%. Determine if
the laws resident country provides for tax-deemed paid credit rule and belongs to
the first or second group. If it belongs to the first group and does not provide for
the tax-deemed paid credit rule then 25% will be applied, it might be better to
establish a branch. If the resident country of the foreign corporation belongs to the
second group, or in the first group but provide for tax-deemed paid credit rule
then it might be better become a stockholder of a DC.

CHAPTER X
EXEMPTIONS FROM TAX ON CORPORATIONS
Section 30 states that the following organizations shall not be taxed under this
title in respect to income received by them as such.
Q.

What is the exemption being referred to under Section 30?

A. It refers to tax on income because Section 30 says under this title referring to
Title II Tax on Income. Consequently, it refers to the exemption from income tax.
Q.

Does it also refer to association?

A.

Yes. According to BIR ruling, associations are also corporations.

Q. Are those mentioned under Section 30 the only entities exempt from
income tax?
A.

No. The following entities are also exempt:

1.

Section 27C states that SSS, GSIS, PSO and PHIC are exempt from tax.
PAGCOR was not removed from exemption;
2. Those mentioned under Section 32B7b are also exempt;
3. GPP; and
4. Joint ventures for the purpose of undertaking construction project or
engaging in petroleum, coal geothermal and other energy operations with the
government are also exempt.
Q.
What is the diference between the exemption under Section 27C and
Section 30? Why is it not within the same provision?

A. In Section 27C, the exemption is absolute. In Section 30, the exemption is

only for income received by them as such; hence, the exemption is relative.
Consequently, we cannot include those mentioned under Section 27C in Section
30.
Q.

How about those mentioned under Section 22B?

A. Joint ventures are not exempt as a rule; it is exempt only by way of exemption.
Normally, Joint ventures are subject to income tax. Therefore, this cannot also be
included under Section 30.
Ordinarilly, GPP is exempt from income tax.
However, the qualification for
exemption of GPP is different than those under Section 30. In Section 30, the
exemption is only for income received by them as such. This is qualified by the
last paragraph. There are three kinds of transaction under the last paragraph
where these organizations are liable for income tax because it states
Notwithstanding the provisions in the preceding paragraphs, the income of
whatever kind and character of the foregoing organization xxx:
1. Sale of real property;
2. Sale of personal property; and
3. Activities conducted for profit regardless of the disposition of the proceeds.
For example under letter D of Section 30, if the employee contributes money for the
development the cemetery, it is exempt from tax because it is an income received
as such.
The exemption is not absolute because if the organization does the activities
mentioned in the last paragraph, it is now liable for income tax regardless of the
disposition of the proceeds.
To illustrate, if in front of the cemetery the
organization sell bulalo, then it will be subject to income tax because it is an
activity conducted for profit.
Q.
What are the requirements of mutual banks and cooperative for
exemption under Section 30?
A. The requirements are the following:
1. Mutual savings bank not having a capital stock represented by shares; and
2. Cooperative bank without capital stock organized and operated for mutual
purposes and without profit.
Q.

What is the lodge system mentioned in Section 30C?

A.

Lodge system means operating in an inter-country level.

The most important enumeration under Section 30 is the one mentioned under
letter E because one of the exempt entities is the religious organization. But the
exemption is not automatic.
There are three requirements:
first, it must be
nonstock; second, it must be operated exclusively from religious purpose; and
third, no part of its net income or asset shall belong to or inures to the benefit of
any member, organizer, officer or any specific person, including the sakristan.
Base on this requirement, it is impossible for a religious institution to be exempt
from income tax. The requirements are very strict, and if it will be applied, most
religious entities are not exempt, hence, liable to income tax.

CHAPTER XI
COMPUTATION OF GROSS INCOME
Taxable income is the pertinent items in the gross income less allowable
deductions and personal exemption. If this is the case, this is about the payment
of the NIT. Under the Tax Code, NIT is being referred to as the taxable income or
the gross income. Under Revenue Regulations, it is also called the ordinary way of
paying income tax or the normal way of paying income tax. Hence, if we come
across with the terms taxable income, we are talking about the NIT.
Now we go to the Section 32A.
Q.

What is the meaning of the term gross income in this Section?

A. Gross income here shall refer to the payment of NIT.

about payment of the NIT.

Hence, Section 32 is

First thing to remember, if an income is mentioned in this section, it does not

exclusively refer to the payment of the NIT. We have to determine what kind of
income it is.
For example, in number one, wages and salary, it does not necessarily follows that
it is included in the payment of NIT because this section states that The following
shall be included in the computation of the gross income except as provided for in this
code xxx. Take note, that this is the one mentioned in the computation of the
annual ITR for individual.
However, the following shall not be included in the computation of the gross income
in the filing of the annual net income returns:
1.
2.
3.
4.

Income
Income
Income
Income

which are exclusions;

which are exempt;
subject to FIT; and
subject to GIT.

Therefore, if the taxpayer is not allowed to pay by way of the NIT, Section 32A does
not apply.
Q.

Who are those not allowed to pay by way of the net?

A.

The NRFC and NRANE.

If an income is mentioned in this section, it does not follow that it is subject to

income tax. Nor it follows that it is the one to be included in the annual ITR.
First, in the list is wages and salary.
It is the wages and salary that is not
included in the four mentioned above. The moment the taxpayer is a NRANE or a
NRFC, automatically, Section 32A does not apply because they are only allowed to
pay the GIT.
Q. Assuming the taxpayer is paying by way of the net, he received wages and
salary, should it be included in the computation of the annual ITR?
A.

Yes, but the rule is not absolute.

For Filipinos, whether resident or non-resident, they pay by way of the NIT.
Filipinos employed in multinational, off-shore and petroleum, as a rule, they pay by
way of FIT of 15% on their wages and salary. However, if the Filipino is employed
in multinational, they have the option to pay by way of the net or the final income
tax irrespective whether or not they are holding a managerial position under
Section 25C as amended by RR 12-2001. If the Filipino is deployed in offshore

bank and petroleum service contractor, the Filipino has no other option but to pay
by way of the FIT.
Q.

Assuming that the FIT applies, should it be included in the annual ITR?

A. No, because there is a separate return for that.

way of the GIT, this section does not apply.

Also, if the taxpayer pays by

We go to gross income from the exercise of business or profession.

If the taxpayer earned income and he is paying by way of the NIT, all income from
the exercise of the business or profession is subject to the net. That should be
included in the annual ITR in the gross income.
The third one is dealings with property.
Te law did not distinguish on whether the property is real or personal.
Q.
Let us say the taxpayer earned income from dealings with personal
property, will it be included in the NIT assuming the taxpayer is paying by
way of the NIT?
A. Yes. Whether the gain is capital gain or ordinary gain, the same shall be
included in the computation. However, if the personal property is a sale of share
subject to FIT, the return there shall be accomplished by the taxpayer himself but
separate from his annual ITR.
Q.

In the sale of real property, do we include it in the annual ITR?

A. Yes, provided the sale of the real property is subject to the NIT. If it is a capital
asset located in the Philippines we do not include this in the annual ITR because
there is a separate return for this. It is subject to FIT.
We go to interest. The law did not distinguish on whether this is an interest on
loan or bank interest.
Q.

Is it the interest which was derived in the Philippines?

A. No. If the interest is derived from the bank within the Philippines, it is not
included because there should be a separate return for FIT to be accomplished by
the bank officer.
Q.
If a taxpayer earns interest from PNB, is it included in the computation
of gross income?

A. It depends. If the PNB is located abroad, the interest shall be included in the
NIT, if within the Philippines, FIT.
Take note that this is only limited to RC and DC because to all other income earner,
they are exempt from interest earned from ban abroad.
We go to rent.
Assuming the taxpayer is paying by way of the net, this is always included in the
computation of the gross income unless the income earner is a NRANE or NRF.
This is subject to the GIT.
We go to royalties.
Take note that royalties have no definition under the tax code or in the revenue
regulations.
Q.

What is the distinction of sale of service from royalties?

A. If it is royalties which is derived from the Philippines, it is not subject to NIT; if

it is sale of services and was derived from the Philippines, it is subject to NIT.
Q. If we are the composers of Sugarfree and Sugar Babes, do we include the
royalties received from these bands?
A. For Sugarfree, we do not include that because it is subject to FIT; for Sugar
Babe, it is included in NIT because it is an income from sources without.
On annuity, normally it is subject to NIT and will be included in the ITR.
discuss this in Section 32B2.

We will

We go to prizes and winnings.

With regard to prized, the one to be included in the ITR is the one derived outside
the country. Also, for income derived within the country, if the prize does not
exceeds ten thousand pesos. Also, those received by DC whether it is an income
within or without the Philippines. For winnings, the only one subject to NIT is the
winnings derived outside the country and this is only with regard to RC and DC.
For pensions which are not exempt, then, it is included in the NIT. This will be
discussed under Section 32B2.
Lastly, shares of partner in GPP.

Q. Is the share of the partners will be included in the ITR?

A.
Not really. Section 32A11 is the one mentioned under Section 26 third
paragraph where the GPP is exempt.
The share of the partner is subject to the
NIT because the law says it shall be3 included in the computation of the gross
income.
If the GPP is deemed to be a corporation, it is not the one mentioned in
Section32A11 because it is subject to FIT.
Exclusions from computation of Gross Income
We go to Section 32B1.
Q.

Are proceeds of life insurance subject or exempt from NIT?

A. We have to determine whether the proceeds of life insurance are under Section
32B1 or 32B2.
In Section 32B1,it says that the proceeds of life insurance is an exclusion provided
it is payable upon the death of the insured. The only qualification that it is an
exclusion is when it is payable upon the death of the insured. It does not matter
on who is the beneficiary and whether the beneficiary is appointed as revocable or
irrevocable. The most important thing is tht it is payable upon the death. It does
not matter whether it will be paid in lump sum or in instalment so long as it is
payable upon the death of the insured.
However, this exclusion provides a provision: If such amounts are held by the
insurer under an agreement to pay interest thereon, the interest payment shall be
included in the gross income.
For example, in addition to one million as life insurance proceeds, the beneficiary
also received fifty thousand as interest; then, the latter is not exclusion. The fifty
thousand is subject to gross income but the entire one million is exclusion.
We go to Section 32B2.
This is proceeds of life insurance when the insured is still alive.
fact, it is called the return of the premium.

As a matter of

Let us say, the life insurance contract is ten years, after ten years, the insurance
now matures, then the insured will collect the proceeds.
Q.

If the proceed is one million, how much will be exclusion?

A. We have to determine how much is the premium paid in the whole ten years.
If the insured had paid a total of one hundred thousand, then the one included in
the exclusion is only one hundred thousand.
The remaining nine hundred
thousand is subject to income tax and that is so-called annuity under Section
32A8. It is only the return of the premium which is subject to exclusions.
2003 and 2005 Bar
Q. Is it subject to estate tax?
A. The related provision is Section 85E. The following are requirements:
First, this is only applicable if the person is insured himself and he is the one who
died. The rule does not apply if the person insured the life of another one. If the
proceed is included in the computation of the gross estate, the proceeds is exempt
from payment of NIT because it is an exclusion.
Second, if beneficiary of the insured is the estate, execution or administrator, the
proceed of the life insurance shall always be included in the gross estate, whether
the appoint of the estate as a beneficiary is revocable or irrevocable.
If the beneficiary is other than the estate, we have to determine whether the
designation of the beneficiary is revocable or irrevocable.
Assuming the first
requirement has been complie3d with and the appointment of the beneficiary is
other than the estate and the designation is irrevocable, it should be included in
the gross estate, and, therefore, subject to estate tax.
If the appointment of the beneficiary is other than the estate and the designation is
irrevocable, it will not be included in the gross estate and therefore, exempt.
We go to contract of donations.
Q.

Why is it, that property by virtue of donation is exempt from income tax?

A.
It is exempt because these are exclusions. It does not matter whether the
subject matter is donated is real or personal. Hence, donee is exempt from income
tax because donation is exclusions.
We go to compensation under Workmens Compensation Act.
With regard to health and accident insurance, here, it is only the one mentioned
in Workmens Compensation Act. We cannot say that this is different from the
Workmens Compensation Act because under the word or after the word accident,
there is no comma. It means to say that this is the only one mentioned under the
Workmens Compensation Act.
Take note in statutory construction, in
enumeration without comma, it means that it mention only one thing.

But that is not the only one which is deemed exclusion under number four. It
includes amounts received by nature of injury or illness, including damages on
account of such injury or illness.
Q.

Suppose the taxpayer died, is it the one mentioned here?

A. Yes. Under independent civil actions under the Civil Code, the term injury
includes death.
We go to number five; income under treaty.
law.

These are also exclusion under the

We have number six; the concept of retirement pay, separation pay and terminal
leave benefits. Unfortunately, the tax code is silent on terminal leaves benefits.
First, we have to determine whether the sum of money we receive is a retirement
pay, separation pay or a terminal pay because the requirement for classifying it for
exclusion varies. They have the different requirements.
Retirement pay is the sum of money received when the employee reached the
maximum age for employment. Separation pay is the amount received by virtue
of illness, injury, sickness, physical disability or other injury. Terminal leave is
the unused vacation and sick leave converted into cash money.
The governing rules for retirement pay is Section 32B6 a, c, d, e and f; in other
words, all other enumeration under 32B6 except paragraph b.
For separation pay, it is Section 32B6, b and c. For terminal leave, it all depends
on whether it is granted on a yearly basis or upon retirement or separation. If
granted on a yearly basis, we have Section 2.78.1 par. A7 of RR 2-98 and
Executive Order 291 of the former Pres. Estrada, RMC 16-2000. If granted in a
yearly basis, we have the following cases: In Re Atty. Zialcita, 190 SCRA 851,
Borromeo vs. Civil Service 199 SCRA 911, Castaneda vs. CA, 203 SCRA 70.
Retirement Benefits
The proper way to read it is to begin at Section 32B6c. Never mind the statement
there if receive by resident or nonresident citizen of the Philippines xxx because we
already have Section 23. It further states from foreign government agencies and
other institution, private or public which means to say, retirement benefits given
by foreign government agencies and foreign corporation, public or private. Why
foreign corporation? Because it is says and other institution, private or public.
Hence, it includes foreign corporation, whether public or private.

If we receive retirement benefits from foreign government or foreign corporation

located in the City of Makati, it is automatically deemed exclusions. There are no
requirements with respect to the years of service and age of the retiree.
The
reason is that we copy this provision from US, Canada, Germany and England
where the retirement age is forty.
If the one granting the benefits is the Philippine government or DC under Section
33B6 d and e, the PVAO, SSS and GSIS, these are all exclusion without any
qualification.
The following retirement benefits are exempt from tax:
1. RA 7641 Retirement benefits received under this law pertains to private
firms without retirement trust fund.
2. RA 4917 Retirement benefits pursuant to RA 4917 received by official and
employees of private firms whether individual or corporate in accordance
with a reasonable private benefit plan maintained by the employer
provided the following requirements are met:
a. Retiring employee has been in the service of the same employer for the
past 10 years;
b. He is not less than 50 years of age at the time of his retirement;
c. He avails of the benefits only once;
d. The private benefit plan is approved by the BIR [RR-2-98].
If the retirement benefit is given by private institution by virtue of Sec. 32B6a,
determine if there is a private benefit plan. If there is a private benefit plan, there
are requirements for exemption.
If there is no private benefit plan, the
requirements are different.
RA 7641 applies to private firms without retirement plan.
the requirements:

The following are

1. The first has no retirement trust fund;

2. Retiring employee is at least 60 years old but not more than 65;
3. The benefits are equivalent to 15 days salary and of the 13 th month pay
for every year of service; and
4. The employee has been in the service for 5 years. Here the source of the
benefit is the management.
RA 4917 applies to private firms with retirement plan.

The requirements are:

1. Retiring employee has been in the service of the same employer for the past
10 years;
2. He is not less than 50 years of age at the time of his retirement;
3. He avails of the benefits only once; and

4. The private benefit plan is approved by the4 BIR [RR-2-98].

Situation: SMC engineer will retire. He claims retirement pay only once. Later
on, same engineer, after retirement, became a consultant of SMC. Then he retired
again. This time he cannot claim the exemption anymore.
Separation Pay [Sec 32B6c]
If an employee is terminated because of justifiable reason, there is no separation
pay.
It is important to know if the separation pay is derived from a foreign
government because the phrase other similar benefits under Sec. 32B6c, the
separation pay is deemed included.
It does not matter, however, if the separation pay is given by the Philippine3
government or a private institution if the separation pay is give due to causes such
as:
1. Death, sickness, injury or other physical disability; or
2. Any cause beyond the control of the employee: in these cases, the exclusion
is automatic.
The moment separation pay is received on account of death, sickness or other
physical disability or for causes beyond the control of an employee,
it is
automatically excluded. No more other qualifications.
If, however, grounds are other than the above-stated, a qualification is to be made
of whether or not the cause is beyond the control of the employee.
Example: The management installed a labor-saving device for cost-cutting, and
the personnel manager ask an employee to voluntary resign; that is retrenchment.
In this case, the employee is still entitled to separation pay because the cause for
termination is still beyond the employees control.
When the management lay off employees because of bankruptcy, it is beyond the
employees control, hence, entitled to separation pay.
When an employee is
terminated from failing eyesight, it is still not subject to income tax, it is still an
illness.
When an employee voluntarily resigns but the CBA provides separation pay, the
separation pay is subject to income tax because the cause is other than the causes
provided by law.
Terminal Leave Benefits

It is given on a yearly basis upon retirement.

whether sick leave or vacations leave.

If given on a yearly basis, determine

Rule if Sick Leave: If sick leave given in a yearly basis, it is subject to income tax.
Rule if Vacation Leave: If vacation leave, it is subject to income tax except if it is
10 days or less, in which case it is exempt.
RR-2-98 [January 1999] - covers only private sector
EO 291 [Under ERAP Administration adopted in RMC-16-200] covers government
terminal leave benefits.
Q.

Does it matter if the worker received it from the government?

A.

Yes.
Private Sector

Government Sector

Q.

How about if given in retirement?

A.

We have three rulings:

given on a yearly basis, subject to

income tax
vacation leave, regardless of number
of days is not subject to income tax

1. In Re: Zialcita, 190 SCRA 851

2. Borromeo vs. Civil Service Commission, 199 SCRA 911
3. CIR vs. Castaneda

In Re: Zialcita
190 SCRA 851
Zialcita is a retiree of DOJ. The DOJ withhold the sum of money. Zialcita did not
agree to the deduction. He claimed that it is exclusion. He cited PD 220 which
provides that terminal leave benefits received by employees of the government and
the private sectors are exempt from tax.
It is under the phrase other similar
benefits received by the retiring employee (similar to the retirement benefit pay).
The SC agreed with Zialcita. It ruled that it is in the nature of retirement pay.
Note: Ruling is based on the old law, but it is still relevant in the new law because
what was changed is only the section number. The SC committed a mistake that
is in the nature of a retirement pay, SEC 28, but the ruling is still correct.

However, it added in the dispositive portion that the exemption applies only to DOJ
employees.
This ruling is modified in the case of Borromeo.
exemption is applicable to all government employees.

The ruling was that the

Borromeo vs. Civil Service Commission

199 SCRA 911
Borromeo is an officer of the Civil Service Commission.
were:

The issues in this case

1. WON the terminal leave benefits of Borromeo is subject to tax;

2. WON his terminal leave pay should be computed on the basis of his highest
monthly salary including allowance or on the basis of the highest monthly
salary without said allowances should be subject to tax.
The SC ruled that is should not be subject to tax.
It reiterated the ruling in
Zialcita; it should be exempt from tax. This case however, modified the ruling in
Zialcita in the sense that the income tax exemption to DOJ employees was applied
to workers of the other branches of the government.

CIR vs. Castaneda

203 SCRA 70
Castaneda is a Labor Attache of Philippine Embassy in London.
Issue: WON terminal leave pay received by a government official or employee or
his retirement from government service is subject to income tax.
Ruling: The SC held that the terminal leave pay received by t\retiring employee is
tax exempt, not being part of the gross salary or income but of retirement benefit,
citing the ruling in the case of Zialcita.
Note, however, that in all 3 cases, the petitioners were all government employees.
Q. Suppose a worker from a private corporation receives the terminal leave
benefits, is it exempt from tax?
A. Yes. Under PD 220, it is provided that terminal leave benefits received by a
worker in the private as well as public sector are exempt from tax.

Note: PD 220 argued in Zialcita is not abandoned or superseded; it still

forms part of the law of the land.
Monetization of Leave Credits of Government Officials and Employees
EO 291 [Under ERAP Administration adopted in RMC-16-200] with respect to
terminal leave benefits received by government employees is ALWAYS EXEMPT
FROM TAX, no qualification.
Income derived by Foreign Government (Sec 32B7a)
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
1. Foreign governments
2. Financing institutions owned, controlled or enjoying refinancing from
foreign governments, and
3. International or regional financial institutions established by foreign
Governments
Situation:
The foreign government of Brunei is a stockholder of a DC
(Development Ban of the Philippines). It deposited money in a bank in Makati. Is
it subject to income tax? No. It is exclusion; exempt.
Income Derived by the Government or its Political Subdivisions [Sec 32B7b]
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 subdivisions thereof is an exclusion from gross income.
Note: The exemption from income tax under this section pertains only to income
derived by the government or any of its political subdivision from:
1. Public utility; and
2. The exercise of any essential governmental function.
Consequently, income from sources other that those mentioned are subject to
income tax.
Do not confuse Sec 37B7b with Sec 27D which states that: all GOCCs, agencies or
instrumentalities of the government are taxable, with the exemption of GSIS, SSS,
PHIC and PAGCOR. Even if they are not among the four specifically enumerated,
GOCC can still be exempt if it derived income from public utility and the exercise of
any essential governmental function.
There is no conflict between the two
provisions.

Also on the issue of whether or not the government may tax itself, correlate this
provision with Sec 133 (o), LGC [RA7160] which states that LGU cannot impose
taxes on the national government or any of its political subdivisions.

Prizes and Awards [Sec 32B7c]

Prizes and awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievements(are exclusion from the gross
income) but only if:
1. The recipient was selected without any action on his part to enter the
contest of proceeding; and
2. The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
Prizes and Awards in Sports Competition [Sec 32B7d]
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 (are exclusions from gross
income).
Note: Requirements for exemption:
1. Granted to athletes in local and international sports competitions and
tournaments;
2. Whether held in the Philippines or abroad; and
3. Sanctioned by their national sports associations.
Example: In the case of Grand Master Antonio, his award was sanctioned by the
National Sports Association (NSA) hence exempt from tax.
In the case of Onyok Velasco, the proper answer at that time would be it is not
exempt from tax (because it was not sanctioned by the NSA, it was sanctioned by
the Philippine Olympic Committee).
Q.
Is the amendment from Philippine Olympic Committee to National Sports
Association important?
A.

Yes, because it covers all associations under the umbrella of NSA.

13th Month Pay and Other Benefits [Sec 32B7c)

Gross benefits received by officials and employees of public and private entities (are
exclusion from gross income): Provided, That the total exclusions under this
subparagraph shall not exceed P30,000.00 (may be increased by the Sec of
Finance) which shall cover:
1. Benefits received by officials and employees of the national and local
government pursuant to Act No. 6686;
2. Benefits received by officials and employees pursuant to PD 851;
3. Benefits received by officials and employees not covered by PD 851, as
amended by Memorandum Order No. 29, dated August 13, 1986; and
4. Other benefits such as productivity incentives and Christmas bonus:
Provided, further, That the ceiling of P30,000.00 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.
GSIS, SSS, PhilHealth and Other Contributions [Sec 32Bf]
GSIS, SSS, Medicare and Pag-ibig and union dues of individuals (are exclusions
from gross income).
First, deduct this from the gross income. It is not included in the gross income for
the purpose of computing the net income tax. Contributions from GSIS, SSS, PAGIBIG, should not be included in the gross income.
If certificate of indebtedness has a maturity of more than 5 years it is excluded,
exempt; if lower than 5 years, subject to FIT (5%/ 12%/ 20%). [This is similar to
FIT on interest on bank deposit under Sec 24B1]
Gains from Redemption of Shares in Mutual Fund [Sec 32B7h]
Gains realized by the investor upon redemption of shares of stock in a mutual fund
company as defined in Sec 22BB of this Code (are exclusions from gross income).
Take note that interests on government securities are now taxable.

CHAPTER XII
TAX ON ESTATE AND TRUST

The status of estate shall depend upon the status of the decedent immediately
before his death whether he is a RC, or any of the seven kind of the taxpayers.
Same thing is true with trust; the status of the trust will depend upon the status of
the grantor, or trustor or creator of the trust.
We go to estate.
We are talking here if a person dies and he has properties. While the property is
being partitioned among the heirs, the property left is brief only; there is no income
tax to talk about.
Here, we are talking of person who dies with substantial
amount of property, e.g., a Manila boy who has manufacturing company of hotdog,
chorizo de bilbao, footlong and hotdog de ocho, or maybe, he died owning a bakery
producing money or maybe he owns a plantation of eggplant 12 inches long!
Before the property could be partitioned, it will take some time especially when
there are oppositors which are usually children outside the wedlock. Pending the

settlement of the estate, judicial, extrajudicial or no settlement at all, the estate

earns income managed by the administrator, executor or the heirs.
While the property is being partitioned, it earns an income.
Let us say, our
example, the eggplant plantation, the eggplant 12 inches long, were being sold in
Japan.
Q.
If the estate earns an income from the sale of the eggplant 12 inches
long, does it mean that the executor or administrator will pay the income
tax?
A. Here we have a very unique rule.
there are three possibilities:

With regard to the income of the estate,

1. The income tax imposed on individual. It is as if the income earner is an

individual.
2. The corporate income tax. It is as if the income earner is a corporation;
and
3. The income tax to be paid by the estate through the executor or
administrator.
Let us say the estate shall be settled through judicial proceedings. During the
pendency of the judicial settlement, the applicable income tax should be the one to
be paid by the estate represented by the executor or administrator or the heirs. As
a matter of fact, it is the only income where the applicable income tax is the one to
be imposed on estate.
We have three instances where the tax is not imposed on the estate itself:
1. During extrajudicial settlement;
2. When there is no settlement at all, and
3. When the judicial settlement is already final and executor, but the heirs did
not partition the property.
In these three instances, we have different rules. We do not apply here the income
tax on estate.
There are two possibilities here.
If there will be a creation of unregistered
partnership; meaning, the heirs contributed money, property or industry with the
intention to divide the profit, then there is a creation of unregistered partnership.
Here, we will apply corporation income tax because as a rule under Section 22B, a
partnership is also a corporation; hence, we have to apply the corporate income
tax.

The other instance is where there is no contribution of money, property or industry.

The heirs merely divide the profit. For instance, in the eggplant plantation, there
are only two compulsory heirs, and they divide the profits among themselves,
there is only a creation of co-ownership. Since co-ownership cannot be deemed a
corporation, the income tax shall be imposed on different co-owners in their
individual capacity.
Therefore, the income tax is to be imposed upon the
individual.
These are supported by SC rulings: for creation of unregistered partnership, we
have Evangelista vs. CIR, 102 Phil 114, Reyes vs.CIR, 24 SCRA 198,Ona vs.
Bautista, 45 SCRA 74, and AFISCO vs. CIR 301 SCRA 2; for creation of coownership, we have Obillos vs. CIR,139 SCRA 436, Pascual vs. CIR 160 SCRA 566.
We go to Section 61.
If the income tax to be imposed shall be the one to be paid by the estate, meaning,
this is during the pendency of the judicial settlement.
Section 61 says that it
should be paid in the same manner with that of individual.
Q.

Is it really the same with that of individual?

A. It is similar but it is not identical. There are distinctions: on the personal

exemption, an individual may claim personal exemption depending on whether he
is legally married, single or head of the family, while if the estate is the one liable,
Section 62 governs; that the personal exemption shall always be an exemption
similar to a single individual of twenty thousand pesos whether or not the decedent
is legally married, single or head of the family.
If the income tax of the income tax is the estate itself, there are special deductions
provided for inSection 61.
By virtue of Section 61, the following are special
deductions:
1. Distribution of profit to the heirs;
The option of the administrator or the executor here is to give partial distribution of
the income. If he does not distribute anything within the taxable year, he could
not claim special deduction of distribution. If he gave all the profits to the heirs,
he is not going to file income tax to be paid by the state because the gross income
of the estate will become zero. If he will give only partial, for example 30% of the
income, this will constitute special deduction from the gross income of the estate.
On the part of the heirs, they will be liable for the income received from the estate.
With more reason if all of the income were given to them, they have to pay income
tax in their own individual capacity as individual.

Supposed the administrator did not give any income to the heirs within the taxable
period, he could not claim special deductions for distribution but the heirs upon
receipt of their shares, they are no longer liable to pay income tax for that.
2. Payment made by the administrator to the creditor of the decedent; and
3. Expense to preserve the estate of the decedent.
These special deductions with the special personal exemption shall apply only to
the income tax of the estate if the income taxpayer is the estate itself.
If the
corporate income tax or the income tax on individual should be applied, these
special exemption and deductions does not apply.
We go to second one, the trust.
There are three parties in a contract of trust: the grantor or trustor or creator, the
trustee or the fiduciary, and cestui que trust or the beneficiary.
Q.

When can trust be held liable to pay income tax?

A.

A trust can be held liable to pay income tax when it is irrevocable trust.

When the trust is revocable or for the benefit of the grantor, the income tax to be
paid by the trust does not apply.
Q. If the trust is liable because it is irrevocable, who is the one obliged to
file the return and pay the tax?
A.
The one obliged to file the return and remit the tax is the trustee but not on
its own capacity but in behalf of the trust itself.
If the trust is irrevocable, the provision of Section 61 and 62 shall be applied on
personal exemption and special deductions. Those are also applicable. But if it is
the liability of the grantor, he shall file the tax return on his own behalf, in his own
individual capacity or personal liability; not in behalf of the trust. Then there will
be exemption with regard to Section 61 and 62.
Q. The lessor lease a parcel of land to the lessee for free in the condition
that any improvement introduced by the lessee to the parcel of land shall be
transferred to the lessor after the termination of the lease. Assuming there
is improvement introduced by the lessee and the lease is terminated, how
will the lessor report that income? Should he report that for only one year?
A. In RR 2 issued in 1949, it gives two options to the lessor. If the contract is for
25 years, the value of the property will be spread into 25 years. Supposed the

value of the land is 25 million, for every year, he will report 1 million. Second, he
can choose to report that for only one year but he has to pay income tax for that.

CHAPTER XIII
TAX ON FRINGE BENEFITS
Section 33 speaks of managerial employee although this benefit is also given to a
rank-and file. Please do not have the notion that a fringe benefits is only given to a
managerial employee. This is also awarded to a rank-and-file.
Q.

What is the definition of managerial worker?

A. RR 3-98 merely copied the provisions of the implementing rules of the Labor
Code. We have an identical concept of managerial employer on what is managerial
and rank-and-file.
If fringe benefits were given to managerial worker, the income tax is a FIT of 32%,
and, therefore, deductions and exemptions are not allowed; 25% to NRANE and
15% to aliens employed in MOPs. When it is awarded to managerial employee is it
FIT.
If it is awarded to rank-and-file, we do not say that it is exempt, Section 33C3 says
the following are exempt from tax but we have to continue reading, it says the
following are exempt from tax under this section only and one of them is no. 3, the
one give to rank-and-file.
Q.

Are rank-and-file exempt?

A. Yes. But only from FIT on fringe benefits. But under RR 3-98, a rank-and-file
receiving fringe benefit is subject to NIT. Therefore, there are deduction and there
are exemptions.
There is a great difference between the fringe benefits received by managers which
are subject to FIT while the fringe benefits received by rank-and-file which is
subject to NIT.
2003 Bar
Q.

Who is the one liable to pay the FIT on fringe benefits?

A. The one liable is the managerial employee not the employer, notwithstanding
the statement under Section 33A because it says that The tax herein imposed is
payable by the employer which tax shall be paid in the same manner as provided
for under Section 57A of this Code.
Reading Sections 57 and 58, the management of the employee is a mere final
withholding agent to file the return and remit the tax in behalf of the taxpayer, this
time the managerial employee. Hence, the employer is only acting as mere
withholding agent.
Section 33 does not says that it is the liability of the management but it says it is
payable. To pay and to be held liable are two different things. The liability falls
upon the managerial worker but the one obliged by law to file the return is the
management. The management is a mere withholding agent.
The rule now is that the management is one liable to file the final income tax
return and remit the tax in behalf of the managerial employee. But there are two
instances there where the managerial worker is exempt:
1. If it is for the convenience of the management;
2. If it is necessary to the trade and business of the management.
This is now provided for in RR 3-98.
1998 BQ
Q. A worker enjoys free housing. If that will be leased, the value would be
P10,000.00 per month. Is the rental exempt from income tax?
A. It depends. We have to distinguish if the worker is a managerial employee or a
rank-and-file.
For rank-and-file employee, RR 2-98 says that if he is enjoying free housing, he is
exempt from income tax provided it is for the convenience of the management.
One example of for the convenience of the management if the free housing is very
near to the premises of the management so that anytime he may be called to work.
For managerial, RR 3-98 says that the free housing is exempt provided it is for the
convenience of the management, and the free housing must be within 50 meters
perimeter from the place of the management.
There are two methods of multiplication in the revenue regulations; first, to
multiply 100% of the benefits, and, second, to multiply 50% of the benefits.

The management provides free housing but the management merely leased the
house. Let us if the value of the lease is P10,000.00, the managerial employee is
liable but only to 50% or of the housing.
Section 33B enumerated the fringe benefits. Most of them are self explanatory but
some are not.
Section 33B2 says about expense account.
Q.

What do we mean by expense account?

A. These are the expenses incurred by managerial worker to be reimbursed by the

management. That is expense account.
Section 33B5 says about interest on loan.
than the prevailing rate in the marker.

This is interest in loan which is lower

Q. If the managerial employee borrowed money from the management at the

rate 4%. What would be the fringe benefits?
A. Since the prevailing rate was fixed by RR 3-98 at 12%, the difference between
4% and 12% is a fringe benefit where the worker is liable for FIT.
Section 33B10 says about life or health insurance and other non-life insurance
premiums. In relation to this, we have to study Section 36A4.
Q. If the management insures the life of the worker;; can the management
claim the premium it has paid to the insurance company as a deduction?
A. It depends if the employee is a rank-and-file or a managerial employee. If he is
a rank-and-file worker, we have Section 36A4; if he is manager, we have Section
33B10.
The management can claim deduction for the premium it has paid for the life and
health of the managerial employee provided, it must be in excess what the law
apply.
Q.

What does it mean?

A. GSIS and SSS laws are amended that there is now an obligation among the
management to have a ___________ insurance over the life of the worker. IF the
insurance paid by the management is more that was allowed by GSIS and SSS
laws, then the difference is fringe benefits.
Q.

Can it be claimed as deduction by the management?

A.
Yes. Under Section 34A1ai last phrase, the fringe benefits awarded by the
management to the managerial worker may be claimed as a deduction as business
expense provided that the FIT has been paid already.
First, it must be an insurance which ism ore than the law allows.
on fringe benefits should have been paid already.

Second, the FIT

Q. What if it is a rank-and-file, my the employer claim the premium as a

deduction?
A. Section 36A4 is worded in a qualified manner. The management cannot claim
the premium if it is the beneficiary, directly or indirectly. Therefore, if it is not the
beneficiary, directly or indirectly, it could claim the premium as a deduction.
2005 BQ
Q.

What do we mean by de minimis benefits?

A. De minimis benefits are benefits of minimal value which is exempt from both
FIT and NIT.
Contributions fro the retirement plan and hospitalization by the employer is also
exempt from FIT on fringe benefits because as provided for under Section 33C, it
says that the following are exempt from income tax under this section.

CHAPTER XIV
ALLOWABLE DEDUCTION
Section 34 is the longest provision under the Philippine laws. These deduction
from Section 34A to 34 M could only be availed if the income taxpayer is paying by
way of the net. The rule is absolute: this will not apply to taxpayer paying by way
of the gross.
Q.

Why is it only applicable to taxpayer paying by way of the net?

A. Section 34 refers to taxable income subject to income tax under Section 24A,
25A1, 26, 27ABC and 28A1. These provisions refer to the payment of the net
because it all refers to the payment of taxable income.

These sections refers to RC, NRC, RA, OCW, NRAE, DC, RFC and partners in a
GPP.
Q. If the taxpayer is a pure compensation income earner, what can it claim
as a deduction?
A. If the taxpayer is a pure compensation income earner, the only deduction it
can claim is the one mentioned under Section 34M. Meaning, he can only _______
deduction of the premium. Other than this, it is cannot claim deduction under
Section 34. Provided, it is with regard to health and hospitalization insurance.
Provided further, that the premium incurred does not exceed P2,400.00 and the
family has a gross income of not more than P250,000.00.
However, do not be misled that it is the only that _________ claim as deduction, we
have another one but not under Section 34 but Section 35; the personal as
_____________ the additional exemption. That is the nature of a deduction to be
deducted from the gross income.
For pure compensation earner, he could claim a deduction of premium for insuring
his health and hospitalization. Take note, life insurance is not included in this
deduction.
Expenses
A lot of thing must be explained under this subsection because it has to be
correlated to other provision.
The following are elements under this deduction:
1. The deduction should be incurred within the taxable period;
2. It must be ordinary and necessary expenses; and
3. It must be for the maintenance, development of the trade and business of
the management.
Q. If the management awarded fourteenth month pay of 75 million, can it be
allowed as business expense deduction?
A. No. The amount of 75 million is too much. The law requires that it should be
reasonable and 75 million is not reasonable.
Q. If the taxpayer is an individual, what will be deadline of filing of return
for 2005?

A.

On or before April 15, 2006.

Q. The deduction must be within the same taxable year. If that individual
incurred expenses on February 2006, can he claim deduction for the said
expense?
A.
No, because that was incurred outside the taxable period.
incurred in any month of 2005.

It must be

However, that expense may be allowed as deduction fro the taxable year of 2006.
Q. What about corporation? Supposed the corporation using the fiscal year
which ends on March 31, the deadline here is July 15. Will be allowed to
claim the expense on February 2006 as deduction?
A.

Yes, because that is within the taxable period which ends on March 31, 2006.

For ordinary and necessary expenses, the taxpayer must prove that the expense is
incurred within the taxable period.
We go on Section 34A1ai, there are three items here: 1) reasonable allowance for
salaries and wages; 2) other forms of compensation; and 3) monetary gross up
value of the fringe benefits provided the FIT has been paid already.
_________________ the list, reasonable wages and salaries, did it ___________
much? No.
Q. ____________ a representative of San Miguel and now in the office of the
BIR. He is claiming deduction of ___________ of Danny Siegle amounting to
P600,000.00 a __________. Is the salary of Danny Siegle a reasonable one to
be claimed as deduction?
A. ____. The average salary of employee nowadays is P20,000.00 to P30,000.00.
P600,000.00 is way above the table.
___________ forms of compensation, the requirement is of course, by virtue of BIR
ruling, it must be also reasonable. The one mentioned under Tax Code says for
personal services actually rendered. Underscore the word actually.

Aguinaldo vs. CIR

112 SCRA 136

AIC was manufacturing fish nets. The management acquired a parcel of land. But
the sale of parcel of land was through a real estate broker. The management
earned income on the said transaction and give special bonus on its employees.
The special bonus is being claimed the management as business expense ___
deduction.
The SC ruled that the special bonus cannot be claimed as business expense
deduction. The worker did not render actual service because it was proven that the
sale was course through estate broker. The SC merely invokes Section 34A1ai.
The special bonus was disallowed as deduction.
Let us go to the monetary grossed up value of fringe benefits provided the FIT
has been paid already. What is the fringe benefit here? It is the one received by
the managerial employee. Otherwise, the law will not say the payment of FIT.
Let us go to travelling expenses away from home in the pursuit of trade or
business.
Q.
Supposed the management will provide travelling allowance to the
employee because he is living in a far away place maybe Farview or
Faranaque. Is this the travelling expense referred to Section 34A1aii?
A.

No.

The one mentioned here are those travel in the pursuit of business away from
home here and abroad, for example in Baguio or Davao or Singapore.
Q. Is the travelling expense in a foreign travel a deduction although it has
nothing to do with trade or business?
A. Yes. We have Section 33B7, the travelling expense for foreign travel. Under
RR 3-98, travelling expenses for foreign travel by the managerial worker is only a
fringe benefit if it is not in the pursuit of trade or business.
If that is the case, it is a fringe benefit it can be claimed as deduction not under
Section 34A1aii but under Section 34A1aii last phrase, the monetary gross up
value of fringe benefits provided the FIT has been paid already.
We go to reasonable rentals for the continued maintenance and development of
the management.
Examples are payment to PLDT, NAWASA, MERALCO and other utilities. These
are reasonable rentals for the continued maintenance, development and existence
of the management.

Lastly, entertainment expense provided it is not contrary to public morals.

It is limited by RR 10-2002. If the taxpayer is selling goods or commodity, the
entertainment expense should not exceed 0.01% of the gross receipt. If the
management is selling services, the entertainment expense should not exceed 1%
of gross receipt.
Here it requires that the entertainment should not be contrary to public morals,
public policy or public order.
Hence, if the management present receipts from
Pegasus, the BIR most probably deny, without thinking, the claim for deduction.
We go to kickbacks. Even assuming there are no statements here in the Tax Code
regarding kickbacks, it is still not possible because of the requirement that it
should be ordinary and necessary.
We go to Section 34B2; private educational institution. We will notice that from
all the taxpayer; it is only this one which mentioned under paragraph A of Section
34. But at this time we have to correlate this to another provision, the one
mentioned under Section 27 referring to private educational institution. But it
should have been referred to Section 36A2 and A3. These are the so-called capital
outlays.
Ordinarily, capital outlays cannot be claimed as deductions except private
educational institution.
Q.

What are capital outlays?

A.
Expenses for the construction of the new buildings or expenses for
improvement and restoration to enhance or improve equipment.
For example, during the typhoon, the equipment was destroyed.
So the
management will incur expense to improve or restore the facility. The expenses
incurred there are also known as capital outlays.
Ordinarily, this cannot be claimed as deduction by the taxpayer except private
educational institution paying the net income tax.
It could be claimed as a
deduction as business expense under Section 34A or itemized deduction of
depreciation.
Q.

What is the rationale to the option to be exercised by the school?

A. If the capital outlays are substantial, e.g. the gross income is 50 million pesos
and the capital outlay is 80 million, and it will be allowed as business expense, the

30 million can no longer be claimed as business expense on the following year

because there is no carry over because business expense can only be claimed in
one year.
It is good if, let us say, the capital outlay is only 10 million pesos and the gross
income is 50 million because all of the capital outlays will be utilized as deduction.
However, if the amount of the capital outlay is too substantial, like for instance 80
million, it is best to claim that up under depreciation under Section 34F. Why? It
is because in itemized deduction of depreciation, capital outlay may be claimed into
several years depending upon the estimated life span of the facility.
For instance, in our example of 80 million, if the life span of the building is 20
years, under depreciation and if we are going to employ the straight line method,
within the span of 20 years in every year, there could be a deduction for
depreciation of capital outlays of four millions within twenty years. Hence, all of
the capital outlays will be utilized as deduction.
In addition, for DC, even assuming that he will apply the capital outlays of 80
million as deduction, he is still liable for MCIT. Hence, the DC is liable for 2% of
the gross income.
If that is the case, it is better to claim the capital outlays as depreciation under
Section 34F.
Take note, however, that it does not apply except to private
educational institution.
Interest
Supposed the taxpayer is businessman and he borrowed money to support his
trade or business and he is going to pay interest on loan.
Q.

Who is the one allowed to claim deduction under Section 34B?

A.

The debtor.

What is the 38%, now 42%, as amended by RA 9337, under this topic? As
explained by RR 13-2000, when the taxpayer borrow money in January 2005 from
a bank or financing institution, let us say 1 million and assuming the interest is
one hundred thousand pesos, upon the grant of the loan in January 2005, the
taxpayer did not immediately spend the money to the trade or business. Instead,
he deposited the money to a bank. Why? He may earn interest from the bank so
that his liability to pay the interest from the creditor bank will be lessened.
Assuming after depositing the money to a bank, them money earned 50 thousand
pesos.

Q. Considering the taxpayer pay the interest of one hundred thousand, is he

authorized to claim the interest of the entire one hundred thousand?
A. No. First we multiply the 42% with the 50 thousand bank interest so the
result will be 21 thousand. This 21 thousand should be deducted to the one
hundred thousand so that the taxpayer will be allowed to claim an interest of loan
of only 79 thousand pesos.
What are thee other interests? Interest on rediscounting of papers, meaning, the
taxpayer will borrow money and the interest will be paid in advance.
For example, in January 2005, a taxpayer borrowed money by way of rediscounting
of papers. Upon the grant of the loan, instead of receiving one million, the interest
of one hundred thousand shall be automatically deducted so he will receive not one
million but nine hundred thousand. That is rediscounting.
Q.

Can he claim the interest as a deduction on April 2006?

A. Section 34B provides for a qualification. If the taxpayer is an individual and

using a cash basis method, he may or may not be allowed depending on whether
the principal obligation has been paid already. If the principal obligation has not
been paid, the interest on loan by virtue of rediscounting should not be allowed as
deduction although it was incurred with the taxable year.
However, if the principal obligation was already paid, the taxpayer may be allowed
to claim the interest as deduction. If he pays the obligation by way of instalment,
for example, only of the obligation, then only of the interest will be allowed as
a deduction.
Q.

What are the interests which are not allowed?

A.

Interest on related parties which is enumerated under Section 36B.

What is important in related parties is Section 36B1.

Q.

Who are the relatives under the Tax Code?

A. The related parties under the Tax Code include corporations and those related
by consanguinity.
For example Section 36B1, the related parties here are brother, sisters, whether full
blood or half blood, lineal descendants and ascendant.

Q.
What about if the taxpayer borrows money from his uncle and he pay
interest, is that covered under allowable deduction?
A. Yes, because an uncle is not a related party under Section 36B1 although he is
a relative.
Correlating this section to Section 99B under donation, a relative includes a
relative by consanguinity within the fourth civil degree.
Interest incurred by oil drillings and mining corporations is not deductible, and,
lastly, when the law says that the taxpayer has the option to claim that as a
deduction of capital expenditure.
For example, the taxpayer will buy a truck worth five hundred thousand pesos if
bought in cash. However, he bought it in instalment, and instead of paying five
hundred thousand pesos, he paid six hundred thousand pesos. The one hundred
thousand pesos constitute as interest for purchasing that by way of instalment.
The one hundred thousand he had paid for the purchase of the truck may be
claimed as a deduction here.
Provided it must be incurred within the taxable
period or the law says we capitalize it. What does it mean?
If the truck is now the subject matter of the itemized deduction of depreciation
under Section 34F, if one hundred thousand is going to be capitalized, we have to
depreciate the truck not by virtue of five hundred thousand but by six hundred
thousand pesos.
But if the interest is already claimed as interest in Section 34B as a deduction of
interest, then the one that should be depreciated should be the five hundred
thousand pesos.
So it depends on the choice of the taxpayer.
Q. If you are a taxpayer, are you going to capitalize or you are going to claim
the interest under Section 34B?
A. It is advisable to claim that under depreciation because it can be claimed for
several years.
Taxes
Section 34C is more controversial than A and B because the first two can only
minimize the payment of income tax by way of deduction.
Here, it may be
minimized into two ways: tax deduction under Section 34C1 and 2 and tax credit
under Section 24C3 to 7.

When we say tax deduction, these are the tax deduction incurred by the taxpayer
in the pursuit of trade of business and of course, it must be incurred within the
taxable period.
The classic example of this is the business tax. When we say deduction, it should
be deducted, as a rule to the gross income. When we say tax credit, it is to be
deducted in the last step of the formula.
Under income tax law we have numerous tax credits. The one discussed here is
only one of the numerous tax credits. What is it? This is the income tax paid to a
foreign country.
Q.

At present, is it only tax credit?

What are the other tax credit if any?

A. Of course not. The following are the tax credits: the input tax under VAT
Section 110B last phrase, the different creditable withholding tax, the tax credt
certificate under Section 204.
Going back to the income tax paid to the foreign country, this is only applicable if
the taxpayer is a RC or a DC. Suppose the taxpayer paid income tax but he is a
RC, here we hit three birds in one stone, we have similar provision from the income
tax paid to a foreign country under donors tax under Section 101C, under estate
tax, we Section 86E, because the contents here are similar in procedure.
Q.
For instance, the taxpayer paid income tax in US.
As converted to
Philippine currency, the income tax paid in US is one hundred thousand
pesos. Can he claim the entire one hundred thousand pesos?
A.

No. We have to follow certain formula.

Taxable income within the Philippines x rate of tax

Taxable income in the entire world
= deductible tax credit
The income in the entire world includes the income within the Philippines. For
individual, the rate of tax is 32%.
If the result of the above formula is seven thousand pesos, although the taxpayer
paid one hundred thousand pesos, he will only be allowed to claim only seven
thousand pesos.
This is the same procedure for donors tax paid in foreign country and estate tax
paid in foreign country.

Q. Which is better to claim that in the beginning of the formula or at the

bottom of the formula?
A.

Of course, it is better to deduct it to the tax due.

Under Section 34C1, if the taxpayer failed to avail the privilege of the tax credit
system, that is the time when he will be allowed to claim that as a deduction. This
is very unique because the deduction is allowed even if the taxpayer has no trade
or business. Normally, in deduction, the taxpayer must have trade or business.
Nonetheless, it is better to claim it as a tax credit because the payment of income
tax will be minimized up to the maximum.
Losses
It ____ principle that the losses should be related to the trade or business of the
taxpayer. To a certain extent, the deduction sometimes may not be connected to
the trade or business.
There are two kinds of losses: losses in real sense of the ______ meaning the
taxpayer is a businessman, he purchased a commodity for one hundred thousand
but he was able to dispose that for only fifty one thousand, there was a loss of forty
nine thousand. The other loss refer to the losses by virtue of natural calamity. Of
course, it is not directly related to trade or business. Examples of losses by virtue
of natural calamity are earthquake, typhoon and other.
Q.

What are the requirements so that it may be deducted as losses?

A. First, it must not be claimed as a deduction under estate tax under 86A1e.
Second, it must not be compensated by insurance or other forms of
indemnification.
As a matter of fact, this is the only deduction under the income tax which may be
claimed as deduction under the estate tax.
Nonetheless, the claim of this
deduction simultaneously is not allowed.
Q. Supposed the loss was allowed by the BIR, and, subsequently, the loss was
compensated by insurance company, what happen to be itemized deduction of
the loss? Will it be cancelled?
A. Of course not. It will remain to be a deduction.
was recovered is subject to income tax.

However, the amount that

Here we have the net-operation loss carry over rule (NOLCO) under Section
34D3. This was discussed under Section 39D on net capital carry over rule.
The ordinary loss may be claimed in the capital gain or ordinary gain, why is it
that there is a carry over? Meaning, in particular year, the taxpayer will not be
allowed to carry over. For example in 2000, the taxpayer will not be allowed to
claim the ordinary loss because the loss is more than the gross income, e.g. gross
income is ten million and the ordinary loss is twenty five million. Hence, there is a
difference of fifteen million. Under the carry over rule, it may be claimed in the
succeeding three years. Hence, if that is incurred in 2000, in 2001, the taxpayer
will be all0wod if there is a profit or gain. If there is none, the taxpayer may claim
it on 2002. Still, if there is none, he will be allowed in 2003. If there is no gain in
2003, he will not be allowed to claim that in 2004. That is beyond the three-year
period with the exception of oil drilling corporation and mining operations. It can
be claimed within five years.
Bad Debts
This was asked in 2003 and 2005 bar.
2003 BQ
Q. What is the tax-benefit rule?
A.

The tax-benefit rule is Section 34E first paragraph.

2005 BQ
Q.

What do you mean by up to the extent that the taxpayer had benefited?

For instance, the taxpayer is the creditor, so he has many account receivables. He
failed to recover those account receivables. The BIR might allow him to claim the
itemized deduction of bad debts.
Supposed the bad debts were allowed and later on he was paid by the debtor, so
the taxpayer was able to recover the amount. What happen now tot he deduction
of the bad debts, will it be cancelled? No more. It remained to be a deduction.
Otherwise, the computation of income tax will be affected. The amount so
recovered, the bad debts, is subject to income tax up to the extent that the
taxpayer had benefited.
Example, before the bad debts, the taxpayer paid ten thousand pesos tax due, but
because the bad debt is allowed, the taxpayer was able to claim the tax due of zero.
Hence, he did not pay any tax.
Subsequently, he was able to recover the bad

debts, so it remains to a deduction. But the amount so recovered is subject to

income tax up to the extent that the taxpayer has been benefited. Meaning, the tax
payer is only subject to income tax of ten thousand. The amount of ten thousand
pesos is the one included in the computation of the ITR subject to income tax
because that is the amount he has been benefited.
It must be claimed not in the year the deduction was incurred. In a contract of
loan, the taxpayer is the creditor, was entered into in 2003. The deduction must
be claimed on the year it was written off or charged off, so that when the loan was
entered into in 2003 but was only written off or charged off in 2006, meaning to
say, in the book of account. It was now cancelled; it is also in the year 2006 that
the deduction may be claimed. It should not be in year entered into but in the
year it was cancelled after a certain effort to recover the same but he failed to
recover.
So under this deduction, although he incurred the bad debts in 2003 but he
cannot claim that in the year it was written off or charged off, or finally determined
worthless or cancelled.
Depreciation and Depletion
When we say depreciation, this is a deduction which refers to ordinary wear and
tear of the facilities, machine equipment, real properties but does not include
parcel of land, which is used to the trade and business of the taxpayer.
For
example, delivery van, in factories, the machine; these are subject to depreciation.
Among the deduction, this is unique because the taxpayer can claim this, unlike in
any other deduction, in succeeding years.
For example, business expense, the
expense can only be claimed in the year it was incurred. Unlike in depreciation, it
can be claimed into several years depending upon the method and the estimated
life span of the property. That is why in capital outlays in private educational
institution, it can be claimed also in depreciation.
Let us compare it with depletion. If depreciation is about the machine or properties
to be used in the trade or business, depletion in Section 34G refers to natural
resources it self like mineral deposits, deposits of coal and deposits of silver.
Q.

Do we use depreciation in the mining business and oil drilling operation?

A. The equipment being used in the drilling and mining operation is subject to
depreciation.
Q. Can we use depletion in other business other than mining corporations
and oil drilling operations?

A.

No. This is only about the natural resources.

Depletion is one of the most unique provisions in Section 34 because this is the
only subsection which is not a self-executing provision where its implementation
will depend upon the revenue regulations to be issued by the Secretary of
Department of Finance after recommendation of CIR.
Corollarily, the Secretary issued the RR 12-76 in 1976 implementing the cost
depletion method of depletion.
Donation
1994 BQ
Q.
The taxpayer donated a property.
The donor claimed deduction from
income tax. Howe do you deduct the donation? Do we deduct it from the
gross income?
A. No. This is the only deduction under the Philippine laws where the law refers
to deduction and yet it will not be deducted from the gross but from the second
step of the formula; the net income or taxable income. So this deduction will be
deducted after the net income or the taxable income has been computed not in the
gross income.
This is the only deduction which should not be deducted from gross income.
Second, the deduction here is only partial that is the rule: the exception, it is total.
Q.

What do we mean by partial deduction?

A. The donor can only claim 10% of the taxable income in case of individual and
5% in case of corporation.
Q. An individual donated one million; hence, there is a deduction of 10%.
How do we deduct it?
A. The amount to be deducted is not based on the amount donated but on how
much of 10% of the net income. If it shows that the 10% is six hundred thousand,
so the deduction is six hundred thousand pesos, if fifty thousand, so let it be. The
basis is not the amount of the property donated but rather how much is the 10% of
the net income or the taxable income after applying the deduction.
If the 10% of the net income is one million, then one hundred thousand may be
claimed deduction.

For corporations, take note that it is only 5% of the net income.

1994 BQ
Q. A philanthropist, donated one million pesos to young lady sufering from
a unique disease. Can the donor claim deduction for the contribution or the
donation?
A. No, because in the enumerations, whether for partial or total deductions, there
is no done under Section 34H who is an individual; all of them are entities,
partnerships, corporations or associations. There is no done under Section 34H
which is an individual.
Therefore, the donor can only claim deduction under the income tax if the done is
one of those enumerated under Section 34H. If the done is not there or the donor
is not a corporation, the donor cannot claim this deduction.
The first paragraph of Section 34H, notwithstanding, the long enumeration after it
can be divided into two: first, the done is the government, and, second, DC. For
the government, the requirement is that the done is the Republic of the Philippines
or any of its political subdivision, agencies and instrumentalities of the government
exclusively for public purpose. The second group, the requirement is that no part
of its net income shall inure to the benefit of any private stockholder or individual.
These are the social welfare, education, charitable, religious youth, sports
development and rehabilitation of the veterans.
We have to take note if the requirement was complied with because even if the
entity is one among those enumerated, nonetheless, if the requirement was not
complied with, the donor cannot claim deduction.
Total deductions is under the last paragraph; donation to the government or
other entities in accordance with the priority plan of the National Economic
Development Authority. If the purpose of the donation is under the priority plan of
the NEDA, the deduction here is total.
We will notice that some of the donees under partial are also mentioned in total
deduction. Is there a conflict? None, because if the government is the done and
the purpose of the donation is under the priority plan of the NEDA, then the
deduction is total. If the purpose is only for public purpose, then the deduction is
only partial.
DC can also claim total deduction if they are accredited nongovernmental
organization mentioned under Section 34H2b and c.
Research and Development

Among the deductions, this is the one which does not appear under the old law.
This was introduced only in 1998. Formerly, taxpayers claimed this as business
expense. But normally, the BIR deny this claim because of the requirement that it
is ordinary and necessary. Hence, when it was amended, the authors of the
amendment deemed it necessary to provide a separate paragraph. Nevertheless,
there are expenses for the research and development which are not deductible even
if it is for trade or business of the taxpayer under the last portion of Section 341;
expenses to locate a parcel of land.
The expenses are not deductible.
Also,
expenses to locate mineral deposits are also not deductible.
Pension or Retirement Pay
Q.

Who is the one allowed to claim this deduction?

A.
The management or the employer for contributing in the private retirement
plan. The management only has to prove that it was incurred in a taxable period.
Optional Standard Deduction
Q.

Is this in addition to the other deduction?

A.
No. This is in lieu of other deduction and the taxpayer here must be an
individual except NRA.
This is first time that the law does not say if it is a NRAE or NRANE. However, this
refers to NRANE because they are not allowed to pay by way of the net.
Q. What is this deduction?
A.

It is 40% of the gross income (para to sa mga tamad!).

Do not confuse this under standard deduction under Section 86A5.

This one
under Section 34, it is optional standard deduction; the one under Section 86
says standard deduction.

CHAPTER

XV

PERSONAL AND ADDITIONAL EXEMPTION

This personal as well as additional exemption can only be claimed if the taxpayer is
paying by way of the net income tax.
Under Section 35A, in determining the income tax, it is being referred to Section
24A. Who are the taxpayers under Section 24A? There are only four: RC, NRC,
OCW and RA. Take note that the NRAE is also allowed to pay by way of the net.

Q. Does it mean that the NRAE is not mentioned in Section 24A he is not
allowed to claim personal exemption?
A. Not really. They can claim personal exemption not because of Section 35A but
because of Section 35D.
Q.

Why is it that he has to be separated from the rest?

A. Because they are not allowed to claim additional exemption.

allowed to claim personal exemption.
Q.

What are the personal exemptions?

A.

Section 35A provided for three personal exemptions.

They are only

First, single including legally married but judicially decreed as legally separated
with no qualified dependent. For those legally separated, under the civil code,
they are still legally married. But under the tax code, those legally separated with
no qualified dependent is considered single. If hey have qualified dependent,
Section 35B, second in the enumeration, they are classified as head of the family.
Hence, they are not considered as legally married under the tax code. They can
only be either head of the family or single.
Q.

Who are the qualified dependents?

A. Section 35B last paragraph says it is the legitimate, illegitimate and adopted
children of the taxpayer.
Second group is the head of the family.
There are so many kinds of head of the family. They are provided for in the last
paragraph of Section35A and RR 2-98 and also in Section 35B, second in the
enumeration.
First, we have the head of the family because we have a dependent father, mother
or both. Second, the taxpayer is the head of the family because he has dependent
brother or sister; third, because of the dependent children, not exceeding four;
fourth, under RR 2-98, because of the dependent senior citizen, whether a relative
or not; and fifth, because the taxpayer is legally married but judicially decreed
with qualified dependent referring to the children.
The third group is the legally married with the deduction of P________________ for
each married individual, meaning the wife and the husband. Underscore the word
each.

We go to Section 35B.
Q.

Who among the taxpayers are allowed to claim additional exemption?

A. First, when we say additional exemption, we are only talking of the children.
The qualification is that the children is below 21, unmarried, not gainfully
employed or regardless of age, is incapable of self-support because of mental or
physical defect.
First, only those who are legally married are allowed to claim additional exemption
but only as far as the husband is concern according to revenue regulations. If the
other wants to claim deduction, he should execute a waiver or an affidavit
renouncing in favour of the wife.
Second, the legally married but judicially decreed as legally separated with
qualified dependent. Other than this two, all taxpayers are not allowed.
2006 BQ
Q.

Supposed the taxpayer is a widower, can he claim for a deduction?

A.

Yes. He is also legally married although his spouse is dead.

Therefore, if the taxpayer is not legally married, he cannot claim for additional
exemption.

CHAPTER XVI
ITEMS NOT DEDUCTIBLE
First, erase the last portion of Section 36B3 because we do not have personal
holding companies nowadays. The personal holding companies were abolished in
1987. EO No. 37 issued by Pres. Aquino has rendered the income tax quite easy
because the income tax on personal holding companies was abolished. However,
the law was not properly amended because Section 36B3 last portion still speaks of
personal holding companies.
Consequently, cross out the last portion which
provides for the personal holding company.
We go to Section 36B1.
Take note that here, on related parties, it does not include relatives by
consanguinity within the fourth civil degree. Therefore, uncles and aunties are
not included.
Those included under this subsection are brothers and sisters,
whether full blood or half blood, spouses, ascendants and lineal descendants.
In other words, when the taxpayer sold properties to his brother and he incurred
the loss, that loss is not deductible.
Supposed instead of loss he derived profit or gain; that is subject to income tax.
Hence, there is unwritten law written under this subsection: if there is a profit, it
is subject to income tax; if there is a loss it is not subject to deduction.
We have to correlate this to Section 99B on donors tax. There, relatives shall
include by consanguinity within the fourth degree of relationship.
Q. The taxpayer sold personal property to his nephew. On that transaction
he incurred a loss. Will he be allowed to claim the loss as deduction?
A. Yes. A nephew is not a relative in view of the above section. It is only limited
to brother, sister, spouse, ascendants and descendants.
We go to Section36B2.
Section 36B2 refers to exchange or sale between individual and corporation where
the individual owns at least majority of the outstanding shares. Take note of the
exemption, it says except in cases of liquidation, meaning if a case of liquidation,
the loss is deductible.

Next is Section 36B3.

This is a sale between two corporations and as a result, majority of the shares is
now owned by the individual.
We go to Section 36B4 and B6 (never mind B5).
In a contract of trust, there are three parties: the trustor or grantor or creator, the
trustee or fiduciary, and beneficiary. Meaning there is a sale or exchange between
these parties. Among the combinations, there are only two where the loss is not
deductible.
Section 36B4 speaks of exchange between a grantor and a fiduciary. B6 speaks of
another thing, it says there sale or exchange of a fiduciary of a trust and a
fiduciary of anther trust if same person is the grantor to each trust.
Was Sale
This was asked in 1985 bar.
Q. Why is it that losses in transaction and sale deemed wash sale are not
deductible?
A. There are two reasons why losses from wash are not deductible: first, to avoid
too much speculation in the market, otherwise, there will always be purchase and
sale of stock; second, the taxpayer normally is not telling that truth that he
incurred the loss.
Q.

What is a wash sale?

A.

It is the purchase of stock within 30 days and sale within the same period.

Let us illustrate, on January 20, 2006 a taxpayer purchased share of stock. On

February 5, 2006, he sold it again. That is a wash sale because the distance of the
sale and purchase is only 16 days because to be classified as such, it must be
within the period of 30 days.
Q. What is the subject matter of the sale?
of stock?

Should it be same sale of share

A. No. It maybe the same shares or it may be identical or substantially similar

shares of stock. It does not mean that it should be the same shares of stock.
When he incurred a loss; that is a wash sale. Hence, there are two requirements:

it must be done within the period, selling the same or substantially similar share of
stocks.
Why is that he is not allowed to claim the deduction if he incurred a loss? Who
knows if he is telling the truth or not? Nonetheless, gain in wash sale is subject to
income tax.
There is one exception. Losses in wash sale, even assuming it is a wash sale, it is
deductible, the loss, and this about dealers or brokers of shares of stocks. They
are allowed because normally they are telling the truth; they have complete record,
i.e. book of accounts and deed of sale.
Therefore, normally, he is telling the
truth.

CHAPTER XVII
DETERMINATION OF GAIN AND LOSS
Section 40 was already asked in 1986, 1987 and 1994 bar.
1987 BQ
Q. Juan de la Cruz, a RC, sold the jewelry for three hundred thousand. Is
there a gain or is there a loss? Will your answer be the same if the subject
matter of the sale is a parcel of land?
A. There is a gain if the amount realized is in excess over the basis or adjusted
basis. There is a loss if the amount realized is not in excess over the basis of the
adjusted basis.
This could be best illustrated by a contract of sale. In a contract of sale, the mount
realized is the selling price.
If the selling price is more than the basis, those
enumerated in Section 40B, there is a gain. We have to determine on how the
seller or transferor acquired the property.
In Section 40B, if the property is acquired by virtue of purchase, the basis shall be
the cost. It is the purchase price when the seller purchased the property, maybe
many years ago plus expense if any. So selling price plus expenses shall be the
cost.

Supposed in our example, if the seller purchased the jewelry for one hundred fifty
thousand plus expenses of two thousand many years ago, the one hundred fifty
two thousand shall be the cost. Since the amount realized is three hundred
thousand pesos, which is more than the cost, there is an income of one hundred
forty eight thousand pesos. That is how to determine gain.
Section 40 applies only if the applicable income tax is the net income tax. We do
not use this method if the applicable tax is the GIT or the FIT except in the sale of
shares.
Therefore, to NRANE and NRFC, Section 40 is totally irrelevant to them.
applicable if the taxpayer is liable by way of income tax.
Q.

This only

Is the entire one hundred forty eight thousand subject to income tax?

A. It depends. Assuming it is an ordinary asset, therefore, the gain is ordinary

gain. 100% of the gain is subject to income tax. If it is a capital gain, assuming
the property is a capital asset, it all depends on whether the long-term or the
short-term holding period will be applicable. If for long-term, 100% of the profit is
subject to income tax; if short-term, 50% shall be subject to income tax, the
remaining half will be exempt.
Q. What about in the sale of realty?

Do we apply cost in the sale of realty?

A. If the property is subject to FIT, we do not apply cost as a basis of determining

as to whether there is a gain or profit. If the sale of realty is subject to NIT, cost is
applicable.
Q. What if the property was obtained through crimes such as estafa, robbery
etc., is there a gain?
For example, the amount obtained is two hundred
thousand.
A.
There is a principle that an income from illegal resource is still subject to
income tax. Under an old CTA ruling, the entire amount of two hundred thousand
pesos is deemed a profit.
Unlike if it is acquired by purchase, we have to
determine how much the profit is.
We go to Section 40B2.
For property acquired by virtue of inheritance, the basis shall be the fair market
value at the time of acquisition.
So if the taxpayer had sold a property by which he acquired that property by way of
inheritance, and he sold that for two hundred thousand, the basis of the cost is the

fair market value of the property at the time he had acquired the same. Let us say,
if the fair market value of the property is only one hundred twenty thousand, and
he sold that for two thousand, then he obtained gain of eighty thousand.
In Section 40B1, the rules we have stated on whether the whole amount is subject
to income tax depending if it is an ordinary or capital gain and whether it is on the
long-term or short-term, if it is areal property whether it is subject to FIT or NIT, is
also applicable here.
We go to Section 40B3. This is about the property acquired by virtue of donation.
To illustrate, a lady received a donation, perhaps jewelry in February 14, 2006,
from her papa. Suppose she sold the jewelry, how much is the profit there? The
basis is under Section 40B3, the basis shall be the same as if it would be in the
hands of the donor who did not acquire that by virtue of donation.
Ordinarily, we have to ask the donor on how he acquired the jewelry. Supposed he
acquired that by virtue of purchase; the cost shall be the basis. If he acquired
that by virtue of inheritance, the basis shall be the fair market value at the time of
the acquisition of inheritance.
If he acquired that by virtue of donation, there comes now the trouble because the
codal says who did not acquire by virtue of donation. Supposed her papa
acquired the jewelry from his SM, sugar mommy, by way of donation, we have to
determine how the sugar mommy did acquire the jewelry. If the purchase ____ the
basis shall be the cost; if by inheritance, the fair market value.
IF the sugar
mommy acquired the jewelry from her DOM, delicious old man, wala ng
katapusang procedure ito! So this codal provision has to be amended.
We go to Section 40B4.
Property which was acquired by virtue of adequate consideration, it will be the
amount given by the transferee. The property will be disposed for one hundred
thousand. What is the amount given by the transferee? Sixty five thousand, for
example. What will be the basis? It will be the sixty five thousand pesos. Using
that as a basis, the profit there is thirty five thousand. Whatever we had said
under Section 40B1, depending if the asset is capital or ordinary and whether the
property is real property, is applicable.
The next is Section 40B5.
The trouble of Section 40B5, we must first understand Section 40C1-6.
C 1. The rule is gains are recognized; losses are recognized. When we say gains
are recognized, gains are subject to income tax.
When losses are recognized,
losses are deductible.

C 2. It says here the exception; gains are not recognized. Meaning, gains are
not subject to income tax or exempt from income tax. Losses are not recognized,
losses are not deductible.
Q.

What are the elements of this?

A.

The elements are the following:

1. The contract is limited to contract of exchange;
2. The parties are members of merger or consolidation; and
3. The subject matter of exchange is only limited or confined to the one
provided for in the law. This is the one enumerated in Section 40C2abc.
There is number four but there is no letter d, the last paragraph of Section
40C2.

We have to determine who among them are the transferors and who among them
are the transferees. Why? In the event that the subject matter of the exchange is
not solely in kind, meaning, the subject matter of the exchange is different than
that provided for the law, we have to determine if he is the transferor. If he is the
transferor, the governing rule is Section 40C3b.
If it is the transferee, the
governing statute is Section 40C3a.
Under Section 40C2abc, gains and losses are not recognized.
But who among
them now are the transferor? If we are facing the book, all entities on the right
side, those are the transferors and all of them are corporations under Section
40C2abc and the last paragraph. Who are the transferees? All those on the left
side are the transferees.
Under Section 40C2a, both of the parties are corporations.
Which is the
transferor, the one on the right side, it will transfer the shares of stock.
The
transferee is on the left side which will transfer property.
For example, if the transfer of shares of stock worth one million will be given to the
transferee, the latter will transfer a property worth one million and five hundred
thousand. So between the two, apparently, the income earner is the transferor
because it received 1.5M while it only gives 1Mj only. Here, the law says the gain
is not recognized assuming the elements above are present. Meaning, it is exempt
from income tax, provided, it is a contract of exchange, the parties are members or
merger or consolidation, and the subject matter is limited to shares and property.
Who has the loss here? The transferee. Can it be claimed as deduction? No,
because the elements are present. That is the meaning of non-recognition of the
gain or loss.

Let us say, the subject matter is not the one mentioned in the law. Now we have
Section 40C3 entitle exchange not solely in kind. Underscore the word not.
Going back to Section 40C2a, we have to take note of the elements above.
Assuming if the third element was not complied with, for instance, the transferee
instead of receiving shares of stock only, in addition it received other kind of
property or cash money. Assuming the transferee earned income, is it still covered
by Section 40C2? No. It is covered by Section 40C3. It is a transferee, so it is
covered by Section 40C3a, the gain is now recognized, meaning, the gain is now
subject to the NIT.
Supposed the transferor corporation will only receive property but in addition it
will receive cash money and share of stocks and assuming it earns income, Section
40C3b applies.
It all depends if it is pursuant to the plan of merger or
consolidation. The gain is still not recognized.
All those pattern applies to Section 40C2bc and the last paragraph.
In Section 40C2b, the transferee is a shareholder and the transferor is a
corporation. In both cases, the subject matter of the exchange is shares of stocks;
if the elements are present, whatever gains are not recognized, whatever loss, the
loss is not recognized.
In Section 40C2c, the transferee is security holder and the transferor is a
corporation.
The transferor will gain share of stock or security, the security
holder will transfer security. We have the same pattern with Section 40C2a.
We go to the most important, the last paragraph of Section 40C2.
Why is there is no letter d? Because the parties here are not members of merger
or consolidation. Who is the transferor her? Still a corporation. The transferee
is the individual. What will the transferor corporation transfer? Shares of stock.
What will the individual give? Property. After the exchange, what happen to the
relationship between the corporation and the individual? This is a simple case of
individual becoming a stockholder of a corporation.
Instead of purchasing stocks by money to become stockholder, the individual wants
to pay in kind, may be kamote, banana, talong or a parcel of land.
For instance, the parcel of land is only worth one million, but the shares given to
him is worth one million seven hundred thousand. What happen now who earned
an income?
Is the income of seven hundred thousand subject to income tax?
The law provides for a qualification in Section 40C2 last paragraph.

If he alone or together with another person, not exceeding four, gained control of
the corporation, and under Section C6, control means at least majority of standing
shares of stock entitled to vote is now owned by that person, meaning he alone
himself, or together with other person not exceeding four persons, then the gain is
not recognized.
If these are complied with, we have to ask for certification
exemption from BIR and state the income.
Let us say, the other way around. The individual will give a parcel of land worth
one million seven hundred and exchange it to shares of stock worth one million.
The exemption under Section 40C2 is only temporary.
Why temporary?
Supposed the individual is a shareholder of a corporation where he paid in kind,
maybe parcel of land, he has sold the shares, he is now liable to pay income tax.
The recognition or non-recognition is no longer applicable.
The same is true with the corporation, if it will sell the parcel of land; it is now
subject to income tax.
Section 40B5 says that it is Section 40C5 which is the
governing statute. It is the other way around. Now the exemption from income
tax is no longer applicable.
We go to Section 40C4. If the party assumes the liability of any of the parties in
Section 40C2, it shall not be prevented from being within the exemption. Meaning,
although the parties assumes the liability of any of the parties there, nevertheless,
if the elements are present, the non-recognition of the gain or loss is still applicable
although he is not a member or a party in a merger.
We go to Section 41, the change of inventory to reflect the true income. The law
says the taxpayer is prohibited to change the method of inventory more often than
once in every three years.

CHAPTER XVIII
ACCOUNTING PERIODS AND METHODS
OF ACCOUNTING
We go to Section 43, the use of calendar method.
Q. What are the instances where the taxpayer is allowed to use calendar year
as compared to fiscal year?
A. Only corporation are allowed to use fiscal year. We do not talk of fiscal year if
the taxpayer is an individual because he has no choice but to use the calendar
year.
Section 44 and 45 talks of what should be included in the gross income and what
should be deducted from the gross income. Even if these two provisions were not
stated, of course, income shall be included in the year it has been incurred; the
same with deduction, as a rule, it will be claimed in the year it has been incurred.
Q.

Why it is still stated under those sections?

A.

because of the importance of the death of a person.

Normally, the period of inclusion of income and deduction is twelve months. But if
a person dies, the taxable period may be lesser than that.
For example, an individual died on July 2006, the taxable period for that individual
will be lesser than 12 months.
Q. What about the period of August to December 2006, what is the taxable
period?
A. That is the taxable period of the estate, the property of the decedent which is
also an income taxpayer.

Section 46 refers to change of taxable period.

When we say of changing the
taxable period, we are talking about corporations because individuals are not
allowed.
There are three changes here: fiscal year to calendar year; calendar year to fiscal
year; and fiscal year to fiscal year. In these three cases, the law says that the
taxpayer has to file a separate return indicating the date of changes.
We go to Section 48. This does not appear under the old law. This refers to
method of reporting income known as percentage of completion.
Who are
authorized? It is only applicable to architects and engineers when the completion
exceeds one year.
Section 49 is the method of reporting income by virtue of the so-called instalment
basis or instalment method. The taxpayer here is disposing the property by way
of instalment.
Q.
If he is selling property, is it relevant to know whether he is selling
personal property or real property?
A.

Yes. The rules vary if he is selling personal property or real property.

With regard to personal property or movable property, it is important to know

whether the taxpayer is selling that regularly or as Section 49A says dealer
because there are requirements to be complied with if the sale by instalment of the
personal property is a casual or isolated basis.
There are two requirements for a sale of personal property in isolated basis:
1. The selling price must exceed one thousand pesos;
2. The initial down payment should not exceed 25% of the selling price.
If the sale is by virtue of a regular sale, like what is being done by businessman,
these two requirements are not present; the taxpayer is now allowed to use the
method of reporting of income known as instalment basis.
With regard to real property, it is not important to know if the sale of real property
is regular or casual because there is only one rule whether the sale is regular or
casual. The rule is that both are applicable for regular and casual sale of real
property and the rules is that the initial down payment should not exceed 25% of
the selling price.
Q. Supposed the initial down payment exceeds 25%, how do we call now that
sale by instalment?

A. It is now known as deferred sale, and the consequence of that, although the
taxpayer is selling the real property by instalment, he will be held liable to pay the
income tax as if he already received the entire purchase price if it exceeds 25%.
Q. What about the computation of the limitation of the 25%? Is it only
limited to cash money? Supposed it includes checks, bill of exchange and
promissory notes?
A.
259.

The answer is now under SC ruling in Banas vs. CIR, 325 SCRA

Banas vs. CIR

325 SCRA 259
There was a sale of parcel of land by way of instalment. But the agreement was the
initial down payment shall be in cash money, the subsequent instalment shall be
simultaneously the cash money and other instalment shall be by virtue of post
dated promissory notes. But in computing the cash money, it did not exceed 25%.
RR 2 enacted in 1949 says that in computing the limitation of the 25%, the one to
be included in the computation should only be the cash money.
We do not
consider the value of the post-dated promissory notes check and bill of exchange.
In this case, on the day of the delivery, the buyer exchanged other post-dated
promissory to cash. After the exchange, the initial down payment including the
second which are already in cash money exceeds 25%.
Issue: Should the taxpayer be allowed to use the instalment because originally,
the limitation of the 25% was complied with? It was not only complied with when
the second instalment was converted to cash money.
The SC ruled that the taxpayer should not be allowed to use the instalment
because the initial down payment consists of more than 25% of the selling price.
Although the ruling is like that, the rule under RR 2 that we do not have to count
the checks and promissory notes is still the rule.
We go to Section 50, the tremendous power of the CIR.
Q.

What do we mean by corporation with the same interest?

A.
These are several corporations with practically the same stockholders, e.g.
Ayala Group of Companies.

Section 50 says the CIR is allowed to allocate the income and the deductions with
different corporations having the same interest. Take note that there is no
limitation provided for even under the revenue regulations. Hence, this is a great
source of corruption.

CHAPTER XIX
RETURNS AND PAYMENTS
Section 51A1, we are talking here of the NIT return. From the enumeration under
Section 51A1, these are the one obliged to pay by way of the net. But there is one
omitted here, the OCW and seaman.
Q.

What is the general rule, do we file an income tax return if he is exempt?

A.

No.

Q.

What is the exemption?

A. Section 51A2, for citizen and aliens who are exercising trade or business or
profession, they have to file a return regardless of the amount of the gross income.
Another one is the GPP under Section 55.
For the rest, they do not have to file the return if they are exempt.
Generally, if the taxpayers gross income does not exceed the personal as well as
additional exemption, the maximum is P60,000.00, he does not file a return.
If the taxpayer is a businessman, even if the income is minimal. He has to file a
return because the law says regardless of amount of the gross income.
The following are not obliged to file the return also:
1. Those whose income is subject to FIT; and
2. Those whose income is exempt from income tax.
Now, the limitation of P60,000.00 is removed.
For pure compensation earner,
regardless of the income, it is the management who is obliged to file the return
under RR 3-2002.
Place and Filing of Return
Of course, the filing should be made to the BIR, to the RDO of the BIR; if none, to
its authorized banks; if none, to the municipal or city treasurer but they are using
here the pay as you file system.
When to File
The filing of the annual ITR is on or before April 15 but that is only with regard to
those using calendar year because Section 77B says that for those using fiscal
year, the deadline for filing of the annual ITR shall be on the fifteen day of the
fourth month following he close of the fiscal year.
The filing of the FIT return for the sale of share and sale of realty subject to FIT
shall be filed within 30 days from the date of the transaction. This is rather an
exemption because the final income tax as well as the creditable will be filed
monthly under Section 58A third paragraph which was amended by RR 12-2001.
The filing of the FIT return and creditable withholding tax return shall be by month
and under RR 12-2001 amending that paragraph, for small-time taxpayer, within
25 days, for large scale taxpayer, within 10 days. That is rather the general rule in
Section 58A third paragraph; the exception is under Section 51C2 that the final
income tax return should be filed within 30 days from the date of the transaction.

For sale of the FIT, return for sale of shares of stock, there must be the filing of the
annual consolidated return.
For those using calendar year, that will be on or
before April 15.
Q. Why is it that in the sale of share subject to FIT there is a requirement of
the filing of the annual consolidated return?
A. In the sale of share subject to FIT, this is the only FIT where there must be
determination of whether there is an actual gain or loss because under Section
24C, the basis of the FIT will be on the capital gains. If it is based on net capital
gains, it presupposes that it undergoes the process of determining whether there is
an actual profit or loss.
For example, in January 2005, there was sale of share subject to FIT.
The
taxpayers pay the FIT. After several months but within 2005, he had sold again
shares of stock subject to FIT. In September 2005, he sold again shares of stock;
he filed the return and paid the income tax. But when those three transactions
will be summed up, the taxpayer will incur loss instead of gain.
Q.

Is he allowed to file an annual consolidation before the end of 2005?

A. He should wait on or before April 15, 2006, before it, on March, February or
January.
That is why there is a need to file an annual FIT return to determine in the
ultimate analysis on whether there was a gain or loss.
We go to Section 51D in relation to Section 24A last paragraph. Not pure means
it is a mixture of salary and business income or in the alternative, it is purely
business income.
Q.
How do the legally married individuals file their return, if that is the
case?
A.

It must be joint.

Q.

If the income is pure compensation?

A.

Section 24A last paragraph says it must be separate.

Section 51E here concerns here a minor.

Section 35 that is below 21.

Minority here is belong 18 unlike in

Q. What happen to income of the minor?

tax of the parent?

Do we include that in the income

A.
The law says it depends if the minor received an income pursuant to the
property given by the parents or not.
If the income is gained pursuant to the property given by the parents, this income
shall be included in the ITR of the parents except that when the donors tax has
been paid or it is exempt from donors tax.
For instance, the father is an operator of tax and he gave ten units to his son. The
income from those units shall be included to the ITR of the father except when the
donors tax has been paid or the property is exempt from donors tax.
Supposed the minor earned an income by virtue of his own industry, like a child
actor, the law says the return of the minor shall be filed by the guardian or
normally, it is also the parents.
We go to Section 52, the return to be filed by corporations.
2002 BQ
Q.

What about corporations, is it obliged to file how many returns?

A.

Five; four for each quarter plus one for the annual.

Q.

Should the extension be allowed in filing the return?

A. Yes. But there is no period provided for by law.

meritorious grounds.

Section 53 merely says on

Section 55 refers to return for GPP. Normally, GPP are exempt, why is it obliged to
file a return? The rationale there is to determine the share of the partner subject
to NIT.
Section 56A1, the Bureau of Custom is authorized to prohibit the departure of a
ship or vessel if the captain of the ship or the owner who failed to pay the tax
under the Revenue Code.
Section 56A2, installment payment of income tax is allowed if the amount of the
income tax is more than two thousand pesos and the second instalment should not
be later than July 15.

Section 56A3, this is being referred to when the taxpayer is claiming exemption
because he is going to use the proceeds of the sale of real property for residential;
the one mentioned under Section 24D2. Here the taxpayer is not yet ready to
comply with the requirements. To avoid payment of interest and penalty, he has to
pay now the FIT of 6%. If his documents are now complete, and, therefore, his
income is exempt, but he paid it already, the law says, he is given 6 months to
claim for a refund. If the taxpayer is using installment of method of reporting
income, within 30 days from the receipt of the installment, the taxpayer has to pay
the tax.
In Section 56b, here we hit three birds in one stone. This is also similar under the
estate tax under Section 93 and donors tax under Section 104 last portion. Here,
the rules are practically the same.
It would seem that there were only two paragraphs but there are three instances
there:
1. The taxpayer filed a return, he paid the tax but the tax is not enough. The
taxpayer might receive notice of deficiency assessment;
2. The taxpayer filed the return but he did not pay the tax; and
3. The taxpayer filed the return, and, therefore, he did not pay the tax.
Section 57A refers to the enumeration of codal provisions subject to FIT. There are
two provisions here which are not subject to FIT but to GIT like Section 25B, but it
is justified because the last portion of this Section is about the FIT in the sales of
shares and realty. Nonetheless, most of the provision under Section 25B is about
the GIT. The other one is Section 28B1; this refers to the gross income tax to be
paid by NRFC.
Why is it included here? Because the withholding tax system
under gross income tax is almost similar to the withholding system under the FIT.
The minimum of the withholding is 1%; the maximum is 35% as amended by RA
9337.
Q.

What is the maximum under the NIT?

A.

15%. Most of them are 10%.

For FIT and GIT, there is the rate of 35% but for creditable withholding under the
net, the highest withholding is 15%. It is written in the law that the maximum
withholding is 35% because the maximum GIT is 35%. This is not true in the NIT
because of the deductions. Remember that in FIT and GIT, the amount of
withholding is totally equal with the rate of the income tax. That is
not the case in NIT.
Take note that Section 57B was already amended to 35%.

Again, do not have the concept that the maximum withholding in NIT is 35%; as
stated, the maximum is 15% because of the deductions.
Section 57C refers to tax-free covenant bonds.
In a contract between an obligor and obligee, or maybe creditor or debtor, it is the
creditor or the obligor who is liable to pay the income tax. The tax liability maybe
agreed upon that it is now the debtor or the obligor who will shoulder the tax.
That is why it is called covenant, meaning, by virtue of agreement the debtor might
shoulder the income tax and if the tax has been paid by the creditor, he might
reimburse it.
It is tax free because it is the creditor who is normally liable to pay the income tax
is now tax-free by virtue of the agreement.
Section 58 refers to the filing of the FIT and the creditable withholding tax return,
and, also, the register of deeds might allow the taxpayer to transfer the property
but upon payment of income tax.

CHAPTER XX
ESTATE TAX AND DONORS TAX
Q.

What are the transfer taxes nowadays?

A.

The transfer taxes nowadays are the following:

1. Estate tax under Section 84 to 97;
2. Donors tax under Section 98 to 104;
3. The transfer tax for transfer of realty under Section 135 of LGU to be
imposed by provinces and cities.

The estate tax is the oldest tax although many Filipinos are not paying this one.
Before the CTRP, the rate for estate tax is 60% and if the net estate, meaning after
deductions, is more than 1.3 million, there is another progressive rate. Therefore,
practically, we have to give everything of what will be inherited.
However, in 1994, the Congress enacted RA 5499 saying that the rate of 60% will
be lowered to 35%. On January 1, 1998, by virtue of RA 8424, the rate of 35%
was lowered to 20%.

Q.
What is the proper scheme to distribute the money to the heirs of a
taxpayer?
1. To create a family corporation.
2. Allow the taxpayer to die and pay the estate tax of the rate of 20%.
3. Except a deed of donation in favour of his children so that he will only
be liable for 15% donors tax.
4. Execute deed of sale so that income tax should be applied.
A.

For family corporations, the trouble is that when the heirs cannot agree.
addition, the rate now is lowered from 60% to 20%, it is no longer advisable.

In

For realty, it depends. If the realty is considered to be ordinary asset where the
applicable income tax is the 5% to 32% because he is an individual, it is not
advisable. It is better to execute deed of donation if the done is a relative because
the rate shall only be 15%. If the donees are strangers, it is either of the two, NIT
of 32% or donors tax of 30%.
If the real property is capital asset and within the Philippines, it is better to execute
deed of sale because it is lower than donation 15%, it is lower than estate tax of
20%; it is only a FIT of 6% plus documentary stamp tax of 1%. It is very much
lower than the NIT, estate tax or the donors tax.
If realty is all ordinary, it is better to execute deed of donation if the donees are
relatives. If the donees are not relatives, it is better to execute deed of donation or
allow the taxpayer to die and pay the estate tax because if the donees are
strangers, the taxpayer will pay the flat rate of 30%.
Upon reaching Section 84, we have to correlate this with Section 104 because this
covers the estate tax and donors tax.
Here, we ought to know who are the
taxpayers under estate tax and donors tax.
For estate tax we have four taxpayers; for donors tax we have six. By the way, we
do not have inheritance tax and donees tax. It was abolished in 1974. Pres.
Marcos issued a presidential decree, and of all the numbers, he chooses the
number 69 abolishing the inheritance tax and donees tax.
For estate tax, the decedent may be classified as the following:
1.
2.
3.
4.

RC;
NRC;
RA; and
NRA.

For donors tax, the status of the donor may be the following:

1.
2.
3.
4.
5.
6.

RC;
NRC;
RA;
NRA;
DC; and
FC.

For donors, we have taxpayer that is a corporation. For estate, we do not have.
Why? A corporation is not capable of natural death. Nonetheless, a corporation
may very well enter into a contract of donation.
Q.

What is the relevance of the knowing status of the decedent and donor?

A. With regard to estate tax, the NRA under estate tax and FC and NRA under
donors tax; to the rest, Section 104 is totally irrelevant because whether the
property is located within or without, they are still liable to pay the tax.
But for NRA and FC, Section 104 is very material because if they can prove that
the property is outside the Philippines, then they are exempt from tax.
The following are property deemed located within the Philippines under Section
104 first paragraph:
1. Franchise a legislative enactment authorizing a person to engage in trade
of business. If the franchise is to be exercised in the Philippines, that is a
property deemed located in the Philippines;
2. Shares, obligation and bonds issued by a corporation or sociedad anonima
which is established under Philippine law. In other words, these are shares,
obligations and bonds issued by DC. This is going to be automatic source
from within;
3. Shares, obligation and bonds of FC provided at least 85% of the business of
the FC is located in the Philippines. With regard to shares, obligation and
bonds issued by FC, it is not automatic, there is a qualification. Normally,
it is property without the Philippines.
However, if at least 85% of the
business is located in the Philippines, it will become a property deemed
located in the Philippines;
4. Shares, obligation and bonds issued by FC whose shares, obligations and
bonds have acquired business situs in the Philippines.
With regard to shares and obligation and bonds of FC, it can only be property
deemed located in the Philippines if at 85% of the business of which is located in
the Philippines or in alternative, the shares, obligation and bonds of the FC have
acquired business situs in the Philippines.

5. Shares or right in any partnership, industry established in the Philippines.

These are deemed located in the Philippines, and if the taxpayer under estate tax is
NRA, and under donors tax, the taxpayer is NRA and FC, they are liable because
their liability shall only be on properties deemed located in the Philippines.
We have to remember that with regard to NRA under estate tax and NRA and FC
under donors tax, their liability shall only be on properties deemed located in the
Philippines.
While it is true that the liability of NRA under estate tax and NRA and FC under
donors tax is only for those property deemed located in the Philippines, for
purposes of filing the estate tax return, Section 86B says that with regard to NRA,
take note this does not apply to donors tax, the admistrator or executor of the NRA
shall include in the return all the properties whether located in the Philippines or
abroad.
Q.

What is the purpose?

A.

In order to allow deductions.

But in the payment of estate tax, NRA shall only be liable for properties located in
the Philippines. But only for the purpose of filing the return, all the properties
should be included.
Going back to Section 104, there is exception there: the property of a NRA and a
FC s located in the Philippines.
There is an exception that they will be exempt. Normally, a NRA which is a donor
or a decedent (including FC), if that is personal property located in the Philippines,
they are liable. However, Section 104, in the middle portion of the first paragraph,
says that if the country of the NRA or the domicile of the FC do not impose or
provide for exemption on intangible personal property owned by Filipinos whoa re
not residing in that foreign country, the NRA or the FC is not liable to pay estate
tax or donors tax as the case may be. Provided, that the foreigner or the alien is a
citizen or national of that foreign country and he must be residing there.
So that if a decedent is a foreigner but a resident alien of the Philippines, this
exemption do not apply. What are the requisites? First, the foreign country of the
alien or the foreign country of the FC do not impose or exempt from transfer tax in
intangible personal properties owned who are not residing there.
Second, the
foreigner or the alien must be a resident and at the same time a citizen or national
of that foreign country. If these two elements are present, the property located in
the Philippines, the donor or decedent is exempt from transfer tax.

1996 BQ
Q.
A German national donated shares of stock in a FC to his Filipina
girlfriend. Is that donation subject to donors tax in the Philippines?
A. No. The donors tax can only be applied if the shares of stock donated by the
NRA have acquired a business situs in the Philippines or in the alternative, the FC
where the shares of stock came from, at least 85% of the business of that FC is
located in the Philippines. Otherwise, the donor is exempt.
2005 BQ
Q. The decedent is RA. He has properties here in the Philippines, USA and
Europe. To which of the foregoing properties are subject to estate tax?
A.

All of the properties are subject to estate tax because the decedent is a RA.
Campos Rueda vs. CIR
42 SCRA 283

The decedent is NRA. The decedent is from Spain who married a national of
Morocco. She has so many properties and all of them are intangible properties but
most of them are shares of stocks in a DC. They are being obliged to pay the tax.
The executor, Campos Rueda claim exemption from payment of estate tax and
inheritance tax claiming the provision of Section 104 that in the country, in
Morocco, it provides therein that intangible personal properties owned by Filipinos,
where this Filipinos are not residing in Morocco is exempt from estate tax. The
petitioner is claiming exemption by virtue of this provision.
However, the BIR
contends that Morocco is not yet a country because it is a colony of Spain; hence,
the said provision is not applicable.
The SC agreed with Campos Rueda to the issue that Morocco is not yet a country is
immaterial. What matters here is that the foreign laws of Morocco provides for an
exemption. Since the elements are present, Campor Rueda was allowed to claim
exemptions from the payment of inheritance and estate tax.
We have to know the payment of estate tax. The formula is also similar with that of
NIT.
Formula:

Gross Estate [Sec 85]

Deductions [Sec 86]

X
-

Net Estate [Exemptions (1st P200,000.00 Sec 84)]

Rate [Sec 84]
Estate Tax Due
Tax Credit if any [Sec 86, 110B, 204]

The estate tax shall be applied to the transfer of property after the death of the
transferor. This is the general rule which is subject to so many exceptions.
Normally, if the property is transferred during the lifetime of the transferor, we
apply the donors tax. There are exceptions. Although it was transferred during
the lifetime of the donor, yet we do not apply the donors tax but the estate tax.
But when the transfer was made after the death of the transferor, the rules is
absolute; we have to apply estate tax.
Q.

What is estate tax?

A. Estate tax is a transfer tax imposed on the transfer of the net estate of the
decedent to the heirs or beneficiaries who are not his heirs.
We go to Section 85A; decedents interest.
Included in this paragraph are properties owned by the decedent at the time of his
death.
Why is it entitled property owned by the decedent at the time of his
death? Instead it says decedents interest.
The intention of the law is to include all properties, not only at the time owned by
the decedent at the time of his death but also those not owned by the decedent but
he has interest on such property. For example, in a contract of lease, when the
decedent is a lessee, normally, in the absence o agreement upon the death of the
lessee, the contract of lease is terminated.
Supposed the lease is for 5 years, after 2 years, the lessee died. That could be
inherited by the heirs. Hence, the value of the lease shall be included in the gross
estate of the decedent. Is he the owner of that? No. He only has interest over
the property.
With regard to usufruct, normally, a contract of usufruct is terminated upon the
death of either of the parties.
If the usufructuary died, then the contract is
terminated. Section 87A says the merger of the usufruct to the naked owner is
exempt from estate tax.
Q. Supposed if it is for a fixed period of time, for example five years. After
two years, one of the parties died, will the use of the property be returned to
the naked owner?

A.

No. That will be inherited by the heir.

That is supported by Section 88A where it says that the value of the usufruct shall
be determined because it is subject to estate tax.
Therefore, there is no conflict between Section 87A and 88A. Section 87A provides
for exemption while Section 88A provides for the imposition of the estate tax
indirectly. Section 87A presupposes a situation where the contract is terminated
upon the death of usufructor. Hence, the property will be returned to the naked
owner, and under Section 87A, that is exempt.
If the usufruct is fixed in a certain period of time, it will not be returned to the
naked owner if the usufructuary died. It will be inherited by the heirs and we have
to determine the value for the purpose of imposition of estate tax. Supposed the
one who dies is the naked owner, Section 85A applies. That is subject to estate
tax.
Hence, the estate does not only include properties owned by the decedent but also
properties wherein he only has interest as stated under Section 85A.
We go to Section 85B.
There are two kinds of transfer in contemplation of death:
1. The technical transfer in contemplation of death under SC ruling in Vda. De
Roces vs. Posadas 58 Phil 108, Dizon vs. Posadas 57 Phil 465; and
2. The one provided for in the Tax Code is only a technical transfer in
contemplation of death. It is deemed a transfer in contemplation of death
because of the technical provision because t does not refer anything about
death.
The SC ruling speaks about death.

Vda. De Roces vs. Posadas

58 Phil 108
A taxpayer executed a deed of donation. Almost simultaneously with the execution
of the donation, she also executed the last will and testament. When she died, the
done tried to pay only donors tax but the government insist the payment of estate
tax and donors tax because the government reason out that these two documents
were executed at almost the same time; and second, the donees in the deed of
donation, were also the same persons in the last will. The BIR concludes that it is
a transfer in contemplation of death.

The SC agreed with the BIR that it is the transfer in contemplation of death
because the execution of the deed of donation was executed almost simultaneously
with the last will and testament. Also, the instituted heirs were also the same
persons, the donees in the deed of donation.

Dizon vs. Posadas

57 Phil 465
The father of the family donated parcels of land to his one and only son. After
several days from the execution of the deed of donation, the father died. When the
father died, the son paid the donors tax. The BIR claimed inheritance as well as
estate tax.
The SC, again, agreed with Posadas stating that since the death of the donor is
very near to the execution of the deed of execution.
Then that is transfer in
contemplation of death.
In these two cases, it is talking indirectly about death.
Q.

What about the one in the tax code under Section 85B?

A.

This is only a technical provision about the transfer in contemplation of death.

Take note of the last two enumerations at the bottom of the paragraph: upon
transfer of his property, he still possess or he still receives the fruits or income of
the property.
Third, the transferor, he himself alone, or together with other
persons, designate who will receive the income of the property and who will
possess. Those are the technical rules on transfer in contemplation of death.
We go to Section 85C, revocable transfer.
Take note that the transfer of property, the rule is that it is irrevocable, if the
transfer is silent. If that is irrevocable, it is not subject to estate tax. Meaning,
the transferor upon his death or after his death that will not be included in the
gross estate because it is exempt for the reason that the one included in the gross
estate is the revocable.
Q.

Why?

A.
That is because of the tremendous power that in any time he can revoke,
change or modify the transfer.

For example, the taxpayer made a conditional transfer to his son. Whether or not
the condition was performed, or whether or not there is prior notice, upon the
death of the taxpayer, that will be included in the gross estate.
The remedy is to remove the condition so that it will become irrevocable.
Therefore, exempt from estate tax.
We go to property passing under general power of appointment under Section 85D.
If we read the provision, it is only similar to Section 85B
contemplation of death. But we have to understand her that the
under the general power of appointment. This was never asked in
this is common in United States. We seldom practice here in
Here, we practice the opposite, the fidelcommissary substitution.

for transfer in
property here is
the bar because
the Philippines.

The general power of appointment, we can understand it by remembering Article

863 of the Civil Code on the fidelcommissary constitution. There are three parties:
the testator, first heirs and the second heir.
According to Section 87D, if the first heir dies, the property now is transferred to
the second heir, the estate of the first heir is exempt from estate tax.
Q.

Why is it exempt?

A. It is exempt because the first heir did not choose on who will be the second
heir. It was the privilege of the testator. That is why upon the death of the first
heir, and the property was transferred to the second heir, the estate of the first heir
is exempt from estate tax.
In general power of appointment, there are three parties: testator, first heir and
second heir. If the first heir dies, the property will be transferred to the second
heir. The estate of the first heir under general power of appointment is subject to
estate tax for the property because under American law, the first heir has the
power to choose the second heir. Because of that, it is only logical that his estate
is subject to estate tax. What is subject matter of transaction? The one we had
discussed under Section 85B.
We go to Section 85E. This was asked in 1999, 2000, 2001, 2002, 2003, 2004 and
2005 a nagawa din nung 2006, hindi na tinanong; the proceeds of life insurance.
Q. Are proceeds of life insurance subject to income tax? Estate tax under
Section 85E?
A. There are requirements. First, a person who ensured himself, Section 85E will
apply.
If the taxpayer ensures the life of another, the rule does not apply.

Second, if the appointed beneficiary is the estate, represented by the executor or

administrator, the proceeds of life insurance, assuming the first requirement is
present, shall be included in the gross estate regardless of whether the
appointment of the estate is revocable or irrevocable.
If the appointed beneficiary is other than the estate, maybe a relative or a friend, it
defends if the appointment of the such beneficiary is revocable or irrevocable. If it
is revocable designation of the beneficiary other than the estate, assuming the first
requirement has been complied with, the proceeds shall be included in the gross
estate. Therefore, subject to estate tax. If beneficiary is other than the estate and
it is irrevocable, having the same assumption, it is not subject to estate tax
because it should not be included in the computation of the gross estate.
Q.

Why?

A. It is because if the appointment is revocable, insured has tremendous power,

control and influence to modify, change or alter the beneficiary. Because of that
tremendous power of control, the law is only logical that when he die, his estate
will be liable to pay estate tax.
When the appointment is irrevocable where the beneficiary is other than the
estate, because if it is the estate, it does not matter, the estate will be liable
whether it is revocable or irrevocable assuming the first requirement has been
complied with the insured lossess control to change, modify or alter the
beneficiary. The law is only reasonable that when he died, his estate is not liable to
pay estate tax.
Q.

Is it subject to income tax?

A.

The governing rule is Section 32B1 and B2.

Section 32B1 speaks of where it is payable upon the death of the insured.
32B2 says that it is payable whether the insured is still alive.

Section

When it is payable upon the death of the insured, the only requirement to be
exempt from income tax because that is an exclusion under Section 32B1, it is
payable upon the death of the insured regardless of who is the beneficiary and
regardless of whether the appointment of the beneficiary is revocable or
irrevocable, regardless of whether or not the payment must be lump sum,
amortization or instalment. That does not matter. The only requirement is that it
is payable upon the death.
Q.
If it is payable within specific period of time, like ten years, after ten
years the contract matures, the insured will be paid now but he is still alive
and kicking, is the proceed of life insurance exempt?

A. The one to be exempt here is only the equivalent of the return of the premium
which means to say in the span of ten years, if the premium paid is one hundred
thousand and he received one million after ten years, what should be exempt is
only up to the extent of one hundred thousand. The remaining nine hundred
thousand is subject to income tax.
Supposed it is under Section 32B1, when it is payable upon the death, the entire
one million is exempt. However, in Section 32B1 there is a proviso which says if
the insurer held proceeds and earned interest, that interest is no longer exempt.
Q.

Is it subject to VAT? Percentage tax?

A.
According to Section 108A, it is subject to VAT if it is a non-life insurance
because if it is a life insurance, it is subject to percentage under Section 123 of the
Tax Code.
As a rule, if a business is subject to VAT, it is exempt from percentage tax or vice
versa.
In one BIR ruling, the BIR prompted to impose VAT to movie houses claiming it is
sale of services. However, the BIR failed to see the old law and the new law that if a
business is subject to percentage tax, it is no longer subject to VAT or vice versa.
Movie houses are subject now to amusement tax under Section 125 but that is a
percentage tax because it is under Title V of the Tax Code.
We go to Section 85F; prior interest.
This is no longer important.
This is about the codification of 1939 when our
parents were not yet born. If today is 1941, that is important. It says that item
about paragraph B, C, and E transfer in contemplation of death, revocable
transfer and proceeds of life insurance whether it happened before and after the
codification of this law in 1939, we have to include that in the gross estate.
However, today is 2006, it is not material anymore.
We go to Section 85G.
We have to correlate this to Section 100. Both provisions are entitled transfer for
less than the adequate consideration. What about Section 100? The value is
subject to donors tax; for instance, a property was transferred for six hundred
thousand, the value of which is one million. There is a difference of four hundred
thousand is subject to donors tax under Section 100.
This was asked in the
1999Bar.

Section 85G is entitled transfer for less than the adequate consideration; using the
same example, the balance of four hundred thousand is subject to estate tax.
Q. Do we apply simultaneously the estate tax and donors tax for transfer for
less than the adequate consideration?
A. No. We do not impose estate tax and donors tax for transfer less than the
adequate consideration.
We have to determine the motive for the transfer of property for less than the
consideration. If the motive of the transferor is for the impending death, the
balance of four hundred thousand shall be subject to estate tax. But if the motive
of the transferor is to donate the property, then it will be subject to donors tax.
1999 Bar
Q. A parcel of land located in Manila worth one million was transferred by
the owner, seller for seven hundred thousand because the buyer is a relative.
Do we impose the donors tax in the above mentioned fact?
A. We do not say it depends because the facts say that the buyer is a relative.
Under Section 100, the donors tax will be applied for a transfer for less than
adequate consideration but it must be other than the real property mentioned in
Section 24D1 (there is no Section 24D, it immediately started with 24D1).
Section 24D1 mentioned about a real property located in the Philippines which is a
capital asset.
We have to determine whether it is a capital asset or not because if it is a capital
asset and located in the Philippines, Section 100 says that the donors tax do not
apply. If the realty is the one mentioned under Section 24D1, the tax under the
Internal Revenue Code to be applied is the FIT of 6% as erroneously known as
capital gains tax. Section 24D1 says this tax is applicable to the sale, barter or
exchange or other modes of disposition which includes this one.
Q.
Will the answer be the same if the subject matter of the sale is not a
parcel of land but shares of stock?
A.
The answer will no longer be the same because shares of stock necessarily
follows that it is not the one mentioned in Section 24D1.
Let us see again Section 100 and 85G.

Q.
What is the subject matter of transfer for less than adequate
consideration?
A. Under Section 100, it could be any kind of property; real, personal, tangible or
intangible, movable or immovable, so long it is not the one mentioned under
Section 24D1, meaning it is not a real property located in the Philippines which is
a capital asset.
Q.

Do we apply it if the property is a real property?

A.

Yes, if it is an ordinary asset.

Q. What are properties which are subject matter of the donors tax under
Section 100?
A. Any kind of property; personal, immovable provided it is not the one mentioned
under Section 24D1.
Q.

What about Section 85G?

A.
We have the same rule, any kind of property; real, personal, tangible or
intangible provided it is the one mentioned under Section 85B, C and D.
Q.
Supposed the transaction for transfer of a property for less than the
consideration is a sale in good faith or a bon fide sale, does estate tax apply?
A.
The estate tax does not apply although it is a transfer for less than
consideration because Section 85G says except in bona fide sale, meaning, a
bona fide sale.
Q.

In Section 100, is that a defense?

A. No. The phrase except in bona fide sale is not present.

faith, the donors tax shall be applied.

Even if it is good

We go Section 85H. We have to correlate this section to Section 86C.

This section violates the rules of literature in paragraphing because Section 85
says the following are included yet paragraph H says not included.
First, we must correct certain misconception here. We must make an annotation
that the capital here is used in its generic sense to include paraphernal property.

This provision and Section 86C applies only for those legally married. Supposed
the decedent is single, this section has nothing to do with him.
Also, if the
decedent is not legally married, this provision also does not apply.
Section 85H speaks of the separate property of the surviving spouse which could
be either paraphernal or capital.
Section 86C speaks of the shares of the
surviving spouse if the absolute community or any other forms of marriage
settlement.
Q. In these two properties, separate property of the surviving spouse and
shares in the marriage settlement, are these properties subject to estate tax,
why?
A. In both cases, these are exempt. In Section 85H, it is exempt because it will
not be included in the gross estate. The second one, under Section 86C, it is also
exempt. Although it is included in the gross estate, later on it will be deducted,
hence, gross minus deductions. Ultimately, it is also exempt.
Q.

What is the relevance and including these Sections in the enumerations?

A.

The relevance are the following:

1. To determine if the estate is exempt under Section 86B1a; the two hundred
thousand pesos and the 5%. The basis here is the gross value, meaning,
before deduction. Hence, if it is before deduction, it should be included;
2. For informing the BIR the net of a person under Section 89, the gross value
but below twenty thousand pesos. Hence, it must be included;
3. Under Section 90A, the minimum requirement for filing the return is the
gross value of the estate which should be at least two hundred thousand
pesos;
4. The certification of the CPA where the gross value exceeds two million pesos.

Remembering all these provisions, all of these speak of the gross value, meaning, it
is before deduction.
If it is before deduction, the shares inherited already is
included unlike the shares of separate property of the surviving spouse is
automatically not included in the estate.
Section 86A, B, C, D and E; we have to determine whether the decedent is
taxpayer belongs to Section86A or belongs to Section 86B. We speak of only four
individual here.
We have three under A: first, the RC because he is not only citizen but also a
resident; second, the NRC because he is a citizen; the RA because he is a resident.
Under B, we only have one, the NRA.

Q.

What is the relevance of determining the same?

A. If the decedent taxpayers belongs to Section 86B, the deductions provided in

Section 86A4, 5, 6 and 7, the family homes, standard deductions, hospitalization
and medical expenses and retirement pay under RA 4917 are not allowed to be
claimed as deduction.
We start with Section 86A1a-e; expenses, losses and indebtedness.
The first one is funeral expense; actual funeral expense not exceeding two hundred
thousand pesos or 5% of the gross value of the estate.
It is possible that the
actual expense value is one hundred sixty pesos yet it may be disallowed if it
exceeds 5% of the gross value of the estate The die now pay alter scheme!

2000 BQ
Q.

Is the deduction for death anniversary included in funeral expense?

A.
No.
Under RR 2-2003, all funeral expenses must be incurred before the
burial. Expenses for death anniversary, it necessary follows that the decedent was
already buried.
Q.

What are funeral expenses under RR 2-2003?

A. We have wearing apparel, food and drinks, lodge, expenses to communicate to

the relatives and friends.
We go to Section 86B.

Fajunar vs. CIR

358 SCRA 666

The administrator was trying to claim extrajudicial expense for the settlement of
the estate before the RDO in Dumaguete City.
Under Section 86A1b and RR 2-2003, with regard to expense for judicial settlement
of the estate, the requirement both under the Tax Code and the RR is that it must
be pursuant to judicial settlement.
We are through with Section 86C when we discussed Section 85F.

We go to Section 86D.
This is very important. With respect to non-resident alien, the decedent, under
Section 85 and 104, his estate is only liable with regard to property deemed located
in the Philippines.
For property outside the Philippines, the estate is exempt.
Remember the rule about the nonresident alien decedent; only the property located
deemed located in the Philippines hall be subject to tax.
However, under Section 86D, in the filing of the estate tax return, all of his
property, whether located inside or outside the Philippines shall be included in the
estate tax return to be allowed only as deductions because it says nonresident and
not citizens of the Philippines, hence, they must be non-resident alien.
Q. The decedent is a nonresident alien, if you will be the administrator, are
you going to include all properties of the decedent including those outside
the Philippines in filing the estate tax return? Are all those properties
subject to estate tax?
A.
Yes. All of the properties including those outside the Philippines shall be
included in filing the estate tax.
However, only those properties within the
Philippines are subject to income tax.
We do not say that only those properties located in the Philippines are those
included in filing of estate tax return. This rule only applies to estate tax but not
in FIT, income tax, donors tax or any other tax.
Remember that under estate tax, the question as to whether the property is
included in the filing of return or it is subject to estate tax, the rule is different
because of Section 86D.
We got o Section 86E.
When we reached Section 34C4, this is the estate tax paid in a foreign country. It
will constitute under the formula as a tax credit. Hence, this shall be deducted
under the bottom of the formula.
We go to Section 87 deductions.
Under Section 87a, when the usufructuary die, the use of the property should be
returned to the naked owner and it is exempt from estate tax. But do not confuse
this with Section 88a; determination of the value of the usufruct which means to
say it is subject to estate tax.
Q.

Is there a conflict with these two provisions?

A.

None. Section 88A is about usufruct with a fixed period of time.

For example the usufruct is for two years and before two years the usufructuray
died, the use of the property will not be returned to the naked owner but to the
heirs of the decedent and the controlling provision is Section 88A. We have to
determine the value of the usufruct because it will be inherited by the heir and it
will be subject to estate tax.
We go to Section 88B.
The first sentence is about personal property because the subsequent paragraph
discuss abut the real property. It is the fair market value of the estate at the time
of the decedent. Underscore the word at the time of the death.
Q. The decedent died in 1995. In 2001, the BIR assessed the estate where
the personal property, maybe jewelries and shares of stock, is worth ten
million pesos but at the time of the death of the decedent it is only three
million. Is the assessment of the BIR correct?
A. No. The assessment is wrong. It should be assessed at the time of the death
of the decedent.
Underscore the word at the time of the death under the section.
2005 BQ
Q. How do we determine the value of the real property for purposes of estate
tax?
A. The value is determined by the CIR or the provincial or city assessor whichever
is higher.
We have to remember that because we have the same rule for estate tax and
donors tax under Section 102 and this provision is only being referred to Section
88B and this refer to the determination of the value of the property.
In addition, we have RR 2-2003; we have the value of shares of stock. We have to
determine whether the stock is listed or not listed in a local stock exchange.
We go to Section 89; notice of death.
Q. If we are the administrator, executor or the heir, do we always notify the
BIR of the death of the person?

A. No. The law says the gross value, meaning before deductions, of the estate
exceeds twenty thousand pesos and within two months, we have to inform the BIR.
Q.
Supposed the net estate is eleven thousand, do you notify the BIR in
writing?
A. Yes. If the net estate is eleven thousand, if follows necessarily that the gross
value is several millions because of so many deductions; family home, funeral
expense, standard deduction etc.
We go to Section 90.
Q.
If you are the executor, do you always file a return?
requirements?

What are the

A.
The law says the gross value of the estate should exceed two hundred
thousand pesos.
Q. If the gross estate is two hundred thousand pesos, is the estate liable for
estate tax?
A. No.
zero.

Because of so many deductions, most probably, the net estate will be

If the gross value is less than two hundred thousand pesos, as a rule, we do not
have to file a return except if the property consists of registrable properties like
shares of stock, parcel of lands or motor vehicle. Although it is below two hundred
thousand, of course, as a rule, we do not file a return except if the property
consists of registrable properties.
In addition, if the gross value of the estate exceeds two million, it needs a
certification of the CPA.
We will notice whether it is 20 thousand, 200 thousand or 2 million, it is always
the gross estate, meaning, before deductions.
Q. What about if the gross estate is two million pesos, is the estate liable to
pay estate tax especially if the estate belongs to Section 86A?
A. No. We have the same reason; because of too many deductions. Standard
deductions is already one million, if other deduction will be included, most
probably, the net estate will be down to zero.

Q.

Where do we file estate tax return and pay the tax?

A.
We pay and file the return to the RDO, if there is none, to the authorized
banks; if there is none, to the city or municipal treasurer.
Q. Supposed the decedent is not staying in the Philippines, where does the
administrator file the return?
A.

If it will be to the office of the CIR in Diliman, Quezon City.

We file the return within six months from the death of the decedent.
Q.

Can we file an extention for filing the return?

A.

Yes. But not more than 30 days.

We go to Section 91.
We follow here the pay-as-you-file system, meaning, we file the return and then
pay the tax. We will notice here that the date of the payment of the tax is also
within 6 months. That is the same with Section 90C.
Q.

What about the payment of the estate tax, can it b extended?

A. It depends, if the partition is judicial or extrajudicial. For judicial, it should

not exceed 5 years; for extrajudicial, it should not exceed two years.
In the event that the extension is granted to pay the tax, the law requires that the
executor or the administrator should file a bond no more than twice the value of
the estate tax.
The primary liability to pay the tax devolves upon the executor or the
administrator. But please take note that it is not in the personal capacity of the
administrator or executor; it is only in behalf of the estate. Hence, he must be
reimbursed.
The subsidiary liability to pay the tax falls upon the heirs. Take note that the law
is very clear about it, meaning, if the administrator fails to pay, it is now the
liability of the heir.
2001 BQ
Q.

Is the liability of the heirs of the decedent joint or solidary?

A. It is joint because Section 91C says the liability of the heir to pay the tax is
only up to the extent of their shares. Because of that, the liability of the heir
should be considered joint.
We go to Section 92; discharge.
If we are an executor or administrator and we want to be relieved from our liability
to pay the estate tax, the proper procedure is to write the BIR in writing asking him
to determine now the estate tax so that we are going to pay the estate tax because
we want to be relieved from the liability to pay the estate tax as an executor or
administrator. We have to do that in one year from the filing of the return; if there
is no return yet, one year from the application.
We go to Section 93; deficiency assessment. We are through here when we reached
Section 56B.
We go to Section 94. In this section, if the judgment will distribute the properties
to the heir, the judge holding the settlement of the estate, the requirement is that
the judge should require the presentation of the certificate of payment of the estate
tax.
We do not present the receipt only. In addition, we have to present a
certification in the nature of an affidavit signed by the BIR that in reality the estate
tax has been paid already. That is certificate of payment.

Marcos vs. Sandiganbayan

273 SCRA 47
The issue is whether or not the consent of the judge holding the settlement of the
estate necessary.
The SC said the consent of the judge is not necessary for the simple reason the job
of the BIR is different from the job of the judge having jurisdiction on the
settlement of the estate.
This was asked in 1998 bar.
We go to Section 95; persons who are obliged to inform the BIR of certain acts or
execution of the documents which tends to prove the payment of the estate tax.
For instance, we are a notary public who notarized extrajudicial partition, an
attorney who filed a pleading for the settlement of the estate, a cadastral surveyor
who partitioned the property. We have to inform the BIR.
We go to Section 97; it speaks of when the decedent has bank accounts.

The requirement that the executor, administrator or the heir must be allowed to
withdraw the money, they have to present again the certification of payment of
estate tax; not only the receipt, but also the certification from the BIR officer that
in reality the estate tax has been paid. It is same requirement under Section 94.
There is an exception here. The banks, even without payment of estate tax or
presentation of certificate of payment, they allow the withdrawal of twenty
thousand pesos. Of course, that is enough to cover the funeral expenses.
However, if the bank account is a checking account, there is a remedy. But this is
illegal and also immoral. Text me if you want to know.

DONORS TAX
This is governed by Section 98 up to 104.
With regard to classification of taxpayers under donors tax, there are six.
ought to know the formula for appreciation and easy understanding.

We

Formula:
Gross gift (Section 98B)
-Deductions (Section 101A, B)
Net gift (taxable gift)
X
rate
Donors tax
-Tax Credit (if any)
However, we do not impose donors tax if the net estate is hundred thousand pesos
net gift; under the estate tax, it is two hundred. This time it is only one hundred ,
take note after deduction and tax credit if any.
Tax credits are found under Section 101C which refers to donors tax paid to a
foreign country; under Section 110B, the input tax under VAT; and Section 204,
the tax credit certificate.
Gross gifts may be real or personal, tangible or intangible.
The most favourite topic in the bar is the splitting and the cumulative way of
donating the property. The cumulative is mentioned under Section 99A and also
Section 103A1.

Before we explain the thing, we have to determine why there is such a thing.
Under estate tax, which is a transfer tax, there is no such thing.
The reason is that there are two rates of taxes under Section 99. For donees who
are the relatives of the donors, the rate is a progressive rate of 2% to 15%. When
the donees are strangers, meaning not a relative, the rate is a flat rate of 30%.
Q.

Who are the relatives here?

A.
the
the
the

Relatives here are the brothers and the sisters, whether whole or half blood,
spouse, ascendants, descendants; this is the first group. The second group is
relatives by consanguinity within the fourth degree of relationships. These are
uncles, aunties and the nephews and nieces.

Please be reminded that under Section 36B1, the second group shall not be
considered a member of the family.
Although a person is a relative, but he is not included in the first group or second
group, he is considered stranger. That is very important because the rate is 30%.
Those are the reasons why there is splitting and cumulative.
RR 2-2003 explains cumulative and splitting. When we say cumulative, several
donations were made in one calendar year. One was made in January 2006, the
other one is May 2006 and the last is August 2006. The methods of filing the
return there since it is all made in one calendar year, is cumulative. How? Under
Section 103, we have to pay within 30 days, pay-as-you-file. For May, and August,
we have to include not only the value of the property donated on May and August
but also those on January although the tax was already paid there.
In splitting, two or more donations were made in two different calendar years.
Q. If a person donated properties, one is December 2005 and the other one
is January 2006 should the value of the property donated in December 2006
be included in the return covering the calendar year 2006?
A.

No, because that is splitting.

We will notice that if the done is a stranger we would like to clarify that splitting
and cumulative applies to both strangers and relatives but only to the matter of
splitting, cumulative or donating a property only once, it does not matter if the
done is a stranger. The rate of the tax is always 30% because the rate is flat.
What if the done is a relative? Provided that the net gift after deduction is below
ten million and depending amount of the deduction, the rate is may be from 2% to

15%. For instance, we gave a donation to our relatives and after the deductions it
is below tem million. Take note that if after donation of two or three times and if
the net gift is always above ten million, it does not matter also because the rate will
always 15%. But if in splitting, the net gift is below ten million, the rate will now
differ, depending on the amount of deductions and depending on the amount of net
gift.
Therefore, as to the matter of splitting donation, that is only material to donees
who are relatives. If the donees are a stranger, the rate shall always be 30%
because the rate is flat.
In splitting or cumulative, please take note that it can be applied to a stranger. It
may be applied but that is immaterial because the rate is always 30%. Hence, it
does not matter even if the donors donated once, twice or thrice. The rate will
always be 30%.
If the done is a relative and if the method used is cumulative, it is beneficial to the
government, because the taxpayer-donor will pay more tax. If done is a relative
and the method used is splitting, it is advantageous to the taxpayer because he
pays less tax.
To illustrate, the donation was made in January 2005, after computing the tax, it
is P7,000.00. The same amount was also donated in May 2006 to a relative. But
in filing of the return, the value of the property shall include not only the one
donated in May but also those made in January where the tax is paid already only
for the purpose of increasing the rte.
For example, the BIR said that the tax is seventeen thousand pesos for donation
made in May, the taxpayer will pay only ten thousand pesos because he has paid
the seven thousand.
If that is the method used, it follows that the rate of the tax will be increased
because it is in a cumulative because the computation is not only the property
made in May but also those made in January where the tax has been paid already.
Supposed using the same example using the splitting, let us say, December 2005,
he pays seven thousand. In January 2006, he again made a donation. This time
it is not cumulative because it is not made in the same calendar year. Using the
same example, the tax to be paid by the taxpayer is only fourteen thousand, seven
thousand for December and seven thousand for January.
1995 BQ
Q. The donor donated a property on December 27, 1993. Second donation
was made in January 6, 1994. The BIR said he should file a return for the

cumulative because the donation is only within several days; hence, those
donated in December should be included. Is the BIR correct?
A. No, because cumulative cannot be applied simply because the donations were
made in different years; one was made in 1993 and the other one is in 1994.
2001 BQ
Q. Same fact as above. But after the filing, the net gift is less than one
hundred thousand because of the deduction. The other one is below one
hundred thousand pesos. This is splitting. Do we say now that the taxpayer
will pay less?
A.
No, because he is exempt from donors tax because the net gift for each
donation is below one hundred thousand pesos net gift.
Q. The donor donated to the Catholic Church thirty thousand pesos, is it
subject to donors tax?
A. No. That net gift which is less than one hundred thousand is exempt from
donors tax, with more reason if the gross gift is less than one hundred thousand
pesos.
Q.

He donated seventy thousand pesos, is it subject to donors tax?

A.

No. Same reason.

we go to Section 99C.
2003 BQ
Q.

Is the donation to a political party exempt from donors tax?

A. Yes. While it is true that Section 99C did not say that whether or not it is
exempt, take note that it is being referred in the election code. In the election code
as amended in 1992, under RA 7166 Section 13 therein, if the done is a candidate
for a coalition of political party, the donation shall be exempt from donors tax,
provided, that the donation must be property reported to the COMELEC.
We have a statute that it is exempt provided it is duly reported to COMELEC.
Section 100 was discussed in Section 85G.

We go to 101; deductions.
We have to determine whether the donor belongs to Section 101 paragraph A or B.
But first, we have to determine who are the six persons liable for donors tax.
It would seem that paragraph A speaks only of one; it says resident. But there
are four there, only that number four is debatable and the first three is clear. First,
RC, RA and DC because they are resident and the domicile of the corporation is
the Philippines, hence, they are all resident. Number 4 is NRC, he is nonresident.
However, following the pattern in Section 86a, it says that NRC should also be
classified under A because under this section, it speaks of citizens and residents.
Under B, we have two; NRA and FC.
Q. What is the importance of determining whether the taxpayer belongs to A
or B?
A.
The requirement of deductibility where the done is classified under Section
101A3, there are five requirements. But if the donor is under B, the requirement
is reduced to only one.
Q. A Chinese, a RA who lives in Manila. He entered into marriage contract,
during the celebration of marriage, the father who is a permanent resident of
Taiwan, donated to the newly wed couple and assuming it is two hundred
thousand pesos. Is a dowry to be deemed a deduction?
A. No. The donor is a NRA because the facts say he is a permanent resident of
Taiwan.
Since, the taxpayer belongs to B, dowry is not a deduction.
Going back to Section 101A1 we have a bar question in 1989.
1989 BQ
Q.
The father of the family died.
The surviving spouse entered into a
marriage contract after several years because she could no longer endure the
cold mornings of November (not included in the bar question). During the
celebration of marriage, one of the children donated a property to the mother
and stepfather during the celebration of marriage. Is it a dowry which is a
deduction?

A. No. Under Section 101A1, the donor should be the father or the mother or
both. In the given facts of question, the donor is the daughter. That is not a donor
to be claimed as deduction.
We go to 101A2; donation to the national government, political subdivision,
agencies and instrumentalities of the government, not conducted for profit.
Take note of this because under Section 86A3, donation to the government must be
exclusively for public purpose. Now, it says here it is not conducted for profit.
We go to Section 101A3.
Q. What are the requirements in order that the donor to an educational or
religious entity can claim a deduction?
A.

Section 101A3 provides for five requirements:

1. Not more than 30% of the property donated should be used for
administrative purposes;
2. It must be non-stock and non-profit;
3. It must be governed by trustees who does not receive any compensation;
4. The school does not pay dividend;
5. The income shall be only used in accordance in the purposes embodied in
the articles of incorporation.

The done here is not limited to educational or religious institution. The done may
be social welfare, charitable institution, educational, religious including
organizations for the organization for the rehabilitation of the veterans.
The above requisites apply to all of them when the question is is it a deduction?
When it belongs to B, these five requirements are down to only one which is not
more than 30% of the property donated should be used for administrative
purposes.
Q. Why is it that the law requires that not more than 30% of the property
donated should not be used for administrative purposes?
A. If the donated property to the done is used for more than 30% of the property
for administrative purposes, the very purpose for which the donation was made will
b rendered meaningless.
We go Section 102.
In determining the value of the property donated, for purposes of the imposition of
the donors tax, both estate tax and donors tax provides for the same procedure for

personal as well as real property. They also have common rule for shares of stock
under the revenue regulation. Even under the imposition of the FIT of 6%, we also
apply the same rule.
When we say value determined by the CIR and the one determined by the City or
City Assessor, whichever is higher, normally, the one higher is the one chosen by
the Commissioner. In BIR it is known as the zonal value.
We have the last provision, Section 103.
The law says now the filing of the return. But what should be noted here is the
date of the payment of the tax. Tax should be paid within 30 days and the return
should be filed within 30 days. Hence, we have the pay-as-you-file system>
Q.

Is there an extension in the filing of the return?

A.

None. The extension was abolished already by the CTRP.

CHAPTER XXI
TAX REMEDIES

There are remedies for the government and there are remedies for the taxpayer.
For remedies for the government under the NIRC, we have assessment and
collection.
Assessment is under Section 203 and Section 222.
Collection
normally goes after the assessment.
Q.

What is an assessment?

A. It is a notice from the government obliging the taxpayer to pay a tax. Maybe
the taxpayer filed a return but the tax is not enough or he filed a return but did not
pay the tax or perhaps, he did not filed a return and, of course, he did not pay the
tax.
In actual practice, a taxpayer will not receive this one unless he is a big time
taxpayer.
The right of the government to send a taxpayer a notice of assessment compelling
him to pay the tax is subject to prescriptive period of time. But in assessment and
collection under NRC, there are two kinds:
1. Normal or ordinary condition; and
2. Extraordinary or abnormal condition.

Q.

What is a normal or ordinary assessment and collection?

A. Normal assessment and collection is governed by Section 203. Under normal,

there is a return filed but the return is not fraudulent and it is not false.
Q.

How about abnormal assessment and collection?

A. It is found under Section 222. There was no return filed, or maybe there was
a failure or omission to file a return, or there is a return, but the return is
fraudulent or false as proven by the BIR.
Q.

Why is it we have to determine whether it is under normal or abnormal?

A. Because the prescriptive period for assessment and collection differ or vary,
and, also the procedures are different.
The burden of proof on whether it is a fraudulent return or false return lies on the
part of the BIR. Therefore, if the return is erroneous in itself, it is not fraudulent
or false because the burden of proof lies on the part of the BIR.
We will notice that if the return is fraudulent or false, just the same, it is under
abnormal. The matter of whether the return is fraudulent or false does not matter
as far as prescriptive period for assessment and collection whether it is fraudulent
or it is false, just the same, it is under abnormal.
Q.

What is the relevance of saying false return and fraudulent return?

A.
Because in fraudulent return there is a surcharge of 50%.
apply to false return.

That does not

So let us see now the prescriptive period under normal for assessment under
Section 203. The prescriptive period is three years to be counted on the day the
return has been filed, take note, it is not counted from the day of payment but on
the date the return has been filed.
But under Section 203, there are three ways of filing the return.
First, when the
return has been filed before the deadline, for example, those using calendar year,
maybe April 2. Second, if the return was filed on the deadline, meaning April 15.
Lastly, the return was made after the deadline, maybe April 27.
Q. Under these three modes of filing the return, there are how many ways of
counting the period?

A. There are two ways of counting the period. First, when the return has been
filed before of during the deadline.
It should be counted on the date of the
deadline. So if the taxpayer filed the return on April 2, we count the deadline not
on April 2 but April 15. With more reason if the taxpayer filed the return on April
15. We have to count the three years on April 15, on the deadline.
But in counting the period, please take note of leap year. There are 366 days in a
leap year. So if there is a leap year, the expiration is not on April 15 but on April
14.
The second mode of counting the period is when the return has been filed after the
deadline, in the example, April 27. The reckoning period is the filing of the return.
Q. A taxpayer filed a return in April 2, 2000 for the taxable year 1998 not
1999. How do you count now the prescriptive period for assessment under
normal condition?
A.

On April 2, 2000 because the return was filed beyond April 15, 1999.

We do not say the prescriptive period is April 15, 2000 because the return is not
filed before the deadline; the return was filed after the deadline. Section 203 says
that if the return is filed beyond the deadline, it will be reckoned on the day the
return has been filed which is after the deadline.
We go to abnormal assessment under Section 222.
There are two options if it is under abnormal, but, take note, that these options do
not apply under normal; first option, assess and then later on collect under
Section 222 first paragraph; and second, collect without assessment but only
through judicial actions.
Q.

What are the periods here?

A. Let us go to the first option. The prescriptive period here is ten years to be
reckoned on the day of the discovery of the non-filing of the return, falsity or fraud.
Q. What is the prescriptive period for collection under abnormal pursuant
under the first option?
A.

Section 222 paragraph C says five years from the date of final assessment.

Let us go to the second option, without assessment, there shall be collection but
only through judicial action.
Since there is no assessment in this option, we
cannot discuss prescriptive period for assessment because there is none.

Prescriptive period for collection here shall be ten years from the date of the
discovery for the non-filing, fraudulent return or false return.
We go back to Section 203, the prescriptive period for collection. Unfortunately, the
Code is totally silent about it. Under the 1939, 1977 and 1985 Code, these laws
are always explicit about the prescriptive period for collection and its provisions
always provides for the prescriptive period under normal. In 1939 Tax Code, it
was provided for in Section 318, in 1977 Tax Code, Section 201, in 1985 Tax Code
in Section 202. In all these Codes, the law always provides for prescriptive period
under normal which is five years from the date of the final assessment.
Therefore, it is safe to assume that the prescriptive period for collection under
normal is also five years.
Also, the intent of the author shows the same
prescriptive period.
Lastly, if we are going to say that there is prescriptive period for collection under
abnormal and there is no prescriptive period under normal, it is too abnormal! It
would have been normal if it were the other way around.
So, if this will be asked in the bar, feel free to answer five years from the date of
final assessment.
Q. Under normal conditions, if the return was filed on April 15, 2000, can it
be collected in 2007?
A. We have to determine the date of final assessment. Take note that there can
only be collection under normal if there is final assessment. However, in abnormal
circumstance, there can be collection even without final assessment but only
through judicial action.
Q.
If the final assessment is on February 2, 2001, can it be collected on
2007?
A.

No. The period is way beyond five years.

Q.

If the final assessment is made on 2003, can it now be collected>

A.

Yes, because it is within the five year period.

Summary of Prescription
Prescription
Normal
Assessment
Collection
Abnormal

3 years from filing of the return

5 years from the final assessment

First Option:

Assessment:

Assessment then collect

discovery

10

of

years

omission,

from
fraud

the
of

omission, fraud or falsity

Collection: 5 years from the date of
Second Option:
Collect without assessment
only through judicial action

final assessment
10 years from

the

discovery

of

but omission, fraud or falsity. We do not

discuss

the

prescription

of

assessment here because there is no

assessment to speak of.

Procedure for Assessment and Protest under NIRC

The procedure for assessment under Section 228 is pre-assessment and final
assessment. However, under RR 12-99, the procedure is expanded to three. So
the procedure are the following:
1. Notice of informal conference which should be done before pre-assessment;
2. Preliminary assessment notice which is equivalent to pre-assessment; and
3. Formal letter of demand and notice to pay the tax, which is the synonym of
the final assessment.
In actual practice, the taxpayer will receive many notice of informal notice which is
final. This refers to the notice of informal notice, meaning, the prescriptive period
does not run. Unfortunately, this is not provided for by the Tax Code; this is done
by virtue of custom and tradition.
Q. After receiving the notice of informal conference, what is the remedy of
the taxpayer?
A.

His remedy is to file a reply within 15 days after the receipt of the notice.

Supposed the taxpayer did not file a reply, two things may happen: the BIR may
repeat the notice of informal or he will immediately issue the preliminary
assessment notice.
Q. Upon receipt of the pre-assessment notice, what is the remedy of the
taxpayer?
A. The remedy of the taxpayer is to file a reply within 15 days after the receipt of
notice.
Failure to file a reply by the taxpayer, the BIR may repeat the pre-

assessment or he may declare him in default. If the taxpayer will be declared in

default, the probability is the taxpayer will now receive the final assessment.
Q. Upon the receipt of final assessment or the formal notice and demand, is
it the one appealable to the CTA?
A.
No. It is not the one appealable in the CTA because of the doctrine of
exhaustion of administrative remedies. In other words, before the taxpayer may file
an appeal, he must first exhaust the administrative remedy of protest within 30
days form the receipt of the final assessment with the office of BIR. That protest is
known under the law as disputing the final assessment, or the motion for
reconsideration or the motion for reinvestigation.
Q. Supposed the taxpayer received two final assessments, one for income
tax and other one for VAT. If the taxpayer wants to file a protest only on final
assessment under income tax, is he required to pay the tax under VAT?
A. Yes. Under RR 12-99, he is required to pay the tax under VAT where he does
not intend to file a protest.
Q.

Is it the so-called payment under protest?

A.
No, because the taxpayer is not protesting as to the validity of the final
assessment under the VAT.
2002 BAR
Q.
If the taxpayer is going to file a protest, is payment under protest
necessary?
A. Under the Section 228 of NIRC, it is not a requirement because if the taxpayer
filed a protest pursuant to the income tax, he is not obliged to pay for the income
tax. Under local taxation, under Section 195 of the LGC, payment under protest is
also not necessary. Under Section ____ of the Traffic and Custom Code, payment
under protest is also not necessary.
The only time that payment under protest is necessary is protest under real
property tax under Section 252 of the LGC. This is the only one where payment
under protest is necessary; the rest, it is not necessary.
RR 12-99 says that if the taxpayer received two or more final assessments, but if he
does not intend to file a protest on one of final assessment, before he can file a
protest, he should first file the tax in which he does not intent to file a protest.

Going back to NIRC, if the taxpayer is going to file a protest, from the day of the
filing, we have to count 60 days. This rule does not appear under the old law.
This is a standard operating procedure that the protestant should file the
necessary documents in support of his protest.
Failure to file the necessary
documents within the 60-day period means that the final assessment becomes
final and executor.
For example, on the 41st day, the taxpayer filed the necessary documents. On that
same day, the 41st day, where the taxpayer had filed the necessary documents, we
have to count 180 days.
Q.

What is the purpose of the 180 days?

A. The purpose is for the BIR to decide the protest.

Q.
Supposed the 180-days period lapsed and the BIR failed to decide the
protest. What is the implication of the failure to decide the protest by the
BIR?
A. After the lapse of the 180 days period, Section 228 says that the taxpayer has
a remedy of filing an appeal to the CTA in relation with RA 9282.
However, Section 228 does not state the filing period after the BIR failed to decide
the protest within 180-day period of time. Nonetheless, RR 12-99 states that after
the expiration of the 180 day period, within a30 days, the taxpayer must file an
appeal to the CTA.
So whether within the period of 180 days, BIR will decide or will not decide the
protest, just the same, an appeal should be made with the CTA sitting the division
as stated in RA 8292. From the ruling of the CTA sitting in division and when the
decision is against the protestant, the remedy is to file a motion for reconsideration
from the receipt of the decision with the same division which rendered the decision.
From the ruling of the division under motion for reconsideration, an appeal, within
15 days from the receipt of the decision, shall be filed to the CTA sitting en banc.
From the ruling of the CTA sitting en banc, within 15 days from the receipt of the
decision, beginning April 23, 204, the appeal shall be made in the Supreme Court.
Prior that date, the appeal should be filed in CA.
Outline
Notice of Informal
Conference
Pre-Assessment

Final Assessment
Protest and Filing of
Documents
Appeal to CTA sitting
in division
MR to the same
division
Appeal to CTA
en banc
Appeal to SC
Protest under Local Taxation
Under Section 195 of LGC, we have the procedure for protest for local taxation.
Q. What is the procedure for protest under this action?
A. Upon receipt of the notice of assessment issued by the provincial, municipal or
city treasurer, the remedy of the taxpayer is to file a protest within 60 days from the
receipt of the assessment with the same treasurer who issued the assessment.
If the treasurer will not decide within the 60-day period, Section 195 says that the
taxpayer has the right to go to the court of competent jurisdiction and that is no
other than the RTC. Or maybe if the treasurer decides the protest within the 60days period, the remedy of the taxpayer is file an appeal within 30 days from the
receipt of the decision to the court of competent jurisdiction and that is no other
than the RTC.
From the decision of the RTC involving local tax cases in its appellate jurisdiction
shall be appealed in CTA sitting en banc.
Take note, the CTA in this case, is
sitting in en banc. The general rule is that an appeal made in CTA, it sits in
division.
There are only two cases where the CTA automatically sits en banc:
first, decision from RTC involving local tax in its appellate jurisdiction and, second,
decision of Central Board of Assessment Appeal in its appellate jurisdiction. To all
other appeals, it follows the general rule that the CTA sits in division where the
ruling of the division is not yet appealable because the taxpayer still have to file a
motion for reconsideration and the ruling therein under the said MR is not yet
appealable in the SC because the taxpayer has to file an appeal to the CTA sitting
en banc.

Outline
Notice of Assessment
Protest
Appeal to CTA sitting
en banc
Appeal to SC
Protest under Real Property Tax
Under Section 252 of LGC, if the taxpayer received a notice of assessment from the
provincial, or the city treasurer, the remedy of the taxpayer under real estate tax is
to pay the tax under protest. Meaning, at the time of the payment, it must be
annotated that it is a payment under protest.
If the payment under protest will be denied by the treasurer, the remedy of the
taxpayer is to file an appeal within 120 days with the Local Board of Assessment
Appeal.
Q.

Why?

A. Under Section 252 of LGC says that the remedy is the one under Chapter 3,
Book II, Title if which is the one mentioned in Section 226 and 229.
From the decision of the Local Board of Assessment Appeal, within 30 days, an
appeal must be filed in Central Board of Assessment Appeal. From its ruling, the
decision is appealable in CTA sitting en banc within 30 days.
The remedy of protest under Section 252, if the assessment received by the
taxpayer under real estate tax is the one issued by the Provincial or City Assessors
Office, we have Section 226 again. The remedy of the taxpayer is to file an appeal
with the Local Board, then from the Local Board, same procedure with that of
Section 252.

Ramie Textile vs. McKay

The taxpayer paid a real property tax. But at the time of payment, he failed to pay
the real property tax under protest.
He later on discovered that under special
statute, he is exempt from real estate tax. He filed a protest to recover the money.

The office of the treasurer denied the protest because he did not paid the tax under
protest.
Issue: Whether or not the taxpayer will be allowed to file a protest considering
that the taxpayer did not pay the tax under protest?
The SC begins by saying that we do not deny and acknowledge the requirement of
payment under protest.
But in the case at bar, this rule do not apply here
because at the time of the payment of the tax, the taxpayer believed in good faith
that he was liable and he was able to prove the same.
If a taxpayer paid the tax and he believed that he is liable, how can he pay under
protest? Basically, the taxpayer will not do that. So the requirement of payment
under protest is not absolute.
Outline
Notice of Assessment
Payment under Protest
to Treasurer City or
Provincial Assessor
Appeal to Local
Board
Appeal to Central
Board
Appeal to CTA en
Banc
Appeal to SC

Protest under Tarif and Custom Code

Section 2313 as amended by RA 7631 (there is a typing error in RA 7661 in stating
that it amend Section 2315) provides for the remedy of the taxpayers in cases of
protest.
The old Tariff and Custom Code says if the importer loses the protest, before the
office of the collector, the remedy of the importer is to file a protest before the office
of the same collector. The taxpayer must submit pleading tying to convince him

that the rate of the custom duties to be paid is what the taxpayer believed so,
based on legal grounds.
Suppose the collector denied the protest, the remedy of the importer or the
taxpayer under the Tariff and Custom Code is to file an appeal within 15 days from
the receipt of the decision of the collector denying the protest in the Office of the
Commissioner.
For that manner, the decision of the Commissioner, within 30
days, the taxpayer should file an appeal to the CTA sitting in division. Then we
have the same procedure: division, MR, CTA en banc then to SC.
Q.
Suppose the importer wins the case to the office of the collector, of
course, the importer will no longer file an appeal because he already wins the
case, what is the proper remedy for the government?
A. The old Tariff and Custom Code provides for an automatic appeal to be filed
before the Office of the Commissioner.
In cases of forfeiture, the remedy of the importer is the same: appeal to the office
of the collector, appeal to the Commissioner, appeal to CTA sitting in Division, MR,
CTA en banc, then to SC.
Q.

What is forfeiture?

A. The commodity of the importers will be confiscated if he violated the Tariff and
Custom Code and its rules and regulation.
For example, the commodities are
ingredients for making illegal drugs.
These commodities can be confiscated by
Custom.
If the importer does not agree with the forfeiture and says that although it is used
for manufacturing illegal drugs but it is regulated drug which is not illegal.
Suppose he loses the case in office of collector, we have the same procedure as
mentioned above.
But under the old code, aside for the remedy for forfeiture and protest, where the
government loses the case, there is only one automatic review; and automatic
review for protest. There is no automatic review for forfeiture. In 1987, former
Commissioner Padilla, he issued a memorandum circular requiring an automatic
review.
In 1993, Congress enacted RA 7651. It amends Section 2313, the
requiring automatic appeal not only apply to protest but also in forfeiture. When
the government loses the case, the importer wins the case; we have an automatic
appeal under protest and forfeiture.
The Congress realized the importance of
automatic appeal.

Supposed the importer lose the case in the office of the collector and government
wins the case, the remedy is to file an appeal within 15 days to the Office of the
Commissioner, then to CTA in division, MR, CTA en banc then SC.
If the government loses the case, RA 7651 provides an automatic review within five
days from the ruling of the collector.
Q.

With what office?

A. It depends. If the published value of commodity is five million pesos or more,

the automatic review should be filed to the Office of the Secretary of the
Department of Finance. The ruling from the Office of the Secretary is final and
executor.
When the involved commodity in protest or in forfeiture is less than five million and
the government loses the case, meaning, the importer wins the case, the automatic
review shall be filed to the Office of the Commissioner of Custom within five days.
Two things might happen there, the Commissioner might decide the case, or he
may not decide the case within 30 day period within which to decide the automatic
appeal.
Q. Is the ruling of the Commissioner from the office of the collector still
appealable?
A.
If the Commissioner reversed the ruling of the Collector, the ruling of the
Commissioner is final and executor and no longer appealable.
But when he failed to decide the case within 30 days, or he might decide the case
but he merely upheld the ruling of the collector. This decision is automatically
appealed again with the Office of Secretary of Department of Finance. Whatever
will be the ruling of the Secretary that is automatically appealed with CTA sitting
in division.
Outline If the importer Loses the Case
Protest to Collector
Appeal to
Commissioner
Appeal to CTA in
division

Motion for
Reconsideration
Appeal to CTA en
banc
Appeal to SC
Outline The Government Loses the Case
Decision from the
Collector
Automatic Review
to Commissioner less than five
If reversed final
and executor

Automatic review to
Secretary of
Finance if five

If upheld Automatic Appeal

to Secretary of
Finance
Automatic review
to CTA sitting in
division

Going back to Section 228 of NIRC, while pending on protest he did not received a
decision of the protest but he received a notice of collection, this is highly
anomalous because collection can be made only if the assessment is already final
and executor.
Let us say, he received a notice of distraint and levy, the Tax Code is totally silent
about it. However, we have two SC ruling within this subject matter. We have the
cases of Yabes vs. Rojo, 115 SCRA 278 and Union Shipping Lines vs. CIR, 185
SCRA 547.

Yabes vs. Rojo

115 SCRA 278
In this case, the taxpayer filed an appeal to CTA allegedly because the BIR deemed
denied the protest because instead of making a decision, it sends a notice of levy.
But almost simultaneously with the appeal filed by the taxpayer, the BIR filed an
ordinary civil action in the CFI.

When the court made a hearing, the taxpayer filed an injunction arguing that two
similar causes of action is pending on two different courts.
The SC was
convinced by the taxpayer so the SC issued an injunction ordering the CFI to stop
conducting the hearing and turnover the case to CTA because the remedy availed
by the taxpayer of filing an appeal to the CTA is the proper remedy because he did
not receive the decision over his protest instead he received a notice of collection.
The SC adds that this appeal is filed on time because the counting of period on
which to file an appeal was reckoned on the day the BIR filed an ordinary civil
action in the regular court because on that day, the protest was deemed denied
when they filed an ordinary civil action for the collection of tax with the CFI.

Union Shipping Lines vs. CIR

185 SCRA 547
The taxpayer was waiting for the decision of his protest; however, he did not
receive the same. Instead, he received a notice of collection. He files a motion for
reconsideration or clarification to the BIR asking the BIR of whether or not it has
deemed denied his protest.
The BIR did not reply on his motion for
reconsideration.
When he received the notice of summons, instead of answering an answer to the
complaint, he filed an appeal to the CTA stating that the tax is now being collected
in the regular court, his protest has been deemed denied.

Issue: Is the filing of an appeal to the CTA the correct remedy?

time?

Was it filed on

Ruling: The SC ruled that filing of an appeal to the CTA is the correct remedy and
it is filed on the time but this time the SC did not ruled that the counting of the
period within which to file an appeal from the day the BIR filed a collection suit the
civil action for collection because if we are going to count the period on that day,
filing of the appeal will be beyond that period. To justify that the appeal was filed
on time, the SC ruled that we have to count it from the day the taxpayer received
the notice of summons.
Q. While the case is pending on appeal in CTA, can the BIR amend the final
assessment?
A.
There are two schools of thought because under the Tax Code it is totally
silent. First is the case of Guerrero vs. CIR 19 SCRA 25 and also the case of
Batangas vs. Collector 102 Phil 322.

In the case of Guerrero while the case is pending appeal in the CTA, the final
assessment can be no longer amended because it is no longer the disputed one.
The disputed assessment was the one subject of protest to the Office of
Commissioner.
But in the case of Batangas, the SC ruled otherwise. It says it can be amended
although it is pending on appeal on CTA in order to avoid multiplicity of suit under
the rules of court.
With these two opinion, Justice Vitug is saying that the second one is the better
opinion, which says amendment should be allowed to avoid multiplicity of suit.
We go to Section 204, the power of the Commissioner to enter into a compromise.
Q.
Can the Commissioner enter to a compromise agreement involving
criminal cases?
A.
Yes, if the case is not yet filed in court, meaning to say, the case is still in the
office of the prosecutor, or if it involves fraud.
In civil cases, it can be
compromised in any stage of the proceedings.
2000 Bar
Q. Supposed the BIR filed a civil case in the collection of taxes under the
NIRC in the regular court. If the ruling of the court is final and executor, can
the case still be compromised?
A. No. If that will be allowed, it will be violative of separation of power between
the judiciary and the executive.
The power of compromise, there are only two grounds: financial capacity and the
other one is on all other grounds.
Q. What is the minimum tax to be paid by the taxpayer if the ground for
compromise is financial incapacity?
A.

It should be not lower than 10% of the original assessment.

To all other grounds, it should be not lesser than 40% of the original assessment.
Therefore, if the tax liability increased because of interest, surcharges and penalty,
in the matter of computing, the 10% should only be based on the basic tax without
including the interest, penalties and surcharges. We have similar rule for the 40%.

Q.

Can it be lowered to 10% or 40%?

A.

No, unless it is approved by the Valuation Board.

Q.

What is the Valuation Board?

A.
It consists of the Commissioner of the BIR including the four deputy
commissioners.
When the taxpayer claim for a refund, nowadays, it is a new rule to eradicate the
syndicate in the BIR, he has to present a proof, a receipt, that he had paid the tax
because it may happen that by virtue of technical provision, the taxpayer is entitled
to tax refund.
Now, the taxpayer may only be allowed a tax refund if he had
proven that he, indeed, paid the tax.
Remedies for Collection
We go to Section 205, if the assessment is already final and executor, the taxpayer
will be notified stating among others that xxx your final assessment is final and
executor, so please pay the tax before November 5, 2006. Xxx. If the taxpayer
failed to pay the tax notwithstanding the notice of finality of the assessment, the
government will now collect the tax.
The remedy of the government to collect the tax is judicial and administrative
remedy. For judicial, we have civil case and criminal case; for administrative we
have levy, distraint and tax penalty under Section 280.
Q.
Is there an order or a sequence for the government to avail of these
remedies?
A.
None. The government can proceed on any of these remedies, judicial or
administrative, simultaneously.
Distraint of Property
When we say distraint, it is the personal property which is being compensated. We
have three kinds of distraint: constructive distraint under Section 206, distraint of
the intangibles under Section 208 and lastly, actual distraint under Section 209.
Q.

What is constructive distraint?

A. Constructive distraint involves only the listing to be made by the distraining

officer of the personal property to be distraint with a notice that the taxpayer or

any person in possession of such property should not alter or dispose the property
and he shall be obliged to sign the receipt.
Q.

If he refuses to sign, what can the distraining officer do?

A.
Under Section 206, it says that the distraining officer should secure the
services of two witnesses in the neighbourhood obliging them to sign the receipt
and they should not allow the taxpayer to transfer, sale or dispose the personal
property.
Q.

What are the grounds of constructive distraint?

A. Under Section 206, the enumerations are the same enumeration under Section
6 paragraph D, the taxable period shortened to 12 months. We have the same
answer for grounds for constructive dismissal. So the grounds are the following:
1.
2.
3.
4.

When the taxpayer is retiring from business;

When the taxpayer intended to leave the Philippines;
When the taxpayer remove, hide or conceal his property; and
The taxpayer obstructs to collect the tax.

Those are the ground for constructive distraint. We have the same answer if the
question is What are the grounds for the Commissioner to terminate the taxable
year? In addition to the above, the answer will include death of the person.
Let us go to distraint of intangibles under Section 208 which refers to shares of
stock, bank accounts and debts and credits. So we do not pursue constructive
distraint on the intangibles.
With regard to the shares of stock, the warrant of distraint should be served only to
the delinquent taxpayer but also to the issuing corporation.
Ordinarily, the
corporation will not allow the taxpayer to transfer, dispose or sell the shares of
stock because this is subject matter of distraint or compensation.
With regard to the bank accounts, the warrant of shall be served not only to the
taxpayer but also on the responsible officer of the bank with a warning that the
taxpayer should not be allowed to withdraw his money. But we do not say that in
bank account, the property will be sold at public auction.
Lastly, debts and credits, both creditor and debtor shall be furnished with the copy.
The third group of distraint is the actual distraint under Section 209.
For example the BIR send a notice stating that the final assessment is final and
executor. The BIR now will say, The assessment is now final and executor, we are

now confiscating your personal property. I have with me the truck, but i am going
to take the property that will suffice the tax delinquency.
Upon service of warrant of distraint under Section 207A, the distraining office shall
make a written report within 10 days with the BIR. So the property now will be
sold in public auction.
Notice to the public shall be made by way of posting.
Publication is not required in this case. It requires posting in two conspicuous
places stating the amount of the tax liability, penalty, interest, the place of sale and
the date and time of the sale.
In the auction sale of personal property, take note that even under statute, there is
no right of redemption. The rule is absolute, whether it is under the rules of court,
the local government code or the NIRC. There is no right of redemption if the
property being sold is a personal one.
However, the Tax Code speaks of right of pre-emption. Section 210 says, before
the consummation of sale, the taxpayer is allowed to recover the property after
payment of all the proper charges. But the procedure in Section 210 refers to the
right of pre-emption.