INCOME TAXATION

I. General Principles

Features of Philippine Income Taxation

1) Income tax is a direct tax because the tax burden is borne by the income recipient upon whom the tax is imposed.
2) Income tax is a progressive tax since the tax base increases as the tax rate increases. (ability to pay principle)
3) The Philippines has adopted the most comprehensive system of imposing income tax by adopting the citizenship
principle, resident principle and the source principle.
renders citizens, regardless of residence, and resident aliens subject to income tax liability on their income from all
sources) and of the generally accepted and internationally recognized income taxable base (that can subject non-
resident aliens and foreign corporations to income tax on their income from Philippine sources.
4) The Philippines follows the semi-schedular or semi-global system of income taxation. Under which,all
compensation and other income not subject to final tax are added together to arrive at the gross income, and after
deducting the sum of allowable deductions from business or professional income, capital gain and passive income,
and other income not subject to final tax, in the case of corporation, as well as personal and additional exemptions,
in the case of individual taxpayers, the taxable income(gross income less allowable deductions and exemptions) is
subjected to one set of graduated tax rates (if an individual) or normal corporate income tax rate (if a corporation).
5) The Philippine income tax law is a law of American origin. Hence the decisions of the US courts have force and
persuasive effect in the Philippines.

Tax Situs - literally means the place of taxation, or the country that has jurisdiction to levy a particular tax on
persons, property, rights or business.

Basis: Symbiotic relationship. The jurisdiction, state or political unit that gives protection has the right to demand
support.

The situs of taxation is determined by a number of factors

a) Subject matter- or what is being taxed. He may be a person or it may be a property, an act or activity;
b) Nature of tax- or which tax to impose. It may be an income tax, an import duty or a real property tax;
c) Citizenship of the taxpayer
d) Residence of the taxpayer.

Only resident citizens and domestic corporations are taxable on their worldwide income (both income inside and
outside the Philippines) while the other types of individual and corporate taxpayers (i.e. non-resident citizen, non-
resident alien, foreign corporation) are taxable only on income derived from sources within the Philippines.

Situs of taxation literally means place of taxation.

GR: The taxing power cannot go beyond the territorial limits of the taxing authority. Basically, the state where the
subject to be taxed has a situs may rightfully levy and collect the tax; and the situs is necessarily in the state which
has jurisdiction or which exercises dominion over the subject in question.

Resident citizens and domestic corporation are taxable on all income derived from sources within or withoutthe
Philippines.
A non-resident citizen is taxable on all income derived from sources within the Philippines.
An alien whether a resident or not of the Philippines and a foreign corporation, whether engaged or not in trade or
business in the Philippines are also taxable only from sources within the Philippines.

The taxable situs will depend upon the nature of income as follows:
1) Interests- Interest income is treated as income from within the Philippines if the debtor or lender whether an
individual or corporation is a resident of the Philippines.
2) Dividends
Dividends received from a domestic corporation are treated as income from sources within the Philippines.
 Dividends received from a foreign corporation are treated as income from sources within the Philippines, unless 50%
of the gross income of the foreign corporation for the three-year period preceding the declaration of such dividends
was derived from sources within the Philippines; but only in an amount which bears the same ratio to such dividends
as the gross income of the corporation for such period derived from sources within the Philippines bears to its gross
income from all sources.
3) Services- Services performed in the Philippines shall be treated as income from sources within the Philippines
4) Rentals and Royalties- Gain or income from property or interest located or used in the Philippines is treated as
income from sources within the Philippines.
5) Sale of Real Property- Gain from sale of real property located within the Philippines is considered as income
within the Philippines.
6) Sale of Personal Property- Gain, profit or income from sale of shares of stocks of a domestic corporation is treated
as derived entirely from sources within the Philippines, regardless of where the said shares are sold Gains from sale
of other personal property can be considered income from within or without or partly within or partly without
depending on the rules provided in Sec. 42 E of the Tax Code.

The source of an income is the property, activity or service that produced the income. It is the physical source
where the income came from.

1. Progressive vs. Regressive System of Taxation (pg 44 PM Rev)

Progressive System of taxation Regressive System of taxation

tax laws shall place emphasis on direct exists when there are more indirect taxes
taxes rather than on indirect taxes imposed than direct taxes

Note: Progressive and Regressive Systems of Taxation are different from Progressive and Regressive Rates.
Progressive Rate Regressive rate
Tax the rate of which increases as the tax Tax the rate of which decreases as the
base or bracket increases. tax base or bracket increases.

2. Global vs. Schedular System of Taxation (pg 45 PM Rev)

Global tax System Schedular Tax System

Where the taxpayer is required to lump Where there are different tax treatments
all items of income earned during a of different types of income so that a
taxable period and pay under a single set separate tax return is required to be filed
of income tax rates on these different for each type of income and the tax is
items of income computed on a per return or per schedule
basis
One rate for all types of gross income Varying taxes are imposed on passive
income
All income receive by the taxpayer are The various types of income
grouped together, without any distinction (compensation; business/professional
as to type or nature of the income, and income) are classified accordingly and
are accorded different tax treatments, in

after deducting therefrom expenses and
other allowable deductions, are subject
to tax at a graduated or fixed rate.
Can be found in the income taxation of
corporations
accordance with schedules characterized
by graduated tax rates.
Since these types f income are treated
separately, the allowable deductions
shall likewise vary for each type of
income
Found in the income taxation of
individuals where the tax rates are
progressive in character

TAX ON INCOME
CHAPTER I - DEFINITIONS
Section 22. Definitions
Person' means an individual, a trust, estate or corporation.

Corporation' shall include partnerships, no matter how created or organized, joint-stock

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

Domestic,' when applied to a corporation, means created or organized in the Philippines or

under its laws.

Foreign,' when applied to a corporation, means a corporation which is not domestic.

The term 'non-resident citizen' means:

1) A citizen of the Philippines who establishes to the satisfaction of the Commissioner the fact
of his physical presence abroad with a definite intention to reside therein.
2) A citizen of the Philippines who leaves the Philippines during the taxable year to reside
abroad, either as an immigrant or for employment on a permanent basis.
3) A citizen of the Philippines who works and derives income from abroad and whose
employment thereat requires him to be physically present abroad most of the time during
the taxable year.
4) A citizen who has been previously considered as non-resident citizen and who arrives in the
Philippines at any time during the taxable year to reside permanently in the Philippines shall
likewise be treated as a non-resident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad until the date of his
arrival in the Philippines.
5) The taxpayer shall submit proof to the Commissioner to show his intention of leaving the
Philippines to reside permanently abroad or to return to and reside in the Philippines as the
case may be for purpose of this Section.

Resident alien' means an individual whose residence is within the Philippines and who is
not a citizen thereof.

Non-resident alien' means an individual whose residence is not within the Philippines and
who is not a citizen thereof.
 Resident foreign corporation' applies to a foreign corporation engaged in trade or
business within the Philippines.

Non-resident foreign corporation' applies to a foreign corporation not engaged in trade

or business within the Philippines.

Fiduciary' means a guardian, trustee, executor, administrator, receiver, conservator or any

person acting in any fiduciary capacity for any person.

Withholding agent' means any person required to deduct and withhold any tax under the
provisions of Section 57.

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

Shareholder' shall include holders of a share/s of stock, warrant/s and/or option/s to

purchase shares of stock of a corporation, as well as a holder of a unit of participation in a
partnership (except general professional partnerships) in a joint stock company, a joint
account, a taxable joint venture, a member of an association, recreation or amusement club
(such as golf, polo or similar clubs) and a holder of a mutual fund certificate, a member in an
association, joint-stock company, or insurance company.

Taxpayer' means any person subject to tax imposed by this Title.

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

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

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

B. General Principles of Income Taxation (pg 55 PM Rev)

Section 23, National Internal Revenue Code

Sec. 23. General Principles of Income Taxation in the Philippines. - Except when otherwise provided in this Code:
a) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the
Philippines;
b) A nonresident citizen is taxable only on income derived from sources within the Philippines;
c) An individual citizen of the Philippines who is working and deriving income from abroad as an overseascontract
worker is taxable only on income from sources within the Philippines: Provided, That a seaman who is a citizen of
the Philippines and who receives compensation for services rendered abroad as a member of the complement of a
vessel engaged exclusively in international trade shall be treated as an overseas contract worker;
d) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from
sources within the Philippines;
e) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and
f) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income
derived from sources within the Philippines.

C. Scope of Income Taxation

II. Income

Income means the gain derived from capital, from labor, or from both combined, including profits gained from
dealings in property or as well as any asset clearly realized whether earned or not.

Income may be defined as the amount of money coming to a person or corporation within a specified time, whether
as payment for services, interest or profit from investment.
1. Difference between Capital & Income
a) Madrigal v. Rafferty 38 Phil 14

Capital Income
A fund A flow
A fund of property existing at an instant A flow of services rendered by that
of time capital by the payment of money from it
or any other benefit rendered by a fund
of capital in relation to such fund
through a period of time
A wealth The service of wealth
All the wealth which flows into the
taxpayer other than a mere return on
capital
Is a fund or property existing at one A flow of wealth during a definite period
distinct point in time of time

Gain derived and severed from capital

"The fact is that property is a tree, income is the fruit; labor is a tree, income the fruit; capital is a tree, income the
fruit." A tax on income is not a tax on property. "Income," as here used, can be defined as "profits or
gains." (Madrigal v. Rafferty)

A "stock dividend" shows that the company's accumulated profits have been capitalized,
instead of distributed to the stockholders or retained as surplus available for distribution in
money or in kind should opportunity offer. Far from being a realization of profits of the
stockholder, it tends rather to postpone such realization, in that the fund represented by the
new stock has been transferred from surplus to capital, and no longer is available for actual
distribution.

The essential and controlling fact is that the stockholder has received nothing out of the
company's assets for his separate use and benefit; on the contrary, every dollar of his
original investment, together with whatever accretions and accumulations have resulted
 from employment of his money and that of the other stockholders in the business of the
company, still remains the property of the company, and subject to business risks which
may result in wiping out the entire investment. Having regard to the very truth of the
matter, to substance and not to form, he has received nothing that answers the definition of
income.

Yet, without selling, the shareholder, unless possessed of other resources, has not the
wherewithal to pay an income tax upon the dividend stock. Nothing could more clearly show
that to tax a stock dividend is to tax a capital increase, and not income, than this
demonstration that, in the nature of things, it requires conversion of capital in order to pay
the tax.

Tax is imposed not upon the stock dividend, but rather upon the stockholder's share of the
undivided profits previously accumulated by the corporation, the tax being levied as a
matter of convenience at the time such profits become manifest through the stock dividend.

A stockholder has no individual share in accumulated profits, nor in any particular part of the
assets of the corporation, prior to dividend declared.

Thus, neither under the Sixteenth Amendment nor otherwise has Congress power to tax
without apportionment a true stock dividend made lawfully and in good faith, or the
accumulated profits behind it, as income of the stockholder. The Revenue Act of 1916,
insofar as it imposes a tax upon the stockholder because of such dividend, contravenes the
provisions of Article I, 2, cl. 3, and Article I, 9, cl. 4, of the Constitution, and to this extent
is invalid notwithstanding the Sixteenth Amendment.

i. Raytheon Production Corp vs. CIR 144 F2d 110

But, to say that the recovery represents a return of capital in that it takes the place of the
business good will is not to conclude that it may not contain a taxable benefit. Although the
injured party may not be deriving a profit as a result of the damage suit itself, the
conversion thereby of his property into cash is a realization of any gain made over the cost
or other basis of the good will prior to the illegal interference. Thus A buys Blackacre for
$5,000. It appreciates in value to $50,000. B tortiously destroys it by fire. A sues and
recovers $50,000 tort damages from B. Although no gain was derived by A from the suit, his
prior gain due to the appreciation in value of Blackacre is realized when it is turned into cash
by the money damages.

Compensation for the loss of Raytheon's good will in excess of its cost is gross income.

Where the cost basis that may be assigned to property has been wholly speculative, the gain
has been held to be entirely conjectural and not taxable. A trespasser had taken coal and
then destroyed the entries so that the amount of coal taken could not be determined. Since
there was no way of knowing whether the recovery was greater than the basis for the coal
taken, the gain was purely conjectural and not taxed. Magill explains the result as follows:
"as the amount of coal removed could not be determined until a final disposition of the
property, the computation of gain or loss on the damages must await that disposition."
Taxable Income, pp. 339-340. The same explanation may be applied to Farmers' &
Merchants' Bank v. Commissioner, supra, which relied on the Strother case in finding no
gain. The recovery in that case had been to compensate for the injury to good will and
business reputation of the plaintiff bank inflicted by defendant reserve banks' wrongful
conduct in collecting checks drawn on the plaintiff bank by employing "agents who would
 appear daily at the bank with checks and demand payment thereof in cash in such a manner
as to attract unfavorable public comment". Since the plaintiff bank's business was not
destroyed but only injured and since it continued in business, it would have been difficult to
require the taxpayer to prove what part of the basis of its good will should be attributed to
the recovery. In the case at bar, on the contrary, the entire business and good will were
destroyed so that to require the taxpayer to prove the cost of the good will is no more
impractical than if the business had been sold. We conclude that the portion of the $410,000
attributable to the suit is taxable income.

b) Income from whatever source

Despite the broad parameters provided, however, we find that the CIR's powers of distribution, apportionment or
allocation of gross income and deductions under Section 43 of the 1993 NIRC and Section 179 of Revenue
Regulation No. 2 does not include the power to impute "theoretical interests" to the controlled taxpayer's
transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the term gross income is understood to mean
all income from whatever source derived, including, but not limited to the following items: compensation for
services, including fees, commissions, and similar items; gross income derived from business; gains derived from
dealings in property; interest; rents; royalties; dividends; annuities; prizes and winnings; pensions; and partners
distributive share of the gross income of general professional partnership. [43] While it has been held that the phrase
"from whatever source derived" indicates a legislative policy to include all income not expressly exempted within
the class of taxable income under our laws, the term "income" has been variously interpreted to mean
"cash received or its equivalent", "the amount of money coming to a person within a specific time" or "something
distinct from principal or capital."[44] Otherwise stated, there must be proof of the actual or, at the very least,
probable receipt or realization by the controlled taxpayer of the item of gross income sought to be distributed,
apportioned or allocated by the CIR.

i. Sec 50 Regulations No. 2

SECTION 50. Forgiveness of indebtedness. The cancellation and forgiveness of indebtedness may amount to a
payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If, for example, an
individual performs services for a creditor, who, in consideration thereof cancels the debt, income to that amount is
realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and
without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor
and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the
debt, the transaction has the effect of the payment of a dividend.

CIR vs. PROCTER & GAMBLE

The term "taxpayer" is defined in our NIRC as referring to "any person subject to
tax imposed by the Title [on Tax on Income]." It thus becomes important to note that under
Section 53 (c) of the NIRC, the withholding agent who is "required to deduct and withhold
any tax" is made " personally liable for such tax" and indeed is indemnified against any
claims and demands which the stockholder might wish to make in questioning the amount of
payments effected by the withholding agent in accordance with the provisions of the NIRC.
The withholding agent, P&G-Phil., is directly and independently liable for the correct amount
of the tax that should be withheld from the dividend remittances. The withholding agent is,
moreover, subject to and liable for deficiency assessments, surcharges and penalties should
the amount of the tax withheld be finally found to be less than the amount that should have
been withheld under law.

A "person liable for tax" has been held to be a "person subject to tax" and properly
considered a "taxpayer." The termsliable for tax" and "subject to tax" both connote legal
obligation or duty to pay a tax. It is very difficult, indeed conceptually impossible, to
consider a person who is statutorily made "liable for tax" as not "subject to tax." By any
 reasonable standard, such a person should be regarded as a party in interest, or as a person
having sufficient legal interest, to bring a suit for refund of taxes he believes were illegally
collected from him.

CHAPTER X - ESTATES AND TRUSTS

Section 60. Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals shall apply to the
income of estates or of any kind of property held in trust, including:
1) Income accumulated in trust for the benefit of unborn or unascertained person or persons
with contingent interests, and income accumulated or held for future distribution under the
terms of the will or trust;
2) Income which is to be distributed currently by the fiduciary to the beneficiaries, and
income collected by a guardian of an infant which is to be held or distributed as the court
may direct;
3) Income received by estates of deceased persons during the period of administration or
settlement of the estate; and
4) Income which, in the discretion of the fiduciary, may be either distributed to the
beneficiaries or accumulated.

(B) Exception. - The tax imposed by this Title shall not apply to employee's trust which forms
part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of some
or all of his employees (1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees the earnings and
principal of the fund accumulated by the trust in accordance with such plan, and (2) if under
the trust instrument it is impossible, at any time prior to the satisfaction of all liabilities with
respect to employees under the trust, for any part of the corpus or income to be (within the
taxable year or thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of his employees: Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to the extent that it
exceeds the amount contributed by such employee or distributee.

(C) Computation and Payment. -

(1) In General. - The tax shall be computed upon the taxable income of the estate or trust
and shall be paid by the fiduciary, except as provided in Section 63 (relating to revocable
trusts) and Section 64 (relating to income for the benefit of the grantor).

(2) Consolidation of Income of Two or More Trusts. - Where, in the case of two or more trusts,
the creator of the trust in each instance is the same person, and the beneficiary in each
instance is the same, the taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and such proportion of said
tax shall be assessed and collected from each trustee which the taxable income of the trust
administered by him bears to the consolidated income of the several trusts.

III. Classification of Income Taxpayers

The Tax Code classifies taxpayers into four main groups, namely:
1) Individuals,
2) Corporations,
3) Estates under Judicial Settlement and
4) Irrevocable Trusts (irrevocable both as to corpus and as to income).
 A. Individuals
1. Citizens
Sections 1 and 2, Article IV, 1987 Constitution

Section 1. The following are citizens of the Philippines:

1. Those who are citizens of the Philippines at the time of the adoption of this Constitution;
2. Those whose fathers or mothers are citizens of the Philippines;
3. Those born before January 17, 1973, of Filipino mothers, who elect Philippine Citizenship
upon reaching the age of majority; and
4. Those who are naturalized in the accordance with law.

Section 2. Natural-born citizens are those who are citizens of the Philippines from birth
without having to perform any act to acquire or perfect their Philippine citizenship. Those
who elect Philippine citizenship in accordance with paragraph (3), Section 1 hereof shall be
deemed natural-born citizens.

a) Resident Citizens

Sec 5 last par, Revenue Regulations No. 2

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

b) Non-resident Alien

3. General Professional Partnership Section 22(B), NIRC

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

ALIENS
1. Resident Aliens
2. Non-resident Aliens
a) Engaged in trade or business (NRAE)
b) Not engaged in trade or business (NRANE)

RA NRAE NRANE
Tax rates Subject to Subject to 25% on income
graduated graduated income within the
income tax rates tax rates Philippines (flat
 tax)
Deductions Can avail of Cannot avail
deductions
Exemptions Allowed Entitled to
personal and personal
additional exemptions only
exemptions by way of
reciprocity and not
to additional
exemptions

RC NRC RA NRA
Without Immigrant resides Stay in the Stays for a
intention of abroad an immigrant Philippines is definite short
transferring for which a foreign either: period of time
his physical visa has been secured 1. definite and
presence extended
abroad
whether to 2. indefinite
stay
permanently
or
temporarily
as an
overseas
contract
worker
Permanent Lives in the Transient
employee Philippines and comes to the
 employment on a has no definite Philippines for
more or less intention as to a definite
permanent basis his stay purpose,
which in its
Overseas contract nature may be
worker - time spent promptly
abroad is immaterial accomplished
as long as the
workers Note: A mere
employment contract floating
passed through and intention
registered with the indefinite as to
POEA time to return
to another
country is
NOT
sufficient to
constitute him
as a transient.
Contract worker: Purpose is of
a. leaves the country such a nature
on account of a that an extended
contract for stay may be
employment which is necessary for its
renewed from time to accomplishment,
time under such and to that end
circumstance as to the alien makes
require him to be the Philippines
physically present his temporary
abroad most of the home, although
time (not less than he intends to
183 days) return to his
domicile abroad.

GENERAL PROFESSIONAL PARTNERSHIP

TAN vs. CIR
GPP Ordinary business partnership
The income tax is imposed not on the treated as a corporation for income tax
professional partnership, which is tax purposes and so subject to the corporate
exempt, but on the partners themselves in income tax
their individual capacity computed on their
distributive shares of partnership profits
not itself an income taxpayer; income tax- Itself a taxpayer for corporate income tax
exempt

Section 23 of the Tax Code

Sec. 23. Tax liability of members of general professional partnerships. (a) Persons
exercising a common profession in general partnership shall be liable for income tax only in
their individual capacity, and the share in the net profits of the general professional
partnership to which any taxable partner would be entitled whether distributed or otherwise,
shall be returned for taxation and the tax paid in accordance with the provisions of this Title.
X x x x x
 There is, then and now, no distinction in income tax liability between a person who practices
his profession alone or individually and one who does it through partnership (whether
registered or not) with others in the exercise of a common profession. Indeed, outside of the
gross compensation income tax and the final tax on passive investment income, under the
present income tax system all individuals deriving income from any source whatsoever are
treated in almost invariably the same manner and under a common set of rules.

We can well appreciate the concern taken by petitioners if perhaps we were to consider
Republic Act No. 7496 as an entirely independent, not merely as an amendatory, piece of
legislation. The view can easily become myopic, however, when the law is understood, as it
should be, as only forming part of, and subject to, the whole income tax concept and
precepts long obtaining under the National Internal Revenue Code. To elaborate a little, the
phrase "income taxpayers" is an all embracing term used in the Tax Code, and it practically
covers all persons who derive taxable income. The law, in levying the tax, adopts the most
comprehensive tax situs of nationality and residence of the taxpayer (that renders
citizens, regardless of residence, and resident aliens subject to income tax liability on their
income from all sources) and of the generally accepted and internationally recognized
income taxable base (that can subject non-resident aliens and foreign corporations to
income tax on their income from Philippine sources).

Partnerships are, under the Code, either

1. "taxable partnerships" or
Ordinarily, partnerships, no matter how created or organized, are subject to income tax (and
thus alluded to as "taxable partnerships") which, for purposes of the above
categorization, are by law assimilated to be within the context of, and so legally
contemplated as, corporations. Except for few variances, such as in the application of the
"constructive receipt rule" in the derivation of income, the income tax approach is alike to
both juridical persons. Obviously, SNIT is not intended or envisioned, as so correctly pointed
out in the discussions in Congress during its deliberations on Republic Act 7496,
aforequoted, to cover corporations and partnerships which are independently subject to the
payment of income tax.

2. "exempt partnerships."
"Exempt partnerships," upon the other hand, are not similarly identified as corporations nor
even considered as independent taxable entities for income tax purposes. A GPP is such an
example. Here, the partners themselves, not the partnership (although it is still obligated to
file an income tax return [mainly for administration and data]), are liable for the payment of
income tax in their individual capacity computed on their respective and distributive shares
of profits. In the determination of the tax liability, a partner does so as an individual, and
there is no choice on the matter. In fine, under the Tax Code on income taxation, the general
professional partnership is deemed to be no more than a mere mechanism or a flow-through
entity in the generation of income by, and the ultimate distribution of such income to,
respectively, each of the individual partners.

Section 6 of Revenue Regulation No. 2-93 did not alter, but merely confirmed, the above
standing rule as now so modified by Republic Act
No. 7496 on basically the extent of allowable deductions applicable to all individual income
taxpayers on their non-compensation income. There is no evident intention of the law, either
before or after the amendatory legislation, to place in an unequal footing or in significant
variance the income tax treatment of professionals who practice their respective professions
individually and of those who do it through a general professional partnership.
ESTATES and TRUST

CIR vs.VISAYAN ELECTRIC COMPANY and CTA, 1968

And, for tax purposes, the employees' reserve fund is a separate taxable
entity.8 Respondent company then, while retaining legal title and custody 9 over the property,
holds it in trust for the beneficiaries mentioned in the resolution creating the trust, in the
absence of any condition therein which would, in effect, destroy the intention to create a
trust.

Given the fact that the dividends are returns of the trust estate and not of the grantor
company, we must say that petitioner misconceived the import of the law when he assessed
said dividends as part of the income of the company. Similarly, the tax court should not have
considered them at all as the company's "receipts, revenues and profits" which are exempt
from income tax.

2. As we look back at the resolution creating the employees' reserve fund and having in
mind the company's admission that it is "solely for the benefit of the employees" and that
the company is holding said fund "merely as trustee of its employees," 11 we reach the
conclusion that the fund may not be diverted for other purposes, and that the trust so
created is irrevocable. For, really nothing in respondent company's acts suggests that it
reserved the power to revoke that fund or for that matter appropriate it for itself. The trust
binds the company to its employees. The trust created is not therefore a revocable trust a
provided in Section 59 of the Tax Code. 12 Nor is it a trust contemplated in Section 60, the
income from which is for the benefit of the grantor.

The assessment made by petitioner and the ruling of the CTA on lack of income tax liability
were on a mistaken premise, but that the trust established by respondent should pay the
taxes imposed upon individuals.

CIR vs. CA, CTA, GCL RETIREMENT PLAN, 1992

In so far as employees' trusts are concerned, the foregoing provision should be taken in
relation to then Section 56(b) (now 53[b]) of the Tax Code, as amended RA 1983. This
provision specifically exempted employee's trusts from income tax and is repeated
hereunder for emphasis:
Sec. 56. Imposition of Tax. (a) Application of tax. The taxes imposed by this Title upon
individuals shall apply to the income of estates or of any kind of property held in trust.
xxx xxx xxx
(b) Exception. The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an employer for the benefit of
some or all of his
employees . . .

The tax-exemption privilege of employees' trusts, as distinguished from any other kind
of property held in trust, springs from the foregoing provision. It is unambiguous. Manifest
therefrom is that the tax law has singled out employees' trusts for tax exemption.

And rightly so, by virtue of the raison de'etre behind the creation of employees' trusts.
Employees' trusts or benefit plans normally provide economic assistance to employees upon
the occurrence of certain contingencies, particularly, old age retirement, death, sickness, or
disability. It provides security against certain hazards to which members of the Plan may be
exposed. It is an independent and additional source of protection for the working group.
What is more, it is established for their exclusive benefit and for no other purpose.

The tax advantage in Rep. Act No. 1983, Section 56(b), was conceived in order to encourage
the formation and establishment of such private Plans for the benefit of laborers and
employees outside of the Social Security Act. Enlightening is a portion of the explanatory
note to H.B. No. 6503, now R.A. 1983, reading:
Considering that under Section 17 of the social Security Act, all contributions collected and
payments of sickness, unemployment, retirement, disability and death benefits made
thereunder together with the income of the pension trust are exempt from any tax,
assessment, fee, or charge, it is proposed that a similar system providing for retirement, etc.
benefits for employees outside the Social Security Act be exempted from income taxes.
(Congressional Record, House of Representatives, Vol. IV, Part. 2, No. 57, p. 1859, May 3,
1957; cited in Commissioner of Internal Revenue v. Visayan Electric Co., et al., G.R. No. L-
22611, 27 May 1968, 23 SCRA 715); emphasis supplied.

It is evident that tax-exemption is likewise to be enjoyed by the income of the pension trust.
Otherwise, taxation of those earnings would result in a diminution accumulated income and
reduce whatever the trust beneficiaries would receive out of the trust fund. This would run
afoul of the very intendment of the law.

There can be no denying either that the final withholding tax is collected from income in
respect of which employees' trusts are declared exempt (Sec. 56 [b], now 53 [b], Tax Code).
The application of the withholdings system to interest on bank deposits or yield from deposit
substitutes is essentially to maximize and expedite the collection of income taxes by
requiring its payment at the source. If an employees' trust like the GCL enjoys a tax-exempt
status from income, we see no logic in withholding a certain percentage of that income
which it is not supposed to pay in the first place.

CORPORATIONS

PASCUAL vs. CIR

DOCTRINE: The sharing of returns does not in itself establish a partnership whether or not
the persons sharing therein have a joint or common right or interest in the property. There
must be a clear intent to form a partnership, the existence of a juridical personality different
from the individual partners, and the freedom of each party to transfer or assign the whole
property.

FACTS: Petitioners Mariano Pascual and Renato Dragon bought 2 parcels of land from
Santiago Bernardino, and they bought another 3 parcels of land from Juan Roque. The first
two parcels of land were sold by petitioners in 1968 to Marenir Development Corporation,
while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson
on 1970. Petitioners realized a net profit in the sale made in 1968 in the amount of
P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of
the tax amnesties granted in the said years.

However petitioners were assessed and required to pay a total amount of P107,101.70 as
alleged deficiency corporate income taxes for the years 1968 and 1970. Petitioners
protested the said assessment asserting that they had availed of tax amnesties way back in
1974.
In a reply, respondent Commissioner informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions formed an unregistered partnership
or joint venture taxable as a corporation under Section 20(b) and its income was subject to
the taxes prescribed under Section 24, both of the NIRC that the unregistered partnership
was subject to corporate income tax as distinguished from profits derived from the
partnership by them which is subject to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability of the
unregistered partnership. Hence, the petitioners were required to pay the deficiency income
tax assessed.

Petitioners filed a petition for review with the respondent CTA which affirmed the decision of
the respondent commissioner. It ruled that an unregistered partnership was in fact formed
by petitioners which like a corporation was subject to corporate income tax distinct from that
imposed on the partners.

In a separate dissenting opinion, Associate Judge Roaquin stated that considering the
circumstances of this case, although there might in fact be a co-ownership between the
petitioners, there was no adequate basis for the conclusion that they thereby formed an
unregistered partnership which made "them liable for corporate income tax under the Tax
Code.

ISSUE:
WON petitioners formed an unregistered partnership subject to corporate income tax.

HELD:
NO. In the present case, there is clear evidence of co-ownership between the petitioners.
There is no adequate basis to support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions whereby they purchased properties
and sold the same a few years thereafter did not thereby make them partners. They shared
in the gross profits as co- owners and paid their capital gains taxes on their net profits and
availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to
have formed an unregistered partnership which is thereby liable for corporate income tax, as
the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to
have been formed, since there is no such existing unregistered partnership with a distinct
personality nor with assets that can be held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as partners for this unpaid obligation of the
partnership. However, as petitioners have availed of the benefits of tax amnesty as
individual taxpayers in these transactions, they are thereby relieved of any further tax
liability arising therefrom.

LORENZO T. OA vs. CIR, 1972

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit
themselves to holding the properties inherited by them. Indeed, it is admitted that during
the material years herein involved, some of the said properties were sold at considerable
profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oa, in the purchase
and sale of corporate securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in accordance with their respective
shares in the inheritance. In these circumstances, it is Our considered view that from the
moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Oa as a
common fund in undertaking several transactions or in business, with the intention of
deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an
unregistered partnership within the purview of the above-mentioned provisions of the Tax
Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of
our corporate tax laws aforementioned. Before the partition and distribution of the estate of
the deceased, all the income thereof does belong commonly to all the heirs, obviously,
without them becoming thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is actually and physically
distributed among the heirs, for it is easily conceivable that after knowing their respective
shares in the partition, they might decide to continue holding said shares under the common
management of the administrator or executor or of anyone chosen by them and engage in
business on that basis. Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the
National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for
holding the appellants therein to be unregistered co-partners for tax purposes, that their
common fund "was not something they found already in existence" and that "it was not a
property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as
petitioners are doing here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already indicated, for tax purposes,
the co-ownership of inherited properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the incomes derived therefrom
are used as a common fund with intent to produce profits for the heirs in proportion to their
respective shares in the inheritance as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in the corresponding testate or
intestate proceeding. The reason for this is simple. From the moment of such partition, the
heirs are entitled already to their respective definite shares of the estate and the incomes
thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes
in connection therewith. If after such partition, he allows his share to be held in common
with his co-heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at least, an unregistered
partnership is formed. This is exactly what happened to petitioners in this case.

ISSUE: As regards the second question raised by petitioners about the segregation, for the
purposes of the corporate taxes in question, of their inherited properties from those acquired
by them subsequently, We consider as justified the following ratiocination of the Tax Court in
denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and sale of real properties and
corporate securities and should not include the income derived from the inherited
properties. It is admitted that the inherited properties and the income derived therefrom
were used in the business of buying and selling other real properties and corporate
securities. Accordingly, the partnership income must include not only the income derived
from the purchase and sale of other properties but also the income of the inherited
properties.

Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or
estate is not distributed or, at least, partitioned, but the moment their respective known
shares are used as part of the common assets of the heirs to be used in making profits, it is
but proper that the income of such shares should be considered as the part of the taxable
income of an unregistered partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the
Tax Court in the aforementioned resolution denying petitioners' motion for reconsideration of
the decision of said court. Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the herein petitioners
have formed an unregistered partnership and, therefore, have to be taxed as such, it might
be recalled that the petitioners in their individual income tax returns reported their shares of
the profits of the unregistered partnership. We think it only fair and equitable that the
various amounts paid by the individual petitioners as income tax on their respective shares
of the unregistered partnership should be deducted from the deficiency income tax found by
this Honorable Court against the unregistered partnership. (page 7, Memorandum for the
Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership
must be reduced by the amounts of income tax paid by each petitioner on his share of
partnership profits. This is not correct; rather, it should be the other way around. The
partnership profits distributable to the partners (petitioners herein) should be reduced by the
amounts of income tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the years in question, but
the income tax due from the partnership has been correctly assessed. Since the individual
income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the
Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they
might have paid as individual income tax cannot be credited as part payment of the taxes
herein in question. It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and, worse, considering the time
that has lapsed since they paid their individual income taxes, they may already be barred by
prescription from recovering their overpayments in a separate action. We do not agree. As
We see it, the case of petitioners as regards the point under discussion is simply that of a
taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right to be reimbursed what
he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not
seem right to virtually disregard prescription merely upon the ground that the reason for the
delay is precisely because the taxpayers failed to make the proper return and payment of
the corporate taxes legally due from them. In principle, it is but proper not to allow any
relaxation of the tax laws in favor of persons who are not exactly above suspicion in their
conduct vis-a-vis their tax obligation to the State.

EVANGELISTA vs. COLLECTOR OF INTERNAL REVENUE, 1957

 ISSUE: Whether petitioners are subject to the tax on corporations provided for in section 24
of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as
well as to the residence tax for corporations and the real estate dealers fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the terms
"corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent
parts of which read:

SEC. 24. Rate of tax on corporations.There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources
by every corporation organized in, or existing under the laws of the Philippines, no matter
how created or organized but not including duly registered general co-partnerships
(compaias colectivas), a tax upon such income equal to the sum of the following: . . .

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

Article 1767 of the Civil Code of the Philippines provides:

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

Essential elements of a partnership are two, namely:

(a) an agreement to contribute money, property or industry to a common fund; and
(b) intent to divide the profits among the contracting parties. The first element is
undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did,
contribute money and property to a common fund. Hence, the issue narrows down to their
intent in acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage in real estate
transactions for monetary gain and then divide the same among themselves, because:
1) Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said common fund.
2) They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.
3) The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945
to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.
4) Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus,
the affairs relative to said properties have been handled as if the same belonged to a
corporation or business and enterprise operated for profit.
5) The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6) Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute
a partnership, the collective effect of these circumstances is such as to leave no room for
doubt on the existence of said intent in petitioners herein. Only one or two of the
aforementioned circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not co-partners, for, in
consequence of the acts performed by them, a legal entity, with a personality independent
of that of its members, did not come into existence, and some of the characteristics of
partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court
of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue Code
includes "partnerships" among the entities subject to the tax on "corporations", said Code
must allude, therefore, to organizations which are not necessarily "partnerships", in the
technical sense of the term. Thus, for instance, section 24 of said Code exempts from the
aforementioned tax "duly registered general partnerships which constitute precisely one of
the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section
84(b) of said Code, "the term corporation includes partnerships, no matter how created or
organized." This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the usual requirements of the
law on partnerships, in order that one could be deemed constituted for purposes of the tax
on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which
has a legal personality of its own, independent of that of its members. Accordingly, the
lawmaker could not have regarded that personality as a condition essential to the existence
of the partnerships therein referred to. In fact, as above stated, "duly registered general
copartnerships" which are possessed of the aforementioned personality have been
expressly excluded by law (sections 24 and 84 [b] from the connotation of the term
"corporation" It may not be amiss to add that petitioners' allegation to the effect that their
liability in connection with the leasing of the lots above referred to, under the management
of one person even if true, on which we express no opinion tends to increase the
similarity between the nature of their venture and that corporations, and is, therefore, an
additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently
from "partnerships". By specific provisions of said laws, such "corporations" include
"associations, joint-stock companies and insurance companies." However, the term
"association" is not used in the aforementioned laws.

For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships with the exception only of duly registered general co-partnerships within
the purview of the term "corporation." It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned and are subject to the
income tax for corporations.
 As regards the residence of tax for corporations, section 2 of Commonwealth Act No.
465 provides in part:
Entities liable to residence tax.-Every corporation, no matter how created or organized,
whether domestic or resident foreign, engaged in or doing business in the Philippines shall
pay an annual residence tax of five pesos and an annual additional tax which in no case,
shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how
created or organized.

Considering that the pertinent part of this provision is analogous to that of section 24 and 84
(b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter
was approved on June 15, 1939, the day immediately after the approval of said
Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and
"partnership" are used in both statutes with substantially the same meaning. Consequently,
petitioners are subject, also, to the residence tax for corporations.

AFISCO INSURANCE CORP vs. CIR, 1999

Pool Taxable as a Corporation

ISSUE: WON pool or clearing house was an informal partnership, which was taxable as a
corporation under the NIRC. They point out that the reinsurance policies were written by
them individually and separately, and that their liability was limited to the extent of their
allocated share in the original risks thus reinsured. Hence, the pool did not act or earn
income as a reinsurer. Its role was limited to its principal function of allocating and
distributing the risk(s) arising from the original insurance among the signatories to the treaty
or the members of the pool based on their ability to absorb the risk(s) ceded[;] as well as the
performance of incidental functions, such as records, maintenance, collection and custody of
funds, etc.

Petitioners belie the existence of a partnership in this case, because (1) they, the
reinsurers, did not share the same risk or solidary liability; [14] (2) there was no common
fund;[15] (3) the executive board of the pool did not exercise control and management of its
funds, unlike the board of directors of a corporation; [16] and (4) the pool or clearing house
was not and could not possibly have engaged in the business of reinsurance from which it
could have derived income for itself.

The Court is not persuaded. This Court rules that the Court of Appeals, in affirming the
CTA which had previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC, as worded in the year ending 1975, provides:

SEC. 24. Rate of tax on corporations. -- (a) Tax on domestic corporations. -- A tax is
hereby imposed upon the taxable net income received during each taxable year
from all sources by every corporation organized in, or existing under the laws of the
Philippines, no matter how created or organized, but not including:
1. duly registered general co-partnership (compaias colectivas),
2. general professional partnerships,
3. private educational institutions, and
4. building and loan associations xxx.
 Ineludibly, the Philippine legislature included in the concept of corporations those
entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NLRCs inclusion of such entities in the tax on corporations
was made even clearer by the Tax Reform Act of 1997, which amended the Tax
Code. Pertinent provisions of the new law read as follows:
SEC. 27. Rates of Income Tax on Domestic Corporations. --
(A) In General. -- Except as otherwise provided in this Code, an income tax of thirty-five
percent (35%) is hereby imposed upon the taxable income derived during each taxable year
from all sources within and without the Philippines by every corporation, as defined in
Section 22 (B) of this Code, and taxable under this Title as a corporation xxx.

SEC. 22. -- Definition. -- When used in this Title:

xxx xxx xxx
(B) The term corporation shall include partnerships, no matter how created or organized,
joint-stock companies, joint accounts (cuentas en participacion), associations, or insurance
companies, but does not include general professional partnerships [or] a joint venture or
consortium formed for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract without the Government. General
professional partnerships are partnerships formed by persons for the sole purpose of
exercising their common profession, no part of the income of which is derived from engaging
in any trade or business.
xxx xxx xxx."

Thus, the Court in Evangelista v. Collector of Internal Revenue [22] held that Section
24 covered these unregistered partnerships and even associations or joint accounts, which
had no legal personalities apart from their individual members. The Court of Appeals
astutely applied Evangelista:
xxx Accordingly, a pool of individual real property owners dealing in real estate business
was considered a corporation for purposes of the tax in sec. 24 of the Tax
Code in Evangelista v. Collector of Internal Revenue, supra. The Supreme Court said:

The term partnership includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on.

Article 1767 of the Civil Code recognizes the creation of a contract of partnership when
two or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves. [25] Its requisites
are: (1) mutual contribution to a common stock, and (2) a joint interest in the
profits.[26] In other words, a partnership is formed when persons contract to devote to a
common purpose either money, property, or labor with the intention of dividing the profits
between themselves.[27] Meanwhile, an association implies associates who enter into a
joint enterprise x x x for the transaction of business.

In the case before us, the ceding companies entered into a Pool Agreement [29] or an
association[30] that would handle all the insurance businesses covered under their quota-
share reinsurance treaty[31]and surplus reinsurance treaty[32]with Munich. The following
unmistakably indicates a partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables that are deposited
in the name and credit of the pool. This common fund pays for the administration and
operation expenses of the pool.
(2) The pool functions through an executive board, which resembles the board of directors of a
corporation, composed of one representative for each of the ceding companies.
(3) True, the pool itself is not a reinsurer and does not issue any insurance policy; however, its
work is indispensable, beneficial and economically useful to the business of the ceding
companies and Munich, because without it they would not have received their
premiums. The ceding companies share in the business ceded to the pool and in the
expenses according to a Rules of Distribution annexed to the Pool Agreement. Profit
motive or business is, therefore, the primordial reason for the pools formation. As aptly
found by the CTA:
xxx The fact that the pool does not retain any profit or income does not obliterate an
antecedent fact, that of the pool being used in the transaction of business for profit. It is
apparent, and petitioners admit, that their association or coaction was indispensable [to] the
transaction of the business. x x x If together they have conducted business, profit must
have been the object as, indeed, profit was earned. Though the profit was apportioned
among the members, this is only a matter of consequence, as it implies that profit actually
resulted.

The petitioners reliance on Pascual v. Commissioner is misplaced, because the facts

obtaining therein are not on all fours with the present case. In Pascual, there was no
unregistered partnership, but merely a co-ownership which took up only two isolated
transactions. The Court of Appeals did not err in applying Evangelista, which involved a
partnership that engaged in a series of transactions spanning more than ten years, as in the
case before us.

c) Co-ownership Art. 484 Civil Code

Art. 484. There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons.

IV. Tax Base & Tax Rates

A. Individuals

1. Resident Citizens & Resident Aliens Section 24, NIRC

Not over P10,000
Over P10,000 but not over P30,000
Over P30,000 but not over P70,000
Over P70,000 but not over P140,000
Over P140,000 but not over P250,000
Over P250,000 but not over P500,000
Over P500,000
5%
P500+10% of the excess over P10,000
P2,500+15% of the excess over P30,000
P8,500+20% of the excess over P70,000
P22,500+25% of the excess over P140,000
P50,000+30% of the excess over P250,000
P125,000+34% of the excess over P500,000 in 1998.

TAX ON INDIVIDUALS
Section 24. Income Tax Rates.

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

(1) An income tax is hereby imposed:

a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B),
(C) and (D) of this Section, derived for each taxable year from all sources within and without the Philippines be
every individual citizen of the Philippines residing therein;
b) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B),
(C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual
citizen of the Philippines who is residing outside of the Philippines including overseas contract workers referred to
in Subsection(C) of Section 23 hereof; and
c) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (b),
(C) and (D) of this Section, derived for each taxable year from all sources within the Philippines by an individual
alien who is a resident of the Philippines.

The tax shall be computed in accordance with and at the rates established in the following schedule:

Provided, That effective January 1, 1999, the top marginal rate shall be thirty-three percent (33%) and effective
January 1, 2000, the said rate shall be thirty-two percent (32%).

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

(B) Rate of Tax on Certain Passive Income.

(1) Interests, Royalties, Prizes, and Other Winnings. - A final tax at the rate of twenty percent (20%) is hereby
imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from
deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other
literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except
prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of
Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources
within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject
to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further,
That interest income from long-term deposit or investment in the form of savings, common or individual trust funds,
deposit substitutes, investment management accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection:
Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%; and
Less than three (3) years - 20%

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

(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - The provisions of Section 39(B)
notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized
during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic
corporation, except shares sold, or disposed of through the stock exchange.
Not over P100,000 5%
On any amount in excess of P100,000 10%

(D) Capital Gains from Sale of Real Property. -

(1) In General. - The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross
selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other
disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and
other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any,
on gains from sales or other dispositions of real property to the government or any of its political subdivisions or
agencies or to government-owned or controlled corporations shall be determined either under Section 24 (A) or
under this Subsection, at the option of the taxpayer.

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

Revenue Regulation No. 10-98

Issued September 2, 1998 prescribes the regulations to implement RA No. 8424 relative to
the imposition of income taxes on income derived under the Foreign Currency Deposit and
Offshore Banking Systems. Specifically, interest income which is actually or constructively
received by a resident citizen of the Philippines or by a resident alien individual from a
foreign currency bank deposit will be subject to a final withholding tax of 7.5%. The
depository bank will withhold and remit the tax. If a bank account is jointly in the name of a
non-resident citizen, 50% of the interest income from such bank deposit will be treated as
exempt while the other 50% will be subject to a final withholding tax of 7.5%. The
Regulations will apply on taxable income derived beginning January 1, 1998 pursuant to the
provisions of Section 8 of RA 8424. In case of deposits which were made in 1997, only that
portion of interest which was actually or constructively received by a depositor starting
January 1, 1998 is taxable.

Revenue Regulation No. 8-98

Issued September 2, 1998 amends pertinent portions of Revenue Regulations Nos. 11-96
and 2-98 relative to the tax treatment of the sale, transfer or exchange of real property.
Specifically, the Capital Gains Tax (CGT) Return will be filed by the seller within 30 days
following each sale or disposition of real property. Payment of the CGT will be made to an
Authorized Agent Bank (AAB) located within the Revenue District Office (RDO) having
jurisdiction over the place where the property being transferred is located. Creditable
withholding taxes, on the other hand, deducted and withheld by the withholding agent/buyer
on the sale, transfer or exchange or real property classified as ordinary asset will be paid by
the withholding agent/buyer upon filing of the return with the AAB located within the RDO
having jurisdiction over the place where the property being transferred is located. Payment
will have to be done within 10 days following the end of the month in which the transaction
occurred, provided, however, that taxes withheld in December will be filed on or before
January 25 of the following year.

Revenue Regulation No. 13-99

Issued September 14, 1999 prescribes the regulations for the exemption of a citizen or a
resident alien individual from the payment of the 6% Capital Gains Tax on the sale, exchange
or disposition of his principal residence. In order for a person to be exempted from the
payment of the tax, he should submit, together with the required documents, a Sworn
Declaration of his intent to avail of the tax exemption to the Revenue District Office having
jurisdiction over the location of his principal residence within (30) days from the date of the
sale, exchange or disposition of the principal residence. The proceeds from the sale,
exchange or disposition of the principal residence must be fully utilized in acquiring or
constructing the new principal residence within eighteen (18) calendar months from the date
of the sale, exchange or disposition. In case the entire proceeds of the sale is not utilized for
the purchase or construction of a new principal residence, the Capital Gains Tax will be
computed based on the formula specified in the Regulations.

If the seller fails to utilize the proceeds of sale or disposition in full or in part within the 18-
month reglementary period, his right of exemption from the Capital Gains Tax did not arise
on the extent of the unutilized amount, in which event, the tax due thereon will immediately
become due and demandable on the 31st day after the date of the sale, exchange or
disposition of the principal residence.

If the individual taxpayer's principal residence is disposed in exchange for a condominium

unit, the disposition of the taxpayer's principal residence will not be subjected to the Capital
Gains Tax herein prescribed, provided that the said condominium unit received in the
exchange will be used by the taxpayer-transferor as his new principal residence.

Revenue Regulation No. 14-2000

Issued December 29, 2000 amends Sections 3(2), 3 and 6 of RR No. 13-99 relative to the
sale, exchange or disposition by a natural person of his "principal residence".

The residential address shown in the latest income tax return filed by the vendor/transferor
immediately preceding the date of sale of said real property shall be treated, for purposes of
these Regulations, as a conclusive presumption about his true residential address, the
certification of the Barangay Chairman, or Building Administrator (in case of condominium
unit), to the contrary notwithstanding, in accordance with the doctrine of admission against
interest or the principle of estoppel.

The seller/transferor's compliance with the preliminary conditions for exemption from the 6%
capital gains tax under Sec. 3(1) and (2) of the Regulations will be sufficient basis for the
RDO to approve and issue the Certificate Authorizing Registration (CAR) or Tax Clearance
Certificate (TCC) of the principal residence sold, exchanged or disposed by the aforesaid
 taxpayer. Said CAR or TCC shall state that the said sale, exchange or disposition of the
taxpayer's principal residence is exempt from capital gains tax pursuant to Sec. 24 (D)(2) of
the Tax Code, but subject to compliance with the post-reporting requirements imposed under
Sec. 3(3) of the Regulations.

REVENUE REGULATIONS NO. 9-2012 issued on June 1, 2012 implements Sections 24(D)
(1), 27(D)(5), 57, 106 and 196 of the National Internal Revenue Code (NIRC) of 1997 relative
to the non-redemption of properties sold during involuntary sales. In case of non-redemption
of properties sold during involuntary sales, regardless of the type of proceedings and
personality of mortgagees/selling persons or entities, the Capital Gains Tax (CGT), if the
property is a capital asset; or the Creditable Withholding Tax (CWT), if the property is an
ordinary asset; the Value-Added Tax (VAT) and the Documentary Stamp Tax (DST) shall
become due.

The buyer of the subject property, who is deemed to have withheld the CGT or CWT due
from the sale, shall then file the CGT return and remit the said tax to the BIR within 30 days
from expiration of the applicable statutory redemption period, or file the CWT return and
remit the said tax to the BIR within 10 days following the end of the month after expiration
of the applicable statutory redemption period, provided that, for taxes withheld in
December, the CWT return shall be filed and the taxes remitted to the BIR on or before
January 15 of the following year. If the property sold through involuntary sale is under the
circumstances which warrant the imposition of VAT, the said tax must be paid to the BIR by
the VAT-registered owner/mortgagor on or before the 20th day or 25th day, whichever is
applicable, of the month following the month when the right of redemption prescribes.

The DST return shall be filed and the said tax paid to the BIR within 5 days after the close of
the month after the lapse of the applicable statutory redemption period. The CGT/CWT/VAT
and DST shall be based on whichever is higher of the consideration (bid price of the higher
bidder) or the fair market value or the zonal value as determined in accordance with Section
6(E) of the Tax Code.

Non-resident Aliens
Sec. 25, NIRC

Section 25. Tax on Nonresident Alien Individual. -

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

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

2) Cash and/or Property Dividends from a Domestic Corporation or Joint Stock Company, or Insurance or Mutual
Fund Company or Regional Operating Headquarter or Multinational Company, or Share in the Distributable Net
Income of a Partnership (Except a General Professional Partnership), Joint Account, Joint Venture Taxable as a
Corporation or Association., Interests, Royalties, Prizes, and Other Winnings. - Cash and/or property dividends
from a domestic corporation, or from a joint stock company, or from an insurance or mutual fund company or from a
regional operating headquarter of multinational company, or the share of a nonresident alien individual in the
distributable net income after tax of a partnership (except a general professional partnership) of which he is a
partner, or the share of a nonresident alien individual in the net income after tax of an association, a joint account, or
a joint venture taxable as a corporation of which he is a member or a co-venturer; interests; royalties (in any form);
and prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under
Subsection (B)(1) of Section 24) and other winnings (except Philippine Charity Sweepstakes and Lotto winnings);
shall be subject to an income tax of twenty percent (20%) on the total amount thereof: Provided, however, that
royalties on books as well as other literary works, and royalties on musical compositions shall be subject to a final
tax of ten percent (10%) on the total amount thereof: Provided, further, That cinematographic films and similar
works shall be subject to the tax provided under Section 28 of this Code: Provided, furthermore, That interest
income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other investments evidenced by certificates in such form
prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection:
Provided, finally, that should the holder of the certificate pre-terminate the deposit or investment before the fifth
(5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository
bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:

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

Three (3) years to less than four (4) years - 12%; and
Less than three (3) years - 20%.
(3) Capital Gains. - Capital gains realized from sale, barter or exchange of shares of stock in domestic corporations
not traded through the local stock exchange, and real properties shall be subject to the tax prescribed under
Subsections (C) and (D) of Section 24.

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

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

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

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

a) Not engaged in trade or business

Republic Act No. 10378
AN ACT RECOGNIZING THE PRINCIPLE OF RECIPROCITY AS BASIS FOR THE GRANT
OF INCOME TAX EXEMPTIONS TO INTERNATIONAL CARRIERS AND RATIONALIZING
OTHER TAXES IMPOSED THEREON BY AMENDING SECTIONS 28(A)(3)(a), 109, 118
AND 236 OF THE NATIONAL INTERNAL REVENUE CODE (NIRC), AS AMENDED, AND
FOR OTHER PURPOSES

Section 1. Section 28(A)(3)(a) of Republic Act No. 8424, otherwise known as the National
Internal Revenue Code of 1997, as amended, is hereby further amended to read as follows:
"SEC. 28. Rates of Income Tax on Foreign Corporations.
"(A) Tax on Resident Foreign Corporations.
"(1) xxx
"(2) xxx
"(3). International Carrier. An international carrier doing business in the Philippines shall
pay a tax of two and one-half percent (21/2 %) on its Gross Philippine Billings as defined
hereunder:

a) International Air Carrier. Gross Philippine Billings refers to the amount of gross revenue
derived from carriage of persons, excess baggage, cargo, and mail originating from the
Philippines in a continuous and uninterrupted flight, irrespective of the place of sale or issue
and the place of payment of the ticket or passage document: Provided, That tickets
revalidated, exchanged and/or indorsed to another international airline form part of the
Gross Philippine Billings if the passenger boards a plane in a port or point in the
Philippines: Provided, further, That for a flight which originates from the Philippines, but
transshipment of passenger takes place at any part outside the Philippines on another
airline, only the aliquot portion of the cost of the ticket corresponding to the leg flown from
the Philippines to the point of transshipment shall form part of Gross Philippine Billings.

b) International Shipping. Gross . Philippine Billings means gross revenue whether for
passenger, cargo or mail originating from the Philippines up to final destination, regardless
of the place of sale or payments of the passage or freight documents.

"Provided, That international carriers doing business in the Philippines may avail of a
preferential rate or exemption from the tax herein imposed on their gross revenue derived
from the carriage of persons and their excess baggage on the basis of an applicable tax
treaty or international agreement to which the Philippines is a signatory or on the basis of
reciprocity such that an international carrier, whose home country grants income tax
exemption to Philippine carriers, shall likewise be exempt from the tax imposed under this
provision.
"x x x."

Section 2. Section 109 of the National Internal Revenue Code of 1997, as amended, is
hereby further amended to read as follows:
"SEC. 109. Exempt Transactions. - The following shall be exempt from the value-added tax:
"(A) xxx;
"xxx
"(S) Transport of passengers by international carriers;
"(T) Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,
equipment and spare parts thereof for domestic or international transport operations;
"(U) Importation of fuel, goods and supplies by persons engaged in international shipping or
air transport operations;
"(V) Services of bank, non-bank financial intermediaries performing quasi-banking functions,
and other non-bank financial intermediaries; and
"(W) Sale or lease of goods or properties or the performance of services other than the
transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts
do not exceed the amount of One million five hundred thousand pesos
(P1,500,000): Provided, That not later than January 31, 2009 and every three (3) years
thereafter, the amount herein stated shall be adjusted to its present value using the
Consumer Price Index, as published by. the National Statistics-Office (NSO);
"x x x."

Section 3. Section 118 of the National Internal Revenue Code of 1997, as amended, is
hereby further amended to read as follows:
"SEC. 118. Percentage Tax on International Carriers.

"(A) International air carriers doing; business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax of
three percent (3%) of their quarterly gross receipts.

"(B) International shipping carriers doing business in the Philippines on their gross receipts
derived from transport of cargo from the Philippines to another country shall pay a tax
equivalent to three percent (3%) of their quarterly gross receipts."

Section 4. Section 236 of the National Internal Revenue Code of 1997, as amended, is
hereby further amended to read as follows:
"SEC. 236. Registration Requirements. 1wphi1
"(A) Requirements. x x x
"xxx
"(G) Persons Required to Register for Value-Added Tax.

"(1) Any person who, in the course of trade or business, sells, barters or exchanges goods or
properties, or engages in the sale or exchange of services, shall be liable to register for
value-added tax if:

"(a) His gross sales or receipts for the past twelve (12) months, other than those that are
exempt under Section 109(A) to (V), have exceeded One million five hundred thousand
pesos (P1,500,000); or

"(b) There are reasonable grounds to believe that his gross sales or receipts for the next
twelve (12) months, other than those that are exempt under Section 109(A) to (V), will
exceed One million five hundred thousand pesos (P1,500,000).