--- II.
INCOME---
BIR RULINGS
REVENUE REGULATIONS
In general
Statutory inclusions
Section 32(A), Tax Code
Compensation for services
Section 78(A), Tax Code
Old Trust Co vs. CIR (June 3, 1929)
In 1916, the American Woolen Company adopted a resolution which
provided that the company would pay all taxes due on the salaries of
the company's officers. It calculated the employees' tax liabilities
based on a gross income that omitted, or excluded, the amount of
the income taxes themselves.
In 1925, the Bureau of Internal Revenue assessed a deficiency for
the amount of taxes paid on behalf of the company's president,
William Madison Wood, arguing that his $681,169.88 tax payment
had wrongly been excluded from his gross income in 1919, and that
his $351,179.27 tax payment had wrongly been excluded from his
gross income in 1920. Old Colony Trust Co., as the executors of
Wood's estate, filed suit in the District Court for a refund, then
appealed to the Board of Tax Appeals (the predecessor to the United
States Tax Court). The petitioners then appealed the Board's
decision to the United States Court of Appeals for the First Circuit,
which certified the following question to be decided by the U.S.
Supreme Court: "Did the payment by the employer of the income
taxes assessable against the employee constitute additional taxable
income to such employee?"
Justiciability. Chief Justice Taft, writing for the majority, first held
that the appeal of Wood's executors was a justiciable case or
controversy for the court to decide. Furthermore, the fact that the
Revenue Act of 1926 (which altered the appeals process for tax
deficiencies) was passed while the case was under review by the
Board of Tax Appeals did not cut off the judicial process sought by
the petitioners. Taft held that the principle of res judicata resolved the
jurisdictional issue, because regardless of whether the District Court
action or the Board's action were decided first, the judgment which
was first in time would then be properly appealable.
Merits. Taft held that payment of Mr. Wood's taxes by his employer
constituted additional taxable income to him for the years in
question. The fact that a person induced or permitted a third party
to pay income taxes on his behalf does not excuse him from filing a
tax return. Furthermore, Taft added, "The discharge by a third
person of an obligation to him is equivalent to receipt by the person
taxed." 279 U.S. 716 at 729.
Thus, the company's payment of Wood's tax bill was the same as
giving him extra income, regardless of the mode of payment.
Further, the payment of taxes of Wood's behalf did not constitute a
gift in the legal sense, because it was made in consideration of his
services to the company, thus making the payment part of his
compensation package. (This case did not change the general rule
that gifts are not includable in gross income for the purposes of U.S.
Federal income taxation, while some gifts but not all gifts from an
employer to an employee are taxable to the employee).
Rents
Helvering vs. Bruun (March 25, 1940)
Case:
Bruun, the landlord, leased his land in favor of a tenant. While in the
possession of the property, tenant demolished the existing building and built
a new one. Defaulting from payment of rent, Bruun cancelled the lease and
ordered tenant to surrender the land including the new building.
Petitioner contends that due to the repossession of the land, Bruun
realized a net gain of $51K and ordered the latter to pay the corresponding
tax.
Bruun refused and contends that the land needs to be sold first before he can
be claimed to have gained something.
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 SC ruled against respondent. When the lease was terminated, the
landlord repossessed the real estate and improvements and increase in value
attributable to the improvements was taxable.
No need to sell the property first before contending that the landlord
gained from his original capital.
Facts:
Bruun, as owner and landlord, leased a lot of land and the building
thereon to a tenant for a term of 99 years.
The lease provided that the lessee may at any time remove or tear
down any building on the land.
While in the possession of the property, tenant demolished and
removed the existing building and constructed a new on.
When tenant defaulted in the payment of rent and taxes, the lease
was cancelled.
Upon termination of the lease, the tenant surrendered the land to
respondent including the new building thereon.
The parties stipulated:
o The building which had been erected upon said premises by
the lessee had a fair market value of (at least) $62K,
o and that the unamortized cost of the old building, which was
removed from the premises to make way for the new
building was (at least) $12K,
o thus leaving a net fair market value of (at least) $51K of the
new building.
Petitioner Helvering determined that respondent realized a net gain
of $51K and ordered the latter to pay the corresponding tax.
o Petitioner contends that Bruuns gain of a new building was
a capital gain.
o As soon as the lease ended, Bruun owned a new building.
He had received a gain and needed to pay taxes on it
immediately.
However, Bruun argued that no income had been realized yet
because his interest was represented by a deed, and when the tenant
left, he had the exact same deed he had when the tenant arrived. So
he hadnt gained anything.
o Eisner v. Macomber: In general, you dont have to report a
gain until you sell the property (that is, severance is a
prerequisite to realization)
The Board overruled petitioners determination, and the Circuit
Court of Appeals affirmed the Board's Decision.
Issue:
Whether or not respondent, by repossessing the land from tenant
including its improvements, received a gain, and thus, required to
pay the tax.
Held:
Yes. Respondent, by repossessing the land, received a gain and thus,
required to pay the corresponding tax.
Petitioners contention:
o Gain was realized when the respondent, through forfeiture
of the lease, obtained untrammeled title, possession, and
control of the premises, with the added increment of value
added by the new building.
Respondents contention:
o Such added value can be considered capital gain only upon
the owner's disposition of the asset.
o Since respondent has not sold the land yet, no gain was
received and therefore no tax is required.
Judgment in favor of petitioner.
The net gain of $51K was realized by the respondent in the year of
repossession.
Respondents contention that no gain was received since the land
was not yet sold is erroneous.
While it is true that economic gain is not always taxable as income,
it is settled that the realization of gain need not be in cash derived
from the sale of an asset. Gain may occur as a result of exchange of
property, payment of the taxpayer's indebtedness, relief from a
liability, or other profit realized from the completion of a transaction.
Here, as a result of a business transaction, the respondent received
back his land with a new building on it, which added an ascertainable
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 amount to its value. It is not necessary to recognition of taxable gain
that he should be able to sever the improvement begetting the gain
from his original capital. If that were necessary, no income could
arise from the exchange of property, whereas such gain has always
been recognized as realized taxable gain. (In other words, selling the
land was not necessary before taxable gain can exist.)
Dividends
Section 73 (A) to (C), Tax Code
Commissioner of Internal Revenue vs. Court of Appeals (January 20, 1999)
What is the exception to the rule that stock dividends are not subject to
income tax?
The redemption converts into money the stock dividends which become a
realized profit or gain and consequently, the stockholders separate property.
Profits derived from the capital invested cannot escape income tax. As
realized income, the proceeds of the redeemed stock dividends can be
reached by income taxation regardless of the existence of any business
purpose for the redemption.
Case:
ANSOR is wholly owned and controlled by the family of Don Andres
Soriano. When Don Andres died, ANSCOR redeemed 28,000 common
shares from Don Andres estate and again, redeemed another 80,000
common shares. BIR assessed ANSCOR for deficiency withholding tax-at-
source based on the redemption of stocks. ANSCOR contested such
assessment claiming that redemption was done for the furtherance of its
filipinization plan. The Court ruled that ANSCORs redemption of stock
dividends are subject to income tax since the redemption of stock dividends
previously issued is used as a veil for the constructive distribution of cash
dividends. The purpose for which the shares were redeemed is not material.
Facts:
ANSCOR was established in the 1930s and is wholly owned and
controlled by the family of Don Andres Soriano who are all non-
resident aliens
When Don Andres died, half of his shareholdings (92,577) were
transferred to his wife, Dona Carmen Soriano, as her conjugal share.
The other half formed part of his estate.
In 1968, ANSCOR redeemed 28,000 common shares from the Don
Andres estate.
1969, ANSCOR redeemed 80,000 common shares from the Don
Andres estate
o ANSCORs business purpose for both redemption of stock
is to partially retire said stocks as treasury stocks in order to
reduce the companys foreign exchange remittances in case
cash dividends are declared
Pursuant to Sections 53 and 54 of the 1939 Revenue Code, BIR
assessed ANSCOR for deficiency withholding tax-at-source for the
year 1968 and the second quarter of 1969, partly based on
redemption of stocks.
o In its reply, ANSCOR claimed that it availed of the tax
amnesty under PD 23 amended by PD 67 and 157.
o BIR ruled that the invoked decrees do not cover Section 53
and 54 in relation to Section 83(b) of the 1939 Revenue Act
under which ANSCOR was assessed.
Section 83(b) of the 1939 Revenue Act:
Sec 83. Distribution of dividends or assets by corporations
(b) Stock dividendsA stock dividend representing the transfer of surplus to
capital account shall not be subject to tax. However, if a corporation cancels or
redeems stock issued as a dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, essentially
equivalent to the distribution of taxable dividend, the amount so distributed in
redemption or cancellation of stock shall be considered as taxable income to
the extent it represents as distribution of earnings or profits accumulated after
March 1, 1913.
Issue:
Whether or not ANSCORs redemption of stock dividends are
taxable as income.
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Held:
Yes. ANSCORs redemption of 82, 752.5 stock dividends is
considered as essentially equivalent to a distribution of taxable
dividends for which it is liable for withholding tax-at-source.
Since ANSCOR redeemed shares from stock dividend declaration,
such are therefore taxable.
The redemption of stock dividends previously issued is used as a
veil for the constructive distribution of cash dividends.
o Redemption- the repurchase or reacquisition of stock by a
corporation which issued the stock in exchange for
property, whether or not the acquired stock is cancelled,
retired or held in the treasury. The corporation gets back
some of its stock, distributes cash or property to the
shareholder in payment for the stock, and continues in
business as before.
For the exempting clause of Section 83(b) to apply, it is indispensable
that:
I. There is redemption or cancellation
II. The transaction involves stock dividends and
III. The time and manner of the transaction makes it
essentially equivalent to a distribution of taxable
dividends
There is no dispute that ANSCOR redeemed shares of stock from a
stockholder (Don Andres) twice (28,000 and 80,000 common
shares). But where did the shares redeemed come from?
o If its source is the original capital subscriptions upon
establishment of the corporation or form initial capital
investment, it will not be taxable under Section 83.
o If the redeemed shares are from stock dividend declarations,
it is taxable for it is not merely a return of capital but a gain.
NOTE: It is not the stock dividends, but it is the
proceeds of its redemption that may be deemed as
taxable dividends
The three elements in the imposition of income tax are:
I. There must be gain or/and profit
II. That the gain or profit is realized or received actually or
constructively
III. It is not exempted by law or treaty form income tax
o What is to be considered is whether or not there was gain
that is actually realized
o The purpose for which the shares were redeemed is not
material (ANSCORs filipinization plan and etc) and the
legitimacy of such business purpose cannot be an excuse to
be exempt from tax
Net effect test- it is the net effect (profit or not)
rather than the motives and plans of the taxpayer
or his corporation
The court had the opportunity to discuss how taxes on stock
dividends are to be imposed
The Proportionate Test- as established in Sec 83(b) of the 1939
NIRC
o General rule: A stock dividend representing the transfer of
surplus to capital account shall not be subject to tax
Stock dividends as capital are not yet subject to tax
because stock dividends issued by the corporation
are considered unrealized gain, and cannot be
subjected to income tax, until that gain has been
realized
o Exception: If a corporation cancels or redeems stock issued
as dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in
part, essentially equivalent to the distribution of taxable
dividend ,the amount so distributed in redemption or
cancellation of the stock shall be considered as taxable
income to the extent it represents a distribution of earnings
or profits.
Such an exception came about as a response to the
devious means to circumvent the law and evade tax
i.e. corporate earnings would be
distributed under the guise of its initial
capitalization by declaring the stock
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 dividends previously issued and later
redeem said dividends by paying cash to
the stockholder
i.e this process of issuance-redemption
amounts to a distribution of taxable cash
dividends which was just delayed to escape
the tax
Redemption or cancellation of stock dividends, depending on the
time and manner it was made, is essentially equivalent to a
distribution of taxable dividends, making the proceeds thereof
taxable income to the extend it represents profits
o In some cases, the proceeds of redemption of stock
dividends are essentially distribution of cash dividends,
which when paid becomes the absolute property of the
stockholder. Having realized gain from that redemption, the
income earner cannot escape income tax.
Whether the amount distributed in the redemption should be treated
as the equivalent of a taxable dividend is a question of fact, which
is determinable on the basis of the particular facts of the transaction
in question. There is no known formula to classify such transaction
but the American courts developed certain recognized criteria, which
include the following:
1. The presence or absence of real business
purpose
2. The amount of earnings and profits
available for the declaration of regular
dividends and the corporations past
records with respect to the declaration of
dividends
3. The effect of the distribution, as compared
with the declaration of regular dividend
4. The lapse of time between issuance and
redemption
5. The presence of a substantial surplus and
generous supply of cash which invites
suspicion as does a meager policy in
relation both to current earnings and
accumulated surplus.
Wise & Co., Inc. vs. Meer (June 30, 1947)
Case:
This case is about HongKong Co. shareholders selling its business and assets
to Manila Co. for a sum of P400,000. As a result of the sale of its business
and assets to Manila Co., a surplus was realized and the HK Co.distributed
this surplus to the shareholders (Appellants included) It was alleged that there
was a tax deficiency because HongKong Co. only paid tax for the ordinary
dividends, not the liquidating dividends. The issue is W/N the amounts
received and on which the taxes in question were assessed and collected were
ordinary dividends or liquidating dividends. The Court held here that it was
liquidating dividends due to the intent of the two companies. They
surrendered and relinquished their stock in return for said distributions, thus
ceasing to be stockholders of the Hongkong Company, which in turn ceased
to exist in its own right as a going concern during its more or less brief
administration of the business as trustee for the Manila Company, and finally
disappeared even as such trustee These liquidating dividends were taxable at
a higher rate.
Facts:
The Board of Directors of Manila Wine Merchants, Ltd., (hereinafter
referred to as the Hongkong Company), recommended to the
stockholders of the company that they adopt the resolutions
necessary to enable the company to sell its business and assets to
Manila Wine Merchants, Inc., a Philippine corporation formed on
May 27, 1937, (hereinafter referred to as the Manila Company), for
the sum of P400,000 Philippine currency
that this sale was duly authorized by the stockholders of the
Hongkong Company at a meeting held on July 22, 1937; that the
contract of sale between the two companies was executed on the
same date,
shareholders of the Hongkong Company, the stockholders by
proper resolution directed that the company be voluntarily liquidated
and its capital distributed among the stockholders;
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 that the stockholders at such meeting appointed a liquidator duly b. The amounts thus distributed among the plaintiffs were not
paid off the remaining debts of the Hongkong Company and in the nature of a recurring return on stock in fact, they
distributed its capital among the stockholders including plaintiffs surrendered and relinquished their stock in return for said
As a result of the sale of its business and assets to PH Co., a surplus distributions, thus ceasing to be stockholders of the
was realized and the HK Co.distributed this surplus to Hongkong Company, which in turn ceased to exist in its
the shareholders (Appellants included) own right as a going concern during its more or less brief
the liquidator duly filed his accounting on January 12, 1938, and in administration of the business as trustee for the Manila
accordance with the provisions of Hongkong Law, the Hongkong Company, and finally disappeared even as such trustee.
Company was duly dissolved at the expiration of three moths from c. It was stipulated in the deed of sale that the sale and transfer
that date. of the corporation shall take effect on June 1, 1937 while
distribution took place on June 8. They could not
That plaintiffs duly filed Philippine income tax returns. That
consistently deem all the business and assets of the
defendant subsequently made the following deficiency assessments
corporation sold as of June 1, 1937, and still say that said
against plaintiffs:
corporation, as a going concern, distributed ordinary
dividends to them thereafter
Issues:
2. The liquidating dividends are taxable income.
1. Whether or not maintain that the amounts received by them and on
a. Where a corporation, partnership, association, joint-
which the taxes in question were assessed and collected were
account, or insurance company distributes all of its assets in
ordinary dividends or liquidating dividends.
complete liquidation or dissolution, the gain realized or loss
2. Whether or not such liquidating dividends are taxable income.
sustained by the stockholder, whether individual or
3. Whether or not profits realized by non-resident alien appellants
corporation, is a taxable income or a deductible loss as the case
constitute income from the Philippines considering that the sale
may be.
took place outside the Philippines (not so important for now)
b. plaintiffs received the distributions in question in exchange
for the surrender and relinquishment by them of their stock
Held:
in the Hongkong Company which was dissolved and in
1. The amounts were liquidating dividends. Or payments for
process of complete liquidation.
surrendered or relinquished stock in a copration in complete
3. Income is still taxable because it is income from the Philippines
liquidation.
a. The Hongkong Company was at the time of the sale of its
a. when the formal deed of sale of all the properties, assets,
business in the Philippines, and the Manila Company was a
and business of the Hongkong Company to the Manila
domestic corporation domiciled and doing business also in
Company was made, it was expressly stipulated that the sale
the Philippines.
or transfer shall take effect as of June 1, 1937. As already
b. the Hongkong Company was incorporated for the purpose
indicated, the transfer of what was sold, like the sale itself,
of carrying on in the Philippine Islands the business of wine,
was, by the mutual agreement of the parties, considered as
beer, and spirit merchants and the other objects set out in
made on and from that date, and that, if thereafter and until
its memorandum of association.
final completion of the transfer, the Hongkong Company
c. Hence, its earnings, profits, and assets, including those from
continued to run the business, it did so in trust for the new
whose proceeds the distributions in question were made, the
owner, the Manila Company.

6
 major part of which consisted in the purchase price of the
business, had been earned and acquired in the Philippines.
Sections 250-254, and 256 RR2
Section 250. Dividends. Dividends, for the purpose of the law, comprise
any distribution whether in cash or other property, in the ordinary course of
business, even though extraordinary in amount made by a domestic or
resident foreign corporation, joint-stock company, partnership, joint
account, association, or insurance company to the shareholders or members
out of its earnings or profits accumulated since March 1, 1913.
Although interest on certain Government bonds and other similar
obligations is not taxable when received by a corporation, upon
amalgamation with the other funds of the corporation, such income loses its
identity and when distributed to shareholders, is taxable, the same extent as
other dividends.
A taxable distribution made by a corporation to individual
stockholders or members shall be included in the gross income of the
distributees when the cash or other property is unqualifiedly made subject to
their demand. Dividends, in cash or other property received by an individual,
are subject to tax in his hands in the same manner as other income.
Dividends, whether in cash or other property received by a domestic
or resident foreign corporation from a domestic corporation are taxable only
to the extent of 25 per cent thereof in accordance with Section 24 of the
Code. Dividends received by a domestic corporation from a foreign
corporation, whether resident or nonresident, are taxable to the extent that
they constitute income from sources within the Philippines, as provided in
section 37 (a) (2) (b) of the Code. Dividends paid by the domestic corporation
to a nonresident foreign corporation are taxable in full.
Section 251. Dividends paid in property. - Dividends paid in securities or
other property (other than its own stock), in which the earnings of a
corporation have been invested, are income to the recipients to the amount
of the all market value of such property when receivable by individual
stockholders. When receivable by corporations, the amount of such
dividends includible for purposes of the tax on corporations are specified in
section 24 of the Code. (See also section 250 of these regulations). A dividend
paid in stock of another corporation is not a stock dividend. even though the
stock distributed was acquired through the transfer by the corporation
declaring the dividends of property to the corporation the stock of which is
distributed as a dividend. Where a corporation declares a dividend payable in
a stock of another corporation, setting aside the stock to be so distributed
and notifying the stockholders of its action, the income arising to the
recipient of such stock is its market value at the time the dividend becomes
payable. Scrip dividends are subject to tax in the year in which the warrants
are issued.
Section 252. Stock dividends. - A stock dividend which represents the
transfer of surplus to capital account is not subject to income tax. However,
a dividend in stock may constitute taxable income to the recipient thereof
notwithstanding the fact that the officers or director of the corporation (as
defined in section 84) choose to call such distribution as a stock dividend.
The distinction between a stock dividend which does not, and one which
does, constitute income taxable to the shareholder is the distinction between
a stock dividend which works no change in the corporate entity, the same
interest In the same corporation being represented after the distribution by
more shares of precisely the same character and a stock dividend where there
either has been a Change of corporate identity or a change in the nature of
the shares issued as dividends whereby the proportional interest of the
shareholders after the distribution is essentially different from his former
interest. A stock dividend constitutes income if it gives the shareholder an
interest different from that which his former stock holdings represented. A
stock dividend does not constitute income if the new shares confer no
different rights or interest than did the old - the new certificates plus the old
representing the same proportionate interest in the net asset of the
corporation as did the old.
Section 253. Sale of stock received as dividends. - Stock issued by a
corporation, as a dividend, does not constitute taxable income to a
stockholder in such corporation, but gain may be derived or loss sustained
by the stockholder, whether individual or corporate, from the sale of such
stock, which gain or loss will be treated as arising from the sale or exchange
of a capital asset. (See section 34 of the Code.) The amount of gain derived
or loss sustained from the sale of such stock, or from the sale of the stock
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with respect to which it is issued, shall be determined in accordance with the
following rules:
(a) Where the stock issued as dividend is as or substantially the same
character or preference as the stock upon which the stock dividend
is paid, the cost of each share (or when acquired prior to March, 1,
1913, the fair market value as of such date) will be the quotient of
the cost (or such fair market value) of the old shares of stock divided
by the total number of the old and new shares.
(b) Where the stock issued as a dividend is in whole or in part of a
character or preference materially different from the stock upon
which the stock dividend is paid, the cost (and when acquired prior
to March 1,1913, the fair market value as of such date) of the old
shares of stock shall be divided between such old stock and the new
stock, in proportion, as nearly as may be, to the respective value of
each class of stock old and new at the time the new shares of stock
are issued, and the cost (or when acquired prior to March 1, 1913,
the fair market value as of such date) of each share of stock will be
the quotient of the cost (or such fair market value as of March 1,
1913) of the class to which such share belongs divided by the number
of shares in that class.
(c) Where the stock with respect to which a stock dividend is issued was
purchased at different times and at different prices and the identity
of the lots cannot be determined, any sale of the original stock, will
be charged to the earliest purchases, of such stock, and any sale of
dividend stock issued with respect to such stock will be presumed to
have been made from the stock issued with respect to the earliest
purchased stock, to the amount of the dividend chargeable to such
stock.
(d) Where the stock with respect to which a stock dividend is declared
was purchased at different times and at different prices, and the
dividend stock issued with respect to such stock cannot be identified
as having been issued with respect to any particular lot of such stock,
then any sale of such dividend stock will be presumed to have been
made from the stock issued with respect to the earliest purchased
stock, to the amount of the stock dividend chargeable to such stock.
Section 254. Declaration and subsequent redemption of a stock dividend. -
A true stock dividend is not subject to tax on its receipt in the hands of the
recipient. Nevertheless, if a corporation, after the distribution of a stock
dividend, proceeds to cancel or redeem its stock at such time and in such
manner as to make the distribution and cancellation or redemption essentially
equivalent to the distribution of a taxable dividend, the amount received in
redemption or cancellation of the stock shall be treated as a taxable dividend
to the extent of the earnings or profits accumulated by such corporation since
March 1, 1913
Section 256. Distribution in liquidation. - In all case's where a corporation (as
defined in section 84) distributes all of its property or assets in complete
liquidation or dissolution, the gain realized from the transaction by the
stockholder, whether individual or corporate, is taxable to the extent
recognized in section 34 (b) of the Code. For this purpose, the term
complete liquidation includes anyone of a series of distributions made by
a corporation in complete cancellation or redemption of an of its stocks in
accordance with a bona fide plan of liquidation under which the transfer of
all the assets under liquidation is to be completed within a reasonable time
from the date of the first distribution, usually not to exceed one year from
the time of such first distribution. If the amount received by the stockholder
in liquidation is less than the cost or other basis of the stock, the loss in the
transaction is deductible to the extent allowed in section 34(c) of the Code.
BIR Ruling 322-87 (October 19, 1987)
Facts:
The Company is a trading concern and at present is in the process
of liquidation; and that individual stockholders will receive their
liquidating dividends in excess of their investment. (This means that
the shareholders will already receive their stake in the company.)
Issue:
Whether or not liquidating dividends are subject to income tax
Ruling:
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 Yes, but only on the difference between the fair market value and
the adjusted cost of the shareholders shareholdings in the
corporation.
Since the individual stockholders of the Company will receive upon
its complete liquidation all its assets as liquidating dividends, they will
thereby realize capital gain or loss.
The gain, if any, derived by the individual stockholders consisting of
the difference between the fair market value of the liquidating
dividends and the adjusted cost to the stockholders of their
respective shareholdings in the said corporation (Sec. 83 (a), Sec.
256, Income Tax Regulations) shall be subject to income tax at the
rates prescribed under Section 21(a)* of the Tax Code, as amended
by Executive Order No. 37.
Moreover, pursuant to Section 34(b) of the Tax Code, as amended
by Executive Order No. 37, only 50% of the aforementioned capital
gain is reportable for income tax purposes if the shares were held by
the individual stockholders for more than twelve months and 100%
of the capital gains if the shares were held for less than twelve
months.
Note that this ruling was issued in 1987, hence the governing tax code was
P.D. 1158 or The National Internal Revenue Code of 1977 instead of R.A.
8424.
Sec. 21. Tax on citizens or residents. (a) Taxable compensation income.
A tax is hereby imposed upon the taxable compensation income as
defined in Sec. 27, other than the incomes subject to tax under paragraphs
(b), (c), (d), (e) and (f) of this section, received during each taxable year from
all sources determined in accordance with the following schedule:
Not over P2,500, 0%
Over P2,500 but not over P5,000, 1%
Over P5,000 but not over P10,000, P25 + 3% of excess over P5,000
Over P10,000 but not over P20,000, P175 + 7% of excess over P10,000
Over P20,000 but not over P40,000, P875 + 11% of excess over P20,000
Over P40,000 but not over P60,000, P3,075 + 15% of excess over P40,000
Over P60,000 but not over P100,000, P6,075 + 19% of excess over P60,000
Over P100,000 but not over P250,000, P13,675 + 24% of excess over
100,000
Over P250,000 but not over P500,000, P49,675 + 29% of excess over
250,000
Over P500,000, P122,175 + 35% of excess over P500,000
BIR Ruling 479-11 (December 5, 2011)
Facts:
Aguirre Pawnshop Co. (APC), with Tax Identification Number 000-
431-934, is a corporation duly registered with the Securities and
Exchange Corporation on 15 December 1956.
On 14 December 2006, the corporate term of APC expired and
accordingly, APC ceased to exist as a corporate entity and was
dissolved ipso facto
On 1 December 2009 a majority of the members of the Board of
Directors of APC in their capacity as Trustees of the corporate
assets, approved and adopted a resolution ordering the distribution
of the remaining assets of APC to its stockholders by way of
liquidating dividend.
A letter dated 18 August 2010 requesting for the issuance of a
Certificate Authorizing Registration to allow for the transfer and
registration of a parcel of land in the City of Manila with Transfer
Certificate of Title No. 46557, together with the improvements
thereon from APC to shareholder Marmitz, Inc. (MI) was sent to the
BIR.
With the letter, it is requested that a confirmation of APCs opinion
be made as to the following issues:
1. APC is not liable for income tax either on its transfer of the
properties to MI as liquidating dividend or in its receipt of
the surrendered shares of MI, citing BIR Ruling No. 039-
02* dated 11 November 2002;
2. No documentary stamp tax (DST) is due on the surrender
and cancellation of APC shares;
3. No DST is due on the transfer of the properties from APC
to MI;
9
 4. MI shall realize capital gain or loss from the transfer of
properties by way of liquidating dividends.
Issues:
Whether or not APC is liable to the said income tax and
documentary stamp tax
Held:
Yes. The request cannot be granted for lack of legal basis under the
National Internal Revenue Code of 1997, as amended.
Consequently, the previously issued BIR Ruling No. 039-02* cited
in your letter and the BIR Rulings cited in the said ruling are reversed
and set aside.
BIR Ruling 039-02 (November 11, 2002)
Are liquidating dividends subject to income tax?
Yes. Where a corporation distributes all of its property or assets in complete
liquidation or dissolution, the gain realized from the transaction by the
stockholder, whether individual or corporate, is taxable income or a
deductible loss as the case may be.
Previously, the CIR has ruled in BIR RULING 039-02 [NOVEMBER 11,
2002] and other previous rulings that the transfer by a liquidating corporation
of its remaining assets to its stockholders and the receipt of the shares
surrendered by the shareholder are not subject to income tax. However, in
BIR RULING 479-11, the CIR reversed and set aside the above- cited ruling
and all previous rulings to that effect. The rule now is that they are subject to
income tax.
Case:
TA and TMBC entered into an agreement (Plan), wherein all of TAs
outstanding preferred shares, and 5,120,980 of its outstanding 6,250,000
common shares shall be surrendered by TMBC and cancelled immediately
upon approval by the TA stockholders, the SEC, and BSP. TA wrote BIT to
confirm their opinion on their income tax liability. The BIR in reply said that
the transfer by a liquidating corporation of its remaining assets to its
stockholders and the receipt of the shares surrendered by the shareholder are
not subject to income tax.
TA is a corporation organized and existing under Philippine laws,
engaged primarily in commercial banking.
TA has a total authorized capital of P5 billion pesos divided into
o 25 million shares
o 25 million preferred shares
o each with a par value of P100
Its outstanding capital consists of P1.25 billions pesos divided into
o P6.25 million preferred shares
o P6.25 million common shares
All of the outstanding shares of TA are wholly owned by TMBC and its
nominees.
TMBC is likewise a corporation organized and existing under Philippine
laws, engaged in business primarily as a thrift bank.
TA is planning to decrease its authorized capital stock to 1,129,020
common shares, with a par value of Php100.00 per share, and a total
value of P112,902,000. (Plan)
Under the Plan, all of TAs outstanding preferred shares, and 5,120,980
of its outstanding 6,250,000 common shares shall be surrendered by
TMBC and cancelled immediately upon approval by the TA
stockholders, the SEC and the Bangko Sentral ng Pilipinas (BSP) of
the said decrease.
In exchange for the surrender of the shares by TMBC, TA shall transfer
to TMBC both real and personal, tangible and intangible properties listed
in their agreement.
So now, TA wrote to the BIR to confirm their opinion that:
o TA is not liable for income tax either for its receipt of the
surrendered share, or its transfer of the Distributed Assets to
TMBC.
o TMBC shall realize capital gain or loss when it surrendered its
shares in TA in exchange for the assets distributed by TA and
such capital gain or loss shall be subject to final tax under Section
27 (D) (2) of the Tax Code.
10
The BIR in reply:
On income tax liability
o TA shall not be liable for income tax either on its receipts of the
surrendered shares, or its transfer of the Distributed Assets to
TMBC as liquidating dividends.
o In BIR Ruling No. 1791-92, this Office ruled that the transfer
by the liquidating corporation of its remaining assets to its
stockholders is not considered a sole of these assets.
o Thus, a liquidating corporation does not realize gain or loss in
partial or complete liquidation.
o Conversely, neither is a liquidating corporation subject to tax on
its receipt of the shares surrendered by its shareholders pursuant
to a complete or partial liquidation.
o Accordingly, TA Bank is not liable for income tax on either the
transfer of its assets to its stockholders, or on its receipt of the
shares surrendered by the shareholder TMBC.
On capital gains liability
o TMBC shall realize capital gain or loss when TA distributes its
assets.
o The tax treatment of liquidating dividends, depends on the
characterization of the income in the form of such dividents
received by shareholders as a result of the dissolution of the
corporation in which they hold shares.
o The second paragraph of Section 73 (A) of the Tax Code of 1997
states:
Where a corporation distributes all of its assets in
complete liquidation or dissolution, the gain realized or
loss sustained by the stockholder, whether individual or
corporate, is a taxable income or a deductibe loss, as the
case may be.
o In the case of Wise & Co., Inc. vs Meer & CIR, the SC adopted
the judicial construction of the US SC in the case of Hellmich
vs Hellman where it was held that the amounts distributed in
liquidation of a corporation shall be treated as payments in
exchange for stock or shares, and any gain or profit realized
thereby shall be taxed to the distributee as other gains or profits.
o The SC also stated that When the corporation was dissolved
and in the process of complete liquidation and its shareholders
surrendered their stock to it and it paid the sums in question to
them in exchange, a transaction took place, which was no
different in its essence from a sale of the same stock to a third
party who paid therefore.
o Liquidating gain is to be treated as the gain from the sale or
exchange of shares, consistent with the decision of the SC in
Wise & Co., subject, however, not to the 5%/ 10% final tax rate
under 27 (D) (2) of the Tax Code of 1997 as believed by TA, but
to the ordinary income tax rates provided under Sections 24
(A)(1) and (B) [that is, the 25% rate], 27 (A) or (E), 28 (A)(1) or
(2) and (B)(1) of the Tax Code of 1997, depending on the status
of the shareholder/ stockholder (i.e. whether the shareholder is
a corporation or an individual, resident or non-resident).
o Finally, this Office also notes that a similar treatment has been
given to corporate shareholders of a dissolving corporation, in
that the liquidating gain realized is subject to ordinary corporate
income tax rate rather than to the current 5%/ 10% final tax
rates.
From whatever source
Section 34 (C)(1), Tax Code
James vs. United States (May 15, 1961)
Case:
Petitioner James embezzled huge sums of money from his employer
union and from an insurance company. He failed to report this amount in his
gross income, and was subsequently convicted for willfully attempting to
evade the federal income tax. He questions his conviction based on the
decision made in Commissioner v. Wilcox, which declared that embezzled
money was not to be included in the gross income.
The Court now clarifies its erroneous decision in Wilcox. Unlawful
gains are comprehended within the term gross income. Despite this, James
indictment was dismissed, because the element of willful intention and
11
attempt to evade obligation was not proven, especially since James relied on
the Wilcox decision.
Embezzled money constitutes gross income. The US Supreme Court
opined that lawful and unlawful gains are comprehended within the term
gross income. The Court has given liberal construction to gross income
in recognition of the intent of the Congress to tax all gains except those
specifically exempted.
Facts:
Petitioner James is a union official who, with another person,
embezzled in excess of $728,000 during 1951-1954 from his
employer union and from an insurance company with which the
union was doing business.
Petitioner failed to report this amount in his gross income, and was
convicted for willfully attempting to evade the federal income tax.
He was sentenced to a total of 3 years of imprisonment. [The case
did not mention if he was charged with and/or convicted of
embezzling.]
The case was brought to US SC, because of 2 conflicting decisions
it made in the past years:
o Commissioner v. Wilcox
In this case, the Court held that embezzled money
does not constitute taxable income to the
embezzler in the year of embezzlement.
The basis for the decision was that a taxable gain
is conditioned upon: (a) the presence of a claim of
right to the alleged gain; and (b) the absence of a
definite unconditional obligation to repay or return
that which would otherwise constitute a gain.
Without any legal or equitable claim, taxpayer
cannot be said to have received any gain or profit
within the reach of Sec. 22 of US Tax Code.
Wilcox was said have embezzled the money
without any semblance of claim of right,
therefore, the embezzled money cannot be
included in the gross income.
o Rutkin v. US
This is a case decided 6 years after Wilcox. The SC
ruled that extorted money constitutes taxable
income to the extortionist in the year the money is
received.
Rutkin did not overrule Wilcox, because of different
factual situation found in each case.
Issues:
1. Whether or not embezzled funds are to be included in the gross
income of the embezzler in the year in which the funds are
misappropriated
2. Whether or not James should be convicted
Held:
1. Yes, embezzled funds are included in the gross income of the
embezzler.
Just to tie the 2 cases together, the Court now clarifies that
o Both Wilcox and Rutkin obtained the money by means
of a criminal act;
o Neither had any bona fide claim of right to the fundsl
o The fact that Rutkin secured the money with the
consent of his victim, unlike Wilcox, is irrelevant in
determining whether the unlawfully gained money is
part of the gross income.
Unlawful gains are comprehended within the term gross
income.
o The Tax Act of 1913 provides that the net income of a
taxable person shall include gains, profits and income xxx
from xx the transaction of any lawful business carried on
xxx.
o When the statue was amended in 1916, the word lawful
was omitted. This revealed the obvious intent of the
Congress to tax income derived from both legal and illegal
sources, to remove the incongruity of having the gains of
the honest laborer taxed and the gains of the dishonest
immune.
12
 A gain constitutes taxable income when its recipient
has such control over it that, as a practical matter, he
derives readily realizable economic value from it.
2. No, James should not be convicted.
This is a felony, which, under the statutes, requires
willful intention or attempt to evade obligation. This
includes an evil motive and want of justification in view
of all circumstances.
In this case, the element of willfulness could not be
proven for failing to include embezzled funds in gross
income so long as James relied on the decision made in
Commissioner v. Wilcox.
Commissioner of Internal Revenue vs. Spouses Manly (November 24,
2014)
Facts:
Respondent Antonio Villan Manly is a stockholder and the
Executive Vice-President of Standard Realty Corporation, a family-
owned corporation. He is also engaged in rental business. His
spouse, Ruby Ong, is a housewife.
o Respondents are into rental business and the net profit for
6 before tax summed only to P1,238,938.32 (an average of
more or less Php200,000.00 annually).
Petitioner BIR issued a Letter of Authority authorizing its revenue
officers to investigate respondent spouses internal revenue tax
liabilities for taxable year 2003 and prior years. Thereafter, BIR
issued a letter to respondents requiring them to submit documentary
evidence to substantiate the source of their cash purchase of a 256-
square meter log cabin in Tagaytay City worth P17,511,010.00.
However, the spouses failed to comply.
BIR found out that Antonio Manly only had a modest income and
as such, required him to show how he was able to acquire luxurious
properties like a mansion and several cars. BIR allegedly found that
Antonios ITRs were underdeclared. And since the under declaration
exceeded 30% of the reported or declared income, it was considered
a prima facie evidence of fraud with intent to evade the payment of
proper taxes due to the government. The revenue officers, thus,
recommended the filing of criminal cases against respondent
spouses for failing to supply correct and accurate information in
their ITRs for the years 2000, 2001, and 2003, punishable under
Sections 254 and 255 in relation to Section 248(B) of the NIRC.
The State Prosecutor found probable cause to criminally charge
respondents. However, on appeal, the Secretary of Justice reversed
the decision of the SP on the ground that she found no willful failure
to pay or attempt to evade or defeat the tax on the part of respondent
spouses as petitioner allegedly failed to specify the amount of tax due
and the likely source of income from which the same was based. She
also pointed out petitioners failure to issue a deficiency tax
assessment against spouses which is a prerequisite to the filing of a
criminal case for tax evasion. The CA upheld this decision.
Issue:
Whether or not there is probable cause that tax evasion was
committed by respondents.
Held:
Yes. The tax evasion is deemed complete when the violator has
knowingly and willfully filed a fraudulent return with intent to evade
and defeat a part or all of the tax. Corollarily, an assessment of the
tax deficiency is not required in a criminal prosecution for tax
evasion.
In the case of income, for it to be taxable, there must be a gain
realized or received by the taxpayer, which is not excluded by law or
treaty from taxation. The government is allowed to resort to all
evidence or resources available to determine a taxpayers income and
to use methods to reconstruct his income. A method commonly
used by the government is the expenditure method, which is a
method of reconstructing a taxpayers income by deducting the
aggregate yearly expenditures from the declared yearly income. The
theory of this method is that when the amount of the money that a
taxpayer spends during a given year exceeds his reported or declared
income and the source of such money is unexplained, it may be
13
 inferred that such expenditures represent unreported or undeclared
income.
And since the underdeclaration is more than 30% of respondent
spouses reported or declared income, which under Section 248(B)
of the NIRC constitutes as prima facie evidence of false or
fraudulent return, petitioner recommended the filing of criminal
cases against respondent spouses under Sections 254 and 255, in
relation to Section 248(B) of the NIRC.
Respondent spouses defense that they had sufficient savings to
purchase the properties remains self-serving at this point since they
have not yet presented any evidence to support this. And since there
is no evidence yet to suggest that the money they used to buy the
properties was from an existing fund, it is safe to assume that that
money is income or a flowof wealth other than a mere return on
capital. It is a basic concept in taxation that income denotes a flow
of wealth during a definite period of time, while capital is a fund or
property existing at one distinct point in time.
Moreover, by just looking at the tables presented by petitioner, there
is a manifest showing that respondent spouses had under declared
their income. The huge disparity between respondent Antonios
reported or declared annual income for the past several years and
respondent spouses cash acquisitions for the years 2000, 2001, and
2003 cannot be ignored. Infact, it makes uswonder how they were
able to purchase the properties in cash given respondent Antonios
meager income.
RMC 16-2013
SUBJECT: Clarifying the Tax Implications and Recording of
Deposits/Advances for Expenses Received by Taxpayers not covered by
Revenue Memorandum Circular No. 89-2012
To: All Internal Revenue Officers and Others Concerned
This Circular is being issued to provide guidelines to be observed in
accounting and recording of deposits/advances for the payment of the
pertinent expenses received by taxpayers other than General Professional
Partnerships (GPP) covered by Revenue Memorandum Circular (RMC) No.
89-2012 dated December 28, 2012.
I. Policies and Guidelines
Deposits/Advances Part of Gross Receipts
When cash deposits or advances are received by taxpayers other than GPP
covered by RMC 89-2012 from the Client/Customer, a corresponding
Official Receipt shall be issued. The amount received shall be booked as
Income and shall form part of the Gross Receipts and subject to Value-added
Tax (VAT) or Percentage Tax (Gross Receipt Tax), if applicable, and shall in
turn be deductible as expense by the Client/Customer provided that it is duly
substantiated by Official Receipts pursuant to Section 34 (A) (1) of the Tax
Code.
Claim for Deduction of Expenses
Receipts incurred, paid for and issued in the name of the taxpayer shall be
recorded as its own expenses for income tax purposes. These expenses shall
be claimed as deductions from gross income provided these are duly
substantiated by Official Receipts/Invoices issued by third-party
establishments.
Income Payments are subject to appropriate Withholding Taxes
All Client/Customer shall, upon payment of deposits/advances, withhold tax
at the rate prescribed in Revenue Regulations No. (RR) 2-98, as amended,
which shall be remitted/paid on or before the 10th day of the following
month using the Monthly Remittance Return of Creditable Income Taxes
Withheld (Expanded) [BIR Form No. 1601E] except for taxes withheld for
the month of December of each year, which shall be filed on or before
January 15 of the following year pursuant to RR 2-98, as amended. For those
filing using the Electronic Filing and Payment System (EFPS), the regulations
pertaining to EFPS filers shall apply.
Issuing Official Receipts for the Deposit and Advances
An Official Receipt shall be issued for every deposit and advances pursuant
to Section 113 of the Tax Code. The Official Receipt shall cover the entire
amount which the Client/Customer pays.
For VAT Taxpayers, the VAT Official Receipt will constitute the Output Tax
14
for taxpayers other than GPP and in turn, the input tax of its client/customer.
II. PRO-FORMA ENTRIES
Upon receipt of the deposit/advances, the same shall be treated and recorded
as outright Income.
In turn, upon making deposit/advances for the necessary expenses, the
Client/Customer shall treat such deposit/advances as an outright expense.
All revenue officials and employees are enjoined to give this Revenue
Memorandum Circular as wide a publicity as possible.
This Circular shall take effect immediately.
Section 50, RR 2
RMC 88-2012
SUBJECT: Tax Treatment of Stock Option Plans
TO: All Internal Revenue Officials, Employees and Others
For the information and guidance of all concerned, this Circular is being
issued to clarify the tax implications of income or gain derived by an
employee from the exercise of stock option plans.
In BIR Ruling No. 119-2012 dated February 22, 2012, it was ruled that any
income or gain derived by the employees from their exercise of stock options
is considered as additional compensation subject to income tax, and
consequently, to withholding taxes on compensation. In the said ruling, stock
options were granted by domestic corporations as part of their compensation
plan. Under the plan, the employees were given the right to buy a specified
number of shares of a foreign corporation, up to a specified time/period
from the grant date, at a fixed price regardless of the stocks future market
price. It was designed to reward employees and the criteria for the reward
was dependent on performance, outstanding business achievements, and
exemplary organization, technical or business
accomplishments/demonstrated expertise yielding significant effects on
business/society. At the same time, all full-time and most part-time
employees were given one-time number of shares upon employment.
The foregoing notwithstanding, any income or gain derived from stock
option plans granted to managerial and supervisory employees which qualify
as fringe benefits is subject to fringe benefit tax imposed under Section 33 of
the National Internal Revenue Code (NIRC) of 1997, as amended.
The additional compensation or the taxable fringe benefit, as the case may
be, is the difference of the book value (BV)/ fair market value (FMV) of the
shares, whichever is higher, at the time of exercise of the stock option and
the price fixed on the grant date. The option has value only if, at the time of
the exercise, the stock is worth more than the price fixed on the grant date.
15
The additional compensation or taxable fringe benefit arises whether the
shares of stocks involved are that of a domestic or foreign corporation.
If the shares to be issued at the exercise of the stock options come from the
unissued shares of stock of the issuing corporation, the original issuance of
said shares is subject to documentary stamp tax (DST) pursuant to Section
174 of the NIRC, as amended.
In the event that employees subsequently sell, barter, exchange or otherwise
dispose of shares of stock obtained from their exercise of the stock options,
the tax treatment is as follows:
A. If the shares involved are shares of stock in a domestic corporation
not traded in the Stock Exchange, the gain, if any, is subject to capital
gains tax imposed under Sections 24 and 25 of the NIRC, as
amended. The gain from sale or transfer of the shares of stock is the
difference between the selling price/book value (BV)/fair market
value (FMV) of the shares, whichever is higher, at the date of sale
and the price at the time of exercise of the option.
Further, the sale of transfer of the said shares is subject to the DST
imposed under Section 175 of the NIRC, as amended, as
implemented by Revenue Regulations No. 13-2004, upon execution
of the deed transferring ownership or rights thereto, or upon
delivery, assignment or indorsement of such shares in favor of
another.
B. If the shares involved are shares of stock listed and traded through
the Local Stock Exchange, the transaction is subject to stock
transaction tax imposed under Section 127(A) of the NIRC, as
amended.
C. If the shares involved are shares of stock in a foreign corporation,
the gain, if any, is subject to ordinary income tax.
All other issuances including rulings inconsistent herewith are hereby
revoked or modified accordingly.
All revenue officers and employees are hereby enjoined to give this Circular
as wide a publicity as possible.
This Circular takes effect immediately.
Inventories
Section 41, Tax Code
BIR Ruling DA 128-08 (August 11, 2008)
Facts:
Addressed to Ms. Maycel Baltazar-Barata (Indirect Tax Planner and
Atty. Nigel T. Avila (Country Tax Manager). Signed by James H.
Roldan (Assistant Commissioner Legal Service).
Philippines Shell Corporation (PSPC), Shell Gas Trading (Asia
Pacific), Inc. (SGTAP), and Shell Gas Eastern, Inc. (SGEI),
collectively referred to as Shell Companies are domestic
corporations organized and existing under the laws of the
Philippines duly registered with the SEC.
They are primarily engaged in the manufacture, importation,
distribution and marketing of petroleum products in the Philippines
and are using the Weighted Average Method (WAVE) in the
valuation of its inventories both for statutory and income tax
reporting.
Their ultimate parent company is Royal Dutch Shell (RDS)
incorporated in United Kingdom.
RDS is adopting a new computerized accounting system based on
Global Systems Application and Product Data Processing or GSAP
because they are incompatible. To be consistent with its parent
company, Shell Companies is adopting the FIFO method of
inventory valuation for taxable year of 2008, except PSPC which will
begin in 2009.
Baltazar-Barata and Avila are requesting for authority for authority
to change the inventory system from WAVE to FIFO.
16
Issues:
Whether or not this is allowed?
Held:
YES. Shell Companies had been using the WAVE method in
compliance with Revenue Regulations No. 3-80.
However, to be consistent with its Parent Company (RDS), Shell
Companies will have to switch to the FIFO method, which will be
introduced in the Philippines in 2009, as said valuation will clearly
reflect the income of the companies.
The earlier date (2008) is to allow SGEI and SGTAP to have
annualize value of its begging inventory for the taxable year 2009.
Since PSPC has a number of product inventories in its various
terminals and depots all over the country, it will be equipped to adopt
FIFO valuation of inventories only in 2009.
Office hereby grants authority, but if upon investigation, it will be
disclosed that the facts are different, then this ruling shall be
considered null and void.
FINAL VERDICT: Change of inventory system from WAVE to FIFO is
ALLOWED.
Notes:
Tax Code of 1997:
SEC. 41. Inventories Whenever in the judgment of the Commissioner, the
use of inventories is necessary in order to determine clearly the income of
any taxpayer, inventories shall be taken by such taxpayer upon such basis as
the Sec of Finance, upon recommendation of the Commissioner, may, by
rules and regulations, prescribe as conforming as nearly as may be to the best
accounting practice in the trade or business and as most clearly reflecting in
the income.
If a taxpayer, after having complied with the terms and conditions prescribed
by the commissioner, uses a particular method of valuing its inventory for
any taxable year, then such method shall be bused in all subsequent taxable
years unless:
(i) with the approval of the Commissioner, a change to a different
method is authorized; or xxx
Sec 2 of Revenue Regulations No. 3-80:
Requirement to Change Inventory Valuation Method from LIFO to
Weighted Average Method Pursuant to the authority vested I nthe
Commissioner of Internal Revenue Code, as amended by BP Blg 41, all
petroleum refining and marketing companies are hereby required to change
their inventory valuation method from last-in, first-out (LIFO) to weighted
average method on per product basis. The change shall be effected by a
gradual shift to the weighted average method of inventory valuation in two
stages as prescribed in the Sec 3 and 4 of these regulations.
WAVE - The weighted average cost is what a company spends per unit of
inventory after accounting for the different cost of different products. Under
the weighted average inventory method, one adds all the sale prices for each
unit of each good and divides by the number of goods available for sale.
Exclusions
Section 32(B), Tax Code
RA No. 10653 (July 28, 2014)
AN ACT ADJUSTING THE 13TH MONTH PAY AND OTHER
BENEFITS CEILING EXCLUDED FROM THE COMPUTATION OF
GROSS INCOME FOR PURPOSES OF INCOME TAXATION,
AMENDING FOR THE PURPOSE SECTION 32(B), CHAPTER VI
OF THE NATIONAL INTERNAL REVENUE CODE OF 1997, AS
AMENDED
Be it enacted by the Senate and House of Representatives of the Philippines
in Congress assembled:
SECTION 1. Section 32(B), Chapter VI of the National Internal Revenue
Code of the Philippines (Republic Act No. 8424) is hereby amended as
follows:
SEC. 32. Gross Income.
x x x
17
 (B) Exclusions from Gross Income. The following items shall not be
included in gross income and shall be exempt from taxation under
this Title:
xxx
(7) Miscellaneous Items. xxx
(e) 13th Month Pay and Other Benefits. Gross benefits received by
officials and employees of public and private entities: Provided,
however, That the total exclusion under this subparagraph shall not
exceed eighty-two thousand pesos (P82,000) which shall cover:
xxx
(iv) Other benefits such as productivity incentives and Christmas
bonus: Provided, That every three (3) years after the effectivity of this
Act, the President of the Philippines shall adjust the amount herein
stated to its present value using the Consumer Price Index (CPI), as
published by the National Statistics Office (NSO).
SEC. 2. Implementing Rules and Regulations. The Secretary of Finance shall
promulgate the necessary rules and regulations for the faithful and effective
implementation of the provisions of this Act: Provided, That, the failure of
the Secretary of Finance to promulgate the said rules and regulations shall
not prevent the implementation of this Act upon its effectivity.
SEC. 3. Repealing Clause. All laws, orders, issuances, circulars, rules and
regulations or parts thereof which are inconsistent with the provisions of this
Act are hereby repealed or modified accordingly.
SEC. 4. Separability Clause. If any provision of this Act is declared
unconstitutional or invalid, other parts or provisions hereof not affected
thereby shall continue to be in full force and effect.
SEC. 5. Effectivity. This Act shall take effect fifteen (15) days following its
publication in at least two (2) newspapers of general circulation.
Retirement benefits
Commissioner of Internal Revenue vs. Court of Appeals (March 23, 1992)
Facts:
PD 1959 - allegedly abolishing tax exemptions on final withholding tax
RA 4917 - exempting retirement benefits
Section 56 (b) (now 53[b]) of the NIRC, as amended by Rep. Act. No.
1983 - exempting employees 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
GCL Retirement plan is an employee trust maintained by the
employer, GCL Inc., to provide retirement, pension, disability and
death benefits to its employees. The Plan was submitted was
approved and qualified as exempt from income tax by Petitioner
Commissioner of Internal Revenue in accordance with RA 4917.
GCL made investments and earned interest income from which was
withheld the 15% final withholding tax imposed by PD 1959.
o PD 1959 amended the Tax Code on interests and
withholding tax as follows:
o Interest from the Philippine Currency Bank deposits and
yield or any other monetary benefit from deposit substitutes
and from trust fund and similar arrangements whether
received by citizens of the Philippines, or by resident alien
individuals, shall be subject to a 15% final tax to be collected
and paid as provided in Sections 53 and 54 of this Code.
GCL filed with CIR a claim for refund in the amounts of P1,312.6
withheld by Anscor Capital and Investment Corp., and P2,064.15 by
Commercial bank of Manila.
It also filed a second claim for refund of the amount of P7,925.00
withheld by Anscor, stating in both letters that it disagreed with the
collection of 15% final withholding tax from the interest income as
it is an entity fully exempt from income tax as provided under RA
4917 in relation to Sec 56 (b) of the Tax Code.
CIR - denied refund.
CTA - ruled in favor of GCL, holding that employees trusts are
exempt from the 15% final withholding tax on interest income and
ordering a refund of the tax withheld.
CA - affirmed CTA ordering a refund, in the sum of P11,302.19, to
the GCL Retirement Plan representing the withholding tax on
18
 income from money market placements and purchase of treasury
bills, imposed pursuant to PD 1959.
CIRs contentions:
o that the deletion of the exempting and preferential tax
treatment provisions under the old law is a clear
manifestation that the single 15% (now 20%) rate is
impossible on all interest incomes from deposits, deposit
substitutes, trust funds and similar arrangements, regardless
of the tax status or character of the recipients thereof.
o that from 15 October 1984 when PD 1959 was
promulgated, employees trusts ceased to be exempt and
thereafter became subject to final withholding tax.
GCLs contentions:
o that the tax exempt status of employees trusts applied to all
kinds of taxes, including the final withholding tax on interest
income
o that exemption, according to GCL, is derived from Sec.
56(b) and not from Sec. 21(d) or 24(cc) of the Tax Code, as
argued by CIR
Issue:
Whether or not the GCl Plain is exempt from the final withholding
tax on interest income from money placements and purchase
treasury bills required by PD 1959
Held:
Yes, GCL Plan was qualified as exempt from income tax by the CIR
in accordance with RA 4917
o RA 4917 Sec. 1 - Any provision of law to the contrary
notwithstanding, the retirement benefits received by
officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit
plan maintained by the employer shall be exempt from all
taxes and shall not be liable to attachment, levy or seizure
by or under any legal or equitable process whatsoever except
to pay a debt of the official or employee concerned to the
private benefit plan or that arising from liability imposed in
a criminal action.
o Sec. 56(b) (now 53[b]) NIRC, as amended by RA 1983 -
taxes imposed by this Title upon individuals shall apply to
the income of estates or of any kind of property held in
trust...except...tax imposed shall not apply to employees
trust which forms part of pension, stock bonus or profit-
sharing plan of an employer for the benefit of some or all
his employees...
o Purpose of exemption:
Employees trust 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 maybe 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 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.
Income of the pension trust is likewise exempt for
a taxation of those earning would result to 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.
o The deletion in PD 1959 of the provisos regarding tax
exemption and preferential tax rates under the old law,
therefore, cannot be deemed to extend t employees trusts.
A general law, cannot repeal by implication a
specific provision, Sec. 56(b) now 53[b] in relation
to RA 4917 granting exemption from income tax to
employees trusts.
19
 Brief chronology of issuances:
June 22,1957 -- RA 1983, which excepted
employees trusts in its Sec 56(b)
June 17, 1967 -- RA 4917
October 15, 1984 -- PD1959
A subsequent statute, general in character as to its
terms and application, is not to be construed
repealing a special or specific enactment, unless the
legislative purpose to do so is manifested.
Commissioner of Internal Revenue vs. Court of Appeals (October 17,
1991)
Reyes notes:
A government employee, retired from service. Upon retirement, he received,
among other benefits, terminal leave pay which the CIR withheld a portion
allegedly representing income tax thereon. Is terminal leave pay considered
part of gross income of the recipient?
No. In CIR vs. CA & Castaneda (1991), the Supreme Court held that terminal
leave pay received by a government official or employee is not subject to
withholding (incme) tax. The rationale behind the employees entitlement to
an exemption from withholding tax on his terminal leave is that commutation
of leave credits, more commonly known as terminal leave, is applied for by
an officer or employee who retires, resigns or is separated from the service
through no fault of his own. In the exercise of sound personnel policy, the
Government encourages unused leaves to be accumulated. Terminal leave
payments are given not only at the same time but also for the same policy
considerations governing retirement benefits. In fine, not being part of the
gross salary or income of a government official or employee but a retirement
benefit, terminal leave pay is not subject to income tax.
Case:
Efren Castaneda retired from government service. Thus, among
others, he was entitled to terminal leave pay. This case arose when the
Commissioner of Internal Revenue withheld P12,557.13 allegedly
representing income tax from the said terminal leave pay.
Is terminal leave pay subject to withholding (income) tax?
No. A terminal leave pay is not part of the gross salary or income of
a government official or employee. Therefore, it is not subject to income tax.
Facts:
Efren P. Castaneda retired from the government service as Revenue
Attache in the Philippine Embassy in London, England.
Upon retirement, he received, among other benefits, terminal leave
pay.
Commissioner of Internal Revenue withheld P12,557.13 allegedly
representing income tax thereon.
Castaneda filed a formal written claim with petitioner for a refund of
the P12,557.13, contending that the cash equivalent of his terminal
leave is exempt from income tax.
The Solicitor General, acting on behalf of the Commissioner of
Internal Revenue, contends that the terminal leave pay is income
derived from employer-employee relationship, citing in support of
his stand Section 28 of the National Internal Revenue Code; that as
part of the compensation for services rendered, terminal leave pay is
actually part of gross income of the recipient. Thus . . . It
(terminal leave pay) cannot be viewed as salary for purposes which
would reduce it. . . . there can thus be no "commutation of salary"
when a government retiree applies for terminal leave because he is
not receiving it as salary. What he applies for is a "commutation of
leave credits." It is an accumulation of credits intended for old age
or separation from service. . . .
Issue:
Whether or not terminal leave pay received by a government official
or employee on the occasion of his compulsory retirement from the
government service is subject to withholding (income) tax.
Held:
20
 No. The Court has already ruled that the terminal leave pay received
by a government official or employee is not subject to withholding
(income) tax.
In the recent case of Jesus N. Borromeo vs. The Hon. Civil Service
Commission, et al., the Court explained the rationale behind the
employee's entitlement to an exemption from withholding (income)
tax on his terminal leave pay as follows: . . . commutation of leave
credits, more commonly known as terminal leave, is applied for by
an officer or employee who retires, resigns or is separated from the
service through no fault of his own. (Manual on Leave
Administration Course for Effectiveness published by the Civil
Service Commission, pages 16-17). In the exercise of sound
personnel policy, the Government encourages unused leaves to be
accumulated. The Government recognizes that for most public
servants, retirement pay is always less than generous if not meager
and scrimpy. A modest nest egg which the senior citizen may look
forward to is thus avoided. Terminal leave payments are given not
only at the same time but also for the same policy considerations
governing retirement benefits.
In fine, not being part of the gross salary or income of a government
official or employee but a retirement benefit, terminal leave pay is
not subject to income tax.
Re: Request of Atty. Bernardo Zialcita (October 18, 1990)
Case:
Atty. Zialcita retired and he is claiming that the commutation of his
accumulated leave credits are not taxable. The SC agreed with this and cited
specific law provisions, especially that the NIRC exempts from taxation any
amount received by an official or employee or by his heirs from the employer
as a consequence of separation of such official or employee from the service
of the employer due to death, sickness or other physical disability or for any
cause beyond the control of the said official or employee. The fact that he
retired because he was already 65 years old and he reached the compulsory
retirement age is beyond his control. However, this only applies to employees
of the Court who want to avail of optional retirement and those who resign
or are separated from the service without their fault. Also, Sec. 284 of the
Revised Administrative Code grants to a government employee 15 days
vacation leave and 15 days sick leave for every year of service. Hence, even if
the government employee absents himself and exhausts his leave credits, he
is still deemed to have worked and to have rendered services. His leave
benefits are already imputed in, and form part of his salary which in turn is
subjected to withholding tax on income. He is taxed on the entirety of his
salaries without any deductions for any leaves not utilized. It follows then
that the money values corresponding to these leave benefits both the used
and unused have already been taxed during the year that they were earned.
To tax them again when the retiring employee receives their money value as
a form of government concern and appreciation plainly constitutes an
attempt to tax the employee a second time. This is tantamount to double
taxation.
Facts:
August 23, 1990: Court En Banc issued a resolution regarding the
amounts claimed by Atty. Zialcita on the occasion of his retirement.
o The terminal leave pay of Atty. Zialcita received by virtue of
his compulsory retirement can never be considered a part of
his salary subject to the payment of income tax but falls
under the phrase "other similar benefits received by retiring
employees and workers", within the meaning of Section 1
of PD No. 220 and is thus exempt from the payment of
income tax. That the money value of his accrued leave
credits is not a part of his salary is further buttressed by Sec.
3 of PD No. 985, otherwise known as The "Budgetary
Reform Decree on Compensation and Position
Classification of 1976" particularly Sec. 3 (a) thereof, which
makes it clear that the actual service is the period of time for
which pay has been received, excluding the period covered
by terminal leave.
o The Court ordered the Fiscal Management and Budget
Office to refund Atty. Zialcita P59,502.33 which was
deducted from his terminal leave pay as withholding tax.
o The Court also declared that no withholding tax shall be
deducted by any Office of this Court from the terminal leave
pay benefits of all retirees similarly situated including those
21
 who have already retired and from whose retirement
benefits such withholding taxes were deducted.
September 18, 1990: CIR filed a motion for clarification and/or
reconsideration with the SC.
Issues:
1. Whether or not the money value of the accumulated leave credits of
Atty. Zialcita are taxable.
2. Whether or not the resolution applies to other government
employees.
3. With regard to those who have already retired and from whose
retirement benefits withholding taxes have been deducted, whether
or not the deducted taxes are refundable even without a written
request for refund from the taxpayer-retiree.
4. Whether or not the resolution applies to employees of the Court who
want to avail of optional retirement and those who resign or are
separated from the service through no fault of their own.
Held:
1. No, not taxable for the following reasons:
Atty. Zialcita opted to retire under R.A. No. 660, which is
incorporated in C.A. No. 186. Applying the provisions, the
amount he received as a result of the conversion of these
unused leaves into cash is exempt from income tax.
o Sec. 12(c), C.A. No. 186: ... Officials and employees
retired under this Act shall be entitled to the
commutation of the unused vacation leave and sick
leave, based on the highest rate received, which
they may have to their credit at the time of
retirement.
o Sec. 28(c), C.A. No. 186: Except as herein
otherwise provided, the Government Service
Insurance System, all benefits granted under this
Act, and all its forms and documents required of
the members shall be exempt from all types of
taxes, documentary stamps, duties and
contributions, fiscal or municipal, direct or indirect,
established or to be established; ...
The commutation of leave credits is commonly known as
terminal leave. It is applied for by an officer or employee
who retires, resigns or is separated from the service through
no fault of his own. Since terminal leave is applied for by an
officer or employee who has already severed his connection
with his employer and who is no longer working, then it
follows that the terminal leave pay, which is the cash value
of his accumulated leave credits, is no longer compensation
for services rendered. It cannot be viewed as salary.
Atty. Zialcita rendered government service from March 13,
1962 up to February 15, 1990. The next day, or on February
16, 1990, he reached the compulsory retirement age of 65
years. Upon his compulsory retirement, he is entitled to the
commutation of his accumulated leave credits to its money
value. Within the purview of the above-mentioned
provisions of the NLRC, compulsory retirement may be
considered as a "cause beyond the control of the said official
or employee". Consequently, the amount that he received
by way of commutation of his accumulated leave credits as
a result of his compulsory retirement, or his terminal leave
pay, fags within the enumerated exclusions from gross
income and is therefore not subject to tax.
o Sec. 1, E.O. No. 1077: Any officer or employee of
the government who retires or voluntarily resigns
or is separated from the service through no fault of
his own and whose leave benefits are not covered
by special law, shag be entitled to the commutation
of all the accumulated vacation and/or sick leaves
to his credit, exclusive of Saturdays, Sundays and
holidays, without litigation as to the number of days
of vacation and sick leaves that he may accumulate.
o Sec. 28(b) 7(b), NIRC: The following items shall
not be included in gross income and shall be
exempt from taxation under this title:
22
 (7) Retirement benefits, pensions,
gratuities, etc.
(b) Any amount received by an
official or employee or by his heirs
from the employer as a
consequence of separation of
such official or employee from the
service of the employer due to
death, sickness or other physical
disability or for any cause beyond
the control of the said official or
employee.
The terminal leave pay of Atty. Zialcita may likewise be
viewed as a "retirement gratuity received by government
officials and employees" which is also another exclusion
from gross income as provided for in Section 28(b), 7(f) of
the NLRC. A gratuity is that paid to the beneficiary for past
services rendered purely out of generosity of the giver or
grantor. It is clear that the law expresses the government's
appreciation for many years of service already rendered and
the clear intention to reward faithful and often underpaid
workers after the official relationship had been terminated.
Sec. 284 of the Revised Administrative Code grants to a
government employee 15 days vacation leave and 15 days
sick leave for every year of service. Hence, even if the
government employee absents himself and exhausts his
leave credits, he is still deemed to have worked and to have
rendered services. His leave benefits are already imputed in,
and form part of, his salary which in turn is subjected to
withholding tax on income. He is taxed on the entirety of
his salaries without any deductions for any leaves not
utilized. It follows then that the money values
corresponding to these leave benefits both the used and
unused have already been taxed during the year that they
were earned. To tax them again when the retiring employee
receives their money value as a form of government concern
and appreciation plainly constitutes an attempt to tax the
employee a second time. This is tantamount to double
taxation.
2. No, the case here is merely an administrative matter involving an
employee of this Court who applied for retirement benefits and who
questioned the deductions on the benefits given to him.
If we extend the effects of the aforementioned resolution to
all other government employees, in the absence of an actual
case and controversy, we would in principle be rendering an
advisory opinion. We cannot foresee at this time and for all
cases all factors bearing upon the rights of government
workers of varying categories from diverse offices. The
authorities concerned will have to determine and rule on
each case as it arises. "Similarly situated" is a most
ambiguous and undefined term whose application cannot
be fixed in advance.
3. For Atty Zialcita, no need to file a formal request for refund since
the August 23, 1990 Resolution, which principally deals with his case,
already binds the intervenor-movant Commissioner of Internal
Revenue. However, with respect to other retirees allegedly similarly
situated and from whom withholding taxes on terminal leave pay
have been deducted, we rule that these retirees should file a written
request for refund within two years from the date of promulgation
of this resolution. Fiscal considerations do not allow that this matter
be left hanging for an indefinite period while retirees make up their
minds as to whether or hot they are entitled to refunds.
4. Yes, it also applies to the two groups.
They are also entitled to terminal leave pay in accordance
with Sec. 286 of the Revised Administrative Code, as
amended by RA 1081. In the light of our ruling that to tax
terminal leave pay would result in the taxation of benefits
given after and as direct consequences of retirement and
would, in effect, constitute double taxation, we rule that this
resolution also applies to those who avail of optional
23
 retirement and to those who resign or are separated from
the service through no fault of their own.
Intercontinental Broadcasting Corporation vs. Amarilla (October 27, 2006)
Case:
The government sequestered IBC in 1986. This case focuses on four
employees of the IBC who retired in the years 1995, 1996, 1998, and another
on 1998, respectively. A P1,500.00 salary increase was given to all employees
of the company, current and retired, effective July 1994. However, when the
four retirees demanded theirs, petitioner refused and instead informed them
via a letter that their differentials would be used to offset the tax due on their
retirement benefits in accordance with the National Internal Revenue Code
(NIRC). Petitioner claims that there was no agreement in their 1993 CBA
with the labor union to the effect that it would shoulder the tax due on
retirement benefits, and that the CBA was not even approved by the BIR,
contrary to what the NIRC required for the exemption of the retirement
benefits from being computed as taxable gross income.
Respondent averred that it was the long standing practice of petitioner to
shoulder the taxes due on retirement benefits, hence was now stopped to
claim otherwise. To this, petitioner contended that it was the old
managements practice, to which it sought to abrogate as it was
disadvantageous to IBC.
The SC ruled that the retirement benefits were indeed subject to tax because:
1. There was no provision in the CBA that IBC would shoulder the same,
and 2. The CBA was not even approved, contrary to what is required in the
NIRC for the retirement benefits to be exempt. HOWEVER, the court sided
with the Respondents because the respondents were led to believe that their
retirement benefits were exempt from withholding tax as a standing policy of
IBC, which induced them to avail of the early retirement.
Facts:
On various dates, petitioner (IBC-13) employed the following
persons at its Cebu station: Candido C. Quiones, Jr.; on February
1, 1975; Corsini R. Lagahit, as Studio Technician, also on February
1, 1975; Anatolio G. Otadoy, as Collector, on April 1, 1975; and
Noemi Amarilla, as Traffic Clerk, on July 1, 1975.
Background of IBC 13 management:
o On March 1, 1986, the government sequestered the station,
including its properties, funds and other assets, and took
over its management and operations from its owner,
Roberto Benedicto.
o However, in December 1986, the government and
Benedicto entered into a temporary agreement under which
the latter would retain its management and operation.
o On November 3, 1990, the Presidential Commission on
Good Government (PCGG) and Benedicto executed a
Compromise Agreement, where Benedicto transferred and
assigned all his rights, shares and interests in petitioner
station to the government. The PCGG submitted the
Agreement to the Sandiganbayan in Civil Case No. 0034
entitled "Republic of the Philippines v. Roberto S. Benedicto, et al.
In the meantime, the four (4) employees retired from the company
and received, on staggered basis, their retirement benefits under the
1993 Collective Bargaining Agreement (CBA) between petitioner
and the bargaining unit of its employees.
NAME RETIREMENT RETIREMENT
BENEFIT
Candido C. Quiones, October 16, P 766,532.97
Jr. 1995
Noemi B. Amarilla April 16, 1998 P 1,134,239.47
Corsini R. Lagahit April 16, 1998 P 1,298,879.50
Anatolio G. Otadoy February 29, P 751,914.30
1996
A P1,500.00 salary increase was given to all employees of the
company, current and retired, effective July 1994. However, when
the four retirees demanded theirs, petitioner refused and instead
informed them via a letter that their differentials would be used to
24
 offset the tax due on their retirement benefits in accordance with the
National Internal Revenue Code (NIRC)
o Amarilla was informed that the P71,480.00 of the amount
due to her would be used to offset her tax liability of
P340,641.42
o Otadoy was also informed in a letter dated July 5, 1999, that
his salary differential of P170,250.61 would be used to pay
his tax liability which amounted to P127,987.57. Since no
tax liability was withheld from his retirement benefits, he
even owed the company P17,727.26 after the offsetting.
o Quiones was informed that he should have retired
compulsorily in 1992 at age 55 as provided in the CBA, and
that since he was already 58 when he retired, he was no
longer entitled to receive salary increases from 1992 to 1995.
Consequently, he was overpaid by P137,932.22 for the
"extension" of his employment from 1992 to 1995, which
amount he was obliged to return to the company. In any
event, his claim for salary differentials had expired pursuant
to Article 291 of the Labor Code of the Philippines
o Lagahits claim for salary differential of P73,165.23 was
rejected by petitioner in a letter dated July 6, 1999, on the
ground that he had a tax liability of P396,619.03; since the
amount would be used as partial payment for his tax liability,
he still owed the company P323,453.80
Petitioners Contention:
Petitioner averred that under Section 21 of the NIRC, the retirement
benefits received by employees from their employers constitute
taxable income. While retirement benefits are exempt from taxes
under Section 28(b) of said Code, the law requires that such benefits
received should be in accord with a reasonable retirement plan duly registered with
the Bureau of Internal Revenue (BIR) after compliance with the requirements
therein enumerated.
o Since its retirement plan in the 1993 CBA was not approved by the
BIR, complainants were the ones liable for income tax on their
retirement benefits. Petitioner claimed that it was mandated to
withhold the income tax due from the retirement benefits
of said complainants. It was not estopped from correcting
the mistakes of its former officers. Under the law,
complainants are obliged to return what had been
mistakenly delivered to them
Complainants Reply:
Complainants averred that the claims for the retirement salary
differentials of Quiones and Otadoy had not prescribed because
the said CBA was implemented only in 1997. They pointed out that
they filed their claims with petitioner on April 3, 1999.
They maintained that they availed of the optional retirement because
of petitioners inducement that there would be no tax deductions.
Petitioner IBC did not commit any mistake in not withholding the
taxes due on their retirement benefits as shown by the fact that the
PCCG, the Commission on Audit (COA) and the Bureau of Internal
Revenue (BIR) did not even require them to explain such mistake.
They pointed out that petitioner paid their retirement benefits on a
staggered basis, and nonetheless failed to deduct any amount as
taxes.
Decision of the Labor Arbiter and the NLRC
The Labor Arbiter ruled that the claims of Quiones and Otadoy
had prescribed. The retirement benefits of complainants Lagahit and
Amarilla, on the other hand, were exempt from income tax under Section
28(b) of the NIRC. However, the differentials due to the two
complainants were computed three years backwards due to the law
on prescription.
The NLRC Affirmed the decision of the Labor Arbiter. The NLRC
held that the benefits of the retirement plan under the CBAs between
petitioner and its union members were subject to tax as the scheme
was not approved by the BIR. However, it had also been the practice
of petitioner to give retiring employees their retirement pay without
tax deductions and there was no justifiable reason for the respondent
to deviate from such practice.
o The NLRC concluded that petitioner was deemed to have
assumed the tax liabilities of the complainants on their
25
 retirement benefits, hence, had no right to deduct taxes
from their salary differentials.
Petitioners arguments on appeal:
Petitioner insists that respondents are liable for taxes on their
retirement benefits because the retirement plan under the CBA was
not approved by the BIR.
Petitioner maintains that respondents failed to present any
document as proof that petitioner bound and obliged itself to pay
the withholding taxes on their retirement benefits. In fact, the Labor
Arbiter did not make any finding that petitioner had obliged itself to
pay the withholding taxes on respondents retirement benefits.
While petitioner admits that its "previous directors" had paid the
withholding taxes on the retirement benefits of respondents, it
explains that this practice was stopped when the new management
took over. The new management could not be expected to enforce
and follow through the illegal policy of the old management which
is adverse to the interests of the petitioner; hence, the decisions of
the NLRC and the CA affirming such undertaking should be
reversed. It points out that it is a government corporation, and as
such, its officials and employees may be held liable for violation of
Section 3(a) of Republic Act Nos. 3019, and 6713
Issue:
Whether or not the retirement benefits of respondents are part of
their gross income?
o Yes. It is a part of their gross income, thus taxable because
the CBA allegedly containing the agreement that the tax on
retirement benefits were to be shouldered by IBC contained
no such stipulation; and even if it did, it was not approved
by BIR, contrary to what is required under Section 28(b) of
the NIRC. However, petitioner is now stopped from
claiming the same due to its practice of shouldering the
disputed tax liability.
Whether or not petitioner is estopped from reneging on its
agreement with respondent to pay for the taxes on said retirement
benefits?
o Yes. It made complainants believe that the retirement
benefits were free from tax deductions, thus was the
inducement relied upon by the complainants for early
retirement.
Held:
The Court agreed with petitioners contention that, under the CBA, it
is not obliged to pay for the taxes on the respondents retirement benefits. Upon
review the CBA was found to contain no provision where petitioner
obliged itself to pay the taxes on the retirement benefits of its
employees.
The Court also agreed with petitioners contention that, under the
NIRC, the retirement benefits of respondents are part of their gross
income subject to taxes. Section 28 (b) (7) (A) of the NIRC of 1986
provides:
Sec. 28. Gross Income.
xxxx
(b) Exclusions from gross income. - The following items shall not be
included in gross income and shall be exempt from taxation under
this Title:
xxxx
(7) Retirement benefits, pensions, gratuities, etc. - (A) Retirement benefits
received by officials and employees of private firms whether
individuals or corporate, in accordance with a reasonable private
benefit plan maintained by the employer: Provided, That the retiring
official or employee has been in the service of the same employer
for at least ten (10) years and is not less than fifty years of age at the
time of his retirement: Provided, further, That the benefits granted
under this subparagraph shall be availed of by an official or employee
only once. For purposes of this subsection, the term "reasonable
private benefit plan" means a pension, gratuity, stock bonus or
profit-sharing plan maintained by an employer for the benefit of
some or all of his officials or employees, where contributions are
made by such employer for officials or employees, or both, for the
26
 purpose of distributing to such officials and employees the earnings
and principal of the fund thus accumulated, and wherein it is
provided in said plan that at no time shall any part of the corpus or
income of the fund be used for, or be diverted to, any purpose other
than for the exclusive benefit of the said official and employees.
Revenue Regulation No. 12-86, the implementing rules of the foregoing
provisions, provides:
(b) Pensions, retirements and separation pay. Pensions, retirement and
separation pay constitute compensation subject to withholding tax,
except the following:
(1) Retirement benefit received by official and employees of private
firms under a reasonable private benefit plan maintained by the
employer, if the following requirements are met:
(i) The retirement plan must be approved by the Bureau of
Internal Revenue;
(ii) The retiring official or employees must have been in the
service of the same employer for at least ten (10) years and
is not less than fifty (50) years of age at the time of
retirement; and
(iii) The retiring official or employee shall not have
previously availed of the privilege under the retirement
benefit plan of the same or another employer.
Thus, for the retirement benefits to be exempt from the withholding
tax, the taxpayer is burdened to prove the concurrence of the
following elements:
o A reasonable private benefit plan is maintained by the
employer;
o The retiring official or employee has been in the service of
the same employer for at least 10 years;
o The retiring official or employee is not less than 50 years of
age at the time of his retirement; and
o The benefit had been availed of only once.
Article VIII of the 1993 CBA provides for two kinds of retirement plans:
o compulsory - Any employee who has reached the age of
Fifty Five (55) years shall be retired from the COMPANY
and shall be paid a retirement pay; A supervisor who
reached the age of Fifty (50) may at his/her option retire
with the same retirement benefits provided above.
o optional - Any covered employee, regardless of age, who has
rendered at least five (5) years of service to the COMPANY
may voluntarily retire and the COMPANY agrees to pay
Long Service Pay to said covered employee
Respondents were qualified to retire optionally from their
employment with petitioner. However, there is no evidence on
record that the 1993 CBA had been approved or was ever presented
to the BIR; hence, the retirement benefits of respondents are taxable.
Under Section 80 of the NIRC, petitioner, as employer, was obliged
to withhold the taxes on said benefits and remit the same to the BIR.
Petitioners, however are estopped from claiming the abovementioned
reasoning to withhold the tax due on the retirement benefits:
However, the Court agreed with respondents contention that
petitioner did not withhold the taxes due on their retirement benefits
because it had obliged itself to pay the taxes due thereon. This was
done to induce respondents to agree to avail of the optional
retirement scheme.
Respondents received their retirement benefits from the petitioner
in three staggered installments without any tax deduction for the
simple reason that petitioner had remitted the same to the BIR with
the use of its own funds conformably with its agreement with the
retirees. It was only when respondents demanded the payment of
their salary differentials that petitioner alleged, for the first time, that
it had failed to present the 1993 CBA to the BIR for approval,
rendering such retirement benefits not exempt from taxes;
consequently, they were obliged to refund to it the amounts it had
remitted to the BIR in payment of their taxes.
27
 o Petitioner used this "failure" as an afterthought, as an excuse
for its refusal to remit to the respondents their salary
differentials. Patently, petitioner is estopped from doing so.
It cannot renege on its commitment to pay the taxes on
respondents retirement benefits on the pretext that the
"new management" had found the policy disadvantageous.
An agreement to pay the taxes on the retirement benefits as an
incentive to prospective retirees and for them to avail of the optional
retirement scheme is not contrary to law or to public morals.
o Petitioner had agreed to shoulder such taxes to entice them
to voluntarily retire early, on its belief that this would prove
advantageous to it. Respondents agreed and relied on the
commitment of petitioner.
o For petitioner to renege on its contract with respondents
simply because its new management had found the same
disadvantageous would amount to a breach of contract.
o There is even no evidence that any "new management" was
ever installed by petitioner after respondents retirement;
nor is there evidence that the Board of Directors of
petitioner resolved to renege on its contract with
respondents and demand the reimbursement for the
amounts remitted by it to the BIR.
The well-entrenched rule is that estoppel may arise from a making
of a promise if it was intended that the promise should be relied
upon and, in fact, was relied upon, and if a refusal to sanction the
perpetration of fraud would result to injustice. The mere omission
by the promisor to do whatever he promises to do is sufficient
forbearance to give rise to a promissory estoppels
Petitioner cannot hide behind the fact that, under the compromise
agreement between the PCGG and Benedicto, the latter had
assigned and conveyed to the Republic of the Philippines his shares,
interests and rights in petitioner. Respondents retired only after the
Court affirmed the validity of the Compromise Agreement and the
execution by petitioner and the union of their 1993 CBA while Civil
Case No. 0034 was still pending in the Sandiganbayan.
o There is no showing that before respondents demanded the
payment of their salary differentials, petitioner had rejected
its commitment to shoulder the taxes on respondents
retirement benefits and sought its nullification before the
court; nor is there any showing that petitioners "new
management" filed any criminal or administrative charges
against the former officers/board of directors comprising
the "old management" relative to the payment of the taxes
on respondents retirement benefits.
RMC 27-2011
SUBJECT: Revocation of BIR Ruling Nos. 002-99, DA-184-04, DA-569-04
and DA-087-06
TO: All Internal Revenue Officials, Employees and Others Concerned.
This Circular is being issued to revoke BIR Ruling Nos. 002-99 (dated January
12, 1999), DA-184-04 (dated April 6, 2004), DA-569-04 (dated November
10, 2004), and DA-087-06 (dated March 6, 2006) which excludes from the
gross income of the taxpayer and hence, exempt from Income Tax,
contributions to Pag-Ibig 2, GSIS, SSS, Life Insurance, Pre-Need Plan in
excess of the mandatory monthly contribution; GSIS Optional Insurance
Premium, GSIS Educational Plan Premium, GSIS Memorial Plan Premium,
and GSIS Unlimited Optional Insurance Premium.
The abovementioned BIR Rulings rendered an opinion regarding Section
32(B)(7)(f) of the NIRC of 1997, to wit:
Since the law and implementing regulations do not categorically state that
the exemption covers only the regular GSIS and Pag-Ibig contributions, it is
safe to conclude that GSIS optional and Pag-Ibig 2 contributions are likewise
excludible from the gross income of the taxpayer and hence, exempt from
income tax.
It has been observed that the grant of Income Tax exemption to SSS, GSIS,
28
PHIC and Pag- ibig contributions in excess of the mandatory contributions
is being abused. As an example, aside from the mandatory contribution of
Php100.00/month to Pag-ibig Fund and 1% (for those with monthly
compensation of Php1,500.00 and below) or 2% (for those with monthly
compensation of over Php1,500.00) to PHIC, an employee may contribute
additional Php1,000.00/month to Pag-ibig 2 and Php1,000.00/month to
PHIC as voluntary contributions which can be gleaned as a form of
investment. The money being invested by the employees in these programs
are not being taxed. Aside from that, employers which are mandated by the
Bureau to correctly withhold the tax due of their employees (i.e. tax due is
equivalent to tax withheld), find it difficult to comply since voluntary
contributions by their employees may not always pass thru them.
The term contribution is defined in Republic Act (RA) No. 8291, otherwise
known as The Government Service Insurance System Act of 1997, as follows:
SECTION 2. Definition of Terms. xxx xxx xxx
(j) Contribution The amount payable to the GSIS by the member
and the employer in accordance with Section 5 of this Act;
Moreover, Section 5 of RA No. 8291 provides:
SECTION 5. Contributions. (a) It shall be mandatory for the
member and the employer to pay the monthly contributions
specified in the following schedule:
xxx xxx xxx (Underscoring provided)
Similarly, Section 8 of RA No. 8282, otherwise known as the Social Security
Act of 1997, defined the term contribution, viz:
SECTION 8. Terms Defined.
xxx xxx xxx
(i) Contribution The amount paid to the SSS by and on behalf of
the member in accordance with Section Eighteen of this Act.
Subsequently, Section 18 of RA No. 8282 states:
SECTION 18. Employee's Contribution. (a) Beginning as of the
last day of the calendar month when an employee's compulsory
coverage takes effect and every month thereafter during his
employment, the employer shall deduct and withhold from such
employee's monthly salary, wage, compensation or earnings, the
employee's contribution in an amount corresponding to his salary,
wage, compensation or earnings during the month in accordance
with the following schedule: (Emphasis provided)
Further, the term Medicare contribution is defined in Section 4 of RA No.
7875, otherwise known as the National Health Insurance Act of 1995, as
follows:
SECTION 4. Definitions of Terms. For the purpose of this Act,
the following terms shall be defined as follows:
xxx xxx xxx
d) Contribution The amount paid by or in behalf of a member to
the Program for coverage, based on salaries or wages in the case of
formal sector employees, and on household earnings and assets, in
the case of the self-employed, or on other criteria as may be defined
by the Corporation in accordance with the guiding principles set
forth in Article I of this Act.
Furthermore, Sections 4 and 7 of RA 9697, otherwise known as the Home
Development Mutual Fund Law of 2009 provided for the definition of Pag-
ibig contribution, to wit:
SEC. 4. Definition of Terms. - The following shall mean: xxx xxx
xxx
(c) Contributions - the amount payable to the Fund by the
members and their employers, in accordance with this Act.
SEC. 7. Fund Generation and Contributions.- The money of the
Fund shall be generated by the provident savings that the covered
employees shall contribute for the purpose every month, and the
equal amounts that their respective employers shall mandatorily
contribute.
Covered employees and employers shall contribute to the Fund
based on the monthly compensation of covered employees as
29
 follows:
Employees earning not more than One thousand five hundred pesos
(P1,500.00) per month one percent (1%).
Employees earning more than One thousand five hundred pesos
(P1,500.00) per month two percent (2%).
All employers - two percent (2%) of the monthly compensation of
all covered employees.
The maximum monthly compensation to be used in computing
employee and employer contributions shall not be more than Five
thousand pesos (P5,000.00): Provided, That this maximum may be
fixed from time to time by the Board of Trustees through rules and
regulations adopted by it, taking into consideration actuarial
calculations and rates of benefits.
Therefore, contributions referred to in Section 32(B)(7)(f) of the NIRC of
1997 cover only the mandatory/compulsory contributions of the concerned
employees to SSS, GSIS, PHIC and HDMF. Thus, this Office holds that
voluntary contributions in excess to what the law allows to these institutions
are not excludible from the gross income of the taxpayer and hence, not
exempt from Income Tax and Withholding Tax. Consequently, the
exemption from withholding tax on compensation referred to in Section
2.78.1(B)(12) of Revenue Regulations (RR) No. 2-98 shall apply only to
mandatory/compulsory GSIS, SSS, Medicare and Pag-ibig contributions.
In this regard, BIR Ruling Nos. 002-99, DA-184-04, DA-569-04 and DA-
087-06 are hereby revoked and invalidated, and all revenue issuance
inconsistent with this Circular are deemed repealed.
All revenue officers conducting audit investigations shall take the provisions
of this Circular into consideration. Accordingly, any claim for exemption for
voluntary contributions shall be disallowed, and, where applicable, the
corresponding deficiency assessment shall be made.
All revenue officials and employees are enjoined to give this Circular the
widest possible publicity.
Income derived by foreign government
Commissioner of Internal Revenue vs. Mitsubishi Metal Corporation
(January 22, 1990)
Facts:
April 17, 1970, Atlas Consolidated Mining entered into a Loan and
Sales Contract with Mitsubishi Metal Corporation, a Japanese
corporation licensed to engage in business in the Philippines, for
purposes of the projected expansion of the productive capacity of
the former's mines in Toledo, Cebu. Under said contract, Mitsubishi
agreed to extend a loan to Atlas 'in the amount of $20,000,000.00,
for the installation of a new concentrator for copper production.
Mitsubishi thereafter applied for a loan with the Export-Import
Bank of Japan (Eximbank). Its loan application was approved on
May 26, 1970. The total amount of both loans is equivalent to
$20,000,000.00 in United States currency at the then prevailing
exchange rate. The records in the Bureau of Internal Revenue show
that the approval of the loan by Eximbank to Mitsubishi was subject
to the condition that Mitsubishi would use the amount as a loan to
Atlas.
Pursuant to the contract between Atlas and Mitsubishi, interest
payments were made by the former to the latter totalling
P13,143,966.79 for the years 1974 and 1975. The corresponding 15%
tax thereon in the amount of P1,971,595.01 was withheld pursuant
to Section 24 (b) (1) and Section 53 (b) (2) of the National Internal
Revenue Code, as amended by Presidential Decree No. 131, and duly
remitted to the Government. (In here, the income of Mitsubishi is
from the interest in loan, which was taxed by 15%)
On March 5, 1976, Mitsubishi filed a claim for tax credit requesting
that the sum of P1,971,595.01 be applied against their existing and
future tax liabilities.
CIR not having acted on the claim for tax credit, on April 23, 1976
private respondents filed a petition for review with CTA.
The petition was grounded on the claim that Mitsubishi was a mere
agent of Eximbank, which is a financing institution owned,
controlled and financed by the Japanese Government. Such
governmental status of Eximbank, if it may be so called, is the basis
for private repondents' claim for exemption from paying the tax on
30
 the interest payments on the loan as earlier stated.
It was further claimed that the interest payments on the loan from
the consortium of Japanese banks were likewise exempt because said
loan supposedly came from or were financed by Eximbank. The
provision of the National Internal Revenue Code relied upon is
Section 29 (b) (7) (A), which excludes from gross income:
o Income received from their investments in the Philippines
in loans, stocks, bonds or other domestic securities, or from
interest on their deposits in banks in the Philippines by (1)
foreign governments, (2) financing institutions owned,
controlled, or enjoying refinancing from them, and (3)
international or regional financing institutions established
by governments.
On April 18, 1980, respondent court ruled in favor of Mitsubishi
ordering petitioner to grant a tax credit in favor of Atlas in the
amount of P1,971,595.01. It also concluded that the ultimate creditor
of Atlas was Eximbank with Mitsubishi acting as a mere "arranger
or conduit through which the loans flowed from the creditor
Export-Import Bank of Japan to the debtor Atlas Consolidated
Mining & Development Corporation."
Issues:
1. Whether or not Mitsubishi is an agent of Eximbank in providing the
loan to Atlas
2. Whether or not interest income from the loans extended to Atlas by
Mitsubishi is exempt from gross income taxation pursuant to Section
29 b) (7) (A) of the tax code and, therefore, exempt from withholding
tax
Held:
1. No, Mitsubishi is not a mere agent of Eximbank in extending the
loan to Atlas. Therefore, Mitsubishi is liable for income tax from the
interest paid by Atlas
The loan and sales contract between Mitsubishi and Atlas does
not contain any direct or inferential reference to Eximbank
whatsoever. The agreement is strictly between Mitsubishi as
creditor in the contract of loan and Atlas as the seller of the
copper concentrates.
When MITSUBISHI therefore secured such loan with
Eximbank, it was in its own independent capacity as a private
entity and not as a conduit of the consortium of Japanese banks
or the EXIMBANK of Japan. While the loans were secured by
MITSUBISHI primarily "as a loan to and in consideration for
importing copper concentrates from ATLAS," the fact remains
that it was a loan by EXIMBANK of Japan to MITSUBISHI
and not to ATLAS. Thus, the transaction between
MITSUBISHI and EXIMBANK of Japan was a distinct and
separate contract from that entered into by MITSUBISHI and
ATLAS.
The conclusion is indubitable; MITSUBISHI, and NOT
EXIMBANK, is the sole creditor of ATLAS, the former being
the owner of the $20 million upon completion of its loan
contract with EXIMBANK of Japan.
2. No, loans extended by Atlas to Mitsubishi is not exempt from
Taxation
What was the subject of the 15% withholding tax is not the
interest income paid by MITSUBISHI to EXIMBANK, but the
interest income earned by MITSUBISHI from the loan to
ATLAS.
It is too settled a rule in this jurisdiction, as to dispense with the
need for citations, that laws granting exemption from tax are
construed strictissimi juris against the taxpayer and liberally in
favor of the taxing power. Taxation is the rule and exemption is
the exception. The burden of proof rests upon the party
claiming exemption to prove that it is in fact covered by the
exemption so claimed, which onus petitioners have failed to
discharge.
Significantly, private respondents Mitsubishi are not even
among the entities which, under Section 29 (b) (7) (A) of the tax
code, are entitled to exemption and which should indispensably
be the party in interest in this case. (Since they failed to prove
that they are agents of Eximbank, which is a financing institution
controlled by a foreign government, which is exempt from
taxation. As concluded earlier, EXIMBANK has nothing to do
with the loan transaction between Mitsubishi and Atlas)
31
 De minimis/PERA
RA No. 9505
AN ACT ESTABLISHING A PROVIDENT PERSONAL SAVINGS
PLAN, KNOWN AS THE PERSONAL EQUITY AND RETIREMENT
ACCOUNT (PERA)
Be it enacted by the Senate and House of Representatives of the Philippines in Congress
assembled:
SECTION 1. Title. - This Act shall be known as the "Personal Equity and
Retirement Account (PERA) Act of 2008".
SEC. 2. Declaration of Policy. - It is declared the policy of the State to promote
capital market development and savings mobilization by establishing a legal
and regulatory framework of retirement plans for persons, comprised of
voluntary personal savings and investments. The State recognizes the
potential contribution of PERA to long-term fiscal sustainability through the,
provision of long-term financing and reduction of social pension benefits.
SEC. 3. Definition of Terms. -Unless the context requires otherwise, the
following terms shall have the following significance as used in this Act:
(a) "Administrator" is an entity accredited by the Bureau of Internal Revenue
(BIR), after pre qualification by the concerned Regulatory Authority. The
Administrator shall be responsible for overseeing the PERA, whose core
functions shall include, but not limited to: reporting on contributions made
to the account, computing the values of investments, educating the
Contributor, enforcing PERA contributions and withdrawal limits, collecting
appropriate taxes and penalties for the government, securing BIR Income
Tax Credit Certificates for the Contributor, consolidating reports on all
investments, income, expenses and withdrawals on the account and ensuring
that PERA contributions are invested in accordance with the prudential
guidelines set by the Regulatory Authorities.
(b) "Contributor" is any person with the capacity to contract and possesses a
tax identification number. The Contributor establishes and makes
contributions to a PERA.
(c) "Custodian" is a separate and distinct entity unrelated to the
Administrator, accredited by the Bangko Sentral ng Pilipinas, providing
services in connection with the custodianship of funds and securities
comprising the PERA investments. The Custodian shall be responsible for
receiving all funds in connection with the PERA, maintaining custody of all
original securities, evidence of deposits or other evidence of investment. The
Custodian shall operate independently from the Administrator. The
Custodian is required to report to the Contributor and the concerned
Regulatory Authority at regular intervals all financial transactions and all
documents in its custody under a PERA.
(d) "Early withdrawal" shall pertain to any withdrawal prior to the period of
distribution as set forth under Section 12 hereof.
(e) "Investment Manager" is a regulated person or entity authorized by a
Contributor to make investment decisions for his PERA. As such, it shall
assume fiduciary duty and responsibility for PERA investments. An
Investment Manager shall act with utmost fidelity by observing policies
directed towards confidentiality, scrupulous care, safety and prudent
management of PERA funds.
(f) "Personal Equity and Retirement Account (PERA)" refers to the
voluntary retirement account established by and for the exclusive use and
benefit of the Contributor for the purpose of being invested solely in PERA
investment products in the Philippines. The Contributor shall retain the
ownership, whether legal or beneficial, of funds placed therein, including all
earnings of such funds.
(g) "PERA Investment Product" refers to a unit investment bust fund,
mutual fund, annuity contract, insurance pension products, pre-need pension
plan, shares of stock and other securities listed and traded in a local exchange,
exchange-traded bonds or any other investment product or outlet which the
concerned Regulatory Authority may allow for PERA purposes: Provided,
however, That to qualify as a PERA investment product under this Act, the
product must be non-speculative, readily marketable, and with a track record
of regular income payments to investors. The concerned Regulatory
Authority must first approve the product before being granted tax-exempt
privileges by the BIR.
(h) "Regulatory Authority" refers to the Bangko Sentral ng Pilipinas (BSP) as
regards banks, other supervised financial institutions and trust entities, the
Securities and Exchange Commission (SEC) for investment companies,
32
investment houses stockbrokerages and pre-need plan companies, and the
Office of the Insurance Commission (OIC) for insurance companies.
(i) "Oveseas Filipino" refers to (1) an individual citizen of the Philippines who
is working or deriving income from abroad, including one who retained or
reacquired his Philippine citizenship under Republic Act No. 9225, otherwise
known as the "Citizenship Retention and Reacquisition Act of 2003"; or (2)
the legitimate spouse, whether or not said spouse is of Filipino ancestry, and
the children of the Filipino citizen mentioned in item (1) hereof.
SEC. 4. Establishment of a PERA. - A Contributor may create and maintain a
maximum of five (5) PERA, at any one time: Provided, That the Contributor
shall designate and maintain only one (1) Administrator for all his PERA. The
Contributor shall make all investment decisions pertaining to his PERA.
However, he has the option of appointing an Investment Manager, either in
writing or in electronic form, to make investment decisions on his behalf
without prior consultation.
SEC. 5. Maximum Annual PERA Contributions. - A Contributor may make an
aggregate maximum contribution of One hundred thousand pesos (P
l00,000.00) or its equivalent in any convertible foreign currency at the
prevailing rate at the time of the actual contribution, to his her PERA per
year: Provided, That if the Contributor is married, each of the spouses shall be
entitled to make a maximum contribution of One hundred thousand pesos
(P l00,000.00) or its equivalent in any convertible foreign currency per year
to his her respective PERA: Provided, further, That if the Contributor is an
overseas Filipino, he shall be allowed to make maximum contributions
double the allowable maximum amount. A Contributor has the option to
contribute more than the maximum amount prescribed herein: Provided, That
the excess shall no longer be entitled to a tax credit of five percent (5%). The
Secretary of Finance may adjust the maximum contribution from time to
time, taking into consideration the present value of the said maximum
contribution using the Consumer Price Index as published by the National
Statistics Office, fiscal position of the government and other pertinent
factors.
SEC. 6. Employer's Contribution. - A private employer may contribute to its
employee's PERA to the extent of the amount allowable to the Contributor:
Provided, however: That the employer complies with the mandatory Social
Security System (SSS) contribution and retirement pay under the Labor Code
of the Philippines. Such contribution shall be allowed as a deduction from
the employer's gross income. The Contributor, however, retains the
prerogative to make investment decisions pertaining to his PERA.
SEC. 7. Separate Asset. -The PERA shall be kept separate from the other assets
of an Administrator/Custodian and shall not be part of the general assets of
the Administrator/Custodian for purposes of insolvency.
SEC. 8. Tax Treatment of Contributions. - The Contributor shall be given an
income tax credit equivalent to five percent (5%) of the total PERA
contribution: Provided, however: That in no instance can there be any refund of
the said tax credit arising from the PERA contributions. If the Contributor
is an overseas Filipino, he shall be entitled to claim tax credit from any tax
payable to the national government under the National Internal Revenue
Code of 1997, as amended.
SEC. 9. Tax Treatment of Investment Income. - All income earned from the
investments and reinvestments of the maximum amount allowed herein is
tax exempt.
SEC. 10. Tax Treatment of Distributions. - All distributions in accordance with
Section 12 hereof are tax exempt.
SEC. 11. Termination. -Any premature termination shall be treated as an early
withdrawal under Section 13 hereof: Provided, That the penalties thereunder
shall not apply if the entire proceeds there from are immediately transferred
to another PERA investment and/or another Administrator.
SEC. 12. Distributions Upon Retirement/Death. - Distributions may be made
upon reaching the age of fifty-five (55) years: Provided, That the Contributor
has made contributions to the PERA for at least five (5) years. The
distribution shall be made in either lump sum or pension for a definite period
or lifetime pension, the choice of which shall be at the option of the
Contributor. The Contributor, however, has the option to continue the
PERA. Complete distribution shall be made upon the death of the
33
Contributor, irrespective of the age of the Contributor at the time of his
death.
SEC. 13. Penalty on Early Withdrawal. - Any early withdrawal shall be subject
to a penalty, the amount of which would be determined by the Secretary of
Finance and payable to the government: Provided, That the amount of the
penalty shall in no case be less than the tax incentives enjoyed by the
Contributor.
No early withdrawal penalty shall be imposed on any withdrawal of any funds
for the following purposes:
(a) For payment of accident or illness-related hospitalization in excess of
thirty (30) days; and
(b) For payment to a Contributor who has been subsequently rendered
permanently totally disabled as defined under the Employees Compensation
Law, Social Security Law and Government Service Insurance System Law.
SEC. 14. Non-Assignability. - No portion of the assets of a PERA may be
assigned, alienated, pledged, encumbered, attached, garnished, seized or
levied upon. PERA assets shall not be considered assets of the Contributor
for purposes of insolvency and estate taxes.
SEC. 15. Rules and Regulations. - Consistent with the policy of promoting
transparency in PERA investment and thereby affording protection to the
Contributor, the Department of Finance, the Bureau of Internal Revenue and
the concerned Regulatory Authorities, with the Bangko Sentral ng Pilipinas
as lead agency, shall coordinate to establish uniform rules and regulations
pertaining to the following subject matters:
(a) Qualification and disqualification standards for Administrators,
Custodians and Investment Managers, including directors and officers
thereof;
(b) Qualified and/or eligible PERA investment products;
(c) Valuation standards for PERA investments;
(d) Disclosure requirements on the terms and conditions of the PERA
investments;
(e) Minimum requirements imposed on the Administrators as regards
inculcating financial literacy in investors;
(f) Ascertainment of client suitability for PERA products;
(g) Fees to be charged by the Administrator, Custodian or Investment
Manager shall always be reasonable and approved by the concerned
Regulatory Authority;
(h) Record-keeping, reporting and audit requirement of Administrators and
Custodians pertaining to records for all contributions, earnings and total
account balances; and
(i) Other pertinent matters to be determined by the Regulatory Authorities.
SEC. 16. Administration of Tax Incentives. - The BIR shall issue the
implementing rules and regulations regarding all aspects of tax administration
relating to PERA. The BIR shall coordinate the qualification standards of the
Administrator with the Regulatory Authorities.
SEC. 17. Penalty. - A fine of not less than Fifty thousand pesos (P 50,000.00)
nor more than Two hundred thousand pesos (P 200,000.00) or imprisonment
of not less than six (6) years and one (1) day to not more than twelve (12)
years or both such fine and imprisonment, at the discretion of the court, shall
be imposed upon any person, association, partnership or corporation, its
officer, employee or agent, who, acting alone or in connivance with others,
shall:
(a) Act as Administrator, Custodian or Investment Manager without being
properly qualified or without being granted prior accreditation by the
concerned Regulatory Authority;
(b) Invest the contribution without written or electronically authenticated
authority from the Contributor, or invest the contribution in contravention
of the instructions of the Contributor;
(c) Knowingly and willfully make any statement in any application, report, or
document required to be filed under this Act, which statement is false or
misleading with respect to any material fact;
(d) Misappropriate or convert, to the prejudice of the Contributor,
contributions to and investments or income from the PERA;
(e) By gross negligence, cause any loss, conversion, or misappropriation of
the contributions to, or investments from, the PERA or
(f) Violate any provision of this Act or rules and regulations issued pursuant
to this Act. Notwithstanding the foregoing, any willful violation by the
accredited Administrator, Custodian or Investment Manager of any of the
provisions of this Act, or its implementing rules and regulations, or other
34
terms and conditions of the authority to act as Administrator, Custodian or
Investment Manager may be subject to the administrative sanctions provided
for in applicable laws. The above penalties shall be without prejudice to
whatever civil and criminal liability provided for under applicable laws for the
same act or omission.
SEC. 18. Abuse of the Tax Exemption and Privileges. - Any person, natural or
juridical, who unduly avails of the tax exemption privileges herein granted,
possibly by co-mingling PERA accounts in an investment with other
investments, when such person is not entitled hereto, shall be subject to the
penalties provided in Section 17 hereof. In addition, the offender shall refund
to the government double the amount of the tax exemptions and privileges
enjoyed under this Act, plus interest of twelve percent (12%) per year from
the date of enjoyment of the tax exemptions and privileges to the date of
actual payment.
SEC. 19. Separability Clause. - If any provision or part hereof is held invalid or
unconstitutional, the remainder of the law or the provision not otherwise
affected shall remain valid and subsisting.
SEC. 20. Repealing Clause. - All laws, decrees, orders, rules and regulations or
parts thereof inconsistent with this Act are hereby amended or modified
accordingly.
SEC. 21. Effectivity. -This Act shall take effect fifteen (15) days following its
publication in a newspaper of general circulation: Provided, That the tax
incentives granted hereunder shall take effect on January 1, 2009.
RR 8-00 (August 21, 2000)
Amends specific provisions of RR No. 2- 98 and RR No. 3-98 with respect
to the De Minimis Benefits, Additional Compensation Allowance (ACA),
Representation and Transportation Allowance (RATA) and Personal
Economic Relief Allowance (PERA). Said benefits/allowances received by
employees are not considered as items of income and, therefore, are not
subject to income tax and, consequently, to the withholding tax. Effective the
Taxable Year 2000, ACA will be classified as part of the Other Benefits
excluded from ones gross compensation income, provided that the total
amount of such benefits does not exceed P 30,000. Items of de minimis
benefits exempt from the fringe benefits tax are enumerated in the
Regulations.
RR 5-2011 (March 16, 2011)
Pursuant to Sections 4 and 244 in relation to Section 33 of the Tax Code of
1997, these Regulations are hereby promulgated to further amend Revenue
Regulations (RR) No. 2-98, as last amended by RR No. 5-2008, with respect
to "De Minimis" benefits which are exempt from income tax on
compensation as well as from fringe benefit tax.
SECTION 1. Section 2.78.1 (A) (3) (c) and (d) of RR 2-98, as last amended
by RR 5- 2008, is hereby further amended to read as follows:
"Sec. 2.78.1 Withholding of Income Tax on Compensation Income.
(A) ...
(1) ...
xxx xxx xxx
(3) Facilities and privileges of relatively small value. . . .
xxx xxx xxx
The following shall be considered as "de minimis" benefits not
subject to income
tax as well as withholding tax on compensation income of both managerial
and rank and file employees: The list is
EXCLUSIVE
a) Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year;
b) Monetized value of vacation and sick leave credits paid to government
officials and employees;
c) Medical cash allowance to dependents of employees, not exceeding
P750 per employee per semester or P125 per month;
d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500;
35
e) Uniform and Clothing allowance not exceeding P4,000 per annum;
f) Actual medical assistance, e.g. medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity
assistance, and routine consultations, not exceeding P10,000.00 per
annum;
g) Laundry allowance not exceeding P300 per month;
h) Employees achievement awards, e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property
other than cash or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an established written
plan which does not discriminate in favor of highly paid employees;
i) Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
j) Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty-five percent (25%) of the basic minimum wage on a
per region basis;
All other benefits given by employers which are not included in the
above enumeration shall not be considered as "de minimis" benefits, and
hence, shall be subject to income tax as well as withholding tax on
compensation income.
xxx xxx xxx
SECTION 2. Section 2.33 (C) of RR 3-98, as last amended by RR 5-
2008, is hereby further amended to read as follows:
"Sec. 2.33. Special Treatment of Fringe Benefits.
(A) Imposition of Fringe Benefits Tax . . .
xxx xxx xxx
(B) Definition of Fringe Benefit . . .
xxx xxx xxx
(C) Fringe Benefits Not Subject to Fringe Benefit Tax In general,
the fringe benefit tax shall not be imposed on the following fringe
benefits:
xxx xxx xxx
The term "DE MINIMIS" benefits which are exempt from the
fringe benefit tax shall, in general, be limited to facilities or privileges
furnished or offered by an employer to his employees that are of
relatively small value and are offered or furnished by the employer merely
as a means of promoting the health, goodwill, contentment, or efficiency
of his employees. The following are considered as de minimis benefits
granted to each employee:
a) Monetized unused vacation leave credits of private employees not
exceeding ten (10) days during the year;
b) Monetized value of vacation and sick leave credits paid to government
officials and employees;
c) Medical cash allowance to dependents of employees, not exceeding
P750 per employee per semester or P125 per month;
d) Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500;
e) Uniform and Clothing allowance not exceeding P4,000 per annum;
f) Actual medical assistance, e.g. medical allowance to cover medical and
healthcare needs, annual medical/executive check-up, maternity
assistance, and routine consultations, not exceeding P10,000.00 per
annum;
g) Laundry allowance not exceeding P300 per month;
h) Employees achievement awards, e.g., for length of service or safety
achievement, which must be in the form of a tangible personal property
other than cash or gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee
under an established written plan which does not discriminate in favor
of highly paid employees;
i) Gifts given during Christmas and major anniversary celebrations not
exceeding P5,000 per employee per annum;
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j) Daily meal allowance for overtime work and night/graveyard shift not
exceeding twenty-five percent (25%) of the basic minimum wage on a
per region basis.

All other benefits given by employers which are not included in the
above enumeration shall not be considered as "de minimis" benefits, and
hence, shall be subject to income tax as well as withholding tax on
compensation income.

xxx xxx xxx"

SECTION 3. Transitory Provisions. The benefits herein provided

shall apply to income earned starting the year 2011.

SECTION 4. Repealing Clause. All existing rules and regulations or

parts thereof which are inconsistent with the provisions of these
regulations are hereby revoked, repealed or modified accordingly.

SECTION 5. Effectivity Clause. These Regulations shall take effect

after fifteen (15) days following its publication in any newspaper of
general circulation.

RR 17-2011 (October 27, 2011)

RR 8-2012 (May 11, 2012)

RR 1-2015 (January 5, 2015)

37