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GUIDE NOTES: GENERAL PRINCIPLES
Q: What is taxation?
- process of taxing or imposing a tax
Q: What are taxes?
enforced proportional contribution of persons and properties levied by
the authority of the state for the support of the government, and for all
public needs
Q: What is the nature of the states taxing power?
- Inherent power of the state
- Legislative power
Q: Explain the lifeblood theory
- Without taxes, the government can neither exist nor endure.
- The exercise of taxing power derives its source from the very
existence of the state whose social contract with its citizens
obliges it to promote public interest and common good
- Emanates from necessity without taxes, government cannot
fulfill its mandate of promoting the general welfare and well
being of the people.
Q: The power to tax is sometimes called the power to destroy. Explain
- Taxes are imposed upon a citizens person and property, which
directly affects their lives. As such, it must be exercised with
caution and maintain a degree of reasonableness, less the tax
collector kill the hen that lays the golden egg.
- It must be used justly and in conformity with our sense of
justice.
Q: The power to tax is imprescriptible although statutes can provide for
prescriptive period to assess and/or collect.
- time limits must be express
Q: what are the purposes or objectives of taxation?
- Regulatory and/or revenue purposes
ED.
- Promotion of general welfare
- Reduction of social inequity through progressive system of tax
- Encouragement of economic growth
- Promotion of protectionism
Q: what is the scope of the legislative taxing power?
- legislature may determine: Situs (Place), Coverage (subject) ,
Objective (purpose), Nature (kind), Extent (rate)
Q: Discuss the consti provisions on tax.
- Art. 6, Sec. 24: All appropriation, revenue or tariff bills, bills
authorizing increase of public debt, bills of local application, and
private bills shall originate exclusively in the House of
Representatives, but the Senate may propose or concur with
amendments.
- Art. 6, Sec. 28:
o (1) The rule of taxation shall be uniform and equitable.
The congress shall evolve a progressive system of
taxation.
o (2) The congress may, by law, authorize the President to
fix within specified limits, and subject to such
limitations and restrictions as it may impose, tariff rates,
import and export quotas, tonnage and wharfage dues,
and other duties or imposts within the framework of the
national development program of the government.
o (3) Charitable institutions, churches and parsonages or
convents, appurtenant thereto, mosques, nonprofit
cemeteries, and all lands, buildings, and improvements,
actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from
taxation.
o (4) No law granting any tax exemption shall be passed
without the concurrence of a majority of all the
members of congress.
- Art. 6, Sec. 29(3)
o All money collected on any tax levied for a special
purpose shall be treated as a special fund and paid out of
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such purpose only. If the purpose for which a special fund
was created has been fulfilled or abandoned, the
balance, if any, shall be transferred to the general funds
of the government.
- Art. 10, Sec. 5
o Each LGU shall have the power to create its own sources
of revenues and to levy taxes , fees and charges subject
to such guidelines and limits as the Congress may
provide, consistent with the basic policy of local
autonomy. Such taxes, fees, and charges shall accrue
exclusively to the local governments.
Q: What are the general constitutional limits on tax?
- Due Process (not just notice and hearing)
o Tax is for public purpose
o Rule on uniformity of tax is observed
o Either the person or property taxed is within the
jurisdiction of the government levying the tax
o Assessment and collection of certain kinds of taxes,
notice and opportunity for hearing are provided
- Equal Protection
o All taxable articles or kinds of property of the same class
shall be taxed at the same rate.
o Reasonable and natural classifications are allowed.
o Uniformity allowed as long as:
Standards that are used are substantial and not
arbitrary
Categorization is germane to achieve the
legislative purpose
The law applies, all things being equal, to both
present and future conditions
Classification applies equally well to all those
belonging to the same class.
- Religious Freedom
- Payment of just compensation
o Issuance of a tax credit certificate and promptness of
release
- Non-impairment of contracts
o Contract clause has never been thought of as a limitation
on the exercise of the States power of taxation, save
only where a tax exemption has been granted for a valid
consideration.
Q: What are the inherent limits on tax?
- Public purpose
o Eg. Taxation as an implement of the states police power
- Non-delegability of the power to tax
- Territoriality
o Tax applicable only within jurisdiction
- Tax exemption of the state
- Principle of comity
Q: What are the other recognized limits on tax?
- Reconciliation of conflicting interests of taxing authority and
taxpayer
- Prospective application
- Promptness in payment
- No injunction against collection of taxes
o Only on national government; local taxes can be subject
to injunction
- No estoppel against the state
o To rectify mistakes, errors, irregularities, or illegal acts
of its officials and agents, irrespective of rank
- No legal compensation between taxes and debts
o Exception: if requisites for valid compensation are met:
Each on of the obligors be bound principally, and
that he be at the same time a principal creditor
of the other
Both debts must consist in a sum of money, or if
the things due are consumable, they be of the
same kind, and also of the same quality if the
latter has been stated.
2 debts are due
debts be liquidated and demandable
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over neither of them there be any retention of
controversy, commenced by third persons and
communicated in due time to the debtor.
Q: Explain the statutory construction rule in regard of tax statutes
- tax statutes are strictly construed against the taxing authority
o because taxation is a destructive power which interferes
with the personal and property rights of the people
Q: Explain the statutory construction rule with regard to tax exemptions.
- liberally in favor of the taxing authority
- must be followed strictly
Q: What is the exception to the rule on tax exemptions?
- Not followed as strictly when exemption is in favor of a political
subdivision
Q: Discuss the principle of solutio indebiti in tax cases.
- Government has to restore sum representing erroneous payment
of taxes.
Q: What are the aspects of taxation?
- Levy: imposition of taxes (legislative)
- Assessment and Collection: (administrative)
o 3 years to assess and
o 5 years to collect
Q: What are the basis principles of a sound tax system?
- Fiscal adequacy requires sources of revenue must be adequate
to meet government expenditures and their variations
- Theoretical justice or equality
- Administrative feasibility tax system should be capable of being
effectively administered and enforced with the least
inconvenience to the taxpayer
o Non-observance will render tax invalid EXCEPT to the
extent that specific consti or statutory limitations are
impaired.
Q: How are taxes classified?
- According to scope of the tax: national and local tax
- According to who shoulders the tax burden: direct or indirect tax
o Burden vs liability
- According to subject matter: personal/poll/capitation tax,
property tax and license/occupation tax
- According to manner of computing: specific tax, ad valorem tax
(tax on the privilege/use) and mixed tax
- According to purpose: revenue and/or regulatory purpose
- According to graduation of tax rates: proportional tax,
progressive tax, regressive tax
Q: Differentiate between tax and license fee
- Licenses for regulation of useful occupations/enterprises
(sufficient to cover expense of issuing license and cost of
necessary inspection only)
- Licenses for the regulation or restrict of non-useful occupations
or enterprises (same limits as previous but wider discretion)
- License for revenue only (warranted by public interest)
Q: Differentiate between tax and special assessment
- special assessment can only be assessed only on land
- a special assessment cannot (at least in most states) be made a
personal liability of the persons assessed
- a special benefit is based wholly on benefits and
- a special assessment is exceptional both as to time and locality
Q: Differentiate between tax and penalty
- Civil liability to pay taxes arises from that, for instance, that one
has engaged himself in business.
- Civil liability in relation the RPC: criminal liability gives birth to
the civil liability such that generally, if one is not criminally
liable under the RPC, he cannot become civilly liable thereunder.
Q: Differentiate between tax and debt
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- in debt, there has to be a creditor and debtor government and
taxpayer cannot be held as such.
- Debts, to be enforceable, must be substantiated by proof that it
is already due and demandable.
Q: Explain the concept of the tax condonation or remission.
- Condonation is equivalent and is in the na ture of a tax
exemption.
o Follow terms strictly.
Q: what is a tax amnesty?
- a general pardon or intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of
evasion or violation of a revenue or tax law
- absolute forgiveness or waiver by government of its right to
collect what is due it and to give tax evaders who wish to relent
a clean slate
Q: What is meant by tax avoidance?
- a tax saving device within the means sanctioned by law, which
should be used by the taxpayer in good faith and at arms length
Q: What constitutes tax evasion?
- assessment of deficiency not necessary but if there is a gross
disparity in the taxes due and the amounts declared by taxpayer,
CIR has cause to pursue criminal prosecution
- must be willful attempt to defeat and evade income tax by filing
a fraudulent return knowing that it is inaccurate
- integration of 3 factors:
o end to be achieved
o state of mind (bad faith, evil, willful, deliberate)
o course of action which is unlawful
Q: What makes a fraudulent tax return? A false return?
- Fraudulent (with intent to evade taxes)
- False (due to mistake, carelessness, ignorance)
Q: Explain the concept of double taxation
ED.)
- taxing the same property twice when it should be taxed only
once
- direct duplicate tax
- same subject matter, same purpose, same taxing authority, same
jurisdiction, same taxing period, same kind/character
Q: Define prescription in tax cases
- beneficial to government: tax officers would be obliged to act
promptly in making the assessment
- beneficial to citizen because after lapse of period, citizens
would have a feeling of security against unscrupulous tax
collectors
- without it, taxpayers would always be open to harassment)
- rationale of a waiver of a statute of limitations: derogation of
taxpayers right to security against prolonged and unscrupulous
investigations and must be strictly construed
o must specify a definite agreed date between BIR and
taxpayer within which former could assess and collect
o must be signed by CIR
o date of acceptance must be ascertainable
o taxpayer must be furnished a copy of the waiver
TITLE I ORGANIZATIONS AND FUNCTION OF THE BIR
Q: Enumerate the CIRs powers and duties (Sec. 2-8, 1997 NIRC) [MEDIO]
- Make assessment and prescribe additional requirements for tax
administration and enforcement
- Ensure the provision of forms, receipts, certificates, and
appliances and acknowledgment of payment of taxes
- Delegate power
- Interpret tax laws and decide cases
- Obtain information from, summon/examine and take testimony
of persons
Q: Which powers of the CIR may NOT be delegated? Sec. 7, 1997 NIRC
[RICA]
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- Recommend the promulgation of rules and regulations by the
DOF Secretary
- Issue ruling of first impression or reverse/revoke/modify any
existing ruling of the CIR
- Compromise or abate tax liability, subject to certain exceptions
- Assign or reassign internal revenue officers to establishments
where articles subject to excise tax are produced or kept
Q: Distinguish between ministerial and discretionary.
- Its a matter of using personal judgment ministerial does not
allow such; discretionary does.
- What is discretion in relation to public officers?
o Power of right conferred upon them by law of acting
officially, under certain circumstances, according to the
dictates of their own judgments and consciences,
uncontrolled by the judgments or consciences of others.
- Ministerial: law imposes a duty on officer to act in a prescribed
manner under a given state of facts in obedience to the mandate
of legal authority, without regard to the impropriety or propriety
of the act done.
- Discretionary: law allows the officer to decide how or when an
act can be done
Q: When may CIR exercise police power?
- only when necessary in the enforcement of its principal powers
and duties consisting of:
o the collection of all national internal revenue taxes, fees
and charges
o enforcement of all forfeitures, penalties, fines
connected therewith
Q: Explain the nature of the CIRs power to interpret tax laws and to
decide tax cases.
- Interpretation of tax laws
o under the exclusive and original jurisdiction of the
Commissioner
o Subject to review of Finance Secretary
- Decide disputes
o Power vested in the Commissioner
o Power administered by the Bureau
o Subject to exclusive appellate jurisdiction of CTA (Think
Civpro! CTA ! CTA En Banc ! SC via Rule 45 Appeal by
Certiorari)
- As such, the BIR can make Revenue Issuances to clarify tax-
related matters
o Considered administrative rulings
Q: The law mandates confidentiality in all returns filed and whatever
information contained therein. Is there an exception to the rule?
- YES, the BIr has regulations issued pursuant to the Tax Code
indicate the instances when the income of a taxpayer may be
made public.
o Eg. Where the return of an individual shall be made open
to inspection by the person who made the return or by
his duly constituted attorney in fact
Q: Explain the nature of the CIRs power to make assessments.
- It is a second level, corrective assessment done after the filing of
the return.
- First assessment (Self-Assessment) is done by the taxpayer by
filing his/its return.
- Second assessment (Deficiency Assessment) is done by the
Commissioner (or his people after all he can delegate powers)
for the purpose of examining and correcting the amount of the
tax.
- The CIR is always an interested party to all matters involving
taxable transactions and, needless to say, qualified to question
their validity or legitimacy whenever necessary to block tax
evasion.
Q: What is the rule on the Best Evidence Obtainable?
- It is the rule applied:
o when a tax report required by law for the purpose of
assessment is not available OR
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o when the tax report is incomplete or fraudulent.
- This is where the BIR can get creative like if a corporation
refuses to submits its books and accounts for inspection.
o Use similar business/industries as benchmarks, find out
their product price points, check records with the SEC
- BIR has the right to assess internal revenue taxes within 3 years
from the last day prescribed by law for the filing of tax return
OR the actual date of filing such return, whichever is later.
- Tax assessments by tax examiners are presumed correct and
made in good faith.
o It is the taxpayers duty to prove otherwise.
- All presumptions are in favor of the correctness of tax
assessments.
o In the absence of proof of any irregularities in the
performance of duties, an assessment duly made by a BIR
examiner and approved by his superior officers will not
be disturbed.
Q: What is the nature of the CIRs authority to prescribe real property
values?
- It includes the authority to delegate duties regarding real
property values, as long as it is for the purpose of computing
internal revenue taxes
- CIR delegates the valuation matters to those who have the
technical know-how/expertise
Q: What act of the CIR constitutes usurpation of legislative prerogative?
- Empowering CIR to periodically review/re-determine the current
net retail prices of commodities (like cigarettes)
o for the purposes of updating their tax classification,
which in effect, reclassifies the commodity,
o for which the legislature has already passed a law
classifying such.
Q: May the CIRs power to approve the filing of tax collection cases be
delegated?
- YES, as long as there is express delegation and as long as it
doesnt fall within Sec. 7, 1997 NIRC exceptions
- Eg. A deficiency assessment signed by the Chief of the Legal
Division (BIR Region 4) and verified by Regional Director
(Pampanga) is valid even without CIRs approval.
Q: How is compromise different from abatement?
- abatement: diminution or decrease in amount of tax imposed;
nullification or reduction in value or amount
- compromise: a mutual concession between the parties (in this
case, CIR and taxpayer)
- The BIR may abate or cancel the whole or any unpaid portion of
a tax liability (with increments) IF:
o Its assessment is excessive or erroneous
o The administration costs involved do not justify the
collection of the amount due.
- An excessive or erroneous tax is abated/canceled NOT
compromised.
Q: What is a letter of authority?
- it is issued BY the Revenue Regional Director(or higher) TO a
Revenue Officer.
- It is now issued ELECTRONICALLY via the Letter of Authority
Monitoring System.
- It allows the examination of taxpayers within the jurisdiction of
the district by the officer, as if the Director had done it himself.
o Examination is for the purpose of collecting correct
amount of tax or recommending the assessment of any
deficiency tax due.
Q1: What is a necessary feature of the LOA?
- it should cover a taxable period not exceeding one taxable year.
- If prior years are to be examined, it must specify the years.
- Unverified prior years in LOA is prohibited. Tax assessments
made based on LOAs stating such shall be disallowed.
- Thats why the taxpayer should read the LOA carefully so he/it
can raise this issue ASAP.
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Q: What are the kinds of administrative issuances?

Q: What is a Letter notice? Is it the same as a LOA?
- It is not the same as a LOA.
- A letter notice is a discrepancy notice issued by the CIR after
conducting data matching process.
- It is issued to the taxpayer informing him of the finds of
discrepancies.
o Eg: under-declared sales and over-claimed purchases
Q1: How should a Letter Notice be treated?
- as a notice of audit or investigation in the absence of evident
error or clear abuse of discretion.
- legislative rules like a subordinate legislation
o designed to implement a primary legislation by providing
details
o requires notice, hearing, publication
- interpretative rules
o designed to provide guidelines to the law, which the
admin agency has to enforce
o it cannot expand the law nor change the intent.
- CIR has quasi-legislative authority SUBJECT to legal
requirements/applicable principles in the exercise of such
powers.

Q2: How can Letter Notice cases be expedited? [RMO. No. 55-10]
- By the issuance of Notices of Informal Conferences
- With that, the investigation may be commenced even without
the prior issuance of LOA.
- Note: Relate this RMO with Sec. 13, 1997 NIRC which authorizes
revenue officer to perform assessment functions on the strength
of an LOA, not just the LN.
o Allowed as long as an LOA is processed and eventually
secured?
o Proper procedure: Filing of Self-Assessed ITR ! data
matching processes ! Letter Notice ! LOA ! Q: What are revenue issuances?
examination - Issuances officially released by CIR
o Speedy procedure: Filing of Self-Assessed ITR ! data
matching processes ! Letter Notice with Notice of What Description Purpose
Informal Conference? !start examination ! LOA
!continue examination [I speculated. Hahaha!] R e v e n u e Specify, describe, define for the enforcement
R e g u l a t i o n s rules and regulations of the provisions of
Q: What are the general requirements for a warrant? [signed by the 1997 NIRC and
- Specific, particular acts or omissions must be alleged. Finance Sec, related statutes
- Why? General search warrants are outlawed. upon reco of
o Why??? It puts the sanctity of domicile and privacy of CIR
communications and correspondence at the mercy of the
whims or caprices or passion of peace officers.

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R e v e n u e Provide directives/ the implementation of - It is also impractical (an exercise in futility) because the
M a n d a t o r y instructions, prescribe stated policies, goals, withholding agent-corporation can no longer withhold taxes. [You
Orders guidelines, outline objectives, plans and cant turn back time].
processes/operations/ programs of the BIR in
methods, all areas EXCEPT Q: Are there exceptions to the rule on non-retroactivity of revenue
etc. necessary auditing issuances or rulings?
- YES, when the taxpayer acts in bad faith (bad faith must be
R e v e n u e Rulings, opinions, Issued from time to proven)
M e m o r a n d u m interpretations of the CIR time for purpose of o What is bad faith? Taxpayer deliberately misstated or
Rulings wrt 1997 NIRC provisions, as providing taxpayers omitted material facts from ITR/other docs
* i f d u l y i s s u e d , applied to a specific set of guidance on tax
cannot b e facts, with or without consequences in - NOTE: Judicial decisions form part of the laws of the land.
contravened by BIR established precedents specific situations. ADMINISTRATIVE DECISIONS DO NOT!!!!!
rulings o Why? No vested rights in the wrong construction of the
law by admin officials
R e v e n u e Issuances that publish pertinent and applicable o Effect: Government is not estopped by their actions and
M e m o r a n d u m portions + amplifications of laws, rules, regulations may still correct or overrule the same.
Circular and precedents issued by BIR and other agencies/
offices Q: May revenue issuances change or modify the laws they implement?
R e v e n u e Periodic issuances, notices consolidate the BIRs [Think Admin]
Bulletins and official announcements position on certain - NO. They cannot override the law they seek to implement.
of the CIR specific issues of law - They must remain consistent and in harmony with them.
or administration in - They are intended to carry out the law.
relation to 1997 NIRC, - They are not intended to supplant/modify the law.
relevant tax laws and
other issuances - EFFECT IF issuances change/modify the law: The Court will not
consider them as valid.
BIR Rulings Official position of BIR to C l a r i f i c a t i o n a n d
queries raised by taxpayers interpretation of tax
and other stakeholders laws
Q: What is the significance of revenue issuances?
- They carry the law into effect.
Q: Discuss the rule on non-retroactivity of revenue issuances or rulings. - They allow the law to be applied.
- GENERAL RULE: If retroactive application is prejudicial to the - It provides both the taxing authority and the taxpayers
taxpayer, it shall not be applied. information as to how a certain tax should and can be imposed
- Why? Retroactive application works to the prejudice of the and on whom.
taxpayer as it deprives him of income earned in a different year.

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Q: What are tax treaties and international agreements?
- A treaty is a formal type of international agreement that require
ratification by the Senate.
- Less formal international agreements may be entered into by the
Chief Executive and are binding without the concurrence of the
Legislature.
Q0: What is the purpose of international agreements?
- To reconcile the national fiscal legislations of the contracting
parties in order to help the taxpayer avoid simultaneous taxation
in two different jurisdictions.
- To eliminate international juridical double taxation
o The imposition of comparable taxes in 2 or more states
on the same taxpayer in respect of the same subject
matter and for identical periods
o EFFECT: free flow of goods, services, etc.
Q1: What is the essence of a most favored nation clause?
- to allow taxpayer in one states to avail of more liberal provisions
granted in another tax treaty to which the country of residence
of such taxpayer is also a party
o provided that the subject matter of tax is the same as
the tax treaty under which the taxpayer is liable
Q2: What is the purpose of a most favored nation clause?
- to grant the contracting party treatment less favorable than that
which has been or may be granted to the most favored among
other countries.
- To establish the principle of equality of international agreement
by providing that the citizens or subjects of the contracting
nations
Q3: How is the purpose of such clause achieved?
- By providing that citizens or subjects of the contracting nations
may enjoy the privileges accorded by either party to those of the
most favored nation
TITLE II TAX ON INCOME
Q: What is income? How is it different from capital?
- Capital is a fund of property existing at an instant of time,
Income is a flow of service rendered by that capital by the
payment of money from it or any other benefit rendered by a
fund of capital in relation to such fund through a period of time.
Q: What is the source of an income?
- the property, activity, or service that produced the income
Q: Define Income tax.
- Tax on the annual profits arising from property, business pursuits,
professions, trades, or offices
- Tax on a persons income, wages, salary, commissions,
emoluments, profits and the like or the excess thereof over a
certain amount, realizable in one taxable year
- Determining factor: Whether any gain or profit was derived from
a transaction
- 3 elements in the imposition of a tax:
o gain or profit
o gain or profit is realized or received, actually or
constructively
o gain or profit is not exempted by law or treaty from
income tax
Q: Does income tax form part of the operating expenses?
- NO. Income tax, by its nature, are not exepnses which contribute
to or are incurred in connection with the production of profit.
- Opex are those which are reasonably incurred in connection with
business operations to yield revenue or income; items of
expenses which contribute or are attributable to the production
of income or revenue
- Income tax is imposed on an individual or entity as a form of
excise tax or a tax on the privilege of earning income
Q: Distinguish between income and percentage tax.
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- %age tax national tax measured by a certain percentage of
gross selling price or gross value in money of goods sold,
bartered or imported OR the gross receipts or earnings derived
by any person engaged in the ale of services
o not subject to withholding
- income tax national tax on the net or the gross income realized
in a taxable year
Q: What are the kinds of income tax systems?
- Schedular approach: income tax treatment varies and made to
depend on the kind or category of taxable income of the
taxpayer.
- Global approach: where the tax treatment views indifferently
the tax base and generally treats in common all categories of
taxable income of the taxpayer.
Q: what are the basic features of our present tax system?
- global, schedular and progressive
Q: what are the kinds of tax rates?
- flat or proportional, graduated
- progressive or regressive
Q: what are the kinds of income according to tax rates
- schedular tax
o compensation earned by individual
o income from trade or exercise of profession of an
individual
o income earned by an estate or trust
- final tax
o interest, royalties, prizes and winnings
o cash/property dividends
o capital gains from sale of shares of stock not traded in
the stock exchange
o capital gains from sale of real property
- reduced rate
ED.)
CH. 1 DEFINITIONS
CH. 2 GENERAL PRINCIPLES
Q: How is a resident citizen taxed?
- BEFORE: From taxable net income received during taxable year
from all sources by a citizen of the Philippines, whether residing
here or abroad.
- [Note: TODAY different treatment of resident and non-resident
citizens under NIRC 1997]
o resident: sources within and without the Phils
o nonresident: sources within the Phils only
Q: How is a non-resident alien taxed?
- NIRC 1997 holds that non-resident aliens, whether or not
engaged in trade or business, are subject to Philippine income
taxation on their income received from all sources within the
Philippines.
Q1: What is meant by sources of income?
- It relates to the property, activity, or service that produced the
income.
- The important factor which determines the source of income of
personal services is NOT the residence of the payor or the place
where the contract for service is entered into, or the place of
payment BUT the place where the services were actually
rendered.
Q: What are considered corporations for income tax purposes?
- 22(B), NIRC: includes:
o partnerships no matter how created or organized
o joint stock companies
o joint accounts
- 22(B), NIRC EXCLUDES:
o General professional partnerships
Partnerships formed by persons for the sole
purpose of exercising their common profession,
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no part of the income of which is derived from
trade or business
o Joint venture or consortium formed for the purpose of:
Undertaking construction projects
Engaging in petroleum, coal, geothermal and
other energy operations pursuant to an operating
a consortium agreement under a service contract
with the government.
- Co-ownership IS NOT partnership
o Co-ownership usually involves individuals not engaged in
any joint venture, usually isolated transactions, nature
of interaction is temporary
o Sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein
have a joint or common right or interest in property.
o There must be a CLEAR INTENT to form for a partnership
a juridical personality different from individual
partners.
o Co-owners cannot be held liable for corporate income
taxes.
- A partnership is formed when person contract to devote to a
common purpose either money, property or labor with the
intention of dividing the profits among themselves.
- An association implies associates who enter into a joint
enterprise for the transaction of business.
Q: Give an example of a resident foreign corporation
- A resident foreign corporation engaged in the transport of cargo
was liable for taxes depending on the income it derived form
sources within the Philippines.
- BUT Before such a tax liability can be enforced, the taxpayer
must be shown to have earned income sourced from the
Philippines.
Q: Give examples of non-resident foreign corporations
- NOTE: Phil. income taxation recognizes 2 kinds of foreign corp:
o Resident foreign corp and
ED.)
o Nonresident foreign corp
Q1: But first, what is residence?
- the place where a corporation operates and transacts business.
Q2: So whats is domicile?
- The state of that corporations formation or organization.
OK back to the question:
- One that maintains a general sales agent in the Philippines which
performed activities in the exercise of the functions normally
incident to and in progressive pursuit of the purpose and object
of its organization (i.e. international air carrier)
- NOTE (Think of CORP on Foreign Corporations): No specific
criterion as to what constitutes doing or engaging in or
transacting business each case must be adjudged in the light
of its peculiar environmental circumstances.
- The term
o implies a continuity of commercial dealings and
arrangements and
o contemplates, to that extent, the performance of acts/
works/exercise of some of the functions normally
incident to and in progressive prosecution of commercial
gain or for the purpose and object of the business
organization.
- In order that a foreign corporation may be regarded as doing
business within a State, there must be a continuity of conduct
and intention to establish a continuous business
o Ex. Appointment of a local agent, not a temporary
business
- A casual business activity in the Philippines by a foreign
corporation does not amount to engaging in trade or business in
the Philippines for income tax purpose.
- How to determine if liability on dividend income is from
Philippine Sources.
o STEP 1: Determine the classification of the Head Office
resident or non-resident?
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GR: a foreign corp is the same juridical entity as
its branch office in the Philippines. [aka
Principal-Agent Relationship]
EXC: When the foreign corp transacts business in
the Philippines independently of its branch, the
Principal-Agent Relationship is set aside the
transaction becomes one of the foreign corps
not the branch.
Ergo, its a non-resident foreign corp.
o STEP 2: Read the code along with treaties (like RP-Japan
Tax Treaty) to determine if there are discounts.
- Note: grant of license does NOT make you a resident corp of the
Phils.
- (FYI: Domestic Corp regarded as giving residence within the
state at any place where it is engaged in the particulars of the
corporate enterprise NOT only its chief place/home office
o a corporation may be domiciled in one state and reside
in another just like a natural person! home is where
the heart is
o legal domicile in the state of its creation presents no
impediment to its residence in a real and practical sense
in the state of its business activities)
CH. 3 TAX ON INDIVIDUALS
Q: What is the difference in treatment between co-owner and partner?
- Co-ownership IS NOT partnership
o Co-ownership usually involves individuals not engaged in
any joint venture, usually isolated transactions, nature
of interaction is temporary
o Sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein
have a joint or common right or interest in property.
o There must be a CLEAR INTENT to form for a partnership
a juridical personality different from individual
partners.
o Co-owners cannot be held liable for corporate income
taxes.
- A partnership is formed when person contract to devote to a
common purpose either money, property or labor with the
intention of dividing the profits among themselves.
- An association implies associates who enter into a joint
enterprise for the transaction of business.
Q: Explain the concept of final withholding tax.
- It is an income tax (as opposed to a percentage tax).
o An income tax is a national tax imposed on the net or the
gross income realized in a taxable year.
Obviously, it comes from the income earned by a
taxpayer.
o (FYI: a percentage tax is a national tax measured by a
certain percentage of
the gross selling price or gross value in money of
goods sold, bartered or imported OR
the gross receipts or earnings derived by a
person engaged in the sale of services.
For a bank: the subject matter of a gross
receipts tax is the privilege of engaging
in the business of banking.)
- Subject matter of FWT is passive income generated in the form
of interest on deposits and yield on deposit substitutes.
- Generally, It is withheld by an agent who is not the taxpayer.
- Example: When the depositary bank withholds the final tax to
pay the tax liability of the lending bank, there is, PRIOR to the
withholding, a constructive receipt by the lending bank of the
amount withheld.
o From the amount constructively received by the lending
bank, the depositary bank deducts the FWT and remits it
to the government for the account of the lending bank.
Q1: What does the term gross receipts include?
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- Money or equivalent actually (physically) or constructively
received in consideration of services or articles sold, exchanged
or leased, whether actual or constructive.
- Income earned by the taxpayer; income the taxpayer RECEIVES
and OWNS
- When the taxpayer acquires ownership of money representing
interest, the money constitutes income or receipt of the
taxpayer.
- GR: Ownership is essential in determining whether interest
income forms part of taxable gross receipts.
o Ownership is the circumstance that makes interest
income part of the taxable gross receipts of the
taxpayer.
- EXC: otherwise provided by law
Q1A: But really, why is ownership important?
- Because it allows the taxpayer to transfer ownership of amount
withheld to the government in payment of his tax liability (Think
Property/Sales: You cant transfer ownership of something you
dont own.)
Q2: Are gross receipts the same as gross revenues?
- HELL NO.
o Gross receipts include money or equivalent actually
(physically) or constructively received in consideration of
services or articles sold, exchanged or leased, whether
actual or constructive.
o Gross revenue include money or its equivalent actually
or constructively received, including the value of
services rendered or articles sold, exchanged or leased,
the payment of which is YET TO BE RECEIVED.
Q: Explain the relevance of payment and capital gains tax in the sale of
real property.
- (Think Sales and (yes, even) Land Titles) Its a prerequisite to the
issuance of NEW TORRENS TITLE in the buyers name (remember:
its not a prerequisite for transfer of ownership).
o NOTE: absent any other agreement, CGT is the liability
of the seller.
o Why? Its a gain from the sale of the SELLERS real
estate.
- Capital gains taxes are only imposed on gains presumed to have
been realized from sales, exchanges or dispositions of property.
Q: How are partners of a general professional partnership taxed?
- Differently from ordinary business partnerships.
o In GPP: partners themselves are liable for the liable for
the payment of income tax in their INDIVIDUAL capacity
computed on their respective and distributive shares of
profits.
o In GPP: it is not the partnership that is taxed [Think
Agency & Partnership the purpose of a GPP is NOT for
profit]. The partnership is only obligated to file an ITR
mainly for administration and data.
- STEP 1: Deduct from gross income like you would a corporation.
- STEP 2: Determine each partners distributive share.
- STEP 3: Apply income tax rates (5-32%) on the distributive share.
CH. 4 TAX ON CORPORATIONS
General Notes:
- A corporate income tax liability has 2 components:
o The general rate of 30%
o Specific final rates for certain passive income (withheld
at source)
20% on the interests on currency bank deposits,
other monetary benefits from deposit
substitutes, trust funds and similar
arrangements, and royalties derived from
sources within the Philippines;
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5% / 10% on the net capital gains realized from
the sale of shares of stock in a domestic
corporation not traded in the stock exchange;
10% on income derived by a depositary bank
under the expanded foreign currency deposit
system; and
6% on the gain presumed to be realized on the
sale or disposition of lands and buildings treated
as capital assets.
- Gross income (Sec. 32) means income derived from WHATEVER
SOURCE, including:
o compensation for services,
o the conduct of trade or business or the exercise of a
profession,
o dealings in property,
o interests,
o rents,
o royalties,
o dividends,
o annuities,
o prizes and winnings
o pensions
o partners distributive share in the net income of a GPP
Q: Is passive income considered in the computation of taxable income?
[In other words, is passive income part of gross income?]
- YES. It is broad enough to include all passive incomes subject to
specific rates or final taxes.
- HOWEVER, since these passive incomes are already subject to
DIFFERENT RATES and TAXED AT SOURCE, they are no longer
included in the computation of gross income, which determines
taxable income.
Q: What are GOCCs? What are government instrumentalities?
- GOCC: must be organized as a stock (with stockholders) or non-
stock (with members) corporation.
- Government Instrumentality: may be vested with governmental
and corporate powers but not organized into a stock/non-stock
corp
-
Q: How CGT computed in sales of shares of stocks?
- Transfer price MINUS acquisition cost = if positive, thats a gain
subject to CGT.
Q: How is CGT computed in sales of real property?
- From whatever gain or loss the individual/corporation incurred
with respect to the ale of the property
Q: What is MCIT?
- it is a tax imposed on gross income.
o It is imposed in lieu of the normal net income tax (30%)
and only if the normal income tax is suspiciously low.
- It approximates the amount of net income tax due from a
corporation, pegging the rate at a very much reduced 2% and
- It uses as the base the corporations gross income.
- It is NOT a tax on capital.
- It is NOT an additional tax imposition.
- it is arrived at by deducting capital spent by the corporation in
the sale of its goods.
o E.g. costs of goods and other direct expenses from gross
sale
Q: Explain the concept of gross Philippine billings. (ew!)
- It is an income tax a direct tax on the income of persons and
other entities of whatever kind and in whatever form derived
from any source.
- [vs. a common carriers tax which is an excise tax]
Q: What is the branch profit remittance tax?
- It is pegged at 15%.
- It is based on profit actually remitted abroad.
- It is not based on the total branch profits out of which the
remittance was to be made.

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Q1: What is the reason for imposing branch profit remittance tax?
- It is an attempt to equalize the income tax burden on foreign
corporations maintaining, on the one hand, local branch offices
and organizing, on the other hand, subsidiary domestic
organizations (charged with 30% income tax) where at least
majority of all the latters shares of stocks are owned by such
foreign corporations.
Q: Explain the sparing rule.
- Applies to foreign corporations doing business in the Philippines.
- It applies preferential tax rates based on tax laws of the mother
foreign country of the foreign corporation.
- Consider treaties/trade agreements with other countries. [Think
PIL. Ugh.]
- Basically: IF the same tax is imposed/allowed in the foreign
country, it may be waived in the Philippines. (Why? To avoid
double taxation. To spare the foreign corp from the burden !
which encourages businesses and foreign investors. Think
Consti.)
- Question to ask:
o Does foreign country tax certain sources of income
similar to the Philippines? Is it equivalent to what the
Philippines imposes?
o If they allow it, then maybe the Philippines can credit
it against the tax of the foreign corporation .
o The NIRC only requires that the foreign country allow the
similar taxes.
o It does not require that the foreign country deem the
parent-corporation to have paid the tax.
Q: What is the Improperly Accumulated Earnings Tax?
- [Think Corp and how corporations are supposed to give out
dividends to shareholders. Sec. 43, par. 2: Stock corporations are
prohibited from retaining surplus profits in excess of one
hundred (100%) percent of their paid-in capital stock, except: (1)
when justified by definite corporate expansion projects or
programs approved by the board of directors; or (2) when the
corporation is prohibited under any loan agreement with any
financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent has
not yet been secured; or (3) when it can be clearly shown that
such retention is necessary under special circumstances
obtaining in the corporation, such as when there is need for
special reserve for probable contingencies.]
- In determining whether accumulations of earnings or profits in a
particular year are within the reasonable needs of a corporation,
o it is necessary to take into account your accumulations,
since accumulations prior to the year involved
may have been sufficient to cover the business
needs and
additional accumulations during the year
involved would not reasonably be necessary.
- Thats nice. But how do I determine the reasonable needs of the
business?
- Apply the Immediacy Test:
o Reasonable needs are the immediate needs of the
business.
o Immediacy needs to be proved.
- If unnecessary and not immediate, then it means it was
improperly accumulated and therefore subject to IAET.
- REMEMBER: The touchstone of liability is the purpose behind the
accumulation of the income, NOT the consequences of the
accumulation.
o If failure to pay dividends was for the purpose of using
the undistributed earnings and profits for the reasonable
needs of the business.
-
Q: What is the tax consequence of real property owned by exempt
corporations?
- If it receives income from rentals, it is taxable, regardless of
when such income is derived and how it is used or disposed of.
o Where the law does not distinguish, neither should we.
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- For Charitable institutions, churches, parsonages, etc.: DO NOT
CONFUSE real property tax (which they are exempted from by
1987 Constitution and 1991 LGC) and taxable income from rents
(which they are subject to under the 1997 NIRC).
CH. 5 COMPUTATION OF TAXABLE INCOME
Q: What is taxable income? How is it computed?
- It is the income on which income tax liability is based for a given
taxable year.
- Taxable Income = [Pertinent items of gross income (deductions
+ personal exemptions + additional exemptions)]
- Does NOT INCLUDE passive incomes because those are already
subject to FWT.
- 3 elements to consider in the imposition of an income tax if yes
to all 3, then it is subject to tax:
o there must be gain or profit
o the gain or profit is realized or received (actually or
constructively)
o the gain or profit is not exempted by law or treaty from
income tax
FOR CORPORATIONS:
- Sec. 31 Taxable Income applies to Regular Corporate Income Tax
(30%) n/a to MCIT
o Remember: MCIT is based on gross income as defined in
Sec. 27(E)(4) NOT exactly the Sec. 32 Gross Income.
MCIT gross income base = Gross Sales (cost of
goods sold + allowances + returns + discounts +
sales) [Gross Sales CARDS)
- Gross income (Sec. 32) means income derived from WHATEVER
SOURCE, including:
o compensation for services,
o conduct of trade or business or the exercise of a
profession,
o dealings in property,
o interests,
ED.)
o rents,
o royalties,
o dividends,
o annuities,
o prizes and winnings
o pensions
o partners distributive share in the net income of a GPP
FOR INDIVIDUALS:
- Taxable year = calendar year from January 1 to December 31
(remember: individuals are not allowed to use fiscal year)
Q: Are the salaries of the members of the judiciary subject to income
tax?
- YES. It is not considered a decrease of salary as protected by
the Constitution.
CH. 6 COMPUTATION OF GROSS INCOME
Q: What is gross income?
- Gross means WITHOUT deduction. I
- Gross is the anti-thesis of net.
- Gross income is Sec. 32 plus plus. The list is not exclusive.
- Gross income is broad enough include other kinds of income not
on the list. (Why? Think like the Taxing Authority. Including more
types of income not listed ! Bigger Tax Base! Bigger Taxes!)
Q: Give an example of compensation for services in whatever form paid.
- Wage/Salary earners vs Businessmen/Entrepreneurs
- Compensation Income vs Professional/Business Income
- No overhead vs with overhead expenses
Q: Give an example of gross income derived from the conduct of trade or
business or the exercise of a profession.
- Sole proprietorships, partnerships and corporations can be validly
classified according to the nature of their sources of income
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- BUT the bottom line is that they ALL still pay gross compensation
income tax and final tax on passive investment income in almost
invariably the same manner and under a common set of rules.
Q: Give an example of dividends.
- Stock dividends represent capital and do not constitute income
to its recipient.
o As capital, stocks postpone the realization of profits.
- Mere issuance of stocks ! no income tax liability.
- Exchanging common shares for preferred shares ! no flow of
wealth ! no income tax liability
- Redemption of stocks ! stocks are converted into money !
there is a realized profit/gain ! become a separate property !
subject to tax
- Q: Differentiate between a tax deduction and a tax credit.
Q: Are proceeds of life insurance policies excluded from gross income?
- YES, if paid to individual beneficiaries as per Code.
- YES, if paid to corporate beneficiaries as per jurisprudence
considered an indemnity.
Q: When are retirement benefits excluded from gross income?
- When the ff. requisites are met:
o Reasonable private benefit plan is maintained by the
employer
o The retiring employee has been in the service of the
same employer for at least 10 years
o Retiring employees is not less than 50 years old at the
time of his/her retirement
o Benefit had been availed of only once
- Burden to prove is on the taxpayer (employee receiving the
benefits)
- Optional retirement schemes (agreements that a corporation will
shoulder retirement benefit taxes as an incentive to prospective
retirees to retire early) are valid.
ED.)
o Retirement benefits in this case are still taxable but now
the corporation pays, not the employee receiving
benefits.
- Terminal leave pay is NOT a part of the gross income of
government official/employee. It is a retirement not subject to
income tax.
o Why? The government doesnt give much to its
employees they are recognized to be less than
generous when it comes to retirement pay.
o So to lessen the suck factor of receiving such a tiny nest
egg, they do not subject it to income tax.
CH. 7 ALLOWABLE DEDUCTIONS
- Tax Credit: fully reimburses peso-for-peso
o The establishment/corporation given a tax credit
recovers 100% of the expense.
- Tax Deduction: does not fully reimburse not on a peso-for-peso
basis
o Merely offers a fractional reduction in taxes owed
o The deductible expense is subtracted from gross income
! resulting in a lower taxable income
Q: In general, what is the treatment accorded to deductions from gross
income?
- They are treated like tax exemptions: strictly construed against
the taxpayer. (Why? Again, because they will lower the taxable
income base)
- Deductions from gross income are PRIVILEGES, not matters of
right.
- They are created only by clear expression in the law, not
implied.
o Taxpayer must show that is claimed deductions clearly
come within the language of the law since allowances,
like exemptions, are a matter of LEGISLATIVE GRACE.
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- Whenever a controversy arises on deductibility for purposes of o (Why? Non-stock, non-profit corps do not incur expenses
income tax, ask yourself two questions: in carrying on any trade or business ! How can they
o Have personal services been actually rendered by the incur reasonable business expenses? )
individuals?
o If yes, what is the reasonable allowance therefor?
Q: Give an example of compensation for personal services actually
rendered.
Q: What are the general requisites for deductibility of business expense?
- The conditions precedent to the deduction of bonuses to
- To be deductible from gross income, expenses must comply with
employees are:
the following requirements: o the payment of the bonuses is in fact compensation;
o the expense must be ordinary and necessary;
o it must be for personal services actually rendered; and
o it must have been paid or incurred during the taxable
o the bonuses, when added to the salaries, are reasonable
year;
o it must have been paid or incurred in carrying on the when measured by the amount and quality of the
services performed with relation to the business of the
trade or business of the taxpayer; and
o it must be supported by receipts, records or other particular taxpayer.
- No fixed test for determining the reasonableness of a given bonus
pertinent papers.
as compensation. Factors include:
o the amount and quality of the services performed with
- Further. there is no hard and fast rule: The right to a deduction
relation to the business.
depends on a number of factors include but not limited to: o payment must be made in good faith
o the type and size of business in which the taxpayer is
o the character of the taxpayers business,
engaged o volume and amount of its net earnings,
o the volume and amount of its net earnings; the nature of
o its locality,
the expenditure itself o the type and extent of the services rendered
o the intention of the taxpayer usually the controlling
o the salary policy of the corporation
fact o the size of the particular business
o the general economic conditions
o the employees qualifications and contributions to the
- Consider the nature of the expenditure.
o Specifically, the extent and permanency of the work business venture
o general economic conditions
accomplished by the expenditure. o right of an employer to fix the compensation of its
- i.e. margin fees are not an ordinary and necessary and business
officers and employees is recognized,
expense they are exacted to curb the excessive demands upon
our countrys international reserve. Besides they usually benefit BUT for income tax purposes the employer
cannot legally claim such bonuses as deductible
foreign corporations with subsidiaries in the Phils.
expenses UNLESS they are shown to be
- i.e. for charitable, non-stock, non-profit corporations the
reasonable.
expenses incurred in the administration or management of such
corporations investments (like interests, dividends) are NOT
Q: Give an example of rentals and other payments.
deductible business expenses.

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- Royalties for locally manufactured products are deductible.
Royalties are not deductible against products imported by
licensee from licensor.
o Code doesnt mean ALL royalties; Central Bank circulars
can provide definitions.
Q: Give an example of entertainment, amusement and recreation (aka
representation) expenses.
- They must be related to the business and of course, must be
ordinary, reasonable and necessary.
o Like what? Teambuilding in Tagaytay?
o I guess it depends on the nature of the business/
industry. Like if you work in Star Cityand you visit
Enchanted Kingdom. Not Disneyland cause thatd be
extraordinary haha.
Q: Distinguish between business expense and capital expenditure.
- An expense may be treated either as:
o A deductible business expense from gross income OR
o A capital expenditure which shall be spread out over a
reasonable amount of time.
- How to classify:
o [Think long-term] Expenditures for replacements,
alterations, improvements, additions which either
prolong the life of the property or increase its value are
CAPITAL in nature
Q: Interest on indebtedneess is an allowable deduction from gross
income. How about interest on taxes?
- YES, taxpayer is NOT PRECLUDED from claiming interest payment
as deduction under 34(B).
o Why? No distinctions can be made between interest on
debts and interest on taxes with respect to deductibility.
o But why??? (Taxes are sort of viewed as debts, since
they are still considered obligations.)
- Note: Taxes (plain, old taxes) are deductible under 34(C).
Q: When are taxes allowed to be deducted from gross income?
ED.)
- When they are ordinary and necessary for the purpose of
furthering ones trade or business.
Q: When are losses allowed to be deducted from gross income?
- BASICALLY: When they become worthless, when it is capable of a
full deduction, when you can determine a definite event as to
when it was sustained
DETAILS
- When is it worthless?
o E.g. a corporation in which you are a shareholder ceases
operations
o BUT if they sell off their assets and you receive proceeds
from such, you MUST report it as income.
- Partial writing off of a loss is not allowed to be deductible it
must be in full (absent an express tax provision authorizing
partial deductions)
- Some definite event should fix the time when the loss was
sustained
Q: What are the requisites for deductibility of bad debts?
- There must be a valid and subsisting debt taxpayer must expect
to be paid.
- Must be capable of full deduction
- Ascertained to be worthless and uncollectible during the taxable
year (
- Charged off during the taxable year
- Must arise from business/trade of the taxpayer.
- Uncollectible even in the future (no hope of recovery )
Steps to be undertaken by taxpayer to prove he exerted diligent efforts
to collect the debts:
- sending of statement of accounts
- sending of collection letters
- giving account to a lawyer for collection
- filing a collection case in court
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- Eg. An equity investment is not an indebtedness nor an ordinary
asset. It is a capital asset and therefore, it sustains a capital
loss.
Q: In order to be allowed as a deductible expense from gross income,
how must depreciation allowance be computed?
- Generally, using the straight-line depreciation method
o Also allowed: declining balance method, sum of the
years method, any other method prescribed by the
Finance Secretary
- Based on acquisition cost and estimated useful life of the asset.
o Of course, adequate proof is needed.
- Income tax law does not authorize the depreciation of an asset
beyond its acquisition cost.
o Why? Itll transgress the underlying purpose of a
depreciation allowance. To authorize such would result
to taxpayer recovering profit.
Q1: Hold up, wait a minute. What is depreciation?
- It is the gradual diminution in the useful value of tangible
property resulting from wear and tear and normal obsolescence.
- It also applied to amortization of the value of intangible assets,
the use of which in the trade or business is definitely limited in
duration.
Q2: When does depreciation begin?
- With the acquisition of property
Q3: Why are allowances for depreciation allowed?
- The owner of property is not bound to see his property gradually
waste WITHOUT making provision out of earnings for its
replacement.
- The owner of the property is entitled to see that from earnings,
the value of the property is kept unimpaired.
o Why would he want to do that? So that at the end of any
given term of years, the original investment remains at is
was in the beginning.
Q5: What is the underlying purpose of depreciation? [i.e., if it had a
mantra, what would it be?]
- recovery in due time
Q: In order to be allowed as a deductible expense from gross income,
how must depletion be computed?
- Cost-Depletion Method
- Tax Code does not authorize the use of straight-line rate of
depreciation for depletion.
- Depletion allowance is an allowance for the exhaustion of the
capital value of deposits by productions (not of capital
investment)
- Capital investment is a limitation of the amount of depletion
that could be claimed.
Q: When may charitable contributions be treated as deductible expense
from gross income?
- When used exclusively for public functions
o i.e. donations for Christmas gifts of policemens families
vs donation to Manila Police Trust Fund
Q: How are personal and additional exemptions computed and paid?
- Based on individual taxpayers status and qualified dependents at
the close of the taxable year.
- The NIRC increased the personal and additional exemptions that
a taxpayer can avail.
- Deductions are made from the taxable year in which they are
paid or accrued or paid or incurred.
- Personal exemptions: THEORETICAL personal, living and family
expenses of an INDIVIDUAL allowed to be deducted from his gross
or net income.
o They are ARBITRARY amounts.
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o They measured to at least be equivalent to the minimum
of subsistence.
o They take into consideration personal status and
additional qualified dependents and additional qualified
dependents.
Q: What are capital assets? (Hahaha. Hahaha!)
- I cant tell what it is but I can tell you what it is NOT.
- It is NOT an ordinary asset as listed in Sec. 39(A). Therefore it is:
o NOT a stock in trade of the taxpayer or other property of
a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the
taxable year,
o NOT property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or
business,
o NOT property used in the trade or business, of a
character which is subject to the allowance for
depreciation provided in Subsection (F) of Section 34;
NOT real property used in trade or business of the
taxpayer.
- It is subject to capital gains and capital losses. It is not
deductible from gross income.
o Why? Because it was not used in the ordinary course of
business?
Q: What is the rationale behind Sec. 39(B) of the NIRC percentages of
capital gains/losses taken into account?
- Capital assets are generally held for a period in excess of a year.
- When held for more than a year, the profit or loss realized is
reported for tax purposes only in that year that the asset was
sold or exchanged even though the increment:
o might have developed several years prior or
o was a result of years of effort.
- Since the gain is taxed all in one year (without considering
expenses made or losses incurred in the improvement/
development/preservation of the asset since capital losses are
not deductible), a higher rate of tax is paid
o And thats kinda unfair.
- This is the NIRCs way of compensating the taxpayer for those
unreported, un-deductible capital losses.
Q: Cite an example of a tax-free exchange.
- When merger results in New Corporation CONTINUING THE
BUSINESS of the Old Corporation and New Corporation is NOT
DISSOLVED after the merger.
- Basic consideration: purpose of the merger
o Why? This determines whether the exchange of
properties involved shall be subject or not to the capital
gains tax.
- Criterion laid down by the law: merger must be undertaken
o for a bona fide business purpose and
o NOT solely for the purpose of escaping the burden of
taxation.
-
Q: Give examples of income from sources within the Philippines.
- International air carrier selling tickets through a sales agent in
the Philippines
o Why?
The tickets exchanged hands in the Philippines
Payments were in Philippine currency
Therefore, flow of wealth proceeded from and
occurred within the Philippines.
- For INTEREST INCOME, since the law speaks of SOURCE and not
activity, the residence of the obligor who pays the interest is the
determining factor of the source of interest income
o NOT the physical location of the securities, bonds, notes
or the place of payment
VS.
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GRUBA TAX I NOTES SKINNY: G-NOTES WITHOUT THE DRAMA (2014-15 ED.)
FORMATTED BY V

- For PERSONAL SERVICES, source of income is determined by the

place where the services were actually rendered.
o NOT the residence of the payor or where the contract
was entered into or the place of payment

Q: May a Philippine subsidiary share in its foreign parent companys

overhead expenses?
- YES, where an expense is clearly related to the production of
Philippine-derived income or to Philippine operations, that
expense can be deducted from the gross income acquired in the
Philippines without resorting to apportionment.
- Not allowed when the overhead expenses of the parent company
directly benefit is branches all over the world (including the
Phils.)
o Why? Because they cannot be definitely allocated or
identified with operations of their Philippine branch.
o Anyway, they are taxed under a different category.

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