Taxation Law Review Reason: for the SEF tax, money goes to the local school boards for
s to the local school boards for the
Taxation: both a power and a process
1. As a power: it is part of the fundamental powers of the state
inherent, it is there from moment state is born
No need for constitutional grant for the exercise of the power
Q: Why is it there are a lot of constitutional provisions?
A: only serve as limitations, for w/o limitations there will be truth to the
saying that the power to tax is unlimited, not unlimited really
CREBA v. Romulo
SC made statement that power to tax knows no limits or boundaries except
will of congress
Literal sense- unlimited power
But don’t take that literally
Supreme, plenary, unlimited and comprehensive: authorizes have
characterizes power of taxation
a. Supreme: some have raised the theory that taxation is the most
important power of the state because lifeblood doctrine, taxes are
the lifeblood of the government
So what? Because speak of 3 fundamental powers of the state, among the 3
the most important is taxation because when you exercise police power it
presupposes that it will be used for something before you exercise police
power
Ex. Peace and order- in order to do that you should have good
armed forces well equipped police force to protect sovereignty and you
need money to do that, and because of that you raise taxes or funds through
taxes
Exercise of power of eminent domain- presupposes the payment
of just compensation, compensate through money collected from taxes
Use of these powers that it presupposes the existence of funds gathered
through taxation
b. Plenary and comprehensive: cover anything it may want to cover
Persons property activities rights all these things are covered by
taxation
c. Unlimited in some respect
Take a look at how SC characterized it in CREBA v. ROMULO
This power when properly exercised the power becomes unlimited
State reasons for taxation:
“Lifeblood doctrine most basic reason: cannot survive or operate”
Focuses its aspect on the government, perception is on the side of
the government, tendency is that tax payers will have natural resistance to
the taxes
Perspective of the taxpayer
Power of taxation: pay taxes and the government requires payment and we
recognize that because of the benefits the people receive from the
government
Benefits received theory
The benefits received from the government can sometimes be presumed
and the presumption is conclusive
Cannot say not deriving benefits from the government
Products of taxes that we pay: deriving benefits from government presumed
by law and is conclusive in nature
Question imposition of special education fund tax: incorporation real
property tax system
Real property aside from paying basic real property tax require to pay
special education fund tax
public schools
Argument: from the pre kinder up to law school all private schools but you
own a real property and pay the SEF tax, can you claim that you did not
benefit from a public school
Not a tenable argument- still you are deriving benefits from the public
school system- get money from you so that the government will help the
operation of public schools- in order to help others, underprivileged and
public schools redound to benefit of the entire nation although not directly
benefited, there is a benefit
Everyone is benefited by it collectively by the measure of the government
Combine life blood doctrine with benefits received principle for mutual
benefit of the parties
Symbiotic theory: give and take relationship, scratch my back and I’ll
scratch yours
(Commissioner v. Algue)
SC said that taxes are what we pay for a civilized society, without taxes
there is a chaos and anarchy
Government will provide the basic services we need
Theories presuppose of taxation as revenue related measure or
generating money
“Objective of taxation which are not revenue related, the revenue aspect is
secondary to the main purpose, or to achieve other objectives other than
revenue related”
1. Taxation to achieve a police power objective: to regulate
Ex: Gov wants to deter people from engaging in a particular activity-
prohibit the activity, using police power but the other thing government can
do is tax the activity heavily so that lesser people will exercise that activity
Sin articles- smoking alcoholic products
Non essentials articles
High taxes because we want to regulate these articles
Taxes higher than cost of production of the articles
Means to achieve a police power objective of the state
2. Taxation to achieve an objective of eminent domain
Eminent domain is taking property for public use subject to payment of just
compensation- taxation is government takes away money from the taxpayer
So how then can we achieve eminent domain through taxation: Central
Luzon drug corp. v. CIR (2005)
CLD owner and operator of chains of drug store mercury drug chain
Problem is about the senior citizens discount
Mandated to give discounts to senior citizens 20% rate
Selling price is 100 pesos the drug store cannot get the 100 pesos to the
senior citizen can only collect 80 pesos, profit margin is not commensurate
to the profit taken away from the discount
Cost is 90 pesos- according to drug owners amount to taking private
property w/o just compensation without return of the cost
SC said that technically this is not an exercise of power of eminent domain
this is a affirmative action law is a police power, grants a relief to a
underprivileged sector
But even if we assume that this is a exercise of power of eminent
domain it is still a valid exercise of the power the just compensation
happens that the 20% discount is considered as a tax credit under old law in
the new senior citizens law is a tax deduction
The tax credit can be offset against tax liabilities to the government – credit
against tax liabilities to the government
20% discount is lost by the government to the tax collection, used by the
tax payer as a credit against tax liability, there is just compensation in the
form of the reduced tax liability that is the just compensation the tax payer
is looking for
Non revenue related objectives of taxation

3. Taxation as reducing social inequities
Through best exemplified as the imposition of estate taxes
No estate tax- if a person who is filthy rich dies his wealth will be inherited
by the heirs concentrated within the same persons
But with estate tax a portion of the estate a big portion in fact left behind by
the person will be taken by the government and hopefully this amount
taken by the government will be used to help the underprivileged
Wealth not concentrated
Capable of paying more should be subjected to more burden so that there
can be an amount to help those underprivileged
4. Taxation for purpose of protection
Power of taxation in order to protect, how? Example is when it comes to
imposition of special duties of tariff and customs code
Dumping duty, Counter veiling, marking discriminatory duties
Dumping duty- imposed when the foreign goods sold in the PH for a price
less than the FMV in the country of origin
Imported articles sold in the PH for a bargain price
Dumping can used to commit things which are of illegal in nature or
purpose
Foreign articles sold in PH and then these articles sold here sold for a very
minimal price so that more and more people will buy foreign articles so
that no one will buy the domestic produced products because the foreign
articles are being sold for a minimal price our domestic industry will suffer
that is the evil sought to be countered
To counter act the government is vigilant in imposing dumping duties
Using taxation to protect the domestic industry by taxing foreign articles
Taxation as a power the power of taxation being an inherent power, this
power is inherently legislative in nature
If taxation is an inherent power that inherent power is inherently exercised
by the legislative branch not the executive, at least not normally because it
is inherently legislative
The legislative power to tax would be covering the determination of the ff:
 Coverage of the tax
 Object
 Nature
 Extent
 Situs of taxation
1. Coverage or subject of the tax: what to be tax is determined by
congress
2. Purpose: objective of the tax
3. Nature or kind of tax: tax on a person right etc
4. Extent and rate: how much will the imposition, based on a certain
amount graduated tabled
5. Situs: sourced within or without the national or government to
impose
Note: Whenever congress determines these things the courts cannot
interfere with these things
Not for the courts to determine but left exclusively to congress
Absent any arbitrariness the court will exercise the doctrine of non judicial
interference
Delegated power to tax
Where it is not the legislative branch that allows to impose tax
1. If allowed by the constitution
Power of the president to adjust taxes according to the constitution
Limited power of taxation in so far as the determination of:
a. tariff rate
b. tonnage dues import and
c. export quotas
Flexible tariff implemented under TCC
2. Taxing powers by LGUs
Traditionally allowed may have that power of taxation
Local government units power not inherent but delegated traditionally but
not merely delegated but power directly granted vested and guaranteed by
the constitution
Note: Congress cannot remove the taxing power of local government units
sec 5 art 10 of constitution
Only extent of congress is to prescribe guidelines and limitations but not to
remove the local taxing power
Even in the local setting when it comes to exercise power of LGU the
power remains to be legislative in nature
LCE does not have any taxing power: rest will local sanggunian
Augmentation for elevator fee: any imposition by the LCE is invalid only
legislative body has the power
1 peso fee for every time you use the city hall elevator
3. Purely administrative functions
Auditing tax payers examining books of accounts conduct surveillance
Cannot focus on admin matters
Leave to admin offices of the government
High degree of expertise- BIR BOC
Administration aspect of taxation
Guided by principles in order to make a sound tax system
1. Fiscal adequacy- tax impose must be just enough to fund the
government needs of the operation of government
Collection should be as much as probable not result to a lot of deficit
But if the collection of government results to a lot of surplus- not sound
Taxes are burdens
Burdens if there is over collection of a tax way beyond the reasonable
needs of the people, if people are overburdened it is not wise
Same if a lot of savings of the government
2. Administrative feasibility- easy to be administered
If they are easy to be understood
All the tax payers will just follow the law as it is- read understand comply
But if very complicated tax payers will not know his obligation
A lot of discretion of tax officials if there is a lot of discretion and faced
with a tax payer who does not understand the taxes imposed it is a formula
for corruption
Loopholes in tax collection
3. Theoretical justice- based on one’s ability to pay the more a
person has the more taxes he should pay
Imposition of individual income taxes
On a progressive type of imposition
Tax base increase tax rate increases
Q: What if congress in all its wisdom has decided to follow the principles
will it result to the nullity of the tax measure? Are the tax laws easy to be
administered, easy to be understood?
A: They still remain to be valid notwithstanding this
Diaz v. sec of finance
Involves the question of the legality regarding the imposition of
VAT on toll fee
Among the issues raised is that, the value added tax on toll fee is not
administratively feasible because there are thousands of vehicles using the
express way
Difficulty to collect the toll fee so not administratively feasible
Whether feasible or not that is the question regarding the wisdom of the
law it is not the courts who should determine whether it is administratively
feasible or not
 Feasibility of imposing VAT on toll fee Answer:
a. 2nd only complies with public purpose even there is only 30
Exception to this: families
When there is a gross violation of the principle of theoretical justice but not Fact remains that everyone can actually use the road
because it violates the principle but violates the constitution Everyone can use of the road including the 1000 families in Barangay X
Might result to the law being violate of the due process law Complies with public purpose
June 31 2013 all persons liable for income tax amounting to 90% of his
gross income b. The 1st one for as long as where the area remains to be private in
Violate principle of theoretical justice and constitution nature no appropriation can be made because it is solely for a
Tax measure is confiscatory private purpose
Q: What if he puts up a gate
Power of taxation which is legislative in nature what is inherently A: Solution- expropriate it first
legislative is the levying or imposition of a tax Without expropriation it is private in nature
Even if 1000 families are benefit- the benefit rest solely on the private
Levying imposing a tax is legislative in nature owner of the property
Act calls for an action on the part of legislature
Identify in its holistic sense that the benefit affects the general public it is
Other phase of taxation is not limited to levying but the administration for a public purpose
aspect which involved assessment and collection of the tax Scholarships- some qualified individuals who are privileged enough to
Assessment and collection is not legislative but administrative study because of the fund the beneficiary will be a private person but the
1. Assessment- government public purpose is to promote education
2. Payment- tax payer
CHED gave SLU COL for purpose of improvement of the school of law
Process of assessment and collection
Taxation as a process not a power Even if the direct benefit is granted to this school the public purpose is for
education in general the entire public will benefit from it
Power of taxation is supreme plenary unlimited comprehensive
Pascual v. sec of public works
Unlimited power of taxation is it really unlimited absolute? Subdivision owned by a political
there are limitation to the power of taxation Proposed to his colleagues to construct public works within the subdivision
Spending funds illegally complained not for a public purpose
Limitation to taxing power: The owner donated all the roads to the government so that the roads will be
public in nature
Broken down into 2 general kinds: At the time of appropriation there was appropriation within private public-
Inherent and constitutional limitations validity determined at the time of passage of the effectivity of the law for
the construction of roads the subsequent donation can cure the void law it is
A. Inherent to taxing power limitations: void ab initio
1. Public purpose- only for public purpose
2. Inherently legislative But if beside a subdivision and the road constructed is public lot then it is
3. Subject to principle of territoriality valid- sec villar
4. Subject to principle of international comity
5. Government exempted from taxes Connection with public purpose this requirement should be present not only
at the moment of levy but up to the time the tax is spent- continuing
1. Public purpose- inherent in the sovereign character of the state requirement
For benefit of public only Tax law enacted by the ate solely for a public purpose and the tax money
Cannot use the power of taxation for a private motive generated should be used for pub purpose
Manner by which we determine public purpose does not fit any hard and
fast rule no clear cut test of public purpose but there are some guides: If levied for public purpose but spent for private purpose the people/
If the objective in using the power of taxation is for a legitimate taxpayer can file a tax payers suit
government objective it is for a public purpose Through a tax payers sui- identify yourself as a taxpayer and affected by
Ex. Like the protection of the integrity of our national territory the imposition/ lack this you do not have any standing unless the case is of
 Internal security transcendental importance
 Peace and order
 Health Tax law specified purpose- for the tax measure
 Education Rule: money generated through tax law should not be used for any purpose
 Infrastructure projects except for the purpose for which it was intended no other uses can be
Complying with the requirement of public purpose allowed

Problems to the determination of public purpose
Question:
a. Barangay X 1000 families residing but barangay X does not
having access to public highway
And ask local officials if they can appropriate funds to link barangay X to a
public highway, but the land is a land of a private individual
b. In barangay Y there are 30 families, and no public highway same
to ask for local officials
The area in barangay Y is public in nature
Possible that money raised through tax law for a definite purpose can end
up as a general fund of the government- normally that should not happen
because it has a definite purpose but the exception is that if the purpose has
already been accomplished the money will now go to general fund of the
government
What if there is no purpose indicated in the law merely levy a done without
identifying a purpose
Is it complying with public purpose? Yes because presumption is that when
funds going to general fund it is for a public purpose
Gomez v. Palomar
Philippine tuberculosis society to help those affected pursuant to the law-
part of the operation of this society would be coming from the anti-TB
stamp
Affix the regular stamp and the anti-TB stamp, money will be collated and
help those affected
Tax payer send mail matter sent an anti-TB stamp and mail was not
delivered
Filed a suit against the government for mandamus to deliver his mail matter
Requirement of law which is to place the anti-TB stamp is a void
requirement because according to him it is a tax measure which does not
comply with public purpose because the funds benefits only one society
thus one beneficiary
PTB society its only used as a conduit to help people with TB but only to
help those affected with TB
Incidentally there are private persons benefited, the ultimate objective is to
health reasons
2. Taxation is inherently Legislative
3. Taxation is subject to principle of territoriality
Relate concept of territoriality to situs of taxation
The situs of taxation will affect the concept of territoriality principle
Case:
X is a Filipino residing in the Philippines, X went to Japan for vacation and
bought an apartment in Japan to use for future vacations
Can X be subject be real property tax?
Consider the rules in situs of taxation
Taxes upon property- situs in this case is tax on property the proper
taxing jurisdiction is determined by the location of the property not affected
by the citizenship of the owner or the residence of the property
Thus cannot impose real property on the real property
Tax on persons
Poll tax
Income tax- tax on a right of a person to earn something
Touchdown of liability is due to the existence of a person who is taxable
X is a Filipino residing in the PH and went to Japan and bought an
apartment to Japan and moved to Japan so now a resident on Japan but
remained to be a Filipino
May X be subject to poll tax?
No because the tax on a person is determined by his residence not
citizenship
X is not residence thus no poll tax
Community tax
Cedula
Same cannot be imposed
Y is an American and went to Phil for a vacation but while here Y met X
and then X and Y decided to live together
Can Y be subject of PH community tax? Even if he is an American yes
because citizenship is not a factor
X a Filipino is residing in the PH and went to Japan for vacation purposes
but while having in having he managed to earn income, may X be subject
of PH income tax?
Yes because income tax is a tax on a right, factors considered is citizenship
and residency
In this case considering that X is a Filipino his income even if sourced in
Japan may be the subject of PH income tax
Within and without
X went to Japan to reside and to work
He earned income in Japan may X be subject to PH taxes earned in Japan?
Yes because X is a Filipino citizenship is a factor in imposing a tax on a
right
Note: Our government can tax it but it doesn’t mean that the government is
taxing it now
But he is a non resident citizen his liability
Under NIRC liability only income if sourced within the PH
Can be taxes because X is a Filipino but not taxed because of the NIRC
Privities of relation to the PH government he is deriving benefit wherever
he may be
Case:
Y the American went to Japan for purposes of having his vacation while
there in Japan Y met X and they went back here to reside in the PH
Y earned income in PH, subject to income tax because Y is now a resident
of the PH aside from having his residence the place of the exercise of the
right was done in the PH thus subject to tax
When Y and X decided to reside in the Ph they realized that their income
potentials were diminished so Y and X went to Japan to reside permanently
in Japan
While in Japan Y earned income may the income of Y be subject of PH
income tax
Citizenship no residence no because it is Japan place of exercise of right is
Japan thus no also
Y the American went to the PH to reside here in the PH
He then went to Japan for vacation purposes and earned income
Can the PH tax the income?
Yes because y is a resident of the PH, residence is a factor to consider
Resident alien the liability of tax shall be sourced from income within the
PH
Question is wrong: may it be the subject of PH tax? Yes legally permissible
if PH will impose of income of a foreigner does not violate our principle of
territoriality
If the income for Y in Japan not subject to PH income tax- Y is a resident
alien liable for income only source within the PH
Provision of the NIRC: apply NIC
Question asking for a legal possibility: permissible or valid to impose this
tax a question on principle of taxation apply this rules discussed
Prior to 1997 tax code, resident citizens, nonresident citizens and resident
aliens are all taxed similarly, within and without, permissible that income
of a resident alien from abroad is subject to PH income tax
X is a Filipino residing in the Ph X has bank account in HK
Because of the dollar account X is earning interest income
May that interest income be subject to final withholding tax on the interest
income?
Principle of territoriality- final WH tax, payor of income is required to WH
the tax the payor is required to remit the same to PH government failure
would make him liable
The HK bank is the agent fails to withdraw or remit, no territorial
jurisdiction over that bank
Note: FWH taxation whether creditable or is subject to principle of
territoriality if a transaction occurs outside the country cannot be subject to
WH in the country.
Is the income of X subject to PH income tax?
Yes because X is a resident citizen, income sourced from abroad are taxed
Part of gross income
Exempt final tax gross income
Certain items subject to final tax but not subject to final tax because of
territoriality
X is a resident citizen
10% tax royalties final tax
Book literary works etc
Within 20M subject to 10% final tax
w/o 30M
All part of gross income
X is a Filipino residing in the PH working for American embassy in MLA
X paid salaries
Subject to WH on wages?
No because cannot be subject of WH principle of international comity
International comity- friendly relation of states all states are equal in
principle
One state cannot impose its taxing authority upon another
Real property tax on embassies of other countries
Do not apply tax laws on other countries or their political representatives
Foreign country sold firearm in the sale- we cannot get taxes from the
particular income
Taxes on income of ambassador because violate principle of international
comity
Ambassador sold a jewelry personal to him- earned income
No because he remains to be a political representative, his personal acts
cannot shed off his status
WH tax on wages of embassy- required the American embassy to WH the
tax and if they WH the American embassy cannot require the WH of the
tax
State related/ representative affairs
If a representative f the state is not involved do not apply international
comity
Tax exemption of the government- inherent exempted from taxes
Q: Does that mean the government cannot tax itself?
A: Of course not, MCIAA no prohibition for government to tax itself
Meaning of limitation is that under ordinary situations the government is
exempted from taxes
Taxation is the rule = Exemption if the exception
Exemption if the rule taxation is the exemption (government)
Without a clear provision of law the government will be the same as
exempted
Taxes remains to be liable even if performing governmental functions
under TCC, liable for customs duties even if importing in its governmental
functions but must undergo exemption process
4. Government exempted from taxes
Possibility to impose upon itself
If government would tax itself it must be done in clear and definite terms
When the government levies taxes the benefit is felt by the government-
paying itself by paying taxes
Not normal we find the government taxing itself
When the government here is the national government agencies political
subdivisions
Do not include GOCC they are like ordinary tax payers
For this purpose even if the government corp. is making use of properties
for purposes beneficial to the public this does not auto give rise to
exemption from taxes
LRTA v. CBAA
Subject of assessment by real property taxes because LRTA operating LRT
system for which it owns carriage ways terminal stations and other
facilities owned by LRT system
LRT defense: enjoys tax exemption in its charter, the properties used by
LRTA are used for purpose of beneficial to the public and this carriage
ways are actually just like roads and roads are not subjected to tax
SC ruling: tax exemption of LRTA: yes in the charter there is an
exemption but remember that those tax exemption revoked by LGC sec 193
which contains the blanket revocation of all tax exemptions
Enacted prior to enacted of LGC
Benefit of the public: mass transport, the SC said that the mere fact used for
benefit of the public does not automatically tax exempt
Proprietary venture beneficial to public- subjected to tax just like any other
property
Just like roads: SC said that no they are not like roads because they are
located above the road
Reason: they are not like roads because they are not available for use by the
public just like roads
For instance, any person who owns a vehicle can freely drive around the
roads unlike in the carriage in the LRT system
If for some reason properties owned y the government but held in trust by a
gov corporation there is possibility to be freed from taxes
MIAA v. CA and Paranaque
MIAA v. CA and Pasay
The MIAA properties thereof NAIA airports are properties fo the
government which are just being administrated by the MIAA being a
regulatory body they are in reality owned by the national government these
properties cannot be subjected from taxation
Inherent limitations regarding exercise of the taxing power
Constitutional limitations
General classifications
1. Directly affecting taxation
2. Indirectly affecting taxation
Indirectly taxation
Bill of rights
1. Due process clause of taxation
Deprived of liberty and property
Without due process of law
Substantive due process and procedural due process
The rule in taxation is before there is collection of a tax there ust be first a
valid tax for the government to collect the tax
No law no tax- power always present but exercised through a valid law
There is a valid law when:
A law is substantively valid if not arbitrary confiscatory whimsical
CIR v. MJ lhullier
MJ is an owner of pawnshops
Congress levied tax on lending investors
BIR wanted to collected the lending investors tax but also from pawnshop
operators on the theory that they are essentially engaged in lending
Defense: tax imposed on lending investors not all lending operators
Not just like any lending operators
Different sets of laws that govern them and lending investors
SC sided with MJ- that only on lending investors not pawnshop operators
There could be no collection on the tax
Depriving the tax payer of the right to substantive due process
Supposing congress passed an income tax law levying income tax all those
that engaged of practicing their profession at 60% of the net income?
Confiscatory? Mere imposition of 60% based on ones net income is not
confiscatory
Sison v. Ancheta
Valid because the tax base of tax payer can actually be reduced by his
allowable deductions
Can claim allowable deduction
Tax base effectively diminished
Double taxation- deprivation of substantive due process? No in a general
sense no denial of due process
Direct duplicate taxation is confiscatory and thus denial of due process
Note: When 2 taxes imposed on the same person by the same taxing
authority for the same purpose
When it does not meet it is only duplicate in the general sense
National and local taxation- not direct duplicate taxation only in a general
sense
In order to be substantively valid a tax law must not be whimsical
Villegas v. choi
City of manila enacted an ordinance- requiring of aliens within manila who
wants to be employed in manila to pay mayors permit fee
Alien employment permit fee
Even if the tax payer or the alien pays the permit fee the mayor at will can
just deny the grant of the permit without any test to guide the mayor
SC whimsical collection there is nothing that will back up that collection
There is no test that will guide the mayor what is allowable or not
Due process violative
Procedural notice to be heard notice and hearing before answered to
explain side
Before audited he is notified
Before his properties taken by the government subject to assessment first
and bring protest in both admin and judicial forum to explain his side
2. Equal protection
Equal protection of the law
Do not require absolute equality
Promote inequitable situations
Ex: Congress enacts a law that all persons liable for tax of 100K
Absurd
What is required by constitution is that all persons who are similarly
situated should be given same privileges and subjected to same burdens in
order to comply with EQ protection
Determine all persons who are similarly situated the law allows
classifications to be made
To know who are similarly situated and those who are not those who
belong to the same catrgory should be subjected to the same burdens
Classification is allowed
 compliance with a valid classification
 substantial distinction based on real differences not just any
difference
 distinction germane to the purpose of the law
 applicable to present and future conditions
 all persons similarly situated subjected equally
Income tax on male should be 50% lower on females- invalid
classifications
gender has nothing to do with liability for income tax
lawyers and doctors free from VAT before
all other professionals subjected to VAT
RA 9337
Now all equally liable to VAT
Is it valid? Belong to a different class of profession
Service that they render nature of service
We provided to those who are in need
There is only one company producing semi conductors- all semi conductors
produced by X corporation subjected to tax
Not valid, because if Y corp. procedures semi conductor because the law
provides liability for semi conductors of X corp. only does not comply with
requirements of equal protection
Apply In the future condition not applicable to all members of the same
class
All semiconductors produced in the Phil subjected to tax
Valid because it applies to all even if there is only one falling to the term all
3. Non impairment clause of the constitution
No law shall be passed abridge obligations and contracts
Revocation of tax exemption
X corp. enjoys a 10 year tax holiday pursuant to a provision of law
After 5 years of being exempt the exemption was revoked- the revocation
was valid
Yes because a tax exemption is a mere privilege which is revocable
anytime
A law was passed saying that those who will put up an investment of 1
billion pesos and hire 100 Filipino investment will enjoy a tax holiday of
10 years
X complied with this requirements after complying X availed for the
exemption was revoked
When the government provided this in the law it is imposing this
requirement because it is sovereign in nature or intention to step down to a
level of a tax payer?
Asserting sovereign right/ character or shedding sovereignty
In this case asserting sovereign right/character- not act of government
shedding sovereignty
No contract here does not shed off sovereign character it is in fact
asserting its authority on the tax payer thus still a mere privilege
It is protected by the non impairment clause
Invoke the non impairment clause
Meralco v. Laguna
SC stated this in order for non impairment clause to apply the tax
exemption must be founded on a contract whereby the government stepped
down to the level of an ordinary tax payer and sheds off its sovereign
character and the government provides as part of the consideration in the
contract the grant of tax exemption
Government borrows money from the people
Issue government bonds- interest bearing bonds and the government in
order to entice more people enacted a law that the interest from the bonds
shall be tax free
Lifespan of 10 years but exemption revoked after 10 years
Revocation is not valid- protected by non impairment clause
There was a contract- the borrow money contract of loan
Not asserting a sovereign character
Quiz
1. Income tax law levying income tax based on net worth of the
corporation?
Invalid
Purpose is violative on due process
Tax income not net worth
2. Capital gains tax, Territoriality excise tax
Can the government require X to pay the CGT?
No because the CPG on the property is a capital asset is a final tax-
territoriality principle can be invoke by X
But the government can collect an ordinary income tax but not the income
tax for which X shall be liable but not CGT (principle of territoriality)
Government collecting from X ordinary income tax- how much will be
included by X? inclusion of 5 Million the gain is 10 Million but property
sold here is a capital asset being a capital asset apply rules concerning
capital gains and losses holding period rule- held more than a year already,
applying your holding period rule there is inclusion of only 50% of the
gain, 50% is 5 million pesos
Income earned form a foreign jurisdiction vis a vis Capital gains tax
Power of taxation not generally delegable: inherently legislative
Principle of exercise of taxation is exercise of imposing burdens imposed
upon the people that is why it is inherently legislative it must be
representative of the people that will impose it, thus the exercise of the
taxing power by the legislative it is a delegation of the sovereign act of the
people, congress will have power to impose burdens taxes upon us, already
delegate by people to congress thus cannot be further delegated generally to
another
TCC shortening form 5 years to 2 years
Violation of due process taking of property without due process of law
If its involving a TCC that has already been issued it becomes a proprietary
right of the tax payer to use within 5 years
Local and real property taxes no refund but give you a TCC- you can credit
against your future tax liabilities
Non impairment clause of the constitution
Availability or non availability of non impairment clause
The loan obtained by the government through issuance of government
bonds, In that situation the NIC is inapplicable because the tax exemption
based on contract of loan state cannot unilaterally back out of such
agreement
In exchange of a mining concession granted in favor of lepanto required to
pay 5% of gross receipts in lieu of all its taxes, term of agreement covered
by a mineral production sharing agreement for 20 years
Question: is that 5% tax in lieu of all taxes arising by reason of contract or
by mere privilege? Any person granted authority to exploit Nat res should
secure a franchise by the government in the form of a mere privilege so not
contract but mere privilege
Any authority to exploit Nat res should be granted first a franchise mere
privilege not contract
Franchises- case of smart v. city of Davao and ABS v. quezon city
Tax payers which had been granted legislative franchises to operate a
telecommunication co. and broadcasting co for ABSCBN
Both tax payers required to pay franchise tax- the franchise tax is in lieu of
all taxes
Despite the in lieu of all taxes provision in the franchise of ABS and
SMART the LGU units wanted to collect from the tax payers the local
franchise tax
LGU can impose local franchise taxes
In lieu of all franchise tax- does it include LGU tax?
Should smart and ABS pay local franchise taxes? Yes because the franchise
merely contained the provision all national taxes only not local taxes
NIC not applicable it because no impairment for the reason when a tax
exemption is granted pursuant to a franchise it is a mere privilege the NIC
cannot be applied
If the franchise contains an in lieu of all taxes provision the does not
include local taxation
In lieu of all taxes whether national or local- then definitely covers local tax
Freedom of religion
Two kinds
a. Free exercise- freedom to exercise religious belief
b. Non establishment- the state is not allowed to promote particular
religion or give preference for a particular religion
Free exercise of the constitution- 2 kinds
a. Freedom to believe- rare kind of freedom which is absolute
b. Freedom to act on your belief- acting pursuant to your belief
State can probably set in- especially if violating the freedom of
other persons
Might infringe right of another person
Religious freedom on taxation
Principle no prior restraint to ones right to freely exercise his religion no
prior restraint on ones right to exercise his religion
Prior restraint key word
If there was prior restraint on exercise of right to religion that is invalid
That prior restraint can come in the form of taxation
Before you can pray pay a prayer permit fee- if you pray without the permit
the prayer is illegal no permit for it- that is concept of prior restraint here
Infringe on your right to freely exercise your religion
American bible society v. city of manila
ABS sale of bibles and religious articles for a minimal fee- motive is to
spread the word faith of God
Manila ordinance taxing all persons engaged all persons engaged in selling
as long as there is a mayors permit fee
ABS does not want to pay infringe religious freedom
Yes infringement because the act of ABS in selling articles is an act of
exercise of religious freedom cannot be prior restrained- in the form of
imposition of mayor permit fee and cannot be done
The ordinance of manila is not null and void it is still valid, general
ordinance that applies to all, but the point is that even it is valid it cannot be
applied to ABS because in applying it the religious freedom of ABS will be
impaired
No prior restraint but when you earn income you must pay income tax-
valid because no prior restraint allowed to freely exercise religious belief
incidentally you made income it is not prior restraint
Non establishment clause
Not allowed to build churches except- military reservation gov hospital
Ordinarily, the state cannot promote a particular religion finance activities
or promote it
Invalid if for the DEPED will appropriate funds to teachers to teach
religion subjects in public schools
Cannot be compelled mandated or financed with public funds
Kabataan party list- proposed a bill, prohibiting holding of religious
celebrations within government offices and placing images in public areas
or properties that belong to government
Provisions of constitution which directly affect taxation
Provision which affects religion
Gives exemption for all properties that are actually directly exclusively
used for educational charitable religious purpose shall be exempt from
taxes
What kind of tax is covered by the exemption- properties exempt from
taxes (real property)
Covers only property tax
If it covers property tax- one of the property tax is RPT- under our LGC on
RPT, basic real property tax but other special levies
If this will exempt only basic tax or even additional levies
Provision covers basic RPT only however, even if the constitution exempts
the properties form basic RPT the LGC extends the exemption even to the
additional levies
If the property used ADE for REC purposes exempt from RPT by reason
on constitution and exempt from special levies by virtue of LGC
Special education tax etc
Asked if Congress amended our LGC by making those properties used for
education subject to special assessments? Valid because merely statutory
Only properties exempted from the tax not any tax payer but the property
will be the one exemptd because used for a exempt purpose
X owns property and X does not need the property and entered not
agreement with the church and leased the property constructed a church
therein and made use of religious purposes
There is no liability for RPT
ADE for religious purpose? Yes thus exempted even if owned by X
Don’t care who owns the property what we care about is how the property
is used- ADE for REC purposes
Property of the church X leased it for other purposes- liable for RPT church
liable for the tax because church owns the property
Determinative criteria the exemption would be how the property was used
Must be ADE for REC purposes
Coverage those properties ADE used for an exempt purpose
Exemption would control basic real property tax in the constitutional
provision concerned
Not relevant as to who owns the property exemption is not reference to the
owner but the use of the property- how was it used? For an exempt
purpose?
Even if property owned by a taxable person but used for an exempt purpose
not subject to RPT
Actual direct and exclusive for exemption
Lund Center of the Phil case (2004)
Meaning of exclusive
Does not mean merely primarily but means solely
Property solely used for an exempt purpose
If not solely used it is not complying with the requirements of the
constitution to be exempted
Portion of hospital used as a orchidarium
The other half used as a hospital
Some portion as used as clinics of doctors- doctors of lung center
Accept their own patients not necessarily patients of lung center
Some portions devoted to paying patients and some charity patients
Whatever generated are the ones used to augment operations of the charity
patients
Should lung center be liable to taxes? Charter enacted prior to LGC-
blanket revocation of all previous tax exemptions
Lung center created as government charitable hospital and accepting
paying patients- liability with PRT
Orchidarium- property tax
Clinics of doctors- subject to property tax- because they are not exclusively
for Charitable purpose doctors are accepting their own private and paying
patients
Exclusive cannot mean any other than solely interpreted as solely used for
an exempt purpose
Thus subject to property tax
Charity portion- free from RPT
Because charity portion for charitable purposes
Portion devoted to paying patients- charitable hospital accept paying
patients and the funds or finance the charity portion of the hospital
Mere acceptance of paying patients will not subject them to property tax
Portion of building not solely used thus not devoted solely for charitable
purpose? Lung center case- it does not prohibit the pro ratio of liability
One floor not used for exempt purpose- taxable
Charitable purpose- that floor exempted
First floor not tax exempt will not affect other floors with tax exempt
purpose
Upper floors- ADE for an exempt purpose
Enough compliance with exemption they must be exempted from property
tax notwithstanding the 1st floor is not compliant with the exemption it
wouldn’t affect other portion which would be exempted
What about the land on which the building is situated?
Insofar as the land is concerned- lung center does not prohibit the proration
of liability
Used by the building where a portion is used for private clinics of doctors
and other portion is charitable if this was consisting of 5 floors and 1 floor
is devoted for taxable purpose then this land would be taxable to the extent
of 1/5- portion that is attribute as the one that is taxable by reason for non
exempt purposes
Land is concerned not clarified
Proration of liabilities
Exclusive means solely not just primarily- debatable whether the old cases
of Abra valley colleges bishop of Nueva Segovia etc cases
Abra colleges- residence of school director incidental to the operation of
the school
Hospital being used to train the students of medicine where the medicine
are being trained the hospital is also free from RPT incidental to operation
of school
Convent with vegetable garden- incidental to the convent
Incidental exemption no longer exemption no longer applicable because of
word exclusive which is solely not just primary
Local treasurer goes to extreme interpretation
Not used for an extreme purpose
Parking spaces etc
Probable defense:
Incidental exemption- you will lose because of lung center
Open area or parking space is forming part of the school itself part of
school itself necessary part of the school itself operation
Provide ample parking space afford them wide open areas to
congregate in these open areas
To be an educational institution in every square inch of your property there
must be learning that is going on- absurd
Educational institution where no actual learning going on but still part of
the educational institution
Church-on a hill
Beside the church is a building- mall owned by the church
All income used by the mall for the religious purpose to the church/
religious or charitable
Church is it subject to or free from property tax- free ADE for religious
purposes
Land on which the church is situated is free
Building- subject
Land of the building- subject to tax
Income of the building-
Statutory provision on the income of religious corporations? Sec 30 of
NIRC, list of tax exempt income tax exempt corporations- yes they are,
listed among income tax exempt corporations
Constitutional provision on religious corporation- No
Should the church be subject or free from income tax? Notwithstanding
that a church is a tax free corporation
Notwithstanding still liable for income tax
Notwithstanding the tax free character- they are subject to income tax if the
income would come from any property irrespective of the disposition of the
income if income from any activity conducted for profit or use of property
Operation of mall is activity for profit- income for the use of the property
even if income to be used ADE for religious and charitable purposes
There is liability for income tax
Sec 4 Art 14
Tax exemption given to non stock non profit educational institution
All revenues and assets of nonstick non profit educational institution shall
be free from taxes provided ADE used for educational purposes
Tax payer specific- non stock non profit education institution
Tax payer specific this time
Non stock corp- capital not divided into shares of stock
Non profit- can the school generate income? Yes it should cannot continue
with purpose if does not have any income
No portion of income is given to any or distributed to any group of persons
by way of dividend etc
Board of trustees not compensated as such
Administrators can received compensation day to day operations
Educational institution- CIR v. CA YMCA
YMCA claims to be an educational institution because it provides
trainings to its members- educational component of YMCA
SC ruled it is not one because merely providing trainings or seminars they
are not equal to educational institutions one which provides hierarchal
forms of training
Supervised by the CHED deped or tesda for vocational technical education
and the legal education board
Freedom from tax- of non stock nonprofit educational institution
All revenues and assets
Not limited to properties because properties are assets and the revenue of
the school freed from the tax- ADE for educational purposes
Constitutional speaks of freedom from taxes and duties- import duties freed
Importation of machinery free from customs duty- ADE for educational
purposes
Actual direct and exclusive use- exclusive use must be solely used for
educational purpose
Problems:
X school is NSNP educational institution
It has income from tuition fees and other payments
Aside from this it has other sources of income
Income from canteen operations
Canteen owned and operated by the school
Income from canteen operation used by school for educational purposes
Free from income tax- ADE for educational purpose
What if canteen not owned and operated by the school canteen
concessionaire and income is from the lease of the space of the school
Income of canteen- taxable
Lease income paid to school used for educational purposes- free form
income tax- ADE for educational purpose
Test laid down by constitution is how the income was used
What if the school not using the property but merely leasing the canteen to
another?
Free from tax still because the income of the lease is a revenue of a NSNP
educ institution
Notwithstanding the fact
Dept of Finance order 137-87
BIR for allied activities canteens bookstores dormitories must be the
schools actually operated this so that the income shall be free from tax-
constitution lays down requirements for exemption- revenue or asset of
NSNP EI free from taxes and duties as long as used ADE for educ purpose
CIR v. CA YMCA
Constitutional provision self executing provision
Mere administrative issuances cannot modify alter amend increase or
decrease whatever rights are created pursuant to the constitution itself
Is the income free form tax- reference is constitution thus free form tax
Test the correctness of an argument- extreme
Mall was sold by the church to a school which is a NSNP educ institution
Owner of the mall is now the school
Every income from operation of the mall used for the school for educ
purposes
Q: Should the income be subject to tax?
Income from mall is a revenue of a NSNP educ institution
Tax free- requirement have been met
Income free from tax
Provision of sec 30 of the NIRC
Lays tax exempt corporation
NSNP educ institutions as tax exempt
Under sec 30 last paragraph notwithstanding the tax exempt character of
the provisions/ corporations these corporations shall be subject to tax for
every income concerning an activity conducted for profit irrespective of the
disposition of the income
Income of NSNP EI form the operation of a mall that is an income
conducted for profit/ or use of a property? Should it be subject tot tax
irrespective of disposition of the income?
A: tax exemption provided by the constitution- exemption provided by a
statute tax payer can claim an exemption via constitution
Tax exemption under constitution will prevails over taxability on a statute
Constitutional of sec 30 last paragraph cannot be applied to NSNP insofar
as income ADE for EI
Basis is not a statute but the constitution itself- frees the income from tax
liability no law can be taxed on a particular income
Mere provision of law cannot modify requirements in the constitution
Constitution disregards source of income because concern of constitution is
how the income was used there can be no issuance of an admin office
which would provide that the income must be sourced from an educational
related activity no requirement regarding source in the constitution
X school, NSNP educ institution
Earned the ff:
Income from tuition and allied fees
Income from non school related activities purely business related
Income arising from investments
Out of the tuition fees only 80% was accounted for by the school as used
for education purposes
For non school related income 60% was accounted for educ purposes
Income taxes will be imposed:
40 % unaccounted for subject to income tax from non school related
activities
80% unaccounted- not used for educational purposes
40% requirement of constitution is not met- no showing that the amount
was not shown to be for ADE Educ purposes
20% Free from tax because income from tuition fee by reason of the
school itself from school operations
Its free from tax because a school is a tax free corporation under sec 30 of
NIRC listed in sec 30 as tax free corp.
Tuition fee is a receipt of its character as a school then the statutory
exemption is applicable
60% used for educational purposes would qualify as exempted not by sec30
but by the constitution
Summary
If income is income from school related activities and allied services the
school shall be free from tax even if there is no showing that the income
was used for educ purposes it will still be free from tax
But if the income is arising from non school related sources determine if
the income was ADE for educ purposes
Qualified ADE for EP then income exempt from tax by reason of the
constitution
Otherwise taxable
Liability of doc stamp tax- diploma transcript issued by the school
Diploma they don’t place the doc stamp even in the transcript
Is there liability
Theory- NSNP are free from taxes
Documentary stamp tax not imposed on the school but on the student the
school is a mere collecting agent
School should incorporate the amount he will pay for the doc stamp tax
Not imposed upon the school but on the persons securing the documents
School liability is a mere withholding agent
NSNP EI is a mere withholding agent tax not imposed it- for the
government
BIR wrote school demanding for payment of doc stamp tax
School wrote BIR asking for exemption ruling whether we are exempted or
not from tax- BIR issued ruling of tax liability
Tax payer appealed- dismissed wrong remedy don’t appeal to CTA from
issuance of ruling of BIR
Act pursuant to an interpretation of an internal revenue law- appellate
recourse is sec of finance
Proprietary educ institution
Enjoy any constitutional exemption? Yes proprietary are still educational
educations the properties ADE for educ purposes shall be free from
property tax
But not income tax- only NSNP educational
May be given the same privileges under constitution
Not self executing depends on laws whether there is a tax exemption
Are proprietary subject to income tax? Subject to tax at what rate
Depend of the predominance test
Which income is more dominant
Income from school related activities- greater form non school related
income (10%)
Character as an educational institution 10% of taxable income
Lesser than non school related income tax is 30% school has downgraded
its status to an ordinary business
Income of proprietary educational institutions
Monitor level of income
Income school related activities > non school related
To enjoy 10% tax rate rather than 30%
Taxability concerning donations that we make in favor of R C institutions
Donations
Made in favor of RC institutions- is there a constitutional provision
concerning R or C provision
There is none in the constitution
Any rule as regards liability or non liability will merely be statutory granted
Donations in favor of R or C institutions subject to or free from donors tax
Requirements:
When will it be exempted
1. If there is compliance with requirement that not more than 30%
of what have been donated should be used for administrative
operations
Sec 101 A-3 of NIRC
Donations made in favor of education institutions
Sec 4 Art 14 of the constitution
All grants endowments donations made to EI are free from taxes but
subject to provision of law
Exemption can be modified by provisions of law
Without any law the tax exemption will prevail
There are provisions of law governing this
NIRC- educ institution free from tax
1. School should be NS NP educ institution
Proprietary educ institution shall be subject to donor’s tax
What is free is only to those NSNP
2. Not more than 30% of what has been donated should be used for
administrative purposes
Priest donated parcels of land to a school
The understanding is that lands donated by priests will be used for educ
purposes future buildings of this school
When documents processed with BIR for issuance of certificate authorizing
registration
BIR issued assessment for donors tax- deed of donation does not mention
that not more than 30% of what has been donated be used for
administrative liability
Board resolution accepting the donation- says that these lands donated by
this priest will be used by the school solely for educational purposes
Sec 101- A3
Other provisions on the constitutions direct effect
Uniformity in taxation
All taxable articles of the same kind should be taxed at the same rate
No person can be imprisoned for nonpayment of poll tax
Nonpayment itself
Falsified entries in entries in cedula can be jailed- can be held criminally
liable
Not because of nonpayment of poll tax but falsification
Rule of granting tax exemption granted only pursuant to law and a high
voting requirement
Concurrence of majority of all members of congress
300 congressmen
In order to act you need the presence of at least 151 congressmen
160 attended
Out of 160- need 151 members
Not just 81
Ordinary legislation 81 but this is a tax exemption which requires a higher
voting requirement
Must be majority of concurrence of all members
13 votes in order to pass a legislation
Revocation of tax exemption need only majority of the quorum
Ordinary legislation only
Non impairment clause- last quiz
Directly affecting taxation constitutional limitations
Origin of revenue appropriation and tariff bills
Required to emanate from the house
Unlike ordinary forms of legislation
It can originate from the house senate, all that will be done transmitted to
other house
Revenue appropriation and tariff bills- must be house originate
Reason: view it that they are impositions of burdens so if burdens
imposition it should come from the people- directly in touch with these
people the district representatives at the house of representatives, people
directly in touch on a district level to know if capable of accepting more
burdens
House bill passed approved by house- forwarded to senate for
deliberations- accept it approve it or introduce amendments in its own
version or entirely new version, senate not tied by deliberation of house or
how the house wanted an appropriation bill formulated, senate can
introduce an entirely new version
Resolve by convening the bicameral conference committee resolve
differences between the version the reconciled to the plenary for voting to
the president
Established procedure- problem arose in the case of ABAKADA guro
partylist v. Ermita case
In this case RA 9337 new VAT law was questioned
Several problems raised by petitioners regarding the issue of origin of tariff
bills
House version contained as the no pass on provision
Senate version no pass on provision
No pass on provision regarding electricity from power producer-power
producer sell to power distributor sell to consumers
Situation: this power plant can shift burden of VAT to power distributor
then to consumer- according to no pass on provision they cannot pass it the
vat should remain with the distributor
But there were a lot of difference in the house and senate version- but no
pass on provision was not among them
Convening of bicameral conference committee- resolved the differences
and removed the no pass on provision
Q: Is that within the power of the bicameral conference committee? Yes
SC said that the BCC has power to introduce changes to version of house
and senate as long as essential to the other differences that were resolved in
the BCC
Change essential to the differences resolves by the BCC then that change
can be introduced by the BCC
Removal of no pass on provision would be having an effect as regards
other differences that would happen in the 2 versions
Tolentino case- BCC can decide to introduce changes in house and senate
version if necessary to reconcile the changes between the 2 version, limited
in its discussion
The BCC touched on the differences of the 2 version- resolved the conflicts
between 2 versions
AKABAKDA- even those not in conflict can be changed by the bicameral
committee to reconcile the differences
Flexible tariff clause of the constitution- power of president to adjust
rates etc.
Issue:
VAT is internal revenue tax- RA 9337 introduced the stand by provision-
authorize the president to determine facts that will lead to adjustment of
Vat from 10% to 12% facts determined by president
President through NEDA determine existence of the facts
Undue delegation of legislative authority- cannot delegate to the president
the rate of the tax- president delegated power to determine rate of the tax-
stand by authority to 12%
No delegation of legislative authority to determine the rates of the tax its
either 10 or 12 only existence of facts that will lead to adjust of facts is not
an undue delegation of legislative authority- only determine existence of
facts laid down already by the congress- 12% rate will be applied
Non imprisonment for nonpayment of poll tax
Nonpayment of poll tax which will not be a cause of imprisonment- falsify
entries in community tax- income is false
Falsification committed you can be imprisoned- entries regarding the
community taxes
The non impairment of SC jurisdiction regarding tax cases- final arbiter
regarding constitutionality of any tax impost
All issues in connection with the SC is final arbiter- doesn’t mean it is the
only arbiter of tat issue
RTC-CA-CTA
Issue before these courts final decision is with SC
Cannot be impaired reduced or increased unless with consent of SC
When there will be a change in this jurisdiction
Increase of jurisdiction of SC on cases decided by the CTA- original
version of 1125 creation of CTA designed as a court with rank of RTC-
collegiate body
Before rule 43 decision of CTA before appeal to CA under rule 43 section
1 of 1997 ROC
Now in RA 9282, the CTA was given a rank equal to that of the CA
The decisions of the CTA cannot be appealed to ca co equal rank CTA
appealable to SC
Ask whether congress obtained the consent of SC- it did before enacting
9282
Identify a constitutional violation question validity of the law- comply with
the types of cases which are ripe for judicial adjudication
If can resolve a case without touching constitutional issues will not rule on
it-
Identify is a violation of an inherent limitation- rule is any violation is
amounting to violation of due process of the constitution requires that there
must be a prior valid law- not a valid law not a valid law then you are
attacking based on due process bottom line everything you will assail will
have constitutional anchor inherent- due process other limitations- specific
provision in constitution
Law is not wise for state to be imposing- wisdom of the law
Avenue is not SC but congress
Not for the courts to determine but congress to determine
Note: Issues involving wisdom of tax measure lodged with congress-
remedy is congress not courts
Lobby for a better type of legislation
Evasion unlawful means of escape
Avoidance lawful means of escape
Note: Both loss of government’s revenue
Think of tax avoidance mechanism- going through a lot of processes to
avoid taxes
Inconvenience to suffer- path to take whenever tax avoidance
Shortcuts- cannot think of tax avoidance
Overstating deductions
Under declaring income
Tax avoidance
Claim lawful deductions
Don’t declare income if excluded by law
Taxes in cities in local taxes higher than municipalities
Real property taxes in cities can be 100% higher – 2% tax rate
Provinces only 1% tax rate
Have a lot of children
Up to 4 children 50K deduction
Quiz answers
1. BIR circular on income of priests, monthly allowances for taking
charge of parish WHT on wages, tokens for holding masses of
the priests- is it valid?
Should be included in the gross income of priests-
Do you have any freedom from taxes for income of religious leaders?
Whether be constitutional or statutory? No there is no provision in any law
that but we have which one provides for an exemption for religious group
or entity
Merely clarifying provisions of the NIRC for the provisions of income tax-
within the powers of the BIR
RMC is partly valid in the sense that subjecting the allowance of priest in
WH because still income not covered any exemption does not exempt
income of religious entities no constitutional or statutory provision that
income should not be free from taxes- merely clarifying
Tokens granted to priests by reason of holding masses- while no
constitutional exemption fact remains that these tokens granted to priests
are intricately connected with the conduct of their religious affair
Even assuming that not covered by the free exercise clause, fact remains
that they are given by reason of liberality which are reason of income
2. Amend provision of VAT to subject tuition fee to VAT- is it
valid?
When a school receives tuition fees and the receipt forms part of the
revenue then covered by the tax exemption and imposed on the tax payer
school not the student and tax the school pursuant to the receipt would you
be taxing the school?
Receipt a non stock nonprofit educ institution
Not limited to income but includes all forms of receipts- tuition fee forms
part of a receipt- so within the constitutional provision
The law is valid except the provision granting tax exemption
3. Protection for migrant workers GOCC- has properties asking for
exemption from property tax
When can we seek exemption from property when ADE for REC
purposes
Is it used for charitable purposes? Charitable purposes is entirely different
from a non government purpose- not all NGO are charitable they belong to
different sets of organization
Tax avoidance and tax evasion
For those obvious ways to avoid and evade taxes, easy to comprehend but
take note if it is form of tax avoidance must be able to identify a provision
of law to avoid you to avoid taxes
Tax avoidance construed strictly against tax payers
Line between avoidance and evasion is very thin
Knowledge about tax laws will be relevant during those situations
Situations:
Proper advice to clients
X corporation engaged in business of selling and assume further that sale
made by X corporation is not subject to VAT- example only
No VAT imposed but what is imposed is a sales tax
Sales tax imposed on the transaction at a rate of 10%
And other assumption that sales tax is imposed on original sales- sale from
first seller to first buyer any sale made after the original sale is subject to
sales tax
Sells directly to consumers @ 100 pesos per item- sales tax is 10 pesos
X thought of this:
Setup Y corporation to minimize tax payments
X sells exclusively to Y corporation at cost- cost is 50 pesos per
item and Y corporation will be the one selling to the consumers it will
remain to be 100 pesos
50 pesos is the original sales- sales tax will only be 5 pesos
Introducing another level of the corporation
Pierce the veil of corporation fiction
Set up corporation just so to minimize taxes- tax evasion
Engaged in the realty business leasing of properties
During 1980’s X corporation bought the building which is the only
property owned by X corporation for price of 1M pesos
Spaces I building leases to several tenants and it continued until recently
when this property became so valuable for the increased activities in the
area this property situated in highly commercial district that this year Y
corp. offered to buy the property for price of 200M
Tax liabilities of X corporation :
1. Capital gains tax for sale of real property- 6%?
No liability imposed for sale of real property classified it is classified as a
capital asset
Real property used in business is an ordinary asset
2. VAT
Sales transaction- of real property for VAT
No liability for VAT not done in regular business isolated transaction-
business is leasing not selling of property
Not done in regular course of business
3. Documentary stamp tax- local transfer tax
There is liability
4. Income tax
Transaction not subject to income tax
Gain from sale of ordinary asset- ordinary income tax
Gross income during year- deductions = net income x 30% for corporation
Maximum tax effect of transaction-
Premise that every gain you will have will directly impact on tax liability-
selling price is 201M
Gain of 200M= apply 30% tax rate for ordinary corporations
Suggestion:
Check zonal value of the property if the zonal value of the property turns
out to be 100M, make use of that value prescribed by the BIR make use of
that
In the deed of sale indicate that- selling price of 201M cost is 1M gain of
only 100M 30% tax is only 30M
Save 30M
This solution is evasion very clear- because liability for NIRC tax not
determined by the zonal value but also the consideration – under declaring
value of the consideration tax evasion
From X execute a deed of sale over the property in favor of an individual A
Sell property to Y corporation- A who will be selling to Y corporation
Indicate correct selling price
A is individual not engaged in business not engaged in business property
considered as a capital asset- 6% subject to capital gains tax of 6%
CPG only be 200M = 12 M
Tax evasion because
No real transaction between X and A
Simulation of sale for saving taxes is tax evasion
CIR v. estate of Benigno Toda
Simulation of transactions
Willful intent to evade tax liabilities
Best Remedy – legal point of view
X corp. selling property to Y the cost is 1M selling price is 200M
Don’t sell the property
Instead of selling the property sell the corporation that owns the property
Shares of X sold to Y so that X will remain to be owner of property and Y
owns X corporation
If selling shares of stocks and there is a gain of sale of shares of stocks how
do you tax from shares not listed or traded- imposition of CPG on sales or
shares
1st 100K gain 5%
In excess of 100K 10% bracket
Tax liability is only 20M
Tax avoidance- not wrong to sell shares of stocks, legitimate business
transactions
Shareholders of X would sell shares to Y corporation that is a legitimate
transaction
How will you be convince Y that you will not be selling the property itself
Show to Y that only property of X
Deal with shares lesser tax liabilities
Duty tax avoidance- because identifying tax avoidance mechanisms
identifying possible loopholes in the law- government aware of loopholes,
the benefit of government through congress aware of the loopholes and
plug them
Claiming tax exemptions
Ambiguity concerning tax exemption- construe against the tax payer
Tax exemptions are considered as privileges so strictly against the tax
payer
If ambiguity on the law itself, rule on ambiguity in a tax law in favor of
against the government
Because taxes are burdens and burdens are never presumed
How do you construe an ambiguity in a tax law?
Against the government
Q: Law is ambiguous and an exempting provision in the law is also
ambiguous?
CIR v. CA and Ateneo
Ateneo assessed liability for contractors tax engaged in doing researches
for a fee- considered as contracting, then liable for contractors tax
Contracting does not include activity of ateneo
Contracting services- not clear whether act of researching falls under
contracting services
CIR called for Ateneo prove the exemption- the exempting provision also
not so clear so that the Ateneo is also not clear whether is exempted or not
Who has burden initially?
Ateneo to prove exemption
Or BIR to prove taxability
If against the burden- strict interpretation against government
If against tax payer- strict interpretation against tax payer
SC said that establish if the tax payer is covered or not- by applying the
strict application of tax laws against the government
BIR prove first that ADMU act falls under contracting
First apply rule on strict interpretation of tax laws against government,
turns out that tax payer is not covered then there is no point for tax payer to
prove that it is exempted
But found out that covered then that is the time the burden shifts to the tax
payer to prove exemption- apply strict interpretation of tax exemptions
against the tax payer
Shifting tax liabilities
Relevant to classify the tax as to whether direct or indirect
Direct tax- can you pass the tax to another? No you cannot
Indirect tax- cannot pass to another
Taxes are personal obligations
Indirect tax- can pass burden of tax but never the tax itself
Passing the burden of the tax, tax imposed upon you and pass tax burden to
another do not feel the economic burden of the tax to another, pass burden
only but not the tax
Pass the tax- you tax payer passing to another no more the tax payer
Sec 105, allows the passing of the tax
VAT is indirect tax passed to another
Exact wordings of the law used the amount of the tax may be passed to
another not the tax being passed but the amount of tax being passed to
another- can shift the burden not the tax itself
Tax liability remains with the tax payer
Shifting of the burden
Buyer is consumer selling X selling goods to Y amounting to 1M and VAT
which is 12%
Successfully perform shifting
Seller require buyer not only 1M selling price but also the VAT portion-
paying seller 1M 120K pesos
If seller collects 1120M pesos, the tax payer is the seller
The buyer not the tax payer
Seller required to pay tax to government- but not economically burdened
Because through the act of shifting burden of the tax
The buyer did not payer any tax- because insofar as buyer is concerned he
paid for his purchase price not a tax
Never paid any tax- only seller will pay the tax
Only shifting burden of the tax
Possible consequences
Seller sells to buyer who is a consumer
1M VAT 12%
Buyer begs not to shift VAT to seller
Seller still liable to VAT even if no shifting
Tax imposed on the seller
Decision to shift burden or not is decision of seller- even if not shifted the
seller still liable for VAT
Buyer is tax exempt
Did not shift burden of VAT to buyer paid only 1M
Seller liable still for the tax because tax imposed on the seller
notwithstanding any exemption from the buyer
Buyer said to seller, after 1m120K paying
Buyer filed for refund
Because grant refund to tax payers, buyer is not a tax payer because from
perspective of the buyer he does not pay any tax
He pays what is paid from the purchase price not a tax
Seller selling goods to buyer 1M- seller said on top of 1M pay VAT of 12%
Buyer agreed 1,120
After seller paid 120K tax to government- they realized that sale not
subjected to VAT
Error in payment of the tax- buyer filed a claim for refund because buyer
paid for him
Buyer cannot claim refund buyer not tax payer
Proper person to claim refund is the seller but suppose seller filed claim for
refund and amount refunded, the seller cannot keep it for himself-
principles of trust in civil law for the person who gave the money to him by Is this procedure allowed? Yes, no violation of principle of taxes
mistake not subject to set off

Seller have personality to file for refund but you cannot benefit for it Sec 76 of NIRC
If there is overpayment arising from excessive quarterly payments-
Buyer itching to file claim for refund but no personality to claim refund File claim for refund
Seller is personality but will not benefit from the refund Claim as credit against tax liabilities of the successive quarterly

Minimize tax liabilities End of year only used by corporation is 30M balance of 20M
Capitalization No more because
Transportation Once availed of crediting mechanism the same is irrevocable no more right
to claim for refund
Forms of escape from taxation If no more right to claim for refund, but can still be used next year
Shoulder the burden and feel it if no escape from taxation Credit to the tax liabilities of the next succeeding taxable years

Government is entitled to the tax the right of government to collect the Prior to 1997 tax code- only up to tax year
same does not prescribe After- succeeding taxable years
Right of gov to collect the tax does not prescribe unless the law clearly
provides prescription in which case the provision of law regarding Imprescriptibility of taxes
prescription will apply Collection of tax does not prescribe right of government to collect does not
Note: If no prescription, basic rule right of government does not prescribe prescribe
Remember that if there is no provision of the law that would state that there
Taxes are not subject to set off is prescription, the right of government will not prescribe
Set off civil law principles debtors become mutual creditors of each other If only be in the instance that the law is specific that there is prescription
of which these persons are claiming form each other that is applicable when Must be definite provision of law that will state that the right of
persons become mutual creditors and debtors of each other government shall prescribe
Tax liabilities emanate from sovereign act of the government not arising
from contracts Almost all of NIRC the collection of this would prescribe
Exception to that is when the tax liabilities and the tax being claimed by the Definite provision of NIRC that deals with prescription
tax payer from the government are both due demandable and fully Local taxation and RPT the same
liquidated Tariff and customs code also
There could be offsetting
These kinds of taxes the collection would prescribe they are explicitly state
For 2011 income tax liability X paid his liability on 2012 in the law
2 years from payment In some occasion that no prescription is stated the right of government to
collect will not prescribe
Apr 15 2012-
Filed refund on June 1 2012 Principle that taxation is prospectively in nature
Prospectively application of tax laws applied prospectively
Indicated on 2013 of tax credit of 800K and liability of 1M Just like almost all of our laws apply laws in a prospective manner
Tax credit one subject of his claim for refund
Declared as tax credit for 2013 Our tax laws not to be applied retroactively especially if prejudicial to tax
payer
Is the act of X proper? No because taxes are not subjected to set off the But those laws that are meant to be retroactive for the benefit of tax payers
claim for refund not yet granted was still pending- no way of knowing if legislative intention is to give a law a retroactive effect it will be given
whether granted or not such retroactive effect
Don’t assume you’re entitled to it- refund
When tax amnesty laws provided by congress, the past obligation of the tax
Not allowed payer will be ignored by the government- cures whatever errors infraction
that might have been committed by the tax payer
Taxes cannot be subject of set off Curing past errors made by tax payer tax amnesty law would also take a
X corporation filing ITR for 2011 look from point of view of prospectivity- clean state of tax payer erase all
4 times quarterly infraction in the past in lieu of clean slate in the future
Quarterly returns on or before the 60th day
Final adjustment return 15 day of the 4th month from the close of the Legislative measures not only applied but also to administrative issuances
taxable year So a revenue memorandum circular by the BIR should be prospective in
Calendar year- April 15 application a ruling issued by BIR prospective in application
Close of fiscal year This rule on prospectivity or non retroactivity not just principle codified
under NIRC
First quarter- paid the tax30M Sec 246 of the NIRC
2nd- 20M Regarding non retroactivity of rulings and other administrative issuances
3rd- 50M No retroactivity save for exception stated by sec 246
4th- suffered heavy losses such that as of the end of 4th quarter ultimate tax Exceptions founded on fraud or misrepresentations committed by tax payer
liability is only 50M Retroactive application of ruling
Thus there was an overpayment of 50M Misrepresented certain facts to BIR
Can file claim of refund for 50M Ruling founded on substantially different set of facts as that found by the
tax payer
What if X did this, did not file a claim for refund
For 2012, quarter 1 10m liability, declared tax credit of 50M
Principle of non retroactivity or prospectively viewed as clashing with
another doctrine- of no estoppels against the government
Government not bound by mistakes of its agents
Suppose that Congress passed a NIR tax law
IRT law imposed tax on process marine products
Tax payer X engaged in packing marine products
Question of X is packing same as processing- not clear whether his act
falling under provision of the law
Interpreted as the same or in another way not considered as processing-
either interpretation of BIR
CIR comes up with a ruling, X asked the CI to rule on the particular issue
Packing is not processing- ruling of CIR
When the CIR ruled this way X did not pay any IRT anymore
Problem- a new CIR installed and new CIR saw the ruling and said that the
ruling is wrong
CIR issued a revenue memorandum circular- says there that packing
considered as processing and all prior ruling contrary would be considered
as null and void no longer applicable
New circular, X was made liable to IRT
Should X pay the new IRT? Tax on process marine products? Of course
valid interpretation of the law
Should X be made to pay back taxes from the time of effectivity of new
IRT
After effectivity of the ruling or retroactive
No retroactive application assessing X from the moment the law is passed
Back taxes
Government will argue that government cannot be bound by the mistakes
of its agents
Argue on the line that previous ruling is erroneous cannot bind government
Q: Should X be made liable for back taxes on this theory of non estoppels
of the government?
A: No cannot be made liable for back taxes
Because of principle of non retroactivity of rulings and other administrative
issuances
Made prospective in application
Administrative issuance must be made prospective in application
X relied on a valid ruling and thus any change of interpretation should be
made prospective in application
Why can’t we not apply the principle of non estoppels of the government
by the mistakes of its agents- because, in this situation was the old ruling a
valid ruling? Law not clear w/n packing is processing
Conformable with provision of law administrative interpretation with
provision of law- valid ruling
Second act of BIR issuance of revenue memorandum circular is also a valid
circular- law can be interpreted either way
Any interpretation here both are considered as valid interpretations- both
considered as valid interpretation government cannot speak of mistake
error committed by agent of the government
Compare with, the BIR through CIR issued a revenue memo circular saying
that those who wrongly thought that liable for a tax but not turned out for
non liability their situation falls under concept of solutio in debiti under the
civil code
Thus, these persons have period of 6 years to claim for refund- wrongful
payment of a tax and wrongful receipt of payment- the tax payer has period
of 6 years to file a claim for refund
X relying on the circular filed a claim for refund filed a claim for 4 years
Problem when new CIR installed new CIR saw the circular and issued a
revenue memorandum circular that those who thought wrongly that they
are liable for a tax but are not does not fall under solution in debiti- case
governed by sec 229 of NIRC- only 2 years to claim refund
Sec 229- In cases of overpayment erroneous payment illegal
payment and payment penalties not authorized by law
Covers erroneous payment- 2 years to file claim for refund not 6 years
New CIR denied X claim for refund because of prescription
X complained on the ground that there cannot be retroactive application of
rulings and other admin issuances including circulars
Change in interpretation by new memo give prospective effect and not
prejudice the claim of X under the old circular
Government countered that it cannot be bound by mistakes of agents
BIR is correct because tax payer cannot invoke the principle of non
retroactivity because apply the principle that government not bound by
mistakes of the agents
Any period of prescription should be fixed by law not fixed by circular or
regulation it is fixed by a law enacted by congress
Law enacted by congress providing prescription for taxes is the NIRC sec
229- only one period to file claim for refund which is 2 years
Covers wrongful erroneous payment
Old CIR issued that revenue memo circular- 6 years period to file claim for
refund interpretation is not conformable with law- law very specific 2 year
period to file claim for refund
Circular is void- did not exists no right cannot be traced from a void act
never issued at all tax payer cannot claim any right pursuant to the void act
This new circular comply with provision of law and this circular is actually
a curative circular because designed to cure the provisions of the old void
circular clarify that old circular is null and void because it violated
provisions of the NIRC
Curative in effect given retroactive application
Apply not provision of circular but provision of the law sec 229
This circular may be given retroactive application
Principle of non retroactivity as distinguished with no estoppels against
government
Income taxation
Dealing with tax on ones right to earn an income
Misconception that income tax is a tax on persons- not a tax on a person
Touchstone of liability is not taxable person but on a right- excise tax
Right to earn an income
Find out if there is an income to tax
Income: simplest definition of income is any flow of wealth other than a
return of capital
Any wealth that goes to a person might potentially be an income determine
whether that flow of wealth is a mere return of capital or it is on top of a
return of a capital
Not return of capital it is potentially income
If capital cannot treat as income
How to know if what is received by a person is capital and is not income?
If what has been received by a person is the resource itself or wealth itself
then he has received capital
But if received the service of his wealth then that is an income
Fruits of the wealth considered as income
Resource of person is capital the outcome of using this resource in order to
generate more wealth is the income
Receipt by a person it is capital not income not capital potentially an
income
1K pesos borrowed by classmate
After sometime paid back the 1K- received wealth from a mere receivable
turned into cash already within your control, but your receipt is mere return
of capital not considered as income
But if received 1050 pesos for interest because used money for sometime
the 50 pesos is income from original 1K you used to gain more wealth on
top of capital is income

In determining whether income exists there are certain tests to follow
An income will only be taxable once the requirements are complied with
1. There must be gain
2. Gain realized
3. And gain not excluded by law
Know when there is a gain the gain here can be an actual gain or a
presumed gain
Sometimes we can refer to gains as constructive gains
Realization of a gain may be actual
Realized actual gain when if a taxpayer obtains physical custody control of
the income
Borrow 1M interest at 1 years and paid 1.1M given money to me I have
actually realized a gain physical possession of the gain
Constructive realization of a gain- if the tax payer gains control over the
income without necessarily getting physical custody of the income
Apply control test here
Ex:
Bank account- earned interest income – can already be taxed by
government even if not withdrawn
Have control over it anytime you may decide to withdraw you can
withdraw control over income
Might not have gained physical custody because with the bank but control
is with you get the money anytime you want
Constructively received the income- taxable by government
Gains realized presumptively
Law presumed the gain doesn’t matter w/n a tax payer would actually be
gaining or not
Not concerned of the law will enjoy actually a gain
Law already presumed the existence of the gain
Example of presumptive realization of income:
Sales of real property classified as capital asset
Sale of real property classified as capital asset subject to CPG of sale of
real property at a rate of 6% of selling price of fair market value whichever
is higher
Selling price or fair market value whichever is higher not the gain
Not concerned about gain can happen that X brought property for 1M pesos
because that is FMV at the time he bought it
X needed money badly after buying the property- he had to sell the
property and sold in bargain price of 800k only
X did not gain, lost 200K
Subject of income tax- sale of real property classified as capital asset-
presumed gain
Basis of tax will remain to be 1M- 6% of 1M ignoring the fact X sustained
a loss
Gains could be presumptively realized by tax payers
Validity of presumptive recognition by an income long upheld by SC
CREBA v. Exec sec
Reiterated the validity of presumptively recognition of an income
Recognition of gains
For this purpose gains can be recognized through actual constructive or
presumptively
X individual engaged in business
Business of X earned income worth 6M
Out of the 6M X will take 3m only while other 3M shall be retained by the
business
To determine tax liability of X what is the tax base: 6M because that is the
income he earned during the year subject to his control even if he actually
took 3M the entire 6M subject to his disposition
6M will be added to gross income of X together with all other income of X
part of gross income after deducting deductions and exemptions subject to
scheduler rates
XYZ partnership earned income of 6M
Partners said that they will get a portion of that income only take out 1M
each partner from the 6M
Assume further that XYZ general professional partnership
Determine the income tax liabilities based on these transactions
Will XYZ partnership liable for income tax?
A general professional partnership not liable for income tax
Not an income tax payer general professional partnership
Individual partners tax payers- based on their individual capacities
How much do we include in their tax bases?
Include 2M each or 1M each?
Retain 3M to recapitalize buy books improve office
To determine liabilities for income tax- will it be 2M or 1M per partner- sec
26 of NIRC
Inclusion is 2m per partner- determination of liability regarding income out
of a GPP the amount received whether actually or constructively we will
include
1M actually received
But 2M is the amount they have constructively received
Constructive receipt- might not have physical custody but has the one who
has control
Check who is the one who has control over the income: the disposition of
the 6M controlled by the partners maintain control over 6M income apply
principle of constructive recognition or receipt of income
2M we include it as part of gross income of the individual partner
Let us assume that what we have is XYZ partnership but this time a
business partnership
Income of 6M partners decided to take out 1M per partner out of 6M profits
of partnership
Income tax liabilities- XYZ partnership subject to income tax
Income of 6M subject to corporate tax rate of 30%
1.8M tax
Therefore the income after tax of the partnership: 4.2M
Now from the 4.2M, the partners took 1M each
Will there be a different tax for that amount given to the partners received
by the partners?
Q:Is there income tax on part of the partners?
A: Yes the tax base is
1M? or 1.4M per partner?
To determine the tax base sec 73 D- 1.4M because principle of constructive
recognition or realization of income deemed constructively received by the
partners
Liability tax base based on 1.4M do not make part of gross income
Subjected to final tax on dividends- because a business
partnership is liable for a tax as it were a corporation
Partnership for tax purposes like a corporation
Distributive share of partnership profits in a business is subject to tax as if
it were dividends- there will be liability for dividends tax
10%
Subject to final tax complete settlement of tax liability not part of gross
income
XYZ corporation earned income of 6M out of which 3M declared as
dividends
Will corporation be liable for income tax? Yes at a rate of 30% tax base is
6M
Income after tax of corporation shall be 4.2M
Out of 4.2 M 3M declared by way of dividends- received by the
shareholders
Will there be an income tax to be received by the shareholder?
Yes what is the tax base
Will it be 4.2M or 3M?
Dividends tax 3M not 4.2M
We don’t apply constructive receipt of income- no such thing in
corporation
In the case of X an individual as a sole proprietor- earned by the business
Because entire amount subject to his full disposition even took
out less than what was earned
GPP- to determine liability of each partner- entire gross income divided by
3- there is constructive recognition of income- who has control over
recognition of income? XYZ earned- who determines how much
distributed by the partners- the partners determines who will receive
Partners have full control over disposition of the entire 6M
Business partnership- income after tax of partnership is 4.2M
Partners took 1M each- liability for income tax 4.2 / 3 disregard the actual
receipt apply constructive receipt
Corporations- income after tax of corporation 4.2M out of 4.2M 3M
declared as dividends- in a corporation who decides how much will be
declared as dividends the board of directors
Those who receive the dividends are not the same persons who determines
declaration of dividends
Don’t apply principle of constructive recognition of income
Dividends tax apply to 3M
Is a business partnership taxed similarly with a corporation but not in all
respects- business partnership concept of constructive recognition of
income
Liability for income tax
Find out who are the different income tax payers greatly affect analysis of
liability for income tax payers
Individuals corporations estate and trusts
Any other income tax payer will not fall under this falls under sub-
classification
Income tax payers:
 Resident citizen
 Nonresident citizen
 Nonresident alien not engaged in trade and business
 Non resident alien engaged in trade and business
 Resident aliens
Note: Tax payer is Filipino presumption of law he is a resident citizen
“Every Filipino presumed to be a resident citizen”
Claim nonresident citizen it is his burden to prove non residency
Prove basis of claim
Nonresident citizens
Sec 22 E of NIRC
Those Filipinos physically present abroad with permanent intention to
remain there
P living in the PH with intention to reside in foreign country
Work requires them to be physically present abroad
Intent to permanently reside in foreign country
Don’t have intent but because of work physically present abroad
Stayed to 200 days in a year in Europe
Resident of PH even if stayed abroad most of the time
200 days most of the time during the year notwithstanding fact that you are
a resident
2 situations to use 180 day rule
1. OFW- requirement that work should require physically abroad all
the time
2. Tax treaties between PH and another country most is not all tax
treaties with other countries contain 180 day rule
Provision in RP US tax treaty
Subject of one goes to another state that PH taxable only in the US
Applicable if tax payer will claim applicability of tax treaty form legal
basis
Non Filipinos residing in the PH
Non resident aliens engaged in trade or business
180 day stay in the PH non resident alien
Alien aggregate considered as engaged in business presumed to be engaged
in business even if no actual income earned or studying here in BS
4 main kinds of tax payers
 Individuals- resident nonresident citizen
 Non resident aliens not engaged in trade or business
 Corporations
 Estates and trusts
Non Filipinos stay in PH for an aggregate period for more than 180 days
180 day period not necessary continuous for as long as aggregate period of
180 days
Alien stayed for first 3 months then went back and stayed for another 4
months during the year
Alien treated by law as if engaged in business
Not requiring actual engaging in business
Alien not residing here but stays for more than 180 days- non resident alien
engaged in business and trade
NO resident alien not engaged in trade or business less than 180 days
Not engaged in business
Transient visitors- brief period stay only
Stay for only limited period in a year for some other purposes
Concerts for example
Special category- various kinds
Special because of some special rules governing them
Alien employee of a regional HQ of a multinational co doing business in
the PH
Minimum wage earners- special because of some special rules governing
them
Individual income tax payers- important to know classification
Person is resident citizen- subject to tax for every income sourced within or
without the PH- liability for income tax
While all the others except for special, are liable for income tax for every
income sourced within the PH
Income sourced without will no longer taxed
Nonresident citizens and non resident aliens- impose taxes on their income
from without the PH- present law what will be taxed income sourced within
the PH
Nonresident citizens non resident aliens engaged or not engaged n
business- income sourced from the PH
Individual engaged in business- basis is net income of tax payer
Not engaged in trade business or practice of profession subject to tax base
on his gross income
If a taxpayer is NRA engaged in trade or business because engaged in trade
and business his liable for income sourced from within based on his net
income
NRA not engaged n business- income sourced from within but from his
gross income sourced from within at a rate of 25%
Every transaction of NRA alien not engaged of alien subject to final
withholding tax of 25%
Finance or produce a concert of foreign artist- invited a foreign artist
Pay her a certain amount- 100K dollars for performance
Present law required before give payment of 100K withhold the 25K
dollars tax
Obligation is to remit to PH government- run after the withholder not the
foreign artist
PH authorities will no longer have jurisdiction over her
You as promoter or producer will be liable for the tax
Final tax- reason: NRA normally transient visitors here for a brief moment
Efficiently administer taxes any person transacting with them is
liable for the tax as WH agents
Engaged as counsel for an artist who will be holding concerts here and
abroad- you are the artist holding concert here and abroad
Enter into contracts in various countries tax liabilities differ
100K dollars- stipulate which law is applicable in the situation because no
stipulation applicable might not know the law of a country especially for
tax liabilities
Foreign artist- 100K dollars no stipulation as to what law applicable-
guessing what is tax implication of the contract
100K is net of all applicable taxes
Whoever will be paying pay 100K regardless of any tax implication or not
bothered by it
Special ones- special rules individual tax payers
Special aliens
Those non Filipinos hired as employees of regional area HQ of
multinational companies in PH even offshore banking units
Special because subject to preferential tax rate- 15% of whatever is their
gross compensation income
If for instance American hired by offshore banking unit in PH- bank in US
doing business in PH
American subject to tax at a rate of 15% regarding the compensation
income
If the alien would have income from all other sources all liability is based
on classification
Resident alien
Compensation income 15% only
For other classes of income other rate
May Filipinos fall under this- if a Filipino is occupying a position similar to
that of an alien regional HQ of a multinational company- this company
hired the services of an American occupy assistant vice president, Filipino
also hired at the same rate
Both of them qualify under special tax treatment of 15%- tax equalizer for
purpose of compensation income- preferential income rate imposed also
occupying position similar with the one occupied by the alien
Minimum wage earners special also
RA 9504
MWE not subject to income taxes
Corporations
Involving any aggregation of persons 2 or more persons combining their
property industry in a common funds with dividing profits among
themselves
Partnership in classification of corporation also included
Business partnership
But not a general professional partnership not income tax payer
Any aggregation of persons impelled by a business motive- not limited to
individuals you can have an aggregation of 2 or more juridical persons
Joint venture- separate corporation treated except again for joint venture
that are exempted by sec 22 (b) of NIRC
Regarding corporations joint ventures are included in corporations except
for joint ventures for construction or infrastructure projects and those with
etc etc look up sec 22
Example:
I own several parcels of land- several equipments for construction-
contribute my raw land construct road networks on my raw land and
thereafter sellable divide the salable areas are there and lets do it 40% of
saleable areas 60% go to you
I pick one you pick another etc- distribution
Up to us to sell parcels of land
Developed that raw land and decided to take respective shares
How many tax payers in that situation?
2 tax payers only- all that is done is develop raw land
Contributed finances capabilities and equipment for purpose of
construction road network
Other situation
Contribute raw land- sell saleable lands and get respective shares I get 40%
of sales 60% of sale goes to you after expenses deduced
3 tax payers in this case
Joint venture included
Because joint venture not solely for construction or infrastructure not
engaged in selling now doing its own business thus liable for a tax as if it
were a corporation
Own a land propose to construct building on the land
6 floors I get the 2 floors you get 4 floors
Extent of agreement
No new corporate tax payer
After constructing the building lease portion of building get rentals- decide
to part with rentals take respective share of rentals- separate corporate
entity exists now
For a joint venture regarding construction or infrastructure project not to
become a separate entity- joint venture is unregistered join venture if
voluntary registered giving separate entity mere application with SEC
certificate recognizing separate juridical personality other than the 2 tax
payers
Even partnership treated as corporations
Even an unregistered partnership treated as corporate entity
Example:
Contribute certain amount buy notebooks to sell during quiz
Profit
Liability that of a corporation
Unregistered partnership main purpose of aggregate money property was
for a business motive
X is a very wealthy individual
When he died he had several properties he left behind
Properties distributed to heirs 123
Made use of respective shares made income out of this
How will the heirs be liable for income tax
Liable as individuals
Took their own shares before making use of their own shares for business
Heris 123 cannot agree to how to distribute
Did not take any portion from estate
Appointed somebody to continue with business of X
Income generated from property 123 distribute among themselves
As individuals, estate, corporation ?
As a corporation- decided to not to get shares they pulled resources
together- actually pulled resources for a business motive to continue with
the business
X died heirs 123 cannot agree
Heir 1 petition for judicial settlement of estate
Heir 1 continued with business as administrator
That income liability for income taxes be settled- estate tax payer under
judicial settlement tax payer by its own right
Estate entitled to personal exemption
Yes it is entitled-
Single individuals personal exemption for 50K
RA 8424
Estate given basic personal exemption for 20K before
Now the adjustment only covers individuals not estates and trust
Amount remain to be 20K pesos for estate
When a person becomes liable as an individual as a corporate entity and as
a estate
Estate only under judicial settlement in its own right for purpose of income
taxation
For purpose of estate taxation whether judicial or extrajudicial settlement
liable for estate tax
Corporations
Corporate tax payer even if arising from unregistered partnerships
X died left behind heirs 123
Heirs 123 cannot agree as to themselves how to divide the parcel o land left
behind
Since cannot agree how to divide they agreed to subdivide parcel of land
and then sell subdivided areas to other persons
Whatever proceeds of the sales are the ones to be divided among them to
facilitate distribution between them
No corporate tax payer here because- selling aspect was merely to facilitate
distribution of estate
Subdivision and selling facilitate estate not really for profit
Note: More of facilitating distribution of estate and so cannot speak here of
a corporate tax payer
X and Y bought a parcel of land co owned and registered
2011- co ownership
2012 relationship got sour
Decided to part ways and process of them parting ways part properties they
co owned
Initially sold parcel of land acquired in 2010 and in same year sold 2011
properties
Will X and Y be liable for corporate taxes?
No because just acquiring properties on a co-ownership basis
Being co owners no presumption of unregistered partnership
The selling aspect to facilitate the termination of co ownership
Not impelled by a business motive no corporate tax payer
Corporations classified for tax purposes as follow
Domestic corporation and foreign corporation
Within and without liable for every income sourced within the PH
How to know if corporation is domestic or not?
Corporation 60% owned by Filipinos- not necessarily
Note: Not the control but the place of incorporation as the test
Incorporated using PH laws- domestic even if entirely foreign owned
Foreign owned- formed using laws of other countries even if 100% PH
owned- treated as foreign corp
Test of incorporation not control test applied
Resident foreign
Doing business in the PH
Nonresident foreign corporation
not doing business in PH
implication: gross income is tax base
and its gross at a rate of 30%- not doing business in PH- every transaction
is subject to FWH tax
Resident foreign corporation
Basis is net income
Estates
Income tax payer- if estate is under judicial settlement
If not, the liability for income tax maybe by the heirs as individuals or by
the heirs as a corporate entity
Trusts
Obligations imposed by a person on his own properties
Oblicon- obligation should be one which involves two persons obligor and
oblige
But in a trust a person imposes obligation on his own properties
X owning a building
X give property to Y so that y will take charge of property and in return this
taking charge of Y can be for the benefit of X or another person Z
X- Trustor
Y-Trustee
Z beneficiary
Can create for his own beneficiary by X
Trust created by X in favor of Y for benefit of Z
Tax angle is:
Because entrusted the building to Y, given certain authorities to Y like
profit relating purposes
Y generating income arising from use of the building
Who will be responsible for the taxes for the particular income
Depend on certain situations:
X said to Y for benefit of Z
Responsible for taxes on the income- if tenor of trust in this manner
Trust created by X in favor of Y for benefit of Z
Anytime X wants to take back all income he takes back- consider basic test
control test who controls disposition of income- it is X
Liability of income tax lies upon X
X says to Y take charge of building for benefit of Z
X will never take back the income but as to building I might want to take
back the building
Responsible for taxes on income? It is trustee acting for the beneficiary
Beneficiary benefiting from the particular trust which cannot be revoked by
X as to its income
X said to Y take charge of building use the building never ever take back
income and building always be for Z
Who will be responsible for income taxes?
It is the trustee acting for the trust itself
Tax payer in its own right
Irrevocable trust and irrevocability is both to properties subject of the trust
and as well as the income thereof
Irrevocable to income not to property- trustee liable acting for beneficiary
Irrevocable as to property not to income- trustor control
Separate tax payer as tax if both irrevocable
Estate planning- remove property from gross properties
Safety mechanisms in the trust to achieve what you want
Set up a trust fund for your child
5M or 10M pesos
Child to finish college- set up mechanism in trust agreement that child will
be able to take trust fund if able to finish AB course
Trustee not to release amount unless certain conditions are fulfilled
Resident citizens liable on every income sourced w/in w/o
All others income sourced from within
Domestic liable for every income w/in and w/o
Foreign income sourced from within
How to know if within or without
Depend on kind of income involved
Test to follow whether income is within or without
X is a Filipino, employed by A corporation domestic,
A corp. has subsidiary in HK as HK corp. nonresident foreign corp.
HK faced problems- necessitating an expert to solve the problem
HK asked parent of corp. A was able to identify X to be best person to
solve problem in HK
X went to fix the problem
Pay you your salary in the Ph on top of that salary in HK all expenses paid
find a place to live etc everything paid for
X receiving both peso and dollar payments- stayed in HK for 9 months
Payments made to X are they sourced from within or without the PH?
Sourced from without both peso and dollars-
Apply test in NIRC- sec 42
Income sourced from within and without- service rendered income
Test is where was the service performed- service performed outside
Do not look at who makes the payment in what currency or who received
Service performed in HK
Service rendered and service rendered abroad service sourced without
An alien was sent to Ph rendered service in PH but payment made by his
mother employer abroad- sourced from within since service done here in
PH
For income for service rendered test is place of service rendered
Are those income subject to PH income tax?
Is X a resident or nonresident
Resident- taxable
Nonresident- not taxable
Nonresident- Filipino whose work required him to be physically present
abroad most of the time- 9months
Not taxable here in PH
X Filipino, residing in Japan
Owns apartment in Japan
Sold the land and apartment to Y another Filipino
Deed of sale executed in the PH- payment made in PH
X made a gain out of the transaction
Would that gain be taxable here in the PH?
Transaction took place in PH execution of sale in PH payment made in PH
property located in Japan
Is the transaction subject to CGT on real property classified as capital
asset?
Note: No territoriality not located in H cannot impose our system of
taxation
Should the gain be included as part of income tax in the PH- as part of
gross income in PH
X is a non resident- sourced from within only liability
The income on the sale of land is gains arising from test of real property-
based on location of the property involved
Abroad property sourced from without
In PH- sourced within
Not taxable
Stock dividends
Not taxable for income tax
Declaration increase number of shares not really wealth- same extent of
wealth
Same percentage of ownership in corporation
Only increase number of shares not wealth
#3
Recovery of wrongly paid income tax
Is it income at year of recovery? No because it is mere return of
capital
Erroneously paid real property tax- qualifications
If by paying RPT the tax payer declared a deduction from gross
income, and the deduction in gross income benefited the tax payer for
purpose of paying income tax- tax benefit- pay income tax
Even on its face giving rise to mere return of capital- there is
benefit granted to tax payer deduction claimed from a RPT tax payment
#5
CIR v. Petron
Tax payer believe in good faith that TCC is valid and initially
validated by government that a post audit would show that it was
fraudulently obtained- not liable for the tax
Good faith for Petron should not be basis for Petron to impose additional
taxes
Fraudulently issued TCC- no payment of a tax
Government cannot be barred by the errors fraud committed by the agents
But there can be surcharges penalties and interest because there was fraud
Source rules:
Services rendered payment for services
Rendered sales of real properties
X corp. domestic corp. borrowed money from Y which is nonresident
foreign corp., with 1Million tax
10% per annum
X paid Y paid Y 1.1M dollars
Transaction took place in office of Y and payment made in the office of Y
The 1.1M dollars is there income there? Yes 1M not income return of
capital but 100K is income
Is 100K sourced from within or without the PH?
X domestic corp. should withhold the interest income if within the PH
Income sourced within the PH
Interest payment by a resident of the PH
Payment of interest by X corp. sourced from within the PH
Interest income- residence of the debtor is the rule
Thus X should withhold the interest withholding tax income
Japanese will develop for X corp. a software
J makes design in Japan payment in US dollars but J will retain ownership
over the software but X is licensed to make use of the software here in the X corporation
PH Are proceeds part of taxable income of X corporation?
If X will pays J, should X withhold taxes of the income? Proceeds of life insurance are excluded whether it be W and X corp.

Not a payment for service rendered Are proceeds part of gross estate of A?
Nature of payment is a royalty payment- payment for use of IP property W yes, part of gross estate
Royalty payment where is the subject of the royalty to be exercised X designation of W and X are silent as to whether revocable or irrevocable
Exercise in the PH- income sourced from within the PH Because silent presumed to be revocable beneficiaries

X bought some items merchandise in HK X irrevocable beneficiary- excluded from gross estate
Went back to PH sold the items in PH made income out of the same
Income is sourced from within Premiums paid by X corp. are they deductible from gross income of X
corp.?
If X bought items in PH brought to HK and sold in HK and sold the same #1 insurance- premium paid are deductible in the form of a fringe benefit,
Income sourced from without thus can be declared as part of ordinary or necessary business expense

Items manufactured here in PH by X brought to HK and sold them there #2 non deductible- because Sec 36 of NIRC- prohibits deduction of
Is income sale sourced from w/in or w/o? it is within and without insurance covering life of employee where employee is designated as
Partially within and without beneficiary either directly or indirectly
Manufactured in HK and sold by the manufacturer in the PH- partially
sourced from within and partially without Insurance requires X to pay a premium of 120K per year for a period of 5
Place of sale relevant factor- determine w/in or w/o years and after paying insured for life
Something happens to X during effectivity of policy- pay beneficiary 2M
Manufacture then sales transactions partially within and without pesos
How to know point of sale? However, additional stipulation that if X survives within period of 20 years,
Bought items from HK but here in PH then seller ships the goods, where is X will be able to get 2M
the point of sale
Terms of the shipment X paid premium complete for 5 years 20 years lapsed X survived
Passage of title test: X took the 2M pesos
Where title passed It is taxable income of X- paid 120K x 5 years = 600K total premium
Determine passage of title payment
Tenor or term of shipment Received 2M difference between 2M – total premium paid= flow of wealth
other than return of capital
FOB shipping point- free on board until shipping point- owner loses Amount in excess of 600K will be considered as income
ownership upon moment goods reach the shipping point, from that point at
the risk of the buyer Return of premium not considered as taxable
But the rest is income- flow of wealth
FOB destination- owner does not lose ownership until after destination-
passage of title occurs in the PH 2. Gifts bequests and devices
Excluded because donors tax
For income to be taxable there must be a gain- gain must have been Technically income but not taxable income subject to donors tax
realized, the gain must not be excluded
Bequests or device- subject to estate tax
Excluded items Refers to any form of inheritance- not considered as taxable income
Gen rule: every gain is taxable- every income taxable unless identify basis
for non taxability If gift is remuneratory donation, there is still income
Incumbent for tax payer is excluded- if cannot show it will be Ex:
subject to tax Gift given because rendered valuable service
Entire amount given by reason of service you rendered which is reason for
Sec 32-B giving not really out of pure liberality love or affection
Income items excluded
By reason of constitution 3. Compensation for personal injuries or sickness
By reason of special law Whether amount be granted by suit or otherwise not taxable
By reason of sec 32-B
Car and a bus
Income item excluded- Collision
1. Proceeds of life insurance Bus wasak- driver survived
Not taxable because treated by law as indemnity Because of negligence of the car
Only for tax purposes B is also the owner of the bus
Bus with B for 2 years already and it was wrecked- costing B 1M pesos but
X has a key officer A in X corporation because total wrecked, court awarded 1.4M which is current replacement
2 insurances taken by X covering life of A cost
a. A covered where he can choose beneficiary he chose W his wife
b. X chose himself as beneficiary B sued A
Court awarded damages in favor of B
Both insurances X corp. was one paying premium Judgment awarded and satisfied
Supposing A dies, and beneficiaries receives the insurance as beneficiary B granted
W life insurance not taxable Amount medical and hospitalization expense
Loss of earnings- not able to work for sometime
-moral damages
Lost profits- for unable to use bus for profits
Amount for medication and hospitalization- excluded not taxable
Loss profits- yes taxable- profit related
Lucrum cessum- loss of profits
Loss of earning capacity of B- by reason of not able to work loss of earning
capacity- excluded because that is a compensation for a personal injury, not
able to work because of injuries compensation for personal injury
He did not actually work- why make use of a rule to apply to people who
can work to those who cant
Bus replacement cost of 1.4M
Should that be excluded?
Amount awarded more than the cost
Gain here is 400K- do not include only 50% because 2 years holding period
is more than 1 year
Capital gain- holding period rule, more than a year consider only
50%
4. Income exempt under treaties
Excluded
In order to be excluded should claim applicability of that treaty
Before a tax payer can claim exemption under a treaty must ask for
confirmatory ruling from the international tax affairs division of the BIR
that the transaction is exempt really pursuant to a treaty
Employment related income- retirement and separation payments
Even if payment is a retirement payment- still arising from e-e generally
taxable
But certain income payment that are not taxable
Break to 2 general kinds
Reasonable Private benefit plan
Employer sets up trust fund the function of which is for the
purpose of paying retiring employees- income of the fun for that fund itself,
employer cannot get income of the fund, only purpose to pay retiring
employees
Employer manages the fund the income solely used for that
purpose of paying retirement employees
Notify BIR to set up trust fund and set up confirmatory ruling to
be a reasonable private benefit plan- BIR approved retirement plan
If retirement payment is payment by employers with reasonable
private benefit fund-
Excluded if comply with these requisites:
a. Employee must be at least 50 years old
b. Rendered service for employer for a period of 10 years-
no need continuous but at least 10 years
c. Employees first time to avail of exemption
If 2nd time of employee to retire- but in the past did not avail of
any exemption before, first time to avail of exemption, it is
possible
If 49 years old does not qualify must be at least 50 years old
w/o private reasonable benefit plan
a. possibility of exemption under what situation- employee must be
at least 60 years old but not more than 65
b. rendered service for employer for at least 5 years
Exemption- granted by reason of CBA
 paid by employers by reason of having a CBA- excluded by
taxation
 separation pay
 excluded if the cause of separation is involuntary mode:
 death
 sickness
 an authorized cause for removal- redundancy retrenchment
installation of labor saving device
 any separation pay granted is not taxable
If cause of separation is voluntary- the retirement pay granted would be
considered taxable
Note: voluntarily severed employment not entitled to separation pay- but if
company policy that allows separation pay- it is taxable in this case
Employers must WH wages of employees
Other benefits other receipts pursuant to e-e relationship
a. Bonuses 13th month pay other similar packages
Rule: only 1st 30K will be excluded in excess of 30K taxable already
rule is accumulate all of bonuses in whatever form it may be- get
all of these only first 30K excluded
b. Leave credits
Q: can a leave credit be considered as a income?
Depend on situation because if leave credit something you have to avail of
otherwise forfeit it- whatever is usually salary is your income
3 days of leave every month- did not go to work on 3 days- same monthly
salary basis of taxes- consumed leave credits
But if allow commutation of leave credits or conversion to cash not able to
utilize leave credits that converted into cash and that may be become part
of your income- rule is there is allowance of leave credits to monetized
value
If monetized value of leave credit of government employee, not taxable but
monetized value of leave credits of cash value of 1 st ten days- any cash
value beyond 10 day period is taxable
Leave credits commuted at the end of the service
At time of retirement- convert leave credits
Tax treatment of leave credits commuted to cash at end of service- rule
same with retirement or separation pay
Terminal leave pay- not because life at terminal stage but
employment at terminal stage already
Rules the same with separation or retirement payments
e-e relationship contributions of employers to our social benefits
SSS GSIS Phil health
Social benefits- there is corresponding contribution both e and e
What is included what is excluded?
Monthly gross pay- 50K
WH tax deducted 5K pesos
Phil health- 500 pesos
Pag ibig- 500 pesos
SSS- 1000
Union dues- 500
Net pay- 42,500
Loan from employer- 2,500
Take home pay- 40,000
Basis of taxable income for this month is 47,500
Phil health- employer contributed 500 also
Pagibig 500
SSS 1000
Where to get 47,500
Monthly gross pay taxable except if there is excluded items:
Phil health
SSS
Pag ibig
Union dues
Contribution to these are not taxable and so with the employers share in the
social benefit contributions
These are not taxable
What if you gave to pagibig contribution beyond those mandated by law- Receipt other than return of capital is 4M
gave SSS or GSIS beyond those mandated by law
SSS- mandated due is 1K only then ask SSS through employer to Gross income
allocate 3K for your contribution- it is allowed and treat that as if Less excluded
investments on your part these are contribution above than the ones Less costs
mandated by law Less income items subjected to final taxes

Revenue memo circular 55-2011 Expenses amount to spend in order to engage in trade or business
For contribution beyond what is required by the law- treated as investment Final tax- complete satisfaction to all income tax liabilities corresponding
considered as part of taxable income to that income
Under NIRC no distinction- whether beyond mandated by law or
not Income items subject to final tax
As long as SSS GSIS Philhealth- excluded Sec 24
Corp sec 27
The amounts that you receive by way of benefits from SSS or GSIS would
be considered as non taxable including those from Philhealth Royalties prizes interest winnings for individuals normally subject to Finals
Maternity leave- receive from SSS of GSIS maternity leave pay- tax at 20%
not taxable social benefits from social legislation not taxable a. Royalties intellectual property usage
Except royalties from book literary works musical compositions- subject to
Sec 32-B 10% Final tax
 Income received by government of the PH will not be taxable
 Income received by foreign governments not taxable Wrote a book
Reason: international comity Sold in PH and abroad
How to tax royalties you received?
Pensions received by war veterans from the PH or from US veterans affairs Within PH- tax rate of 10%
not taxable Abroad- territoriality
Note: Make it part of gross income
Gains from redemption of shares in mutual fund
Gains realized by investor of redemption shares in mutual funds Gross income of sec 32-A
If extra funds with you- and you don’t want your funds to sleep- Make part of gross income if not subjected to a final tax
consider avail services of mutual funds If part of final tax- don’t make it part of gross income anymore because full
Offering mutual funds and these are- buy a share of stock not in the settlement of tax liabilities already
publicly listed corps that we see in the PSE or regular stock brokers but buy
share a stock of a company engaged in mutual funds Prizes and winnings
Investor in that particular company that company will make use 20 % except for prizes not exceeding 10K pesos- make it part of gross
of your investment for investing in various modes of investment including income
shares of public listed companies- engaged in active trading Winnings regardless of amount 20% Final tax

Money added to the pool of funds of mutual fund company used for Won 5K pesos subjected to Final tax
investment and everyday it will be generating income or losses depending
on its trading activities Prize- by reason of talent labor effort
At end of day value of shares different by reason of its trading Winning- pure luck
activities
Won by default in singing contest- still a prize not a winning
NET asset value per share (NAVPS)- change everyday
In order to gain or lose, have to compare with NAVPS at the time Except for PCSO sponsored winnings- not taxable
you bought
b. Interest income
Redeem share holdings in that mutual fund company- whatever gain May be subject to final tax if interest income from a bank deposit or
generated is not taxable deposit substitute
Excluded from the operation of income tax system
Bank deposits- sayings account current account checking account time
Income item not excluded it is taxable deposit
Every income taxable unless excluded by law- every income Usual bank deposits
considered as part of gross income Earn interest income from bank deposit- subject to final tax of 20%

Gross income- items eliminate from GI is those that are excluded by law
X engaged in selling 1000 units of appliance at 10K per appliance bought
at 6K per appliance
X generate 10Million pesos bought this for 6 Million pesos giving him
4million pesos in gain
What is part of Gross income- what is gross?
4 million only- 10 Million is gross sales or receipts
Income is any flow of wealth other than any return of capital
6 M return of capital- cost
4M- flow of wealth less the return of capital
c. Deposit substitute
Alternative forms of borrowing from the public- relationship is that of
simple loan (deposit account)
What is the public?
Public means 20 or more persons to be considered as public
If you borrow money from the public you are actually offering a security-
under securities regulation code required to securitized your borrowing- get
the consent and license from SEC solely for purpose of borrowing money
from the public, reportorial and licensing requirements of SEC
When bonds are issued by corporations
Bond is a loan obtained by a corporate borrower from the public and these
are evidenced by certificates of indebtedness- bond coupons- normally
interest bearing
Coupon evidencing the indebtedness and interest bearing- usually the
coupon rate
These bond will have lifespan 85 years 10 years 5 years
But it is more often interest bearing
Borrowing from the public- the public earns interest income
There is a borrowing from the public- if a corporate will float bonds, you
obtained of these bonds whoever issues the bond is required to withhold the
final tax on the bond 20% from a deposit substitute
Interest income tax from others which are not bank deposit or deposit
substitute- no final tax imposed
Lend amount with agreement to pay interest- paid to you with
interest, do I have to withhold the interest income tax of 20%? No because
you are not a bank not required to withhold the interest, only ones is a
interest income in a bank deposit or deposit substitute, not falling within
these 2 categories
Bank deposits interest income not subject to 20% final tax-
interest income from a long term investment- none exempted from taxes
gauge is 5 years
5 year period should not be a result of continuous or repeated renewal of
investment
Time deposit- for 1 year renew for another year then another year, by
reason of successive renewals it reached 5 years
Pre-agreed period at inception it already at least 5 years- long term
investment
Long term investment from a bank deposit
Exclusion applicable only for bank deposits not deposit substitute- do not
exempt latter even if more than 5 years of maturity
Foreign currency deposit of a resident final tax of 7.5%
Dollar account absolutely confidential- earn interest income
subject to 7.5% interest per annum
Nonresident interest income from a foreign currency deposit not subject to
7.5% it is exempted from the final tax
Non residents Foreign currency deposit- exempted
X is a resident peso deposit in BPI, Dollar deposit in Metrobank, dollar
deposit in HSBC HK
Peso deposit in BPI- 20% final tax
Dollar deposit in MBTC- 7.5%
Dollar deposit HSBC- part of gross income
Sourced from without- loan obtained by a non resident- do not
apply 7.5%
Territoriality principle applies also to exemptions
d. Dividends
Are dividends subject to Final tax it depends on a lot of factors
Establish whether cash or property or stock dividend
Stock dividend- not income considering that only increase number of
shares w/o increasing extent of wealth in that corporation
X corp. owned by A and B
A-6M shares
B-4M shares
Stock dividend declaration
Double stocks
A-12M
B-8M
In both instances both still own same extent of interest, 60% and 40%
respectively
Not technically considered as income
Q: Can there be a situation where stock dividend can turn out to be an
income?
1. When there is an option granted by a corporation to choose
between cash/property and stock dividend
Corp in dividend declaration gave option to SH- choose 1 peso per share as
cash dividend or choose 1 share for every share held
Those who opted for cash subjected to dividend tax- opted cash dividend
On stock dividend- if some availed of cash and others availed of stock
dividend
X corp declared the ff: choose 1 peso per share as cash dividend or choose
1 share for every share held
A-6M- availed of stock dividend
B-4M-availed of cash dividend
After stock dividend declaration with option to get cash
A now has 12M shares
B has 4m shares still
A owns 12/16 = 75%
B owns 4/16= 25%
Reduced interest at a rate of 25% after availment of A of stock dividend,
increase extent of interest from orig 60% became 75%
For B reduced participation from orig 40% to 25%
The increase in # in number of shares and correlative interest- subject of
tax
Whatever is value of 6M shares treated as income
2. Sec 73-B of NIRC
When there was a SD declaration which was subsequently redeemed or
cancelled and the manner of such redemption or cancellation is in such a
manner as treated as essentially equivalent to a declaration of a taxable
dividend
Product of learning by congress with experiences with tax payers
X corp.- declared SD today
July 28 2012- 1:1 SD
20M shares in X corp., as of today is there supposed to be a income tax
liability? There is none- only SD declaration- no tax implication
Y corp. today, stated that we will redeem or cancel some of the shares
previously issued shares in past cancelling or retiring those shares
In retiring those shares the SH were paid whatever is their shareholding-
the retirement of share is that taxable, paid value of share because it will be
cancel- there is none only paid your capital, only mere return of capital
Also having no implication
Treated separately no tax implication- mere issuance of stock dividend the
other mere retirement of shares
Taxability:
A corp. today decided to issue SD 20 M shares 1:1 addition 20M shares
issued to SH
After 3 months oct 28, A corp decided to cancel the SD that was previously
issued 3 months ago- 1 peso for every share held
Corporation shelled out 20M pesos
If the 1st branch of transaction and 2nd transaction treated separately there is
no taxability
In its totality, clear intention of corporate stockholder- to declare cash
dividend, to make it appear as not a cash dividend
To earmark non taxability iota of non taxability- the real intent is to declare
cash dividend
A corp really wants to pay 20M by way of cash dividends to SH
Making a provision that redemption or cancellation of a previously
declared SD taxable if treated as essentially equivalent to a declaration of a
taxable dividend

Really a mode of evading payment of dividends tax- then sec 73-B can be
your law to rely on
Treated as taxable dividend
Dividend in stock- taxable, property dividend
Corporation declares its own shares as the dividend
Shares of stock of another corp. as dividends
Owns the share of stock of another corp.- property dividend, taxable
Q: How to tax if they are of a taxable kind?
Domestic corp.- recipient is resident citizen
Sec 24- 10%
Domestic corp. received by a non resident citizen
10%
Domestic corp. received by a resident alien
10%
Domestic corp. received by a non resident alien engaged in business
20%
Domestic corp. received by a non resident alien engaged in business
25%
Domestic corp. received by another domestic corp.
Intracorporate dividend- exempt from tax
X corp. declared dividends the recipient is the parent corp.- non taxable it is
exempt
Domestic corp received by a resident foreign corp
exempt
Domestic corp received by a non resident foreign corp
30% final tax
Exception: possible to reduce to 15%
Tax sparring rule is applicable
Government will spare the collection of some taxes- orig rate 30% reduced
rate is 15%, spare collection of 15% tax
Forego collection of 15% tax- under this rule the gov will forego collection
of 15% is such tax sparred will be allowed as a credit in the country of
origin of the nonresident foreign corporation
X USA multinational company based in US
In the Phil nonresident foreign corp- X did business in PH by creating X
Philippines and under our laws, domestic corp but it is subsidiary of parent
multinational company
X Phil earned income amounting to 100M- tax liability 30%, income after
tax will be 70M
Out of 70M X phil might probably declare dividends
50M declared as dividends
Q: Who will receive the dividends- SH of X Phil, X usa is a fully owned
domestic subsidiary
This 50M subject to tax at rate of
Subject to tax- no longer income of X phil but income of X USA
Income of nonresident foreign corporation- fixed at rate of 30% dividend
declared by domestic received by nonresident foreign corp
50M x 30% =35M will reach X USA
15M dividends tax
X USA corporation based in USA- pay taxes in US
Assume that laws in US similar with PH
X USA being a corp based in US earning in income not only in US but also
abroad
X USA subject to income tax, being a domestic corp in US subject to
income tax for every income sourced from within and w/o the US
In the eyes of US law- income sourced from without the US- X Phil, X
USA liable for income tax
X USA paid taxes already to Ph government subject to final withholding
the 15M taxed paid by X USA here in PH
That same income included in income of X in the US- subject to US again
the same income subjected to PH tax same income subjected to US taxes
PH corp pays taxes here and PH corp income abroad and pays taxes there-
treat income tax from abroad-treat it as tax credit or tax deduction
The same with that of foreign countries- taxes paid in PH may possibly be
allowed be allowed as a credit in the foreign country- tax sparring rule
comes in
Paid to PH government allowed as credit in country of origin allowed as
credit the 30% will not be imposed but only impose 15%, spare collection
of some if that spared tax will be allowed as tax credit in tax payer country
of origin
Reciprocate by reducing tax rate to 15% only
Claim for refund of 15% may be granted
Taxes sparred in the PH should first be allowed as tax credit in country of
origin- if no do not apply tax sparring rule
What if in the US, there are no taxes imposed
In country of origin- we still apply tax sparring rule- the idea because is to
minimize whatever tax liabilities, that idea already achieved by the non
imposition of income tax
DC to DC exempt
DC to RFC exempt
DC to NRFC- 30% subject to tax sparring rule
RFC- DC- part of gross income
No exemption no specific rate
RFC-RFC- gross income
RFC-NRFC- 30% final tax
No tax sparring rule not applicable here
Is resident foreign corp, isn’t it earning income from both within and
without the PH
But it is subject to tax only sourced within the PH
Point is resident foreign corp- declares dividends from what income will it
declare dividends whether be from within or without
Taxable only one sourced from within the PH
Example:
X corp
RFC
Earning income from within and without the PH- 100M and without 50M
Then declared dividends amounting to 100M pesos
Can we say that only sourced from within the PH only? No already out of
total earnings of 150M
100M can be sourced from within and part sourced from without and the
recipient is another NRFC
Liable for taxes only if income sourced from within- 100M combination of
earnings from within and without
How to delineate what is within and what is without?
What portion sourced from within or without? Not part of what is taxable
Applying sec 42: X corp earned income in PH 100M w/o 50M
RFC-NFRC
100M dividend declared
Part of gross income of Y corp NRFC
Will the entire be part? Yes income within is more than 50% of
worldwide income for past 3 years
baliktarin
X corp earned income in PH 50M w/o 100M
Only 1/3 will be part of gross income
Less than 50% of worldwide income
Sec 42 concerning dividends
If dividend declared by domestic corp- sourced from within the PH
Dividend NRFC not doing business in PH- sourced from without
RFC- are foreign corporation doing business in the PH- do business here
and abroad how to know if within and without the PH sec 42 is the basis
Take a look at the income of the resident foreign corporation for past 3
years immediately preceding the dividend declaration
If income within the Ph is at least 50% of the worldwide income
Sourced from within the PH then entire divided is 100% is entire dividend
sourced from within the PH
But if income from within is less than 50% of worldwide income
Pro rata treatment to source dividend whether sourced from within and
without
Ex:
2012 X corp RFC declared dividend of 10M
Income of X for past 3 years immediately preceding dividend declaration
2011 within 70M w/o 15M
2010- within 20M w/o 5M
2009- within 10M w/o 30M
Total: within 100M without 50M
Totally sourced within the PH- worldwide income is 150M- 100M greater
than 50% sourced from within the PH
Partially within and without-Total within 50M, without 100M
Extent of what is within 50/150M- 1/3 of 10M will be sourced from within
2/3 is sourced from without
NRFC-DC part of gross income
NRFC-RFC-
No final tax- income sourced from without because of territoriality
Income sourced from without
Exempt here in PH
NRFC-NRFC
Exempt
Sale of real property classified as capital asset
Subject to final tax at rate of 6% based on selling price or FMV whichever
is higher
Selling price is the actual consideration paid for and not the one indicated
in deed of sale- consideration in DOS lower than real consideration (tax
evasion)
FMV- the value as determined by the BIR or value determined by the
assessor
BIR value- for lands it will be referring to the zonal value of the property
Authorized to divide PH into zones- prescribes real property
values change from zone to zone
Residential area- lower zonal valuation
Value by assessor- tax declaration referring to fair market value not the
assessed value as determined by the assessor
Sold house and lot- X sold to Y for price of 5M pesos
Perusal of transaction
Lot is 1000 sq lot
Zonal valuation of BIR- 2000 pesos per sq meter
Tax declaration- value of 1500 pesos per sq meter
House- tax declaration value for the house = 3.5M
What value used to determine the tax liability?
6% CPG tax based on?
Value of house = 3.5M
Zonal= 2000 pesos x 1000 sq meters = 2Million
Total 5.5M higher than selling price 5M
Make use of 5.5M
Ignore selling price because it is lower
CPG tax imposed on sale of real property classified as capital asset
Barter exchange of property classified as capital asset
Can also be involuntary mode of sales- expropriation is it subject to CPG?
Yes possibly
Sales on execution- involuntary mode also, sheriff selling your property on
execution possible liability of CPG
Judgment debtor did not pay the obligation, the sheriff look for
properties and finds real property subject of levy and sold at public auction-
sheriff issue a sheriffs certificate of sale- from time of issuance of COS is
there liability of CPG?
Moment of registration is there CPG? Or pay CPG to register COS?
Still judgment debtor the owner- he is allowed a period of 1 year
redemption
COS will not yet trigger liability for CPG
Still be after expiration of period of redemption before there is CPG
liability
Registration of COS may be done without payment of CPG tax- before you
can get COS from sheriff the office of clerk of court will require you to pay
governments commission- redemption period has expired after 1 year, there
will not be consolidation of ownership get from sheriff a final COS indicate
no redemption that took place- now liable for CPG tax
Before can register final COS with sheriff pay the CPG tax
CPG tax under normal situations must be paid within period of 30 days
In case of involuntary sales count 30 day period?
Moment of Issuance of COS? No but from the expiration of 1 year period
of redemption- the judgment debtor already lost his right now the owner
and the ROD will be waiting documents you will be submitting
1 year period expires the 30 day period to pay CPG begins
Expiration of period of redemption
Foreclosure sales
1. Judicial
2. Extra judicially- Act 3135- mortgage if indicated in the deed
itself or separate deed to execute extrajudicial means of
foreclosure- if no stipulation then only means of foreclosure is
judicial
Mortgage deed- know the client if mortgagor, do not place the extrajudicial
foreclosure unless demanded by the mortgagee, favorable to mortgagor
Subject to involuntary sale- extrajudicial foreclosure
Done by sheriff notary public art 3135
Schedule the auction sale- proceeded issuance of sheriffs COS- payment of
governments commission
Even sheriff accept request for extrajudicial foreclosure- filling
fee
Once there is a sale made by sheriff by EJS is the owner still the mortgagor
or mortgagee- after COS, still the mortgagor, there is still redemption 1
year begins to run after registration of COS
Might change if the parties are bank and juridical persons
Because of this, the CPG will not yet attach-if there was no redemption
effected, then it is now ripe for consolidation of ownership no more final
certificate of sale affidavit of consolidation of ownership
Affidavit of non redemption
CPG will only attach after expiration of period of redemption
Count 30 days from redemption pay the CPT- otherwise liable for
surcharge
No right of redemption immediate liability will attach
Juridical person
Mortgagee is a bank
General banking act sec 47
States that if mortgagee is a bank and mortgagor is juridical person
No right of redemption only equity of redemption availed of prior to reg of
COS 3 months
No right of redemption immediately liability for CPG tax

Rev memo 55-2011clarification concerning foreclosure of mortgages
RMC 27-2011 SSS GSIS clarification
Pacto de retro sale
Immediate liability or after repurchase has lapsed?
Yes there is immediate transfer of ownership- immediate liability for CPG
tax
If there is repurchase- will there be another liability for CPG tax? Laws are
liberal about this no more additional CPG treat the sale and repurchase as
only one transaction continuation of original transaction
Deed of sale but conditional
Sec 24. Liability for CPG attach if there is sale including conditional sales
Even if conditional sale there will be liability for CPG tax
If executed is contract to sell? Not yet no sale yet only agreeing for a sale in
the future
No liability for CPG yet
Payment is a positive suspensive condition- trigger obligation to sell
Payment not made as if no agreement to speak off
What is a capital asset- if a property arising from being engaged in
business? Ordinary asset or capital?
If property is arising from being engaged in business it is automatically
ordinary?
No its not automatically ordinary
Limited situations of what is ordinary
What do we consider as ordinary and what is capital? Are assets ordinarily
ordinary or ordinarily capital?
Default classification of an asset- all assets are ordinarily capital except if
they are ordinary asset
Capital is the default
Ordinary asset is an exceptional- only consider an asset if fall under any
of the ff classification:
1. Stocks in trade, properties included in inventory or held for sale
in ordinary course of business
2. Real Property used in business
3. Property subject to depreciation used in business
Stocks in trade, not shares of stocks- stocks in inventory warehouse stocks
in trade
Sales outlet as well as those in the warehouse
Properties in inventory- engaged in manufacturing- goods in process, raw
materials and finished products
Selling in ordinary course of business
Real properties can they be ordinary- when used in business or held for sale
in the ordinary course of business
Idle parcel of land is capital except if the idle parcel of land is owned by a
realtor- held for sale in ordinary course of business
Properties subject to depreciation used in business- machinery fixtures
If an asset arises from being engaged in business
Engaged in selling and selling on account basis- have accounts receivables
Are my receivables ordinary or capital assets?
It is an asset. Capital assets but arose out of being engaged in
business
Not all assets that arise out of being engaged in business is classified as
ordinary
Real property not used in business capital asset- residential except if held
for sale in ordinary course of business
Situations where even there was a sale of real property not subject to
6%
Sale of principal residence- requisite for exemptions from CPG tax
Requirements:
1. Sold is principal residence certification of principal residence
from punong barangay
2. Construct another principal residence is the purpose
3. The purchasing or construction done within a period of 18
months
4. Apply for exemption for CPG within period of 30 days- period to
settle liable for CPG tax, apply for exemption
5. Any amount not used for construction considered as taxable
6. Avail of exemption not oftener than once every 10 years
18 months period to comply- gap from time of transaction up to time of
period of liability to determine
Ensure that tax payer will comply with conditions
Apply for exemption for CPG tax- deposit the amount of CPG tax
Under an escrow account- account for a definite purpose to ensure the
payment of CPG tax cannot withdraw that except if there is prior tax
clearance from the BIR
Sales made in favor of the government
No CPG tax
Subject to alternative taxation- there is an alternative
Alternatives: choices that can be availed of by the tax payer not the
government
a. Subject transaction to CPG tax or
b. Make actual gain part of gross income
Property bought for 1M expropriated the price paid by government 900K
only no actual gain- make the gain part of gross income, no gain nothing to
include in gross income
Choice to make gain part of gross income
Sales of real property classified as capital asset by resident located abroad-
cannot impose final tax sourced from w/o the PH
Sales of shares of stock not listed or traded in the stock exchange
Income tax- depending on the actual gain
1st 100K 5%
In excess of 100K- 10%
Sale of shares involving listed or traded in stock exchange
Income tax imposed is nothing
½ of 1% not income tax- percentage tax, stock
transfer/transaction tax
Employer-employee tax
Fringe benefits
Final tax
Received by employee on top of usual salary
Tax fringe benefits- depend on who receives the benefit
If received by a rank and file employees- part it part of their gross
compensation income
But if the benefit received by manager or supervisor in the real
sense
Some are manager but not really managers
Managers or supervisor- final tax known as fringe benefit tax
Fringe benefit tax- final tax imposed on fringe benefits at the highest rate
applicable 32%
Is it a Tax on employee or employer?
Tax on the employee
But required to be withheld by the employer- being the withholding agent
Who is liable to pay the fringe benefit tax- employer
32% where to base this?
Base in the grossed up monetary value
Convert to gross Employers benefit/ convenience
Whatever monetary value or benefit Resident manager of a hotel or resort
House maid
X manager given brand new car- 680K Driver
Amount actually received by the manager- so not the gross
Whatever is gross reduce the tax- actual amount received by the manager or Applicable not just to housing but all kinds of benefits
sueprvisor Educational assistance- FB but if assistance granted is in furtherance of
your position as a manager/ employee
680K actual value received Required to render return service
Tax is 32% of the gross In order for employers convenience rule to apply- purpose of schooling of
Gross fixed at 100% employee is in furtherance of his function and required to render future
How do we know the tax? services to the employer- not for his own benefit but for the employer
68% of the gross = actual value received by the manager
100% is 680 / 68% = 1M Key technical man in a software company- doing the job for several years
320K fringe benefit tax paid already
Enrolls in any course other than technical function and took up culinary
What is the fringe benefit expense that can be declared by the employer as arts- not for the benefit of the employer but for his own benefit
deduction part of ordinary and necessary expense- 1M
Expense is whatever is the actual benefit + tax liability on part of employer Application of employers convenience rule does not apply- no relation to
the function of the business
Concept behind law- no fringe benefit tax
Employer received benefit worth 1M Educational assistance to dependents of an employee is a FB tax on part of
Tax of 320K- employee benefit of 680K only employee
Parents employed here study in SLU for free except for some courses
FBT- any amount or anything of value received on top of usual salary of If that is granted to rank and file employee- value added to compensation
employee income
Sec 33 Manager or supervisor high rank positions- subject to FB tax
Housing expense account
Vehicle of any kind Benefits of small value
Membership dues De minimis benefits- benefits of small value
Expense of foreign travel Refer to revenue regulations 3-98
Holiday expenses As amended
Educational assistance
Revenue reg 10-2000
List not exclusive, can admit of others
RR 5-2001
HEVHIMEHEL
RR 8-2012
Bank manager allowed to obtain loan from a bank- for other persons 18% How small are they?
his interest only 14% per annum Depends on the regulations on small value
Interest less than market rate 12% Rice allowance equivalent to 1 sack of rice every month
Market rate must be lower than 12% If given in cash must not exceed 1500 pesos

Fringe benefit any income item received by an employee over and above Medical allowance not exceeding 10K every year
the usual salary if received by rank and file added to compensation income Uniform or clothing allowance- not exceeding 5K pesos 8-2012
Manager- final tax- fringe benefit tax (before 3k became 4K now not exceeding 5K)

FB tax 32% of whatever is the gross up monetary value of the fringe Cash value of vacation leave not exceeding 10 days for private employees
benefit Sick leave and vacation leave of government employees
Not the actual monetary value
Grossed up monetary value Christmas bonus not exceeding 5K aside from the 30K 13th month pay
Normal divided by 68% of the gross- the actual is always net of tax and other bonuses
Gross is always 68% 1st 30K excluded
Christmas bonus not exceeding 5K
Benefits not subject to fringe benefits tax?
If the benefit is received by a rank and file employee not subject to fringe States that the list is an exclusive list cannot admit of any other item other
benefit tax than those identified in the RR
Included in the compensation income
Excluded by law not subject to fringe benefit tax Instead of Cash worth 20K every year
1. 13th month pay and other bonuses not in excess of 30K pesos Make it into rice allowance 1500 every month= 18k already non taxable de
Exempted by law minimis
2. Apply what is known as the employers convenience rule Christmas bonus worth 10K- 5K only
Housing privileges can be considered as a FB tax- but the housing privilege Other 5K uniform allowance
of the employer than the employee
Driver required to stay in house of employer- on call driver always Lawful amounts allowed by law to be claimed as de minimis benefits
This rule applies Law allows employers to give monetary value and leave the employee to
Free employee of the tax not limited to manager or supervisors but how to spend the allowance
extended to rank and file
Other rules regarding inclusion and exclusion of income
Special rules:
1. Transactions on installments
If a transaction on installment basis can the tax payer declare the gain on
installment basis?
Yes it is allowed because if a tax payer received only part of the contract
price and required to pay full amount of the tax, the tax might eat up
everything received by the tax payor
Receives only 10% of contract price
Required to pay tax exceeding 10%
Amount received will not even be enough to pay the tax
Recognition of income on installment basis
Problem:
X sold to Y property the agreement is that the contract price is for 1M
pesos
Down payment is 300K balance is to be paid in 5 years
Can the income be declared on installment basis?
Profit rate is 20%
Can the income be declared on installment basis?
If on equal annual installment payable every dec 31 of each year
700K / 5 whatever is the amount installment every end of the year
No, this is not an installment transaction- might be in civil law but in
taxation it is not
This is called a deferred payment scheme
It is not an installment basis because an installment transaction where
the initial payment will not exceed 25% of the contract price
In this case the down payment is 30%- exceeding 25% of the contract price
not qualified to be a installment contract
Deferred payment scheme taxable as if it were a cash transaction
Initial payment not necessarily the down payment
Initial payment is the totality of all payment received by the tax payer
during the year of the transaction
Ex:
Contract of 1M Down payment given January stipulation that every month
payment of 10K pesos
The initial payment is down payment of 200K plus all the amortizations
made during the year of the transactions-11 months of 10K = 110K
Totaling 310K pesos
Initial payment not limited to down payment but all payments received
during the year of the transaction
Down 200K next payments made the year following
Transaction on installment basis- did not exceed 25% of the contract price
Income from long term construction projects
Contractor here will be undertaking project for more than 1 year
Contract price 100M
Duration of contract last for 3 years period for constructing
Out of contract price the profit margin is 30% or 30M of the contractor
Profit declared for taxation purposes?
1st year completed 20% of the building
2nd year 40%
3rd year 40%
During first year, although completed portion of the project is 20%,
contractor is able to bill in advance an amount of 30%
2nd year, bill 35M
3rd year billed 35M
How will this contractor bill this income based on the construction project
Can he declare only after completion of the project- completed contract
method 100% of profit declared at the time the project was completed
Can he bill on basis of percentage of completion?
30% of 30M
30% of 35M
30% of 35M
Or Any of the above at the option of the taxpayer contractor?
Or is it based on the percentage of billing?
Percentage of completion is allowable
Tax code used to allowed the completed contract method but right now it is
no longer allowed
Long term construction projects income are to be taxed
Income from leasing
Whatever you receive out of lease is taxable income
Lessor charging lease monthly rentals
Received any other thing on top of what was paid- charging lessee 5% of
their gross sales
Considered as part of lease income
Pay the real property tax- part of lease income also
Lessor required to pay advance rentals- which utilize at the end of lease
term
During last 6 months of the lease contract
When: received during first year but utilized during last year
Declare as income during 1st year because of control test- full control over
the
Even if declaring on cash or accrual basis still income on year of receipt
Deposits
Q: Are they part of lease income
Security deposit- not lease income
If convertible to lease- lease income
Don’t pay income but construct a building which will go to the owner of
the lot upon completion of the lease contract, Rent free
Income declared how?
X owns a property entered into agreement with Y that Y will construct a
building
Based on pre agreed specification agreement
Building cost 20M useful life of at least 20 years
Y will make use of building only for 10 years
After 10 years, turn over possession to X
Is there any income arising from X arising from transaction? Yes because
out of a bare parcel of land he became an owner of the building
There is an income capital of X is the land aside from the land he owns the
building
X can declare using the outright method- income at the completion of the
improvement
Value is cost of the improvement
One time recognition of income, no more in the future
2nd mode: spread out method
Estimated value of the improvement at the end of the lease term
Whatever is the estimated value of the improvement will be spread out
during the entire duration of the lease
Expires after 10 years lease
Building estimated life of 20 years
Value at the end of the lease term where X becomes the owner of the
property
Depreciation expense of 1M every year
10 years = 10 M worth of depreciation
Duration of the lease
Property valued at 20M estimated depreciation is 10M depreciated value In order for you to claim OSD, current regulations require that you claim
after 10 years is 10M the OSD even from the moment you file your first quarterly return- claim
Spread out the 10M during the 10 year lease period OSD already
If filling return at the end of the year and claimed an OSD, chances are
Every year there is 1M worth of income your claim for deduction will be disallowed
Tax payer recognize income of 1M for 10 years Regulation says you should claim OSD even when you file your quarterly
X declares 1M as income every year returns
Practice of profession- must file quarterly returns
Don’t always conclude that the spread out method is always better Not applicable for employees
2012 X sustained losses in other businesses
Loss of 25M- make use of the outright method- 20 not enough to offset the Itemized standard deduction
25M losses Comply with substantiation rule
Unless case falls under exceptional circumstances
If always in an income position always gaining- spread out method is better Cohan principle- if it is obvious that there are deduction but the tax payer
does not have proof of these deductions the tax payer may still be allowed
Trade business practice of profession- net income to claim the deduction
From gross income remove all deductions allowed- allowable deductions How to determine: the government will make a reasonable estimate on the
deductions will bear heavily on the taxpayer due to his inexactitude
Deductions Whatever estimate made will be binding on the taxpayer
These are deductions from the gross income to determine net income of a Deductions still allowed if there are obvious deductions
taxpayer granted by mere legislative grace depends on congress whether to
grant its grace All events test
Sole prerogative of congress CIR v. Isabela cultural corp 2007
Taxpayer makes sure definite provision of law that allows the deduction Isabela cultural corporation- religious corporation belonging to the Jesuits
and prove factual basis of the deduction Engaged services of bengzon law office past dealings of isabela cultural
corp, with the law office ICC more or less establish the basis for bengzon
2 main kinds law office charges
1. Itemized deductions- found in sec 34 of NIRC Knows how the bengzon law office charges
2. Optional standard deduction ICC paid the services of Bengzon law office-
Service rendered 2010
Rule on deductions: But the billing by the bengzon law office given only in 2011 and payment
Every deduction should be duly substantiated- substantiation rule- evidence made in 2011
of the deduction Isabela is declaring income and expense on an accrual basis
Best evidence of deduction- those that prove the deduction Accrual basis v. cash basis
Receipts of expenses- sign payroll slips, showing deductions Accrual basis- recognize income when it accrues and expense when
If a tax payer claim the optional standard deduction does not require any incurred
proof of the deduction is a mere option to claim a standard deduction Cash basis- recognize income when you receive cash or recognize expense
when you pay the expense
Individual- OSD 40% of the gross sale or gross receipt
Corporate tax payer OSD 40% of the gross income ICC declaring income and expense on an accrual basis
2011 payment for bengzon law office due to service rendered in 2011
Does not require substantiation based on deduction Disallowed by the BIR because to BIR payment for a service rendered by
Based on gross sale/receipt or income the law office in the year 2010- should have been declared as a expense
But how to know the amount if they have still to be billed?
Merely an option
If does not claim OSD, assume claiming itemized deduction SC ruled that ICC should have declared the expense in the year 201
Must make express clear indication of choosing the option Reason- declare expense at the time expense occurred
It is not necessary that the amount be absolutely established or certain for
Individual as long as reasonably certain
Gross sale- 1M
Cost of income – 600K In determining reasonable certainty of an expense isablea need not wait for
Gross income 400K Make reasonable estimate on the amount to be billed by the bengzon law
OSD-400K office
Income tax 0
Take account all relevant circumstances to determine what is certain
All events claims worked against in 2011- must be declared in 10K
Corporation
Gross sale- 1M If only declared expense in 2010 basing on reasonable estimate- disallowed
COI- 600K by the BIR
gross income- 400K Not necessary that the amount be certain and can b used by taxpayer to his
OSD- 160K advantage
Taxable income- 240K

How to claim OSD

Practicing profession- income tax returns during the year: 4 times Answers to the exams
Quarterly returns and annual income tax return The right to collect note the case of petron where the court said that the
File it quarterly income tax return good faith can estop the government
Final adjustment return- corporations only
Pal vs. edu
Regulatory tax police power the amount should be commensurate if it But when you engage in bus litigation will happen and it can be an expense
exceeds it becomes a tax imposed in the exercise of taxation it is a tax it in bus
cannot be imposed on NSNP
Ordinary expenses in business
Angeles university vsangeles city  Salaries of personnel
 Rental expense
Tax exemption is granted by law, not the sec of finance  Supplies
 Repairs and maintenance
31-50 refer to 2011 bar  Utility payments
23. A- FT of 20% deposit substi UTIF Necessary: those expenses you incur in order to generate more income or
24. C need not withhold – prize bec there is exertion of effort reduce other expenses or losses
25. D sale of principal residence subj to FT (C it is the TP who has the  Cost of printing tarpaulins to announce opening of business
option to either withhold or make it part of GI)
 Q: paying rentals, you constructed a building to avoid paying
26. D interest from gov’t bonds which is deposit substi rents, is the cost of the bldg expense
27. C monetized value of sick leave and vacation benefits to private EE not
A: no, bec it is a capital expenditure
exceeding 10 days
Expense is allowable deduction for the taxable year
28. A entire income during the yr of receipt w/c is the control test
1m bldg you will benefit it for many years it is not an expense but
29. A OSD not applicable to estate capital expenditure
30. D (gift must be non monetary in value for it to be de minimis)
Can later be an expense by subjecting it to depreciation
31. – 50 skip
There are some CE w/c cannot be depreciated
51. B
52. C only BW 300k and 20k out of 13th month not the 600k Lands do not depreciate: buying one is a CE
53. B RP developed by realtor for his residence bldg machineries or equipments: capable of depreciation do not treat them
54. C
as expense but assets and CE so you can later convert them to expenses
55. C ordinary asset you have to compare the consideration over the cost
subject to depreciation
56. D
57. C intra corporate dividends Intangibles: you paid huge amount for good will it is intangible not subject
58. D only C gained an income
to wear and tear
59. D selling price – historical cost if real property as ordinary asset
Franchise a business you actually pay for the good will
60. C
You are paying for the name of Jolibee w/c will not be subject to W&T
61.D To become an expense make it an amortization
62. A
Amortization is the same in concept w/ depreciation
63. B - the government can chose bet the buyer and seller because of the
Amortize a CE
agreement w/c is binding between the parties
64. D - it can never be exercised by executive How do you know that it is an expense or CE
65. B – ad valorem
Basic test: how long will benefit be felt
66. B – sale to government
If the TP will feel if for a given Tax period expense
67. A – TP claim has expired
Several years it is CE
68. D - Bldg will last for more than 1 year
69. C -
Furniture and fixtures can last for more than 1 year
70. C/D–w/c is not direct duplicate taxation
Most likely a capital expenditure relative value of what you have spend
If you bought a stapler it can last for more than 1 year but will you consider
them CE
Do not capitalize them
Amount is relatively low treat that already as expense
Deductions: substantiation
Situations when substantiation can be dispensed w/
Gauge of amount and size of the business of the TP
Cohan rule
Some companies w/c is big they can treat 50k or less is expense
Cir v Abela: reasonable certainty Another test for CE (improvement)
If you do not avail OSD
Will the improvement pro long the life of the capital asset
Painting or repainting a business
Claim itemized deductions: found in the provisions of sec 34 of NIRC
The extent of amount spend and will it pro long the life
Look at sec 34 to classify If it will pro long the life of CA it is CE
Bad debt
Interest
For ornamentation or beautification w/o prolonging the life treat it as a
Taxes
business expense
Expenses
Deprecation Are there TP that can declare their CE as an outright business expense
Depletions
Proprietary educational institutions for school expansion
Losses
CE – school expansion purposes
It is only then that the school can treat it as CE = outright bus expense
Expenses: reasonable incurred in the course of business One form of tax avoidance
Ordinary
Habituality is not required
Instance a school can project its income and it projected an income of 50m
Not engaged in litigation in the past
how will it be taxes
Depend on pre dominant test 50m x 10% = 5m
Construct a school bldg amounting to 40m treat it as outright bus expense On top of these it was aggravated by BD
at a rate of 5m you were able to save 4m total loss of 6m
If X is able to recover 1m should X declare an income
Salaries and wages of sales personnel are expense X should not, bec there was no TB
Business is manufacturing certain articles like podium
You paid the wages of your carpenters Suppose there was 2010 net income of 10m
Q: are they bus expense There was BD of 1m
A: no they are not BE Tax income is 9m only
Bec it is referring to the cost of the article He should declare an income for there was a TB
Raw materials as well – you purchased a wood it is not expense but asset. From his supposed income tax liability there is 1m
Forms part of inventory of materials
Reason for tax benefit rule: this BD expense of !M allow the TP to claim
Manufacturing in the factory you are paying for light and water deduction
Q: the payment is it expense But he was able to recover a deductible expense
A: No, bec it forms part as the cost of the article It is just proper the government also recover
The cost of the article will not be limited to the raw materials
Overhead expense forms part of the cost of the article
Interest
Whether directly or indirectly Tax rules in connection w/ interest income
Purchased raw materials you have to ensure the goods while in transit From the perspective of the one paying the interest
Is this business expense: no bec it is still in connection w/ this article Interest expense: maybe deductible
It is not in all situations that it can be and subj to compliance
You have to pay for the insurance
Indirect labor: you still have to pay for them like the cleaners and will all Pay on interest on loan on housing or residential dwelling for your own
form part of the cost of the article and not as bus expense home
Declare it as deduction – no not connected for trade
In knowing what is deductible Business purposes – yes it can be deducted
Do not deduct cost
Do not declare CE How to know: requisites
Note: actual payment of IE is not automatically deductible
Bad debts: is an estimated amount that you cannot collect from your 10m loan obtained by X subj to interest of 10% per annum
receivables So the actual interest per annum is 1m
1m receivables you were not able to collect Use it for business: not yet deductible
In taxation we are not concerned only of estimated Sec 34b of NIRC you have to adjust it by 33% of the interest income subj
It should be a worthless account to final tax
Hindi langsiyadapatmasamadapatwala pa siyangkwenta You will get what is allowable
There must be a worthless account
During this year there is also interest income from the bank deposit w/c is
How do you know if the account is worthless 1m also
Notwithstanding the reasonable collection the amount remains unpaid The actual interest expense of 1m will be adjusted
It will not be wise 33% of 1m 330k
Reasonable to sue – sue if not do not Allowable interest expense is 670
All of the demand letters are for substantiation requirement
Exerted reasonable efforts for collection Reason: prevention of tax arbitrage scheme
Access devices regulations act: you can be criminally liable Congress wanted to prevent TP from engaging themselves of the TAS
TAS:
X corp. borrowed money the amount of 10m subj to an IE of 10% per
For every ID there are requisites so note them annum
Those requisites will come out during exams Yearly annual IE is 1m
This is an expense assume that no rule on adjustment
BD account is worthless there must be a showing of reasonable collection 1m IE is already deductible
despite this payment was not made Effect of 1m in the taxable income of TP – it will have the tendency of
Supposing that there was BD w/c turns out to be uncollectible for it is lowering the tax income
worthless There will be tax saving on the part of the TP by diminishing the TAX
Yr 2010 TP X wrote off a BD an indebtedness of Y w/c is 1m BASE
Y cannot really pay anymore aside from the fact that Y is broke and Y has 30% of 1m is the tax savings w/c is 300k
no intentions of paying What if X corp. reinvested the 10m in a bank
X write of the 1m in his books declared a BD expense and treated 10% is also the interest income of this particular investment in the bank
allowable deduction There will be an annual interest income w/c is 1m
2012 upon walking session rd Y wanted to pay Tax rate on an IE subj to FT – 20%
Should X report an income Tax collected by government is 200k
Application of the TB rule
Should there be an income: TS-300k
GR: no income to be declared, bec it is a mere return of capital tax collected 200k
EX: apply the TB rule where X will be required to declare an income is if net TS=100k
at the time X declared a BD he claimed a tax benefit there should be an This is the TAS, where the tax payer takes advantage of the different tax
income to be declared during recovery rates
Example:
During the year 2010 net loss of 5m The rule now
Annual interest expense is 1m adjust it by 33% of the interest income Tax rate 30%
1m x 33% = 330k Tax liability is 6m
Allowable IE now will be 670K Treat the SCD 10m tax payer need not pay anything anymore to the
TS = 30% of 670 201k government
To equalize the tax savings and tax collection
The level of tax treatment has been leveled GI 30m
TS is merely 1k D 40m
Net loss 10m
Note: it is more how you utilize the loan TC of 10m SCD
It must be used for business purposes Liability is 0
TC cannot be used for you cannot offset it w/ other liability
Why is the adjustment only to II subj to final tax
Reason: is because of the lower rate 20% You cannot interchange
Interest income not subj to FT is subj to usual rate
1m corporate it will increase the tax base – 300k Suppose now it is deduction
Adjust only bec the FT is 20% other interest income not subj to FT is 30% GI 30m
D 40m
Special rules concerning IE SCD 10m
IE on capital expenditure: the tax treatment on CE cannot be business Loss of 20m
expense No liability
Tax treatment on the IE on CE NOLCO carry over the next 3 taxable years
option: declare it as bus expense or capitalize it
If all things are held equal the better choice is to = Present seniors citizens law it is now deduction
IE every yr part of it is CE IE you also earn II what will be better choice =
Always income position is to capitalize you will enjoy more deduction Tax as a deduction vs. credit
If outright expense it will be adjusted If the law states that it is deduction it is deduction same with credit
Capitalize it it can be part of cost and subj to depreciation w/o adjustment You cannot convert it into a credit vice versa
of 33% Foreign taxes the TP has the option to claim it either as D/C

What about IE concerning loans where interest are removed in advance All taxes are deductible except those mentioned
Example: loan of 1m w/ interest 10% per annum 2 years Special assessments: when the LGU finances an infrastructure the LGU can
200k collect as much as 60%
You will get 800k only the 200k got in advance There must be an ordinance
Loan as it stands is 1m Not less than 5
Recognize the 200k as IE? Or deduction? You cannot recognize the whole
bec it is subj to 33% RPT in the course of the bus it is deductible
Assume it is used for business Percentage taxes in the practice of profession is deductible
Assume IE the 200K is when deductible If you practice you are required to pay monthly percentage taxes unless you
When to recognize it? We do not know yet it is dependent on the payments pay vat
that you make
If the agreement is that during the 1styr you paid 500k – if you did so you Q: purchased appliances in the purchase thereof you shouldered the burden
will recognize a deduction of 100k proportionate to payment you made of VAT your business is selling is this deductible
2nd year paid 500 another 100 will be IE A: no. it is not, even if it does not fall on non deductible.
Pay 1m after 2yr recognize the 200k in the 2nd year It may be forming part of cost only
VAT tax payer it will be an input tax w/c you can credit
It is not a deductible bec it has separate character
Taxes
Incur in connection w/ trade are deductible except those non deductible If the tax you pay becomes part of the article you are selling cannot be
1. Income tax treated as deduction
2. Estate
3. Donors Depreciation is the estimated value of the normal wear and tear of an asset
4. Special assessment under the LGU If you use a property it will be subjected to depreciation
The normal w&t of asset
You bought a property you agreed to shoulder the CGT Bldg normally depreciate
Cannot be declared as deduction Estimated value is the depreciation
It is income tax
It forms part of the cost of acquisition Various methods
Straight line method uniform amt of dep during the life time of asset
IT except for one Salvage value is value asset is value after its useful life
Foreign income tax where you decided not to recognize it as credit 10 year bldg after this the 11m bldg SV is 1m
But it can be declared as tax credit subject to limitations or deductible tax From an 11 million cost of bldg the DV is only 10m subj to dep expense

Credit vs. deduction (CIR vs. Central Luzon drug) Note the other modes
Under the old senior citizens law it was a TC Sum years digits method
It is removed from a tax liability Declining balance method
SCD formerly a TC example mercury SCD amounted to 1m the tax liability
GI 30m Declining simple, 150%, double declining
D 10m DBM only up to DDBM is allowed 200%
TI 20m
As a collorary to dep is amortization applicable to intangible assets GI is not from all sources it must be exercise of trade or bus
Amortize the intangible Tax treatment of OL: can actually be a deduction from all your other
Advertising expense income
General foods vs. CIR where the foods generally spent for the product Aside from GI w/ B and T
Tang You also have income from sale of personal sale of jewelry and cycle or
Heavy spending and tang was introductory phase dealings w. properties in amount of 10m
GF declared it as an expense declaring that it is necessary as it increases the GI will be 20m
income AD: 15m
To increase the marketability of the product TI: 5m
According to the BIR it is not necessary OL can be offset to other income to determine your income
SC: if advertising in normal course of bus it is BE
If so heavy and created a good will it is not an expense but asset it must be This OL can be subj of NOLCO rule
amortize OL of TP can be carried as deduction of GIBT practice of prof for next 3
succeeding taxable years
Depletion: applicable for bus considered as wasting assets 2013 – 15 you can carry over next year
Concept: WA this are bus involved in extraction and utilization of natres
Whenever you get a natres it is a deduction in consideration of depletion 5. Capital loss
Deposit of oil or minerals establish how much is the oil in the area CL: is a loss from your dealing with capital properties
Do it by scientific study Pated w/ cap asset lee than cost or DV then you have CL
1’s they come out with this it becomes part of their assets if you dealt w/ cap asset less than cost –CL
Correlate it w/ bldg Not FMV but cost or DV
Deposit of oil or minerals dealt w/ CA consideration is lower what is tax treatment
You can later convert this into deduction bec you are depleting this asset TT:

This are not immediately replenished Rules on CG and CL

They will be considered deduction upon depleting them
1) Rule in connection w/ sale of real property classified as CA
2) sale of shares not listed or traded
Losses
Lose several kinds: what if the CA does not belong to the above
a. Ordinary sold the motor vehicle not used for bus
b. NOLCO rule that you will follow
c. Capital loss Apply the special rules
d. NCLCO a. loss limitation rule
e. Losses from oil wells etc b. holding period rule
c. net capital loss carry over rule
1. Wagering loss: (gambling)
Are this deducible: they are, up to wagering gains LLR: it tells us the CL are deductible only from CG
You can deduct them from the gambling gains only Cannot deduct it from ordinary gain
When you gamble you normally lose and if you lose more than no more Income from bus
deduction GI10m
ADL 8m
Still follow the rule that only lawful losses are deductible OD2m
Gambling must be lawful Sale of personal jewelry
Bought by TP for a cost of 5m able to sell it for 3m only
2. Casualty loss: sudden unexpected losses Cost 5m
Robbery theft storm flood earthquake SP 3m
It must be something you used in bus or trade CL 2m
Rules:
a. Used in trade or bus Aside from this another transaction w/c is a sale of personal vehicle
b. Report the fact of loss to BIR w/in the period of regulation Cost 8m
45 days to report loss SP9m
Investigate w/n there is loss CG1m
Document the loss
As much as possible don’t remove the evidence of loss until Q: based on this facts what is taxable income this year
investigation TI: 2m
Why this 2m is income from T or B
3. Ordinary loss Net capital loss and net capital gain
Is when you part w/ OA for a price less than the cost or adjusted basis NCL cannot deduct it from OA
Ex. Delivery truck w/ 1m DV sold it 800 OA = 200k
Even if the truck is 2m but current DV is 1m Cost of the ring 3m
Selling price against DV – loss is only 200k Sold it 5m
Tax treatment: it is an allowable deduction CG 2m

4. Operating loss Car is 9m

Is when your total allowable deductions exceed your GI Sold it 8m
GI 10m CL of 1m
Allowable deduction 15m TI: 3m
Operating loss is 5m NCG 1m + income from exercise of trade or profession
 OI 1m

Next case Capital transactions

STCG 3m
GI: 10m LTCL 10m
Ad 12m
OL 2m TTI: 1m
NCL 2m
Ring
C 5m 2013
SP 10m GI 15m
CG 5m AD 10m
OI 5m
Car
C 9m STCG 5m
SP 8M LTCL 4m
CL 1m
2013 TI: 7m
TI: 2m NCL has a ceiling w/c is not to exceed the OI
NCG 4m NOLCO no ceiling
OL can be deducted it is not prohibited by loss limitation rule NCL only succeeding year – 1 year
4m-OL 2m= 2m NOLCO 3 taxable years

The rules above are applicable only to individuals

Holding period rule Corporate tax payers only loss limitation rule
Length of time that you are holding an asset will have an effect to tax
liability Suppose that X corp. is always gaining
How long have you been holding the asset Y corp. is a losing corp.
2kinds Y has net operating losses amounting to 100m
a. long term HP Merger w/ Y and X
anything exceeding 1year NOLCO
only 50% of gain or loss shall be recognized Ordinarily it cannot be done
Unless the circumstances fall under the exception w/c is compliance w/
75% interest retention rule
b. short term HP There must be no substantial change in the ownership of the bus holding
not exceeding 1 year the operating loss
100% of gain or loss shall be recognized Maintenance of 75% in Y corp. interest
To determine if whether it is allowed
Problem: Suppose X corp owned by
GI10m 1 2 3 4 5 all 20%
AD 8m Y
OI 2m 1 - 10
2 – 40
Ring 3 - 15
C 5m 6–2
SP9m 7–3
CG4m
Held for 2 years X corp.
Recognize 2m LTHP 1 25
2 25
Car 3 20
C 9m 4 10
SP 8m 5 10
CL 1m 65
6months 75
Consider the entire 1m Can carry over 80% thus 75% interest retained
NCG 1m
TI: 3m Charitable contribution
If the TP donates thru charity there could be deduction by reason
Net capital loss carry over rule Give it to qualified institution
Whatever is the NCL of the TP cannot be removed of ordinary income Identify the recipient is qualified org
LLR How to know
May carry the loss as a deduction from the CG of the TP Check if accredited by NCSC
For the next succeeding taxable year in an amount not to exceed
The taxable income during the year the loss was sustained Regulation issued by sec of finance allowed to receive donations

TP’s business There is a procedure for this

GI 10m The donations can be charitable contribution
AD 9m
Cannot claim deduction when you help the poor directly Deductions may be
Receipted donations you can claim deductions Optional
Itemized
Under the tax code the rare kind is found on sec 34 of NIRC
Limitations of deduction is 10% to income prior to the contribution Premium for insurance: rare bec the basic premise is that the deduction is
5% if corporate TP on the TP engaged in trade business or profession practice

Books of the TP Purely compensation earner you can declare PHHI

AD is 9m inclusive of 1m charitable contribution This is allowed if you pay premiums of health and hospitalization insurance
Not personal medical expenses
National commission for NGO certification How much: 2400 a year or 200 pesos per month
GI 10m You deduct it from GI
TI is 1.8
10% of 2m is 200k Note: it is even required that income or combined family income should not
exceed 250k pesos in 1year
Pension trust
This are amounts set up by an ER in order to pay retirement of EE GI
There is no problem w/ yearly contribution to this pension (less) deductions
Net Income
Most ER set up pension fund Different tax treatments for IT payers
Contributory is when both the ER and EE contribute
Tax approach bet individual and corporate
Individual from the exercise of profession there can be a claim for basic
Non-contributory only the ER and personal additional exemptions
Pension fund is deduction by way of bus expense Clarification: when we mention about personal exemptions in general take
Problem is when you set up the fund for the 1st time it involves it to mean both basic and additional
capitalization Covers both the exemptions

Initial capital is the one quiet heavy Basic: is granted by reason of his status
You can actually capitalize it and amortize it w/in a period of 10 years Roughly equivalent to a person’s minimum subsistence
RA 9504: grants 50k to single, married or head of family
Pension funds w/c is set up as different corporation create an irrevocable BE: 50K a year (premise is that you can survive w/ min subsistence)
trust w/c is income of fund and not of the ER
Sec 32 if Irrevocable pension trust is exempt The original version is 20k
Note: Married individuals if both are working each sps is entitled to 50k
Research and development cost
For every TP who wants to advance in bus Additional exemption: granted to TP w/ qualified dependent children
Applicable to TP engaged on product development and technical products note: if your dependent is parent no additional exemption
bro and sis not QDC unless they are your child
if senior citizen it is questionable still subj to a possible case but right now
R&D no additional exemption
Incurring cost Senior citizens law there is a gray area Seniors can be a basis for claiming
Can this be allowable deduction personal exemption
Matching income and expense JB: in his opinion no additional exemption
It is not in connection w/ current income HOF is not entitled to AE – w/c is by reason of a dependent child
What you sell is the old R&D product
How much: 25k max of 4
Tax treatment is to capitalize it and convert it as a deduction For tax avoidance have more children
When you start making profits out of your R&D
Amortize it in period of 60months Q: how do you know QDC
2012 r and d A; fixed by sec. 35 child should:
2013 you sold a. not married
Amortize it 60 months b. not gainfully employed
c. not over 21 years of age
Exam notes (just added) there is an exception w/ 21 you are mentally and physically incapable of
X bank has deposit in Y bank, the interest of w/c is 10m and subj to FT support
20% this child should be living w/ TP and dependent upon the TP for chief
2m FT support
The interest income net of tax is 8m
Banks are subj to gross receipt tax 10m is required to be included Q:If you have a child and you are single and supported by the other parent
Is this direct duplicate taxation? of your child is he QDC
A:NO, it is not bec the 20%FT is income tax A: NO. bec he is living w/ you but dependent upon the other parent for
GRT is percentage tax chief support
This system is valid measure and does not amount to DDT
Possibilities
Final tax is the satisfaction of all income tax liabilities Q:What if a child was born during the year is qualified during that year
Or what if at the end of the year
(Deductions continuation) A: yes
Q:Child died during the year Matters to note of:
A: yes he is still qualified Who are required and not required to file ITR
Even if he died even at the beginning of the year
Corporate tax payers (CTP)
Q: Child got employed during the year How to determine the existence of a corp.
A: yes Determine those not subj of taxes
Those not considered as CTP at all
Q: Reached age of 21 this year
A: yes during that year NI x 30% is already the normal or ordinary income tax
Basic sec.35c changes favorable are immediately considered like having a There are also special tax rates
child Corp. enjoying preferential tax treatments
Not favorable considered the year after like death of a child (do not 1. exempt by reason of:
immediately consider the effect) constitutional: like non stock non-profit educational institution
Sec. 35c law mentions that the status of TP shall be determined at the end special law:
of the year NIRC: domestic corp. exempt from IT sec 27 SSS, GSIS
This approach are only applicable to those governed by sec.25c Philhealth PCSO and local water districts as an amendment of
If not do not apply this rule sec.27
The rule is: whatever is the status at the end of the year is the one w/c will Note: PAGCOR already removed (still exempted however for
prevail VAT)
Example:
H and W: married and during the year they got a decree of legal separation sec 30 exempt corp.
For tax purpose they are considered a separated and single individuals they will only be exempted if their income is in relation to the
They are entitled to single personal exemption purpose for w/c they are established
sec 27 is for all their income
Situation: H and W have children 1 and 2 Q: religious corp. invest for other income activities
C1: to live w/ H A: liable for IT, irrespective of the disposition of the income
C2: to live w/ W
They shall give support to both 2. if corp. is not TE it still enjoys a lower rate of tax
They are not entitled to AE proprietaryeduc institution: 10%
the child is not dependent upon them for chief support although living w/ non-profit hospitals: 10%
them both must comply w/ predominance test
Their status at the end of the year will prevail
Aside from normal corp. income tax:
Case: 1. MCIT: least amount of tax
H and W married the W gave birth to 6 kids successively The amount is 2% of the GI
30mins each child Not net but gross
Can the H claim additional exemption for 4 and W for 2 CREBA v. ROMULO: MCIT as income tax is valid even if based
A: no it cannot be done max is 4 only on gross the law presumes gain here
Compare MCIT and NCIT
H = 2C and W = 2C If minimum is higher then pay MCIT i
Cannot be done only one spouse can claim AE f normal is higher then pay NCIT
W can only claim if H waives or is a NINJA
H is the one primarily to claim AE or by default GI 1m
AD: 100k
Q: suppose that this persons who are parents of the children A and B are Tax income: 100 x 30% Net income
not married w/ 6 children. NCIT 30k
Both are working Can A claim for 4 and B for 2
A: no prohibition for this under the tax code GI 1m
Spouses who are legally married cannot do this MCIT is 20k
For those not married no such prohibition exists You pay NCIT
Also note of this payment for premium for health and hospitalization: Not all corp. are liable for MCIT
claimed by the one claiming personal exemption Rules
By default it is the H who should claim a. MCIT is compared only against the normal and not
preferential tax
Remove the BE and AE you will get the taxable income of the TP If corp. is subj to PTR no more MCIT
After getting the TI apply the rates of sec 24
Note: the individuals earning min not subj to IT b. MCIT shall be imposed only if the corp. is in its 4thyrof
existence
Administrative matters concerning individuals Not upon start up corp.
If you are person liable for IT you have to file ITR MCIT is not in the tax code prior to 1997
Requirement must be complied w/ by apr 15 of the next year except Idea is to prevent for fraudulent claim for loss
individuals engaged in trade or business who must file a quarterly return Congress recognizes the fact that start up will incur losses at
Not allowed fiscal only calendar year the start its operations
If tax liability exceeds 2k you can avail of installment payment of taxes
1st installment is upon filing Apr 15 first half Q: MCIT is imposed just after the 1997 tax code does it
2nd is on or before July 15 mean that it is an additional imposition to corp.
 A: while it is true that it came after 1997 it is not a new
imposition
It is only a modification by w/c government collects taxes
Bear in mind the principle of carry forward of excess MCIT
Excess MCIT is the excess of MCIT over normal tax
Rule is that the excess of MCIT/normal tax maybe carried
forward as a deduction from the Normal tax for the next 3
succeeding taxable years
Q: Ways to be exempt from MCIT
A: You can seek relief from MCIT under the ff;
a. Loss is due to force majeure (casualty loss)
b. Loss is due to a prolonged labor dispute
1 month – no
6 months – yes this is the requirement
It is the regulations that fixes it

Here is 2012 c. Legitimate business reverses

NCIT MCIT What is sought to be avoided is fraudulent claim for loss
50m 100m Legitimate bus loss you can seek relief
Tax to be paid is MCIT of 100m Investments crush due to financial crisis
Excess MCIT is 50m
2. Improperly accumulated earnings tax or surtax
Carry it forward for the NCIT of next 3 Improperly accumulated earnings
2013,14,15 how to know: reasonableness test
Is it still w/in reasonable needs of business
2013 Immediate test: amount is needed for the business not IAET
NCIT MCIT
40m 70m Reasonableness is limited to factors
Tax to be paid is 70m for MCIT is higher Under the corp. code there are situations where they are allowed
Do not use the 50m for you cannot credit against another MCIT to not declare dividends
Excess of 30m 2014,15, 16 1. Amount is needed for expansion
2. Paying obligations and debts
Total EMCIT is 80m 3. Address a contingency

2014 Simple guide

NCIT MCIT Analysis of FS of a corp. like the retained earnings portion
60m 80m Paid-up capital of the corp. you will see in the stockholders
80m is to be paid equity is retained earnings portion
EMCIT 20m 15,16,17 If URE is greater than the paid-up capital there is prima facie IAE
Suggestion: URE is reaching 100% advise the client to declare
Total MCIT is 100m dividends or appropriate the retained earnings
Come up w/ board resolution that it will come out w/ expansion
Problem is 2012 EMCIT can only be utilized until 2015
NCIT MCIT Reason for IARE: for tax collection
100m 80m Not declaring dividends the government cannot collect dividends
NCIT is to be paid tax to set-off collect surtax
How much to be paid: 0, nothing is to be paid
Credit the whole EMCIT To determine this consider the reasonable needs of the bus
Take into consideration of immediate needs – immediancy test
Normal is higher forget about NCIT
Tax is 10% of IARE
Illustrate a point: MCIT is not a new imposition Incidentally the div tax on the div declared by domestic corp.
w/o the MCIT the government system of collection would be the received by RC it is the same
1st column Surtax is to recover taxes by non-declaration of div
Total for the whole period is 250 for Normal
MCIT: 3 column Suppose a corp accumulated earnings the accumulation exceeded
4 year total is 250k it is actually the same tax collected whether the paid-up capital
w/ MCIT or no MCIT After learning IARE the corp. declared div but this div came
from those subj to IARE –surtax
The MCIT can be an advance payment of taxes Will this div be subj to tax: no more div tax to be imposed
Designed to those fraudulently claiming deductions The IARE is a way for government to recover taxes for non
issuance of div
Tax tip in the above last situation for 2015
Normal is 75m Other taxes for corp:
MCIT 80m
Pay MCIT Gross income tax of optional corp. income tax
You can do something about this 15% of gross
Don’t claim of your deductions no law mandates to declare This is GI tax note that even if found in NIRC is not applicable as
deductions of the moment
If the deduction will not work increase your net income Normal is 30% of net income
w/c is tax avoidance Why: the conditions set forth in law have not been met
Law declares all income but deductions you can chose not to do Tax effort and vat effort ratio
so
Real or imposable tax
 Foreign corp. – branch profit remittance tax at a rate of 15% of
amt applied for or earmark to be remitted
Applicable to foreign corp. the branch will repatriate the income
to the mother corp.
X USA – based in USA wanted to do bus in the Phil
X PHIL fully owned subsidiary
XP earned income and wanted to repatriate it
15% BPRT? No bec it is a branch and not a subsidiary
XP is domestic corp. and XU is FC – there are 2 TP
Dividends tax at rate of 30%
GPB we don’t care where the ticket is sold or where the travel
doc is issued
The thing considered is where flight originated
British airways case:
Applying the BOAC doctrine the place of sale in Phil considered
income in the Phil
This argument is correct not applicable in the problem
The case involves an airline carrier w/o landing right

BPRT – XU creates XP branch What we discuss in GPB is AC w/ landing rights

XPB earns income and repatriated to the office XU If none apply the BOAC
Subj it to BPRT at rate of 15% Reiterated in South African Airways v. CIR

Q: for tax purposes how do you classify XPB BOAC no landing rights but is selling tickets for flights not
A: resident foreign corp. originating in the Phil
XU – resident foreign corp. P – wants to go to London
Apply the single entity concept – the head office is the same as No flight from Manila to London
branch BOAC’s tickets coming from Taiwan to London
Thus there is only one TP Query: is BOAC doing bus in the PHIL is it taxable
It is not direct duplicate taxation Yes and taxable here for it is a resident foreign corp.
The tax BPR is to tax the right to remit the income How will it be taxed: whatever its GI-deductions
1987 case
Q:w/c is better branch or subsidiary
A: know whether the country of origin you can invoke tax 1997 NIRC was enacted: airline carriers GPB
sparing rule Flight originating in the Phil
If you can then the 30% div tax is reduced to 15% Is BOAC still applicable

Subsidiary will not affect the head office or parent corp. Bar 2002: there is airline carrier w/ no landing rights selling
tickets
XP branch had the ff details of transaction How will it be taxed:
GI – 100m w/in deduction 80 No flight originating from the Phil
GI – w/o 500m deduction 400 A of experts: no tax shall be imposed for there is no tax
As to GI: originating in the PHIL
What is taxable in the Phil Note: no landing rights
The income from w/in only JB: RFC – 30% of net income
As to deductions w/in as well
The taxable income is 20m at a rate of 30% 2010 case SAA v. CIR
6m is the tax SC said that BOAC is still applicable
No landing rights still apply BOAC
Income after tax will be 14m GPB is exception to GR
Suppose that 10m is to be remitted to XU The GR is that they are taxed as RFC – 30%
Will the 10m reach XU Exception is 21/2% of GPB
No it will not, it will be subj to BPRT 15%
8.5m will be only remitted to XU
NRFC – subj to 30% tax based on their GI
From w/in the Phil only
Gross Phil billings for airline carriers – foreign air carriers
Have landing rights in the Phil 2 ½% based on GPB Read cinematographic lease – but will not be asked by JB
Landing rights: They can carry passengers to and from the Phil anymore

What will comprise the GPB Administrative matters of corp.

Example: Korean air 4 times
It has landing rights in the Phil 1st quarterly returns before the 60th day of the close of taxable
Selling tickets in the Phil quarter
Coming to Korea and going to Korea – sold in Manila Final adjusted return
Also sells in Korea
What will be part of the GPB Calendar year
Ticket sold in Manila – Fiscal year
Korea to manila: not GPB FY – Aug 24 and end Aug 23 count the 15th day of the 4th month
Flight is M – K: part of GPB Those availing the FY you must inform the BIR
Sold in Korea
K – M: not part Cumulative sys of paying and filing taxes
M – K: GPB Sec 26 allows crediting of excess
Sec 28 of the NIRC is regarding of sale of tickets is where the Principles that taxes are not subj to set-off
flight is originating in the Phil irrespective of the place of sale of
ticket and issuance of doc Returns should be filed at every close of the tax quarter
Must originate in Manila Rule is that cumulative basis of filing
 Whatever income on the 1st quarter and reflect it on the 2nd
quarter less whatever quarterly payments made Gratuitous 2 forms
1. Mortis causa – death tax
You will see that you can actually deduct the previous quarter tax a. Estate tax
payments b. Tax on inheritance w/c inheritance tax
Remember sec 76 regarding the rule on crediting excessive At present it is estate only
quarterly payment
As to those transactions subj to FT follow the usual as to 2. Intervivos– during life time
individual Gift tax
a. Donor – donor’s tax
Corp cannot avail of the 2 installment payment of taxes b. Done – donee’s tax
They have to pay upon filing of return Present only donor

Estates and trusts Lladoc is donee’s tax

How to determine the existence
Estate tax
Estate under jud settlement A tax on a right
Trust must be irrevocable trust as to both the obj and proceeds Contrary to the statement that it is a tax on the property
It actually emanates from an individual It is not on the property but on the right
If one files a case it emanates from an individual Right – to transfer property gratuitously w/c takes effect at moment of
death
E and T are taxed as if they were individuals
Rules regarding income and deductions are the same w/ Difference:
individual If on the property based on its location
If they are to be taxed as such can they enjoy personal Right is on the 3 categories of situs
exemptions – yes
Individuals are entitled to basic personal exemption There are various reasons for the exercise
ET are entitled only to 20k 1. Life blood
2. Reason w/c is to reduce social inequities
There is an explicit provision in the tax code w/c discusses about 3. Benefits received principle –there are benefits bec if a person dies
the personal exemptions of estates and trust (sec 62) The government set in that his property will be delivered to his
Only amounts to 20k heirs
This exemption rate is still applicable as to this moment The will of the decedent is followed thru the court
RA 9504 is sec 35 Settlement of estate
Nothing mentions sec 62 of the TC
Kind of decedent that is involved
Is there any difference bet tax treatment of ET v I 1. Resident or citizen decedents
Example All of their properties Phil be part of the gross estate
The ET earned income that would be a source of liability on the
part of ET 2. Non resident alien or citizen
For some reason part of the income of ET was actually given to Only those located w/in
heir or trustee
This amt can be declared as deduction Alien died in the Phil at the time he died he was residing and left behind
Considered as deduction on the gross – special kind properties here and abroad
All of his properties will be part of the gross estate
There is basic rule for this
The rule is that income given to an heir or beneficiary should X American residing in Phil
declare that as part of his taxable income HA in Baguio 10m
It must be reported as such Condo 15m
Real property in US 50m
Note of the tax exemption on EE trust When he died there were funeral expenses incurred – 200k
Employee’s trust – this is actually a fund for retiring EE Other expenses – 4.8m
Set up for the purpose of paying Q: how much is the GE
Irrevocable trust w/c is for paying EE – it is tax exempt A: question is GE the statement about deductions are distracters
No other purpose for the setting up of this Gross is the question
Thus it is 75m GE
Revocable trust fund must reported in the income If net 70m
NSNP – you still have to ADE use of RCE purpose
R and C are all the properties w/in or w/o
What is meant by all properties
A person X during his lifetime gave Y a ring but if I want to take it back I
Transfer taxation can
Not taken back the ring
2 kinds of transfers Who is the owner of the ring: Y
1. Onerous Do you include it part of X GE – yes
2. Gratuitous Bec the law says so being a revocable transfer

Tax purposes only # 2 All means – in taxation

# 1 can be subj to income or Vat All properties actually owned by decedent
Also includes all properties w/ca are deemed by law to be owned by D
Those properties deemed by law to be owned by D
there are inclusions in the GE
1. TICOD – transfer in contemplation of death
A person during his lifetime transferred properties
It is in contemplation I death was the moving factor
Thought of death was the consideration
Real intention that the transfer takes effect at moment of death

If you consider motive something you cannot see

How to know: infer from overt acts and factual circumstances
Example
Transfer made at his death bed: TICOD is not conclusive
Very sickly person: indications only