Approach To Income Taxation)

TAXATION LAW REVIEW NOTES (FINALS part) In CWTS the taxpayer must report the income received
Justice Japar B. Dimaampao as part of his gross income and hence must file an Income Tax
SBCA-SOL 4S 2017-2018 Return (ITR) whereas in FWTS if the source of income is subject to
final tax no need to file an ITR.
Table of Contents Page Why final (referring to FWTS) because it is a complete payment of
Income Taxation - March 17, 2018 1 tax liability.
Gross Income And Capital Transaction - March 24,
5 3. Explain Schedular tax treatment, global tax treatment, gross
2018
Corporate Income Taxation - April 14, 2018 13 income taxation, net income taxation.
Allowable Deduction And Special Topics - April 21,
16 Schedular Tax System is a system of taxation which
2018
imposes taxes on income of individual taxpayers. The income tax
Allowable Deductions (Continuation) And Value
21 treatment classifies income, it imposes different tax rules or
Added Tax - April 28, 2018
treatment and imposes different tax rates on different categories
of income.
March 17, 2018
Global Tax System is a system of taxation which imposes
INCOME TAXATION
taxes on income of corporate taxpayers. The income tax treat
generally does not classify income, it generally provides uniform
Recitation:
tax rules and tax rates.
1. Chapter 1 was asked one time in the bar exam. The question,
state and explain briefly the salient features of our present income
Gross Income Taxation is a tax system which no
tax system. 10pts. just like that. We have 6, then explain this briefly.
deductions and exemptions are allowed and the tax base is gross
income. Net Income Taxation is a tax system which allows
Answer:
deductions and exemption and the tax base is Taxable Income.
The following are the present salient features of our Income
Taxation:
4. Last Saturday I wrote down all income that is subject to final tax
1. Schedular System of Taxation - one that classifies income. It
and it was previously asked in the bar exam. What are the 7
provides different tax rules. It impose different tax rates.
common items of income subject to final tax? You should know it
2. Global System of Taxation - one that generally provides for
by now.
uniform rules. It imposes uniform tax rate. It does not generally
classify income.
Apply what we just said. This does not need to be reported
3. Net Income Taxation System - A system of taxation where the
because?
tax base is Taxable Income and deductions and exemptions are
Answer:
allowed.
It constitute as final and full settlement of tax liability.
4. Gross Income Taxation System - A system of taxation where the
tax base is gross income and no deductions and exemption are
Answer for income subject to final tax: (see p. 54 of Basic
allowed. Approach to Income Taxation)
5. Creditable withholding tax system - where a withholding agent
1. Dividend received from domestic corporation by individual or
withhold income and such will be included in the taxpayer's gross
non-resident foreign corporation.
compensation income and may be claimed as a tax credit or
may be deducted from the income tax due or payable.
*Supposed it is received by a corporate taxpayer, by another
6. Final withholding tax system - where a withholding agent
domestic corporation? Subject to final Tax? What is the tax
withhold income and is not included in the taxpayer's gross
treatment there?
income and which constitute as a final and full settlement of tax
Answer:
liability.
No not subject to final tax. The tax treatment is it is tax exempt.
2. Can you briefly discuss this very technical method, we have
*Supposed it is received by a resident foreign corporation? What
discussed this last week, creditable withholding tax system and
is the tax treatment? It is not subject to final tax.
final withholding tax system? Check your book (See page 2 of
Answer:
Basic Approach to Income Taxation)
The tax treatment is it is tax exempt.
Answer:
When you are asked for the tax treatment the answer should be
In Creditable Withholding Tax System (CWTS) and Final
taxable or tax exempt.
Withholding Tax System (FWTS) the common feature is that there is
a withholding agent who withholds the tax and remit the same to
2. Interest Income from bank deposit.
the BIR.
In CWTS the tax withheld is included in the gross income
*Interest income on loans is it subject to final tax?
of the taxpayer whereas in FWTS the tax withheld is not included
Answer: No.
in the gross income of the taxpayer.
Not all interest income are subject to final tax.
What is the effect of CWTS and FWTS?
*Interest income on bonds is it subject to final tax?
Answer: No.
In CWTS the tax will not constitute as the full and final
settlement of tax liability of the taxpayer contrary to FWTS where
3. Royalties
the tax withheld constitute as the final and full settlement of tax
4. Prizes
liability.
In CWTS the tax withheld can be claimed as a tax credit
*What is the Condition?
or may be deducted from the income tax due or payable on the
Answer: Amounting to more than Php. 10,000
other hand in FWTS the tax withheld cannot be claimed as a tax
credit for it constitute as the final and full settlement of tax liability.
5. Winnings
Abunales-Bernardo-Dadua-Evidente-Erum-Valenzuela-Millera-Picardal-Rafael-Ramos-Rocelyn-Suan-Talorong|SBCA TAXATION REVIEW Finals 2018 TRANSCRIPT J.D. Page 1 of 26
9. Officers and staff of Asian Development Bank (ADB), experts
*What are those exempt winnings? and consultants performing missions for the Bank shall be exempt
Answer: sweepstakes and lotto from Philippine Income Tax ( Art. XII, Sec. 45, Government
Agreement with ADB)
6. Partner's share from net income after tax of business partnership, 10. Award given by Ramon Magsaysay Award Foundation (RMAF)
joint account, joint venture or consortium. are exempt from the payment of income tax (R.A. 2062)
*When the income is from the share of a partner from the income Lets focus on those exempt in the NIRC. I do not do this to my bar
of general professional partnership is it subject to final withholding lecture but I will do this to your class. You must know that there are
tax? What is the tax treatment of the that share of a professional 57 items of income that is exempt.
partner from the income from the general professional
partnership? 1. Sec. 32 (b), you will find 19 items.
Answer: No it is not subject to final withholding tax. The tax 2. Sec. 24 and 25, there 5 items that are exempt from income tax.
treatment is it is taxable subject to progressive rates and therefore 3. Sec. 27 and 28, 4 items. Provisions on corporate income
must be reported. taxation.
4. Sec. 33 (b), 10 items. Clarified by RR 3-98. I mentioned in your
*What about the share of a business partner from the net income book in pp. 35 -36.
after tax of a business partnership? What is the tax treatment? 5. Sec. 33 (1), (2), (3) there 3 items.
Answer: It is taxable and is subject to final tax. 6. Sec. 33 (c) (4), 6 items.
7. Pp. 33 - 35 of Basic Approach to Income Tax, De Minimis Benefit,
7. Capital Gains from sale of shares of stock not traded in stock 11 items memorize this. In the last 3 years there are always
exchange questions on de minimis benefit.
8. Sec. 40 (c) , pp. 179 - 180 there are 4 items of tax exempt sales
*When is such gain subject to final tax? or exchanges "no gain no loss recognized".
Answer: When it is not traded in stock exchange. 10. Sec. 73 (b) stock dividend.
*What it the tax base? *If you can memorize this you are better than tax professors.
Answer: Net Capital Gain
6. Let us now focus on Sec. 32 (b) because among these it is the
*When is such gain transaction subject to percentage tax? most favorite. 19 exclusions from gross income.
Answer: When it is traded in stock exchange.
Answers: (see pp. 15 - 24 of Basic Approach of Income Taxation)
*What is the tax base? The following are exclusions under the NIRC:
Answer: Gross Selling Price 1. Proceeds from life insurance
2. Amounts received as return of premium
Memorize this income subject to final tax. It is for your own good. 3. Gifts, bequests and devises
*In civil law parlance these are donations inter vivos and mortis
5. These are the requisites of taxable income. If you say it is not causa.
taxable you point out the requisite that is absent. (see p. 8 - 11 of
Basic Approach to Income Taxation) 4. Compensation for injuries or sickness
5. Income exempt under treaty
1. There must be a profit or gain 6. Retirement benefits received by officials and employees of
2. The gain must be realized or received private firms, individuals or corporations. Retirement benefits paid
3. The gain must not be excluded by law (tax code), to employees who have reached the age of 60 or more but not
special law or treaty from taxation beyond 65 years with at least 5 years of creditable service under
RA 7641
Please refer to P. 24 to 25 of your book. Try to memorize those 10 7. Separation benefits due to death, sickness or other physical
items there. They are exempt by virtue of special law. One or two disability or for ANY CAUSES BEYOND THE CONTROL of said official
of them will come out in the bar exams. or employee.
8.Social Security benefits ,retirement gratuities received by
resident or non-resident citizens or resident aliens from foreign
The following are exempt by virtue of special law: (p. 24 - 25 of government agencies and other private or publics institutions.
Basic Approach to Income Taxation) Pensions received by retirees from foreign sources.
1. Prizes received in charity, horse racing sweepstakes from the 9. Benefits received from US Veterans Administration (RA 360) by
PCSO (R.A. 1169) veterans residing in the Philippines
2. Salaries and stipend in dollars received by non-filipino citizen 10. Payment of benefits under the SSS under RA 8282
serving as staff of International rice research institute ( R.A. 2707) 11. Benefits received from GSIS under RA 8291
3. Salaries and stipend in dollars received by non-filipino citizen *Miscellaneous Items there are 8.
serving as staff of Ford foundation grants (R.A. 3538)
4. Salaries and stipend in dollars received by non-filipino citizen 12. Income Received by foreign governments from their
serving as staff of Agricultural Department of the Southeast Asian investments in the Philippines
Fisheries Development Center (P.D. 246) 13. Income derived by the government of the Philippines or any
5. Salaries and stipend in dollars received by non-filipino citizen of its political subdivision from any public utility of from the exercise
serving as staff of Population Council of New York (P.D. 246) of any essential governmental function
6. Income from bonds and securities for sale in the international *Must be derived from the exercise of any ESSENTIAL
market (P.D. 81) GOVERNMENT FUNCTION.
7. Income from bonds and securities issued by EPZA (P.D. 66) 14. Prizes and awards received in recognition of religious
8. Income derived from the installment sales of houses to their charitable , scientific, educational, artistic, literary or civic
employees and workers or to low-income groups in housing achievement.
projects or income derived from rentals thereof (P.D. 745 and 1217 *It must be answered by "received in recognition of..."
-- Housing Program of the government)

15. Prizes and awards in sports competition granted to athletes representing moral damages and exemplary damages, are these
whether held in the Philippines or abroad and sanctioned by their amounts subject to tax?
national sports associations
16. 13th-month pay and other benefits
*The exempt amount now is 90,000. (train law) Answer:
No, it is not taxable because it does not qualify as income. The
17. GSIS, SSS, Medicare and other contributions requisite of taxable income that is absent here is that there is no
18. Gains from sale or exchange of retirement of bonds, gain or profit to speak of.
debentures or other certificate of indebtedness with a maturity of
more than 5 years, 11. What about the amount representing exemplary damages?
19. Gains from redemption of shares in Mutual Fund Company
Answer:
7. Next question, can you tell us why it does not constitute as No, it is not taxable because it does not qualify as income.
income?
12. What are the grounds for recovery of Moral Damages? There
Answer: are 9. You are supposed to know them.
1. Proceeds of life insurance - it is an indemnity rather than as a
gain or profit. Answer:
*In the bar exam the prennial sub-question is "does that form part Under Art. 2217 of the New Civil Code.
of the gross estate"? 1. Physical suffering
Answer: It depends. You mark section 85. It depends upon the 2. Mental Anxiety
beneficiary designated. Excluded under two cases, included 3. Freight
under two cases. 4. Serious Anxiety
Excluded in two cases: 5. Besmirched reputation
It shall not form part of the gross estate: 6. Wounded Feelings
1. If third person is irrevocably designated as 7. Moral Shock
beneficiary, 8. Social Humiliation
2. If it partakes as a proceeds of group insurance. 9. Similar Injury.
Included in two cases: * Do not make your answers long.

It forms part of the gross estate:
1. If third person is revocably designated as beneficiary; 13. What are the requisites for exemption under the law (RA 7641)?
2. The beneficiary is the estate, executor or administrator This is an amendment in the labor code -- RA 7641. The retirement
is designated as beneficiary, revocable or irrevocable. benefits paid to the employees who have reached the age of 60
or more but not beyond 65 years with at least 5 years of cedited
service.
2. Amount received as a return of premium - it is a return of capital
3. Gifts, bequest and devises - it is not a product of capital nor 14. What are the requisites for exclusion of retirement benefits
industry under the tax code?
4. Compensation for injuries or sickness - it is not a gain/profit adds Answer:
nothing to the individual a. Reasonable private plan maintained by the employer duly
5. Income exempt under treaty - it adheres to the generally approved by the BIR for exclusive benefit of the members -
accepted principles of international law. employees
6. Income received by foreign governments from their investment b. Retiring official or employee who has rendered at least 10 years
in the Philippines - it is to lessen the burden of foreign loans in as of service
much as the interest of these loans are, by contractual c. At least 50 years of age at the time of the retirement
agreement, borne by the domestic borrowers d. The benefit of exclusion shall be availed of only once
7. Income derived by the government of the Philippines or any of
its political subdivision from any public utility of from the exercise 15. He retired from his first employment, assuming all 4 requisites
of any essential government function - it is in recognition of the are present to exempt, he subsequently got employed and after
principle of exemption from taxation of government agencies rendering service for 3 years he retired from such employment
and entities. and he received again a retirement benefit. Is that second
retirement benefit taxable?
8. What are the possible implications of donation inter vivos? Answer: Yes it is taxable because under the requisite of exemption
such benefit exclusion it must be availed of only once. (it applies
Answer: to private employees)
1. Donation is subject to donor's tax.
2. The Donee is subject to donor's tax. 16. When is separation pay tax exempt?
3. The recipient of such donation not subject to income tax. [sec. Answer: If the separation pay is due because it is beyond the
32(b) item (3)] control of said offical or employee.
17. If the employee receive separation pay as a result of voluntary
9. What is the possible implications of donation mortis causa? resignation is it taxable?
Answer: Yes because it is within the control of said employee.
Answer:
1. It is subject to estate tax 18. What is the Zialcita Doctrine or the judicially recognized cause
2. The heirs are not subject to inheritance tax of beyond the control of the employee or official?
3. The heirs are not subject to income tax [sec. 32 (b) item (3)] Answer: Compulsory Retirement
10. Let us go to compensation for injuries or illness. This is the 19. What are those payments that may comprise compulsory
perennial bar questions: The amounts granted by the court retirement?
Answer: Lump Sum Credits -- Terminal leave pay
1. Interest income received by the individual taxpayer from a
20. How do you distinguish separation pay from retirement depository bank under expanded foreign currency deposit
benefits? system provided that the individual depositor is non -resident
Answer: individual.
In separation pay you the exemption hold regardless of 2. Winnings from sweepstakes and lotto
age and length of service, in retirement benefits the retiring 3. Prizes amounting to Php. 10,000 or less
employee must be at least 50 years of age render 10 years of 4. Interest income from long-term deposit
service. 5. Investments in the form of savings, common or individual trust
In separation pay the law does not require that the funds, deposit substitutes, investment management accounts and
exclusion be enjoyed once, in retirement benefits the exclusion other investments evidence by certificates in such form
must only be availed once. prescribed by BSP.
In separation pay it must be because of causes beyond 27. The 6% Capital Gains tax is a perennial question and may be
the control of the employees, in retirement benefits there is no avoided upon the concurrence of 5 requisites.
such requisite. Answer:
In separation pay there is no private plan to be 1. The subject of sale must be real property classified as capital
maintained by the employer, in retirement benefits there must be asset.
a reasonable retirement plan. 2. The proceeds of the sale must be fully utilized in acquiring or
constructing a new principal residence
3. BIR should be notified of the intention to avail of the exemption
21. The case of Commisioner vs Mitsubishi Metal Corp. has not within 30 days from the date of sale or disposition
been asked in the bar exam. It is a potential bar question. Read 4. Acquisition or construction of new principal residence must be
original case. (see p. 22 of Basic Approach to Income Taxation) made within 18 months from the date of sale or disposition
5. The Tax exemption can only be availed of once every 10 years.
In this case the exemption for income received by foreign
government from their investment in the Philippines, to be exempt, March 24, 2018
the creditor must be the foreign government or financing GROSS INCOME AND CAPITAL TRANSACTION
institution owned, controlled and established by it.
Q: Let’s start at Sec. 32 (A) of NIRC. That was the first question in
22. There are 3 exempt recipient of such income received by the bar exam. Now you underscore the phrase “Whatever source
foreign government from their investment in the Philippine? derived”. Thus has been subject of Bar question. What do you
1. Foreign Government understand by that phrase “Derived from whatever source? What
2. Financial Institution controlled or financed by the foreign does it imply?
government
3. Regional or International financing institutions established by A: It implies that the source is immaterial including but not limited
the foreign government. to the following items:
Q: What is this connotes?

23. How do you distinguish the 2 exempt prizes and rewards in par.
C & D? A: It connotes that the enumerations are not exclusive. It means
Answer: that these are not only the sources of income that is subject to tax.
In Par. C it must be received in recognition of religious,
charitable, scientific, educational, artistic, literary or civic Q: So on pages 6 to 7 on your book, I mentioned 7 items and 5
achievement; in Par. D it must be from a sport competition came out in the bar exams. There are sources of income not
granted to athletes in local or international sport competitions. mentioned in Sec. 32(A). Yet, these are still taxable. Other than
In Par. C there must be no action on his part to enter the these 11 items mentioned in Sec. 32 (A), there are other items of
contest or proceeding; in Par. D there is no such prohibition. income which will fall under the phrase “Income which ever
In Par. C it must be an unconditional receipt of such derived from whatever source.” What are these?
prize; in Par. D. there is no such requirement.
In Par C there is no requirement of accreditation, in Par. A: Under the Tax Code, however, income derived from whatever
D the national sport association must be accredited by the source forms part of the taxpayer’s income. This includes the
Philippine Olympic Committee. following:
(1) Treasure found or punitive damages representing profits
24. Let us go to transactions involving gains from sale or exchange lost (Actually this composes into two parts: Treasure
of retirement of bonds, debentures or other certificate of found and lost profits which makes an 8-item
indebtedness, what are the gains that are exempt? There are 3. enumeration.
Answer: (2) Amount received by mistake when the free disposal be
1. Gain derived from the sale of these bonds, debentures or other applied by the control test
certificate of indebtedness (3) Cancellation of the taxpayer’s indebtedness when the
2. Gain derived from the exchange of these bonds, debentures debtor renders in consideration of services
or other certificate of indebtedness (4) Payment of usurious interest
3. Gain derived from retirement (5) Illegal gains
(6) Tax refund
*Interest Income on bonds having a term of more than 5 years is (7) Bad debt recovery
tax exempt?
Answer: Not exempt. Q: BAR 2013: When does amount obtain or received by mistake
constitutes taxable income in Javier v. CA (199 SCRA 824)? What
25. When is gain derived from redemption of shares exempt? is the general rule and exception to the rule and apply the Control
Answer: If it is from Mutual fund company. tests?
26. Let us go to sec. 24 and 25. There are 5 exempt items there. A: The general rule, it is not taxable because under Art. 2154 of the
Answer: Civil Code provides that “If something is received when there is no
right to demand it, and it was unduly delivered through mistake,
the obligation to return it arises. (Solutio indebiti).” There is an (3) Taxable Capital Transaction: It will amount to taxable
obligation of the receiver to return the undue payment. That is capital transaction when the creditor is a corporation
why, it is not taxable. and the debtor is a stockholder. Under Sec. 50 of RR-2, it
is in effect of an indirect dividend.
However, it is taxable if you apply the Control Test. According to
an American jurisprudence, Helvering v. Horst (311 US 112), Control “SECTION 50 of RR-2. Forgiveness of indebtedness. — The
Test is the power to procure the payment of income and enjoy cancellation and forgiveness of indebtedness may amount to a
the benefit thereof. payment of income, to a gift, or to a capital transaction,
dependent upon the circumstances. If, for example, an individual
Q: Javier v. CA (199 SCRA 824) – the Melon Bank case - He was performs services for a creditor, who, in consideration thereof
supposed to receive $1,000 but by mistake he received $1 million. cancels the debt, income to that amount is realized by the debtor
He spent his excess in banks and properties here and in abroad. Is as compensation for his services. If, however, a creditor merely
there subject to tax? desires to benefit a debtor and without any consideration therefor
cancels the debt, the amount of the debt is a gift from the creditor
A: Yes, by applying the Control Test, he used the excess payment to the debtor and need not be included in the latter's gross
received by mistake in his own benefit. income. If a corporation to which a stockholder is indebted
forgives the debt, the transaction has the effect of the payment
Q: PROBABLE BAR QUESTION: in the case of North American of a dividend.”
Consolidated v. Burnet (286 US 417), Supposed it was received Q: Is such indirect dividend mentioned above subject to Regular
under trust. Is such received under such amount in trust subject to graduated rates or Final income tax?
taxable income?
A: No, Sec. 24 and 25 of NIRC mentioned therein cash or property
A: As a general rule, No, it is not taxable because there is no flow dividend however, in this case, it is not in the nature of cash nor
of wealth or income on his part which he does not own but in trust. property dividend and therefore, it is not subject to Final Income
Therefore, there was no income. tax. Subject to regular graduated rates.
Q: When will it amount to taxable income? Q: When will such tax refund resolve to taxable income?
A: It will amount to taxable income when there is a realization of A: It is taxable by applying Tax Benefit Rule. In other words, the
income or there is a flow of wealth of income. recipient must receive tax benefit. Tax Refund is subject to taxed
if such recipient receives such tax benefits.
Q: When will that arise in relation to the case above?
Q: What is Tax Benefit Rule? And what is tax benefit?
A: In this case of North American Consolidated v. Burnet (286 US
417), It has been held that if a taxpayer receives earnings under a A: It applies to two cases: Tax Refunds and Recovery of Bad Debts
claim of right without restrictions as to its deposition, he received written of. So if tax refund, it is subject to tax if the receiver receives
income even though it may still be claimed that he is not entitled tax benefit. Tax Benefit refers to expenses that are refer to tax
to retain the money and even though he may still be adjudged refund which taxes are paid then subsequently refunded and loss
liable to restore its equivalent. This is an exception to the rule that or bad debt, Bad debt claimed as deduction subsequently
income received through mistake is not taxable as its receipt is recovered. That is the Philippine Jurisprudence. It is a rule that Tax
offset by liability to the party making the excessive payment. (2015 refund or recovery of bad debt written-off resolves to tax savings.
Book, p.6) It is a rule that recognizes that taxability of Tax refund or recovery
of bad debt written-off provided that on the condition that such
Q: Bar Question: What are the basis that such illegal gains are tax refund or bad debts are actually claimed as deduction in
taxable? previous or preceding or prior taxable year.
A: These are taxable. In Rutkin v. US (343 US 130), illegally acquired To summarize, the following are the conditions on the tax benefit
income constitutes realized gain called as a “Claim of right rule:
doctrine.” (1) The tax refunded or Bad debt recovered must and was
a deductible tax.
Q: Bar 2015: When does Cancellation of the taxpayer’s (2) It must be actually claimed as a deduction in the
indebtedness amounts to taxable income? previous or preceding or prior taxable year.
A: It tantamount to taxable income when if the cancellation, Tax Benefit rule is a rule which limits the recognition of income from
forgiveness or renunciation of an obligation amounts to taxable the recovery of an expense or loss properly deducted in a prior
income in the nature of compensation income in the following taxable year to the amount of the deduction that generated a
situtation: tax savings. Under this rule, if an amount deducted from gross
 the creditor is the employer and the debtor is the income in a prior taxable year is recovered in a later year, the
employee. recovery is income in the last year. (Tennessee Carolina
 there is an employer-employee existing relationship Transportation Inc. v. CIR, 6, 586 F 2nd 378, 379).
between them
 That in consideration of services rendered. Q: What are the Four (4) non-deductible taxes where you can find
it in sec. 34(C)?
Q: what are the other two tax implications found in the book?
A: A: These are the following
(1) Taxable Compensation Income: It was given by the (1) Donor’s Tax
employer from the obligation of the employee in (2) Estate tax
consideration for the services rendered. (3) Income Tax
(2) Taxable Donation: It will be amount to taxable donation (4) Special Assessment
when the employer asks the creditor to cancel, forgives
or renounce the debt of the employee and more so, no
consideration was given by the employee. (Bar 2001).
There you will find the tax benefit rule and shall be included part Situation#1: The Employee is Managerial or supervisory employee
of gross income in Sec. 32(A) in the year of receipt to the extent and the beneficiary is the heirs, family, executor or administrator
of income tax benefit offset. This is precisely the tax benefit rule. of the estate of the Employee
The Employer can deduct the amount of the premiums paid as a
Q: Sec. 34 (D) what are the two conditions of which bad debts form of business expense under Sec. 34A(i) and the Life insurance
recovered as taxable income? Premium is subject to Final Tax on fringe benefit
A: These conditions are as follows: Situation#2: The Employee is Rank-and-File employee and the
(1) Requisites of deductibility of bad debt expense are met beneficiary is the heirs, family, executor or administrator of the
then it is deductible estate of the Employee
(2) When it is subsequently recovered. The Employer can deduct the amount of the premiums paid as a
form of business expense under Sec. 34A(i) and the Life insurance
Q: what are the requisites for the deductibility of Bad debts Premium is considered a Compensation Income subject to the
expense? progressive rate of 20-35% of the employee's income tax.
A: The requisites are as follows: Situation#3: The beneficiary is the employer regardless of nature
(1) Ascertained to be worthless of an employee
(2) It must arise from a valid and existing obligation The Employer cannot claim it as deductions or expenses because
(3) Charged for against the books of the taxpayer the insurance proceeds are but a mere return of capital under
(4) It must be uncollectible in the near future Sec. 36A(4) and Life insurance premium is not taxable to the
(5) It must related to taxpayer’s trade or business employee since there was no benefit received by the EE or his
family.
When these requisites are present, the amount is deductible and
when if it is subsequently recovered. Q: These is a possible question on distinction. The rule before was
compensation income and fringe benefits were treated under the
Q: Can you think a situation under which creditor-Taxpayer may same tax treatment. But in the light of Sec. 33, we can now
possibly recovered that? develop 5 or 6 distinctions. Give the distinctions between
Compensation income and fringe benefit.
A: When the debtor financial position is improved such as when
the bank grant a loan to a depositor who was subsequently A: The distinction between compensation income Sec. 32(A) and
declared a bankrupt and the bank recovered such loan. fringe benefit Sec. 33 are as
Q: Potential Bar Question: In Item 1 of Sec. 32 (A), what is that? (1) As to Tax rate, Compensation Income are taxed by
progressive rates. Whereas, Fringe Benefits are taxed by
A: Compensation Income. Final income tax.
Q: A while ago, we stated the rule that cancellation, forgiveness (2) As to tax base, Compensation income is taxed based on
or renunciation of an obligation may amount to taxable total amount actually or constructively received by the
compensation income if it is cancelled or renounced in employee. On the other hand, Fringe Benefit, the final
consideration of the services rendered by the employee. What is income tax is based on grossed-up monetary value.
your basis under the tax code? There is a cash received normally
in cash. The argument of the employee is not taxable. Is his (3) As to taxpayer’s covered, Compensation income is
argument tenable? It is not. What is that provision tells in Sec. covered by rank-and-file employees as well as
32(A)(1) in such a rule? managerial and supervisory employees. While Fringe
Benefits only applies to managerial employees as well as
A: “in whatever form paid” supervisory employees.
Q: What is the test in determine whether income is compensation (4) As to the method of collection/system of collection.
or not? Compensation income, it is subject to creditable
withholding tax. On the contrary, Fringe Benefits, it is the
A: it must be one and payment must be paid under in an final withholding tax subject final income tax.
Employer-employee relationship.
(5) As to whether or not the income will be reported
Q: Bar Question: Aside from the cancellation, forgiveness or (Reporting), Compensation income, it is required for the
renunciation of an obligation as taxable compensation income, employee to file an ITR for he or she received
what is that other form of compensation income? compensation income for the entire year. Meanwhile,
Fringe Benefit, it is no longer be required because the
A: No cash receive is in the form of payment of life insurance final income tax is already made which constitutes its
premium. final income tax.
This must be distinguish. Part of compensation income or subject (6) As to the application of substituted filling of Income Tax
to final tax. Before, that was rendered as part of compensation return (ITR), Compensation income, the substituted filing
income. No qualification. But in Sec. 33(B)(10), you really need to only applies to taxpayers who are purely compensation
qualify. income earners. In contrast to Fringe Benefit, such rule
on substituted filing is not anymore included simply
Q: Let’s formulate this probable bar question. State the tax because he tax on fringe benefits being subject to final
treatment of life insurance premiums paid by the employer on the withholding tax. The final tax constitutes full settlement.
life insurance policy of the employee. Hence, it is no longer required to be reported under the
tax code.
A: Consider whether the employee is rank and file, managerial or
supervisory employee. Q: Before, as asked at the bar, taxable compensation income.
The rule was changed by the TRAIN Law. What is now the tax base
the basis for the 20-35% progressive rates? It is no longer taxable
compensation income. (1) Stock in trade: Stock in trade of the taxpayer or other
property of a kind which would properly be included in
A: Gross compensation income because personal and additional the inventory if on hand at the close of the taxable year
exemptions are no longer available in the TRAIN Law. (raw materials, work in process, finished goods, supplies);
(2) Inventoriable assets
Q: Gains derived from buildings and property. What do you (3) Property primarily held for sale to customers in ordinary
understand with that? What is its source? course of trade or business: Example is real estate.
(4) Depreciable property used in business: Property used in
A: It is derived from sales, exchanges or barters (Dealings) trade or business of a character which is subject to the
allowance for depreciation. Examples are machineries
The tax code does not define Sales. The tax code does not define and furniture and fixtures
the meaning of exchange. This brings us to the definition of sales (5) Real property used in trade or business of the taxpayer.
under art. 1458 of the civil code which provides “ARTICLE 1458. By
the contract of sale one of the contracting parties obligates Q: Explain inventoriable assets?
himself to transfer the ownership of and to deliver a determinate
thing, and the other to pay therefor a price certain in money or its A: In cost accounting, these are parting of the finished goods, raw
equivalent. A contract of sale may be absolute or conditional.” materials and work in process.
As regards to exchange, “ARTICLE 1638. By the contract of barter
or exchange one of the parties binds himself to give one thing in Q: what are the common dominant relationship of these five
consideration of the other's promise to give another thing.” In a Enumeration?
sale there two parts there. The buyer and seller.
A: they are used in trade or business. The enumeration is exclusive.
Q: Who may be the possible recipient to that deal? The buyer or What is not ordinary asset or not included in the 5 enumerations is
the seller? considered and classified as capital asset.
A: the seller. Q: What are Capital Assets?
Q: What about lease? Is that included? A: Capital Assets are not ordinary assets means property held by
the taxpayer whether or not connected with trade or business
A: No. except other than the following:…
Q: Bar 2010. The word property is exchange to what in sec. 39 and Q: “Whether or not connected with trade or busniess.” What does
then Sec. 40? it imply?
A: Asset A: It implies that capital assets may include properties which are
held by the tax payer in connection with trade or business.
Q: There are four (4) exempt gains from exchanges of property,
shares of stocks and securities? Q: Not considered as ordinary capital though they are held or
used in connection in trade or business. In Balance sheet, recall
A: These are Tax exempt sales or exchanges and considered “no on section on assets. Assets may either tangible or intangible
gain, no loss recognized” under Sec. 40(C)(2) assets. What are the two intangible assets held by the taxpayer
(1) Property for Stock: Between corporations which are which may be found in the balance sheet held by the taxpayer
parties to the merger or consolidation. held in connection with his trade or business? And if these are sold
(2) Stock for Stock: Between a stockholder of a corporation in a profit, then it is treated as a capital gain.
party to a merger or consolidation and the other party
corporation. A: (1) Accounts receivables from transaction and (2) gain or
(3) Securities for securities or stock: Between a security business goodwill. These are not mentioned in the 5.
holder of a corporation party to the merger or
consolidation and the other corporation. Q: Distinguished Ordinary gain from Capital gain?
(4) Property for stock: Transfer or exchange of property for
stock resulting in acquisition of corporate control. A: Ordinary gain derives from the same sales or exchanges of the
following assets (the 5 enumeration). On the other hand, capital
Q: What is the formal which in the language of the court in the gains derived from sales or exchanges of properties held by the
case ___ as form of tax avoidance. taxpayer held in connection with his trade or business except the
following 5.
A: This is a transfer of property for stock. One person including
others not exceeding four exempt property for stock as a result Q: Why do you have to know whether the subject of sale is
thereof these person/s acquired corporate control. ordinary or capital?
Q: Treating on capital asset. Sec. 39(A)(1). What are ordinary A: because different tax treatment applies to each transactions.
assets? Capital Asset? Distinguish Ordinary asset with Capital If it were capital, the gain derived therefrom the sale, the subject
Asset? Distinguish Ordinary gain from Capital Gain? of which is the special rules. Every time these rules are passed are
killer attacks. Sec. 39(B)(C) and (D). They are the Holding period
A: Ordinary assets are defined by enumeration. Capital assets are rule, loss limitation rule and the net capital loss carry over.
defined by exclusion.
Q: What are the three special rules on Capital Transactions?
The NIRC (Sec. 39) defines capital assets by exclusion. There is no
concrete definition. The term “Capital Asset” means property held A: These are (1) The Holding period rule; (2) Loss limitation Rule and
by taxpayer (Whether or not connected with his trade or (3) Net Capital Loss/Carry over.
business), but does not include the following (These are ordinary
assets).
Q: Explain Holding Period Rule? What is the holding period? When Q: Is that capital loss paid or incurred in connection with the trade
will it be subject to capital gains tax? When it is liable for 100% or or business of the taxpayer?
50%?
A: No.
A: 100% of Percentage of gain or loss recognized if the asset was
held for not more than 12 months and 50% of such if the asset was Settled rules:
held for more than 12 months. The Holding period is the length of (a) Ordinary loss is deductible from ordinary gain.
time the asset was held by the taxpayer. It covers the period from (b) Capital loss is deductible from capital gain.
the date of acquisition of the assets to the date of sale. In (c) Capital loss is not deductible from ordinary gain;
computing the period, the day on which the property was (d) Ordinary loss is deductible from capital gain
acquired is excluded, the day on which it was disposed of is
included. Q: Question of J. Vitug: I did not state the reason there why
Ordinary loss is deductible from capital gain. What must be the
Q: The law on sec. 39(B) does not say what year but 12 months. basis for such rule? Why is it that? Let’s try to analyze. What does
What is the difference? Seek the law in Art. 13 again. the principle of matching of cost against revenue imply?
A: In the New Civil Code, 1 year is consist of 365 days, 1 month A: (No answer given by J.D. in class)
consists of 30 days.
TAPSI notes 2007:
Q: Short term capital gain and long-term capital gain. Explain. Q: Can you deduct ordinary loss from capital gain?
A: YES, the NIRC provides no prohibition against it.
A: In short term capital gain that is a gain derived from the sale or
exchange or disposition of capital asset if the property sold within Q: Net capital loss/Carry over, what should be carry over?
the period of not more than 12 months and then it is taxable for
100%. Meanwhile in Long-term Capital gains, it is a gain derived A: The capital loss. It must be arise from capital transaction
from the sale, exchange or disposition of capital asset that was involving capital assets. The capital loss may be carried over on
held more than 12 months. Thus, the latter is a form of tax the succeeding year which may be deducted from the capital
avoidance. gain.
Q: To whom taxpayers do this rule apply? Q: how much is the amount that should be carried over?
A: it only applies to individual taxpayers because it is clear under A: Up to the extent of net income during the year, not to exceed.
sec. 39(B) of NIRC states “other than corporate taxpayers.” In the
case of corporate taxpayers, it is considered always 100%. Q: what do you mean by net capital loss?
Q: Explain Capital loss limitation Rule? A: It is the excess of capital loss over capital gain.
A: The capital loss is deductible only from Capital gains. It applies Q: Example the capital gain amounts to ₱150,000, how much must
to individual or corporation taxpayers except not Banks and trust be the capital loss that it will resolve to net capital loss?
companies.
A: It must be more than ₱150,000.00. So, ₱170,000 of capital loss
Q: BAR 20003: what is the rationale to the rule that Capital loss is resolve to have a net capital loss of ₱20,000.00.
not deductible to ordinary gain?
Q: How do you distinguish net capital loss-carry over from net
A: Capital loss is not deductible from ordinary gain because it is operating loss carry over? Return to Sec. 34(D)(3).
not derived in connection with the trade or business of the
taxpayer. A: The following distinctions are here as follow:
(1) As to Transaction covered
Note: do not answer like this “It cannot claim deduction from Net capital loss-carry over, it must involve capital asset. While Net
ordinary gain because it is deductible to capital gain.” If I were operating loss carry over, it must covered ordinary transactions
your examiner, I will give you a zero. and therefore involve ordinary asset.
Q: You have mentioned the principle of Matching of costs against (2) As to taxpayer covered
revenues? What is that principle n economics. Net capital loss-carry over applies to individual taxpayers other
than corporate taxpayers. Whereas Net operating loss carry over
A: It dictates that the expenses or costs, which may be deducted applies to individual and corporate taxpayers. The law makes no
from the Revenue, must be paid or incurred in connection with distinction.
the production of such income or revenue. It means that it is
connected with the business or trade. (3) As to the number of years (Period)
Net capital loss-carry over for one year. In contrast to Net
TAPSI notes 2007: Under Sec. 34, there's a rule on matching cost operating loss carry over for three years or 5 years, as the case
against revenue. This principle states that ―Only ordinary and may be.
necessary expenses (business connected expenses) are
deductible from Gross income or Ordinary income. These non- Q: One of the Bar question there is the 6% of capital gains tax.
business connected expenses cannot be considered as Well, this applies. Supposed that the subject of sale is a real
deductible items. Capital loss is non-business connected expenses property not used in trade or business. Is these special rules
as it arises or can be sustained only from capital transactions. If we applicable?
allow capital loss as a deduction from ordinary income, it will
violate this rule that only ordinary and necessary expenses are A: No, you apply Sec. 34 (D) (1) the 6%.
deductible from Gross income as required by the Principle of
Matching cost against revenues

Q: Sale of shares of stock. Sold and traded in local stock A: Yes, Scholarship granted to the employee in the condition that
exchange. You will find that in Sec. 24,25,27,28. Are these special the employee must remain to the employment of the employer
rules applicable? as an expression of gratitude.
A: No, the special rules applies only is now 15% final tax based on Q: What about the benefit for scholarship grant given to the
net capital gain. dependent?
Q: what do you mean by net capital gain? Sec. 39(A)(2) A: the dependent must have passed the competitive exam
conducted by the employer.
A: Net capital gain refers to the excess of capital gain over capital
loss. TAPSI Notes 2007:
EDUCATIONAL BENEFIT – for the employee or his dependent
Fringe Benefits EXEMPT in 2 CASES:
Q: It was asked several times in the bar. In addition to exclusions 1. Scholarship grant to managerial or supervisory
to Sec. 33(B), I mentioned ten exempt fringe benefits. Pursuant to employees – there must be a written agreement that the
RR-3-98, there are ten items there in Sec. 33 (B). On Item 1- Housing employee shall remain in the employ of the employer for
benefits, may be exempt under four (4) cases. What are these four a certain period of time, and such a scholarship is
exempt housing benefits? required by the nature of the employer’s business.
2. Scholarship grant to the dependent/s of an employee –
A: Housing units, it is exempt by applying the convenience of the the dependent must have passed the competitive
employer. exam conducted by the employer.
(1) Within the business premises of the employer. A housing
unit which is situated inside the business premises; Q: Then go to the last, “Premiums” – there are three.
(2) A housing unit which is situated outside at most 50 meters
from the perimeter of the business premises; A: Premiums paid on life or non-life insurance on (1) SSS, (2) GSIS
(3) Temporary housing for an employee for 3 months or less; and (3) Group Insurance Policy.
(4) Military housing units. Housing privilege of military officials
of the AFP located inside or near the military camps. Sec. 33 (C) Fringe Benefits Not Taxable. — The following fringe
benefits are not taxable under this Section:
Q: Do you know the rationale for Military housing units? (1) Fringe benefits which are authorized and exempted from tax
under special laws;
A: It is said in the revenue regulation. The rationale is that The (2) Contributions of the employer for the benefit of the employee
military officials of the Armed Forces of the Philippines were to retirement, insurance and hospitalization benefit plans;
provided housing units so that they should be readily concord of (3) Benefits given to the rank and file employees, whether granted
such exigency of military service in the case at bar. under a collective bargaining agreement or not; and
(4) De minimis benefits as defined in the rules and regulations to
Note: Sec. 2.33 (B)(1)(f) of RR-3-98 provides "Housing privilege of be promulgated by the Secretary of Finance, upon
military officials of the Armed Forces of the Philippines (AFP) recommendation of the Commissioner.
consisting of officials of the Philippine Army, Philippine Navy and
Philippine Air Force shall not be treated as taxable fringe benefit Q: What is the new deminis benefits? That used to be 10 items but
in accordance with the existing doctrine that the State shall in RR-1-2015 it is now 11
provide its soldiers with necessary quarters which are within or
accessible from the military camp so that they can be readily on A: Collective Bargaining agreement benefits and benefits derived
call to meet the exigencies of their military service" from productivity incentive schemes not exceeding ₱10,000.00
per annum.
Q: Now go to Item 7 – What is that travelling expenses? Board and
travel. Acquired the rule on convenience. Acquired to the nature Q: what are the characteristics and features of fringe benefits?
and necessary to the fact of employer’s business. What and why are they exempt?
A: These are business conventions or meetings that implies a valid A: The Characteristics are as follows:
commitment of the employer. (1) Purpose: to promote contentment, health, efficiency
and goodwill.
TAPSI Notes 2007: (2) they are relatively small value
Expenses for Foreign Travel
Exempt If: Q: Enumerate the 11 deminis benefits:
1. Required by the nature of the employer’s trade, business (1) Monetized unused vacation leave credits of provate
or exercise of profession; employees not exceeding ten (10) days during the year;
2. Paid or incurred in connection with the business (2) Monetized value of leave credits paid to government
conventions, mtgs or seminars abroad; officials and employees;
3. All expenses are substantiated by receipts or documents (3) Medical cash allowance to dependents of employees
4. there must be an official communication coming from not exceeding ₱750.00 per employee per semester or
the business associates abroad; ₱125.00 per month.
(4) Rice subsidy of ₱1,500.00 or one (1) sack of 50-kg. rice
Tax treatment of the cost of airline ticket: per month amounting to not more than ₱1,500; (BAR
Economy class- Exempt 2007)
Business class- Exempt (5) Uniform and clothing allowance not exceeding
1st class tickets--- are exempted only up to 70% ₱5,000.00 per annum
(6) Actual medical assistance, e.g., medical allowance to
5. Allowance exempt only up to $300.00 cover medical and health care needs, annual
medical/executive checkup, maternity assistance, and
Q: on Item 9 – There two there. Educational Benefits, is it exempt? routine consultations, not exceeding ₱10,000.00 per
annum.
(7) Laundry allowance not exceeding ₱300.00 per month.
(8) Employee achievement awards, e.g., for length of A: follows:
service or safety achievement, which must be in the (1) Sec. 27 – ““Intercorporate Dividends – Dividends
form of tangible personal property other than cash or gift received by a domestic corporation from a domestic
certificate, with an annual monetary value not corporation liable to tax under this Code shall not be
exceeding ₱10,000.00 received by the employee under subject under this title.
an established written plan which does not discriminate
in favor of highly paid employees. (2) 28(A)(7)(d) – “Intercorporate Dividends – Dividends
(9) Gifts given during Christmas and major anniversary received by a resident foreign corporation from a
celebrations not exceeding ₱5,000.00 per employee per domestic corporation liable to tax under this Code shall
annum. not be subject under this title.
(10) Daily meal allowance for overtime and night/ graveyard
shift work not exceeding twenty-five (25%) of the basic (3) 73(B) – Stock dividend. “A stock dividend representing
minimum wage. the transfer of surplus to capital account shall not be
(11) Collective Bargaining agreement benefits and benefits subject to tax. However, if a corporation cancels or
derived from productivity incentive schemes not redeems stock issued as a dividend at such time and in
exceeding ₱10,000.00 per annum. such manner as to make the distribution and
cancelation or redemption, in whole or in part,
Q: what are those ₱5,000? essentially equivalent to the distribution of a taxable
dividend, the amount so distributed in redemption or
A: There are three cancellation of the stock shall be considered as taxable
(1) Uniform and clothing allowance income to the extent that it represents a distribution of
(2) Christmas bonus earnings or profits.
(3) Major anniversary celebrations
Q: If the recipient is individual stockholder, is the dividend received
Q: What are those ₱10,000? exempt?
A: There are three A: No, it is subject to final tax

(1) Actual medical assistance
(2) Employee achievement awards Q: There are two tax exempt, intercorporate dividends. What are
(3) Collective Bargaining agreement benefits and benefits these two? P. 53
derived from productivity incentive schemes
A: There are:
Q: BAR QUESTION: State the rules on the receipt of monetized or (1) Sec. 27(D)(4) – ““Intercorporate Dividends – Dividends
commutation unused value of vacation or sick leave credits? received by a domestic corporation from a domestic
corporation liable to tax under this Code shall not be
A: The rules are here as follows subject under this title.
(1) If the employee is a Government Employees or officials, his
commutation or monetized value of vacation pay is Tax exempt (2) 28(A)(7)(d) – “Intercorporate Dividends – Dividends
and Sick leave is tax exempt. These makes no distinction received by a resident foreign corporation from a
domestic corporation liable to tax under this Code shall
(2) If the employee is a Private Employees or officials, his not be subject under this title.
commutation or monetized value of vacation leave is exempt up
to 10 days and sick leave if unused is taxable. Q: Is Stock dividend taxable or exempt?
Q: What are the four (4) purposes that these benefits will be A: It is exempt.
granted?
Pp 51-52 mentioned exception to the rule. You must master them
A: 4 purposes here as follows: (CHEG) it to promote because I would ask them again and you must read the decided
(1) Contentment case CIR v. ANSCOR (31 SCRA 152). I might ask that
(2) Health
(3) Efficiency Q: What if it is received by non-resident foreign corporation? Tax
(4) Goodwill exempt or taxable?
Interest Income A: Subject to 15% final tax under Sec. 28(B)(5)(b)

Q: What are those interest income that are exempt?
On page 53 regarding that 3 years and 50%, you make a note
A: These are the following: Sec. 24 and 25 there that sec. 42(A)(2)(b) and you analyzed that. If it is receive
(1) Interest income from bank deposit on the expanded from foreign corporation, (Analyze it again!) it does not
foreign currency deposit system received by non- categorically state the receiver. The recipient can be either an
resident individual (depositor/recipient). individual or corporate. That is income “within” on those two
(2) Interest income from long-term deposit or investment conditions:
certificate is exempt under RMC 18-2011 (1) This foreign corporation must have at least 50% of the
world income coming from the Philippines. If it is less
Q: Supposed the depositor is a corporate taxpayer, it has a long- than, then it is an income without.
term (₱10 million) deposit or more than 5years. Is it (interest (2) It must be with the 3 preceding years.
income) Tax exempt?
April 14, 2018
A: No, it is only apply to individual Tasxayers. CORPORATE INCOME TAXATION
Dividend Income
Q: Instances where dividend income shall be subject to tax?
The source is Section 22b of the tax code. What are those What is the doctrine laid down in Evangelista case?
considered Corporate taxpayers?
 the creation of common fund by the two sisters without
 Business partnership being registered for the purpose of engaging in series of
 Joint stock companies transactions for profit is a taxable partnership
 Joint accounts, associations or insurance companies
These are 8 rules in corporate Income taxation.
What about General Professional Partnership?
1. MCIT
 Tax Exempt. (Sec. 22b) 2. Branch Profit Remittance Taxes
3. Tax Sparing credit Rule
What are tax-exempt under 22b? 4. IAET
5. Offline international airline
1.Joint Construction Venture
6. Taxation of Regional HQ of multinational corporations
2. General professional partnership 7.
8.
3. Joint Venture for engaging in Petroleum, coal, geothermal and
other energy operations pursuant to a consortium agreement with Minimum Corporate Income Tax
the government
MCIT applies to 2 corporations:
In you book. I mentioned 6 cases, four of them came out in the
1. Domestic Corporation
bar exams. Evangelista, Rallos, Pascual and Dragon, Obillos ,
2. Resident Foreign Corporation
Afisco, Ona. The favorite of justice Vitug is the Ona case. What is
the Ona doctrine? What Is the purpose of MCIT?
 As a rule, coownership is tax exempt. It becomes taxable  To prevent corporations from overstating their allowable
if it is converted into an unregistered partnership. deductions.
When does a co-ownership becomes a taxable partnership? Why is Non Resident Foreign Corporation not subject to MCIT?
 If shares are held under single management for profit  Because they are taxed based on their gross income.
making The rate is 30%.
In Civil law, what is the purpose of Co-ownership? Rules Included in the bar:
 For common enjoyment  Please read Air Canada vs. CIR. Sec. 28e1 applies to
offline international airline. Resident Foreign Corporation
Heirs inherited certain properties from the deceased, is it taxable?
includes offline international airlines. What is this word
international (not sure) where the rate is 2.5% based on
 No. no partnership formed or organized.
gross Philippine Billings? Taxation of Regional HQ of
What is that factual circumstance that give rise to the existence of multinational corporations, Branch profits remittance tax
partnership? and last the Tax credit sparing rule.
 They authorized one of them to administer the properties Branch Profit Remittance Taxes.
and allowed … (inaudible)
There are 3 Significant Cases. Taxsparing Credit Rule is the most
As a rule, why is coownership not taxable? technical of them all. It is about intercorporate dividend. Now tell
us the recipient and the source. The recipient is a Non resident
 It is for common enjoyment Foreign Corporation and the source is a domestic corporation.
Potential bar question, Pascual & Dragon? What are the distinction between minimum corporate income tax
and regular corporate income tax?
 There was no taxable unregistered partnership. They
divided the profits based on GROSS RETURNS. MCIT RCIT
Tax rate is 2% 30%
What are the 2 test pointed out by the SC?
Tax base is GROSS income TAXABLE income
1. There is contribution to a common fund Applies to Domestic and ALL
2. There is intention to divide the profits among themselves. Resident Foreign Corporation
only
In Obillos case, was there a taxable unregistered partnership? It may result to tax credit. It may not result to tax credit
 No. The heirs had no intention to divide the partnership

among themselves. CREBA vs. ROMULO
How do the partnership divide the profits?  Theory of FAVORABLE BUSINESS CLIMATE
o -Domestic corporations owe their corporate
 Based on gross profits. existence and their privilege to do business to
the government. They also benefit from the
In Affisco case, there was a taxable unregistered partnership. efforts of the government to improve the
financial market and to ensure a favorable
 Yes. Pool of insurers is taxable as unregistered partnership
business climate. It is therefore fair for the
government to require them to make a Which rate applies? The NIRC rate? Or the rate under the
reasonable contribution to the public agreement?
expenses. (MCIT case)
 Rate under the agreement must prevail.
Key words that JD will look for *corporate
existence- favorable business climate- International carrier defines Philippines Gross Billings. The
reasonable contribution* definition has been modified. What is the determinative test of
such Philippines Gross Billings?
What is the prevailing in MCIT as to filing of income tax return?
 Before, it’s the place of payment, it’s now the origin.
 QUARTERLY.
State the tax treatment of offline international airlines, International
This may be suspended under special or evitable circumstances. airlines that has landing rights in the Philippines.
What are these 3?
Offline International International
When a corporation suffers losses on account of: Airlines Airlines with
Landing Rights in
a. prolonged labor dispute, or the Philippines
b. force majeure, or Tax base Taxable income gross Philippine
billings
c. legitimate business reverses Tax rate 30% 2.5%
CREBA claims that this 2% is a tax on capital and violates due

What is the tax treatment of income derived by offshore banking
process. Is it unconstitutional?
transactions?
 Constitutional. MCIT is not a tax on capital. The MCIT is
 10% FINAL TAX
imposed on gross income which is arrived at by
deducting the capital spent by a corporation in the sale What are those profits that may be subject to these Branch Profit
of its goods, i.e., the cost of goods and other direct Remittance Tax?
expenses from gross sales. Clearly, the capital is not
being taxed.  They are gains, profits… that precisely is the MARUBENI
CASE. It was asked twice already in the bar exams.
When is a Foreign Corporation considered engaged in trade or
business? Issue in MARUBENI case: What constitutes profits subject to branch
remittance tax of 15%?
 “doing business” means a continuity of commercial
dealings and arrangements, and contemplates, to that  Pursuant to Section 24 (b) (2) of the Tax Code, as
extent, the performance of acts or works or the exercise amended, only profits remitted abroad by a branch
of some of the functions normally incident to, and in office to its head office which are effectively connected
progressive prosecution of, the purpose and object of its with its trade or business in the Philippines are subject to
organization. –(Mentholatum vs Mangaliman) the 15% profit remittance tax.
What is substance test?  To be effectively connected it is not necessary that the

income be derived from the actual operation of
 whether the foreign corporation is continuing the body taxpayer-corporation's trade or business; it is sufficient
or substance of the business or enterprise for which it was that the income arises from the business activity in which
organized or whether it has substantially retired from it the corporation is engaged. For example, if a resident
and turned it over to another. foreign corporation is engaged in the buying and selling
of machineries in the Philippines and invests in some
What is the BOAC case all about? (landmark case on resident shares of stock on which dividends are subsequently
foreign corporation) Is an offline airline subject to tax even if it has received, the dividends thus earned are not considered
no landing rights? 'effectively connected' with its trade or business in this
country. (Revenue Memorandum Circular No. 55-80).
 Yes! Based on the protection theory.
READ SOUTH AFRICAN AIRWAYS AND AIR CANADA, BOAC. IT MAY

COME OUT IN OUR FINAL EXAMS. THERE IS NEW JURISPRUDENCE A direct investment by the mother company in japan, is that
THERE. income derived from the direct investment considered branch
remittance profit?
Offline International Airlines are taxed as resident foreign
corporation therefore you apply the corporate rate of 30% based  No. read marubeni case
taxable income.In the BOAC Case the theory is the protection
theory.
Before the tax base is actually remitted, is the rule the same?
What is PACTA SUNT SERVANDA?
 It is an international law recognized principle that

 No. That has been amended. (applied earmarked or in
the multiple choice look for that--- check tapsi) disregard
mandates that International agreements must be
word actually.
complied in good faith their contractual obligations.
 Sound corporate practice dictates that earnings or
profits that are not reserved must be distributed.
Before, exempt profits include those profit remitted branches on
Export Processing Zones what is What kind of imposition?
Now the new rule?  is this 10% form of penalty
 EPZA is now Philippine Economic Zone Authority Exceptions:
What is the purpose of branch profit remittance tax? Why does the 1. Loan agreement
lower it to 15 % where we could tax it at 30%.? Corporation that 2.
established branch here are subsidiary corporations. In so far as 3.
the corporate rate is concerned should we treat them alike? 4.
5.
 that’s why 15% In the new case. DEUTSCHE BANK AG
MANILA BRANCH v. CIR. Applied in this case is PACTA As to imprescriptibly of taxes, national… vs mulberry? Is this
SUNT SERVANDA. The tax treaty prevailed over the 15%. applicable to improperly accumulated tax? What is the rule?
How do you apply pacta sunt servanda here? The was this rp-  The rule does not apply to Improperly accumulated
germany agreement. 15% was imposed in that. The next student earning because …
will answer that.
What’s the purpose of MCIT?

If you read sec 29 “ every/each corporation”. Does this apply
 Bank of America vs. CA to ALL corporations?
Multinational Corporations May or may not be subject of income  NO. Only DOMESTIC CORPORATIONS.
tax. When is it subject to corporate income tax of 10%? When is it
exempt? Why is it closely held corporation are covered?
 Regional or area headquarters of multinational 

companies are exempt from income tax while regional
operating headquarters of multinational companies are What are the characteristics of close corporation?
subject to 10% tax on net taxable income.
1. Not more than 20
Lets go back to domestic Corporation, Sec. 27 C. before the train 2. Not listed
these are the 4 exempt GOCC they are GSIS,SSS, PHIC AND PCSO.
Under train law PCSO is not exempt anymore.
What corporations are not subject to IAET?
What about PAGCOR? Exempt or not from Corporate income tax?
 Publicly held corporations
 It depends. Read presidential decree 1869 sec 13 and
14. That will answer that.
Immediacy test
Tax Sparing credit Rule
 To determine the reasonable needs of the business in
CIR v. P&G. you must be able to explain the word tax credit and
order to justify an accumulation of earnings, the Courts
word sparing. In this case it is a tax sale. What kind of income is
of the United States have invented the so-called
subject to that 15 %.?
Immediacy Test which construed the words reasonable
needs of the business to mean the immediate needs of
 Taxable dividend income by a domestic corporation
the business, and it was generally held that if the
from a nonresident foreign corporation. The purpose is
corporation did not prove an immediate need for the
encourage foreign investments by reducing the rate
accumulation of the earnings and profits, the
from 30 to 15%.
accumulation was not for the reasonable needs of the
What is tax credit? business, and the penalty tax would apply. (CYANAMID
v. CA)
 P&G CASE VS. WANDER CASE (ACTUAL GRANT)
landmark cases:
There was tax refund filed as there is erroneous imposition of
ST.LUKES st. lukes is not exempt charitable hospital. 4
income tax before of 30%. Does a withholding agent of a foreign
CASE requisites of tax exemption. The requisite that it
corporation have legal personality to file a claim for refund? must be organized and operated exclusively for
charitable purposes is lacking. Apply 10%
 YES. preferential rate
IAET
YMCA rent income is subject to corporate income tax.
CASE – CONSTRUED THE LAST PARAGRAPH SEC 30
 Tax rate- 10% (memorize)
 Tax base- improperly accumulated earnings
What’s the purpose?

DE LA Yes. DLSU is tax exempt. wherein agreements entered into by states must be
SALLE observed and complied with in good faith
UNIVERSITY The Court then significantly laid down the  The facts of the problem clearly show that offline
CASE requisites for availing the tax exemption under international airline derived income from the sale of
Article XIV, Section 4 (3), namely: (1) the taxpayer
passage documents here in the Philippines. Is such
falls under the classification non-stock, non-profit
educational institution; and (2) the income it offline international airline entitled to claim deduction?
seeks to be exempted from taxation is used o Yes. Because the applicable tax base is
actually, directly and exclusively for educational taxable income. An offline international airline
purposes is taxed as resident foreign corporation under
Section 28 (A) (1) of the Tax Code. Usually, an
RFC is subject to the corporate income tax rate
April 21, 2018 of 30% but Air Canada is not subject to such
ALLOWABLE DEDUCTION
rate because of the Philippine-Canada Tax
Treaty.
What are the jurisprudential rulings in the case of PAGCOR vs. CIR
 How do we tax such an income derived by Air Canada
(744 SCRA 712), which is a most probable question in the bar? Is
PAGCOR subject to corporate income tax? from such sale of airline tickets or passage documents
here in the Philippines? Do you apply the rate under the
 It depends. PAGCOR may be exempt or it may be Philippine-Canada Tax Treaty? [YES]
taxable.  Justice Leonen failed to mention why is it that offline
 It is taxable as regards the income derived from “other international airline, one who has no landing rights, can
related operations” which includes, but is not limited to: still be taxed. Did I not tell you last week the reason why?
a) Income from licensed private casinos covered by This can be answered in the BOAC case. That is the
authorities to operate issued to private operators; Protection Theory, it is in Chapter 2 of your book. Explain
b) Income from traditional bingo, electronic bingo and and apply Protection Theory in this case:
other bingo variations covered by authorities to operate o In BOAC's case, the sale of tickets in the
issued to private operators; Philippines is the activity that produces the
c) Income from private internet casino gaming, internet income. The tickets exchanged hands here
sports betting and private mobile gaming operations;
and payments for fares were also made here
d) Income from private poker operations;
in Philippine currency. The site of the source of
e) Income from junket operations;
payments is the Philippines. The flow of wealth
f) Income from SM demo units; and
proceeded from, and occurred within,
g) Income from other necessary and related services,
shows and entertainment. Philippine territory, enjoying the protection
 PAGCOR is exempt for its income derived from its accorded by the Philippine government. In
operations and licensing of gambling casinos, gaming consideration of such protection, the flow of
clubs and other similar recreation or amusement places, wealth should share the burden of supporting
gaming pools, includes, among others: the government.
a) Income from its casino operations; o Therefore, we can tax an offline international
b) Income from dollar pit operations; airline although it has no landing rights.
c) Income from regular bingo operations; and
d) Income from mobile bingo operations operated by it,
with agents on commission basis. Provided, however,
Allowable deductions. What are the guiding principles or settled
that the agents’ commission income shall be subject to
rules on allowable deductions? Is the principle of strictissimi juris
regular income tax, and consequently, to withholding
applicable?
tax under existing regulations.
 Yes, the principle of strictissimi juris is applicable because
it squarely applies to exemptions and allowable
What are the jurisprudential rulings in the case of Air Canada (778 deductions partake of the nature of a tax exemption.
SCRA 121)? The principle of strictissimi juris holds that exemptions
must be strictly construed against the taxpayer/person
 The first case discussed there is the BOAC case, which claiming an exemption and liberally construed in favor
was already asked thrice in the bar exams. Then, South of the State. The effect of exemption is that the
African Airways, which was asked in 2016. It’s really a government may no longer collect taxes from such
favorite bar question. exempted items while the effect of allowable
 Three sentences, one-liner jurisprudence: deductions is that it reduces the taxable income,
o [1] An offline international airline is taxed as therefore, inevitably, it lessens the taxpayer’s tax liability.
resident foreign corporation under Section 28
(A) (1) of the Tax Code. [2] Applicable tax rate
is 1 ½% according to the Philippine-Canada
Tax Treaty [3] Applicable tax base is taxable Cohan Principle (you can check it in the Appendix of the book).
income, which is gross Philippine billings. It is a rule in allowable deductions where when the taxpayer
 The principle of pacta sunt servanda is applied in this incurred expenses but could not substantiate the same because
case. It is a recognized principle in international law he could not provide receipts, the BIR may allow (has discretion
to allow) deductions up to 50% of the claimed deductions.

7. Depletion of oil and gases wells and mines
8. Charitable and other contribution
Guiding principles in the Atlas Consolidated Mining Case. Since 9. Research and development
deductions are disfavored by the government (because it
10. Pension trust
reduces the taxpayers’ tax liability which eventually lessens the tax
collection by the government), the one claiming deduction must
prove (1) that there is a law allowing such deduction, and (2) that
he is entitled to such deduction. In what way? By proving the Of these 10, which is a new allowable deduction?
requisites for deductibility.
 Research and Development Expenses
Statutory Test. The case of Pilmico-Mauri Foods Corp. vs. CIR (802  It was non-deductible before because is used to be
SCRA 619) is the most recent case on allowable deductions. If you treated as a capital expenditure. Now, although it is
go over these allowable deductions, particularly business
treated as a capital expenditure, it is nonetheless
expenses, the Supreme Court pointed out 3 significant requisites
allowed as a deduction.
for deductions: (1) it must be ordinary and necessary, (2) it must
 The rule is CAPEX is non-deductible. In accounting
be paid or incurred in carrying on the business or it must be a
parlance, it should be amortized, spread out over a
business-connected expense, and (3) it must be paid or incurred
during the taxable year. reasonable period. What are the exceptions to the rule?
J. Dimaampao: Of the 10 Allowable Deductions, which among

Allowable deductions under Section 34 as amended by the TRAIN them is a new one? There is that deduction, which was
Law may either be itemized deductions or optional standard nondeductible before, because it should be treated as capital
deductions. Now, this is a possible question for distinction. How do expenditure. Now it is, though it partakes of a capital expenditure
you distinguish itemized deductions from optional standard an allowable deduction, what is that? The rule is that capital
deductions? expenditure is nondeductible, in accounting parlance, it is spread
out over a reasonable period of time. What are the exceptions to
Itemized Deductions Optional Standard the rule?
Deductions
As to There must be Requires no Student: Research and Development Expenditure.
compliance documents and documents nor
with receipts to receipts J. Dimaampao: So that partakes of an exception. It can be
substantiation substantiate and claimed its in your book, by a private educational institution, so if
rule prove those claimed it has an estimated useful life of more than one year, expansion of
deductions educational facilities, the construction of a school building, or
As to rate Charitable Rate is 40% of the library. That’s a privilege granted only to private educational
Contributions – 5% or gross income or institutions. So, remember those exceptions. There’s another one.
10% gross Its there in the item of depletion, regarding the volume of
All others, no rate receipts/sales
operation. There are 10 itemized deduction. So here is a bird’s eye
view. What are the common requisites for deduction? What are
Is it advisable to avail of itemized deductions or optional standard the common requisites of deductibility?
deductions?
Student: The common requisites of deduction/ deductibility are
 It depends upon the circumstances of the case. (2P-R-O-I-S-E):
 If the taxpayer does not have receipts, choose OSD. If 1. The expense must be ordinary and necessary.
the taxpayer has receipts and can prove 100% of the 2. The expenses must be incurred in trade or business
deductions, choose itemized deductions. carried on by the taxpayer.
3. The expenses must be substantiated by proof.
4. The expenses must be reasonable.
5. The expenses must be paid or incurred during the
Jurisprudential rulings of the Supreme Court on allowable
taxable year.
deductions?
6. Expenses must not be against public policy, public
o Isabela Cultural Corporation moral, or law.
7. If subject to withholding tax, proof of payment to BIR must
o PICOP Case
be shown.
o PRC Case
o CIR vs Algue J. Dimaampao: You mentioned the requisite of “It must be paid or
incurred in connection of the business of the taxpayer or exercise
of his profession.” This has been relaxed in one of the 10 allowable
deductions. What is that? So, what again are the 10 allowable
What are the 10 allowable deductions? deductions.
1. Business expense Student: Charitable and Other Contributions. The following are the
2. Interest expense 10 allowable deductions: (2B-I-L-T & 2D-R-E-C)
3. Taxes
4. Losses 1. Business Expenses
5. Bad Debts 2. Interest Expenses
6. Depreciation 3. Taxes
4. Losses
5. Bad Debts 1. Advertising to stimulate the current sale of merchandise
6. Depreciation or use of services; and
7. Depletion 2. Advertising designed to stimulate the future sale of
8. Charitable and Other Contributions merchandise or use of services.
9. Research & Development Expenditure
10. Employer’s Contribution to Pension Trust J. Dimaampao: Which of these two is deductible?
J. Dimaampao: One of this 10 has no connection of the requisite Student: The advertising expense paid or incurred to stimulate the
“The expenses must be paid or incurred during the taxable year.” current sale of merchandise or use of services.
In effect you can’t carry over the expense. What may be the
J. Dimaampao: How about the other kind? Is it deductible or
exception to the rule.
nondeductible?
Student: Net Operating Loss Carry Over.
Student: As a rule, it should be capitalized hence it should be
J. Dimaampao: So how do you understand/ determine that? amortized because it partakes of a nature of a capital
Ordinary Gain- Ordinary Loss. So that’s an exception to such a expenditure. Therefore it should be amortized over a reasonable
rule. In your book which was asked in the Bar Exam, there is such period of time.
jurisprudence applying such a rule, that an expense which
J. Dimaampao: Now what are these examples of capital
partakes partly of a nature of a provisional expense, the case of
expenditures mentioned in your book if you read it carefully.
CIR vs Isabela Cultural Corp. The all events test. So, let’s discuss this
very significant ruling. What is the all events test? What are the Student: Advertising expenses paid or incurred to promote sale of
requisites for the application of this test? In that case it applies capital stock for acquisition of additional capital. Efforts to
such rule that expenses paid must be claimed as such in the year establish reputation or Goodwill. Protection of Brand Franchise
it was paid or incurred. It rejected the argument that Isabela did analogous to maintenance of goodwill or title to one’s property.
not receive any billing statement in 1985, hence they claimed it in
1986 when they received such a bill. SC applied the all events test. J. Dimaampao: What is the rule on arbitrage interest? The purpose
So, what are these events? Explain. of the law is to avoid the so called back to back transaction.
Student: The all events test requires that the liability be fixed, and Student: Arbitrage rule on deductible interest- The percentage by
the amount of such liability be determined with reasonable which the taxpayer’s otherwise allowable deduction for interest
accuracy. The amount of liability does not have to be determined expense shall be reduced by 33% of the interest income earned
exactly; it must be determined with reasonable accuracy subjected to final tax.
(something less than an exact or complete accurate amount).
(CIR vs Isabela) J. Dimaampao: It’s called arbitrage because it is the law which
imposes such reduction. The rule is that capital expenditure should
J. Dimaampao: Does it require the actual or accurate amount? be amortized over a reasonable period of time. So what is that
capital expenditure which can now be claimed as a deduction?
Student: No. Research & Development Expenditure. Now, there’s another one,
with that of private proprietary educational institutions. So in
J. Dimaampao: What it only requires is reasonable amount or
interest, there is likewise an exception, an interest which partakes
reasonable certainty. Now this is a probable bar exam question in
of a nature of a capital expenditure. RA 8424, provides such.
your bar exam. Accurate or complete amount is not required,
only a reasonable amount of the expense incurred. That case of Student: Interest Expense incurred for the purchase of capital
Esso Standard vs CIR 175 SCRA 149, that’s another probable bar assets with useful life of more than one year.
question. We have explained so many tests, here, it’s a test of
production. J. Dimaampao: Yes, that’s the one, such as equipment. It can now
be claimed as a deduction either through allowance for
Student: The (margin)fees were paid not in the production of depreciation or deducted in full. It is another exception to the rule
income, but in the disposition of said income after it has already that capital expenditure should be amortized over a reasonable
been earned. Hence it is an expense properly attributable to the period of time. Now let’s go to taxes and Bad Debts. So before we
head office and not in carrying on of its trade or business in the go to that we must first discuss the Tax Benefit Rule. You can check
Philippines. (Esso Standard Eastern, Inc. vs CIR 175 SCRA 149) that in 34 (c) and 34 (e). So Tax Refund, when does tax refund
amount or result to taxable income. When will recovery of bad
J. Dimaampao: Now why are bribe moneys not deductible?
debt debt written off result to taxable income.
Student: Because it’s illegal payments.
Student: Under the tax benefit rule, receipt of tax refund will result
J. Dimaampao: Why are illegal payments nondeductible? Are to a taxable income when the period in which such tax was
illegal gains taxable? Yes, because its an income derived from incurred and claimed as a deduction it reduced the taxpayer’s
whatever source, but illegal expenses/ payment are income, hence giving rise to a tax benefit.
nondeductible due to the requisite that such expenses are not
J. Dimaampao: So you must know all those deductible taxes. So
business connected. This case came out during the bar exam, the
what are all those deductible taxes? And what are those
case of CIR vs General Foods 401 SCRA 545. This case is about the
deductible taxes.
deductibility of Advertising Expense. So, what are the
jurisprudential rulings of the court. What are the 2 kinds of Student: The following are the nondeductible taxes:
Advertising Expenses.
1. Philippine Income Tax, except Fringe Benefit Taxes;
Student: The 2 kinds of Advertising Expenses are: 2. Income, war profit, and excess profit taxes imposed by
the authority of any foreign country provided the
taxpayer chooses to take a tax credit (if a taxpayer is
qualified to take a tax credit for income, war profits and J. Dimaampao: You have to state that in your answer. There is no
excess profit taxes accrued to a foreign country such tax benefit, because it was mere recovery of capital. Any
taxes, when not taken as tax credit may be claimed as volunteer for the subsequent items? I am giving you an
deduction from gross income; assignment. The Tax Benefit on the Sale and Leaseback
3. Estate and Donor’s Tax Transaction. This is based on American jurisprudence. It’s in effect
4. Special Assessment Tax (Real Property Tax); a pacto de retro sale. Because here, the seller may retain the
5. Taxes paid for commodity not connected with the possession as a lessee. So you really have to analyze that. So here
taxpayer’s business: the buyer obtained a loan to buy the property. So if there’s a loan,
 No deductions are allowed for there will be an interest expense. Hence, you may claim that
amount representing: (1) interest; (2) interest expense as a deductible expense. So, as an owner of the
surcharges; and (3) fines or penalties building, he can likewise claim an allowance for depreciation
incident to delinquency (Par. 2 Sec. from the building. The seller now is the lessee, hence he can now
80, RR No. 2) claim rental expense. It’s there in the latest edition of your book. I
have explained that. That’s an example of a really technical and
The following are the deductible taxes;
shocker question. Now you prepare for the Air Canada Case. For
1. Percentage Taxes those who wish to volunteer, next Saturday is your last chance. I
2. Documentary Stamp Tax will focus on the VAT cases. Take note of these:
3. Local Business Taxes
1. Philippine Refining Corp vs CIR 256 SCRA 267 – Landmark case
J. Dimaampao: I forgot to ask you this, still on interest. The case of on Bad Debt expense (I will only ask on the sound business
Picop vs CA 250 SCR 434. I am referring to the theoretical interest. judgment, factors that determine the worthlessness, OSD-this can
Is that deductible? also be availed of of GPPs/ partners) (this was never asked in the
past 30 years)
Student: No. Theoretical interest is not deductible as it is merely
computed or calculated. It does not arise from interest bearing 2. Then Estate and Trusts(this was never asked in the past 30 years)
obligation. (Picop vs CA 250 SCR 434) Hence, it also failed to so just know when is it taxable, what kind of trust is considered as
comply with the requisite of “The expenses must be paid or a taxpayer. The P 20, 000 exemption has already been deleted
incurred during the taxable year.” just like individuals, unfortunately REX failed to delete it in the
annotation, so when you buy that book, you might like to delete
J. Dimaampao: Is interest on capital (preferred stock) deductible? that in the annotation.
Student: No. The rule is absolute under RMC No. 17-71 it is 3. Read Sec. 23 (source of income) in relation to Sec. 42 (situs of
nondeductible income)
J. Dimaampao: When is recovery of bad debt taxable? When is 4. Focus on National Development Corp. vs CIR 151 SCRA 472
there tax benefit?
5. Those who are required to file ITR and those who are exempt.
Student: Recovery of bad debt is taxable when in the year the
bad debts are written off, the taxpayer’s taxable income has 6. VAT: In Sec. 105 I will ask you, what are the requisites for the
been reduced, hence giving rise to a tax benefit (through tax taxability of sale of goods and services, then in par. 3 I’ll ask you
savings). Thus, to that extent (of reduction) will bad debts the meaning of incidental transaction- Mindanao Geothermal
recovered be taxable. Case
J. Dimaampao: Suppose you incur a Net Loss of P 100, 000 in 2015, 7. Take note those sale of goods and services and importation
Bad Debts Declared worthless and noncollectible, P 15,000. In subject to VAT
2016, this P 15,000 was recovered due to the improvement of the
8. Regarding the sale of goods, let’s focus on the deemed sale
debtor’s financial condition. Is that P 15,000 deductible?
transaction. Memorize that. Its there in 106 (b)
Student: No. because in the writing off the bad debt, there was
8. Then in 107, importation you must know the transaction value.
no tax benefit to the taxpayer because, he had already incurred
loss. Hence, whether or not the bad debt was written off, there 9. In 108, the case of Diaz vs Sec of Finance, Sm Cinema vs CIR 613
was no reduction of the taxpayer’s taxable income because he SCRA 772
no longer had a taxable income to speak of.
10. Read the landmark case Fort Bonifacio vs CIR- Creditable
J. Dimaampao: Read Sec. 4 of RR No. 5-99. Input Tax/ What is this Transitional Input Tax
Student: Sec. 4. Tax Benefit Rule. The recovery of bad debts 11. Focus on 109
previously allowed as deduction in the preceding year or years
shall be included as part of the taxpayer’s gross income in the 12. read those 11 new exemptions introduced by the TRAIN Law.
year of such recovery to the extent of the income tax benefit of
said deduction. Conversely, if the said taxpayer did not benefit 13. there are 10 exempt sale of goods, there are 10 exempt sale
from the deduction of the said bad debt written off because it did of service. There are 8 exempt importations and there are 3
not result to any reduction of his income tax in the year of such exempt lease of properties. So before the TRAIN Law there are 31
deduction (i.e. where the result of his business operation was a net exempt transactions.
loss even without deduction of the bad debts written off), then his
subsequent recovery thereof shall be treated as a mere recovery
or return of capital, hence, not treated as receipt of realized
taxable income. April 28, 2018
ALLOWABLE DEDUCTIONS (CONTINUATION)
and VALUE ADDED TAX (1) sending of statements of accounts; (2) sending of collection
letters; (3) giving the account to a lawyer for collection; and (4)
filing a collection case in court. (Philippine Refining Co. v. Court of
What are the requisites of deductibility of casualty losses? Appeals, G.R. No. 118794, [May 8, 1996], 326 PHIL 680-692)
Revenue Regulations No. 12-77 provides for the following

requisites for deductibility of casualty losses:
How do you determine worthlessness? What is the sound business
a.) Sworn declaration of loss must be filed with the BIR. judgment rule?
i. Nature of the event giving rise to loss and time of its Note: It is not the same as the business judgment rule in
occurrence; corporation law. Correlate the sound business judgment rule with
the deductibility of bad debts.
ii. Description of the damages property and its location;
iii. Items needed to compute the loss such as cost or other basis
of the property, depreciation allowed if any, value of the property Worthlessness is not determined by an inflexible formula, but upon
before and after the event, cost of repair; the exercise of sound business judgment. Mere uncertainty of
collection or investigation that the debtor is in an unsatisfactory
iv. Amount of insurance or other compensation received or financial condition and that the collection of the debt is doubtful
receivable. will not suffice. All pertinent facts and evidence must be
considered. The burden of proof to show worthlessness of debt is
b.) Filed through the nearest RDO within 45 days after the date of
on the tacpayer.
the occurrence.
c.) Proof of the elements of the loss claimed, such as the actual
nature and occurrence of the event and the amount of the loss. What are the factors affecting the worthlessness of debts?
i. Casualty loss - documentary proof of costs, photograph Note: Memorize.
showing extent of damage, condition or value of the property
after it was repaired, restored or replaced. They are:
ii. Robbery, theft, or embezzlement losses - amount of loss. Police 1. improbability of success of judicial collection
report is necessary although not conclusive proof of the loss arising
therefrom. 2. statute of limitations
3. meager amount involved
Keyword: NPA-NIDA  45-day notice, proof of loss, affidavit 4. injury of the debtor making it impossible for him to earn a living
containing the nature of the event, items for computation,
description of damages, and amount of insurance 5. destruction by fire of original invoices evidencing the
indebtedness
6. bankruptcy or insolvency of the debtor

What are bad debts?
7. insufficiency of the collateral
They are those debts due to the taxpayer actually ascertained to
be worthless and charged off within the taxable year except 8. death of the debtor leaving no assets
those not connected with profession, trade or business and those
sustained in a transaction entered into between parties
mentioned under Section 36 (B) of the Code.
Keyword: I SAID BID
What are the requisites of deductibility of bad debts?

What is the tax benefit rule?
The requisites are:
It dictates that the recovery of bad debts previously allowed as
1. Existence of a valid and subsisting debt (legal and factual) deduction in the preceding years shall be included as part of the
gross income in the year of recovery to the extent of the income
2. Debts must be actually ascertained to be worthless. tax benefit of said deduction. Under this rule, if an amount
deducted from the gross income in a prior taxable year is
3. Debt must be charged off within the year of worthlessness. recovered in a later year, the recovery is income in the last year.
4. Debt arises from business or trade.
5. It does not arise from transactions between related taxpayers. What are arbitrage interests?
They refer to interests on simultaneous or back-to-back

transactions.
The requisites in Section 34(E) are incomplete. Complete it using
the doctrine in PRC v. Commissioner, 256 SCRA 667.
6. Additionally, before a debt can be considered worthless, the What is the arbitrage rule on interest expense?
taxpayer must also show that it is indeed uncollectible even in the
future. Furthermore, there are steps outlined to be undertaken by The percentage by which the taxpayer’s otherwise allowable
the taxpayer to prove that he exerted efforts to collect the debts: deduction for interest expense shall be reduced, has been
increased from 38% to 42% of the interest income subjected to Yes. General professional partnership and the partners may avail
final tax effective July 1, 2005. It shall be reduced to 33% effective of the OSD only once, either by the GPP or the partners comprising
January 1, 2009. the partnership.
What is the ruling of the Court in PICOP v. CA?* What is the rate of OSD?
*Probable bar question The rate of OSD is 40%
On deductions of interest: What is the base of OSD?
Interest payments on loans incurred by a taxpayer (whether BOI- The base of OSD in case of corporate taxpayers is gross income.
registered or not) are allowed by the NIRC as deductions against In case of individual taxpayers, the base is gross sales.
the taxpayer's gross income. Thus, the general rule is that interest
expenses are deductible against gross income and this certainly
includes interest paid under loans incurred in connection with the
carrying on of the business of the taxpayer. The Tax Code does Under Section 36, what are the non-deductible items?
not prohibit the deduction of interest on a loan incurred for
The following are the non-deductible items under Section 36:
acquiring machinery and equipment. Neither does it compel the
capitalization of interest payments on such a loan. The 1977 Tax 1. Personal, living or family expenses. Reason for non-deductibility:
Code is simply silent on a taxpayer's right to elect one or the other non-business expenses
tax treatment of such interest payments. Accordingly, the general
rule that interest payments on a legally demandable loan are 2. Amounts paid out for new buildings or for permanent
deductible from gross income must be applied. (Paper Industries improvements, or betterments made to increase the value of any
Corp. v. Court of Appeals, G.R. Nos. 106949-50, 106984-85, property or estate, EXCEPT intangible drilling and development
[December 1, 1995], 321 PHIL 1-63) costs incurred in petroleum operations which are deductible
under Section 34 (G) of the Tax Code. Reason: capital
expenditure
On deductions of losses: 3. Any amount expended in restoring property or in making good
the exhaustion thereof for which an allowance is or has been
The CTA and the Court of Appeals allowed the offsetting of RPPM's
made. Reason: capital expenditure
accumulated operating losses against Picop's 1977 gross income,
basically because towards the end of the taxable year 1977, upon 4. Premiums paid on any life insurance policy covering the life of
the arrival of the effective date of merger, only one (1) any officer or employee, or of any person financially interested in
corporation, Picop, remained. The losses suffered by RPPM's any trade or business carried on by the taxpayer, individual or
registered operations and the gross income generated by Picop's corporate, when the taxpayer is directly or indirectly a beneficiary
own registered operations now came under one and the same under such policy. Reason: the taxpayer cannot have its cake
corporate roof. We consider that this circumstance relates much and eat it, too. It cannot enjoy both desirable but mutually
more to form than to substance. We do not believe that the single exclusive alternatives. There can be no double benefits in tax law.
purely technical factor is enough to authorize and justify
the deduction claimed by Picop. Picop's claim for deduction is 5. losses from sales or exchanges of property between related
not only bereft of statutory basis; it does violence to the legislative taxpayers. Reason: to prevent avoidance of income tax by
intent which animates the tax incentive granted by Section 7 (c) means of purported or simulated sale or exchange; because the
of R.A. No. 5186. In granting the extraordinary privilege and law presumes that the transactions are devoid of free bargain
incentive of a net operating loss carry-over to BOI-registered between the seller and the buyer
pioneer enterprises, the legislature could not have intended to
require the Republic to forego tax revenues in order to benefit a
corporation which had run no risks and suffered no losses, but had
merely purchased another's losses. We conclude that Under Section 36(A) item 4, what is the tax implication? What is the
the deduction claimed by Picop in the amount of P44,196,106.00 tax consequence?
in its 1977 Income Tax Return must be disallowed. (Paper Industries
If the employee paid the premiums:
Corp. v. Court of Appeals, G.R. Nos. 106949-50, 106984-85,
[December 1, 1995], 321 PHIL 1-63) The premiums are subject to fringe benefits tax if the life insurance
policy covers the life of a managerial or supervisory employee
(Section 33 (B) item 10). In case of rank and file employees, the
What is an optional standard deduction? premiums are subject to regular income tax falling under the
category of compensation for services in whatever form paid
Section 34(L) states that an individual subject to tax other than a (Section 32 (A) item 1).
nonresident alien and nonresident foreign corporation may elect
a standard deduction in an amount not exceeding ten percent
(10%) of his gross income, in lieu of the deductions allowed under
If the employer paid the premiums:
the Tax Code.
It is a deductible expense if the beneficiary of the insurance policy
is the estate, executor/administrator or heir (Section 34 (A) item 1a
Can a general professional partnership avail of the optional (i). It is non-deductible if the employer is directly or indirectly the
standard deduction? beneficiary of policy (Section 36 (A) item 4).

Note: Learn to correlate provisions of the law. 2. Rent Location of property (real or
personal)
3. Royalties Place of use of intangibles
What is the basis for deductibility of premiums where the 4. Merchandising Place of sale
beneficiary of the policy is the estate, executor/administrator or 5. Gain on sale of personal Place of sale
heir? property
6. Gain on sale of real Location of property
The basis is Section 34 (A) item 1a (i), which states that there shall property
be allowed as deduction from gross income a reasonable
7. Mining income Location of the mines
allowance for salaries, wages, and other forms of compensation
for personal services actually rendered. 8. Farming income Place of farming activities
9. Gain on sale of domestic Income within the Philippines
stock
10. Interest Residence of the debtor
The other items in Section 36 are personal expenses. Expenses
under Section 36 (A) items 2 and 3 and 36 (B) are non-deductible
capital expenses. What is the tax implication?
Know which taxpayer is taxable within and outside the Philippines.
They are deductible from capital gains tax.
Resident Citizen and Domestic Corporation – within and outside
the Philippines
With regard to Section 42 (A) 1, which refers to interest income, Non-resident Citizen, Resident Alien, Non-Resident Alien, Resident
what is the tax situs? Foreign Corporation and Non-resident Foreign Corporation –
within the Philippines only
Note: Read NDC V. QC, 151 SCRA 472.
The tax situs is the residence of the debtor.

Who among the taxpayers are required to file income tax
returns?*
What are the sources of interest income? Note: Apply the process of exclusion
The sources are loans, bonds, debentures, certificate of All are required EXCEPT:
indebtedness and the like.
1. in case of a non-resident alien, not engaged in trade or business
Basis: Section 25 states that he is subject to final tax, which is the

Who are subject to tax on their interest income? final and full settlement of tax, upon all items of income.
Resident Citizen, Non-resident Citizen and Resident Alien 2. in case of a non-resident foreign corporation
Basis: Section 28 (B) 1 provides that all its income are subject to
final tax of 30%.
Is an employee who rendered services taxable?
3. in case of minimum wage earners
Note: Consider the kind of taxpayer and the tax situs.
Basis: The Tax Code provides for a threshold amount of P250,000
Compensation income is taxed on the place of performance of for individual taxpayers. Thus, they are no longer taxable if their
services. Thus, a resident citizen is taxable whether or not the income did not reach such amount.
services are performed within or outside the Philippines. On the
other hand, a non-resident citizen is taxable only for services
performed within the Philippines.
VALUE-ADDED TAX
In case of sale of goods, what is the tax situs?

Overview:
The tax situs is the place of sale.
Sections 105-115 are the provisions on VAT.
The important provisions are:

What if the gain is derived from sale of goods abroad?
105
It depends on the seller. A resident citizen is taxable on gains
derived from sale abroad. In case of a non-resident citizen, he is 106
not taxable for gains derived from sale of goods abroad.
107
108
Memorize the table to determine the source for different kinds of
income. 109
Kinds of Income Source (Tax Situs) 111

1. Service or compensation Place of performance of 112
income service
on Section 109. Exclude the eleven additional exemptions
included in the Train Law.
Note: Have mastery of the cases I assigned. I will ask one or two of
them. I will just modify the facts. Better read the facts. Note: Let us use the term “vatable.”
VAT is a sales tax. It is a tax on sale or exchange of goods and We are talking here of tax, so you should know the tax rate and
services, including lease. What are the transactions that are the tax base. Discuss.
subject to VAT?
The rates are 12% and 0%. For the first five transactions we
1. Sale of goods or properties (106) discussed, the tax rate is 12%. For the 6th and 7th transactions, the
tax rate is 0%.
2. Sale of services (108)
3. Barter or exchange of good or properties (106)

The tax base of 12%-rated transactions depends on Section 106
4. Lease of properties (108) and 108. In case of sale of goods or properties (including barter or
exchange), the tax base is the gross selling price or its equivalent
5. Importation of goods (107) (Section 106). In case of sale of services, it is the gross receipts
(Section 108).
What are the two kinds of VAT? (Section 110)

Note: Read the Ericsson Telecommunications case regarding
1. Input tax
direct double taxation.
2. Output tax
What is the tax base on importation?

How to determine whether or not VAT is payable?
The law is silent. It is the transaction value. It is no longer the ad
If the output tax exceeds the input tax, VAT is payable. valorem.
If the input tax exceeds the output tax, there is creditable input Basis: Section 701 of Customs Modernization and Tariff Act
tax.
What is the ruling in Kapatiran v. Tan?

What are the sources of output tax?
The phrase "except customs brokers" is not meant to discriminate
Sale of goods, services and properties against customs brokers. It was inserted in Sec. 103(r) to
complement the provisions of Sec. 102 of the Code, which makes
Lease of properties the services of customs brokers subject to the payment of the VAT
and to distinguish customs brokers from other professionals who
are subject to the payment of an occupation tax under the Local
Tax Code. With the insertion of the clarificatory phrase "except
What are the sources of input tax? customs brokers" in Sec. 103(r), a potential conflict between the
two sections, (Secs. 102 and 103), insofar as customs brokers are
Vat is shifted to another. (Importation or purchase, as the case
concerned, is averted.
may be)
At any rate, the distinction of the customs brokers from the other
There are eight transactions covered by the VAT provisions. What
professionals who are subject to occupation tax under the Local
are these?
Tax Code is based upon material differences, in that the activities
1. Sale of goods or properties of customs brokers (like those of stock, real estate and immigration
brokers) partake more of a business, rather than a profession and
2. Sale of services were thus subjected to the percentage tax under Sec. 174 of the
National Internal Revenue Code prior to its amendment by EO
3. Lease of properties 273. EO 273 abolished the percentage tax and replaced it with
the VAT. If the petitioner Association did not protest the
4. Importation of goods classification of customs brokers then, the Court sees no reason
why it should protest now.
5. Barter or exchange of goods or properties
6. Zero rated sale of goods or properties.

What is the ruling in Tolentino v. Secretary of Finance?
7. Zero rated sale of services
Indeed, regressivity is not a negative standard for courts to
8. Exempt transactions enforce. What Congress is required by the Constitution to do is to
"evolve a progressive system of taxation." This is a directive to
Congress, just like the directive to it to give priority to the
Note: Of these eight, for purposes of the bar, it is the last one which enactment of laws for the enhancement of human dignity and
is the favorite bar question. That is why you must read and focus the reduction of social, economic and political inequalities (Art.
XIII, § 1), or for the promotion of the right to "quality education"
(Art. XIV, § 1). These provisions are put in the Constitution as moral (1) Regularity - the regular conduct or pursuit of an activity
incentives to legislation, not as judicially enforceable rights.
(2) Profit – the transaction must be in pursuit of a commercial or
an economic activity
What is the ruling in Abakada v. Ermita?
The powers which Congress is prohibited from delegating are Is there an exception to the rule of regularity?
those which are strictly, or inherently and exclusively, legislative.
Purely legislative power, which can never be delegated, has Yes. Section 105 also provides that “the rule of regularity, to the
been described as the authority to make a complete law – contrary notwithstanding, services as defined in this Code
complete as to the time when it shall take effect and as to whom rendered in the Philippines by nonresident foreign persons shall be
it shall be applicable – and to determine the expediency of its considered as being course of trade or business.”
enactment.
Distinguish indirect tax from direct tax.

Nonetheless, the general rule barring delegation of legislative
powers is subject to the following recognized limitations or Indirect tax can be shifted from the transferor to the transferee, or
exceptions: seller to buyer, or lessor to lessee. Direct tax cannot be shifted to
another.
(1) Delegation of tariff powers to the President under Section 28
(2) of Article VI of the Constitution;
(2) Delegation of emergency powers to the President under In Section 105, paragraph 3, “incidental transactions” are
Section 23 (2) of Article VI of the Constitution; mentioned. The Mindanao II Geothermal case construed that
term. What did the Court rule?
(3) Delegation to the people at large;
Mindanao II’s sale of the Nissan Patrol is said to be an isolated
(4) Delegation to local governments; and transaction. However, it does not follow that an isolated
transaction cannot be an incidental transaction for purposes of
(5) Delegation to administrative bodies. VAT liability. Indeed, a reading of Section 105 of the 1997 Tax
Code would show that a transaction "in the course of trade or
business" includes "transactions incidental thereto."
The case before the Court is not a delegation of legislative power. Mindanao II’s business is to convert the steam supplied to it by
It is simply a delegation of ascertainment of facts upon which PNOC-EDC into electricity and to deliver the electricity to NPC. In
enforcement and administration of the increase rate under the the course of its business, Mindanao II bought and eventually sold
law is contingent. The legislature has made the operation of the a Nissan Patrol. Prior to the sale, the Nissan Patrol was part of
12% rate effective January 1, 2006, contingent upon a specified Mindanao II’s property, plant, and equipment. Therefore, the sale
fact or condition. It leaves the entire operation or non-operation of the Nissan Patrol is an incidental transaction made in the course
of the 12% rate upon factual matters outside of the control of the of Mindanao II’s business which should be liable for VAT.
executive.
Note: The discussion of tax remedies in this case is partly modified

No discretion would be exercised by the President. Highlighting by the Train Law.
the absence of discretion is the fact that the word shall is used in
the common proviso. The use of the word “shall” connotes a
mandatory order. Its use in a statute denotes an imperative
obligation and is inconsistent with the idea of discretion. Where What are the zero-rated sales of goods or properties?
the law is clear and unambiguous, it must be taken to mean
exactly what it says, and courts have no choice but to see to it Under Section 106, the following sales by VAT-registered persons
that the mandate is obeyed. shall be subject to zero percent (0%) rate:
(a) Export Sales. - The term "export sales" means:
Thus, it is the ministerial duty of the President to immediately (1) The sale and actual shipment of goods from the Philippines to
impose the 12% rate upon the existence of any of the conditions a foreign country, irrespective of any shipping arrangement that
specified by Congress. This is a duty which cannot be evaded by may be agreed upon which may influence or determine the
the President. Inasmuch as the law specifically uses the word shall, transfer of ownership of the goods so exported and paid for in
the exercise of discretion by the President does not come into acceptable foreign currency or its equivalent in goods or services,
play. It is a clear directive to impose the 12% VAT rate when the and accounted for in accordance with the rules and regulations
specified conditions are present. The time of taking into effect of of the Bangko Sentral ng Pilipinas (BSP);
the 12% VAT rate is based on the happening of a certain specified
(2) Sale of raw materials or packaging materials to a nonresident
contingency, or upon the ascertainment of certain facts or
buyer for delivery to a resident local export-oriented enterprise to
conditions by a person or body other than the legislature itself.
be used in manufacturing, processing, packing or repacking in
the Philippines of the said buyer's goods and paid for in
acceptable foreign currency and accounted for in accordance
In sale of goods or properties, isolated transactions are not with the rules and regulations of the Bangko Sentral ng Pilipinas
vatable. Why? (BSP);
They are not vatable because it lacks the requisite regularity of (3) Sale of raw materials or packaging materials to export-
transaction. Under Section 105, paragraph 3 of the NIRC, the oriented enterprise whose export sales exceed seventy percent
following are the requisites of vatability: (70%) of total annual production;
(4) Sale of gold to the Bangko Sentral ng Pilipinas (BSP); and The phrase "sale or exchange of services" means the performance
of all kinds or services in the Philippines for others for a fee,
(5) Those considered export sales under Executive Order No. 226, remuneration or consideration, including:
otherwise known as the Omnibus Investment Code of 1987, and
other special laws. C 1. those performed or rendered by construction and service
contractors;
I 2. stock, real estate, commercial, customs and immigration

(b) Foreign Currency Denominated Sale. - The phrase "foreign brokers;
currency denominated sale" means sale to a nonresident of
goods, except those mentioned in Sections 149 and 150, L 3. lessors of property, whether personal or real;
assembled or manufactured in the Philippines for delivery to a
resident in the Philippines, paid for in acceptable foreign currency W 4. warehousing services;
and accounted for in accordance with the rules and regulations
of the Bangko Sentral ng Pilipinas (BSP). C 5. lessors or distributors of cinematographic films;
E 6. persons engaged in milling processing, manufacturing or

repacking goods for others;
(c) Sales to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a P 7. proprietors, operators or keepers of hotels, motels, resthouses,
signatory effectively subjects such sales to zero rate. pension houses, inns, resorts;
R 8. proprietors or operators of restaurants, refreshment parlors,

cafes and other eating places, including clubs and caterers;
What are the deemed sale transactions?
D 9. dealers in securities;
Under Section 106(B), the following transactions shall be deemed
sale: I 10. lending investors;
(1) Transfer, use or consumption not in the course of business of T 11. transportation contractors on their transport of goods or
goods or properties originally intended for sale or for use in the cargoes, including persons who transport goods or cargoes for
course of business; hire another domestic common carriers by land, air and water
relative to their transport of goods or cargoes;
(2) Distribution or transfer to: (a) Shareholders or investors as share
in the profits of the VAT-registered persons; or (b) Creditors in F 12. services of franchise grantees of telephone and telegraph,
payment of debt; radio and television broadcasting and all other franchise grantees
except those under Section 119 of this Code;
(3) Consignment of goods if actual sale is not made within sixty
(60) days following the date such goods were consigned; and B 13. services of banks, non-bank financial intermediaries and
finance companies;
(4) Retirement from or cessation of business, with respect to
inventories of taxable goods existing as of such retirement or N 14. and non-life insurance companies (except their crop
cessation. insurances), including surety, fidelity, indemnity and bonding
companies; and
S 15. similar services regardless of whether or not the performance

How do you explain the phrase “deemed sale”? thereof calls for the exercise or use of the physical or mental
faculties.
There is really no actual sale, but the transactions are considered
sale.
Keyword: LBC RCPI WEST FIND
In Commissioner v. Acesite Hotel, the Court explained such

transactions by virtue of a special law. What did the Court rule?
The transport of goods or cargoes may be by land, air or water.
PAGCOR is a VAT-exempt entity. VAT exemption extends to Are all of these vatable?
Acesite. While it was proper for PAGCOR not to pay the 10% VAT
charged by Acesite, the latter is not liable for the payment of it as No.
it is exempt in this particular transaction by operation of law to pay
the indirect tax. Such exemption falls within the former Section 102
(b) (3) of the 1977 Tax Code, which provides that the “services Which of these are not vatable?
rendered to persons or entities whose exemption under special
laws or international agreements to which the Philippines is a 1. Transportation of goods by international carriers (exempt by
signatory effectively subjects the supply of such services to zero R.A. No. 10378).
(0%) rate.” The proviso in P.D. 1869, extending the exemption to
entities or individuals dealing with PAGCOR in casino operations, 2. Domestic transport by land (exempt by way of omission).
is clearly to proscribe any indirect tax, like VAT, that may be shifted
to PAGCOR. Reason: Burdensome. If it is vatable, could you just imagine the
number of individuals who would file for credit or refund of input
tax?
In Section 108, memorize the transactions that constitute sale of

services.
What are the requisites of vatability of sale of services?

1. The service must be performed for others.
2. It must performed within the Philippines. There is a lease of residential unit in the amount of P15,000. Is this
vatable or vat-exempt?
3. The service rendered must be for a fee, remuneration or
consideration. In case of lease of a residential unit with a monthly rental not
exceeding P15K, and the gross receipt of more than P3 million, it
is vat-exempt, in which case you will disregard the threshold
amount of P3M, as provided.
In Diaz v. Secretary of Finance, the Court ruled on the application
of Section 108. Is that vatable sale of services? Is the tollway In case of lease of a residential unit with a monthly rental of more
operator transaction, vatable or exempt? than P15K, and the gross receipt of less than P3 million, it is vat-
exempt, in which case you will apply the threshold amount.
It is vatable.
Note: Correlate Section 109 (w & x), as amended. It may be items

Does section 108 provide for that transaction? q and v in some codal books.
Yes. It falls under services of franchise grantees of electric utilities,
telephone and telegraph, radio and television broadcasting and
all other franchise grantees (except those under Section 119 of this In Commissioner v. SM Prime Holdings, the Court also ruled on the
Code). application of Section 108. Is the sale of cinema tickets vatable?
It is not vatable. It is not one of those considered as sale of services.

There is no lease but only showing or exhibition of films.
Is this one of the exempt grantees for franchise?
The legislature never intended operators or proprietors of
No. cinema/theater houses to be covered by VAT. Historically, the
activity of showing motion pictures, films or movies by
cinema/theater operators or proprietors has always been
What is that VAT exempt sale of service referred to in Section 119? considered as a form of entertainment subject to amusement tax.
Prior to the Local Tax Code, all forms of amusement tax were
They are subject to percentage tax. It does not mention tollways. imposed by the national government.
When the Local Tax Code was enacted, amusement tax on

admission tickets from theaters, cinematographs, concert halls,
What are the three reasons why tollway operators are vatable? circuses and other places of amusements were transferred to the
local government. Under the NIRC of 1977, the national
1. The law imposes VAT on "all kinds of services" rendered in the government imposed amusement tax only on proprietors, lessees
Philippines for a fee, including those specified in the list. The or operators of cabarets, day and night clubs, jai-alai and race
enumeration of affected services is not exclusive. By qualifying tracks. The VAT law was enacted to replace the tax on original
"services" with the words "all kinds," Congress has given the term and subsequent sales tax and percentage tax on certain services.
"services" an all-encompassing meaning. Thus, every activity that
can be imagined as a form of "service" rendered for a fee should When the VAT law was implemented, it exempted persons subject
be deemed included unless some provision of law especially to amusement tax under the NIRC from the coverage of VAT.
excludes it. When the Local Tax Code was repealed by the LGC of 1991, the
local government continued to impose amusement tax on
When a tollway operator takes a toll fee from a motorist, the fee admission tickets from theaters, cinematographs, concert halls,
is in effect for the latter's use of the tollway facilities over which the circuses and other places of amusements. Amendments to the
operator enjoys private proprietary rights that its contract and the VAT law have been consistent in exempting persons subject to
law recognize. In this sense, the tollway operator is no different amusement tax under the NIRC from the coverage of VAT. Only
from the following service providers under Section 108 who allow lessors or distributors of cinematographic films are included in the
others to use their properties or facilities for a fee. coverage of VAT.
2. Section 108 subjects to VAT "all kinds of services" rendered for a These reveal the legislative intent not to impose VAT on persons
fee "regardless of whether or not the performance thereof calls for already covered by the amusement tax. This holds true even in
the exercise or use of the physical or mental faculties." This means the case of cinema/theater operators taxed under the LGC of
that "services" to be subject to VAT need not fall under the 1991 precisely because the VAT law was intended to replace the
traditional concept of services, the personal or professional kinds percentage tax on certain services. The mere fact that they are
that require the use of human knowledge and skills. taxed by the local government unit and not by the national
government is immaterial. The Local Tax Code, in transferring the
3. Tollway operators are, owing to the nature and object of their
power to tax gross receipts derived by cinema/theater operators
business, “franchise grantees” and they do not belong to
or proprietor from admission tickets to the local government, did
exceptions (the low-income radio and/or television broadcasting
not intend to treat cinema/theater houses as a separate class. No
companies with gross annual incomes of less than P10 million and
distinction must, therefore, be made between the places of
gas and water utilities) that Section 119 spares from the payment
amusement taxed by the national government and those taxed
of VAT. The word "franchise" broadly covers government grants of
by the local government.
a special right to do an act or series of acts of public concern. The
construction, operation, and maintenance of toll facilities on To hold otherwise would impose an unreasonable burden on
public improvements are activities of public consequence that cinema/theater houses operators or proprietors, who would be
necessarily require a special grant of authority from the state. paying an additional 10% VAT on top of the 30% amusement tax
Indeed, Congress granted special franchise for the operation of imposed by Section 140 of the LGC of 1991, or a total of 40% tax.
tollways in the Philippines. Such imposition would result in injustice, as persons taxed under

the NIRC of 1997 would be in a better position than those taxed Section 112([C]) of the NIRC clearly provides that the CIR has "120
under the LGC of 1991. days, from the date of the submission of the complete documents
in support of the application [for tax refund/credit]," within which
to grant or deny the claim. In case of full or partial denial by the
CIR, the taxpayer's recourse is to file an appeal before the CTA
In the Fort Bonifacio case, the Court discussed the transitional within 30 days from receipt of the decision of the CIR. However, if
input tax. What is the ruling of the Court? after the 120-day period the CIR fails to act on the application for
tax refund/credit, the remedy of the taxpayer is to appeal the
To give Section 105 a restrictive construction that transitional input
inaction of the CIR to CTA within 30 days. Thus, the taxpayer must
tax credit applies only when taxes were previously paid on the
wait for the decision of the CIR or the lapse of the 120-day period.
properties in the beginning inventory and there is a law imposing
the tax which is presumed to have been paid, is to impose Section 112([A]) of the NIRC, on the other hand, states that "any
conditions or requisites to the application of the transitional tax VAT-registered person, whose sales are zero-rated or effectively
input credit which are not found in the law. The courts must not zero-rated may, within two years after the close of the taxable
read into the law what is not there. To do so will violate the quarter when the sales were made, apply for the issuance of a tax
principle of separation of powers which prohibits this Court from credit certificate or refund of creditable input tax due or paid
engaging in judicial legislation. attributable to such sales." The phrase "within two (2) years x x x
apply for the issuance of a tax credit certificate or refund" refers
to applications for refund/credit filed with the CIR and not to
What is transitional input tax? appeals made to the CTA. This is apparent in the first paragraph
of subsection (C) of the same provision, which states that the CIR
It is when you are not exempt but you have attained the resold has "120 days from the submission of complete documents in
amount. There is in fact a transition. support of the application filed in accordance with Subsections
(A) and (B)" within which to decide on the claim.
In fact, applying the two-year period to judicial claims would

What is the tax benefit? render nugatory Section 112(C) of the NIRC, which already
provides for a specific period within which a taxpayer should
It is exempt. One cannot claim for creditable input tax. appeal the decision or inaction of the CIR. The second paragraph
of Section 112(C) of the NIRC envisions two scenarios: (1) when a
decision is issued by the CIR before the lapse of the 120-day
When can there be a claim or credit thereof? period; and (2) when no decision is made after the 120-day
period. In both instances, the taxpayer has 30 days within which
You must register as a VAT-registered person. to file an appeal with the CTA. As we see it then, the 120-day
period is crucial in filing an appeal with the CTA.
Further, in Commissioner of Internal Revenue v. San Roque Power

What is the three-fold purpose of transitional input tax? Corporation, the Court emphasized that the 120-day period that
is given to the CIR within which to decide claims for refund/tax
It serves to alleviate the impact of VAT on the taxpayer. It operates credit of unutilized input VAT is mandatory and jurisdictional. The
to benefit newly VAT-registered persons. It is a form of Court categorically held that the taxpayer-claimant must wait for
encouragement. the 120-day period to lapse, should there be no decision fully or
partially denying the claim, before a petition for review may be
filed with the CTA. Otherwise, the petition would be rendered
premature and without a cause of action. Consequently, the CTA
Note: Prior payment of taxes is not necessary to avail transitional
does not have the jurisdiction to take cognizance of a petition for
input tax. (Section 112, as amended)
review filed by the taxpayer-claimant should there be no decision
by the CIR on the claim for refund/tax credit or the 120-day period
had not yet lapsed.
What is the Aichi Doctrine?
An appeal to the Court of Tax Appeals must be made within 30

days from the receipt of the adverse decision of the Note: This is the case that has not been modified by the Train Law.
Commissioner, even if it is filed beyond the 2-year period for
refund.
In Commissioner v. Team Sual Corporation (715 SCRA 478, G.R. No.

194105, February 5, 2014), the Court discussed about the VAT
remedies in Section 112. What is the jurisprudential ruling of the
Court?
The pivotal question of whether the imminent lapse of the two-

year period under Section 112(A) of the NIRC justifies the filing of
a judicial claim with the CTA without awaiting the lapse of the 120-
day period given to the CIR to decide the administrative claim for .
refund/tax credit had already been settled by the Court. In
Commissioner of Internal Revenue v. Aichi Forging Company of
Asia, Inc., the Court held that: “However, notwithstanding the
timely filing of the administrative claim, we are constrained to
deny respondent's claim for tax refund/credit for having been
filed in violation of Section 112([C]) of the NIRC”


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TAXATION LAW REVIEW NOTES (FINALS part) In CWTS the taxpayer must report the income received

Abunales-Bernardo-Dadua-Evidente-Erum-Valenzuela-Millera-Picardal-Rafael-Ramos-Rocelyn-Suan-Talorong|SBCA TAXATION REVIEW Finals 2018 TRANSCRIPT J.D. Page 2 of 26

Included in two cases: * Do not make your answers long.

Q: What is this connotes?

A: the seller. Q: What are Capital Assets?

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A: There are three A: No, it is subject to final tax

Interest Income A: Subject to 15% final tax under Sec. 28(B)(5)(b)

 No. The heirs had no intention to divide the partnership

CREBA claims that this 2% is a tax on capital and violates due

What is substance test?  To be effectively connected it is not necessary that the

READ SOUTH AFRICAN AIRWAYS AND AIR CANADA, BOAC. IT MAY

 It is an international law recognized principle that

Now the new rule?  is this 10% form of penalty

 EPZA is now Philippine Economic Zone Authority Exceptions:

What’s the purpose of MCIT?

 Regional or area headquarters of multinational 

What’s the purpose?

Abunales-Bernardo-Dadua-Evidente-Erum-Valenzuela-Millera-Picardal-Rafael-Ramos-Rocelyn-Suan-Talorong|SBCA TAXATION REVIEW Finals 2018 TRANSCRIPT J.D. Page 14 of 26

J. Dimaampao: Of the 10 Allowable Deductions, which among

Revenue Regulations No. 12-77 provides for the following

3. meager amount involved

6. bankruptcy or insolvency of the debtor

What are the requisites of deductibility of bad debts?

4. Debt arises from business or trade.

They refer to interests on simultaneous or back-to-back

*Probable bar question The rate of OSD is 40%

On deductions of interest: What is the base of OSD?

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The tax situs is the residence of the debtor.

Basis: Section 25 states that he is subject to final tax, which is the

In case of sale of goods, what is the tax situs?

The important provisions are:

Kinds of Income Source (Tax Situs) 111

3. Barter or exchange of good or properties (106)

What are the two kinds of VAT? (Section 110)

What is the tax base on importation?

What is the ruling in Kapatiran v. Tan?

6. Zero rated sale of goods or properties.

What is the ruling in Abakada v. Ermita?

Distinguish indirect tax from direct tax.

Note: The discussion of tax remedies in this case is partly modified

(a) Export Sales. - The term "export sales" means:

I 2. stock, real estate, commercial, customs and immigration

E 6. persons engaged in milling processing, manufacturing or

R 8. proprietors or operators of restaurants, refreshment parlors,

S 15. similar services regardless of whether or not the performance

In Commissioner v. Acesite Hotel, the Court explained such

In Section 108, memorize the transactions that constitute sale of

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Note: Correlate Section 109 (w & x), as amended. It may be items

It is not vatable. It is not one of those considered as sale of services.

When the Local Tax Code was enacted, amusement tax on

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In fact, applying the two-year period to judicial claims would

Further, in Commissioner of Internal Revenue v. San Roque Power

An appeal to the Court of Tax Appeals must be made within 30

In Commissioner v. Team Sual Corporation (715 SCRA 478, G.R. No.

The pivotal question of whether the imminent lapse of the two-

Abunales-Bernardo-Dadua-Evidente-Erum-Valenzuela-Millera-Picardal-Rafael-Ramos-Rocelyn-Suan-Talorong|SBCA TAXATION REVIEW Finals 2018 TRANSCRIPT J.D. Page 25 of 26

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