i.

Tax on Corporations

‣AFISCO INSURANCE v. CA; G.R. No. 112675

a. Classification of Corporations

1. Domestic Corporations
- Corporations organized in the Philippines or under its laws liable
for its income with sources within or without the Philippines.
(section 22, NIRC)

1. Foreign Corporations

(i)Resident Foreign Corporations- Not domestic and is engage

in the business in the Philippines, liable for income from
sources within the Philippines.

(ii) Nonresident Foreign Corporations

a.1)Special Cases:

(i) Condominium Corporation

(iii) Real Estate Investment Trust

a. Domestic Corporations

• Sec. 27, NIRC

(i) Normal (Regular Income Tax)- 30% of taxable income from

all sources within or without the phils.

Gross Sales
Less: Sales Return/ Allowances/ Discounts/ Cost of Goods
Sold/ Cost of Services
------------------------------------------------------------------------------
Gross Income
Less: Allowable Deductions
------------------------------------------------------------------------------
Taxable Income
X 30%
------------------------------------------------------------------------------
NCIT
(ii) Gross Income Tax-
- includes all items enumerated under section 23
Compensation for services
Gross income from trade or business
Gains from dealings of property
Interest
Rents
Dividents
Annuity
Prizes and winnings
Pensions

- except income tax and income subject to final income tax

(RR 12-2007)

(iii) Proprietary Education Institutions and Hospitals

A. Proprietary Educational Institution- Any private

school administered and maintained by private
individuals or groups with an issued permit to
operate.
A. They are NOT TAX EXEMPT but rather
TAXED AT PREFERENCIAL RATE of
10%. Except on passive income.
B. 120, 000 related income
60,000 unrelated income
---------------------------------
180,000
Divide 60, 000 x 100
--------------------------------
33% preferencial rate (Section 27, B,
NIRC)

• Predominance Test

‣CIR v. ST. LUKE’S; G.R. Nos. 195909 & 195960

• Proprietary- Following the definition of proprietary
institution- A private school operated and
administered by a private group or individuals with
a government permit”
 • Non-profit- No net income or asset accrues to or
benefits any member or specific person, WITH
ALL THE NET INCOME DEVOTED TO THE
INSTITUTIONS PURPOSE and all its activities
conducted not for profit.

‣CIR v. ST. LUKE’s; G.R. No. 203514

• The Non-Stock Non-Profit hospital must satisfy the
following requisites in order to be entitled to the
exemption from income tax:
• 1. It is a non-stock corporation
• 2. It is operated exclusively for charitable
purposes; and
• 3. No part of its income or asset shall belong
to or inure to the benefit of any member,
organizer, officer or any person.

NOTA BENE:
50% tax if- non-profit private hosp. and institution exceeds 50% of total gross
income from all sources.

10% (preferencial rate) if it does not exceed 50%

Exempt if purely charitable as ruled in the case of CIR vs St. LUKES (2011)

(iv) Government-Owned or Controlled Corporations

GR. ALL corporations owned and controlled by the

government are taxed in the same manner the
domestic private corporations are taxed.

XPNs:
1. GSIS
2. SSS
3. Philhealth
4. PCSO
5. LWD

‣PAGCOR v. BIR; G.R. No. 172087

‣PAGCOR v. BIR; G.R. No. 215427
 • PAGCOR is no longer exempted from corporate
income tax as it has been effectively omitted from
the list of GOCCs that are exempt from payment of
the income tax. Nevertheless, pagcor tax privilege
of 5% franchise tax is not repealed.
‣BLOOMBERRY RESORTS v. BIR; G.R. No. 212530
‣CIR v. SECRETARY; G.R. No. 177387

(v) Tax on Passive Income- income derived from activity which

the tax payer has no active participation or involvement.

1. INTEREST from any currency bank

deposits

TAX TREATMENT:
DC 20%
RFC 20%
NRFC 30% NCIT

XPNs
1. Bank Deposits. Recipient are:
a. Foreign Government
b. Financing Institution
owned, controlled,
finance by FG.

2. Regional or Int’l Financing corp.

estb, by FG

2.DIVIDENT INCOME

Distribution made by corporation to its

shareholder out of its earning or profits, it
could be money or property.
 a. Dividents received by a DC and
RFC from DC not subject to tax.

b. Dividents rcvd by a NRFC from

DC shall be subject to FWT. TAX
SPARING RULE (15% FWT):

a. Allow 15% tax credit to

foreign corp.
b. Does not impose income
tax on such dividents.

c. Dividents rcvd from Foreign

Corp.

a. Rcvd by DC from FC=

30% NCIT
b. Rcvd by RFC and NRFC
from FC subject to 30% if
sources are within the
phils.

Note:
 1. FWT of 10% is imposed to dividents rcvd by a RC
from BBB a DC;
2. FWT 25 imposed to NRA ETB
3. FWT of 25% imposed to NRA not ETB
4. Dividents rcvd by DC from DC is exempt
5. NRFC from DC subject to 30%

STOCK DIVIDENTS are not Income hence not Taxable. It

is merely a certificate of stock which evidences the interest
of the stockholder in the increased capital of the corp.

It may be subject to:

2. Schedular rates;
3. Final tax.

• Capital Gains Tax

‣SMI-ED PHILIPPINES v. CIR; G.R. No. 175410

• Petitioner’s entitlement to benefits given to PEZA-registered enterprises

• Petitioner is not entitled to benefits given to PEZA-registered enterprises, including the 5%

preferential tax rate under Republic Act No. 7916 or the Special Economic Zone Act of 1995. This
is because it never began its operation.

• Essentially, the purpose of Republic Act No. 7916 is to promote development and encourage
investments and business activities that will generate employment. Giving fiscal incentives to
59

businesses is one of the means devised to achieve this purpose. It comes with the expectation that
persons who will avail these incentives will contribute to the purpose’s achievement. Hence, to
avail the fiscal incentives under Republic Act No. 7916, the law did not say that mere PEZA
registration is sufficient.

(i) Minimum Corporate Income Tax

 • RR 9-98
• RR 12-2007

‣CREBA v. ROMULO; G.R. No. 160756

‣CIR v. PAL; G.R. No. 180066
‣MBC v. CIR; G.R. No. 168118

a. Resident Foreign Corporations

‣N.V. REEDERIJ v. CIR; G.R. No. L-46029

‣ERIKS PTE. LTD. v. CIR; G.R. No. 118843
‣CIR v. BOAC; G.R. Nos. L-65773-74
‣CIR v. CA; G.R. No. 104151

• Sec. 28, NIRC

(i) Normal (Regular) Income Tax

(ii) Minimum Corporate Income Tax

(iii) Gross Philippine Billings Tax

• International Carriers
• Originating Rule

‣SOUTH AFRICAN AIRWAYS v. CIR; G.R. No. 180356;

‣
‣ISSUE:

‣Is petitioner’s income sourced within the Philippines and

is to be taxed at 32% of the gross billings?

‣HELD:

‣The answer was YES!

‣Court said in the instant case, the General Rule is that

resident foreign corporations shall be liable for a 32%
income tax on their income from within the Philippines,
Except for resident foreign corporations that are
international carriers that derive income “from carriage of
persons, excess baggage, cargo and mail originating
 from the Philippines” which shall be taxed at 2 1/2% of
their Gross Philippine Billings.

‣Petitioner, being an international carrier with no flights

originating from the Philippines, does not fall under the
exception. As such, petitioner must fall under the general
rule.

‣(This principle is embodied in the Latin maxim, exception

firmat regulam in casibus non exceptis, which means, a
thing not being excepted must be regarded as coming
within the purview of the general rule.)

‣To reiterate, the correct interpretation of the above

provisions is that, if an international air carrier maintains
flights to and from the Philippines, it shall be taxed at the
rate of 2 1/2% of its Gross Philippine Billings, while
international air carriers that do not have flights to and
from the Philippines but nonetheless earn income from
other activities in the country will be taxed at the rate of
32% of such income.

‣------------------------

‣So I believe JAL though being a non-resident foreign

corporation (contrary to the first requisite in the general
rule) was taxed at 32% gross on billings, having
absence of flight operations to and from Philippines.

‣Question: There being absence of flight operations to

and from Philippines in the JAL case and there having no
landing rights and thus did not carry passengers and/or
cargo to or from the Philippines in the BOAC case, then
why is BOAC taxed at the rate of 2 1/2% gross on
billings.

‣Here in this case SAA was selling off-line flights outside

Philippine territorial jurisdiction and not licensed to do
business in the Philippines. So it was taxed at 32% since
it falls under the exception.

AIR CANADA v. CIR; G.R. No. 169507

• Whether Air Canada is subject to the 2½% tax on Gross Philippine Billings pursuant to Section 28(A)
(3).

NO. Air Canada is not is not liable to tax on Gross Philippine Billings under Section 28(A)(3). The tax
attaches only when the carriage of persons, excess baggage, cargo, and mail originated from the
Philippines in a continuous and uninterrupted flight, regardless of where the passage documents
were sold. Not having flights to and from the Philippines, petitioner is clearly not liable for the Gross
Philippine Billings tax.

• If not, whether Air Canada is a resident foreign corporation engaged in trade or business and thus,
can be subject to the regular corporate income tax of 32% pursuant to Section 28(A)(1);

YES. Petitioner falls within the definition of resident foreign corporation under Section 28(A)(1) 1,
thus, it may be subject to 32% tax on its taxable income.

The Court in Commissioner of Internal Revenue v. British Overseas Airways Corporation declared
British Overseas Airways Corporation, an international air carrier with no landing rights in the
Philippines, as a resident foreign corporation engaged in business in the Philippines through its local
sales agent that sold and issued tickets for the airline company. According to said case, there is no
specific criterion as to what constitutes “doing” or “engaging in” or “transacting” business. Each case
must be judged in the light of its peculiar environmental circumstances. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident to, and in
progressive prosecution of commercial gain or for the purpose and object of the business
organization.

An offline carrier is “any foreign air carrier not certificated by the Civil Aeronautics Board, but who
maintains office or who has designated or appointed agents or employees in the Philippines, who
sells or offers for sale any air transportation in behalf of said foreign air carrier and/or others, or
1
SEC. 28. Rates of Income Tax on Foreign Corporations. -

(A) Tax on Resident Foreign Corporations. -

(1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under
the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an
income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year
from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be
thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%); and effective
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). (Emphasis supplied)
 negotiate for, or holds itself out by solicitation, advertisement, or otherwise sells, provides,
furnishes, contracts, or arranges for such transportation.”

Petitioner is undoubtedly “doing business” or “engaged in trade or business” in the Philippines. In

the case at hand, Aerotel performs acts or works or exercises functions that are incidental and
beneficial to the purpose of petitioner’s business. The activities of Aerotel bring direct receipts or
profits to petitioner. Further, petitioner was issued by the Civil Aeronautics Board an authority to
operate as an offline carrier in the Philippines for a period of five years. Petitioner is, therefore, a
resident foreign corporation that is taxable on its income derived from sources within the
Philippines.

‣
• Whether the Republic of the Philippines-Canada Tax Treaty is enforceable;

YES. While petitioner is taxable as a resident foreign corporation under Section 28(A)(1) on its
taxable income from sale of airline tickets in the Philippines, it could only be taxed at a maximum of
1½% of gross revenues, pursuant to Article VIII of the Republic of the Philippines-Canada Tax Treaty
that applies to petitioner as a “foreign corporation organized and existing under the laws of Canada.”

The second paragraph of Article VIII states that “profits from sources within a Contracting State
derived by an enterprise of the other Contracting State from the operation of ships or aircraft in
international traffic may be taxed in the first-mentioned State but the tax so charged shall not exceed
the lesser of a) one and one-half per cent of the gross revenues derived from sources in that State;
and b) the lowest rate of Philippine tax imposed on such profits derived by an enterprise of a third
State.”

“By reason of our bilateral negotiations with Canada, we have agreed to have our right to tax limited
to a certain extent.” Thus, we are bound to extend to a Canadian air carrier doing business in the
Philippines through a local sales agent the benefit of a lower tax equivalent to 1½% on business
profits derived from sale of international air transportation.

Our Constitution provides for adherence to the general principles of international law as part of the
law of the land. The time-honored international principle of pacta sunt servanda demands the
performance in good faith of treaty obligations on the part of the states that enter into the
agreement. Every treaty in force is binding upon the parties, and obligations under the treaty must
be performed by them in good faith. More importantly, treaties have the force and effect of law in
this jurisdiction. (Deutsche Bank AG Manila Branch v. Commissioner of Internal Revenue).

(iv) Branch Profits Remittance Tax

‣BANK OF AMERICA v. CA; G.R. No. 103092

‣MARUBENI v. CIR; G.R. No. 76573
‣CIR v. BURROUGHS LIMITED; G.R. No. 66653

• Sec. 28 (A)(5), NIRC

• Single Entity Concept

• Attribution Rule
• Principal-Agent Relationship Theory

(v) Tax on Passive Income

(vi) Capital Gains Tax

(vii) Tax on Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Corporations

a. Nonresident Foreign Corporations

• Sec. 28, NIRC

(i) In General

(ii) Specific Cases

(iii) Capital Gains Tax

(iv) Tax on Intercorporate Dividends

• Tax Sparing Rule

‣CIR v. PROCTER & GAMBLE; G.R. No. L-66838

‣CIR v. WANDER PHILIPPINES; G.R. No. L-68375

 ‣CIR v. GOODYEAR PHILIPPINES; G.R. No.
216130

b. Improperly Accumulated Earnings Tax

• Sec. 29, NIRC

• RR 2-2001

‣CIR v. TUASON; G.R. No. 85749

‣MANILA WINE v. CIR; G.R. No. L-26145
‣BASILAN ESTATES v. CIR; G.R. No. L-22492
‣CYANAMID PHILIPPINES v. CA; G.R. No. 108067

a. Exempt Corporations

• Sec. 30, NIRC

‣CIR v. V.G. SINCO; G.R. No. L-9276

‣CIR v. CA and YMCA; G.R. No. 124043

Issue: WON income derived from rentals of real property

owned by YMCA is subject to income tax under NIRC and the
constitution?

Ruling: YES. The exemption claimed by YMCA is expressly

disallowed by the wording of the last paragraph of section 30 of
the NIRC w/c mandates that income of exempt organizations
(such as YMCA) from any of their properties, personal or real,
be subject to the tax imposed by the same code.

The last paragraph of the same section unequivocally subjects

to tax the rent income of YMCA from its real property. Thus, the
court is duty bound to abide strictly by its literal meaning.

On YMCA’s argument the constitution grants tax exemption to

charitable institution, the court is not persuaded, YMCA is only
exempted from payment of property tax and not on the renatl
income derived therein.

To be exempted YMCA must prove that income it seeks to be

exempted must be ACTUALLY, DIRECTLY and EXCLUSIVELY
used for educational purposes.
‣CIR v. DLSU; G.R. No. 196596
‣CIR v. ST. LUKE’S; G.R. Nos. 195909 & 195960

Issue: WON St. Luke’s is liable for deficiency income tax under
Sec. 27 (B) of the NIRC which imposes a 10% preferential rate.

Held: Petition partly granted. YES, St. Luke’s is liable under

Sec. 27 (B) of the NIRC.

Under Sec. 30 (E) of the NIRC provides that a charitable

institution must be:
(1) non-stock corporation or association;
(2)ORGANIZED EXCLUSIVELY for charitable purposes;
(3) OPERATED EXCLUSIVELY for charitable purposes;
(4) No part of its net income or asset shall inure to the benefit
of any member , officer or any person.

Under the last paragraph of Sec. 30 of the NIRC if a tax

exempt charitable institution conducts "any" activity for profit,
such activity is NOT TAX EXEMPT even as its not-for-profit
activities remain tax exempt.

It simply means that even if a charitable institution organized

and operated exclusively for charitable purposes is
nevertheless allowed to engage in “activities conducted for
profit” without losing its tax exempt status for its no-for-profit
activities. However, as a consequence "income of whatever
kind and character" of a charitable institution "from any of its
activities conducted for profit, regardless of the disposition
made of such income, shall be subject to tax." (Sec. 30, last
par.). Therefore, services rendered to paying patients are
activities conducted for profit and thus taxable under Sec. 27
(B) of the NIRC.
St. Luke's fails to meet the requirements under Section 30 (E)
and (G) of the NIRC to be completely tax exempt from all its
income. However, it remains a proprietary non-profit hospital
under Section 27 (B) of the NIRC as long as it does not
distribute any of its profits to its members and such profits are
reinvested pursuant to its corporate purposes. St. Luke's, as a
proprietary non-profit hospital, is entitled to the preferential tax
rate of 10% on its net income from its for-profit activities.
 Notes:
1. TEST OF CHARITY - as a gift, to be applied consistently
with existing laws, for the benefit of
an indefinite number of persons, either by bringing their minds
and hearts under the influence of education or religion, by
assisting them to establish themselves in life or [by] otherwise
lessening the burden of government." (In other words,
charitable institutions provide for free goods and services to the
public which would otherwise fall on the shoulders of
government.)

2. Solely is synonymous with EXCLUSIVELY. (Lung center of

the Phil.)
3. Proprietary- means private.
4. Non-profit- no net income accrues to the benefit of any
person and with all its income devoted to the institutions
purpose and all its activities CONDUCTED NOT FOR PROFIT.

‣PAGCOR v. BIR; G.R. No. 172087

‣PAGCOR v. BIR; G.R. No. 215427

‣BLOOMBERRY RESORTS v. BIR; G.R. No. 212530
‣CIR v. SECRETARY; G.R. No. 177387
‣REPUBLIC v. PAL; G.R. Nos. 209353-54
‣CIR v. PAL; G.R. No. 215705-07
‣AMERICAN BILBLE SOCIETY v. CITY OF MANILA
‣MANILA GAS v. COLLECTOR; G.R. No.

ii. Taxable Income

• Sec. 31, NIRC

a. Concept

• Accounting Income

b. Characteristics (Requisites)

c. Net Worth Method

d. Expenditure Method
 ‣CREBA vs. ROMULO; G.R. 160756
‣FERNANDEZ HERMANOS v. CIR; G.R. No. L-21551
‣FISHER v. TRINIDAD; G.R. No. L-17518
‣CIR v. FDC.; G.R. Nos. 163653 & 167689
‣CIR v. BANK OF COMMERCE; G.R. No. 149636
‣LIMPAN INVESTMENT v. CIR; G.R. No. L-21570
‣LI YAO v. COLLECTOR; G.R. No. L-11875
‣COLLECTOR v. JAMIR; G.R. No. L-16552

i. Gross Income

• Sec. 32, NIRC

‣CIR v. BOAC; G.R. Nos. L-65773-74

‣JAMES v. U.S.; 366 U.S. 213 (1961)
‣RUTKIN v. U.S.; 343 U.S. 130

a. Concept

b. Compensation Income

• Convenience of the Employer Rule

‣MILLARES v. NLRC; G.R. No. 122827

‣CIR v. HENDERSON; G.R. No. L-12954
‣PIROVANO v. CIR; G.R. No. L-19865

c. Business Income (Income from Exercise of Profession)

d. Passive Income

‣CIR v. PAL; G.R. No. 160528

(i) Gains from Dealings in Property

6. Shares of Stock

7. Real Property

‣GONZALES v. CTA; G.R. No. L-14532

(i) Interest Income

 • RR 14-2012

• 20-Lender Rule (19-Lender Rule)

• Imputed/Theoretical Interest

‣GONZALES v. CTA
‣CIR v. MITSUBISHI METAL; G.R. No. L-54908
‣CIR v. FDC; G.R. No. 163653
‣BDO v. CIR; G.R. No. 198756
‣CIR v. ISABELA CULTURAL; G.R. No. 172231

(ii) Rental Income

• BIR Ruling No. 3-00, 05 January 2000

• RMC 16-2013

1. Outright Method

8. Spread-Out Method

(iii) Royalty Income

(iv) Dividend Income

‣CIR v. CA; G.R. No. 108576

‣CIR v. Manning; G.R. No. L-28398
‣WISE AND CO. v. MEER; G.R. No. 48231

(v) Annuities and Proceeds from Insurance

(vi) Prizes and Winnings

(vii) Pensions

a. Distributive Share from the Net Income of General Professional

Partnership

‣TAN v. DEL ROSARIO; G.R. No. 109289

b. Income from Miscellaneous Sources

 • Tax Benefit Rule

(i) Bad Debts Recovery

(ii) Unutilized Campaign Funds

(iii) Subsidy

‣CIR v. SONY; G.R. No. 178697

(iv) Tax Refund (Credit)

(v) Condonation of Debt

i. Exclusions from Gross Income

• Sec. 32, NIRC

a. Nature

b. Rationale

c. Exclusions and Deductions

d. Excluded Items

‣CIR v. CA; G.R. No. 95022

‣CIR v. MITSUBISHI METAL; G.R. No. L-54908
‣EL ORIENTE v. POSADAS; G.R. No. 34774
‣RE: REQUEST OF ATTY. BERNARDO ZIALCITA; A.M. No. 90-6-015-
SC
‣BORROMEO v. CSC; G.R. No. 96032
‣SANTOS v. SERVIER PHILIPPINES; G.R. No. 166377
‣TANTUICO v. DOMINGO; G.R. No. 96422

e. De Minimis Benefits

f. 13th Month Pay and Other Benefits

i. Fringe Benefits
• Fringe Benefits Tax

• Convenience of the Employer Rule