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Atty. Vic C. Mamalateo

July, 2011 Ateneo Law School


Taxation is the rule; exemption, the exception. In case of doubt, tax income or disallow deductions and tax credits.

Taxes are imposed by law (e.g., NIRC), while financial accounting are based on generally accepted accounting standards. In case of conflict between tax rules and accounting rules, the former shall prevail.

Tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a persons income, emoluments, profits and the like (Fisher v. Trinidad). Income tax is a direct tax on taxable actual or presumed income (gross or net) of a taxpayer received, accrued or realized during the taxable year.

It is not an internal revenue tax but a mode of collecting income tax in advance on income of the recipient of income thru the payor of income. [NOTE: Sec. 21, NIRC enumerates various internal revenue taxes.] There are 2 types of withholding taxes, namely: (1) final withholding tax; and (2) creditable withholding tax, including expanded withholding tax.


It is a direct tax. It is a progressive tax, since the tax base increases as the tax rate increases. It is founded on the ability to pay of taxpayer. Phil adopted the most comprehensive system in imposing income tax. Phil follows the semi-global or semi-schedular income tax system. It is of American origin. Decisions of U.S. tax authorities have peculiar and persuasive effects for the Phil.


Compensation income not subject to FWT Business and/or professional income Capital gains not subject to FWT Passive investment income not subject to FWT Other income not subject to FWT Compensation income subject to FWT Capital gains subject to FWT Passive investment income subject to FWT Other income subject to FWT


The Philippines adopted the semi-global or semi-schedular tax system. Either the global or schedular system, or both systems, may apply on income of a taxpayer. You apply the schedular tax system only when the income, gain or profit is subject to FWT.


Income payment is listed in Sec 57(A), NIRC, as subject to FWT. FWT withheld by the payor of income (e.g., 20% FWT on interest income on bank deposits) represents FULL payment of income tax due on such income of the recipient. Income payee (or recipient of income) does not report income subjected to FWT in his income tax return, although income is reflected in his audited financial statements for the year. However, he is not allowed to claim any tax credit on income subjected to FWT. Withholding agent (payor of income) files the withholding tax return, which includes the FWT deducted from the income of payee, and pays the tax to the BIR. There is no Certificate of Tax Withheld issued to income payee. No Certificate of Tax Withheld (BIR Form 2307) is attached to the income tax return of recipient of income because he does not claim any tax credit in his tax return.


For Filipino citizens and domestic corporations, who are entitled to Philippine government protection wherever they are situated.

Residence principle
For alien individuals and foreign corporations

Source principle
For alien individuals and foreign corporations


Graduated income tax on individuals; Normal corporate income tax on corporations (RCIT); Minimum corporate income tax on corporations (MCIT); Special income tax on certain corporations (e.g., private educational institutions; foreign currency deposit units; international carriers) 5. Capital gains tax on sale or exchange of unlisted shares of stock of a domestic corporation classified as a capital asset; 6. Capital gains tax on sale or exchange of real property located in the Philippines classified as a capital asset; 7. Final withholding tax on certain passive investment incomes; 8. Final withholding tax on income payments made to non-residents (individual or corporation); 9. Fringe benefit tax (FBT); 10. Branch profit remittance tax (BPRT); and 11. Tax on improperly accumulated earnings (IAET). 1. 2. 3. 4.

GLOBAL SYSTEM Gross sales Less: Cost of sales Gross income Less: Deductions PAE (for ind.) Net taxable income Multiplied by applicable rate (graduated or flat) Income tax due Less: Creditable WT Balance SCHEDULAR SYSTEM Gross selling price or fair market value, whichever is higher times applicable tax rate = Tax due (real property) Gross selling price less cost or adjusted basis = Capital gain times applicable tax rate = Tax due (shares of dom corp) Gross income times applicable rate = Tax due (passive inv income; income paid to nonresident person)

INDIVIDUAL, including estate and trust

Resident (RC) Taxable on worldwide income Non-resident immigrant, permanent worker, OFW (seamen)

Resident Non-resident
Engaged in trade or business (more than 180 days in the Phil) Not engaged in trade or business (180 days or less stay in Phil)

CORPORATION, including partnership DOMESTIC (DC) Taxable on worldwide income

FOREIGN Resident (e.g., Phil branch of foreign corporation) Non-resident

Law of incorporation RULE: All taxpayers are taxed only on income from sources within the Phil, except RC and DC.


EXEMPT General professional partnership (GPP) Joint venture undertaking construction activity or energyrelated activities with operating contract with the government TAXABLE Partnerships, no matter how created or organized RULES: If taxable, partnership is taxed like a corporation. If taxable partnership derives net income during the year, the entire net income is deemed received by the partners in the year it was earned by the partnership. If GPP adopts itemized deductions during the year, partners must use itemized deductions during the same year.


Ordinary branch of a foreign corporation in the Phil: 30% x net income from sources within the Phil PEZA- & SBMA-registered branch of foreign corporation is exempt from 15% BPRT Regional operating headquarters (ROHQ): 10% x net income from sources within the Phil Offshore banking unit (OBU) and foreign currency deposit unit (FCDU) [ING Bank Manila v. CIR]: 10% x gross interest income on forex loan to residents Foreign international carriers by air or water: 2.5% x GPB Foreign contractor or sub-contractor engaged in petroleum operations in the Phil: 8% x gross income from sources within the Phil

EXEMPT: Not engaged in trade or business in the Phil

Representative office Regional headquarters (RHQ)

Lease of properties under common management
Three sisters borrowed money from their father and bought twenty-four (24) pieces of real property that they leased to various tenants for over fifteen years and derived rentals therefrom. They appointed their brother to manage their properties and to collect and receive rents. The court ruled that a taxable partnership was formed. There were series of transactions where petitioners purchased twenty-four lots, showing that the purpose was not limited to the conservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present. The properties were leased out to tenants for several years. Moreover, the term corporation includes organizations that are not necessarily partnerships in the technical sense of the term as well as partnerships, no matter how created or organized. This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations (Evangelista vs. Collector, 102 Phil. 140). When a father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, there is a taxable partnership (Reyes vs. Commissioner, 24 SCRA 198).

Insurance pool or clearing house
An insurance pool or clearing house, composed of 41 non-life insurance corporations, whose role was limited to its principal function of allocating and distributing the risks arising from the original insurance among the signatories to the treaty or the members of the pool on their ability to absorb the risks ceded as well as the performance of incidental functions, such as records, maintenance, collection and custody of funds, and which did not insure or assure any risk in its own name, was treated as a partnership or association subject to tax as a corporation. Article 1767 of the Civil Code recognizes the creation of a contract of partnership when two or more persons bind themselves to contribute, money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Its requisites are mutual contribution to a common stock, and a joint interest in the profits (AFISCO Insurance Corp et al. vs. Commissioner, G.R. No. 112675, Jan. 25,

Agreement to manage and operate mine denominated as Power of Attorney

Philex Mining Corporation entered into an agreement denominated as Power of Attorney with Baguio Gold Mining Corporation to manage and operate the latters mining claim. In managing the project, Philex made advances of cash and property. The mine suffered continuing losses resuling in Philexs withdrawal as manager and cessation of mine operations. A Compromise with Dation in Payment was executed by the parties, where Baguio Gold admitted its liabilities to Philex and agreed to pay the same. Philex wrote off in the books the remaining outstanding indebtedness of Baguio Gold by charging a portion of the amount to allowances and reserves that were set up in 1981 and a portion to the 1982 operations. The amount allocated to 1982 was deducted from the 1982 gross income as loss on settlement of receivables. The BIR disallowed the deduction for bad debt and assessed Philex deficiency taxes because the advances are Philexs investment in a partnership with Baguio Gold for the exploitation and development of the mine.

The totality of the circumstances and the stipulations in the parties agreement indubitably lead to the conclusion that a partnership was formed between the parties. First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by Philex under the agreement. Second, the Tax Court correctly observed that it was unlikely for a business corporation to lend hundreds of millions to another corporation with neither security nor collateral or a specific deed evidencing the terms and conditions of such loans. The parties also did not provide for a specific maturity date for the advances to become due and demandable, and the manner of payment was unclear. Third, the strongest indication that Philex was a partner is the fact that it would receive 50% of the net profits as compensation under the agreement (Philex Mining Corporation vs. Commissioner, G.R. No. 148187,
Apr. 16, 2008).

Interest Interest from sources within Phil and interest on bonds and obligations of residents, corporate or otherwise Dividend From domestic corporation and from foreign corporation, unless less than 50% of gross income of foreign corporation for 3 years prior to declaration of dividends was derived from sources within the Phil, in which case, apply only ratio of Phil-source income to gross income from all sources Services Place where services are performed, except in case of international air carrier and shipping lines which are taxed at 2.5% on their Gross Phil Billings. Revenues from trips originating from the Phil are considered as income from sources within the Philippines, while revenues from inbound trips are treated as income from sources outside the Philippines. Rentals and royalties Location or use of property or property right in Phil Sale of real property Located in the Philippines Sale of personal property Located in the Philippines Gain from sale of shares of stocks of a domestic corporation is ALWAYS treated as income from sources within the Philippines. Other intangible property Mobilia sequuntur personam (e.g., gain from sale of shares of stocks of a foreign corporation)

SALE OF GOODS Gross Sales Less: Cost of Sales: Beg. Inventory
+ Purchases Total available for sale - Ending inventory Cost of Sales

SALE OF SERVICES Gross Revenue Less: Cost of Service consisting of all direct costs and expenses

Gross income Times 2% MCIT

Gross income Timex 2% MCIT

INCOME means cash or its equivalent coming to a person within a
specified period, whether as payment for services, interest or profit from investment. It covers gain derived from capital, from labor, or from both combined, including gain from sale or conversion of capital assets. Return of capital is exempt from income tax. Capital, labor, or property is the tree; income is the fruit. Capital is the fund, income is the flow of fund. To be taxable, there must be income, gain or profit; gain is received, accrued or realized during the year; and it is not exempt from income tax under the Constitution, treaty or law.
Mere increase in the value of property does not constitute taxable income. It is not yet realized during the year. Transfer of appreciated property to the employee for services rendered is taxable income.


Realization test
There must be separation from capital of something of exchangeable value (e.g., sale of asset)

Claim of right doctrine

CIR v. Javier, 199 SCRA 824 (bank erroneously paid $1 M, instead of $1,000)

Economic benefit test

Stock option given to the employee

Income from whatever source

All income not expressly exempted from income, irrespective of voluntary or involuntary action of taxpayer in producing income

Existence of employer-employee relationship


NO employer-employee relationship

Real property in the Phil and shares of stock of domestic corporation Other sources of capital gain


Interest, dividend, and royalty income

Prizes and winnings All other income, gain or profit not covered by the above classes

Compensation income falling within the meaning of statutory minimum wage(SMW) under R.A. 9504, effective July 6, 2008, as implemented by Revenue Regulations No. 10-2008 dated July 8, 2008, shall be exempt from income tax and withholding tax. Holiday pay, overtime pay, night shift differential pay, and hazard pay earned by Minimum Wage Earner (MWE) shall likewise be covered by the above exemption, provided that an employee who receives/earns additional compensation such as commissions, honoraria, fringe benefits, benefits in excess of the allowable statutory amount of P30,000, taxable allowances and other taxable income other than the SMW, holiday pay, overtime pay, hazard pay and night shift differential pay shall not enjoy the privilege of being a MWE and, therefore, his/her entire earnings are not exempt from income tax and withholding tax.

Commissions paid for marketing services rendered abroad for a Philippine company is considered foreign-source income. The source of the income is the property, activity or service that produced the income. Place where services are rendered determine taxation. The fact that recipient of commission income is President and majority stockholder of the Philippine company does not alter the source of income. There are only two ways by which the President and other members of the Board can be granted compensation apart from reasonable per diems: (1) when there is a provision in the by-laws fixing their compensation; and (2) when the stockholders agree to give it to them. If none of these conditions are present, commission income cannot be automatically attributed to petitioners position in the company (Juliane Baier-Nickel vs. CIR, GR No.
156305, Feb. 17, 2003)

Documents faxed to Philippine company bearing instructions as to sizes, designs and fabrics to be used in finished products and sample sales orders relayed to clients abroad are not enough to show services were performed abroad. Said documents must show that instructions or orders ripened into concluded or collected sales in Germany (CIR v. Baier-Nickel, GR No. 153793, Aug 29, 2006).


Construction and installation works were subcontracted and done in the Philippines by a Phil corporation; hence, income is from sources within the Philippines. However, some pieces of equipment and supplies for NDC project and ammonia storage tanks and refrigeration units were completely designed and engineered in Japan. All services for the design, fabrication, engineering and manufacture of materials and equipment under Japanese Yen portion were made and completed in Japan; hence, exempt from Phil income tax. Service income from turn-key contract on a project in the Phil is divisible (CIR v. Marubeni Corp, GR No. 137377, Dec 18, 2001).


On outbound trip: Flight from Phil to foreign destination, income is treated as from Philippine sources; hence, subject to 2.5% on GPB
Continuous and uninterrupted flight If transhipment of passenger in another country on another foreign airline takes place: GPB tax applies only on aliquot portion of revenue on Philippine leg (Phil to foreign country)

On inbound trip: Flight from foreign country to the Phil, income is treated as from foreign sources; hence, exempt from Phil income tax


From Phil to final foreign destination: entire income is taxable, even if transhipment of cargoes took place in another country From foreign country to Phil: exempt

Capital gain from sale of real property located in the Phil Capital gain from sale of shares of stocks of a domestic corporation Other types of capital gains

Sale of real property located in the Phil

Seller is not engaged in real estate business
The law presumes that the seller realizes a profit from sale of capital asset; hence, despite the loss from sale, seller has to pay the 6% CGT.


The tax base is gross selling price or fair market value, whichever is higher Apply the 6% capital gains tax, if the seller is a resident citizen, an alien individual (resident or non-resident), or a domestic corporation. If the seller is a foreign corporation (resident or non-resident), the asset in the Phil is a capital asset, but the gain from sale is subject to the global tax system of taxation. If the real property is located abroad, the gain from sale is exempt from Phil income tax, unless the seller is a resident citizen or a domestic corporation. If the seller is a resident citizen and capital asset is the principal residence of the seller, the sale may be exempt from the 6% CGT, provided that the conditions provided for in the law are complied with by the seller.


Seller is a person engaged in real estate business Real property is an ordinary asset; hence, any gain (selling price less cost or adjusted basis) from sale is taxed under the global tax system. The transaction is subject to the expanded withholding tax, such tax to be withheld by the buyer of the property and remitted to BIR. The withholding tax is creditable against the income tax of the seller. The 6% capital gains tax on the transaction is not applicable thereon.


Seller is a dealer in securities
Dealer in securities is a person regularly engaged in the buy and sale of securities for his own account. He sells property and looks at profits from sale of shares or securities. A stockbroker is a middleman between the seller and buyer of stocks or securities. He is a seller of services and his income is commission. Shares are ordinary assets of seller; selling price less cost or adjusted basis equals gain; gain from sale is subject to global tax system of income taxation. Transaction involving listed shares traded in local stock exchange is not covered by Sec 127(A), NIRC (stock transaction tax), by express provision of law.


Seller is an investor who is not a dealer in securities If shares are listed and traded in a local stock exchange, apply of 1% stock transaction tax on gross selling price or gross value in money. Sale is exempt from income tax. If shares are listed but not traded in a local stock exchange (or over-the-counter), or the shares are unlisted, the net capital gain (selling price less cost or adjusted basis), if any, is subject to the capital gains tax computed as follows: 5% on first P100,000 net capital gain; and 10% on any amount in excess of P100,000


CGT return is filed within 30 days from date of sale. Every sale must be covered by a separate CGT return and the tax paid upon filing of the return. All transactions during the year are consolidated and the annual return shall be filed not later than April 15 of the following year, but only one P100,000 is subject to 5% and the balance of net capital gain for the year is subject to 10%. Net capital gain = Total capital gains from sales of shares of domestic corporation during the year less total capital losses during the same year.


If capital asset is long-term (holding period is over 12 months), only 50% of gain is subject to income tax, using the global tax system. If gain is short-term, 100% of gain is subject to income tax under the global tax system.

Regardless of holding period, the entire gain or loss is taxable or deductible.

Subject to FWT: Interest income on bank deposits, deposit substitutes, trust and other similar arrangements
20% FWT peso deposit with bank 7.5% FWT foreign currency deposit with OBU/FCDU

NOT subject to FWT but subject to global tax system: All other interest income or financing income not covered above Exempt income:
Long-term deposit or investment (5 years or more) by individuals in the form of trust funds, deposit substitutes, IMA and other investments prescribed by BSP

Taxable income:
Preferential tax rate Pre-termination of long-term deposit by individual : 20%, 1- less than 3 yrs; 12%: 3 yrs-less than 4 yrs; 5%: 4 yrs-less than 5 yrs); and interest on foreign loan (20%) Regular tax rate All other cases

Final tax on interest income from loans to resident borrower is a direct liability of FCDU Failure of local borrower to withhold and remit the final withholding tax does not exempt OBU/FCDU on onshore interest income (ING Bank v CIR, 2005). The withholding agent-borrower may also be assessed deficiency withholding tax as penalty for failure to withhold (RCBC v. CIR, CTA Case 2004).

Presence of positive retained earnings No prohibition to declare dividend in loan agreement Declaration of dividend by Board of Directors

Cash dividend Property dividend

Stock dividend (except when there is change in proportionate interest among stockholders, or there is subsequent cancellation or redemption of shares declared as stock dividend, which is essentially equivalent to cash dividend)

NOTE: Liquidating dividend represents distribution of corporate assets to stockholders. Gain from surrender of shares are treated as ordinary income.

Intra-corporate dividend: Exempt from tax
Corporation paying dividend: Domestic corporation Recipient of dividend: Another domestic corporation or resident foreign corporation

Dividend paid to non-resident foreign corporation

Corporation paying dividend: Domestic corporation Recipient of dividend
Foreign head office makes direct investment in Phil company: 15% FWT on gross dividend income Phil branch of foreign corporation makes investment in Phil company: Exempt from income tax

Tax-sparing provision
If country of residence of the foreign corporation does not impose income tax on dividend paid by a domestic corporation, impose 15% FWT only

While there is transfer of the shares of stock/securities to the Borrower pursuant to the Securities Borrowing and Lending (SBL) Agreement, the Lender retains certain rights accruing to the shares of stock/securities lent, such as the right to receive cash, stock dividends or interest which the Borrower is obliged to manufacture or reimburse to the Lender during the borrowing period. These cash, stock dividends or interest which the Borrower is required to manufacture or reimburse to the Lender are otherwise referred to as "Manufactured Dividends or Benefits". The Lender may likewise retain voting rights over the loaned shares of stock/securities while in the possession of the Borrower, if mutually agreed upon by the parties. Receipt of the Manufactured Dividends or Benefits shall not be a taxable income of the Lender since it just represents dividends/other benefits that the lender would have received had the share not been loaned pursuant to SBL agreement. However, the payment of such amount by the Borrower shall not be a tax deductible expense. On the other hand, the receipt of cash dividend from the issuing company by the Borrower or Buyer shall be subject to the provisions of existing laws (e.g., final withholding tax of 10% on gross dividend paid to a citizen).

Income from any source whatever The words income from any source whatever discloses a legislative policy to include all income not expressly exempted from the class of taxable income under our laws (Madrigal vs. Rafferty, supra; Commissioner vs. BOAC). The words income from any source whatever is broad enough to cover gains contemplated here. These words disclose a legislative policy to include all income not expressly exempted within the class of taxable income under our laws, irrespective of the voluntary or involuntary action of the taxpayer in producing the gains (Gutierrez vs. Collector, CTA Case 65, Aug.
31, 1955).

Any economic benefit to the employee whatever may have been the mode by which it is effected is taxable. Thus, in stock options, the difference between the fair market value of the shares at the time the option is exercised and the option price constitutes additional compensation income to the employee (Commissioner vs.
Smith, 324 U.S. 177).

Life insurance proceeds Amount received by insured as return of premium Gifts, bequests and devises Compensation for injuries or sickness Income exempt under treaty Retirement benefits, pensions, gratuities
R.A. 7641 (5 yrs & 60 yrs) and R.A. 4917 (10 yrs & 50 yrs)
Interest income of employee trust fund or accredited retirement plan is exempt from FWT (CIR v. GCL Retirement Plan, 207 SCRA 487)

Amount received as a consequence of separation because of death, sickness or other physical disability or for any cause beyond the control of employee

Miscellaneous items
Income of foreign government Income of government or its political subdivisions from any public utility or exercise of governmental function


COA alleged that DBP is actual owner of the trust fund and its income because:
DBP made the contribution to the Fund Trustees of the Fund are merely administrators DBP employees only have an inchoate right to the Fund

DBP responded that the Trustees received and collected income and profit from the Fund and they maintained separate books for that purpose. The principal and income will not revert to DBP, even if trust is subsequently modified or terminated. SC ruled that the beneficiaries of the Fund are the DBP officials and employees who will retire. It is not always necessary that the beneficiaries should be named or even be in existence at the time the trust is created in his favor, provided they are sufficiently certain or identifiable. The Salary Loan Program did not terminate the trust to the Funds trustee. That the DBP Board of Directors confirms the approval of the SLP by the Funds trustees does not make the fund property of DBP (DBP v. COA, 2004).

Miscellaneous items
Prizes and awards
In recognition of religious, charitable, artistic, literary achievement, etc. (He did not enter contest and is not required to render substantial future services) Granted to athletes in local and international sports competitions, sanctioned by their national sports associations

13th month pay and other benefits (up to P30,000) Gains from sale of long-term (5 years and 1 day) bonds, debentures and other certificates of indebtedness Gains from redemption of shares in mutual fund

Gains cannot include interest, since it clearly refers to gains from the sale of bonds, debentures and other certificates of indebtedness. Whereas the term gains includes interest in its general sense, this rule cannot be applied to Section 32(B)(7)(g) of the Tax Code in the specific sense. Section 32(A) of the Tax Code defines gross income and it is clear that there is a distinction between gains derived from dealings in property and interests. Gains realized from the sale or exchange or retirement of bonds, debentures and other certificate of indebtedness would fall under the category of gains derived from dealings in property. On the other hand, interests would include interest from bonds, debentures and other certificate of indebtedness. Only citizens, resident aliens and non-resident aliens engaged in trade or business are exempt from income tax on interest from long-term deposit or investment. On the other hand, domestic and resident foreign corporations are subject to a 20% final tax on such interest. If Congress intended to exempt interest from bonds, debentures and other certificates of indebtedness under Section 32(B)(7)(g) of the Tax Code, it would have done so in clear and specific terms (Nippon Life Insurance Company vs. Commissioner, CTA Case No. 6142, Feb 4, 2002). After all, exemptions are construed strictly against the taxpayer and liberally in favor of the government.

EXEMPT DE MINIMIS BENEFITS, REGARDLESS OF RECIPIENT (RANK AND FILE, OR MANAGERIAL OR SUPERVISORY) a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year and the monetized value of leave credits paid to government officials and employees; b. Medical cash allowance to dependents of employees not exceeding P750.00 per employee per semester or P125 per month; c. Rice subsidy of P1,500.00 or one (1) sack of 50-kg rice per month amounting to not more than P1,500.00; d. Uniforms and clothing allowance not exceeding P4,000.00 per annum; e. Actual yearly medical benefits not exceeding P10,000.00 per annum; f. Laundry allowance not exceeding P300.00 per month;

g. Employees achievement awards (e.g., for length of service or safety achievement, which must be in the form of a tangible personal property other than cash or gift certificate, with an annual monetary value not exceeding P10,000.00 received by the employee under an established written plan which does not discriminate in favor of highly paid employees; h. Gifts given during Christmas and major anniversary celebrations not exceeding P5,000.00 per employee per annum; i. Flowers, fruits, books, or similar items given to employees under special circumstances (e.g., on account of illness, marriage, birth of a baby, etc.); and j. Daily meal allowance for overtime work not exceeding twenty-five percent (25%) of the basic minimum wage. The amount of de minimis benefits conforming to the ceiling herein prescribed shall not be considered in determining the P30,000.00 ceiling of other benefits provided under Sec. 32(b)(7)(e) of the Tax Code. However, if the employer pays more than the ceiling prescribed by these regulations, the excess shall be taxable to the employee receiving the benefits only if such excess is beyond the P30,000.00 ceiling. Any amount given by the employer as benefits to its employees, whether classified as de minimis benefits or fringe benefits, shall constitute as deductible expense upon such employer.


for profit does not qualify the word properties. This makes income from the property of the organization taxable, regardless of how that income is used whether for profit or for lofty non-profit purposes. Thus, the income derived from rentals of real property owned by the Young Mens Christian Association of the Philippines, Inc. (YMCA), established as a welfare, education and charitable non-profit corporation, is subject to income tax. The rental income cannot be exempted on the solitary but unconvincing ground that said income is not collected for profit but is merely incidental to its operation. The law does not make a distinction. Where the law does not distinguish, neither should we distinguish. Because taxes are the lifeblood of the nation, the Court has always applied the doctrine of strict interpretation in construing tax exemptions. YMCA is exempt from the payment of property taxes only but not income taxes because it is not an educational institution devoting its income solely for educational purposes. The term educational institution has acquired a well-known technical meaning. Under the Education Act of 1982, such term refers to schools. The school system is synonymous with formal education which refers to the hierarchically structured and chronologically graded learnings organized and provided by the formal school system and for which certification is required in order for the learner to progress through the grades or move to higher levels (Commissioner vs. Court of Appeals and YMCA of the Phils., G.R. No. 124043, Oct. 14, 1998).

The phrase any of their activities conducted for profit does not qualify the word properties.-- The phrase any of their activities conducted

Itemized Deductions Optional Standard Deductions Special Deductions

Business expenses, incl. research and development Interests Taxes Losses Bad debts Depreciation Depletion Charitable contributions Contributions to pension trust Health or hospitalization premium


1. The expense must be ordinary and necessary; 2. Paid or incurred during the taxable year; 3. In carrying on or which are directly attributable to the development, management, operation and/or conduct of the trade, business or exercise of profession; 4. Supported by adequate invoices or receipts; 5. Not contrary to law, public policy or morals. Operating expenses of an illegal or questionable business are deductible, but expenses of an inherently illegal nature, such as bribery and protection payments, are not. 6. The tax required to be withheld on the amount paid or payable is shown to have been paid to the BIR.

An expense is ordinary when it connotes a payment, which is normal in relation to the business of the taxpayer and the surrounding circumstances. An expense is necessary where the expenditure is appropriate or helpful in the development of taxpayers business or that the same is proper for the purpose of realizing a profit or minimizing a loss. P9.4 M paid in 1985 for advertising a product was staggering incurred to create or maintain some form of goodwill for the taxpayers trade or business or for the industry or profession of which the taxpayer is a member. Goodwill generally denotes the benefit arising from connection and reputation, and efforts to establish reputation are akin to acquisition of capital assets. Therefore, expenses related thereto are not business expenses but capital expenditures (CIR vs. General Foods Phi.,
GR No. 143672, Apr. 24, 2003).

TEST OF REASONABLENESS OF BONUS There is no fixed test for determining the reasonableness of a given bonus as compensation. This depends upon many factors, one of them being the amount and quality of the services performed with relation to the business. Other tests suggested are payment must be made in good faith, the character of the taxpayers business, the volume and amount of its net earnings, its locality, the type and extent of the services rendered, the salary policy of the corporation, the size of the particular business, the employees qualifications and contributions to the business venture, and general economic conditions. However, in determining whether the particular salary or compensation payment is reasonable, the situation must be considered as a whole. Ordinarily, no single factor is decisive (C.M.
Hoskins & Co., Inc. vs. Commissioner, L-24059, Nov. 28, 1969; Pacific Banking Corp. vs. Commissioner, CTA Case 1667, Oct 29, 1970).

Bonuses that are out-and-out gifts, are gratitude and are not deductible.

Legal and accountants fees for prior years were not billed in corresponding years (1984-1985). It was paid by taxpayer in succeeding year (1986) when it was billed by the lawyer and accountant. Taxpayers uses accrual method of accounting. Accrual of income and expense is permitted when the all events test has been met. This test requires (1) fixing a right to income or liability to pay, and (2) the availability of reasonably accurate determination of such income or liability. It does not, however, demand that the amount of income or liability be known absolutely; it only requires that a taxpayer has at its disposal the information necessary to compute the amount with reasonable accuracy, which implies something less than an exact or completely accurate amount. Moreover, deduction takes the nature of tax exemption; it must be construed strictly against the taxpayer (Commissioner vs. Isabela Cultural Corporation, G.R. No. 172231, Feb. 12, 2007).

Entertainment, amusement and recreation expenses are subject to limitation % of net sales for sellers of goods 1% of net sales for sellers of services Club dues for membership in social or athletic clubs to promote business of corporation paid by the corporation are deductible from gross income. However, they will be treated as fringe benefits subject to FBT on the part of the employer. FBT paid by employer is deductible as business expense of the corporation. Rental expenses include leasehold acquired for business purposes and cost of improvements introduced by lessee to be allocated over the term of the lease. Realty taxes paid by lessee for business property is part of rental expenses.

Directors Fees If not officer or employee of corporation, report it as other income subject to 10% EWT. If director is also an officer of the corporation, apply CWT on compensation income upon the directors fees, together with salaries. Commission Income If there is no employer-employee relationship between broker and payor of income, treat it as business income subject to 10/15% EWT. If there is employer-employee relationship, commission income is treated as part of CWT on compensation income.


There must be a valid and existing indebtedness; The indebtedness (unconditional obligation to pay) must be that of the taxpayer; The interest must be legally due and stipulated in writing; The interest expense must be paid or incurred during the taxable year; The indebtedness must be connected with the taxpayer's trade, business or exercise of profession; 6. The interest payment arrangement must not be between related taxpayers as mandated in Section 34(B)(2)(b), in relation to Section 36(B), of the Tax Code; 7. The interest is not expressly disallowed by law to be deducted from the taxpayers gross income (e.g., interest on indebtedness to finance petroleum operations); and 8. The amount of interest deducted from gross income does not exceed the limit set forth in the law. In other words, the taxpayers otherwise allowable deduction for interest expense shall be reduced by forty-two percent (42%) of the interest income subjected to final tax beginning November 1, 2005 under R.A. 9337, and that effective January 1, 2009, the percentage shall be thirty-three percent (33%) [Sec. 34(B)(1), NIRC]. 1. 2. 3. 4. 5.

Deficiency or delinquency interest
Deficiency or delinquency interest on unpaid taxes is not deductible as tax, but taxpayer is allowed to deduct the same as interest.

Interest expense on capital expenditures

At the option of the taxpayer, interest expense on capital expenditure incurred to acquire property used in trade, business or exercise of profession may be deducted in full in the year incurred, or may be treated as capital expenditure subject to amortization. However, taxpayer cannot claim interest expense both as deduction and part of cost of asset.

1. Payments must be for taxes; 2. Taxes are imposed by law upon the taxpayer; 3. Taxes must be paid or accrued during the taxable year in connection with the taxpayers trade, business or profession; and 4. Taxes are not specifically excluded by law from being deducted from the taxpayers gross income.

The word taxes means taxes proper and no deduction should be allowed for amounts representing interest, surcharge or penalties. Interest on taxes is not deductible as taxes, but as an item of interest. Fines and penalties for violations of law are not deductible as taxes. Only the person upon whom taxes are imposed may claim them as deduction, except: (1) Taxes upon an individual upon his interest as shareholder of corporation which are paid by corporation without reimbursement; and (2) Corporate bonds or other obligations containing a tax-free covenant clause, the corporation paying the tax or any part of it for someone else (Sec. 80, RR 2).

All taxes, national and local, paid or accrued during the year in connection with trade, business or exercise of profession is deductible. Examples: professional tax, documentary stamp tax, other percentage tax, excise tax, real property tax, etc.

NON-DEDUCTIBLE TAXES 1. Philippine income tax

2. Foreign income tax 3. Estate and donors taxes 4. Special assessments on real property 5. Electric energy consumption tax under B.P. 36. 6. VAT Foreign income tax paid may be credited against the Phil income tax due, subject to limitation (e.g., Federal income tax of M Pacquiao).

LOSSES (Rev. Regs. No. 12-77 and Rev. Regs. No. 10-79) 1. The loss must be that of the taxpayer; 2. The loss is actually sustained and charged off within the taxable year; 3. The loss is evidenced by a closed and completed transaction (fixed by identifiable events or when insurance recovery was definitely established); 4. The loss is not claimed as a deduction for estate tax purposes; 5. The loss is not compensated for by insurance or otherwise; 6. In the case of an individual, the loss must be connected with his trade, business or profession, or incurred in any transaction entered into for profit though not connected with his trade, business or profession; and 7. In the case of casualty loss, it has been reported to the BIR within forty-five days from date of occurrence of the loss.

Bad Debt Theory
Loss from theft or embezzlement occurring in the year and discovered in another year is deductible in the year in which sustained. However, where the taxpayer had no means of determining the actual date of embezzlement, a loss was sustained in the year of discovery. The rule is now modified by the bad debt theory, which holds that since embezzlement creates a debtor-creditor relationship, a loss is deductible as bad debt in the year the right of recovery becomes worthless.

Net operating loss of one year may be carried over and deducted from gross income for the next succeeding 3 years, provided that no substantial change in the ownership of the business or enterprise (not less than 75%) takes place.

BAD DEBTS 1. There must be an existing indebtedness due to the taxpayer which must be valid and legally demandable; 2. The same must be connected with the taxpayer's trade, business or practice of profession; 3. The same must not be sustained in a transaction entered into between related parties enumerated under Sec. 36(B) of the Tax Code of 1997; 4. The same must be actually charged off the books of accounts of the taxpayer as of the end of the taxable year; and 5. The same must be actually ascertained to be worthless and uncollectible as of the end of the taxable year.

In the case of banks, the BSP thru the Monetary Board shall ascertain the worthlessness and uncollectibility of the bad debts and approve in writing the writing off of bad debts from the books, without prejudice to the CIRs determi-nation of the worthless and uncollectibility of debts. In no case shall a receivable from an insurance or surety company be written off from taxpayers books and claimed as bad debt deduction, unless such company has been declared closed due to insolvency or for any similar reason by the Insurance Commission.

The taxpayer is obliged to declare as taxable income any subsequent recovery of bad debts in the year they were collected to the extent of the tax benefit enjoyed by the taxpayer when the bad debts were written off and claimed as deduction from gross income. It also applies to taxes previously deducted from gross income but which were subsequently refunded or credited by the BIR. He has to report income to the extent of the tax benefit derived in the year of deduction.

DEPRECIATION 1. The allowance for depreciation must be reasonable; 2. It must be for property arising out of its use in the trade or business, or out of its not being used temporarily during the year; 3. It must be charged off during the taxable year from the taxpayers books of accounts; 4. Depreciation shall be computed on the basis of historical cost or adjusted basis. While financial accounting allows computation based on appraised value, recovery of investment for tax purposes shall be limited to historical cost. Depreciation for the year = Cost less salvage value divided by the estimated useful life (number of years) of the asset Book value of the asset = Cost or adjusted basis less accumulated depreciation.

CHARITABLE CONTRIBUTIONS 1. The charitable contribution must actually be paid or made to the Philippine government or any political subdivision thereof exclusively for public purposes, or any of the accredited domestic corporation or association specified in the Tax Code; 2. It must be made within the taxable year; 3. It must not exceed 10% (individual) or 5% (corporation) of the taxpayers taxable income before charitable contributions (whether deductible in full or subject to limitation); 4. It must be evidenced by adequate receipts or records; and 5. The amount of charitable contribution of property other than money shall be based on the acquisition cost of said property (Sec. 34(H), NIRC). The limitation is imposed to prevent abuse of donating paintings and other valuable properties and claiming excessive deductions therefrom.

D. Optional Standard Deduction Privilege is available only to citizens or resident aliens as well corporations subject to the regular corporate income tax; thus, non-resident aliens and non-resident foreign corporations are not entitled to claim the optional standard deduction. Standard deduction is optional; i.e., unless taxpayer signifies in his/its return his/its intention to elect this deduction, he/it is considered as having availed of the itemized deductions; Such election when made by the qualified taxpayer is irrevocable for the year in which made; however, he can change to itemized deductions in succeeding year(s);

Amount of standard deduction is limited to 40% of taxpayers gross sales or receipts (in the case of an individual) or gross income (in the case of a corporation). If the individual is on the accrual basis of accounting for his income and deductions, OSD shall be based on the gross sales during the year. If he employs the cash basis of accounting, OSD shall be based on his gross receipts during the year. It should be noted that cost of sales or cost of services shall not be allowed to be deducted from gross sales or receipts. A general professional partnership (GPP) may claim either the itemized deductions or in lieu thereof, the OSD allowed to corporations in claiming the deductions in an amount not exceeding 40% of its gross income. The net income determined by either the itemized deduction or OSD from the GPPs gross income is the distributable net income from which the share of each share is to be ascertained. Proof of actual expenses is not required; hence, he is not also required to keep books of accounts and records with respect to his deductions during the year.

1. Personal, living or family expenses; 2. Any amount paid out for new buildings or for permanent improvements, or betterments made to increase the value of any property or estate. This Subsection shall not apply to intangible drilling and development costs incurred in petroleum operations, which are deductible under Subsection (G)(1) of Section 34 of this Code. 3. Any amount expended in restoring property or in making good the exhaustion thereof for which an allowance is or has been made; or 4. Premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any trade or business carried on by the taxpayer, individual or corporate, when the taxpayer is directly or indirectly a beneficiary under such policy 5. Losses from sales or exchanges of property between related parties

RA 8424: Jan 1, 1998 Single and estate or trust P20,000 Head of family P25,000 Married P32,000 For each child, not to exceed 4 P8,000 RA 9504: July 6, 2009 Individual, whether single, HOF, or married P50,000 For each child, not to exceed 4 P25,000 Law exempts income of minimum wage earners and increases OSD from 10% to 40% of gross sales or receipts, for individuals, and of gross income, for corporations.

Status-at-the-end-of-the-year rule Status-at-the-end-of-the-year rule which means that whatever is the status of the taxpayer at the end of the calendar year shall be used for purposes of determining his personal and additional exemptions generally applies. A change of status of the taxpayer during the taxable year generally benefits, but does not prejudice, him. Thus, if he marries at the end of the year, he shall be entitled to personal exemption of P32,000/P50,000. If a child is born at any time during the calendar year, even on the last day of the year, the taxpayer is entitled to claim his child as a dependent entitling him to deduct additional exemption of P8,000/P25,000 for that year. On the other hand, if one of his qualified dependent children dies during the year, the law considers that the child died on the last day of the year; hence, he is entitled to claim the full amount of additional exemption of P8,000/P25,000 for the deceased child for the year.


COMPENSATION INCOME Gross compensation income less PAE times graduated rates Gross compensation income of employees of RHQ, ROHQ, OBU/FCDU, and petroleum contractors times 15% Grossed-up monetary value of fringe benefits times taxable rate times 32% = FBT



Corporations (see formula opposite here) Individuals:
There is no MCIT. Deduct applicable PAE. Apply graduated rates of 5% to 32% Pay IT on two equal installments, provided amount is more than P2,000.

Gross sales Less: Cost of sales or services Gross income Multiplied by: 2% MCIT Gross income Less: Deductions Net income Multiplied by: 35% RCIT Less: CWT Balance


A. REAL PROPERTY IN THE PHILIPPINES Consideration or FMV, whichever is higher times 6% = CGT. Sale of principal residence is exempt from CGT, provided conditions are satisfied


Listed and traded in local stock exchange: GSP times of 1% = Stock transaction tax Listed but traded over the counter or unlisted shares: Gross selling price less cost or adjusted basis = Capital gain or loss times 5%/10% = CGT Include in global tax system, but longterm capital gain or loss shall be taxable or deductible only at 50% thereof.



PASSIVE INCOME A. Interest 20% FWT (peso deposit) and deposit substitute 7.5% FWT (foreign exchange deposit) Long-term deposits (5 years of more) of individuals: exempt Others: Global system 10% FWT Citizen 20% FWT Resident alien engaged in trade 25% FWT NRANE 0% -- DC & RFC 35%, unless tax sparing provision applies -- NRFC

B. Dividend


C. Royalty 10% FWT books, literary works and musical compositions (citizen) 20% FWT general rate (NRAE, DC & RFC) 25% FWT NRANE 35% FWT NRFC NRFC
25% x gross income: NR cinema film owner, lessor or distributor 4.25% x gross income: NR owner or lessor of vessels 7.5% x gross income: NR lessor of aircraft, machineries and other equipment

D. Rental income


Branch profit of the Phil. branch used as additional capital investment of the foreign head office in the Philippine branch, pursuant to the requirements of the Bangko Sentral ng Pilipinas, is considered as profit constructively remitted abroad. Branch profit remittance tax (BPRT) applies not only when the profit is actually remitted but also when such profit is constructively remitted to the head office abroad
(ING Bank, Manila Branch vs. CIR, CTA Case No. 6017, Mar. 11, 2002)

BPRT does not apply on profits remitted by an enterprise registered with PEZA or SBMA and other freeport zones. Tax base of BPRT is the amount of profit earmarked for remittance to its head office abroad.

ORDINARY ASSET Inventory if on hand at end of taxable year Stock in trade held primarily for sale or for lease in the course of trade or business Asset used in trade or business, subject to depreciation Real property used in trade or business All other assets, whether or not used in trade or business, other than the above assets



Who is seller of asset? Person is habitually engaged in real estate business Presumption or proof when habitually engaged in real estate business 6-transaction rule Person is not habitually engaged in real estate business Nature of asset sold? If it forms part of stock primarily for sale or it is being used in trade or business, ordinary asset Otherwise, capital asset


Type of capital asset sold? If CA is used as principal residence of seller who is a citizen or alien who resident or non-resident but engaged in trade in the Phil, sale is exempt from 6% CGT, provided other conditions are present. Otherwise, sale is taxable. Tax base, tax rate, and gain or loss from sale CA located in the Phil 6% CGT; CA located abroad Global tax system. Basis is FMV or GSP, whichever is higher. Seller pays the 6% CGT, but buyer does not withhold the FWT. In OA, tax base is net income and rate of tax depends on whether seller is individual or corporation; it is subject to EWT provisions.


Cost or adjusted basis upon subsequent sale This is not material, if asset sold is capital asset, because tax base is GSP/FMV, whichever is higher. This is important, if asset sold is ordinary asset, because tax base is net income. Donors tax on sale for insufficient consideration If CA, no donors tax due. If OA, there is donors tax due per Sec 100, NIRC. Filing of tax return If CA, within 30 days from date of sale If OA, within 45/60 days from close of quarter


The entire gain or loss shall be recognized.


No gain or loss shall be recognized at the time of the transaction on tax-free exchanges of property under Sec 40(2), NIRC: a. Merger or consolidation b. Exchange of property for shares of stocks, as a result of which, he together with four others gains control of the corporation

Cash method Accrual method
All events test; amounts received in advance are not treated as revenue of the period in which received but as revenue of future periods in which earned (Manila Mandarin Hotels vs. CIR, CTA Case No. 5046, Mar 24, 1997).

Installment sales
Sale on the installment plan
Initial payments do not exceed 25% of GSP

Deferred payment sale, not on the installment plan

Initial payments exceed 25% of GSP

Percentage of completion Crop year method


SUBSTITUTED FILING OF ITR: No individual income tax return for the year will be filed by the employee concerned, and the employer is the one that files the return for him
Applies only to individuals With only one (1) employer Who correctly withholds the income tax on compensation income paid to the employee and remits the same to the BIR

Substituted filing of return does not apply when the conditions above are not met, such as when the individual has (a) two or more employers, (b) mixed incomes, correct WT was not deducted from compensation income, etc.


Individual deriving mixed income, or purely business/ professional income, or other income must file his quarterly income tax returns (BIR Form 1700 Q) and annual income tax return (BIR Form 1700 ) as follows: Period Q1 Return Q2 Return Q3 Return Annual Return Due Date for Filing Return April 15 of same year August 15 of same year November 15 of same year April 15 of the following year


A domestic corporation and resident foreign corporation shall file quarterly corporate income tax return (BIR Form 1702 Q) and annual corporate income tax return (BIR Form 1702 as follows:
Q1 Return Q2 Return Q3 Return Annual Return May 31 of same year August 31 of same year November 30 of same year April 15 of the following year (if on calendar year), or 15th day of the fourth month following the close of the fiscal year (if on fiscal year).

Computation of the quarterly and annual tax returns of individuals (except those receiving purely compensation income) and corporations shall be made on the cumulative basis; i.e., gross income and deductions are consolidated and the income tax liability is computed on the consolidated net income, and the income taxes paid for the preceding quarter(s) are credited against the consolidated income tax due.

An income payment is subject to the expanded withholding tax, if the following conditions concur: a. An expense is paid or payable by the taxpayer, which is income to the recipient thereof subject to income tax; b. The income is fixed or determinable at the time of payment; c. The income is one of the income payments listed in the regulations that is subject to withholding tax; d. The income recipient is a resident of the Philippines liable to income tax; and e. The payor-withholding agent is also a resident of the Philippines.



1. National government and its instrumentalities, including provincial, city or municipal governments and barangays, except government-owned or controlled corporations; 2. Persons enjoying exemption from payment of income taxes pursuant to the provisions of any law, general or special, such as but not limited to the following: a. Sales of real property by a corporation which is registered with and certified by HLURB or HUDCC as engaged in socialized housing project where the selling price of the house and lot or only the lot does not exceed P180,000 in Metro Manila and other highly urbanized areas and P150,000 in other areas; b. Corporations registered with the BOI, PEZA, and SBMA, enjoying exemption from income tax under E.O. 226, R.A. 7916, and R.A. 7227; c. Corporations which are exempt from income tax under Section 30 of the Tax Code, such as GSIS, SSS, PHIC, PCSO, and PAGCOR; d. General professional partnerships; and e. Joint ventures or consortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations f. International carriers (by air or water) subject to 2.5% Gross Phil Billings

1. Professional fees for services rendered by individuals; and professional entertainers and athletes, and directors:
If gross income for current year exceeds P720,000 If gross income for current year does not P720,000 - 10% - 15%

2. If recipient of professional fees, talent fees, etc. is a juridical person:

If gross income for current year exceeds P720,000 If gross income for current year does not P720,000 Real properties Personal properties of P10,000 per payment; P10,000 shall not apply when accumulated rental to same lessor exceeds or is reasonably expected to exceed P10,000 within a year Poles, satellites and transmission facilities Billboards - 10% - 15% - 5%

3. Rental income

- 5% - 5% - 5%

4. Gross payments to resident individuals and corporate cinematographic film owners, lessors, or distributors 5. Gross payments to contractors 6. Income distribution to beneficiaries 7. Income payments to certain brokers and agents 8. Income payments to partners of general professional partnerships: If gross income for current year exceedsP720,000 If otherwise 9. Professional fees paid to medical practitioners If gross income for current year exceedsP720,000 If otherwise 10. Gross additional payments to government personnel from importers, shipping and airline companies, or their agents 11. One-half of gross amounts paid by any credit card company in the Philippines 5% 2% 15% 10%

- 15% - 10% - 15% - 10%

- 15% 1%


12. Income payments made by any Top 20,000 Corp Supplier of goods Supplier of services 13. Income payments made by government to its local/resident supplier of goods and services other than those covered by other rates of withholding taxes Supplier of goods Supplier of services 14. Commissions of independent and exclusive distributors, and marketing agents of companies 15. Tolling fees paid to refineries 16. Payments made by pre-need companies to funeral parlor 17. Payments made to embalmers 18. Income payments made to suppliers of agricultural products 19. Income payments on purchases of minerals, mineral products and quarry resources 20. MERALCO refund to customers With active contracts With terminated contracts

- 1% - 2%

- 1% - 2% 10% 5% 1% 1% 1%

- 10% - 25% - 32%

A taxpayer must do two things to be able to successfully make a claim for the tax refund of withholding tax on compensation income: (a) declare the income payments it received as part of its gross income and (b) establish the fact of withholding. The amounts of total taxes withheld for each redundant employees cannot be verified against the Summary of Gross Compensation and Taxes Withheld for 1995 due to the fact that this summary enumerates the amounts of income taxes withheld on per district/area basis. The SGV certification cannot be appreciated in PLDTs favor as the courts cannot verify such claim. Besides, the documents from which SGV traced the Alpha List to the Monthly Remittance Returns of Income Taxes have not been presented to the court, and this is fatal to PLDT . Also, the cash salary vouchers for the rank and file employees do not have acknowledgment receipts (PLDT v. CIR, GR 157264, Jan 31, 2008).

Requisites of claim for refund are:
Claim was filed within 2 years under Sec. 230, NIRC; Income upon which taxes were withheld were included in the return of the recipient; and Fact of withholding is established by a copy of statement (BIR Form 1743.1) duly issued by payor (withholding agent) to payee, showing amount paid and amount of tax withheld (RR 6-85).

CTA found above requisites were satisfied. Findings of facts of CTA are entitled to great weight and will not be disturbed on appeal, unless it is shown that the lower court committed gross error in the appreciation of facts. Failure of respondent to indicate its option in its annual ITR to avail itself of either tax refund or tax credit is not fatal to its claim for refund.
Sec. 76, NIRC offers two options: refund or tax credit. The options are alternative and the choice of one precludes the other. However, in Philam Asset Mgt v. CIR, this Court ruled that failure to indicate a choice will not bar a valid request for refund, should this option be chosen by the taxpayer later on. The requirement is only for the purpose of easing tax administration, particularly the self-assessment and collection aspects.

Failure of respondent to present in evidence the 1998 ITR is not fatal to its claim for refund.
CTA denied claim for 1997 tax credit of PERF because it failed to submit its 1998 ITR. PERF attached its 1998 ITR to its motion for reconsideration. The ITR is part of the records of the case and clearly showed that income taxes were not claimed as tax credit in 1998. Technicalities should not be used to defeat substantive rights, especially those that have been held as a matter of right. The CAs reliance on Rule 132, Sec. 34 of Rules of Evidence is misplaced. This provision should be taken in the light of RA 1125; proceedings therein shall not be governed strictly by technical rules of evidence. No one shall unjustly enrich oneself at the expense of another. This applies not only to individuals but to the State as well. In the field of taxation where the State exacts strict compliance upon its citizens, the State must likewise deal with taxpayers with fairness and honesty. The harsh power of taxation must be tempered with evenhandedness (CIR v. PERF Realty Corp., GR 163345, July 4, 2008).

Tax refunds or credits are not founded principally on legislative grace but on the legal principle which underlies all quasi-contracts, abhorring a persons unjust enrichment at the expense of another. The dynamic of erroneous payment of tax fits to a tee the prototypic quasi-contract, which covers not only mistake in fact but also mistake in law. The government is not exempt from the application of solutio indebiti. Indeed, the taxpayer expects fair dealing from the government, and the latter has the duty to refund without any unreasonable delay what it has erroneously collected (CIR v. Fortune Tobacco Corp, GR
167274, July 21, 2008).

END OF PRESENTATION Atty. Vic C. Mamalateo Mobile: 0918-9037436 Email: