TAXATION LAW I l Atty.
Amago l Updated by JCV 2017-2018
HISTORICAL BACKGROUND
A SHORT HISTORY OF TAXATION
In the Beginning
Etymology
The word „tax‟ first appeared in the English language only in the 14th
century. It derives from the Latin taxare which means ‗to assess‘.
Before that, English used the related word ‗task‟, derived from Old
French. For a while, ‗task‘ and ‗tax‘ were both in common use, the first
requiring labour, the second money.
‗Tax‘ then developed its meaning to imply something wearisome or
challenging. So words like ‗duty‟ were used to suggest a more
appealing purpose. Political spin has just as long a history as taxation,
and neither has been detained unduly by the meaning of words.
The Written Record
China
China has one of the longest of all written records, and we know that
taxes were levied here some 3,000 years ago as the Empire was being
established. Powers (usually military) that were able to impose taxes
created the first bureaucracies to collect and administer them.
Egypt
Under the Egyptian Pharaohs ‗scribes‘ were charged with raising funds
in any way practicable, including a tax on household cooking oil.
Regular audits were conducted to ensure that oil was not recycled –
perhaps the first historical record of ‗avoidance‘.
The ‗Book of Genesis‘ in The Bible suggests that a fifth of all crops
should be given to the Pharaoh.
Ancient Greece
The city states of Ancient Greece imposed eishpora to pay for wars,
which were numerous; but once a war was over any surplus had to be
refunded. Athens imposed a monthly poll tax on foreigners.
Imperial Rome
Imperial Rome used tribute extracted from colonized peoples to
multiply the bounty of empire. Julius Caesar imposed a one-percent
sales tax; Augustus instituted an inheritance tax to provide retirement
funds for the military. However, human bondage remained the most
lucrative form of tribute for both Greece and Rome.
The Price of Faith
With the decline of Rome in Europe, ‗spiritual‘ and ‗temporal‘ powers
were not always easy to distinguish. Religious institutions rivalled –
and sometimes surpassed – political ones in their material power. To
secure this, they imposed forms of taxation.
Christians
For Christians it was a ‗tithe‟, or a tenth of what the faithful produced,
usually paid to the Church in kind. Tithe barns for the receipt and
storage of such payments were lesser in size only to churches in
villages and towns.
Islam
The expansion of Islam was accompanied by the ‗Islamic Tax‘,
the khums, or ‗one twentieth‘ – more modest by half than the tithe.
There are direct references to it in the Qu‘ran, which requires its use
for specified purposes, such as the relief of the poor. In India, Islamic
rulers imposed a tax called jizya in the 11th century.
Other Cultures
In Latin America the Aztec, Olmec, Maya and Inca cultures all seem to
have raised forms of taxation, usually in association with ritual
observance.
Hinduism & Buddhism
Both Hindus and Buddhists sustained their temples and monasteries
with contributions of time, skill and resources from the faithful.
Doomsday
Feudal Europe
Land was the basic commodity of feudal Europe and service (military
or labour) its currency. Aspiring monarchs had little access to revenues
in cash, though ‗scutage‟ was sometimes accepted in lieu of military
service.
Vikings
Then the Vikings, sailing from Scandinavia, started demanding
protection money. In 845, they extorted six tons of silver in return for
not sacking Paris; in 994, a similar amount from London. Though the
Viking threat subsided, ‗Dangeld‟ (restyled ‗carucage‟ in England)
was still collected by rulers.
Normans
After the invasion of England in 1066 by the Normans (descended
from Vikings), William the Conqueror commissioned the Doomsday
Book, a land survey to assess his new kingdom‘s tax potential.
Imperial Measures
More modern systems of taxation followed the expansion of imperial
Europe, together with towns and cities, where tribute in kind was less
useful – cash was the currency here.
The monarchies of Spain and Portugal, however, still transposed feudal
structures, and an obsession with gold – which was portable – to their
occupation of Latin America.
Others followed the example of the city states of Italy, particularly
Venice, which had grown rich on trade with the East; taxes on trade
were relatively easy to raise.
France, the Netherlands and Britain in particular began to establish
commercial outposts, and then military control, across Africa and Asia.
Traditions of tribute through human bondage revived, however, with
the triangular slave trade between Africa, Europe and the Americas.
In Britain, a disagreement on the rights of taxation between
Parliament and King Charles I in 1629 led to civil war.
Nation States
French Revolution
Resentment of tax fuelled the French Revolution between 1789 and
1799. Thereafter, Napoleon centralized the tax system and employed
private collectors who could keep a proportion of their takings.
Formation of the United States
Revolt against taxation – levied from imperial Britain – also fuelled the
formation of the United States, though an independent Congress soon
enacted the Federal Property Tax in 1798.
Representation
By now, no aspiring nation, in Europe or elsewhere, could dispense
with the machinery of a state or the taxes to pay for it. At the same
time, the principle of ‗no taxation without representation‘ was
becoming more firmly established – though representation was still
largely limited to the wealthy.
Promises, Promises
Income Tax
As the power of monarchies declined and of industrial capitalism
increased, a new settlement was required. This was pioneered in
Britain.
Income tax was first imposed on personal wealth in Britain in 1798,
to pay for the wars with Napoleon. It was billed as a ‗temporary‘
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measure, renewable annually by Parliament – and has remained so
ever since (it still expires on 5 April every year). A year after the Battle
of Waterloo in 1815 it was repealed.
In the general election of 1841 Sir Robert Peel opposed income tax,
but once elected he reimposed it, reducing customs duties at the same
time. Tax ‗commissioners‘ (who came from the landed gentry) were
transformed into the Board of Inland Revenue in 1849 to produce an
efficient bureaucracy.
In the general election of 1871, both Gladstone and Disraeli opposed
income tax. Disraeli won, but the tax stayed.
In 1908, Lloyd George as Chancellor introduced non-contributory old-
age pensions, and – in the ‗People‘s Budget‘ of 1909 – plans for a
super-tax on the rich. The rejection of this by the House of Lords led
to the 1911 Parliament Act which removed the Lords‘ power of veto.
As taxation increased, so the right to vote and the principle of
democratic consent were extended, culminating in universal adult
suffrage.
Taxes to Beat the Axis
World War I
At the start of World War One in 1914, the standard rate of income tax
in Britain was 6 per cent; by the end of the war in 1918 it was 30 per
cent. An Excess Profits Tax was levied on companies benefiting from
war production. The total tax ‗take‘ was 17 times higher than it had
been in 1905. This continued after the war, when government was
expected to provide homes and public services in ‗a land fit for heroes‘.
Government borrowing soared. In the US, the ‗New Deal‘ in response
to mass unemployment during the Great Depression of the 1930s
relied heavily on the Federal Government‘s ability to borrow against
future tax revenues.
World War II
It was only after Pearl Harbor, and the US entry into World War Two,
that the Revenue Act of 1942 subjected millions of new taxpayers to
income tax and gave rise to a whole new taxpaying culture.
The Federal Government launched an all-out campaign to market the
changes, including Disney animated shorts featuring Donald Duck
touting the importance of ‗taxes to beat the Axis!‘ Asked in February
1944 whether they considered the amount of income tax they paid to
be ‗fair‘, 90 per cent answered ‗yes‘.
Cold War
Liberation
Great expectations also followed World War Two. Worldwide liberation
movements made ‗nation building‘ (and the state machinery to go with
it) an urgent priority for newly independent states in Africa and Asia.
However, the Cold War between the ‗West‘ and the Soviet Union
ensured that vast military machines continued to operate at public
expense, and ‗defence‘ loomed large in the finances of the new states
right from the outset.
Public Service
Meanwhile, demand for public services gave rise to such things as the
National Health Service in Britain and new forms of taxation to pay for
them. Scandinavia led the way as the proportion of national wealth
devoted to public expenditure and services rose towards a half. The
use of taxation to redistribute wealth and even out the inequalities of
capitalism in the West became an ideological weapon in the Cold War.
Global Consensus
Control Taxes
As the Cold War came to an end, triumphant free-market orthodoxy
demanded ‗small‘ government, privatization and cuts in taxes on the
wealth of private individuals and corporations.
Corporate globalization was, in any event, making it more difficult for
nation states to exercise control (or collect taxes), rather than compete
with each other to offer the most favourable rates.
In Russia, the tax rap became a nationalist tool against oligarchs and
foreign businesses. Everywhere, the ‗neoliberal‘ process has continued,
but its outcome is increasingly uncertain.
Public expenditure as a proportion of national wealth has not fallen in
rich countries. Private or corporate wealth still relies on governments
to provide (or, more often, finance) a vast range of services –
including ‗bail-outs‘ when free-market orthodoxy turns out to be
flawed, as in the recent ‗credit crunch‘.
Military expenditures have still not been reduced significantly. In poor
countries, revenues for desperately needed public services remain
minimal. A ‗global consensus‘ agrees, as the saying goes, that „only
the little people pay tax‟.
HISTORICAL BACKGROUND
EGYPT
Tax on cooking oil
During the reign of the Egyptian pharaohs, tax collectors were known
as scribes. The scribes imposed taxes on cooking oil and to ensure that
the people were not avoiding said tax, the scribes would audit the
households.
GREECE
Taxes for wartime expenditure
The Athenians would impose a tax in times of war, known as eisphora
which was used to pay for wartime expenditure. They were the first
ones to introduce the concept of tax refund/credit/carry-over, because
when additional resources were gained by the war effort, such were
used to refund the tax to the citizens.
Monthly poll tax
Athenians imposed a monthly poll tax on foreigners, or those who did
not have both an Athenian mother and father. One drachma for men
and a half drachma for women. The tax was referred to as metoikion.
ROMAN EMPIRE
Customs duties tax
Tax collectors in this time were known as publican. The earliest in
Rome were customs duties on imports and exports called portoria. The
Romans were to the first ones to introduce the Tax Haven, where in
one particular area no tax were collected.
Inheritance tax
Caesar Augustus, the most brilliant tax strategist of the Roman Empire,
virtually eliminated the publicani as tax collectors for the central
government. During this period, cities were given the responsibility for
collecting taxes. Augustus instituted a 5% inheritance tax to provide
for retirement funds for the military.
Sales tax
Also, a 1 percent sales tax was imposed.
GREAT BRITIAN
Income tax
Great Britain was the first to introduce income tax. The first tax
assessed in England was during the occupation by the Roman Empire.
Legend has it that Leofric, Earl of Mercia, imposed very high taxes. His
wife, Lady Godiva, asked him that the taxes be reduced. He obliged,
on the condition that Lady Godiva roam the town naked while riding a
horse. Lady Godiva did so, hence the tax was minimized.
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PHILIPPINES
In the Philippines, taxation can be traced during the Spanish era where
several taxes and monopolies were established.
Resident tax
The resident tax during the Spanish times were known as tribute. It
may be paid in cash or kind. In 1884, however, the tribute was
replaced by the cedula personal or personal identity paper, which is
equivalent to the present community tax certificate.
Bandala system
A form of direct taxes that the Spaniards implemented where the
natives were coerced to sell their products to the government at very
low prices. The collection of taxes were specific in a particular area
rebellious to the Spaniards.
Cedula Personal
A legal identity document issued by cities and municipalities to all
persons that have reached the age of majority and upon payment of a
community tax. The cedula served as an identification card that had to
be carried at all times. One who cannot present the same could be
detained for being indocumentado.
TN: Andres Bonifacio and other Katipuneros tore their cedulas in
August 1896, sparking the start of the Philippine Revolution.
Community tax
This was imposed by the Americans when CA No. 465 took effect,
mandating the imposition of a base resident tax of 50 cents and an
additional tax of one peso based on factors such as income and real
estate holdings. The payment of this tax merits the issue of a
residence certificate.
Eventually, Philippines passed the Local Government Code, after
gaining independence, mandating the payment of community tax and
proof of entries is the community tax certificate.
Polo y servicio
Forced labor for 40 days of men ranging from 16 to 60 years old who
were obligated to give personal services to the community projects.
One could be exempted from the polo by paying a fee called falla.
DIFFERENT TAXES UNDER THE NIRC
TAXES UNDER THE NATIONAL INTERNAL REVENUE CODE
A. Income tax
A. Individuals
B. Corporation
C. Other persons
B. Business taxes
A. Value-added tax
B. Other percentage taxes
C. Transfer taxes
A. Donor‘s tax
B. Estate tax
TN: Taxation is a destructive power of the State which interferes with
personal and property rights of the people and takes a portion of their
property from them for the support of the government. Being a
destructive power, it can be used to kill an activity or business if it
wants to. Thus, it must be exercised with caution.
DEFINITION OF TAXATION
TAXATION
Taxation is the inherent power of the State exercised by the legislature
to demand enforced contributions from the people to raise revenue in
order to defray the necessary expenses of the Government.
Taxes
Taxes are the enforced proportional contributions from properties and
persons levied by the State by virtue of its sovereignty for the support
of the government and all public needs.
Taxation refers to the power to collect money, while tax is the money
itself.
Q: Can LGU validly enact a law imposing amusement tax on local
swimming pools not provided in the LGC or other laws?
A: No. Cebu City is not sovereign, thus, there is no inherent power of
taxation. It can impose only those taxes delegated to it by the
legislative branch of the national government. Only Congress has an
unlimited power to exercise the power to tax.
Q: May a legislative body enact laws to raise revenue in the absence of
a constitutional provision granting such body the power to tax?
A: Yes. Taxation is inherent in the State, being an attribute of
sovereignty. Thus, the legislature can enact laws to raise revenues
even without the grant of said power in the Constitution. It must be
noted that Constitutional provisions relating to taxation do not operate
as grants of power to the Government, but merely constitute as
limitations upon a power which would otherwise be practically without
limit.
Paseo Realty v. CA
Re: How tax refunds are construed
Taxation is a destructive power which interferes with the personal and
property rights of the people and takes from them a portion of their
property for the support of the government. And since taxes are what
we pay for civilized society, or are the lifeblood of the nation, the law
frowns against exemptions from taxation and statutes granting tax
exemptions are thus construed strictissimi juris against the taxpayer
and liberally in favor of the taxing authority.
A claim of refund or exemption from tax payments must be clearly
shown and be based on language in the law too plain to be mistaken.
Elsewise stated, taxation is the rule, exemption therefrom is the
exception.
Case discussion: The confusion as to petitioner‘s entitlement to a
refund could altogether have been avoided had it presented its tax
return for 1990. The grant of a refund is founded on the assumption
that the tax return is valid, i.e., that the facts stated therein are true
and correct. Without the tax return, it is error to grant a refund since it
would be virtually impossible to determine whether the proper taxes
have been assessed and paid.
Pelizloy Realty v. Province of Benguet
Re: Scope of authority of a province to impose amusement tax
The power to tax is an attribute of sovereignty, and as such, inheres in
the State. Such, however, is not true for provinces, cities,
municipalities and barangays as they are not the sovereign. Rather,
they are mere territorial and political subdivisions of the Republic of
the Philippines.
A municipal corporation, unlike a sovereign state, is clothed with no
inherent power of taxation. The charter or statute must plainly show
an intent to confer that power or the municipality cannot assume it.
And the power when granted is to be construed strictissimi juris. Any
doubt or ambiguity arising out of the term used in granting that power
must be resolved against the municipality. Therefore, the power of a
province to tax is limited to the extent that such power is delegated to
it either by the Constitution or by statute.
Case discussion: Resorts, swimming pools, bath houses, hot springs
and tourist spots do not belong to the same category or class as
theatres, cinemas, concert halls, circuses, and boxing stadia. It follows
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that they cannot be considered as among the ‗other places of
amusement‘ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes.
NATURE OF THE POWER OF TAXATION
NATURE OF THE POWER OF TAXATION
A. Inherent attribute of sovereignty
B. Legislative in character
C. Subject to constitutional and inherent limitations
INHERENT ATTRIBUTE OF SOVEREIGNTY
INHERENT ATTRIBUTE OF SOVEREIGNTY
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government. It exists apart from constitutions and without being
expressly conferred by the people. Hence, it can be exercised by the
government even if the Constitution is entirely silent on the subject.
Basis – Lifeblood theory
The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist
without the means to pay its expenses, and for those means, it has the
right to compel all citizens and property within its limit to contribute.
Manifestations
A. Taxes can be imposed even in the absence of a constitutional
provision.
B. The state can select the object and subject matter of taxation.
Thus, unlimited.
C. No injunction in the collection of taxes.
EXC: There is a pending case filed in the CTA to enjoin the
collection of tax.
D. Taxation is not subject to set-off.
EXC: When both debts are due and demandable and has
been fully liquidated.
TN: There can be no compensation as the
Government and the people are not principal
debtors and creditors of each other.
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial v. Sec of DSWD
The power to tax is plenary and unlimited in its range, acknowledging
in its very nature no limits, so that the principal check against its abuse
is to be found only in the responsibility of the legislature (which
imposes the tax) to its constituency who are to pay it. Nevertheless, it
is circumscribed by constitutional limitations. At the same time, like
any other statute, tax legislation carries a presumption of
constitutionality.
The power to tax is a principal attribute of sovereignty. Such inherent
power of the State anchors on its "social contract‖ with its citizens
which obliges it to promote public interest and common good.
DOCTRINE OF EQUITABLE RECOUPMENT
DOCTRINE OF EQUITABLE RECOUPMENT
Where the refund of a tax illegally or erroneously collected from or
overpaid by a taxpayer is barred by prescription, a tax presently being
assessed against a taxpayer may be recouped or set-off.
A claim for refund barred by prescription may be allowed to offset
unsettled tax liabilities. This doctrine finds no application in the
Philippines.
LEGISLATIVE IN CHARACTER
LEGISLATIVE IN CHARACTER
The power to tax is peculiarly and exclusively legislative and cannot be
exercised by the executive or judicial branch of the government.
Hence, only Congress, our national legislative body, can impose taxes.
However, the levy of a tax may also be made by a local legislative
body, subject to such limitations as may be provided by law.
Reason: The power is granted by the people to the legislature, the
representative of the people.
GR: The power to tax is essentially a legislative function and which the
central legislative body cannot delegate to other branches.
EXC: (Permissive delegation of the power to tax)
A. Local governments in respect to matters of local concern
TN: Through the Local Government Code of 1991
B. When allowed by the Constitution
TN: To the President with respect to tariff rates, import and
export quotas, flexible tariff clause, etc.
C. Administrative regulations (Assessment and Collection)
Q. What are the two tests of a valid delegation?
1. Completeness test – the law should already be complete in all
its terms and conditions before it leaves Congress so that when
the law reaches the hands of the delegate, the latter has nothing
else to do but to enforce the same.
2. Sufficient standard test – even if the law is not complete in
itself, but any delegation of authority may be upheld as valid if
such delegation is accompanied by sufficient standards as to map
out the boundaries of the exercise of the delegate‘s delegated
authority.
TN: These standards may take the form of legislative policies as
may be mentioned in the law itself or in another related law
which would recite the circumstances under which such delegated
authority may be validly performed.
Basis of the legislative power to tax
Taxes are a grant of the people who are taxed and the grant must be
made by the immediate representatives of the people. Hence, it should
be our representatives who must levy and impose taxes.
Scope of Taxation
Subject to constitutional and inherent restrictions, the power of
taxation is regarded as supreme, unlimited and comprehensive. The
principal check on its abuses rests only on the responsibility of the
members of the legislature to their constituents.
Extent of the legislative power to tax
Subject to constitutional and inherent restrictions, the legislature has
the discretion to determine the incidence of the power to tax.
A. Purpose – tax must be for a public purpose. The legislative
body‘s determination, however, on the question of what is a
public purpose is not conclusive. The courts can inquire into
whether the purpose is really public or private.
Judicial action is limited only to a review where it involves:
a. The determination of the validity of the tax in relation to
constitutional precepts or provisions, or
b. The determination in an appropriate case of the
application of a tax law
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B. Subjects and objects of taxation – refer to the coverage and
the kind or nature of the tax. They may be persons, property,
businesses, transactions, or the exercise of rights or privileges.
A state is free to select the subject of taxation and it has been
repeatedly held that the inequalities which result from the
singling out of one particular class for taxation or exemption
infringe no constitutional limitation so long as such is reasonable
and not arbitrary.
C. Amount and rate of tax – as a general rule, the legislature
may levy a tax of any amount or rate it sees fit. If the taxes are
oppressive or unjust, the only remedy is the ballot box and the
election of new representatives. However, the tax must be
reasonable, one that would not go against the deprivation of
property without due process of law.
D. Manner and mode of enforcement and collection – these
refer to the administration of the tax or the implementation of
tax laws. The legislature possesses the sole power to prescribe
the mode or method by which the tax shall be collected, and to
designate the officers through whom its will shall be enforced.
Congress should provide sufficient standards on how taxes are
supposed to be collected.
Examples: withholding tax, creditable, etc.
E. Situs of taxation – refers to the place of taxation. In
determining the same, the nature of the taxes must be
considered.
Examples: Community tax – residence of the taxpayer
Real property tax – location of the property
F. Apportionment of the tax – refers to the determination of
which portion of the society gets to be benefited by the tax. It
could either of general or limited application.
G. Grant tax exemption or condonation – The power to tax
carries with it the power to grant exemption therefrom.
Exemptions are interpreted strictly against the taxpayer and
liberally in favor of the government.
H. Kind of tax to be collected – it can be based on income,
sales, import or export, etc.
Provision of administrative and judicial remedies that may be availed
by the taxpayers and the government
SUBJECT TO CONSTITUTIONAL & INHERENT LIMITATIONS
CONSTITUTIONAL AND INHERENT LIMITATIONS
These limitations are those provided in the fundamental law or implied
therefrom, while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the Constitution.
Inherent limitations
A. Public purpose
B. Exemption from taxation of government entities
C. Non-delegation of the legislative power to tax
D. International comity
E. Territorial jurisdiction
Constitutional limitations
Direct Constitutional limitations
A. Revenue bill must originate exclusively in the House but the
Senate may propose with amendments
B. Concurrence of a majority of all the members of Congress for
the passage of a law granting tax exemption
C. Rule of uniformity and equity in taxation
D. Progressive system of taxation
E. Exemption of religious, charitable and education entities, non-
profit cemeteries, and churches from property taxation
F. Exemption is non-stock, non-profit education institution from
taxation
G. Non-imprisonment for non-payment of a poll tax
H. Non-impairment of the jurisdiction of the SC in tax cases
I. Prohibition on the use of special purpose fund
J. Power of the President to veto any particular items in a revenue
or tariff bill
Indirect Constitutional limitations
A. Due process of law
B. Equal protection of the laws
C. Non-impairment of the obligations of contracts
D. Non-infringement of religious freedom
E. No appropriation for religious purposes
F. Non-infringement of the freedom of the press
THEORIES OF TAXATION
THEORIES OF TAXATION
A. Lifeblood theory
B. Necessity theory
C. Benefits received or compensation theory
LIFEBLOOD THEORY
LIFEBLOOD THEORY
Taxes are the lifeblood of the government and their prompt and
certain availability is an imperious need. Without taxes, the
government would be paralyzed for lack of motive power to activate
and operate it.
CIR v. Metro Star Superama
Taxes are the lifeblood of the government and so should be collected
without unnecessary hindrance. On the other hand, such collection
should be made in accordance with law as any arbitrariness will negate
the very reason for government itself.
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
exercised reasonably and in accordance with the prescribed procedure.
If it is not, then the taxpayer has a right to complain and the courts
will then come to his succor. For all the awesome power of the tax
collector, he may still be stopped in his tracks if the taxpayer can
demonstrate that the law has not been observed.
Case discussion: The Tax Code requires that the taxpayer must first be
informed that he is liable for deficiency taxes through the sending of a
Preliminary Assessment Notice. He must be informed of the facts and
the law upon which the assessment is made. To proceed heedlessly
with tax collection without first establishing a valid assessment is
evidently violative of the cardinal principle in administrative
investigations – that taxpayers should be able to present their case
and adduce supporting evidence.
NECESSITY THEORY
NECESSITY THEORY
The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist
without the means to pay its expenses, and for those means, it has the
right to compel all citizens and property within its limit to contribute.
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BENEFITS RECEIVED THEORY /
COMPENSATION THEORY / RECIPROCITY THEORY /
SYMBIOTIC RELATIONSHIP DOCTRINE
BENEFITS RECEIVED OR COMPENSATION THEORY
This theory is the basis of taxation and is founded on the reciprocal
duties of protection and support between the State and its inhabitants.
TN: Inhabitants and not citizens because even aliens are taxed.
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial v. Sec of DSWD
It is said that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the motive
power to activate and operate it. Hence, despite the natural reluctance
to surrender part of one's hard-earned income to the taxing
authorities, every person who is able to must contribute his share in
the running of the government.
The government, for its part, is expected to respond in the form of
in/tangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is
the rationale of taxation and should dispel the erroneous notion that it
is an arbitrary method of exaction by those in the seat of power.
Take Note:
Theory of Taxation – Lifeblood/Necessity
Theory Basis of Taxation – Benefits Received Theory
PURPOSE AND OBJECTIVE OF TAXATION
THE FOUR (4) R‟S OF TAXATION
THE FOUR (4) R‟S OF TAXATION:
TN: According to Atty. Amago, these refer more to the effects of
taxation.
A. Revenue – purpose of taxation is to raise revenue in order to
defray the expenses of the government.
B. Redistribution – people who earn more, pay more taxes, so
their wealth is used for the benefit of everyone, including the
less wealthy individuals.
TN: This is the justification of estate tax.
Reason: Those who earn more are given more opportunities by
the State, so they should give more to the Government.
C. Re-pricing – higher taxes are imposed on articles which are
considered dangerous to the health of the people, i.e. alcoholic
drinks, cigarettes, etc. To address externalities and prevent
citizens from using such dangerous products, higher taxes may
be imposed to curtail such practice. The end goal is to change
the behavior of the citizens or to promote a certain policy.
D. Representation – Our representatives are the ones imposing
the tax, but since the people are the ones putting them in
power, the people can demand something from them – efficient
and effective government service. There is the sense of
accountability.
―No taxation without representation‖
TN: The purpose of taxation to raise revenue to defray the expenses of
the Government has evolved to include social justice.
PRIMARY PURPOSE OF TAXATION
REVENUE RAISING
The primary purpose of taxation has always been to raise revenue.
A law which has for its intention the raising of revenue is an exercise
of the power of taxation.
Of the three inherent powers of the State, only the power of taxation
has for its purpose the raising of revenue.
SECONDARY PURPOSE OF TAXATION
NON-REVENUE RAISING
TN: Also known as the sumptuary purpose of taxation.
A. Regulation –Taxes can be used to curtail or improve a
particular industry. Taxes can be levied with a regulatory
purpose to provide means for the rehabilitation and stabilization
of a threatened industry which is affected with public interest.
Example: to protect local industries, higher taxes is imposed on
foreign investors in order to level the playing field and prevent
unfair competition; re-pricing.
Tio v. Videogram Regulatory Board
The public purpose of a tax may legally exist even if the motive
which impelled the legislature to impose the tax was to favor
one industry over another.
It is inherent in the power to tax that a state be free to select
the subjects of taxation, and it has been repeatedly held that
inequities which result from a singling out of one particular class
for taxation or exemption infringe no constitutional limitation.
Taxation has been made the implement of the state's police
power.
Case discussion: The levy of the 30% tax is for a public
purpose. It was imposed primarily to answer the need for
regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual property
rights, and the proliferation of pornographic video tapes. And
while it was also an objective of the decree to protect the movie
industry, the tax remains a valid imposition.
B. Promotion of general welfare – Taxation can be used as an
implement of police power for the purpose of promoting general
welfare. But sometimes, the use of the power of taxation as an
implement of taxation can destroy industry.
Example: 20% Senior Citizen Discount
Panhandle Oil v. Mississipi
Re: Marshall Dictum
―The power to tax involves the power to destroy.‖
McCulloch v. Maryland
Re: Holmes Dictum
―The power of taxation does not involve the power to destroy as
long as this court sits.‖
Reyes v. Almanzor
Re: How were the doctrines reconciled?
While taxation is plenary and unlimited, it has restrictions. Both
the due process of law and equal protection clauses of the
Constitution may be invoked to invalidate revenue measures. It
is the Court‘s role to see to it that the exercise of the power
does not transgress these limitations.
How to reconcile
The power to tax can be used to destroy only if it used as an
implement of police power such as when you try to regulate a
particular act to the extent that industries can really close down.
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Hence, the power to tax is a power to destroy only if you are
looking at the power to tax as an implement of police power.
But in all other instances, no because the court will always be
there to see whether the inherent and constitutional limitations
are violated.
C. Reduction of social inequalities – Progressive system of
taxation prevents the undue concentration of wealth in the
hands of a few individuals. Progressivity is the keystone on the
principle that those who are able to pay, shoulders the bigger
portion of the burden. Whatever one earns is for the benefit of
all.
D. Encourage economic growth – Refers to exemptions and
incentives granted to foreign investors to entice them to invest
in the country. This is also to encourage higher reserves of
foreign currencies, so the value of the peso in relation to foreign
exchange will be higher. The more foreign reserves, the higher
the value of the currency.
Example: Creation of economic zones like PEZA
SCOPE OF TAXATION
SCOPE OF TAXATION [CUPS]
A. Comprehensive
B. Unlimited
C. Plenary
D. Supreme
Q: When is the exercise of power of taxation legal or valid?
A: When it complies with the inherent and constitutional limitations
Pepsi Cola v. Municipality of Tanauan
The power of taxation is an essential and inherent attribute of
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. It is a
power that is purely legislative and which the central legislative body
cannot delegate either to the executive or judicial department of
government without infringing upon the theory of separation of
powers.
The exception, however, lies in the case of municipal corporations, to
which, said theory does not apply. Legislative powers may be
delegated to local governments in respect of matters of local concern.
This is sanctioned by immemorial. By necessary implication, the
legislative power to create political corporations for purpose of local
self-government carries with it the power to confer on such local
government agencies the power to tax.
Case discussion: The plenary nature of the delegated power of local
governments would not suffice to invalidate the law as confiscatory
and oppressive. In delegating the authority, the State is not limited to
the measure of that which is exercised by itself. When it is said that
the taxing power may be delegated to municipalities and the like, it
means that there may be delegated power to impose and collect taxes
the legislature may deem expedient. Thus, municipalities may be
permitted to tax subjects which for reasons of public policy the State
has not deemed wise to tax for more general purposes.
Plenary – the legislative body has the power to impose taxes as they
may deem expedient. After all, they can determine the subjects and
objects of taxation.
Tio v. Videogram Regulatory Board
A tax does not cease to be valid merely because it regulates,
discourages, or even definitely deters the activities taxed. The power
to impose taxes is one so unlimited in force and so searching in extent,
that the courts scarcely venture to declare that it is subject to any
restrictions whatever, except such as rest in the discretion of the
authority which exercises it.
ASPECTS OF TAXATION
ASPECTS OF TAXATION [LAC]
A. Levy or imposition
B. Assessment
C. Collection
Levy or imposition
Refers to the enactment of a law by Congress. The power to levy taxes
which involves tax policy is essentially legislative in character, although
it may be delegated to executive agencies with respect to
administrative matters, provided that adequate guidelines or
safeguards prescribed are followed in the administration of tax laws.
(Subordinate legislation)
Tax administration
It is exercised by the executive department of government, particularly
the BIR with respect to internal revenue taxes.
A. Assessment – applying the law passed by Congress to the
specific person, property or activity covered by it. Involves the
determination of how much tax is due.
TN: In the Philippines, we follow self-assessment. If ever it is
not enough, there is the involuntary assessment by the BIR.
B. Collection – process or method of implementing the tax laws
for the purpose of satisfying the tax obligations, as when money
is actually taken from the taxpayers.
Agencies involved in the collection of taxes are:
a. Bureau of Internal Revenue
b. Bureau of Customs
c. Provincial, City, and Municipal Assessor and Treasurers
TN: Other aspects of taxation:
(1) Payment – involves the act of compliance by the taxpayer of his
tax obligation, as when he actually pays his taxes;
(2) Refund – Taxes paid will be returned to the taxpayers as when
there is an erroneous or illegal collection of taxes.
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
TN: In the bar exam, most people answer only the three principles.
A. Fiscal adequacy – It means that the revenues generated
should be sufficient to meet the demands of public expenditure.
Taxes should not be too much nor too less. Also, it must be
elastic or capable of expanding or contracting annually in
response to variations in public expenditures and to address
contingencies.
B. Theoretical justice or equity – The tax burden should be
distributed in proportion to the taxpayer‘s ability to pay.
Similarly situated taxpayers should pay equal taxes, while those
who have more should pay more.
C. Administrative feasibility – It means that tax laws should be
capable of convenient, just and effective administration. One
which can be easily implemented to assure smooth flow of funds
to the Treasury, in such a way that it can be enforced uniformly
by the government, convenient as to time and manner, and not
unduly burdensome upon, or discouraging to business activity.
D. Economic efficiency – A combination of fiscal adequacy and
administrative feasibility. The cost of collecting taxes should not
be higher than the benefits derived from it.
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DISTINGUISHED FROM OTHER INHERENT POWERS intent and purpose behind the law requiring owners of vehicles to pay
for their registration is mainly to raise funds for the construction and
maintenance of highways and to a much lesser degree, pay for the
TAXATION V. POLICE POWER
operating expenses of the administering agency. Fees may be properly
Taxation Police Power regarded as taxes even though they also serve as an instrument of
regulation.
Promotion of general
Purpose Raise Revenue
welfare Taxation may be made the implement of the state's police power/ If
Limited to the cost of the purpose is primarily revenue, or if revenue is, at least, one of the
Amount of exaction Unlimited real and substantial purposes, then the exaction is properly called a
regulation
tax. Such is the case of motor vehicle registration fees.
Non-impairment of Inferior to the non- Superior to the non-
contracts impairment clause impairment clause TN: Motor vehicle registration fee and chauffeur‘s license fee are
powers of taxation, whereas the special permit fee and additional fee
Scope for charge of registration is an exercise of police power because such
(Rights which cannot fees are very minimal to be revenue-raising.
Liberty and
be taken away Property rights
Property rights
without due process CIR v. Central Luzon Corp.
of law) The privilege enjoyed by senior citizens does not come directly from
Can be bargained or the State, but rather from the private establishments concerned.
compromised and be Accordingly, the tax credit benefit granted to these establishments can
Bargain be deemed as their just compensation for private property taken by
subject to Cannot be bargained
(Surrender) the State for public use. The taxation power can also be used as an
abatement
Ex. Tax amnesty implement for the exercise of the power of eminent domain. Tax
measures are but enforced contributions exacted on pain of penal
Altruistic feeling of
Compensation Enjoyment of sanctions and clearly for a public purpose.
contributing to society‘s
(Benefits) government services
welfare
Carlos Superdrug v. DSWD
Property taken Generally money Any kind of property In this case, the Congress changed the tax credit scheme to a mere
tax deduction. The Court held that the Expanded Senior Citizens Act is
a legitimate exercise of police power and not eminent domain. The
basic reason for the passage of the law is social justice and general
TAXATION V. EMINENT DOMAIN
welfare of the senior citizens. Hence, property rights must bow to the
primacy of police power because property rights, though sheltered by
Taxation Eminent Domain due process, must yield to general welfare.

The government and Manila Memorial Park v. Sec of DSWD

Who can exercise Only the government even public utility The 20% discount is a price regulatory measure affecting the ability of
companies private establishments to price their products and services relative to a
special class of individuals, the senior citizens, for which the
Purpose Raise revenues Public convenience Constitution affords preferential concern.
Non-impairment of Inferior to the non- Inferior to the non- These establishments have the capacity to revise their pricing strategy
contracts impairment clause impairment clause so that whatever reduction in profits they may sustain can be
Owner of the private recouped through higher mark-ups or from other products not subject
Taxpayers of discounts. As a result, the discounts resulting from sales to senior
Persons affected property
citizens will not be confiscatory or unduly oppressive. In sum, the 20%
discount and tax deduction are valid exercises of police power of the
Planters Products v. Fertiphil Corp. State absent a clear showing that it is arbitrary, oppressive or
Police power and the power of taxation are inherent powers of the confiscatory. The Central Luzon case was a mere obiter dictum.
State. These powers are distinct and have different tests for validity.
Police power is the power of the State to enact legislation that may
interfere with personal liberty in order to promote the general welfare, TAXES DEFINED
while the power of taxation is the power to levy taxes to be used for
public purpose. TAXES DEFINED

The main purpose of police power is the regulation of a behavior or The enforced proportional contributions, generally payable in money
conduct, while taxation is revenue generation. The ―lawful subjects‖ and paid at regular periods or intervals, levied from persons and
and ―lawful means‖ tests are used to determine the validity of a law property or the exercise of a right or privilege, by the State which has
enacted under the police power. The power of taxation, on the other jurisdiction over the subject or object of taxation, through the
hand, is circumscribed by inherent and constitutional limitations. legislative body of the State, for the support of the government and for
all public needs.
The imposition of the levy was an exercise by the State of its taxation TN: All taxes are revenues, but not all revenues are taxes.
power. While it is true that the power of taxation can be used as an
implement of police power, the primary purpose of the levy is revenue A. Internal Revenue taxes – Provided under the NIRC
generation. If the purpose is primarily revenue, or if revenue is at a. Income tax
least, one of the real and substantial purposes, then the exaction is b. Business tax
properly called a tax. c. Transfer tax
d. Donors and estate tax
Philippine Airlines v. Edu e. Percentage tax
The imposition of a vehicle registration fee is not an exercise by the f. Excise tax
State of its police power, but of its taxation power. The legislative g. Documentary stamp tax

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B. Local/Municipal taxes – Provided under the LGC
C. Tariff and customs duties – Provided under the TCC
Taxes and tax incentives under special laws
Common example is the PEZA law which provides 5% tax in lieu of all
taxes for businesses catered within its territory.
ESSENTIAL CHARACTERISTICS OF TAXES
ESSENTIAL CHARACTERISTICS OF TAXES
A. Enforced contribution – Not dependent upon the will or
contractual assent of the person taxed. Hence, whether the
taxpayer likes it or not, he is compelled to pay taxes. It is a legal
and mandatory obligation.
B. Generally payable in money – Tax is a pecuniary burden
payable in money.
Exceptions:
1. Tax credit certificate or backpay certificate – When
taxes are paid in excess of that due, the government issues
a certificate where said excess in taxes will be deducted
from the taxes payable the following year.
2. Tax liens – Forfeiture of property by reason of failure to
pay real property tax – but this property will be sold and
the proceeds shall be used to satisfy the tax obligation.
C. Proportionate in character – It is assessed in accordance
with some reasonable rule of apportionment which is usually
based on the ability of the taxpayer to pay.
D. Levied on persons, property, exercise of a right or
privilege, act or transactions – within the taxing authority‘s
jurisdiction in accordance with the principle of territoriality.
Ex. Persons – Cedula; Property – Real Property Tax; Exercise of
a right or privilege – Income tax, Donor‘s Tax
E. Levied by the State which has jurisdiction over the
subject or object of taxation
F. Levied by the lawmaking body of the State – The power to
tax is a legislative power but is also granted to local
governments, subject to such guidelines and limitations as law
may provide.
G. Levied for public purpose – The public purpose of the
imposition is implied in the levy of tax. A tax levied for a private
purpose constitutes taking of property without due process of
law.
REQUISITES OF A VALID TAX
REQUISITES OF A VALID TAX? [PUJ-DL]
1. It must be for a public purpose
2. The rule on taxation should be uniform
3. Subject taxed must be within the jurisdiction of the taxing
authority
4. The assessment and collection must be in consonance with the
due process clause
5. The tax must not infringe the inherent and constitutional
limitations of the power of taxation
CLASSIFICATION OF TAXES
AS TO SUBJECT MATTER OR OBJECT
A. Personal, Poll, or Capitation – tax imposed on persons
residing within a specified territory, whether citizens or not,
without regard to their property or the occupation or business in
which they may be engaged.
Ex: Community tax
B. Property – tax levied on property, real or personal, in
proportional to its value or in accordance with some rule of
apportionment.
Ex: Real estate tax
C. Excise – tax imposed upon the performance of an act, the
enjoyment of a privilege, or the engagement in an occupation or
business.
Ex: Income tax, donor‘s tax, estate tax.
AS TO BURDEN OR INCIDENCE
A. Direct – tax demanded from the very person who, as intended
should pay the tax which he cannot shift to another.
Ex: Income tax, estate tax, donor‘s tax, community tax
B. Indirect – tax demanded in the first instance from one person
with the expectation that he can shift the burden to someone
else, not as taxes, but as part of the purchase price.
Ex: VAT, percentage tax, excise tax, customs duties
AS TO TAX RATE
A. Specific – tax imposed by the head or number, or by some
standard of weight or measurement. Requires statistics. No
need for an appraisal.
Ex: Wines, fermented liquors, etc.
B. Ad valorem – tax of a fixed proportion of the value of the
property with respect to which the tax is assessed. It requires
the intervention of assessors or appraisers to estimate the value
of such property before the amount due from each taxpayer can
be determined. Ad valorem – ―according to value‖
Ex: Income tax, real estate tax, excise tax on automobiles
C. Mixed – Basis of the tax is the value of the article and weight.
Example: Customs duties
AS TO PURPOSE
A. General, Fiscal or Revenue – tax levied for the general or
ordinary purposes of the government, i.e. raise revenue for
governmental and public needs. These funds can be used for
whatever purpose.
Ex: Income tax, VAT, and almost all taxes.
B. Special or Regulatory – tax levied for special purposes, i.e. to
achieve some social or economic ends, irrespective of whether
revenue is actually raised or not.
TN: These funds can be used only for the specific purpose
which the law creating it indicated.
AS TO SCOPE OR AUTHORITY IMPOSING THE TAX
A. National – taxes imposed by the national government
Ex: NIR taxes, customs duties, national taxes imposed by
laws
B. Municipal or Local – taxes provided in the LGC and imposed
by local governments.
Ex: Business taxes imposed under the LGC
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B. Imposition must bear a reasonable relation to the probable

AS TO GRADUATION
A. Proportion – based on a fixed percentage of the amount of the
property receipts or other basis to be taxed.
Ex: Real estate tax, corporate tax (fixed at 30% regardless
of how much income the corporation earns)
expenses of regulation, taking into account not only the costs of
direct regulation but also its incidental consequences as well.
TN: A charge of a fixed sum which bears no relation at all to the cost
of inspection and regulation may be held to be a tax rather than an
exercise of the police power.

B. Progressive – rate of which increases as the tax base or
bracket increases.
Ex: Income tax
C. Regressive – tax rate decreases as the tax base or bracket
increases.
Ex: VAT (regressive as to its effect)
A regressive tax must not be confused with regressive system of
taxation. In a society where the majority of the people have low
incomes, it exists when there are more indirect taxes imposed than
direct taxes. Since the low-income sector of the population as a whole
buys more consumption goods on which the indirect taxes are
collected, the burden of indirect taxes rests more on them than on the
more affluent groups.
TAX DISTINGUISHED FROM OTHER IMPOSITIONS
Importance of distinguishing taxes from other impositions
The different kinds of impositions mentioned below are not considered
taxes. Hence, if they are not considered taxes, the requirements for a
valid tax (PUJ-DL) need not be complied with.
TAX V. LICENSE FEE
Fees may be regarded as taxes
Fees may be properly regarded as taxes even though they also serve
as an instrument of regulation. If the revenue is the primary purpose,
or if revenue is at least one of the real and substantial purposes, then
the exaction is properly called a tax.
Lutz v. Araneta
Police power may be exercised for the purpose of requiring licenses for
which license fees may have to be paid. The amount of the license
fees for the regulation of useful occupations should only be sufficient
to pay for the cost of the license & the necessary expense of police
surveillance and regulation. For non-useful occupations, the license fee
may be sufficiently high to discourage the activity sought to be
regulated.
TAX V. TOLL FEE
Toll is a sum of money for the use of something, generally applied to
the consideration which is paid for the use of a road, bridge or the like,
of a public nature.
Tax Toll Fee
A demand of
Basis A demand of sovereignty
proprietorship

License is in the nature of a special privilege, or authority to do what Depends upon the cost of
is within its terms. It makes lawful an act which would otherwise be construction or
Amount Unlimited
unlawful. A license granted by the State is always revocable. maintenance of the public
improvement used
License fee – charge imposed under the police power for regulation. For the use of the
Purpose For raising revenue
property of another
Tax License Fee
Imposed by the
Imposed by the
Purpose Revenue-raising Regulation Authority Government or private
Government
individuals or entities
Basis Power of Taxation Police Power
Time of Paid after the start of the
Limited to the cost of the Paid before and after use
Payment business
Amount Unlimited license and expenses of
regulation Effect of
Business is suspended Use is prohibited
Non-payment
Paid before the
Time of Paid after the start of the
commencement of the Can be bargained through
Payment business
business Surrender a substantial consideration Can be waived
(with compensation)
Effect of Non- Does not make the
Makes the business illegal
payment business illegal

Can be bargained TAX V. COMPROMISE PENALTY

through a substantial Cannot be bargained
Surrender
consideration (without compensation) Compromise penalty is the amount collected by the BIR in lieu of
(with compensation) criminal prosecution for violations committed by taxpayers.
Government can grant Government cannot grant
Exemptions This is a sanction imposed as a punishment for violation of a law or
exemptions exemptions
acts deemed injurious. This is paid in lieu of prosecution.

Primary purpose test (To be considered a license fee)
A. The imposition must relate to an occupation or activity that so
engages the public interest in health, morals, development and
safety, as to require regulation for the protection and promotion
of such public interest.
Perpetual Succour vs. CIR
Compromise penalties are amounts collected by the BIR in lieu of
criminal prosecution for violations committed by taxpayers, the
payment of which is based on a compromise agreement validly
entered into between the taxpayer and the CIR.

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Tax Compromise Penalty Draws interest if

Does not draw interest
Interest stipulated in writing or
For forestalling unless delinquent
Purpose For raising revenue when there is default
prosecution

Imposed only by the Imposed by the Francia v. IAC

Authority
Government Government The income tax liability cannot be compensated with the amount
owed by the government as compensation for his expropriated
Cannot be subject to
Set-off Can be subject to set-off property. Taxes are of distinct kind, essence and nature than
set-off or compensation
ordinary obligations. Taxes and debts cannot be the subject of
Enforceability Involuntary Voluntary compensation because the government and the taxpayer are not
mutually creditors and debtors of each other and a claim for taxes is
not a debt, demand contract, or judgment allowed to be set off.
TAX V. SPECIAL ASSESSMENT
TAX V. SUBSIDY
Special assessment – a charge imposed on lands specially benefited
by public works or improvements financed by the government. It is not
Subsidy is a sum of money granted by the government or a public
a personal liability of the person assessed. His liability is limited only to
body to assist an industry or business so that the price of a
the land involved. It is based wholly on benefits and not necessity.
commodity or service may remain low or competitive

Tax Special Assessment It is a pecuniary aid or directly granted by the government to an

Basis Based on necessity
Levied on persons,
Subject property, or the exercise
of a right or privilege
Based wholly on benefits
Levied only on land
individual or private commercial enterprise and even to foreign
establishments deemed beneficial to the public.
Tax subsidy is a reduction in the amount of tax that a business has to
pay, allowed by the government, especially to create jobs.

Limited or Exceptional as Tax is not given or granted by the government, but rather collected
Scope General application to the time and place by the government from its people
(specific area for 5 years

Limited to recovery of Tax Subsidy

expenditures (maximum
Amount Unlimited Source People Foreign Nations
of 60% of the costs of the
improvement for 5 years) Enforceability Mandatory Voluntary
Cannot be surrendered
Surrender Can be surrendered
without compensation TAX V. REVENUE

Republic v. Bacolod
Revenue refers to all funds or income derived by the government,
The purpose of a special assessment is to finance the improvement
whether from tax or from whatever source and whatever manner.
of particular properties, with the benefits of the improvements
accruing or inuring to the owners thereof, who, after all, pay the
Tax is a type of revenue.
assessment. The purpose of an ordinary tax on the other hand, is to
TN: All taxes are revenues, but not all revenues are taxes.
provide the Government with revenues needed for the financing of
state affairs. Thus, while the refusal of a citizen to pay his ordinary
taxes may not indeed be sanctioned because it would impair TAXATION V. INTERNAL REVENUE
government functions, the same would not hold true in the case of a
refusal to comply with a special assessment.
Internal Revenue refer to taxes imposed by the legislature other
than duties on imports and exports.
TAX V. DEBT
TTax is broader than internal revenue.

Tax Debt
TAX V. CUSTOMS DUTIES
Based on contract or
Basis Based on law
judgment
Customs Duties is a tax levied on imports (and, sometimes, on
Assignability Not assignable Generally assignable exports) by the customs authorities of a country to raise state
revenue, and/or to protect domestic industries from more efficient or
Mode of May be paid in money or predatory competitors from abroad.
Generally paid in money
Payment in kind
Customs duty is based generally on the value of goods or upon the
Set-off Not subject to set-off Subject to set-off
weight, dimensions, or some other criteria of the item (such as the size
Can be imprisoned for of the engine, in case of automobiles).
Effect of Non- Cannot be imprisoned for
non-payment of tax,
payment non-payment of debt
except poll tax Tax Customs Duties
Imposed by public Imposed by private Type National and Local National
Authority
authority individuals
Scope General or Specific Specific in Scope
NIRC governs the Civil Code governs the
Prescription Authority BIR or LGU Bureau of Customs
prescriptive periods prescriptive periods

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true intent is to give undue benefit and advantage to a private

TAX V. TARIFF
enterprise, the law will not satisfy the requirement of "public purpose".

Tariff is a tax imposed on imported goods and services. Tariffs are Case discussion: the LOI provides that the imposition of the P10 levy
used to restrict trade, as they increase the price of imported goods was conditional and dependent upon PPI becoming financially viable.
and services, making them more expensive to consumers. They are This suggests that the levy was actually imposed to benefit PPI.
one of several tools available to shape trade policy. Worse, the levy was used to pay the corporate debts of PPI (Planters
Products Inc). The letter of understanding and the plain text of the LOI
Tax Tariffs clearly indicate that the levy was exacted for the benefit of a private
corporation.
Type National and Local National
TEST TO DETERMINE PUBLIC PURPOSE
Scope General or Specific Specific in Scope

Authority BIR or LGU Bureau of Customs Pascual v. Sec of Public Works

Whether the statute is designed to promote the public interest, as
opposed to the furtherance of the advantage of individuals, although
LIMITATIONS ON THE POWER OF TAXATION each advantage to individuals might incidentally serve the public

Case discussion: The appropriation of amount for the construction on a

CONSTITUTIONAL AND INHERENT LIMITATIONS
land owned by private individual is invalid imposition since it results in
the promotion of private enterprise; it benefits the property of a
These limitations are those provided in the fundamental law or implied
particular individual. The provision that the land thereafter be donated
therefrom, while the rest spring from the nature of the taxing power
to the government does not cure this defect. The rule is that if the
itself although they may or may not be provided in the Constitution.
public advantage or benefit is merely incidental in the promotion of a
particular enterprise, such defect shall render the law invalid. On the
INHERENT LIMITATIONS other hand, if what is incidental is the promotion of a private
enterprise, the tax law shall be deemed ―for public purpose‖.
INHERENT LIMITATIONS
Determination that the tax is for public purpose
A. Proceeds of the tax must be used for the support of the
Inherent limitations refer to those limitations which are based on
government, specifically on its governmental functions
taxation‘s nature as a power. They exist despite the absence of an
B. Proceeds of the tax must be for any of the recognized objects of
express constitutional provision thereon. Hence, they need not be
the government
contained in any law or constitution.
C. Proceeds of the tax must be to promote the welfare of the
community
Violation of any of the inherent limitations amounts to a taking of
property without due process of law and therefore void.
TN: The test is not as to who receives the money, but the character or
the purpose of which it is expected. Also, the test is not the immediate
The inherent limitations are the following: [PENIT]
result of the expenditure but the ultimate result.
A. Public purpose
Q: When is the reckoning period to determine the purpose of the levy?
B. Exemption from taxation of government entities
C. Non-delegation of the legislative power to tax
A: To determine if it is for public purpose, it must be reckoned from
D. International comity
the date the law is passed and not from the time of implementation.
E. Territorial jurisdiction
Lutz v. Araneta
PUBLIC PURPOSE Re: For public purpose although it is for a specific industry

The tax is levied with a regulatory purpose, to provide means for the
THE LEVY MUST BE FOR A PUBLIC PURPOSE
rehabilitation and stabilization of the threatened sugar industry. In
other words, the act is primarily an exercise of the police power.
The right of taxation can only be used in aid of a public object. It
The protection and promotion of the sugar industry is a matter of
cannot be exercised in aid of enterprises strictly private and for the
public concern. Sugar production is one of the great industries of the
benefit of individuals, even though in a remote or collateral way, the
Philippines, with sugar occupying a leading position among its export
public may be benefited thereby.
products. It is a great source of the state‘s wealth, hence, its
promotion, protection and advancement redounds greatly to the
TN: Public purpose has now evolved to include social justice. Social
general welfare.
Justice is the broader term.
Thus, the legislature may determine within reasonable bounds what is
Planters Products v. Fertiphil Corp.
necessary for its protection and expedient for its promotion. Here, the
The term "public purpose" is not defined. It is an elastic concept that
legislative discretion must be allowed full play, subject only to the test
can be hammered to fit modern standards. It does not only pertain to
of reasonableness.
those purposes which are traditionally viewed as essentially
government functions, such as building roads and delivery of basic
Q: Why is it that only those people engaged in the sugar industry are
services, but also includes those purposes designed to promote social
the ones burdened to pay the tax?
justice. Thus, public money may now be used for the relocation of
illegal settlers, low-cost housing and urban or agrarian reform.
A: That the tax to be levied should burden the sugar producers
themselves can hardly be a ground of complaint. Indeed, it appears
While the categories of what may constitute a public purpose are
rational that the tax be obtained precisely from those who are to be
continually expanding in light of the expansion of government
benefited from the expenditure of the funds derived from it. At any
functions, the inherent requirement that taxes can only be exacted for
rate, it is inherent in the power to tax that a state be free to select the
a public purpose still stands. Public purpose is the heart of a tax law.
subjects of taxation, and it has been repeatedly held that inequalities
When a tax law is only a mask to exact funds from the public, when its
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which result from a singling out of one particular class for taxation or
exemption infringe no constitutional limitation.
Caltex v. COA
Taxation is no longer envisioned as a measure to raise revenue to
support the existence of the government. Taxes may be levied with a
regulatory purpose to provide means for the rehabilitation and
stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State.
The oil industry is greatly imbued with public interest as it vitally
affects the general welfare. Any unregulated increase in oil prices
could hurt the lives of a majority of the people and cause economic
crisis of untold proportions. It would have a chain reaction in terms of
demands for wage increase and upward spiralling of the cost of basic
commodities. Hence, the stabilization of oil prices is of prime concern
which the state, via its police power, may properly address.
CONCEPTS RELATIVE TO PUBLIC PURPOSE
1. Inequalities resulting from the singling out of one particular
class for taxation or exemption infringe no constitutional
limitation
2. Individual taxpayers need not derive direct benefits from the tax
3. Public purpose is continually expanding, areas formerly left to
private initiative may not be undertaken by the government if it
is to meet the increasing social challenges of the time.
4. Public purpose is determined at the time of the enactment of
the tax law and not at the time of its implementation.
TAXPAYER‟S SUIT
Where a taxpayer questions the validity of a law appropriating public
funds, the case is called a taxpayer‘s suit. It is a question of whether
the public money is used for public purpose or not.
The act complained of is directly involved in the illegal disbursement of
public funds. However, the public funds must be derived from taxation.
Proper party
One who has sustained or is in imminent danger of sustaining and
injury as a result of the act complained of. To be a proper party, one
must have legal standing.
Taxpayers have sufficient interest in preventing the illegal expenditure
of moneys raised by taxation and may therefore question the
constitutionality of statutes requiring expenditure of public money.
Important concepts to remember:
1. The public funds must be derived from taxation
2. Does not apply to donations and contributions made by public
individuals or private entities
3. Taxpayer is not relieved from the obligation to pay tax just
because of his belief that it is being misappropriated
4. A taxpayer has no legal standing to question acts which do not
involve the use of public funds.
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
The power of taxation peculiarly and exclusively belongs to the
legislative body of the government and therefore may not be
delegated as a rule.
General rule: The power of taxation is vested in the legislative
branch of the national government and therefore cannot be delegated.
Exceptions:
1. Delegation to local governments
2. Delegation to the President
3. Delegation to administrative bodies
Matters which cannot be delegated
1. Nature of taxation
2. Object and purpose
3. Subject or coverage
4. Amount or rate of tax
5. Manner, means and agencies of collection
6. Situs
EXCEPTIONS
Delegation to Local Government Units
Article 10, Section 5, Constitution
Each LGU shall have the power to create its own sources of revenues
and to levy taxes, fees, charges, subject to such guidelines and
limitations as the Congress may provide, consistent with the basis
policy of local autonomy.
TN: Hence, the Congress passed the Local Government Code of 1991
which embodies the guidelines on how LGUs can exercise such power.
Q: Can a municipality pass an ordinance imposing a tax on any sale or
transfer of real property located within its territory?
A: No. The Local Tax Code only allows provinces and cities to impose a
tax on the transfer of ownership of real property. Municipalities are
prohibited from imposing said tax that provinces are specifically
authorized to levy. While it is true that the Constitution has given
broad powers of taxation to LGUs, this delegation however is subject
to such limitations as may be provided by law.
Basco v. PAGCOR
A mere municipal corporation has no inherent right to impose taxes.
Thus, the Charter must plainly show intent to confer such power.
Otherwise, the municipality cannot assume it. Its power to tax must
always yield to a legislative act which is superior, having been passed
upon by the State itself which has the inherent power to tax.
Delegation to the President
A. The authority of the President to fix tariff rates, import and export
quotas, tonnage and wharfage dues, and other duties or imposts.
(Article VI, Section 28(2), 1987 Constitution)
B. Flexible tariff clause – the authority given to the President, upon
the recommendation of NEDA, to adjust the tariff rates under
Sec. 401 of the Code in the interest of national economy, general
welfare and/or national security.
Reason: Impelled by necessity. These matters pertain to
international trade. In the enactment of laws, the process
attendant thereto is very cumbersome. If we let Congress fix
tariff rate, it would take a really long time. But any such
delegation to the President must be done by Congress through
the enactment of a law.
Delegation to administrative bodies
Limited to the administrative implementation that calls for some
degree of discretionary powers under sufficient standards expressed
by law or implied from the policy and purposes of the Act.
A. Power to value property for purposes of taxation
B. Power to assess and collect taxes
C. Power to perform an innumerable details of computation,
appraisal and adjustment
When Congress delegates legislative powers to the various
administrative agencies, i.e. BIR, BOC, what is delegated is the power
of ―subordinate legislation.‖
It confers upon the administrative bodies the power and authority to
fill in the details which are lacking in the law and which Congress may
not have the competence or opportunity to fill in.
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EXEMPTION FROM TAXATION
EXEMPTION FROM TAXATION OF GOVERNMENT ENTITIES
TN: Refers only to real estate tax
If the taxing authority is the National Government
GR: Agencies and instrumentalities of the government performing
governmental functions are tax exempt. If performing proprietary
function, taxable.
A. Governmental function – tax exempt
B. Proprietary function – taxable
EXC: Even if performing proprietary function, if the franchise or law
creating them exempts them – tax exempt.
Reason: Otherwise, it would necessitate the imposition of new taxes
in order to pay for the tax imposed on them. There would be a
continuing cycle of imposing taxes.
If the taxing authority is the LGU
RA 7160 expressly prohibits LGUs from levying tax on the National
Government, its agencies and instrumentalities and other LGUs.
NDA v. Cebu City
Re: GOCCs with respect to tax exemption
The Republic, like any individual, may form a corporation with
personality and existence distinct from its own. The separate
personality allows a GOCC to hold and possess properties in its own
name and thus permit greater independence and flexibility in its
operations. It may therefore be stated that tax exemption of property
owned by the Republic refers to ―properties owned by the Government
and by its agencies which do not have separate and distinct
personalities (unincorporated entities)‖
Case discussion: When a land is reserved, the land remains the
absolute property of the government. The latter does not part with its
title by reserving them, but simply gives notice that it desires them for
a certain purpose. As its title remains with the Republic, the reserved
land is covered by the tax exemption. The reserved land is tax-exempt
but the warehouse constructed on such reserved land should be
assessed real estate tax as such improvement does not belong to the
Republic.
Hence:
A. TAX EXEMPT – GOCCs with original charter; attached to the
government; unincorporated
B. TAXABLE – GOCCs with special charter; personality distinct from
the government; incorporated
Government entities exempted from income tax:
A. GSIS
B. SSS
C. PHIC
D. PCSO
E. PAGCOR (but not exempted from business tax)
PAGCOR v. BIR
There was no need for Congress to grant tax exemption to PAGCOR
with respect to its income from gaming operations as the same is
already exempted from all taxes of any kind or form, income or
otherwise, whether national or local, under its Charter, save only for
the five percent (5%) franchise tax.
Where a general law is enacted to regulate an industry, it is common
for individual franchises subsequently granted to restate the rights and
privileges already mentioned in the general law, or to amend the later
law, as may be needed, to conform to the general law. However, if no
provision or amendment is stated in the franchise to effect the
provisions of the general law, it cannot be said that the same is the
intent of the lawmakers as repeal of laws by implication is not favored.
In this regard, we agree with petitioner that if the lawmakers had
intended to withdraw petitioner's tax exemption of its gaming income,
then Section 13 of PD 1869 should have been amended expressly in
R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.
1. Petitioner's tax privilege of paying five percent (5%) franchise tax
in lieu of all other taxes with respect to its income from gaming
operations, pursuant to P .D. 1869, as amended, is not repealed
2. Petitioner's income from gaming operations is subject to the five
percent (5%) franchise tax only
3. Petitioner's income from other related services is subject to
corporate income tax only
Bar Question:
A tobacco corporation bought a parcel of land and donated the same
to a municipality for the sole purpose of devoting said land as a
relocation site. Through an ordinance, the municipality ordained that
the lots be finally transferred and donated to the beneficiaries.
Determine the tax consequence of the foregoing disposition with
respect to the municipality.
The Municipality is not subject to any donor‘s tax on the value of the
land it subsequently donated, it being exempt from taxes as a political
subdivision of the National Government.
INTERNATIONAL COMITY
INTERNATIONAL COMITY
The respect accorded by nations to each other because they are
sovereign equals. Thus, one state cannot exercise its sovereign powers
over another, and hence the property or income of a foreign state or
government may not be subject of taxation by another state.
TN: Under international comity, a state must recognize the generally
accepted tenets of international law, among which are the principles of
sovereign equality among states and freedom from suit without their
consent – these limit the authority of a government to effectively
impose taxes on a sovereign state.
Reasons:
1. Doctrine of sovereign equality among states – as between
equals, there is no sovereign. One state cannot exercise its
sovereign powers over another.
2. Non-suability of States – under international law, a foreign
government may not be sued without its consent. Hence, it is
useless to impose a tax which could not be collected.
3. Usage among states – when a foreign sovereign enters the
territorial jurisdiction of another, there is an implied
understanding that the former does not intend to degrade its
dignity by placing itself under the jurisdiction of another.
Bar Question:
A multinational corporation doing business in the Philippines donated
100 shares of stock of said corporation to Mr. Cortez, its resident
manager in the Philippines. What is the tax liability if any of the said
corporation?
Foreign corporations effecting a donation are subject to donor‘s tax
only if the property donated is located in the Philippines. Accordingly,
donation of a foreign corporation of its own shares of stocks in favor of
resident employees is not subject to donor‘s tax. However, if 85% of
the business of the foreign corporation is located in the Philippines, or
the shares have acquired business situs in the Philippines, the donation
may be taxed in the Philippines, subject to the rule of reciprocity.
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TERRITORIAL JURISDICTION
TERRITORIAL JURISDICTION
A state may not tax property lying outside its borders or lay an excise
or privilege tax upon the exercise or enjoyment of a right or privilege
derived from the laws of another state and therein exercised and
enjoyed.
General Rule: Taxation may be exercised only within the territorial
jurisdiction of the taxing authority.
Exceptions: Where privity of relationship exists. Hence, a person may
be taxed where there is between him and the taxing state a privity of
relationship justifying the levy. Thus, a citizen‘s income may be taxed
even if he resides abroad as the personal jurisdiction of his
government over him remains.
TN: In this case, the basis of the power to tax is not dependent on the
source of the income, location of the property or upon the residence of
the taxpayer but upon his relation as a citizen to the state. As such
citizen, he is entitled, wherever he may be, inside or outside of his
country, to the protection of his government.
Reasons:
1. Tax laws do not operate beyond a country‘s territorial limits
2. Property which is wholly and exclusively within the jurisdiction of
another state receives none of the protection for which a tax is
supposed to be compensation.
Foreign embassies
Foreign embassies are not subject to tax because they are considered
extensions of the foreign country they represent.
Situs of taxation
Within the territorial jurisdiction, the taxing authority may determine
the situs. Situs of taxation literally means the place of taxation.
CONSTITUTIONAL LIMITATIONS
DIRECT CONSTITUTIONAL LIMITATIONS
Direct constitutional limitations
A. Revenue bill must originate exclusively in the House of
Representatives but the Senate may propose or amendments
B. Concurrence of a majority of all the members of Congress for
the passage of a law granting tax exemption
C. Rule of uniformity and equity in taxation
D. Progressive system of taxation
E. Exemption of religious, charitable and educational entities, non-
profit cemeteries, and churches from property taxation.
F. Exemption of non-stock, non-profit educational institutions from
taxation
G. Non-imprisonment for non-payment of a poll tax
H. Non-impairment of the jurisdiction of the SC in tax cases
I. Prohibition on the use of special fund
J. Power of the President to veto any particular items in a
revenue or tariff bill
REVENUE BILLS MUST ORIGINATE FROM
THE HOUSE OF REPRESENTATIVES
Article VI, Section 24(4) of the 1987 Constitution
All appropriation, revenue or tariff bills shall originate from the House
of Representatives, but the Senate may propose or concur with
amendments.
TN: What‘s required to originate from HREP is the bill and not the law
or statute.
Tolentino v. Secretary of Finance
Re: VAT originating from the Senate and not the HREP
To insist that a revenue statute and not only the bill which initiated the
legislative process culminating in the enactment of the law must
substantially be the same with the house bill, would be to deny
senate‘s power not only to concur with amendments but also to
propose amendments. It would violate the co-equality of legislative
power of the two houses and in fact make the HREP superior to the
Senate.
It is not the statute that must originate in the HREP but the bill. The
Constitution simply requires that there must be that initiative coming
from the HREP relative to appropriation, revenue and tariff bills. The
Constitution does not prohibit the filing in the Senate of a substitute
bill in anticipation of its receipt of the bill from the HREP, as long as
action by the Senate is withheld until receipt of the bill coming from
the HREP.
What is prohibited is for the Senate to enact revenue measures on its
own without a bill originating from the HREP. But once he revenue bill
was passed by the HREP and sent to the Senate, the latter can pass its
own version on the same subject matter by virtue of its power to
propose or concur with amendments. This is in consonance with the
principle of co-equality between the two branches of Congress.
MAJORITY VOTE OF CONGRESS FOR TAX EXEMPTIONS
Article VI, Section 28 (4) of the 1987 Constitution
No law granting any tax exemption shall be passed without the
concurrence of a majority of all the members of Congress.
Votes required
A. For the grant of tax exemption – absolute majority of the
members of Congress (50+1 of all the members voting
separately)
B. For withdrawal of tax exemption – relative majority or majority
of the quorum
TN: Tax amnesties, tax condonations and tax refunds are considered
grants in the nature of tax exemptions. Hence, absolute majority is
required.
UNIFORM, EQUITABLE AND PROGRESSIVE SYSTEM
Article VI, Section 28 (1) of the 1987 Constitution
The rule of taxation shall be uniform and equitable. The Congress shall
evolve a progressive system of taxation.
A. Uniformity in taxation – alt taxable articles or kinds of
property of the same class shall be taxed at the same rate.
B. Equity – uniformity in taxation is effected through the
apportionment of the tax burden among the taxpayers which
must under the Constitution must be equitable – fair, just,
reasonable and proportionate to the taxpayer‘s ability to pay.
C. Progressive – There shall be more direct taxes than indirect
taxes, with ability to pay as the principal criterion. Hence, the
tax rate increases as the tax bracket increases.
Q: Is progressive system of taxation directory or mandatory?
A: It is merely directory because we even have regressive taxes (VAT),
the lesser money you have, the more you can feel the impact. It is
regressive as to effect. Such a provision is placed in the Constitution as
moral incentives to legislation and not as judicially enforceable rights.
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TN: This does not mean that there should be no indirect taxes. There
can still be indirect taxes as long as it is minimized. In other words,
having a progressive system means that the direct taxes are more
than the indirect taxes.
Q: Is classification allowed?
A: Yes. Uniformity in taxation does not prohibit the classification of the
objects of taxation or the entities or subjects upon which taxes are
imposed. However, to withstand any constitutional infirmity, such
classification must comply with certain guidelines.
A. It is based upon substantial distinctions which make real
differences
B. These are germane to the purpose of the legislation or
ordinance
C. The classification applies, not only to present conditions, but,
also, to future conditions substantially identical to those of the
present
D. The classification applies equally to all those who belong to the
same class
Bar Question:
The City of Makati, in order to solve the traffic problem in its business
districts, decided to impose a tax, to be paid by the driver, on all
private cars entering the city during peak hours from 8:00 am to 9:00
am from Mondays to Fridays, but it exempts those cars carrying more
than two occupants, excluding the driver. Is the ordinance valid?
No. The ordinance is in violation of the rule of uniformity and equality,
which requires that all subjects or objects of taxation, similarly situated
must be treated alike and must not be classified in an arbitrary
manner. The ordinance exempts cars carrying more than two
occupants and taxes only private cars, exempting public vehicles,
although both contribute to the traffic problem.
Also, the tax is imposed not on the registered owner but the driver,
who has no control over the route of the vehicle. The ordinance does
not just violate the rule of uniformity, the same is likewise unjust.
EXEMPTION FROM REAL PROPERTY TAXES
Article VI, Section 28 (3) of the 1987 Constitution
Charitable institutions, churches, parsonages, or convents appurtenant
thereto, mosques, and non-profit cemeteries, and all lands, buildings
and improvements actually, directly and exclusively used for religious,
charitable or educational purposes shall be exempt from taxation.
TN: This is a self-executing provision.
Important principles:
A. The tax exemption of religious, charitable and educational
institutions covers real property tax only.
B. The test is usage and not ownership.
C. The exemption extends to facilities which are incidental to or
reasonably necessary for the accomplishment of said purpose.
Test of Exemption Nature of Use Scope of Exemption
Real property taxes on
facilities which are:
Actual, direct, and
a. Actual
Use of the property, exclusive use for
b. Incidental
and not the religious, charitable
c. Reasonably
ownership. and educational
necessary for the
purposes
accomplishment of
said purpose
TN: The owner of the property does not matter.
The exemption attaches to the property and not to the owner.
Example:
Land owned by Caritas Health Shield/USC
Rented out to different entities
(Are the lots exempt from Real Property Taxes?)
Jollibee University of Cebu
Not exempt Exempt
Iglesia ni Cristo Idle Land
Exempt Not exempt
Q: Is the income of the church taxable?
A: No. It is not taxable. While it is true that Section 28 Art 6 deals only
with real property tax exemption, but income tax exemption is
provided under Sec 30 of the National Internal Revenue Code.
Sec 30. The following organizations shall not be taxed under this Title
in respect to income received by them as such: (E) Non-stock
corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall
belong to or inures to the benefit of any member, organizer, officer or
any specific person.
Herrera v. Quezon City
TN: This was decided under the 1935 Constitution (there was no
provision yet on ―actually, directly and exclusive used‖ – only
―exclusively used‖.
The admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity.
The exemption in favor of property used exclusively for charitable or
educational purpose is not limited to property actually indispensable
therefore, but extends to facilities which are incidental to and
reasonably necessary for the accomplishment of said purpose, such as
in the case of hospitals – a school for training nurses, a nurses‘ home,
property used to provide housing facilities for interns, resident doctors,
superintendents and other members of the hospital staff, and
recreational facilities for student nurses, interns and residents such as
athletic fields and farms. Thus, within the purview of the Constitution,
St. Catherine‘s Hospital is a charitable institution exempt from taxation.
TN: This is no longer controlling because this case was decided during
the 1935 Constitution where there was no provision yet on ―actually,
directly and exclusively used.‖ Hence, if asked in the exam, the
controlling doctrine is that laid down in Phil Lung Center v. QC.
Abra Valley v. Aquino
TN: This was decided under the 1935 Constitution
Facts: Abra Valley is an educational corporation and institution of
higher learning duly incorporated with the SEC. The elementary
students are housed in a two-storey building across the street, while
the high school and college students are housed in the main building.
The director with his family is in the second floor of the main building.
Also, the ground floor of the college building is used and rented by a
commercial establishment, the Northern Marketing Corporation. Abra
Valley‘s contention is that the primary use of the lot and building for
educational purposes and not the incidental use thereof determines
exemption from property taxes under Sec 22 Art 6 1935 Constitution.
Held: The test of exemption from taxation is the use of the property
for purposes mentioned in the Constitution. It must be stressed
however, that while this Court allows a more liberal and non -
restrictive interpretation of the phrase "exclusively used for educational
purposes", reasonable emphasis has always been made that
exemption extends to facilities which are incidental to and reasonably
necessary for the accomplishment of the main purposes. Otherwise
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stated, the use of the school building or lot for commercial purposes is
neither contemplated by law, nor by jurisprudence.
Thus, while the use of the second floor of the main building in the case
at bar for residential purposes of the Director and his family, may find
justification under the concept of incidental use, which is
complimentary to the main or primary purpose— educational, the lease
of the first floor thereof to the Northern Marketing Corporation cannot
by any stretch of the imagination be considered incidental to the
purpose of education.
Hence, the school building as well as the lot where it is built should be
taxed not because the second floor of the same is being used by the
Director and his family for residential purposes, but because the first
floor thereof is being used for commercial purposes. However, since
only a portion is used for purposes of commerce, it is only fair that half
of the assessed tax be returned to the school involved.
TN: The property need not be indispensable. It is enough that it is
incidental and reasonably necessary to the purpose.
Phil. Lung Center v. QC
Philippine Lung Center is not tax exempt. Under the Constitution, in
order to be entitled to exemption from real property tax, there must be
clear and unequivocal proof that:
1. It is a charitable institution and
2. Its real properties are actually, directly and exclusively used for
charitable purposes.
While portions of the hospital are used for treatment of patients and
the dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals
and enterprises.
Exclusive is defined as possessed and enjoyed to the exclusion of
others, debarred from participation or enjoyment. If real property is
used for one or more commercial purposes, it is not exclusively used
for the exempted purposes but is subject to taxation. The words
"dominant use" or "principal use" cannot be substituted for the words
"used exclusively" without doing violence to the Constitution and the
law.
What is meant by actual, direct and exclusive use of the property is
the direct and immediate and actual application of the property itself
to the purposes for which the charitable institution is organized. It is
not the use of the income from the real property that is determinative
of whether the property is used for tax-exempt purposes.
TN: In the Herrera case, the meaning of ―exclusive use‖ is the
―principal‖ or ―dominant‖ use. In fact, it likewise considers incidental
use. Hence, as long as it is related to the principal purpose, then it can
be exempted. However, in the Lung center case, ―exclusively‖ is
synonymous to ―solely‖. Hence, to be exempted from real property
tax, the property should be solely for charitable purpose and not just
mere incidental to the principal purpose. This is the controlling
doctrine.
City Assessor of Cebu v. Ass. of Benevola de Cebu
Facts: Petitioner insists on a 35% assessment rate on the building
which he considers commercial in nature contrary to respondent's
position that it is a special real property entitled to a 10% assessment
rate for realty tax.
Issue: Whether or not a medical arts center built by a hospital to
house its doctors a separate commercial establishment or an
appurtenant to the hospital.
Held: The CHH Medical Arts Center (CHHMAC) is an integral part of
CHH. It is definitely incidental to and reasonably necessary for the
operations of Chong Hua Hospital. The doctors and medical specialists
holding clinics in CHHMAC are those duly accredited by CHH. They are
consultants of the hospital and the ones who can treat CHH's patients
confined in it. This fact alone takes away CHHMAC from being
categorized as "commercial" since a tertiary hospital like CHH is
required by law to have a pool of physicians who comprises the
required medical departments in various medical fields.
The fact that the physicians are holding office in a separate building
does not take away the essence and nature of their services vis-à-vis
the over-all operation of the hospital and the benefits to the hospital‘s
patients. Their transfer to a more spacious and, perhaps, convenient
place and location for the benefit of the hospital‘s patients does not
remove them from being an integral part of the overall operation of
the hospital.
Respondent‘s charge of rentals for the offices and clinics its accredited
physicians occupy cannot be equated to a commercial venture, which
is mainly for profit.
First, CHHMAC is only for its consultants or accredited doctors and
medical specialists. Second, the charging of rentals is a practical
necessity: (1) to recoup the investment cost of the building, (2) to
cover the rentals for the lot CHHMAC is built on, and (3) to maintain
the CHHMAC building and its facilities. Third, as correctly pointed out
by respondent, it pays the proper taxes for its rental income. And,
fourth, if there is indeed any net income from the lease income of
CHHMAC, such does not inure to any private or individual person as it
will be used for respondent‘s other charitable projects.
American Bible Society v. City of Manila, 1957
Facts: American Bible Society is engaged in the distribution and sales
of bibles and religious articles. The City Treasurer of Manila informed
the plaintiff that it was conducting the business of general
merchandise without providing itself with the necessary Mayor's permit
and municipal license, in violation of Ordinance No. 3000, as amended,
and Ordinance No. 2529, as amended, and required plaintiff to secure
the corresponding permit and license.
Held: The constitutional guaranty of the free exercise and enjoyment
of religious profession and worship carries with it the right to
disseminate religious information. Any restraint of such right can only
be justified like other restraints of freedom of expression on the
grounds that there is a clear and present danger of any substantive
evil which the State has the right to prevent.
It may be true that in the case at bar the price asked for the bibles
and other religious pamphlets was in some instances a little bit higher
than the actual cost of the same, but this cannot mean that appellant
was engaged in the business or occupation of selling said
"merchandise" for profit. For this reason we believe that the provisions
of City of Manila Ordinance No. 2529, cannot be applied to appellant,
for in doing so it would impair its free exercise and enjoyment of its
religious profession and worship as well as its rights of dissemination
of religious belief.
EXEMPTION OF NON-STOCK,
NON-PROFIT EDUCATIONAL INSTITUTIONS
Article XIV, Section 4 (3) of the 1987 Constitution
All revenues and assets of non-stock, non-profit educational
institutions used actually, directly and exclusively for educational
purposes shall be exempt from taxes and duties.
Proprietary educational institutions, including those cooperatively
owned, may likewise be entitled to such exemptions, subject to the
limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
Subject to conditions prescribed by law, all grants, endowments,
donations, or contributions used actually, directly, and exclusively for
educational purposes shall be exempt from tax.
Important principles:
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A. The exemption covers income, property, and donor‘s taxes,
custom duties, and other taxes imposed by either or both the
national government or political subdivisions on all revenues,
assets, property or donations, used actually, directly and
exclusively for educational purposes.
TN: In case of religious and charitable entities and non-profit
cemeteries, the exemption is limited only to property tax.
B. The exemption does not cover revenues derived from, or assets
used in, unrelated activities or enterprise.
C. Lands, buildings, and improvements actually, directly and
exclusively used for educational purposes are exempt from
property tax (Sec 28 (3) Art VI), whether the educational
institution is proprietary or non-profit.
D. The test is usage and not ownership.
E. Similar tax exemptions may be extended to proprietary
educational institutions by law subject to such limitations as it
may provide, including restrictions on dividends and provisions for
reinvestment. The restrictions are designed to insure that the tax-
exemption benefits are used for educational purposes.
Example: UC (Proprietary)
Not tax exempt but given a special rate of 10%.
School building/area – exempted from property tax
Rent income of UC – taxable at 30% (normal corporate
income tax)
TN: Where an educational institution is private and non-profit but
a stock corporation, it is subject to income tax but at a
preferential rate of 10%. Same thing is true for charitable
hospitals or institutions.
Requisites for the application of the 10% preferential rate:
1. It must be private
2. It has permit to operate as an educational institution
3. It is non-profit
4. Its gross income from unrelated trade or business must not
exceed 50% of its total gross income from all sources,
otherwise, it will be subject to the 30% corporate income
tax rate
Example:
Land owned by USC
Rented out to different entities
(Are the rentals subject to tax?)
Depends on the use of the Income
If ADE used for educational purposes
Jollibee University of Cebu
Tax exempt Tax Exempt
Iglesia ni Cristo Idle Land
Tax Exempt Taxable
If not ADE used for educational purposes
Jollibee University of Cebu
Not exempt Not exempt
Iglesia ni Cristo Idle Land
Not exempt Not exempt
Summary of rules:
A. If non-stock, non-profit educational institution – tax
exempt
B. Even if for profit – preferential rate at 10% provided its
gross income from unrelated trade must not exceed 50%
of its total gross income
The 10% preferential tax rate does not apply to the following:
A. The passive income derived by the educational institution,
which is subject to final income tax, i.e. rent income or
interest in income
B. Engaged in unrelated trade or business or other activity
where the gross income from such exceeds 50% of the
total gross income
Distinguish Article VI from Article XIV.
Article VI, Section 28 (3) Article XIV, Section 4(3)
Charitable institutions, churches,
and parsonages or convents
appurtenant thereto, mosques, non-
profit cemeteries, and all lands, Non-stock, non-profit educational
buildings, and improvements, institutions
actually, directly, and exclusively
used for religious, charitable, or
educational purposes.
Income, property, donor‘s taxes
Property taxes
and customs duties
Perpetual Succour v. CIR
TN: This is a CTA decision. Not yet affirmed by the SC.
When a hospital is proprietary or private, which is not for profit and its
gross income from unrelated trade, business or other activity does not
exceed 50% of its total gross income from all sources, it is subject to
10% tax rate. On the other hand, when a hospital is non-stock,
meaning its capital stock is not divided into shares, and is not
authorized to distribute to the holders of such shares dividends,
operated exclusively for religious or charitable purpose, no part of its
net income or asset belong to or inure to the benefit of any specific
person, then the hospital will fall under the provision of Section 30 (E)
of the NIRC.
Sec 30. The following organizations shall not be taxed under this Title
in respect to income received by them as such: (E) Non-stock
corporation or association organized and operated exclusively for
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall
belong to or inures to the benefit of any member, organizer, officer or
any specific person.
The admission of pay-patients does not detract from the charitable
character of a hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity. In other words,
where the rendering of charity is its primary object, and the funds
derived from payments made by patients able to pay are devoted to
the benevolent purposes of the institution, the mere fact that a profit
has been made will not deprive the hospital of its benevolent
character.
CIR v. CA
Issue: Whether or not the income derived from rentals of real property
owned by the Young Mens Christian Association of the Philippines, Inc.
(YMCA) established as a welfare, educational and charitable non-profit
corporation – subject to income tax.
Held: Yes. Under the NIRC, income of whatever kind and character of
non-stock non-profit institutions from any of their properties, real or
personal, or from any of their activities conducted for profit, regardless
of the disposition made of such income, shall be subject to the tax.
Hence, rental income derived by a tax-exempt organization from the
lease of its properties, real or personal, is not exempt from income
taxation, even if such income is exclusively used for the
accomplishment of its objectives.
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Moreover, for the YMCA to be granted income exemption under the
Constitution, it must prove with substantial evidence that (1) it falls
under the classification non-stock, non-profit educational institution
and (2) the income it seeks to be exempted from taxation is used
actually, directly, and exclusively for educational purposes.
To begin with, YMCA is not even an educational institution within the
purview of the Constitution. The term educational institution, when
used in laws granting tax exemptions, refers to a school, seminary,
college or educational establishment. Therefore, YMCA cannot be
deemed one of the educational institutions covered by the
constitutional provision under consideration.
TN: YMCA cannot avail of Art VI, Sec 28 since it covers only real
property taxes.
Q. Are income derived from profit-generating activities of non-
stock non-profit educational institutions subject to income
tax? There seems to be a conflict between the Constitution and the
NIRC regarding this matter.
If you look at the Constitution, it provides that: ―All revenues and
assets of non-stock, non-profit educational institutions used actually,
directly, and exclusively for educational purposes shall be exempt from
taxes and duties.‖
It is clear that the Constitution does not distinguish with respect to the
source or origin of the income. Hence, whether the income was
derived from profit-generating activities or not, it will still be tax
exempt.
The NIRC, while echoing said exemption, however provided a
condition, to wit: ―The income of whatever kind and character of the
foregoing organizations from any of their properties, real or personal,
or from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed
under this Code.‖
In other words, the NIRC is trying to say is that income derived by a
non-stock, non-profit educational institutions from profit-generating
activities are now taxable. It in effect made a distinction with respect
to the source or origin of the income, a distinction that the Constitution
itself did not make. This would appear contradictory to the all-
encompassing exemption provided in the Constitution.
Applying the doctrine of constitutional supremacy, the condition
imposed by the Tax Code requiring such institutions to limit the
sources of their income to educational activities only should be
deemed void and of no effect for running contrary to the constitutional
exemption.
However, the Supreme Court has not yet declared this condition as
―unconstitutional.‖ Consequently, while the fight to render void the last
paragraph of Section 30 of the Tax Code continues, until it is finally
resolved, those advertisements, rental income and other such income
derived from profit-generating activities of non -stock non-profit
educational institutions are all subject to income tax.
Important: On 8 June 2011, the Court of Tax Appeals en banc
promulgated a Decision holding that a non-stock non-profit educational
institution is entitled to the constitutional tax exemption, regardless of
source, as long as the institution is able to prove that these revenues
were actually, directly and exclusively used for educational purposes.
However, until this is affirmed by the Supreme Court, the BIR will
continue and has continued to tax all income of educational institutions
from activities conducted for profit.
NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
Article III, Section 20 of the 1987 Constitution
No person shall be imprisoned for debt or non-payment of a poll tax.
Poll tax is a tax of a fixed amount fixed on persons residing within a
specified territory, whether resident or not, without regard to their
property or the occupation of business which they may be engaged.
It is a tax imposed on persons whether residing or not residing in a
particular place as evidenced by a community tax certificate or cedula.
NON-IMPAIRMENT OF THE JURISDICTION OF THE SC
Article VIII, Section 2 of the 1987 Constitution
The Congress shall have the power to define, prescribe, and apportion
the jurisdiction of the various courts but may not deprive the Supreme
Court of its jurisdiction over cases enumerated in Section 5 hereof.
Article VIII, Section 5 (2) of the 1987 Constitution
The Supreme Court shall have the following powers:
(2) Review, revise, modify or affirm on appeal or certiorari, as the
laws or the Rules of Court may provide, final judgments and orders of
lower courts in xxx
(b) all cases involving the legality of any tax, impost, assessment or
toll or any penalty imposed in relation thereto.
Article VI, Section 30 of the 1987 Constitution
No law shall be passed increasing the appellate jurisdiction of the
Supreme Court without its advice and concurrence.
San Miguel Corp v. Avelino
Even the legislative body cannot deprive the SC of its appellate
jurisdiction over all cases coming from inferior courts where the
constitutionality or validity of an ordinance or the legality of any tax,
impost, assessment, or toll is in question.
Q. What is the scope of judicial review in taxation?
Limited only to the interpretation and application of tax laws. Its power
does not include inquiry into the policy of legislation. Neither can it
legitimately question or refuse to sanction the provisions of any law
consistent with the Constitution.
PROHIBITION ON THE USE OF SPECIAL PURPOSE FUND
Article VI, Section 29 (3) of the 1987 Constitution
All money collected on any tax levied for a special purpose shall be
treated as a special fund and paid out for such purpose only. If the
purpose for which a special fund was created has been fulfilled or
abandoned, the balance, if any, shall be transferred to the general
funds of the Government.
POWER OF THE PRESIDENT TO VETO ANY PARTICULAR
ITEMS IN A REVENUE OR TRARRIFF BILL
Article VI, Section 27 (2) of the 1987 Constitution
The President shall have the power to veto any particular item or items
in an appropriation, revenue, or tariff bill, but the veto shall not affect
the item or items to which he does not object.
General rule: The President has to approve or disapprove a bill in its
entirety.
Exceptions: (where partial or item veto is allowed)
A. Appropriation bill
B. Revenue bill
C. Tariff bill
TN: The Line-item veto power of the President should be a direct
constitutional limitation.
CIR v. Manila Golf and Country Club
Whether the presidential veto referred to the entire section or merely
to the imposition of 20% tax on gross receipts of operators of
restaurants, bars, etc
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The CTA opined that the President could not veto words or phrases in
a bill but only an entire item. Obviously, what the CTA meant by "item"
was an entire section.
We do not agree. The presidential veto referred merely to the inclusion
of hotels, motels and rest houses in the 20% caterer's tax bracket but
not to the whole section.
An "item" in a revenue bill does not refer to an entire section imposing
a particular kind of tax, but rather to the subject of the tax and the tax
rate. In the portion of a revenue bill which actually imposes a tax, a
section identifies the tax and enumerates the persons liable therefor
with the corresponding tax rate. To construe the word "item" as
referring to the whole section would tie the President's hand in
choosing either to approve the whole section at the expense of also
approving a provision therein which he deems unacceptable or veto
the entire section at the expense of foregoing the collection of the kind
of tax altogether.
INDIRECT CONSTITUTIONAL LIMITATIONS
INDIRECT CONSTITUTIONAL LIMITATIONS
A. Due process of law
B. Equal protection of the laws
C. Non-impairment of the obligations of contracts
D. Non-infringement of religious freedom
E. No appropriation for religious purposes
F. Non-infringement of the freedom of the press
DUE PROCESS OF LAW
Article III, Section 1 of the 1987 Constitution
No person shall be deprived of life, liberty or property without due
process of law, nor shall any person be denied the equal protection of
the laws.
TWO KINDS OF DUE PROCESS
A. Substantive due process – an act is done under the authority
of a valid law or the Constitution itself.
Requires that a tax statute must be within the constitutional
authority of Congress to pass
It must be reasonable, fair and just
To grant exemption, the constitution mandates that it must
be passed by a vote of all members of Congress
TN: Anything that contradicts with the direct constitutional
limitations is an infringement of substantive due process.
Example of Non-compliance with Substantantive Due
Process: Imposition of tax for private purpose
B. Procedural due process – an act is done after compliance
with fair and reasonable methods or procedure prescribed by
law.
Requires notice and hearing or at least an opportunity to be
heard
Example of Non-compliance with Procedural Due Process:
Forfeiture of property of the taxpayer for non-payment of
tax without giving notice to the taxpayer or giving a chance
to explain.
Q. What are the requirements of due process in taxation?
A. It must be for a public purpose
B. Imposed within the taxing authority‘s territorial jurisdiction
C. Assessment or collection is not arbitrary or oppressive
Q. Give instances of violations of the due process clause.
1. If the law violates the inherent limitations on taxation.
2. If the tax amounts to confiscation of property
3. If the subject of confiscation is outside the jurisdiction of the
taxing authority
4. If the tax is imposed for a purpose other than a public purpose
5. If the law which is applied retroactively imposes just and
oppressive taxes
IMPORTANT PRINCIPLES
A. The validity of a statute must be contested only by one who
sustained or stands to sustain direct injury in consequence of its
performance
EXC: Transcendental importance, taxpayer‘s suit
B. There must be proof of arbitrariness, otherwise, the
presumption of constitutionality applies.
C. Due process requires hearing before adoption of legislative rules
by administrative bodies of interpretative rulings
D. Compliance of strict procedural requirements must be followed
to avoid a collision course between the state‘s power to tax and
the individual‘s recognized rights
E. Due process clause may be correctly invoked only when there is
a clear contravention of inherent or constitutional limitations
Sison v. Ancheta
The due process clause may be invoked where a taxing statute is so
arbitrary that it finds no support in the Constitution, as where it can be
shown to amount to the confiscation of property. However, where the
due process clause is invoked, considering that it is not a fixed rule but
rather a broad standard, there is a need for proof of such persuasive
character as would lead to such a conclusion. Absent such a showing,
the presumption of validity must prevail.
Chamber of Real Estate v. Romulo
A group of real estate brokers questioned the validity of the imposition
of minimum corporate income tax (MCIT) of 2% on corporations‘ gross
income and a creditable withholding tax (CWT) on sales of real
properties. They contend that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain
since the basis for the income tax is the gross selling price instead of
the net taxable income.
On the issue of MCIT
The MCIT was introduced as a result of the perceived inadequacy of
the self-assessment system in capturing the true income of
corporations. It is a means to ensure that everyone will make some
minimum contribution. As a tax on gross income, it prevents tax
evasion and minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and other
stratagems.
In fact, there is even a safeguard where the MCIT commences only on
the fourth taxable year immediately following the year in which the
corporation commenced its operations. This grace period allows a new
business to stabilize first and make its ventures viable before it is
subjected to the MCIT.
MCIT is constitutional because of the following reasons:
1. There was a legitimate governmental end.
2. MCIT is not a tax on the capital but on gross income.
TN: Gross income is arrived at by deducting the capital spent by a
corporation in the sale of its goods, i.e., the cost of goods and
other direct expenses from gross sales
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 All persons subject to legislation shall be treated alike under

3. Tax deductions on gross income are a matter of legislative grace.
TN: Congress has the power to condition, limit or deny
deductions from gross income in order to arrive at the net that it
chooses to tax
4. Petitioner did not present any proof or any empirical data to show
that the implementation of the MCIT resulted in the confiscation
of their property.
5. Consistent with US Practice where they have Alternative Minimum
Tax (AMT) System. Our tax laws are patterned after US tax laws.
On the issue of CWT
The collection of income tax via the CWT on a per transaction basis,
i.e., upon consummation of the sale, is not contrary to the Tax Code.
Withholding tax is just a manner of collection. It is still an income tax,
only that it was made in installment basis.
The taxes withheld are in the nature of advance tax payments by a
taxpayer in order to cancel its possible future tax obligation. They are
installments on the annual tax which may be due at the end of the
taxable year. The withholding agent buyer‘s act of collecting the tax at
the time of the transaction, by withholding the tax due from the
income payable, is the very essence of the withholding tax method of
tax collection.
similar circumstances and conditions both in the privileges
conferred and liabilities imposed.
 All persons, businesses, and properties should be taxed at the
same rate, so long as they belong to the same classification.
 Equality among equals.
Requirements for a valid classification
A. Classification rests on substantial distinctions which make real
differences
B. Classification is germane to achieve the legislative purpose
C. The law applies, all things being equal, to both present and
future conditions
D. The classification applies equally well to all those belonging to
the same class.
Criteria for equal protection
A. When the law operates uniformly
On all persons
Under similar circumstances
B. All persons are treated in the same manner
The conditions not being different
Both in privileges conferred and liabilities imposed
Favouritism and preferences are not allowed
Q: Does the equal protection clause require territorial
uniformity of laws?

TN: CWT is not a tax but a manner of imposing taxes. A: No. It is well-settled that the equal-protection guarantee does not
require territorial uniformity of laws. As long as there are actual and
material differences between territories, there is no violation of the
Net Income Tax Payable
constitutional clause.

Income P xxx 1 Cooley 608

Less Exclusions (xxx) The doctrine does not require that persons or properties different in
Gross Income P xxx fact be treated in laws as though they were the same. Indeed, to treat
Less Allowable Deductions (xxx) them the same or alike may offend the Constitution. What the
Constitution prohibits is class legislation which discriminates against
Net Income P xxx
some and favors others. As long as there are rational or reasonable
Less Personal & Additional Exemptions (xxx) grounds for so doing, Congress may, therefore, group the persons or
Taxable Net Income P xxx properties to be taxed and it is sufficient ―if all of the same class are
Multiplied by Appropriate Tax Rate (xxx) subject to the same rate and the tax is administered impartially upon
Income Tax Due P xxx them
Less Creditable Withholding Tax or Tax Credits (xxx)
Chamber of Real Estate v. Romulo
Net Income Tax Payable P xxx
Petitioner claims that the revenue regulations are violative of the equal
protection clause because the CWT is being levied only on real estate
enterprises. Specifically, petitioner points out that manufacturing
MCIT enterprises are not similarly imposed a CWT on their sales, even if
their manner of doing business is not much different from that of a
real estate Enterprise. Like a manufacturing concern, a real estate
Gross Sales P xxx business is involved in a continuous process of production and it incurs
Less: Cost of Goods Sold (xxx) costs and expenditures on a regular basis. The only difference is that
Gross Profit P xxx "goods" produced by the real estate business are house and lot units.
Multiplied by MCIT rate 2%
MCIT P xxx. The taxing power has the authority to make reasonable classifications
for purposes of taxation. Inequalities which result from singling out a
particular class for taxation, or exemption, infringe no constitutional
EQUAL PROTECTION OF THE LAWS limitation. The real estate industry is, by itself, a class and can be
validly treated differently from other business enterprises.

Article III, Section 1 of the 1987 Constitution
No person shall be deprived of life, liberty, or property without due
process of law, nor shall any person be denied the equal protection of
the laws.
Equal protection of the laws
 The equal protection clause means that no person or class of
persons shall be deprived of the same protection of laws which
is enjoyed by other persons or other classes in the same place
and in the like circumstances.
What distinguishes the real estate business from other manufacturing
enterprises, for purposes of the imposition of the CWT, is not their
production processes but the prices of their goods sold and the
number of transactions involved. The income from the sale of a real
property is bigger and its frequency of transaction limited, making it
less cumbersome for the parties to comply with the withholding tax
scheme.
On the other hand, each manufacturing enterprise may have tens of
thousands of transactions with several thousand customers every
month involving both minimal and substantial amounts. To require the

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customers of manufacturing enterprises, at present, to withhold the
taxes on each of their transactions with their tens or hundreds of
suppliers may result in an inefficient and unmanageable system of
taxation and may well defeat the purpose of the withholding tax
system.
People v. Cayat
Facts: Cayat was a native of Baguio, Benguet, Mountain Province. He
was accused for violating Act No. 1639 which declared unlawful for any
native of the Philippine islands who is a member of a non-Christian
Tribe to have in his possession, drink any beer, wine or intoxicating
liquors of any kind, other than the so-called native wines and liquors
which the members of the tribes have been accustomed.
It is an established principle of constitutional law that the guaranty of
the equal protection of the laws is not violated by a legislation based
on reasonable classification. And the classification, to be reasonable,
(1) must rest on substantial distinctions; (2) must be germane to the
purposes of the law; (3) must not be limited to existing conditions
only; and (4) must apply equally to all members of the same class.
Act No. 1639 satisfies these requirements.
A. Classification rests on substantial distinctions which make real
differences
The classification rests on real or substantial, not merely
imaginary or whimsical, distinctions. It is not based upon
"accident of birth or parentage," as counsel for the appellant
asserts, but upon the degree of civilization and culture. "The
term 'non-Christian tribes' refers, not to religious belief, but, in
a way, to the geographical area, and, more directly, to natives
of the Philippine Islands of a low grade of civilization, usually
living in tribal relationship apart from settled communities."
B. Classification is germane to achieve the legislative purpose
Designed to insure peace and order in and among the non-
Christian tribes. It has been the sad experience of the past, as
the observations of the lower court disclose, that the free use
of highly intoxicating liquors by the non-Christian tribes have
often resulted in lawlessness and crimes, thereby hampering
the efforts of the government to raise their standard of life and
civilization.
C. The law applies, all things being equal, to both present and
future conditions
It is intended to apply for all times as long as those conditions
exist. The Act was not predicated, as counsel for appellant
asserts, upon the assumption that the non-Christians are
"impermeable to any civilizing influence." On the contrary, the
Legislature understood that the civilization of a people is a slow
process and that hand in hand with it must go measures of
protection and security.
D. The classification applies equally well to all those belonging to
the same class
E.
The Act applies equally to all members of the class is evident
from a perusal thereof. That it may be unfair in its operation
against a certain number of non-Christians by reason of their
degree of culture, is not an argument against the equality of its
application.
Ormoc Sugar Company v. Conejos
A perusal of the requisites instantly shows that the questioned
ordinance does not meet them, for it taxes only centrifugal sugar
produced and exported by the Ormoc Sugar Company, Inc. and none
other. At the time of the taxing ordinance's enactment, Ormoc Sugar
Company, Inc., it is true, was the only sugar central in the city of
Ormoc. Still, the classification, to be reasonable, should be in terms
applicable to future conditions as well.
The taxing ordinance should not be singular and exclusive as to
exclude any subsequently established sugar central, of the same class
as plaintiff, from the coverage of the tax. As it is now, even if later a
similar company is set up, it cannot be subject to the tax because the
ordinance expressly points only to Ormoc Sugar Company, Inc. as the
entity to be levied upon.
Tiu v. CA
Petitioners challenged the constitutionality of EO 97-A for allegedly
being violative of their right to equal protection of the laws. Petitioners
contended that the provisions of EO 97 -A confining the application of
R.A. 7227 which grants tax incentives within the secured area and
excluding the residents of the zone outside of the secured area is
discriminatory.
Substantial distinctions which make real differences
There are substantial differences between the big investors who are
being lured to establish and operate their industries in the so-called
"secured area" and the present business operators outside the area.
On the one hand, we are talking of billion-peso investments and
thousands of new jobs. On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the
second, only local. Even more important, at this time the business
activities outside the "secured area" are not likely to have any impact
in achieving the purpose of the law, which is to turn the former
military base to productive use for the benefit of the Philippine
economy.
Germane to the purpose of the law
It was reasonable for the President to have delimited the application of
some incentives to the confines of the former Subic military base. It is
this specific area which the government intends to transform and
develop from its status quo ante as an abandoned naval facility into a
self-sustaining industrial and commercial zone.
Why the seeming bias for big investors? Undeniably, they are the ones
who can pour huge investments to spur economic growth in the
country and to generate employment opportunities for the Filipinos,
the ultimate goals of the government for such conversion.
The law applies to both present and future conditions
The objective is to establish a "self-sustaining, industrial, commercial,
financial and investment center" in the area. There will, therefore, be a
long-term difference between such investment center and the areas
outside it.
Classification applies equally well to all those belonging to the same
class
The classification applies equally to all the resident individuals and
businesses within the "secured area. The residents, being in like
circumstances or contributing directly to the achievement of the end
purpose of the law, are not categorized further. Instead, they are all
similarly treated, both in privileges granted and in obligations required.
TN: What is the purpose of the law? To convert former US military
bases into an economic or industrial area. So, it must be to entice
investors into the area. How? By providing economic/fiscal incentives.
TESTS TO DETERMINE VALID CLASSIFICATION
1. Compelling State Interest Test – State balances the public
interest against religious freedom. The need to advance the
constitution and public interest. In case there are less restrictive
means to advance a right under the constitution.
2. Rational Basis Test – The classification is valid if it is rationally
related to a constitutionally permissible state interest.
Ex. Senior Citizens Act
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3. Quasi-Suspect Case – Available if needed. Based on
gender/legitimacy. It points out a specific constitutionally granted
state interest such as protection of women where there is a valid
classification between men and women.
NON-IMPAIRMENT OF THE OBLIGATIONS OF CONTRACTS
Article III, Section 10 of the 1987 Constitution
No law impairing the obligation of contracts shall be passed.
General Rule: The power to tax is pursuant to a law and therefore
the obligation to pay taxes is imposed by law. Thus, the non-
impairment clause does not apply because it refers to obligations
brought about by contracts and not law.
Exception:
In cases of tax exemptions granted for a valuable consideration
because it takes the form and essence of a contract.
Tolentino v. Secretary of Finance
The non-impairment clause has never been thought as a limitation on
the exercise of the State's power of taxation, except where a tax
exemption has been granted for a valid consideration.
Rules to remember:
A. If the exemption was granted for a valuable consideration on the
basis of a contract – it cannot be revoked by passing another law.
The non-impairment clause applies.
B. If the exemption is granted by virtue of a contract between a
private corporation and the government – it cannot be revoked
unilaterally by the government. The non-impairment clause
applies.
C. If the basis of the tax exemption is a mere franchise granted by
Congress – it can be unilaterally revoked by the government
CONGRESS CAN REVOKE FRANCHISE
Article XII, Section 11 of the 1987 Constitution
No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the
Philippines or to corporations or associations organized under the laws
of the Philippines at least sixty per centum of whose capital is owned
by such citizens, nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither
shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the
Congress when the common good so requires. The State shall
encourage equity participation in public utilities by the general public.
The participation of foreign investors in the governing body of any
public utility enterprise shall be limited to their proportionate share in
its capital, and all the executive and managing officers of such
corporation or association must be citizens of the Philippines.
Smart Communications v. City of Davao
Aside from the national franchise tax, the franchisee is still liable to
pay the local franchise tax, unless it is expressly and unequivocally
exempted from the payment thereof under its legislative franchise. The
"in lieu of all taxes" clause in a legislative franchise should categorically
state that the exemption applies to both local and national taxes;
otherwise, the exemption claimed should be strictly construed against
the taxpayer and liberally in favor of the taxing authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law",
did not remove or abolish the payment of local franchise tax. It merely
replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten
percent (10%) VAT in accordance with Section 108 of the Tax Code.
VAT replaced the national franchise tax, but it did not prohibit nor
abolish the imposition of local franchise tax by cities or municipaties. *
The power to tax by local government units emanates from Section 5,
Article X of the Constitution which empowers them to create their own
sources of revenues and to levy taxes, fees and charges subject to
such guidelines and limitations as the Congress may provide. The
imposition of local franchise tax is not inconsistent with the advent of
the VAT, which renders functus officio the franchise tax paid to the
national government. VAT inures to the benefit of the national
government, while a local franchise tax is a revenue of the local
government unit.
MCIA v. Marcos
The exempting statutes are both granted unilaterally by Congress in
the exercise of taxing powers. Since taxation is the rule and tax
exemption, the exception, any tax exemption unilaterally granted can
be withdrawn at the pleasure of the taxing authority without violating
the Constitution.
Cagayan Electric Power v. Commissioner
The Congress could impair petitioner‘s legislative franchise by making
it liable for income tax. The Constitution provides that franchise is
subject to amendment, alteration or repeal by Congress when the
public interest so requires.
Christ Church v. Philadelphia
The exemption granted is in the nature of a unilateral tax exemption.
Since the exemption given is spontaneous on the part of the
legislature and no service or duty or other remunerative conditions
have been imposed on the taxpayer‘s receiving the compensation, it
may be revoked at will by the legislature. What constitutes an
impairment of the obligation of contract is the revocation of an
exemption which is founded on a valuable consideration because it
takes the form and essence of a contract.
NON-INFRINGEMENT OF RELIGIOUS FREEDOM
Article III, Section 5 of the 1987 Constitution
No law shall be made respecting an establishment of religion, or
prohibiting the free exercise thereof. The free exercise and enjoyment
of religious profession and worship, without discrimination or
preference, shall forever be allowed. No religious test shall be required
for the exercise of civil or political rights.
Non-establishment clause: No law shall be made respecting an
establishment of religion, or prohibiting the free exercise thereof.
Free exercise clause: The free exercise and enjoyment of religious
profession and worship, without discrimination or preference, shall
forever be allowed.
TN: The free exercise clause is the basis of tax exemptions.
American Bible Society v. City of Manila
The imposition of license fees on the distribution and sale of bibles and
other religious literature by a non-stock, non-profit missionary
organization not for purposes of profit, amounts to a condition or
permit for the exercise of their right, thus violating the constitutional
guarantee of the free exercise and enjoyment of religious profession
and worship which carries with it the right to disseminate religious
beliefs and information.
TN: It violates the non-establishment of religion clause and
religious freedom.
Tolentino v. Secretary of Finance
The free exercise of religion clause, however, does not prohibit
imposing a generally applicable sales tax on the sale of religious
materials by religious organizations. The sale of religious articles can
be subject to VAT, what cannot be taxed is the exercise of religious
worship or activity. The income of the priest from the exercise of a
religious activity cannot also be taxed.
Coleman v. City of Griffin
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The contention as to restraint "upon the free exercise of religion," with
respect to the same ordinance, was presented in the case of Coleman
v. City of Griffin, 55 Ga. App. 123, and the appeal was dismissed for
want of a substantial federal question.
NO APPROPRIATION FOR RELIGIOUS PURPOSES
Article VI, Section 29 (2) of the 1987 Constitution
No money shall be paid out of the Treasury except in pursuance of an
appropriation made by law.
No public money or property shall be appropriated, applied, paid, or
employed, directly or indirectly, for the use, benefit, or support of any
sect, church, denomination, sectarian institution, or system of religion,
or of any priest, preacher, minister, other religious teacher, or
dignitary as such, except when such priest, preacher, minister, or
dignitary is assigned to the armed forces, or to any penal institution, or
government orphanage or leprosarium.
General rule: No appropriation is allowed in favor of any sect,
church, or any priest, minister, etc.
Exception: when such priest is assigned to the armed forces, penal
institution or government orphanage or leprosarium.
Q. Is the appropriation or budget given for the visit of the
pope in the Philippines valid or a violation of the separation of
the church and state?
It is valid. The Pope is a head of the State, Vatican, and being one, the
appropriation made by the government for the visit is justified. Also,
the visit has for itself a secular purpose which is for tourism. The
benefit to the Catholic Church is merely incidental. The principal
primary effect neither advances nor fosters religion.
NON-INFRINGEMENT OF THE FREEDOM OF THE PRESS
Article III, Section 4
No law shall be passed abridging the freedom of speech, of expression
or of the press.
Freedom of the Press
There is curtailment of press freedom and freedom of thought and
expression if a tax is levied in order to suppress this basic right and
impose prior restraint.
Example: Imposing a very high tax which in effect curtails the
freedom of the press.
TN: But it does not mean that the press is exempted from tax. The
press is subject to tax but it should be reasonable and not
oppressive nor arbitrary.
Hence, the sale of magazines or newspapers may be subject to tax.
What is not allowed is to impose tax on the exercise of an activity such
as when license fees are required before one sell magazines or
newspapers.
SITUS OF TAXATION
SITUS OF TAXATION
Persons, properties or activities can only be taxed within the place of
the taxing authority or within its territorial jurisdiction. Within the
territorial jurisdiction, the taxing authority may determine the situs.
Situs of taxation literally means ―place of taxation‖.
It is the place and authority that has a right to impose taxes. It usually
refers to the place of taxation. It involves the determination of who
has jurisdiction of a particular object or subject of taxation.
TN: There are multiple situs in the Philippines
Basic rule: The state where the subject to be taxed has a situs may
rightfully levy and collect the tax, and the situs is necessarily in the
state which has jurisdiction or which exercises dominion over the
subject in question.
TN: A Filipino citizen earning income abroad can still be a subject of
tax in the Philippines not because of geographical location but due to
the jurial concept or nexus or bond between the taxing authority and
the taxpayer.
Q. Why is it important to know the situs or place of taxation?
1. To know if the taxing authority really has the authority to tax
2. Because there are exceptions or exemptions which only apply to
a specific locality
Q. What are the factors that determine situs?
1. Nature of the tax
2. Subject matter of the tax (person, property, act or activity)
3. Possible protection and benefit that may accrue both to the
government and the taxpayer
4. Citizenship of the taxpayer
5. Residence of the taxpayer
6. Source of income
Factors in the Philippines for Purposes of Situs of Income Tax
1. Domiciliary Theory – the residence of the taxpayer is the basis
of the tax
2. Nationality Theory – the citizenship of the taxpayer is the basis
of the tax
3. Source Theory – the source of the income of the taxpayer is the
basis of the tax
CIR v. Baier-Nickel
The "source of income" relates to the property, activity or service that
produced the income. With respect to rendition of labor or personal
service, as in the instant case, it is the place where the labor or service
was performed that determines the source of the income.
The decisive factual consideration here is not the capacity in which
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
The settled rule is that tax refunds are in the nature of tax exemptions
and are to be construed strictissimi juris against the taxpayer. To those
therefore, who claim a refund rest the burden of proving that the
transaction subjected to tax is actually exempt from taxation.
The faxed documents presented by respondent did not constitute
substantial evidence, or that relevant evidence that a reasonable mind
might accept as adequate to support the conclusion that it was in
Germany where she performed the income producing service which
gave rise to the reported monthly sales in the months of March and
May to September of 1995.
She thus failed to discharge the burden of proving that her income
was from sources outside the Philippines and exempt from the
application of our income tax law. Hence, the claim for tax refund
should be denied.
KINDS OF TAX AND THEIR SITUS
1. Poll or community tax – residence of the taxpayer regardless
of citizenship.
2. Business tax – place of business
3. Excise tax – where the act is performed or the occupation is
pursued
4. Income tax – source of income, citizenship, or residence
5. Transfer tax (donor‟s or estate tax) – residence, citizenship
or location of the property
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6. Franchise tax – the state which granted the franchise acquired a business situs in
7. Value added tax – where the transaction is made. However, if another jurisdiction
the property is not to be consumed in the Philippines, then it 2. When the law provides
should not be taxed in the Philippines (cross border doctrine or for the situs of the object
destination principle)
8. Sales tax – where the sale is consummated. Presumption: sale Where the act is performed
Excise Tax
of personal property or the occupation is pursued
9. Interest income – residence of the borrower who pays the
interest, irrespective of the place where the obligation was Source of the income,
contracted. Income Tax nationality or residence of
10. Property tax – could either be real or personal property tax. the taxpayer

Location of the property,

A. Real property tax – place where the real property is located ( lex rei Donor‘s Tax nationality or residence of
sitae) the taxpayer
B. Personal property tax
EXCISE Location of the property,
i. Tangible personal property – where the property is physically TAX Estate Tax nationality or residence of
located although the owner resides in another jurisdiction the taxpayer
Where the transaction is
ii. Intangible personal property –
made
GR: Domicile of the owner because movables follow the
person.
Cross-border Doctrine or
VAT Destination Principle – If the
EXC:
goods are not to be
1. When the law provides for the situs of the subject of tax
consumed in the Philippines,
2. When the property has acquired a business situs in another
then it should not be taxed
jurisdiction
in the Philippines
Examples: State which granted the
Franchise Tax
franchise
A. Franchise exercised in the Philippines even if the franchise
owner or holder is not from the Philippines Where the sale is
consummated
B. Shares of stocks, obligations, bonds issued by domestic Sales Tax
corporations Presumption: Sale of
OTHERS personal property
– taxed in the Philippines
Business Tax Place of business
C. Shares of stocks, obligations, bonds issued by foreign Residence of taxpayer,
corporations where 85% of its business is located in the Poll, Capitation or regardless of the source of
Philippines – taxed in the Philippines Community Tax income or location of the
D. Shares or right in a partnership business or industry property of the taxpayer
established in the Philippines – taxed in the Philippines
even if the holders or owners thereof are not Filipino
DOUBLE TAXATION
E. Shares, obligations, bonds issued by foreign corporations
used which acquired business situs when sanctioned in the TWO KINDS OF DOUBLE TAXATION
furtherance of foreign corporation – taxed in the
Philippines
DOUBLE TAXATION
TN: Even if owners are not domiciled in the Philippines, they will still It means taxing twice for the same tax period the same thing or
be taxed in the Philippines, subject to the Reciprocity Rule (citizen of
activity, when it should be taxed but once, for the same purpose and
such country which grants exemption to the intangible personal
with the same kind of character of tax.
properties of Filipinos in their country will also be exempted)
The same object or property is taxed twice by the same taxing
Summary of Rules authority for the same purpose and for the same taxing period.

Kind of Tax Situs Two kinds of double taxation:

Place where the real 1. Strict sense (direct duplicate taxation)
Real Property
property is located
Double taxation in the objectionable or prohibited sense; It is
Place where property is illegal for being oppressive and inequitable.
Tangible Personal physically located although
Property the owner resides in another A. The same property must be taxed twice when it should be
PROPERTY jurisdiction taxed once
TAX B. Both taxes must be imposed on the same property or
GR: Domicile of the owner subject matter
Intangible Personal
(Movables follow the C. For the same purpose
Property
person) D. By the same State, Government, or taxing authority
(e.g. credits, bills,
stocks, promissory E. Within the same territory, jurisdiction or taxing district
EXC: F. During the same taxing period
notes)
1. When the property has G. Of the same kind or character of tax
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2. Broad sense (Indirect duplicate taxation)
There is double taxation in the broad sense if any of the
elements for direct duplicate taxation is absent. It extends to all
cases in which there are two or more pecuniary impositions, for
example, a tax upon the same property imposed by two
different states.
TN: The Constitution does not prohibit double taxation in the
broad sense.
Examples:
a. Corporate income is taxed at 30% and the income
distributed to the shareholders is taxed at 10%.
b. LGU imposes tax on businesses and the businesses
are taxed by the national government.
TN: Double taxation in its strict sense is undoubtedly unconstitutional
but that in the broader sense is not necessarily so. Where double
taxation (in its strict sense) occurs, the taxpayer may seek relief under
the uniformity rule or the equal protection guarantee.
Important principles
A. Only direct double taxation is not allowed because it amounts to
confiscation of property without due process of law. It violates
the due process clause.
B. You can question the validity of double taxation if there is
violation of the equal protection clause, or uniformity of taxation
C. Doubts as to whether double taxation has been imposed should
be resolved in favor of the taxpayer.
CONSTITUTIONALITY OF DOUBLE TAXATION
No Constitutional Prohibition
It is not prohibited by the Constitution. Hence, it may not be invoked
as a defense against the validity of a tax law.
Though not prohibited, it is not favored. It should be avoided and
prevented whenever possible.
A. Doubts as to whether double taxation has been imposed should
be resolved in favor of the taxpayer.
B. Direct duplicate taxation where double taxation in the strict sense
occurs, the taxpayer may seek relief under the uniformity rule or
the equal protection guarantee
Q: Is double taxation unconstitutional?
A: No, double taxation cannot be used as a ground to declare the law
unconstitutional.
However, yes, double taxation is unconstitutional in relation to the
equal protection clause.
Q: Is double taxation constitutionally prohibited?
A: There is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided
some other constitutional requirement is not thereby violated.
Pepsi Cola v. Mun. of Tanauan
Double taxation, standing alone and not being forbidden by our
fundamental law, is not a valid defense against the legality of a tax
measure. But from it might emanate such defenses against taxation
as oppressiveness and inequality of the tax.
INSTANCES OF DOUBLE TAXATION
Instances of double taxation
1. A tax on mortgage as personal property when the mortgaged
property is also taxed at its full value as real estate
2. A tax upon a corporation for its property and upon its
shareholders for their shares
3. A tax upon a corporation for its capital stock as a whole and
upon the shareholders for their shares
4. A tax upon depositors in a bank for their deposits and a tax
upon the bank for the property in which such deposits are
invested
5. An excise tax upon certain use of property and a property tax
upon the same property
6. A tax upon the same property imposed by two different states
Q: Tanya owns a beer house. She pays sales/business tax as well as
the local tax imposed by an ordinance on every bottle of beverage to
be sold. Is there double taxation?
A: Yes. There is indirect double taxation because it is imposed by
different taxing authorities and the purpose is different, one is for the
sales and the other is for the fact of selling. Hence, it does not make
the local ordinance invalid.
Domestic and International double taxation
A. Domestic double taxation – arises when the taxes are imposed
by the local or the national government.
B. International double taxation – imposition of comparable taxes
in two or more states on the same taxpayer with respect to the
same subject matter and for an identical period.
Allowed because they are imposed by different taxing
authorities (domestic and international)
Measures allowed by the government are tax refund or
credit but not to declare it invalid.
Examples
a. Income earned by Manny Pacquiao abroad is
subject to income tax both by US and Philippines
b. Income earned by foreign performers in the
Philippines
Decided Cases: Only Indirect Double Taxation
A. Taxpayers with warehousing business although carried on in
relation to the operation of its sugar central, is a distinct and
separate taxable business – different subject, although the same
owner.
TN: There can be no double taxation where the State merely
imposes a tax on every separate and distinct business in
which a party is engaged in.
B. A license tax may be levied upon a business or occupation
although the land or the property used in connection therewith is
subject to property tax.
TN: License tax applies to the business, property tax is for
the land – different subject, object or purpose although the
burden is carried by one entity.
C. Both a license fee and a tax may be imposed in the same
business or occupation for selling the same article.
TN: License fee is not a tax.
D. When every bottle or container of intoxicating beverages is
subject to local tax and at the same time the business of selling
such product is also subject to liquor‘s license
TN: Different taxing authority and purpose.
E. A tax imposed in both the occupation of fishing and the fish pond.
TN: Different object and subject
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F. A local ordinance imposing a tax in the storage of copra where it
appears that the finished products manufactured out of the copra
is also subject to VAT.
TN: Different subject matter and purpose
G. A lessor pays real estate tax, real estate dealer‘s tax and income
tax on the rentals.
TN: Different kind and character. Real estate tax is a tax on
the property, dealer‘s tax is a tax on the privilege to engage
in business, income tax is a tax on the privilege to earn
income.
MODES OF ELIMINATING DOUBLE TAXATION
A method of establishing equality of trading opportunity among states
by guaranteeing that if one country is given better trade terms by
another, then all other states must get the same terms.
This is applied to those doing business in the Philippines who are
parties or signatories to a bilateral treaty.
Purpose of the Most Favored Nation Clause
To grant to the contracting party treatment not less favorable than
that which has been or may be granted to the "most favored" among
other countries. It is intended to establish the principle of equality of
international treatment by providing that the citizens or subjects of the
contracting nations may enjoy the privileges accorded by either party
to those of the most favored nation.

1. Allowing reciprocal exemption either by law or by treaty Deutsche bank case

The Philippines has a lot of tax treaties with other States.
2. Allowance of tax credit for foreign taxes paid
o Tax Credit – deduction from tax payable. It reduces the
amount payable directly. It is a full deduction of the amount
paid abroad. This is the best option.
3. Allowance of deduction for foreign taxes paid
Deutsche bank asked for a refund of taxes, believing that it made an
overpayment of the branch profit remittance tax and requested a
confirmation of its entitlement to the preferential tax rate of 10%
under the RP-Germany Tax Treaty. The CTA ruled that prior
application for a tax treaty relief is mandatory, and noncompliance
with this prerequisite is fatal to the taxpayer's availment of the
preferential tax rate.
Issue: Whether the failure to apply for a tax treaty relief will deprive
corporations of the benefit of a tax treaty.

o Tax Credit – deduction from taxable income. The amount Held: No. The filing of a tax treaty relief application is not a condition
of taxes paid abroad is used to reduce tax payable in the precedent to the availment of a preferential tax rate.
Philippines. Here, the amount paid abroad is multiplied by
the tax rate in the Philippines. A state that has contracted valid international obligations is bound to
make in its legislations those modifications that may be necessary to
4. Reduction of Philippine tax rate ensure the fulfillment of the obligations undertaken. Thus, laws and
issuances must ensure that the reliefs granted under tax treaties are
Ex. Dividend income of a foreign corporation from dividends accorded to the parties entitled thereto. The BIR must not impose
received from a domestic corporation in the Philippines – the tax additional requirements that would negate the availment of the reliefs
rate is only 15% instead of the usual 30%, subject to the rule on provided for under international agreements. More so, when the RP-
reciprocity. This is under the tax sparing rule. Germany Tax Treaty does not provide for any pre-requisite for the
availment of the benefits under said agreement.
Tax Credit
The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance
Sales P 1,000,000. would impair the value of the tax treaty. At most, the application for a
Less Allowable Deduction (100,000) tax treaty relief from the BIR should merely operate to confirm the
Taxable Income P 900,000. entitlement of the taxpayer to the relief.
Multiplied by the Tax Rate 30%
CIR v. Johnson & Son, Inc.
Tax Due and Payable P 270,000.
Facts: Pursuant to the license agreement entered into by private
Less Tax Credit (100,000) respondent S.C. Johnson and Son, U.S.A., the private respondent was
Tax Payable P 170,000. granted, among others, the right to use the trademark, patents and
technology of SC Johnson and Son, U.S.A. and was obliged to pay to
the latter royalties based on a percentage of net sales. The said
royalties were subjected by the government to a 25% withholding tax.
Tax Deduction
Consequently, from July, 1992 to May, 1993, the private respondent
Sales P 1,000,000. paid a total withholding tax in the amount of P1,603,433.00. However,
Less Allowable Deduction (100,000) on October 29, 1993 the private respondent filed before the
Taxable Income P 900,000. International Tax Affairs Division of the BIR a claim for refund of the
Less Tax Deduction (100,000) overpaid withholding tax on royalties in the amount of P963,266.00.
Tax Due and Payable P 800,000. Issue: Whether or not private respondent is entitled to a tax refund.
Multiplied by the Tax Rate 30%
Tax Payable P 240,000. Held: No. The Court ruled that the RP-US and the RP-West Germany
Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, expressly allows crediting against
Tax credit is preferable since it yields to lesser amount of tax payable. German income and corporation tax of 20% of the gross amount of
royalties paid under the law of the Philippines. On the other hand,
Article 23 of the RP-US Tax Treaty, which is the counterpart provision
MOST FAVORED NATION CLAUSE
with respect to relief for double taxation, does not provide for similar
crediting of 20% of the gross amount of royalties paid.
MOST FAVORED NATION CLAUSE

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Since the RP-US Tax Treaty does not give a matching tax credit of
20% for the taxes paid to the Philippines on royalties as allowed under
the RP-West Germany Tax Treaty, private respondent cannot be
deemed entitled to the 10% rate granted under the latter treaty for
the reason that there is no payment of taxes on royalties under similar
circumstances.
Tax refunds are in the nature of tax exemptions. As such they are
regarded as in derogation of sovereign authority and to be construed
strictissimi juris against the person or entry claiming the exemption.
The burden of proof is upon him who claims the exemption in his favor
and he must be able to justify his claim by the clearest grant of
organic or statute law.
Private respondent is claiming for a refund of the alleged overpayment
of tax on royalties; however, there is nothing on record to support a
claim that the tax on royalties under the RP-US Tax Treaty is paid
under similar circumstances as the tax on royalties under the RP-West
Germany Tax Treaty.
FORMS OF ESCAPE FROM TAXATION
FORMS OF ESCAPE FROM TAXATION
A. Shifting
B. Capitalization
C. Transformation
D. Tax Evasion
E. Tax Avoidance
F. Tax Exemption
SHIFTING
SHIFTING
The process where the tax burden is transferred from the statutory
taxpayer to another without violation of law. Statutory taxpayer – the
original taxpayer required under the law to pay the tax or to remit the
tax to the government.
TN: Applicable only to indirect taxes like business or percentage taxes.
Direct taxes cannot be shifted, i.e. income tax.
Applicable only when there is an exchange of goods or services.
Impact of taxation
The point on which a tax is originally imposed. In so far as the law is
concerned, the taxpayer, the subject of tax, is the person who must
pay the tax to the government.
This is the point in the taxation process where the tax is imposed.
Ex. Enactment of laws
TN: Applicable only in indirect taxation.
Incidence of taxation
That point on which the tax burden finally rests or settles down. It
takes place when shifting has been effected from the statutory
taxpayer to another.
TN: But there may be incidence without shifting, as in transformation.
In case of business taxes, incidence of taxation falls on the final
consumer.
Relationship between impact, shifting and incidence of a tax
The impact is the imposition of the tax or the initial phenomenon.
Shifting is the transfer of the tax or the immediate process. Incidence
is the setting or coming to rest of the tax or the result.
Example: Impact in a sales tax is on the seller who shifts the burden to
the customer who finally bears the incidence of the tax.
THREE KINDS OF SHIFTING
A. Forward shifting – the transfer of the burden of tax from the
units of production to the units of distribution to the consumer.
When the burden of the tax is transferred from a factor of
production through the factors of distribution until it finally settles
on the ultimate purchaser or consumer.
Ex. VAT, percentage tax
Onward Forward Shift
Manufacturer/Producer –> Wholesaler –> Retailer –> Consumer
B. Backward shifting – The transfer of the burden of tax from the
consumer back to the units of distribution to the units of
production.
When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factor of
production
TN: This seldom happens. Usually, it can happen when the
buyer haggles for a discount from the retailer.
Ex. Consumer/purchaser may shift tax imposed on him to retailer
by purchasing only after the price is reduced, and from the latter
to the wholesaler, and finally to the manufacturer or producer.
Onward Backward Shift
Consumer –> Retailer –> Wholesaler–>Manufacturer/Producer
C. Onward shifting – When the tax is shifted two or more times
either forward or backward. More than one shift.
Example: A transfer from producer to wholesaler involves one
shift; from producer to wholesaler then to retailer, two shifts; if
the tax is transferred again to the consumer by the retailer, there
are three shifts in all.
CAPITALIZATION
CAPITALIZATION
The reduction in the price of the taxed object equal to the capitalized
value of future taxes which the purchaser expects to be called upon to
pay. It occurs when the tax falls on an income-producing property, i.e.
commercial building.
The buyer naturally takes into account the taxes that he will be paying
on the property when he becomes the owner thereof in determining
whether the price is reasonable or not. The burden of the tax rests on
the present owner (seller) if he reduces the price because of the tax.
Examples:
a. Buying depreciable goods like 1M car, payable every year
b. Buying a property with a repurchase agreement after 5
years on the condition that the seller will pay all real
property taxes for 5 years.
Value of Property P 1,000,000.
Less RPT for 5 years (20,000x5) (100,000)
Amount Payable (Price) P 900,000.
TN: It is a special kind of backward shift.
TRANSFORMATION
TRANSFORMATION
Method of escape in taxation whereby the manufacturer or producer
upon whom the tax has been imposed, fearing the loss of his market
should he add the tax to the price, pays the tax and endeavors to
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recoup himself by improving his process of production thereby turning
out his units of products at a lower cost.
In such a case, the loss occasioned by the tax may be offset by the
gains resulting from the economics of production. The taxpayer
escapes, not by shifting but by transforming the tax into a gain
through the medium of production.
Example: Videoke – the greater in number, the lesser the cost.
TAX AVOIDANCE
TAX AVOIDANCE
The exploitation by the taxpayer of legally permissible alternative tax
rates or methods of assessing taxable property or income in order to
avoid or reduce tax liability. It is politely called ―tax minimization‖ and
is not punishable by law.
Examples:
 A person refrains from engaging in some activity or enjoying
some privilege in order to avoid the incidental taxation or to
lower his tax bracket for a taxable year.
 If you don‘t want to pay business tax then don‘t do business.
 Donate below P100,000 to be exempt from donor‘s tax.
 Pay minimum wage to employees then just give allowances/
de minimis benefits (not included in 13 th month pay unless
there is agreements as part of company practice/policy)
Delphers Traders Corp. v. IAC
The Supreme Court upheld the estate planning scheme resorted to by
the Pacheco family in converting their property to shares of stock in a
corporation which they themselves owned and controlled. By virtue of
the deed of exchange, the Pacheco co-owners saved on inheritance
taxes. The SC said that the records do not point to anything wrong
and objectionable about the estate planning scheme resorted to. The
legal right of the taxpayer to decrease the amount of what otherwise
could be his taxes or altogether avoid them by means which the law
permits cannot be doubted.
TAX EVASION
TAX EVASION
The use by the taxpayer of illegal or fraudulent means to defeat or
lessen the payment of a tax. It is also known as ―tax dodging.‖ It is
punishable by law.
Examples:
 Deliberate failure to report a taxable income or property
 Deliberate reduction of income that has been received
 Online sellers who do not declare income, do not pay taxes
and those who do not have business permits (illegal)
 Declare sales less than 30% of the amount
 Declare expenses of more than 30% of the sale
 Non-issuance of receipts – There is a penalty of P10,000
Elements of Tax Evasion (How to Establish Tax Evasion)
A. The end to be achieved is to lessen payment of taxes
Example: the payment of less than that known by the taxpayer to
be legally due, or in paying no tax when such is due.
B. An accompanying state of mind described as being ―evil,‖ ―in bad
faith,‖ ―willful‖ or ―deliberate and not accidental.‖
C. A course of action (or failure of action) which is unlawful.
Q: Should fraud be proved by direct evidence?
(How to Prove Tax Evasion)
A: No. Since fraud is a state of mind, it need not be proved by direct
evidence but may be inferred from the circumstances of the case. One
can only present circumstantial evidence or make use of presumptions
under tax laws.
Ex: Under declaration over 30% - fraud is presumed under the law
Republic v. Gonzales
The substantial under declaration of income in the income tax returns
of the taxpayer for four (4) consecutive years coupled with his
intentional overstatement of deductions justifies the finding of fraud.
Perez v. CTA and Collector
The failure of the taxpayer to declare for taxation purposes his true
and actual income derived from his business for two consecutive years
has been held as an indication of his fraudulent intent to cheat the
government of its due taxes.
CIR v. Toda
The scheme resorted to by CIC in making it appear that there were
two sales of the subject properties, i.e. from CIC to Altonaga, and then
from Altonaga to RMI cannot be considered a legitimate tax planning.
Such scheme is tainted with fraud.
Here, it is obvious that the objective of the sale to Altonaga was to
reduce the amount of tax to be paid especially that the transfer from
him to RMI would then subject the income to only 5% individual
capital gains tax, and not the 35% corporate income tax.
Altonaga's sole purpose of acquiring and transferring title of the
subject properties on the same day was to create a tax shelter.
Altonaga never controlled the property and did not enjoy the normal
benefits and burdens of ownership. The sale to him was merely a tax
ploy, a sham, and without business purpose and economic substance.
Doubtless, the execution of the two sales was calculated to mislead
the BIR with the end in view of reducing the income tax liability.
In a nutshell, the intermediary transaction, i.e, the sale of Altonaga,
which was prompted more on the mitigation of tax liabilities than for
legitimate business purposes constitutes one of tax evasion.
TAX EVASION V. TAX AVOIDANCE
This is best exemplified through the payment of toll for passing
through a bridge. It is tax evasion if you pass through the railings in
order not to pay the toll as long as you don‘t get caught. On the other
hand, if there are two bridges where one is imposing a lesser toll fee
than the other, it is tax avoidance if you choose to pass through the
bridge paying a lesser toll.
EXEMPTION FROM TAXATION
TAX EXEMPTION
TAX EXEMPTION
The grant of immunity to particular persons or corporations or to
person or corporations of a particular class from a tax which persons
and corporations generally within the same state or taxing district are
obliged to pay.
Act of the state of divesting itself of its prerogative to impose taxes.
 Broad Sense – Tax not applied on a particular property.
Tax on particular property or object within the same
jurisdiction but not taxed by the taxing authority.
Ex. Tax on property used by the Government when the
other properties in the same area are subject to tax
 Narrow Sense – Exemption of a particular class.
An entire class of the same conditions are exempted from
taxes supposedly imposed on a bigger class.
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Important principles
A. It is an immunity or privilege
B. It is freedom from a financial charge or burden to which others
are subjected
C. Allowed only when there is a clear provision of the law.
D. Strictly construed against the taxpayer.
E. It is not necessarily discriminatory as long as there is a
reasonable foundation or rational basis.
Double Nexus rule
Person claiming exemption must prove:
1. The law granting the exemption
2. You fall within the law or you qualify in the exemption
Taxation is the rule and exemption, the exception
Taxation is the rule and exemption, the exception, and therefore, he
who claims exemption must be able to justify his claim or right thereto,
by a grant expressed in terms ―too plain to be mistaken and too
categorical to be misinterpreted.‖ If not expressly mentioned in the
law, it must at least be within its purview by clear legislative intent.
NATURE OF TAX EXEMPTION
NATURE OF TAX EXEMPTION
A. Mere personal privilege of the grantee – cannot be
assigned or transferred without the consent of the Legislature.
The legislative consent to the transfer may be given either in the
original act granting the exemption or in a subsequent law
B. Generally revocable by the government –
EXC: Unless founded on a contract with valuable consideration
which is protected from impairment. But the contract must
contain the essential elements of other contracts.
EXC to EXC: A legislative franchise which is in the nature of a
contract. It may be repealed or amended pursuant to the
Constitution (see Sec. 11, Art. XII).
C. Implies a waiver on the part of the government of its
right to collect taxes due to it, and, in this sense, is
prejudicial thereto. Hence, it exists only by virtue of an express
grant and must be strictly construed.
D. Not necessarily discriminatory, provided it has reasonable
foundation or rational basis. As long as it complies with equal
protection clause and there is valid classification. Where,
however, no valid distinction exists, the exemption may be
challenged as violative of the equal protection guarantee or the
uniformity rule.
Bar Question:
ABC Corp. was granted tax exemption by the government as an
incentive for newly established companies. It purchased materials by
XYZ Corp. Normally, the sale is subject to sales tax. XYZ Corp claims
that since it sold the equipment to ABC Corp which is tax exempt, it
should not be liable to pay the sales tax. Is the claim tenable?
No. Exemption from taxes is personal in nature and covers only taxes
for which the taxpayer-grantee is directly liable. The sales tax is a tax
on the seller who is not exempt from taxes. Since XYA is directly liable
for the sales tax and no tax exemption privilege is ever given to it,
therefore, its claim that the sale is exempt is not tenable. A tax
exemption is construed in strictissimi juris and it cannot be permitted
to exit upon vague implications.
Bar Question:
Supposing XYZ Corp paid the sales tax. ABC Corp later found however
that XYZ merely shifted or passed on to ABC the amount of the sales
tax by increasing the purchase price. ABC Corp now claims for a refund
from the BIR in an amount corresponding to the tax passed on to it,
since it is tax exempt. Is the claim of ABC Corp meritorious?
No, the claim of ABC Corp is not meritorious. Although the tax was
shifted to ABC by the seller, what is paid by it is not a tax but a part of
the cost it has assumed. The taxpayer who can file a claim for refund
is the person statutorily liable for the payment of the tax. Since ABC
Corp is not said taxpayer, it has no capacity to file a claim for refund.
NATURE OF THE POWER TO GRANT TAX EXEMPTION
NATURE OF THE POWER TO GRANT TAX EXEMPTION
National Government
The power to grant tax exemptions is an attribute of sovereignty for
the power to prescribe who or what persons or property shall be taxed
implies the power to prescribe who or what persons or property shall
not be taxed.
It is inherent in the exercise of the power to tax that the sovereign
state be free to select the subjects of taxation and to grant exemptions
therefrom. Unless restricted by the Constitution, the legislative power
to exempt is as broad as its power to tax.
Local Government
Municipal corporations are clothed with no inherent power to tax or to
grant tax exemptions. But the moment the power to impose a
particular tax is granted, they also have the power to grant exemption
therefrom, unless forbidden by some provision of the Constitution or
the law.
The legislature may delegate is power to grant tax exemptions to the
same extend that it may exercise the power to exempt.
Q: Is the power to grant tax exemption inherent in all levels of the
Government?
A: No. It is inherent only in the national government as the power to
tax includes the power to grant tax exemptions. However, upon valid
delegation of the power to tax, the local government can grant tax
exemptions unless prohibited.
GR: Inherent in national government only
Source of power to tax: State sovereignty
EXC: Delegation to local government
Source of power to tax: Constitution
Basco v. PCGG
In a compromise agreement between the Philippine Government,
represented by the PCGG, and the Marcos heirs, the PCGG granted tax
exemptions to the assets which will be apportioned to the Marcos
heirs.
The Supreme Court ruled that the PCGG has absolutely no power to
grant tax exemptions, even under the cover of its authority to
compromise ill-gotten wealth cases.
The grant of tax exemption is the exclusive prerogative of the
Congress. In fact, the Supreme Court even stated that Congress itself
cannot grant tax exemptions is in the case at bar because it will violate
the equal protection clause of the Constitution.
RATIONALE OF TAX EXEMPTION
RATIONALE OF TAX EXEMPTION
Such exemption will benefit the body of the people and not particular
individuals or private interest and that the public benefit is sufficient to
offset the monetary loss entailed in the grant of the exemption.
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Its avowed purpose is some public benefit or interest which the
lawmaking body considers sufficient to offset the monetary loss
entailed in the grant of the exemption.
As long as public interest is subserved and the benefit that the
government acquires outweigh the monetary loses due to the
exemption.
TN: These are the non-revenue raising purposes of taxation.
GROUNDS FOR TAX EXEMPTION
GROUNDS FOR TAX EXEMPTION
A. It may be based on contract.
When the charter provides for such exemption
TN: In such a case, the public which is represented by the
government is supposed to receive a full equivalent therefor
B. It may be based on some ground of public policy.
The exemption is provided in the law itself or the constitution.
TN: To encourage new industries or to foster charitable
institutions. Here, the government need not receive any
consideration in return for the tax exemption
C. It may be created in a treaty on grounds of reciprocity or to
lessen the rigors of international or multiple taxation.
TN: Recognition of international comity
TN: Equity is NOT a ground for tax exemption. Exemption from tax is
allowable only if there is a clear provision. While equity cannot be used
as a basis or justification for tax exemption, a law may validly
authorize the condonation of taxes on equitable considerations.
KINDS OF TAX EXEMPTION
AS TO MANNER OF CREATION
A. Express or affirmative – when certain persons, property or
transactions are, by express provision, exempted from all or
certain taxes.
- When the provision itself provides for exemption
TN: May be made by provisions of the Constitution, statutes,
treaties, ordinances, franchises, or contracts.
B. Implied exemption or exemption by omission – when a
tax is levied on certain classes of persons, properties or
transactions without mentioning the other classes. Every tax
statute, in a very real sense, makes exemptions since all those
not mentioned are deemed exempted.
- When the law did not include it in the list of those
exempted. Ex. PAGCOR
TN: The omission may be either accidental or intentional.
Exemptions are not presumed, but when public property is
involved, exemption is the rule, and taxation, the exception.
C. Contractual – in the real sense of the term and where the non-
impairment clause of the Constitution can rightly be invoked, are
those agreed to by the taxing authority in contracts, such as
those contained in government bonds or debentures, lawfully
entered into by them under enabling laws in which the
government, acting in its private capacity, sheds its cloak of
authority and waives its governmental immunity.
TN: These contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises. A
franchise partakes of the nature of a grant which is beyond the
purview of the non-impairment clause of the Constitution.
AS TO SCOPE OR EXTENT
A. Total exemption – when certain persons, property or
transactions are exempted, expressly or implied, from all taxes
entirely.
B. Partial exemption – when certain persons, property or
transactions are exempted, expressly or implied, from certain
taxes in part.
Ex. Basic personal exemption and additional exemption
AS TO OBJECT
A. Personal exemption – granted directly in favor of certain
persons
Ex. Basic personal exemption of 50k and additional exemption
of 25k for each dependent up with a maximum of 4
dependents; However, these have been repealed by the TRAIN
Law effective January 1, 2018.
B. Impersonal exemption – granted directly in favor of a certain
class of property
Ex. Property
TN: There cannot be simultaneous exemption under two laws
CONSTRUCTION OF TAX EXEMPTION STATUTES
CONSTRUCTION OF TAX EXEMPTION STATUTES
General rule
Tax exemption statutes are construed strictly against the taxpayer and
liberally in favor of the government.
A. In the construction of tax statutes, in case of doubt, exemptions
are not favored and are construed strictissimi juris against the
taxpayer.
B. The fundamental theory is that all taxable property should bear
its share in the cost and expenses of the government.
C. Taxation is the rule and exemption the exception, and therefore,
he who claims exemption must be able to justify his claim or
right thereto, by a grant expressed in terms ―too plain to be
mistaken and too categorical to be misinterpreted.
D. Claims for an exemption must be able to point out some
provision of law creating the right, and cannot be allowed to
exist upon a mere vague implication or inference.
E. Refunds are in the nature of exemption, and must be construed
strictly against the grantee/taxpayer.
Exceptions
A. When the law itself expressly provides for a liberal construction,
that is, in case of doubt, it shall be resolved in favor of
exemption.
B. When the exemption is in favor of the government itself or its
agencies, or of religious, charitable, and educational institutions
because the general rule is that they are exempt from tax.
C. When the exemption is granted under special circumstances to
special classes of persons.
D. If there is an express mention or if the taxpayer falls within the
purview of the exemption by clear legislative intent, the rule on
strict construction does not apply.
E. If exemption refers to public property (in case of public
property, the general rule is exemption and taxation is the
exception)
F. Solutio indebiti
Q: When will you apply the strict construction?
A: Only if there is doubt as to the interpretation of the law exempting
the person of the property. If there is no doubt, no need to apply the
strict construction.
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Strict interpretation does not apply to the government and its
agencies
Maceda v. Macaraig
Petitioner cannot invoke the rule on strictissimi juris with respect to the
interpretation of statutes granting tax exemptions to the NPC. The rule
on strict interpretation does not apply in the case of exemptions in
favor of a political subdivision or instrumentality of the government.
Davao Gulf v. Commissioner
A tax cannot be imposed unless it is supported by the clear and
express language of a statute. On the other hand, once the tax is
unquestionably imposed, a claim for exemption from tax payments
must be clearly shown and based on language in the law too plain to
be mistaken.
Since the partial refund authorized under Section 5, RA 1435 is in the
nature of a tax exemption, it must be construed strictissimi juris
against the grantee. Hence, petitioner‘s claim for refund on the basis
of the specific taxes it actually paid must be expressly granted in a
statute stated in a language too clear to be mistaken.
TAX EXEMPTIONS ARE GENERALLY REVOCABLE
General rule:
Tax exemptions are generally revocable by the government.
Exception:
If founded on a contract which is protected from impairment, it cannot
be revoked unilaterally. But the contract must contain the essential
elements of other contracts.
Exception to the exception:
A legislative franchise which is in the nature of a contract. It may be
repealed or amended pursuant to the Constitution (Sec. 11, Art. XII).
RESTRICTIONS ON REVOCATION OF TAX EXEMPTION
A. Non-impairment clause – Applies in contractual tax
exemptions or those agreed to by the taxing authority in
contracts, such as those contained in government bonds or
debentures, lawfully entered into by them under enabling laws in
which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity.
TN: Where the tax exemption is provided by law, the non-
impairment clause will not apply.
B. Adherence to form – If the exemption is granted by the
Constitution, it can only be revoked through a Constitutional
amendment. It cannot be revoked by mere passage of a law.
C. Tax-exempting grant is in the form of a special law –
where the grant is given through a special law and not by a
general law, even if the terms of the general act are broad
enough to include the intent to repeal or alter the special law,
there would still be no revocation.
TN: If you want to revoke the tax exemption granted by a special
law, another special law revoking the same must be passed. It
cannot be done by implied revocation.
TAX AMNESTY
TAX AMNESTY
A tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty
of evasion or violation of a revenue or tax law.
TN: There is already a finding that the person has evaded the payment
of tax or violated a tax law. The taxes due are still collected since only
the penalties are forgiven.
Republic v. IAC
A tax amnesty partakes of an absolute forgiveness or waiver by the
Government of its right to collect what otherwise would be due it, and
in this sense, prejudicial thereto, particularly to give tax evaders, who
wish to relent and are willing to reform a chance to do so and become
a part of the new society with a clean slate.
TN: When we say absolute forgiveness, this is retrospective. It looks
back to your previous liabilities and if given a tax amnesty, it is as if
you did not incur those liabilities at all.
Tax amnesty not favored
A tax amnesty, much like a tax exemption, is never favored nor
presumed in law. If granted, the terms of the amnesty, like that of a
tax exemption, must be construed strictly against the taxpayer and
liberally in favor of the taxing authority.
CIR v. Marubeni Corp.
For the right of taxation is inherent in government. The State cannot
strip itself of the most essential power of taxation by doubtful words.
He who claims an exemption (or an amnesty) from the common
burden must justify his claim by the clearest grant of organic or state
law. It cannot be allowed to exist upon a vague implication. If a doubt
arises as to the intent of the legislature, that doubt must be resolved
in favor of the state.
DISTINGUISHED FROM TAX EXEMPTION
Tax Amnesty Tax Exemption
Immunity from all criminal and
civil obligations arising from non-
Immunity from all civil liability
payment of taxes
only
(Immunity from all civil, criminal,
and administrative liabilities)
A privilege, a freedom from a
A general pardon given to all
charge or burden of which others
taxpayers
are subjected
Applies to past tax periods, hence Generally prospective in
of retroactive application application
TAX REMISSION OR TAX CONDONATION
TAX REMISSION OR CONDONATION
To desist from exacting, inflicting or enforcing something. The
remission of taxes due and payable to the exclusion of taxes already
collected does not constitute unfair discrimination. Such a set of taxes
is a class by itself and the law would be open to attack as class
legislation only if all taxpayers belonging to one class were not treated
alike.
Remission or condonation simply means forgiving the taxpayer out of
liberality. However, if the government is to remit or condone a tax, it
must not be applied to a specific person alone but to the entire
persons or property belonging to the same class. Otherwise, it will
amount to class legislation.
TN: The taxes are no longer collected since they are forgiven.
In the nature of a tax exemption
The condonation or remission of a tax liability is equivalent and is in
the nature of a tax exemption. Thus it should be sustained only when
expressly provided in the law.
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NATURE, CONSTRUCTION & APPLICATION OF TAX LAWS
NATURE OF INTERNAL REVENUE LAW
NATURE OF INTERNAL REVENUE LAW
Internal revenue laws are not political in nature. Tax laws are civil and
not penal in nature. Even if there is change in government control, it
remains to be implemented.
Not political in nature
Internal revenue laws are not political in nature. They are deemed to
be the laws of the occupied territory and not of the occupying enemy.
So even if we are occupied by another State, the taxation laws will
continue. It is as if there is no stoppage of the tax law. Thus, our tax
laws continued in force during the Japanese occupation.
Hilado v. Collector
It is well-known that our internal revenue laws are not political in
nature and as such, continued in force during the period of enemy
occupation and in effect were actually enforced by the occupying
government. Income tax returns that were filed during that period and
income tax payments made were considered valid and legal. Such tax
laws are deemed to be the laws of the occupied territory and not of
the occupying enemy.
Civil and not penal in nature
Tax laws are civil and not penal in nature, although there are penalties
provided for their violation. The purpose of tax laws in imposing
penalties for delinquencies is to compel the timely payment of taxes or
to punish evasion or neglect of duty in respect thereof.
Republic v. Oasan
The war profits tax is not subject to the prohibition on ex post facto
laws because such a concept applies only to criminal or penal matters.
Tax laws are civil in nature.
CONSTRUCTION & APPLICATION OF TAX LAWS
CONSTRUCTION OF TAX LAWS
No person or property is subject to taxation unless within the terms or
plain import of a taxing statute. Taxes, being burdens, they are not to
be presumed beyond what the statute expressly and clearly declares.
General rule:
In case of doubt, tax laws are to be construed strictly against the
government and liberally in favor of the taxpayer.
Exceptions:
A. Where the language of the statute is plain and there is no doubt
as to the legislative intent
B. Where the taxpayer claims exemption from taxation.
TN: In case of tax exemptions, the rule is strictly against the taxpayer
and liberally in favor of the government.
Reason: The taxpayer should not be burdened by unreasonable
interpretations of authorities.
TN: Penal provisions and the statute of limitations are construed in
favor of the taxpayer.
Important principles:
A. Generally prospective in operation
B. When the language is plain, rule on strict construction against
the government does not apply
C. Public purpose is always presumed
D. Provisions of the tax act are not to be extended by implication
E. Tax laws are special laws and therefore prevail over general
laws.
APPLICATION OF TAX LAWS
General rule: Taw laws are prospective in operation because the
nature and amount of the tax could not be foreseen and understood
by the taxpayer at the time the transactions which the law seeks to tax
was completed.
Exception: While it is not favored, a statute may nevertheless
operate retroactively provided it is expressly declared or is clearly the
legislative intent.
Exception to the exception: A tax law should not be given
retroactive application when it would be so harsh and oppressive, for
in such case, the constitutional limitation of due process would be
violated.
Q: BIR issued a ruling that printing companies are not covered by a ew
tax law. Relying on this ruling, DEF Printers did not pay said tax.
Subsequently however the BIR reversed the ruling and issued a new
one stating that the tax covers printing companies. Could the BIR now
assess DEF Printers for back taxes corresponding to the years before
the new ruling?
A. No. The reversal of a ruling shall not be given a retroactive
application, if said reversal will be prejudicial to the taxpayer.
Therefore, the BIR cannot assess DEF Printers for back taxes because
it would be violative of the principle of non-retroactivity of rulings and
doing so would result in grave injustice to the taxpayer who relied on
the first ruling in good faith.
MANDATORY AND DIRECTORY PROVISIONS OF TAX LAWS
A. Directory provisions – those designed merely for the information
or direction of officers or to secure methodical and systematic
modes of proceedings.
Ex. Revenue memorandum circulars issued by BIR to guide
personnel on matters of regulation.
B. Mandatory provisions – those intended for the security of the
citizens or which are designed to ensure equality of taxation or
certainty as to the nature and amount of each person‘s tax.
Ex. Remedies under the tax code (security); tax rate (equality)
LEGISLATIVE APPROVAL BY RE-ENACTMENT
Where a statute is susceptible of the meaning placed upon it by a
ruling of the government agency charged with its enforcement and the
legislature thereafter re-enacts the provisions without substantial
change, such action is to some extent confirmatory that the ruling
carries out the legislative purpose.
TN: The legislature is presumed to have full knowledge of the existing
revenue regulations interpreting the provisions of law, and with its
subsequent substantial re-enactment, there is a presumption that the
lawmakers have approved and confirmed the rules in question as
carrying out the legislative purpose.
RULES & REGULATIONS
Sec. 244 of the NIRC
The Secretary of Finance, upon recommendation of the CIR, shall
promulgate all needful rules and regulations for the effective
enforcement of the provisions of this Code.
EXCLUSIVE AUTHORITY OF THE SECRETARY OF FINANCE TO
PROMULGATE RULES AND REGULATIONS
This is without prejudice to the power of the Commissioner of Internal
Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including
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rulings on the classification of articles for sales tax and similar
purposes.
A. Promulgation: Secretary of Finance
B. Recommendation: Commissioner of Internal Revenue
C. Administrative rulings: Commissioner of Internal Revenue
REVENUE REGULATIONS
General Rule: Revenue regulations are general interpretations of the
BIR issued by the CIR or by its delegate
Exception: When it tramples novel issues or is intended to revoke or
amend or modify a previous ruling.
TN: Once implemented, it forms part of the law. It can be questioned.
The CIR has exclusive jurisdiction but it is subject to review by the
Secretary of Finance except for a tax assessment appeal which is
cognizable by the CTA and those in relation to a local ordinance which
is subject to review by the Secretary of Justice.
Jurisdiction to Question Revenue Regulations – CIR
Subject to Review by
GR: Sec of Finance
EXC:
 CTA – tax assessment appeal
 Sec of Justice – only in relation to a local ordinance
Tax Rulings
Tax rulings are specific positions by the BIR on matters or facts to a
specific taxpayer. It is applicable only to the particular taxpayer.
REQUISITES FOR VALIDITY & EFFECTIVITY OF REGULATIONS
A. It must be issued under authority of law
B. It must be within the scope and purview of the law; not contrary
to law and the Constitution
C. It must be published in the OG or newspaper of general
circulation
TN: Interpretative rules or those merely internal in nature
may simply be posted in conspicuous places in the agency
itself.
D. Where the regulations impose penal sanctions, the law itself must
declare as punishable the violation of the administrative rule or
regulation and should fix or define the penalty thereof.
Roxas v. Rafferty
The omission to follow mandatory provisions renders invalid the act or
proceeding to which it relates while the omission to follow directory
provisions does not involve such consequence.
Two kinds of administrative issuances
1. Legislative rules – rules in the nature of subordinate legislation
designed to implement a primary legislation by providing the
details thereof. Before it is adopted, there must be a hearing
under the AC of 1987.
2. Interpretative rules – are rules and regulations construing or
interpreting the provisions of a statute to be enforced and is are
binding on all concerned until they are changed. Designed to
provide guidelines to the law, which the administrative agency is
in charge of enforcing. They have the effect of law and are
entitled to great respect and have in their favor the presumption
of legality.
Republic v. Phil Shell Petroleum
Tax regulations (issued by the CIR/DOF Secretary) whose purpose is
to enforce or implement existing law must:
(a) Be published in a newspaper of general circulation, and
(b) Filed with UP Law Center ONAR (per Chapter 2, Book VII of the
Admin Code of 1987 (EO 292) before they can become effective.
Such rules once established and found to be in consonance with the
general purposes and objects of the law have the force and effect of
law, and so they must be applied and enforced. They are, therefore,
just as binding as if the regulations had been written in the law itself.
NECESSITY AND FUNCTION OF REGULATIONS
Purpose of the Implementing rules and regulations:
1. To properly enforce and execute the laws
2. To clarify and explain the law
3. To carry into effect the law‘s general provisions by providing
details of administration and procedure
FORCE AND EFFECT OF REGULATIONS
Revenue Memorandum Circular 20-86 was issued to govern the
drafting, issuance and implementation of revenue tax issuances,
including:
1. Revenue regulations
2. Revenue audit memorandum orders
3. Revenue memorandum circulars and orders
TN: Except when the law otherwise expressly provides, the aforesaid
revenue tax issuances shall not begin to be operative until after due
notice thereof may be fairly assumed.
Due notice of the said issuances may be fairly presumed only
after the following procedures have been taken:
1. Copies of the tax issuance have been sent through registered
mail to the following business and professional organizations:
a. Philippine Institute of Certified Public Accountants
b. Integrated bar of the Philippines
c. Philippine chamber of commerce and industry
d. American chamber of commerce
e. Federation of Filipino-Chinese chamber of commerce
f. Japanese chamber of commerce and industry in the
Philippines
2. However, other persons or entities may request a copy of the
said issuances
3. The BIR shall issue a press release covering the highlights and
features of the new tax issuance in any newspaper of general
circulation
4. Effectivity of date of enforcement of the new issuance shall take
place 30 days from the date the issuance has been sent to the
above-enumerated organizations
TN: IRR and administrative regulation are not the same. You have the
law, then you pass the IRR and from the IRR, it now depends on the
Commissioner if he wants to issue a revenue regulation. This revenue
regulation however is not to implement the whole IRR but specific
provisions only.
BIR RULINGS
ADMINISTRATIVE RULINGS AND OPINIONS
Known as BIR rulings. Less general interpretation of tax laws being
used from time to time by the CIR. They are usually rendered on
request of taxpayers to clarify certain provisions of a tax law. These
rulings may be revoked by the Secretary of Finance if the latter finds
them not in accordance with law.
If there is a provision in the tax law which is not clear, you can send a
clarification to the BIR. You just have to lay down all the facts and all
the details that you have and send it either to the CIR or RD and they
will address and clarify your concerns.
But when it comes to BIR and administrative rulings, it applies only to
the entity asking for it. So even if two companies have the same
conditions, as when Company A was declared by the BIR as tax
exempt, Company B with the same economy conditions as Company A
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cannot presume that it is also tax exempt. Company B should likewise
ask from the BIR a ruling pertaining to its own company.
Power to revoke the rulings of his predecessor
The Commissioner may revoke, repeal or abrogate the acts or previous
rulings of his predecessors in office because the construction of the
statute by those administering it is not binding on their successors if,
thereafter, such successors are satisfied that a different construction of
the law should be given.
Rulings in the form of opinions are also given by the Secretary of
Justice who is the chief legal officer of the Government.
Reason: This is possible because the government will not be stopped
by the acts or mistakes of its agents.
Non-retroactivity of repeal of regulations or rulings
General Rule: No retroactivity if the repeal, revocation, modification
ore reversal of regulations or rulings is prejudicial to the taxpayer.
Exceptions:
1. Where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the BIR
2. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based
3. Where the taxpayer acted in bad faith
ADMINISTRATIVE INTERPRETATION AND THE COURTS
ADMINISTRATIVE INTEPRETATION AND THE COURTS
The power to interpret the provisions of the Tax Code and other tax
laws is under the exclusive and original jurisdiction of the
Commissioner of Internal Revenue subject to review by the Secretary
of Finance.
Different from the IRR
When it comes to administrative interpretation, rulings or
opinions are not binding to the courts. However, it is given great
weight in making the decision.
Commissioner v. CA
The authority of the Minister of Finance, in conjunction with the CIR,
to promulgate rules and regulations for the effective enforcement of
internal revenue rules cannot be controverted. Neither can it be
disputed that such rules and regulations, as well as administrative
opinions and rulings, ordinarily should deserve weigh and respect by
the courts. Much more fundamental than either of the above however,
is that all such issuances must not override, but must remain
consistent with the law they seek to apply and implement.
Administrative rules & regulations are intended to carry out, and not to
modify or supplant the law.
La Suerte v. CTA
When an administrative agency renders an opinion by means of
a circular or memorandum, it merely interprets existing law and
no publication is therefore necessary for its validity. Construction by an
executive branch of the gov‘t of a particular law, although not binding
upon courts, must be given weight as the construction came from the
branch of the government which is called upon to implement the law.
DECISION OF THE SC AND THE CTA
DECISIONS OF THE SC AND CTA
Decisions of the Supreme Court applying or interpreting existing tax
laws are binding on all subordinate courts and have the force and
effect of law. As provided for in Article 8 of the Civil Code, they ―form
part of the law of the land‖. They constitute evidence of what the law
means.
The same is also true with respect to decisions of the Court of Tax
Appeals.. However, by the nature of its jurisdiction, the decisions of
this court are still appealable to the Supreme Court by a petition for
review on certiorari. Decisions of the CTA have persuasive value
Important:
1. Follow the hierarchy of the courts
2. If it is a question pertaining to the constitutionality of a ruling or
IRR, raise it immediately before the regular courts
3. But if it pertains to questions on the tax payable computations,
question it first with the BIR (Administrative level) then appeal it
to the CIR (depends on the amount), then after it can be
appealed later to the Sec of Finance or CTA, and then after, that‘s
the time you can go the SC.
4. But in the SC, it should only be purely questions of law
INCOME TAXATION – GENERAL OVERVIEW
DEFINITION OF INCOME TAX
INCOME TAX
A tax on all yearly profits arising from property, professions, trades or
offices or a tax on person‘s income, emoluments, profits, and the like.
Income tax is a direct tax on actual or presumed income (gross or net)
of taxpayers during the taxable year. A final income tax may also be
imposed on certain one-time transactions like the sale of real property
classified as capital asset.
It is also defined as a tax on income, whether gross or net, realizable
in one year. It is not exclusive to those that arise out of property,
profession, etc. since it also includes those you find by mere luck like
hidden treasures.
An income tax is one levied on the income from property or an
occupation. It is a direct tax upon the thing called income.
NATURE OF INCOME TAX
NATURE OF INCOME TAX
National tax
The BIR has the authority to collect nationwide under RA 8424 or the
National Internal Revenue Code.
Excise tax
Tax on the privilege or the right to earn something
Direct tax
Impact and incidence is on the taxpayer and tax cannot be shifted,
making it personal
General tax
Levied on all kinds of income; it is source blind. There is tax so long as
there‘s flow of wealth, increase in income, even if the source is illegal.
TN: It is self-assessing or self-computed as the taxpayer
determines how much is the income and tax
PURPOSES OF INCOME TAX
PURPOSES OF INCOME TAX
Fiscal purpose
To provide or raise revenue
Non-fiscal purpose
1. To offset sales and consumption of taxes which are regressive.
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Application: The consumer gets the burden of tax because they
cannot transfer it. The wholesalers, manufacturers may shift the
burden down the line but they get to pay the income tax and
this offsets the effect of regressive taxes.
2. To mitigate the evils arising in the unequal distribution of
income and wealth.
This is redistribution of wealth. This follows ability to pay,
those who earn more are taxed more which will be used to
benefit everyone.
DEFINITION OF INCOME
IN THE BROAD SENSE
IN THE BROAD SENSE
In the broad sense, income refers to all wealth which flows into the
taxpayer other than those that are mere return of capital. It is return
on capital or return above the capital as opposed to return of capital.
It is anything which comes into the hands of the taxpayer which
increases its assets. The amount remaining after deducting the
expenses will be considered income.
Wealth – anything of value that you possess or own.
Gain – what is earned on selling such assets which is not an inventory
of the business
Profit – what is left after deducting such expenses from revenue
which made the receipt of revenue.
Illustration: If you sell a cup of coffee for P10, the 10 is not your total
income. Since you have to consider the cost of sale or your capital
(such as your expenses for the cup, stirrer etc.). If you spent 5 pesos
for your capital, only P5 is considered as income.
Remember:
Sales – Cost of Sales = Income
Allowable Deductions = Taxable Income
IN THE STRICT SENSE
IN THE STRICT SENSE
In the strict sense, income refers to the amount of money coming to
the taxpayer for services performed or an activity which he is engaged
in or for an investment which he has made including those do not have
specific owners but comes in the hands of a finder.
It refers to all earnings derived from service rendered, capital, or both
including gain derived from sale or exchange of personal or real
property classified as either ordinary or capital asset.
INCOME V. CAPITAL
Capital denotes the original investment or fund used in order to
generate earnings which is called income. It is the fund or property
existing at one point in time. It is what you put up to generate income.
Amounts received as a return of capital are not income.
Income Capital
Flow Fund
Service or fruit of wealth Wealth
Tree fruit
INCOME V. REVENUE
Revenue refers to the amount received by the business from selling
main goods or services to its customers during the period
Income Revenue
All funds accruing to the treasury Earnings of individual persons,
of the government derived from partnership, corporation or estate
tax, donation, grants and any and trust whether or not subject
other source to tax
SOURCES OF INCOME TAX LAWS
SOURCES OF INCOME TAX LAWS
TN: According to hierarchy:
A. Constitution – the most supreme source of our tax laws
B. Legislations/Statutes from Congress – National Internal
Revenue Code and other special laws like the exemption
granted to economic zones
These are subject to income tax on activities not exempted from
their grant since they can have the 5% rate in lieu of other
taxes
C. Administrative rules and regulations – Those issued by
BIR, and other administrative agencies to interpret tax laws.
1. Revenue regulations – issued by Sec of Finance with
recommendation of the Commissioner of Internal Revenue
2. Revenue memorandum orders, memorandum rulings, and
memorandum circulars – issued by BIR
D. Judicial decisions – only SC decisions since they form part of
the law of the land.
E. Tax Treaties or Agreements
DEFINITION OF TERMS
DEFINITION OF TERMS IN TITLE II
The definitions laid down in Title II, Chapter 1 are good for title II only
and you cannot use it for other titles. However, if there are no other
definitions provided in other titles, definitions in Title II may be used
as a supplement to understand other terms. These terms are
discussed as they are used in a particular Codal provision.
GENERAL PRINCIPLES OF INCOME TAXATION
Sec. 23 of the NIRC
General Principles of Income Taxation in the Philippines -
Except when otherwise provided in this Code:
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines;
(B) A nonresident citizen is taxable only on income derived from
sources within the Philippines;
(C) An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only
on income derived from sources within the Philippines: Provided, That
a seaman who is a citizen of the Philippines and who receives
compensation for services rendered abroad as a member of the
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complement of a vessel engaged exclusively in international trade shall
be treated as an overseas contract worker;
(D) An alien individual, whether a resident or not of the
Philippines, is taxable only on income derived from sources within the
Philippines;
(E) A domestic corporation is taxable on all income derived from
sources within and without the Philippines; and
(F) A foreign corporation, whether engaged or not in trade or
business in the Philippines, is taxable only on income derived from
sources within the Philippines.
Therefore, it is schedular in the sense that we lump different items of
income per type or category and it is global in the sense that we
subject all the items in this lump to one tax rate
Passive incomes such as royalties, interests and dividends are however
subject to different tax rates. This cannot be lumped and so we follow
a schedular tax rate here
Passive income earned by non-stock, non-profit educational institutions
are either subject or not subject to tax. No definite SC decision yet. It
may be answered either way.
KINDS OF INCOME TAX METHODS

GENERAL PRINCIPLES OF INCOME TAXATION

KINDS OF INCOME TAX METHODS

Gross income taxation

This is a system based on gross income, which doesn‘t allow
Resident
(RC) deductions but allows exclusions.
Citizen
Non- Gross Income = Income – Exclusions (e.g. Capital)
resident
(NRC) A final tax is imposed on the gross amount of specified types of
Individual
Resident
Engaged in income such as interest income, royalty, prizes, dividends, and capital
Trade or gains. (Schedular system)
(RA) Business within
Alien the Philippines
Taxpayer Non- (NRA-ETB) Net income taxation
resident Net Income = Gross Income – Deductions
(NRA)
Domestic Not Engaged in
(DC) Trade or Certain deductions are allowed and subtracted from the aggregate of
Corporation Business within incomes not subject to final tax, and the tax computed based on the
Resident the Philippines resulting net income. (Global system)
(RFC) (NRA-NETB)
Foreign In the Philippines, net income taxation is used more. There are other
Non- expenses which are not part of direct cost so you are given deductions
resident
(indirect costs such as those you pay to your lawyers, etc).
(NRFC)

This will allow deductions and encourage people to pay taxes. When
Only Resident Citizens and Domestic Corporations are taxed for
you follow gross income taxation, you might be overburdened by the
income earned within and without the Philippines. The rest are taxed
huge taxes you pay and you will feel disheartened. But this type of
for income earned within the Philippines only.
taxation is still followed in the Philippines. MCIT follows gross income
taxation to curtail some evils.
SYSTEMS OF INCOME TAXATION
FEATURES OF OUR PRESENT INCOME TAXATION
SCHEDULAR INCOME TAX SYSTEM
COMPREHENSIVE TAX SITUS
Follows a schedule of tax rates, the tax code treats every category of
income earners individually.
FOLLOWS A COMPREHENSIVE TAX SITUS
The items are classified based on kind or category of income and this
Uses nationality, residence and source rules in determining where or
is subject to different tax rates based on the income classification.
what income are considered taxable or not.
When one files their tax return, there are as many tax returns as there
are tax rates for several income types.
There are a lot of factors to account for prior to determining if the
income is taxable in the Philippines or not.
GLOBAL INCOME TAX SYSTEM
The general principles of income taxation discusses who are the
The taxpayer is required to lump all items of income and a
individuals taxable within and without, including those for the
single/proportional/uniform income tax rate is imposed. Only one
corporation.
return is filed.
Illustration:
SEMI-SCHEDULAR AND SEMI-GLOBAL
For individuals, resident-citizens are taxable within and without;
(Applicable in the Philippines)
Non-resident, taxable sourced within.
There are several items of income which are lumped by kind and
Residency, citizenship, and source of income are factors considered to
subjected to a similar rate.
determine how the person is taxed. The fact that there are several
factors to consider before taxing a person is the reason why the
This is still just similar to following a schedular tax system because we
income taxation system of the Philippines is comprehensive but
still classify them and then subject them to different tax rates and then
corporation have a fixed tax rate.
when all incomes are lumped such as business and compensation
income, we subject this lump to a uniform rate.
Semi-schedular or semi-global but mostly schedular.

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INDIVIDUAL INCOME TAXATION
BASIC FEATURES OF INDIVIDUAL INCOME TAXATION
Progressive
Proportional to income earned by individual. The income tax imposed
is proportional to the income earned by the individual. Progressive
system is much more clearly illustrated in individual than corporation.
Income increases, tax rate increases. In other words, it follows a
scheduler system.
TN: Starting 2018, there is a new income tax schedule.
Modified Gross Income Taxation for Pure Compensation
Earners
A modified gross income taxation is used for pure compensation
earners because deductions such as return of capital are not allowed.
The computation for gross income only have exclusions.
Normally, return of capital is deducted from gross income. BUT for
pure compensation earners, there is no return of capital since these
individuals do not have any capital to put in (you only use yourself as
your capital).
The compensation pure compensation earners get are taxable right
away but subject to 50,000 pesos exemption as provided by law which
is considered the BASIC personal exemption and 25,000 pesos for
every dependent.
Illustration:
30, 000/mo. income * 12 mos. = P360,000
P360,000 – 50,000 (personal exemption) = P310,000 (This amount is
now taxable)
TN: That is why it is modified because although you are not allowed
deductions, you are granted this exemption by law. Note also that only
pure compensation earners are subjected to modified gross income.
The rest, net income is used.
Net income taxation for taxpayers that derive income from
business, trade or professional income
For those who earn income through business, trade or business, they
follow the net income.
Illustration:
Sir Amago, an employee earns compensation income as his allowance
from the firm, but also earns business income from his practices as a
lawyer. At the end of the year, both types of income are subjected to
tax. But for the portion for the business income, he can deduct
electricity, rent, depreciation, etc. These expenses are allowed to be
deducted. I will add both incomes and whatever is the result, deduct
personal and basic exemption:
Compensation Income = Income A
Business Income (Business Income – Deductions (expenses) =
Income B Total Income = Income A + Income B
Income A + Income B – P50,000 (BPE) = Taxable
income
Follows pay-as-you-file system
The moment you file your income tax return, you pay taxes due. Pay
and file to the bank. Those who go to BIR are those individuals or
entities that either those incurred a loss or do not pay any taxes at all.
They have correctly paid their taxes as they have estimated in their
income tax return.
If no tax to pay – go to BIR.
If you have tax to pay – go to authorized banks.
In some cases, Withholding System (Pay as you earn)
This is a way of collecting tax and is not another type of tax.
Compensation income earners are subjected to withholding tax.
Persons who are leasing out their properties—persons or
corporations— earn net income. They are subjected to income tax but
there is withholding tax required by them which is being withheld by
the lessee. Lessees are required to withhold equivalent to 5%.
CORPORATE INCOME TAX
BASIC FEATURES OF CORPORATE INCOME TAX
Fixed rate of 30% (Proportional)
The progressive system still exists for Corporate Income taxation even
though the rate is fixed because the how much a corporation is taxed
still increases by the income it earns
Net Income for Corporate Income Taxation Can deduct itemized
deductions under Sec 34
Pay-as-you file system
Pay the tax the moment you file the income tax return
CRITERIA USED IN IMPOSING INCOME TAX
COMPREHENSIVE SYSTEM OF IMPOSING INCOME TAX
1. Citizenship or Nationality Principle – a citizen of the
Philippines is subject to Philippine income tax
a. On his worldwide income, if he resides in the
Philippines, or
b. Only on his Philippine-source income, if he
qualifies as a non-resident citizen; hence, his
foreign-source income shall be exempt
2. Residence or Domicile Principle – an alien is subject to
income tax because of his residence in the Philippines.
Thus, a resident alien is liable to pay Philippine income tax
only on his income from sources within the Philippines but is
exempt from tax on his income from sources outside the
Philippines.
3. Source of Income Principle – an alien is subject to
Philippine income tax because he derives income from
sources within the Philippines.
Thus, a non-resident alien or non-resident foreign
corporation is liable to pay Philippine income tax on income
from sources within the Philippines, such as dividend,
interest, rent or royalty, despite the fact that he has not set
foot in the Philippines.
SOURCES OF INCOME
SOURCES OF INCOME
Source is the property, activity, or service that produces the income.
A. Capital
B. Labor
C. Both labor and capital
D. Dealings in property
Necessity of determining source of income
As defined in general principles of income taxation, there are
individuals or entities taxable only for income sourced within the
Philippines while some are within and without the country
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Therefore, we need to know where the income is sourced to know Income is not exempted by any treaty or law
where the income can be taxed, here in the Philippines or abroad by Not taxable income
another taxing authority. If services are rendered in the Philippines by NIRC provides for exclusion, and some exceptions.
a non-resident citizen, this is taxed by the Philippines All those income (sec 32B), while they are considered income under
first two criteria, cannot tax them.
Example: OFW is a non-resident under Tax code. If you have a
property leased in the Philippines. It is taxable in the Philippines
KINDS OF TAXABLE INCOME OR GAIN
because property is located here and the source is the property or to
be strict, the activity of leasing out is the source which is conducted
here in the Philippines. So, taxable because being a non-resident, TAXABLE INCOME
taxable within but his compensation while working abroad, not taxable
here. Outside the Philippines, so not taxable here. The pertinent items of gross income specified in the NIRC, less the
deductions and/or personal and additional exemptions, if any,
authorized for such types of income by the NIRC or other special laws.
CRITERIA TO DETERMINE IF INCOME IS TAXABLE
GENERAL CLASSIFICATION OF GAINS
HOW TO TELL IF INCOME IS TAXABLE
1. Capital gains – gain or income from sale or exchange of capital
1. There is gain or profit assets
2. Gain or profit is realized or received (actually or constructively) 2. Ordinary gains – gains or income from sale or exchange of
3. Such gain or profit is not exempted by any treaty or law properties or services which are not considered as capital assets
(categorized as ordinary assets)
TN: These three must be complied with before income can be said to
be taxable.
GROSS INCOME
There is gain or profit
If you are in a better position than where you were originally or net DUMPING GROUND COMPUTATION
worth increases in value than what you used to have.
Gross Income P xxx
Clearly presented if there is investment, Invested 100 then got 400, Less Allowable Deduction (xxx)
there is a 300 gain or profit. But, even if you do not have any Taxable Income P xxx
investment like you found a bar of gold in the street. It increased your Multiplied by the Tax Rate x%
net worth. No investment so the entire value is considered an Tax Due and Payable P xxx.
investment.
TN: For discussion purposes only. Do not write ‗using dumping ground
Gain or profit actually or constructively received computation‘ in the exam as this is only a term coined by Atty. Amago
 Actual – there is actual possession of the wealth to facilitate discussion.
 Constructive- no actual possession but already in your
control.
Examples: Income deposited in a bank; shares of stock INCLUSIONS

Q: You own shares of stock. Purchased for P100. You look at stock ITEMS OF GROSS INCOME [CGGIRRDAPPP]
exchange, the value is P1,000. Is there gain or profit?
A: Yes, since you are in a better position than before. 1. Compensation for services in whatever form
2. Gross income derived from the conduct of trade or business or
nd
Q. Did it comply with the 2 criteria of actual or constructive receipt? the exercise of a profession
A: No. It is complied only when you sell it. 3. Gains derived from dealings in property
4. Interests
You can only realize the profit in this case is when you separate it from 5. Rents
the capital. You can separate when you sell the shares, you can deduct 6. Royalties
the cost and the remaining is the realized gain. 7. Dividends
8. Annuities
Buying stocks at 100 pesos per share, then when the right time comes 9. Prizes and winnings
and the share increases to 1000 pesos per share, the only way you 10. Pensions
realize profit is when you sell your shares and get the profit out of that 11. Partner‘s distributive share from the net income of the general
sale. In that sense, you get to control both capital and gain by professional partnership
physically segregating them.
TN: Pertinent items of income are not exclusive. It is income when it
You can physically segregate income from capital whereas if not yet increases the wealth or the assets.
sold, it is something inchoate. You do not own the amount (P1,000)
yet but you own the shares which could potentially be an income.
COMPENSATION INCOME
Income is realized:
1. If there is control of income COMPENSATION INCOME
2. It is borne out of a completed transaction
Compensation income refers to all remuneration for services rendered
Other ways to earn income: by an employee for his employer, unless specifically excluded under
Contract of loan – Interest payment is the source of income. The the Tax Code.
moment it is executed, deemed realized. When transaction is
completed, contract perfected, there is already control I the sense that There is compensation income when there is an employer-employee
if due and demandable, can demand payment of interest. relationship. Compensation income can only be earned by an
individual. Only natural persons can become an employee.

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TESTS TO DETERMINE EXISTENCE OF EMPLOYER-EMPLOYEE

CONVENIENCE OF THE EMPLOYER RULE
RELATIONSHIP

Four-Fold Test CONVENIENCE OF THE EMPLOYER RULE

1. Selection and engagement of the employee There are certain allowances given by the employer to the employees
2. Payment of wages which benefit the employer. These allowances are not taxable on the
3. Power of dismissal part of the employee but the employer as it is primarily for the
4. Power to control the employee‘s conduct employer‘s benefit.

Two-Tiered Test
BUSINESS INCOME
1. Economic Dependency Test – whether or not the employee
is dependent on the employer for continued employment in TAXABLE INCOME COMPUTATION
the employer‘s line of business For Manufacturing, Merchandising, or Mining Business

2. Control Test – whether or not the employer has the power

Taxable Income
to control the employee‘s conduct not only as to the result of
For Manufacturing, Merchandising, or Mining Business
the work to be done but also as to the means and methods
by which the work is to be accomplished
Gross Sales P xxx
Less: Cost of Goods Sold (xxx)
MODES OF PAYING COMPENSATION INCOME
Gross Profit P xxx
A. If paid in cash – amount of money received Add: Other Income xxx
B. If in kind – monetary equivalent of the property Gross Income Subject to Tax P xxx.

COMPENSATION IN KIND
COST OF GOODS SOLD COMPUTATION
1. Stock options – taxed only if there is a benefit to the
employee such as when he can buy the share at a more Cost of Goods Sold
favorable price than the public For Merchandising Concern

2. Promissory note – face value of the promissory note, unless Beginning Inventory P xxx
discounted wherein the cash discounted value will be used Add: Net Purchases xxx
Cost of Goods Sold Available for Sale P xxx
3. Cancellation of debt – value of debt forgiven Less: Ending Inventory (xxx)
Cost of Goods Sold P xxx.
4. Tax liability as compensation – amount of tax shouldered by
employer

For Manufacturing Concern

Cost of Goods Sold
DOCTRINE OF CASH EQUIVALENT
For Manufacturing Concern
Direct Materials used P xxx
DOCTRINE OF CASH EQUIVALENT Direct Labor
Direct Materials used P xxx
xxx
Direct
Direct Overhead
Labor xxx
xxx
All items considered as income which you do not receive as cash has Total
DirectManufacturing
Overhead Cost P xxx
to be valued in cash for purposes of taxation. After all, taxes are Beginning Work-in-process
Total Manufacturing Cost (WIP) Inventory P xxx
xxx
payable in money. It must have a cash equivalent before a tax is Cost of Goods
Beginning Placed in Process
Work-in-process (WIP) Inventory P xxx
imposed; usually the fair market value. Less:
Cost ofEnding
GoodsWIP Inventory
Placed in Process P (xxx)
xxx
Cost
Less:of GoodsWIP
Ending Manufactured
Inventory P xxx
(xxx)
Valuation of real property Add: Finished
Cost of Goods Goods Inventory
Manufactured P xxx
xxx
Under Sec. 60 of the NIRC, the valuation of real property is the higher Cost
Add: of Goods Goods
Finished Available for Sale
Inventory P xxx
of zonal value and assessed value. But assessed value is technically Less:
Cost ofEnding
GoodsInventory
Available for Sale P (xxx)
xxx
wrong because this is what appears at the back of the tax declaration Cost
Less:of GoodsInventory
Ending Sold P xxx
(xxx)
multiplied by an assessment level. But what is used is only the amount Cost of Goods Sold P xxx
appearing at the back of the tax declaration without having to multiply
it by an assessment level.
PARTNERSHIP INCOME
In some instances, it has to be compared with gross selling price for
tax purposes. For personal properties, the law is not strict with regards
to how it is valued, as compared with that of real properties. PARTNER‟S SHARE IN GPP

Fair Market Value Partnerships follow the constructive receipt doctrine wherein the
It is the value of the property where a seller, who is not compelled to income is deemed automatically distributed to the partners even if
sell, is willing to sell and the buyer, who is not compelled to buy, is there be no actual distribution.
willing to buy.
Tax rate
Example: If there is a property worth 100k and the seller is willing to It is taxed at 0-35%, part of the dumping ground computation.
sell it at 90k and a buyer is also willing to buy it at 90k, that 90k
becomes the fair market value. Situs
Where the profession is undertaken

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TWO FORMS OF PARTNERSHIP depreciation expense is multiplied by 6 years which yields an

1. Trade Partnership – partnership wherein part or all of its
income is derived from the conduct of trade of business
2. General Professional Partnership – formed by persons
for the sole purpose of exercising their common profession
of which no part of its income is derived from engaging in
any trade or business
CONSTRUCTIVE RECEIPT DOCTRINE
accumulated depreciation of 600,000. This accumulated depreciation
of 600,000 will be deducted from the acquisition cost of 1,000,000 in
order to arrive at the book value of the property at the end of the 6 th
year which is 400,000. The book value of 400,000 will be deducted
from the selling price of 700,000 which will yield a gain of 300,000.
If what is sold is an ordinary asset, then it forms part of the dumping
ground computation which is subject to the 0-35% tax rate. On the
other hand, if what is sold is a capital asset, then the holding period or
other gains and the net capital loss carry over should be considered.

ORDINARY ASSETS
CONSTRUCTIVE RECEIPT DOCTRINE

The income is deemed received even if there is no actual distribution
or receipt of the income.
For General Professional Partnership, the partnership income is
deemed distributed to the partners automatically. Even if not declared,
the share of the partner in the partnership income goes to the partner.
INCOME FROM DEALINGS IN PROPERTY
DEALINGS IN PROPERTY
Dealings in property refer to the disposal through the sale or exchange
of ordinary assets or capital assets.
TN: The gains depend on the type of property sold.
Goodwill – there may be gain or loss when the business sold
Example
Property which costs 1,000,000 with a life of 10 years is sold for
700,000 at the end of the 6th year. How much is the gain?
The gain is 300,000. Selling price of 700,000 less the book value of
400,000 equals a gain of 300,000.
Gain or Loss on Sale
ORDINARY ASSETS
1) Stock in trade included in the inventory at the end of
taxable year
Ex: Stock of sardines
You originally have 100 cans of sardines. Then you are left with
2 cans of sardines at the end of the year. What do you consider
as ordinary assets? 2 cans of sardines because they are the only
assets left in your possession.
If sold or eaten, it can no longer be called your asset. Your
assets are those which are included in your inventory at the end
of a taxable year.
TN: If land, cannot be stocked and cannot fall under the first
criterion. Instead it falls on the second one.
2) Properties primarily held for sale to customers in the
ordinary course of his trade or business.
Ex: Sale of house and lot
You have 10 houses, and you sold the one in Cebu in Cristina
North but you are not engaged in real estate business.
It will be considered capital because the asset is not primarily
held for sale and it is not in the ordinary course of business
because you are not engaged in real estate business.

Gross Selling Price (GSP) P 700,000 Ex: Shares of stocks.

Less: Book Value* (400,000) Investment house, you ordinary sell securities. When you sell
Gain or Loss P 300,000 shares of stock/securities, considered ordinary because these
securities are primarily held for sale in the ordinary course of
business.
*Book Value
If engaged in real estate instead and you sell condo units in
Ayala and you were able to sell, these will be considered
Purchase Price (Acquisition Cost) P 1,000,000
ordinary. While they are real property but because you are
Less: Accumulated Depreciation ** (600,000)
engaged in the business, this is primary held in the ordinary
Book Value P 400,000.
course of your business.

Ex: Securities. You may be able to stock the certificates, but not
Straight-Line Method the stock themselves.
**Accumulated Depreciation
3) Property used in trade or business subject to
Cost P 1,000,000 depreciation – that is when there is a decline of value of
Less: Salvage Value - property because of passage of time or because of usage
Depreciable Amount P 1,000,000
Divided by: Useful Life in years 10 Example of property that depreciates: cars, cellphones.
Depreciation Expense (for the year) P 100,000 TN: Land does not depreciate, it ordinarily appreciates rather
Multiplied by: Number of Years used 6 than depreciate. Most personal properties depreciate however
Accumulated Depreciation P 600,000. Rolex watches and other luxury items does not.

Is it automatic that they are considered ordinary assets because

The depreciation of the property has to be taken into account since it they don‘t depreciate? No. It must be one which is used in trade
was already used for 6 years. The annual depreciation under the or business.
straight-line method is 100,000, computed as the depreciable amount
of 1,000,000 divided by the useful life of 10 years. The annual 4) Real property used in trade or business

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Rules for individual taxpayers

Example: Land even if not primarily held for sale. 1. Net capital gain is added to ordinary gain but net capital loss is
If it is the building where your shipping business is located, still not deductible from ordinary gain.
ordinary assets because it is used in trade or business.
2. Net ordinary loss is deductible from ordinary gain
Take note: Everything used in trade or business falls under ordinary
assets. You just have to identify under which criteria it falls. Memorize 3. Capital losses are deductible only to the extent of the capital
the 4 because it will help you identify WON capital or ordinary assets. gain.

If you earn income out of ordinary assets, you have ordinary gains.
But if you earn income with the conduct of business even without
those materials enumerated above, considered ordinary gain.
GR: Ordinary if in relation to earning an income not involving capital
asset
Examples of ordinary income
1) Compensation income
2) Business income
3) Professional
4) Passive – as a rule are ordinary, unless used as capital
4. For the individual, the reportable percentages of capital gain or
loss shall be:
a. 100% if the capital asset is held for 1 year or less
b. 50% if the capital asset is held for more than 1 year
5. There is a net capital loss carry-over on the net capital asset‘s
loss in a taxable year; provided that the following conditions
shall be observed:
a. The taxpayer is other than a corporation
b. The amount of loss does not exceed the income before
exemptions at the year when the loss was sustained
c. The holding period should not exceed twelve months

Example:
CAPITAL ASSETS
Holding Cost GSP Gain
Period (Loss)
Sec. 39 A (1) of the NIRC Rolex 10 years P300,000 P450,000 P150,000
The term 'capital assets' means property held by the taxpayer Watch
(whether or not connected with his trade or business), but does not Jewelry 2 years P100,000 P200,000 P100,000
include stock in trade of the taxpayer or other property of a kind which
would properly be included in the inventory of the taxpayer if on hand Car 9 months P1,500,000 P900,000 (P600,000)
at the close of the taxable year, or property held by the taxpayer
primarily for sale to customers in the ordinary course of his trade or Net Capital Loss Carry Over (NCLCO)
business, or property used in the trade or business, of a character
which is subject to the allowance for depreciation provided in Gain (Loss)
Subsection (F) of Section 34; or real property used in trade or business Rolex Watch (150,000 x 50%)* P 75,000
of the taxpayer. Jewelry (100,000 x 50%)* P 50,000
Car (600,000 x 100%)* (600,000)
Three types of assets subject to capital gains: Net Capital Loss Carry Over P (475,000)
1. Income from dealings in shares of stock of domestic corporation
whether or not through the stock exchange *The holding period is taken into account.
2. Income from dealings in real property located in the Philippines
and
Income
3. Income from dealings in other capital assets other than (a) and
Year 1
(b).
Ordinary Income P 300,000*
TN: This gives a negative definition: ―but does not include…‖ - gives
an enumeration of what are ordinary assets. If does not fall under any,
considered capital assets. For you to answer the exam, memorize the *No NCLCO because there is only ordinary income
ordinary assets.
Year 2
Capital assets are assets which are not used in business but does not
include enumerated ordinary assets. If not one of the ordinary assets, Gain (Loss)
it is capital asset (opposites define each other) Ordinary Income P 300,000
Net Capital Gain P 100,000
NCLCO* (100,000) -
HOLDING PERIOD OF CAPITAL ASSETS Taxable Income P 300,000

For Individual Taxpayer *NCLCO can only be applied to the extent of the capital gain.
Apply the holding period
 Held for 12 months or less – report gain or loss at 100%
 Held for more than 12 months – report gain or loss at 50% TAX TREATMENT OF ORDINARY AND CAPITAL ASSETS

For Corporate Taxpayer

Gain or Loss from Ordinary Asset Transactions
Holding period is not applicable. Capital gain and loss are to be
Ordinary gains form part of business income subject to normal tax.
reported in full amount regardless of the number of years the capital
Ordinary loss is allowed as deduction from other business income and
asset is held.
capital gains.

NET CAPITAL GAIN (LOSS) Gain or Loss From Capital Asset Transactions
Capital gains are to be reduced by capital loss incurred during the
taxable year. Capital loss allowed as deduction from the capital gains
PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN (LOSS)
only.

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1. Outright Method – income shall be recognized at the time

PASSIVE INCOME
of the completion of the improvement

PASSIVE INCOME 2. Spread-out Method – income is spread over the term of

Passive Income is subject to a final withholding tax. It shall not be
included in the gross income of the taxpayer.
Important: Passive income sourced outside the Philippines will be
included as gross income subject to the dumping ground computation.
the lease
The estimated book value of the leasehold improvement at
the end of the lease is spread over the term of the lease and
is reported as income for each year of the lease an aliquot
part thereof

It is subject to the 0-35%. This rule is applicable only to resident Example:

citizens or domestic corporations because resident citizens and
domestic corporations are taxable on income derived from sources
within and without the Philippines.
It is still considered as an income tax however, the manner of
collecting passive income is different from the manner of collecting the
normal income that is subjected to the dumping ground computation.
It is collected through withholding and deemed final.
INTEREST INCOME
INTEREST INCOME
Mr. Y, the lessee, will erect a building on a leased parcel of land owned
by Mr. X, the lessor.
Property – 100k
Lease term – 20 years
Building – 10M finished on the 5th year of the lease term
Useful Life of the Building – 20 years
Q: How much is taxable Income under the two methods?
A: Under the outright method, the taxable income on the year of
completion of the building is 2,500,000. While, under the spread-out
method, the taxable income is 166,667.

Interest income is the compensation for the use of money or for

Outright Method
forbearance of the use thereof.

Interest Income from Banks Cost of the Leasehold Improvement P 10,000,000

Interest from bank deposits or other financial institutions is subject to Less: Accumulated Depreciation
a final withholding tax of 20%. What is contemplated here is interest at end of lease term* (7,500,000)
from deposit, trust fund and other deposit substitutes. Income to be Reported P 2,500,000

Interest Income From Non-Banks

Interest income out of a loan transaction is not a passive income.
Thus, it shall not be subject to a final tax but subject to the normal tax Spread-out Method
rate of 0-35% per dumping ground computation.
Cost of the Leasehold Improvement P 10,000,000
Example: A extended a loan to B worth 1M subject to 10% per annum. Less: Accumulated Depreciation
Hence, A has an interest income of 100K for one year which at end of lease term* (7,500,000)
represents the interest. The 100K is subject to income tax of 0-35%. Value of Building at end of lease term P 2,500,000
Divided by: Term of Lease in years 15
Foreign Currency Deposit Units (FCDU) Income to be reported P 166,666.67
Dollar account of a resident taxpayer under FCDU is subject to a 15%
final tax. This is only applicable to residents. Residence is the basis and
not citizenship. Straight-Line Method
*Accumulated Depreciation
Interest income of a non-resident under FCDU is exempted from tax.
Cost P 1,000,000
Summary Less: Salvage Value -
 If Philippine currency deposits – 20% Depreciable Amount P 10,000,000
 If foreign currency deposits – 15% Divided by: Useful Life in years 20
 Non-banking institutions – 0-35% Depreciation Expense (for the year) P 2,500,000
Multiplied by: Number of Years used 15
RENT INCOME Accumulated Depreciation P 7,500,000.

RENT INCOME ROYALTIES

Rent income refers to the consideration for the use of the property of
another. The rent paid by the lessee is income for the lessor. ROYALTIES

LEASEHOLD IMPROVEMENT Royalty is the compensation for the use of intellectual property.
Situs: Place of use
When the lessee built permanent improvements on the leased property
which will become the property of the lessor upon the expiration of the Kinds of Royalty Income
lease, the value of the improvement should be reported as income of 1. Active Royalty Income – 0-35% for individuals or 30% for
the lessor using either outright method or spread out method. corporations
2. Passive Royalty income – 20% final tax
How to Report Income from Leasehold Improvement Royalties on books as well as other literary works and musical
composition – 10% final tax

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The royalty must be earned within the Philippines
Otherwise, the said passive income will form part of the gross income
of the taxpayer that will be subject to the dumping ground
computation, provided such taxpayer is a resident citizen or a domestic
corporation.
Rule in case of active royalty
If is an active royalty, such as a business engaged in extending
franchises like Jollibee, royalties earned will be included in the
dumping ground computation. They are active in earning royalties and
this becomes a regular source of income.
DIVIDENDS
DIVIDENDS
Refer to any distribution made by a stock corporation out of its
earnings or profits from earnings and payable to its stockholders.
This is income earned by an owner of the corporation from his shares.
It is the share in the profits in a corporation as declared by the Board
of Directors. Dividends can be in the form of cash or property.
Note
If what are distributed are its own shares, then it is stock dividends.
If what are distributed are shares of another corporation, then it is
property dividends.
Situs
1. Dividend from Domestic Corporation – purely within
2. Dividend from Foreign Corporation
a. More than 80% - incomevwithin
b. More than 50% up to 80% - partly within and partly
without
c. 50% or less – income without
CASH/PROPERTY DIVIDENDS
CASH/PROPERTY DIVIDENDS
To individuals from domestic corporations
Dividends shall be subject to a final withholding tax of
 10% - RC, NRC, and RA
(Resident Citizens, Non-resident citizens and
Resident Aliens)
 20% - NRA – ETB
(Non-resident alien engaged in trade or business
in the Philippines)
 25% - NRA –NETB
(Non-resident alien not engaged in trade or
business in the Philippines)
To domestic corporation from another domestic corporation
Dividends are exempt as it will only be taxed when it is distributed to
the stockholders
Rule if dividends are in the form of property
They will be subject to a final withholding tax based on the fair market
value of the property.
Corporation declaring dividends must be a domestic corp
To be subject to final tax, a domestic corporation must distribute it or
otherwise, it may be included as gross income and subject to the
dumping ground computation.
Rule in case of foreign corporation
It gets complicated when it is foreign corporation. You will need to
apply the rule on situs with regard to foreign corporations. Apply the
50% and 85% rule.
Important: Share in trade partnership is taxed the same way as
dividends. This is different from a general professional partnership.
They are not subject to passive income tax (they follow constructive
receipt doctrine: even when you declare or not, you are taxed), and
they are subject to dumping ground computation of 0-35%.
STOCK DIVIDENDS
STOCK DIVIDENDS
General Rule: Stock dividends are exempt from tax
Exceptions:
1. Cancellation or redemption of stocks – treated as cash
dividends
TN: If it exceeds the taxable year, it will be
deemed as a sale of share rather than a dividend
2. Change in capital structure of the corporation – when
there is an option to get cash or stock dividends, entire
dividends, whether cash or stock, will be taxable
TN: But that is not allowed under the law, the SEC will not
accept that. Dividends must be uniform. The best thing to
do is to declare stock dividends, then redeem your shares,
so in effect it becomes stock redemption.
3. Stockholders receive a different kind of stock than
that which they already own – net effect is that it will
change the equity structure of the corporation
Example:
A, B and C are stockholders of Company X with 100 equal shares each.
Hence, they have 33.33% shares each in the company. When the
company has a stock dividend of 200 shares but A refused to accept
his shares and instead received only cash or property such that B and
C have additional 100 shares each, there has been a substantial
change in the equity interest of the current stockholders because A has
only 100 shares (1/5), B has 200 shares already (2/5) and C has 200
shares already (2/5).
As a result, the stock dividend will be subject to tax based on
applicable final tax rate on dividends for individual taxpayers (10% or
20% or 25% FWT as the case may be.
Treasury Shares
These are shares of corporation being bought back by such
corporation.
Company X has 100 shares with five stock holders (A, B, C, D, E)
having 20 shares each. A wants to sell his share and the corporation
bought it exercising its right of first refusal as reflected in their by-
laws. As a result, the corporation is now holding its own share which is
commonly called as a Treasury Share.
The treasury share is the property of the corporation already. When the
corporation would like to sell its treasury share, it will be treated as a
property dividend subject to 10% or 20% or 25% as the case may be
LIQUIDATING DIVIDENDS
LIQUIDATING DIVIDENDS
Return of stockholders investment. It arises from the disruption of
assets by a corporation to its stockholders upon corporate dissolution.
Return of capital if
1. If it is higher than cost
2. When the corporation is a wasting asset corporation which is
a type of business that will diminish like mining.
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Rule
The excess amount of liquidating dividends over cost of shares
surrendered is taxable. Such excess is a gain realized which is taxable.
If the stockholder sustains a loss, such loss is deductible. It is the
difference between what the stockholder spent and what the
stockholder has.
SCRIP DIVIDEND
SCRIP DIVIDEND
It is issued in the form of promissory note and is table to the extent of
its fair market value. It is taxable in the year when the warrant was
issued. Like cash dividends it is based on the face value of the
promissory note which is the same as the fair market value.
INDIRECT DIVIDENDS
INDIRECT DIVIDENDS
Those other dividends representing payments or rights received by the
taxpayer, which are really dividends. They are taxed like cash/property
dividends.
They are not actually declared as dividends by the corporation but can
become dividends by its nature, such as
1. Forgiveness of debt of stockholder
2. Personal use of corporate properties
TAX SPARING RULE
TAX SPARING RULE
Under the tax sparing rule, non-resident foreign corporations are
subject only to a tax rate of 15% instead of the usual 30%, subject to
the rule on reciprocity.
Reason: To encourage foreign investors. And to make it equal with the
branch profit remittance tax of 15%, otherwise, the foreign
corporations will only create branches, not subsidiaries, in the country.
ANNUITIES
ANNUITIES
Annuities refer to income in fixed amount in fixed interval over a
period of time. It is connected with pension but it need not require
services. Annuities are actually investments. It is a contract of
investment that promises to pay a periodic payment of income.
TN: Need not be yearly as long as it is periodic.
This is given not on account of services rendered under an employer-
employee relationship. It is subject to tax under the ground
computation.
Tax rate
A. For individual taxpayer – 0-35%
B. Non-resident alien not engaged in trade or business – 25%.
Situs: Where the contract is made
PRIZES
PRIZES
Prizes represent remuneration for an effort reflecting one‘s superiority.
It involves a showcase of skills or talents.
Situs: The place where the prize is given.
Prizes not subject to tax
1. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic
achievement – but only if he was selected without any action on
his part to enter the contest and he is not required to render
substantial future services as a condition to receiving the prize or
award.
2. Prizes and awards in sports competitions sanctioned by the
national sports associations.
Prizes and awards other than the two mentioned above
If the taxpayer won any prizes or awards that are not included above,
such prizes or awards shall be subject to:
A. P10,000 or less – 0-35%
B. In excess of P10,000 – 20% final tax
Example:
Prizes won by Miss Universe Pia Wurtzbach is taxable as an ordinary
income that will be subjected to the dumping grousnd computation.
Always remember that all passive income sourced outside or without
the Philippines shall be treated as an ordinary income and included in
the gross income of the taxpayer that will be subjected to the dumping
ground computation. Provided, that such taxpayer is a resident citizen
or domestic corporation.
WINNINGS
WINNINGS
Winnings are rewards for an event that is based on chance or fortune.
The full amount of winnings shall be subject to the final withholding
tax of 20%.
Except: PCSO and lotto winnings
 10,000 or less – exempt from tax
 In excess of P10,000 – 20% final tax
Situs: Where it is given
PENSIONS
PENSIONS
Pensions are periodic payments of income on account of employer-
employee relationship.
Situs: Where the service is rendered
RETIREMENT BENEFITS
With Reasonable Private Benefit Plan
Retirement benefits may be exempt subject to the following
conditions:
1. Reasonable private benefit plan
2. Approved by the BIR
3. Employee who received the reasonable private benefit plan
must be at least 50 years old
4. Such employee must have rendered service for at least 10
years, which need not be continuous
5. The benefit can only be availed once in a lifetime
TN: There are not a lot of questions regarding pensions in the bar
exam. What usually come out are retirement benefits.
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Without Reasonable Private Benefit Plan
If there is no reasonable benefit plan, you can still be exempt if there
is a collective bargaining agreement (CBA) on the matter, provided the
benefit under the CBA is more favorable.
1. There is an existing CBA
2. Employee must have rendered at least 5 years of service
3. Employee is at least 60 years old
BENEFITS RECEIVED FROM GSIS, SSS
Benefits or pensions received from foreign governments by one
working abroad or corporations are exempt.
Separation Pay
Depends on the reason for termination
 Beyond the control of the employee – exempt
 Within the control of the employee – subject to tax
Those received on account of death, etc. are exempt from tax
LONG-TERM DEPOSITS OR INVESTMENTS
LONG-TERM DEPOSIT OR INVESTMENTS
Interest income from long-term deposit or investment in form of
savings, common or individual trust funds, deposits substitutes,
investment management accounts and other investments evidenced by
certificates which was pre-terminated by the holder before the 5th year
at the rates herein prescribed:
Holding Period Tax Rate
4 years to less than 5 years 5%
3 years to less than 4 years 12%
Less than 3 years 20%
The basis for the rate is the holding period of the taxpayer
If the holding period is at least five years, it is not anymore subject to
tax. This is applicable only to Philippine currency deposits or
investments.
Q: Feds has a five-year deposit worth one million pesos. He assigned it
to Mike after 2 years. How much is Feds subjected to tax?
A: 20% tax because the holding period of Mr. X is less than 3 years.
Important: The controlling factor in determining the tax rate for each
taxpayer would be their individual holding period. Each person will be
taken individually.
CAPITAL GAINS TAX
CAPITAL GAINS
Capital gains may be derived from the following:
1. Capital gains from the sale of real property held as capital assets.
2. Capital gains from sale of shares of stock not listed or traded at
the stock exchange.
3. Capital gains from sale of other capital assets.
SALES OF SHARES OF STOCKS
SALES OF SHARES OF STOCKS
The shares of stocks must not be listed or traded in the local stock
exchange. Shares of stocks represent equity interest in a corporation.
Note: These are annual rates and the net income is aggregated.
Subject to a flat rate of 15%
Sales of shares of stocks not listed and traded in the local exchange or
listed but not traded in local stocks exchange is subject to capital gains
tax of 15%.
Example:
10,000 shares with a cost of P10/share are sold for P16/share. How
much is the Capital Gains Tax?
The CGT is P9,000. The cost of the shares which is P100,000 is
deducted from the gross selling price of P160,000 which will result to a
net gain of P60,000. The 15% rate is multiplied to the net gain of
P60,000 in order to arrive at the CGT of P9,000.
Capital Gains Tax
Gross Selling Price (P16x10,000) P 160,000
Less: Cost (P10x10,000) (100,000)
Net Gain P 60,000
Multiplied by 15% tax rate 15%
Capital Gains Tax P 9,000
Rule if stocks are traded outside the Philippines (not local)
If the stocks are traded outside the Philippines, it is included in the
gross income subject to dumping ground computation.
If a domestic corporation‘s stock is sold not through the local stock
exchange, it will be included as gross income subject to the dumping
ground computation.
Example:
You are a resident citizen. You bought shares listed in the New York
stock exchange. You also sold it through the New York stock
exchange. The cost of the shares is P100, 000.00, but you were able
to sell it for P400, 000.00. What is the applicable tax rate?
The income should be subjected to the 0-35% tax rate, part of the
dumping ground computation. The income is outside the Philippines. It
will be difficult to compel anyone. While it is not shares of stock listed
and traded in the local stock exchange (NY stock exchange being
foreign), the same is still not under capital gains tax because it‘s
outside the Philippines.
Stock transaction tax of 60% of 1%
If the shares of stocks are listed and traded in the local stock
exchange, it will be subject to a stock transaction tax (OTP) at a rate
of 60% of 1% of the gross selling price. The two must go together
for it to be subjected to the stock transaction tax. It has to be listed
and at the same time traded.
Q: PLDT shares are listed in Philippines stock exchange. If you have
shares here and you sold it directly to your seatmate. What tax rate is
applicable?
A: 15% because it has to be listed and traded in the stock exchange
for the stock transaction tax to apply. Take note that what was
mentioned under 15% is not traded or listed in the local stock
exchange. The two must go together for it to be subjected to the stock
transaction tax: it has to be listed and at the same time traded.
Although it will never happen that a share which is not listed in the
stock exchange will be sold or traded through the stock exchange. At
most what will happen is that there is one which is listed and not
traded there.
Q: If Jollibee shares are listed in the Philippine stock exchange and
sold through a broker in the stock exchange, how much is the tax due?
A: 60% of1%.
Q: But if it is sold directly to a buyer, not through the local stock
exchange, how will it be taxed?
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A: 15% because it will fall under not listed or traded in the local stock
exchange. While listed, it is not traded.
Q: If the shares involve a non-domestic corporation, probably a
corporation abroad, or even if it is a corporation here in the
Philippines, like PLDT is already listed in the NY stock exchange. How
will it be taxed?
A: 0-35% because again it is abroad.
Summary:
 60% of 1% – listed and traded within the Philippines
 15% CGT – not listed or not traded in the local stock
market
 0-35% – if it involves a domestic corporation or a
foreign stock exchange
SALE OF REAL PROPERTY
SALE OF REAL PROPERTY
If it doesn‘t involve real properties, as in the case of real properties
defined under the local government code like machineries, properties
which are reported or declared to the local government and is
represented by a tax declaration which is applicable to both house and
lot. The building, the house is also declared with a separate tax
declaration from the lot. It is also possible that machineries are
declared to be considered as real property.
Involves only properties which are deemed capital assets
Hence, those not in the ordinary business or trade.
Subject to 6% capital gains tax
If it involves properties supported by tax declaration because they are
deemed real properties, the rate applicable to them is 6%. This refers
to capital assets because we are talking about capital gains tax. Only
involve properties which are deemed capital assets. 6% tax is
applicable based on the following:
1. Gross Selling Price
2. Zonal value – Fair Market Value determined by BIR which is
otherwise termed as zonal value
3. Assessed value – Fair Market Value determined by the local
assessor which is termed as assessed value (for discussion
purposes, although really has no technical name)
6% will be based on whichever is higher between the three
In all likelihood, it is the gross selling price which is higher but
sometimes people don‘t disclose their real selling price. Instead, what
they declare is the zonal value since most likely it is higher than the
assessed value determined by the local assessor.
Presumed gain in sale of real property
This is really unfair because there is no gain but automatically you are
subjected to tax. It is possible you are earning a loss and yet you are
subjected to tax because the basis is the selling price, not the net
gains unlike that of shares of stock. You don‘t deduct your cost. So if
you bought your property for 1 Million and it is sold for 800, 000,
where will you base your tax? It will be based on 1 million pesos even
if you sold it at a loss because it is always gross selling price, zonal
value or assessed value.
PRINCIPAL RESIDENCE
This is the family home of the individual taxpayer. It refers to the
dwelling house, including the land on which it is situated, wherein an
individual including his family permanently resides, or whenever
absent, wherein the said individual intends to return.
It is the residential address of a natural person as certified by the
Barangay Chairman who has jurisdiction over the place, or the Building
Administrator (in lieu of said Punong Barangay) if the residence is a
condominium or the individual taxpayer‘s address as indicated in the
latest income tax return.
Exempt from CGT
If it is the principal residential property of the taxpayer, the transaction
is exempted from CGT. There are certain requirements which must be
complied to prove that it is indeed your residential property:
1. Certification from the barangay that this is your principal
residence.
2. It must be located in the Philippines.
3. The proceeds derived in the sale must be used to acquire a new
Principal residence within 18 months.
4. Historical cost or adjusted basis of the real property sold or
disposed shall be carried-over to the new principal residence built
or acquired
5. The BIR is notified within 30 days from the date of disposition of
the taxpayer‘s intention to avail of the tax exemption
6. Tax exemption can only be availed of only once every 10 years.
7. Unutilized portion of the proceeds is subject to CGT of 6% based
on the portion of the GSP or ZV, whichever is higher, to be
computed proportionately as expressed in this formula:
8. The tax on the unlimited portion shall be paid within 30 days after
the expiration of the 18-month period.
Important: The exemption applies only if you are selling your
principal residence to purchase a new residence.
Q: What if you sold your principal residence but you found your new
residence after 2 years?
A: Subjected to capital gains tax because you failed to comply with the
condition that it must be within 18 months from the time you sold your
old residence.
Q: What if the construction of the house is more than 18 months?
A: There is no requirement that it must be reasonable. Problem is you
must be able to spend the proceeds during the period.
“The historical cost or adjusted basis of the real property sold
or disposed will be carried over to the new principal residence
built or acquired”
It means that the if the property now that you are selling after
depreciation is worth 1 Million pesos and you built a house worth 2
Million, it is as if it is only worth 1M because you are supposed to
carry-over the historical or adjusted value of your property.
The reason for this is that if ever you will sell your new residential
property now, because the basis of the value is less, you will always be
subject to tax since cost is less. Though it does not matter because
your sale is based on gross selling price, zonal value or assessed value,
whichever is higher supposedly but because you will include it there,
the zonal value is very small.
Gross selling price now is the highest among them and it will
be subjected to tax in terms of that higher value.
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It just includes the value of your old house to your new house. So if
you avail of that, your principal house is worth 1 Million and you were
able to sell it for 2 Million pesos (total proceeds). You now want to buy
a house which is worth 1.6 Million, what will happen to the excess
400,000? It will be taxable because the requirement is that all
proceeds must be fully utilized for purposes of your new principal
residence. The excess will be subject to tax.
For example, only 1/3 of the entire proceeds is being used. Only 1/3 of
the capital gains tax supposedly will be subject to tax.
Example:
GSP = 2M Zonal value = 1.8 M
Assessed Value = 1.6 M Value of the new house = 1.6M
The capital gains tax on the excess is P24,000.
Another example:
Amount of property is 1M, after 5 years, you want to change principal
residence so you sold it. Because of the land value, it is now worth 5M.
You comply with all the requirements to be able to avail of the
exemption. In addition to the requirements above, an additional
requirement is that it must be placed in an escrow account which is a
conditional account—you cannot withdraw on that amount until the
condition was fulfilled. The supposed capital gains tax in favor of BIR
so that if ever, after 18 months, you are not able to purchase a new
principal residence, the BIR will just withdraw whatever is in that
escrow account.
The zonal value of the property is 6M, assessed value is 5.5M. If after
10 months, you decided to purchase a house and lot worth 4M in Ma
Luisa. How much is the Capitals Gains Tax due on the transaction
provided?
Given:
Cost of the house = P1M GSP = P5M
Cost of new principal residence = P4M ZV = P6M
AV = P5.5M
Excess (P5M - P4M = P1M)
Is there capital gains tax due on the transaction? Yes.
Capital Gains Tax is P72,000.
Reason why it is not subjected to tax
The reason why it is not subjected to tax is because you are still living
in that residence although in a different location. It would be unfair
that you sold your old house to buy a new one and it will be subjected
to tax. Shelter is a necessity.
Q: But if what happens is that you sold your old house, purchased a
new one less in value of a previous house?
A: That excess will be subjected to tax. So, never buy a house lesser in
value than your old one. Otherwise, the basis for computing capital
gains tax is higher.
Q: Why do we not deduct the original cost of the house?
A: Because the law deems it that there is a presumed gain regardless
of the cost of the property. The law is specific in saying that it should
be based on GSP, FMV, or AV, whichever is higher.
SALE OF OTHER PROPERTIES
SALE OF OTHER PROPERTIES
Those like microphone, laptop, jewelry. If they will be sold, you will be
subject to tax if ever there is income. Rate is the dumping ground
computation of 0-35%.
Your capital loss can only be deducted from capital gains.
If engaged in business, you have ordinary income. If in addition to
that, you sold your car, not used in business, you will have capital
gains. How will it be subject to tax?
Important: Ordinary gains and capital gains can be added. Ordinary
loss and capital gains can be joined. But the capital loss cannot be
deducted from ordinary gains.
Summary:
OG & CL – cannot join
OL & CL – cannot join
OG & CG – can join
OL & CG – can join
Example:
Before you compute the taxes, there is a portion for capital gains and
capital loss. Example if you receive jewelries (capital asset) for 100k
when you were 18 years old and you were able to sell it at 120k after
1 year (Note: it matters how long you held on to it). Cost is 100k,
gross selling price is 120k. Difficulty here is determining whether it is
ordinary or capital assets. How much is the tax due?
Cost – P100k
Gross selling price – P120k
P120k – P100k = P20k
Net gain is 20k. 20k is added to taxable income, and the sum is called
net capital gains. Assuming ordinary income is 100k, total taxable
income is 120k, subjected to the rate of 0-35%.
Total tax due and demandable for this type of income is 18.5k. No
problem because you only have net capital gains.
Q: What if it is more than 1 year? Example you received it when you
were 18 years and you are now 21. Will you still be able to consider
the entire 20k?
A: No. When it is more than 1 year, you subject it to a holding period
which will necessitate 50% deduction on gains. Better if you hold on
for more than 1 year because only 50% will be considered as the gain
for taxation purposes. It means that only 10k (20k times 50%) will be
added.
Applicable only to individuals
Sec. 39(B) of the tax code states that ―In the case of a taxpayer, other
than a corporation.‖ Take note that if there is individual, there is the
holding period requirement to account for.
Capital Loss Carry Over
You have a capital loss of 30k. The rule is that you cannot deduct it
from your P10k ordinary income. Also, there is no capital gains to
deduct it from. What will you do then? You will have to carry-over the
capital loss to the next year.
In accounting parlance, this is known as NOCOLCO. There is NOLCO in
allowable deductions, there is NOCOLCO for capital gains.
Limitations:
1. You can only carry it over for a period of 1 year.
TN: If beyond that, no carry-over anymore.
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2. You can only carry it over to the extent of the net income on the
year it was incurred.
TN: Loss is 30k and ordinary income is 10k. How much can you
carry over to the next year? Only 10k because there is a limit that
it should not exceed the ordinary income of the year the loss was
incurred.
Q: If on 2016, it is still an ordinary gain with no capital gains, what will
happen to your 10k?
A: You cannot carry it over again.
Q: If in 2017, you have a capital gain of 10k, can you still carry over
the 10k from your 2015 loss?
A: No, because the limit is only 1 year.
Q: Had it been that there was a capital gain on 2016 for 50k?
A: Then 10k will be deducted. There will be a net capital gain of 40k,
added to 200k. You can now deduct—net capital loss carry over—net
capital gains of 40k. Total taxable income is 240k. Capital loss can be
deducted from capital gains but if there is no capital gain, you cannot
deduct capital loss.
EXCLUSIONS
EXCLUSIONS [LAGCIRM]
Sec 32 (B). Exclusions from Gross Income. — The following items shall
not be included in gross income and shall be exempt from taxation
under this Title:
1. Life Insurance
2. Amount Received by Insured as Return of Premium
3. Gifts, Bequests, and Devises
4. Compensation for Injuries or Sickness
5. Income Exempt under Treaty
6. Retirement Benefits, Pensions, Gratuities
7. Miscellaneous Items
a. Prizes and awards given in recognition of Religious,
Charitable, Scientific, Educational, Artistic, Literary or Civic
Achievements
b. Prizes and awards in sports competitions
c. Income derived by Foreign Government or its political
subdivisions from the exercise of any essential governmental
function or from any public utility
d. Income derived from investments in the Philippines by
Foreign Government or Financing institutions
e. Gains derived from redemption of shares of stock issued by
a Mutual Fund Company
f. Contributions to GSIS, SSS, PAG-IBIG, and Union Dues
g. Benefits in the form of 13th month pay and other benefits
h. Gains derived from the sale, exchange, retirement bonds,
debentures or other certificate of indebtedness with a
maturity of more than 5 years
Shall not be included in the gross income and shall be exempt from
taxation.
TN: The exclusions are exclusive because they construed strictly
against the taxpayer while in favor of government.
PROCEEDS OF LIFE INSURANCE
PROCEEDS OF LIFE INSURANCE
The proceeds of life insurance policies paid to the heirs or beneficiaries
upon the death of the insured, whether in a single sum or otherwise,
but if such amounts are held by the insurer under an agreement to
pay interest thereon, the interest payments shall be included in gross
income.
TN: Not taxable because it is an indemnity in lieu of death.
Example:
Kads secured a life insurance for the benefit of Marmie. Marmie was
designated as irrevocable beneficiary. If Kads dies, the life insurance
will pay his beneficiary 10K every month to Marmie. Is it taxable for
income tax purposes? No.
Whether or not revocable, it does not matter. Whoever is the
beneficiary, it does not matter. Still not subject to income tax.
TN: Life insurance is tradition it that you must die first before the
insurance is issued. (Unlike in an endowment fund – you pay then you
can get the investment if you outlive the insurance) Whatever the
proceeds of traditional life insurance – not subject to income tax.
Company Insuring Employee Example
If the company is the beneficiary = expenses (not taxable)
A company takes a life insurance for one of its employees because the
latter has been such a great guy that they love him. The company was
named as the beneficiary – it will be the only one benefitting from
their beloved employee‘s death.
The amount paid for the life insurance is now treated as an EXPENSE
and the income that they get after the employee‘s death is not taxable
because these are life insurance proceeds.
The company may deduct it as an expense on their part.
If estate of the employee is the beneficiary = compensation (taxable)
If the company makes the estate of the employee as the beneficiary,
the life insurance premium the company pays will now be treated as
COMPENSATION on the part of the employee and will be taxed yearly
as compensation.
Insurance premium – Taxable
Life insurance proceeds – Still not taxable since the law does not
distinguish who the beneficiary is.
TN: Proceeds of life insurance are never taxable, regardless of the
beneficiary.
When life insurance can be subject to tax
1. Insurer and insured agreed that the amount of the proceeds shall
be withheld by the insurer with the obligation to pay interest in
the same – the interest is the one subject to tax.
Example:
On Jan. 9, 2016, you got life insurance proceeds in the amount of
1M but the insurance company will only pay you on Jan. 9, 2017.
During this supervening period, there is interest of 20% so that
when the time comes, you will get 1.2M by Jan 9, 2017. Only 1M
will be excluded. The 200,000 will be subject to tax because this
is the interest will be subject to tax.
(1) There is transfer of the insurance policy.
When one sells his insurance to another, the income that the
purchaser gains from the insurance is subject to tax. The income
derived from this is now taxable since the insured is now making
a business out of the insurance policy.
Illustrative Problem:
Mr. A is insured for a life insurance policy of 10 Million Pesos
which is due from payment for 10 years. From Year 1 to Year 4,
Mr. A paid for the premium for 4 Million pesos. On the 4 th year,
Mr. A sold the Insurance Policy to Mr. B for 5 Million Pesos. From
4th year to 8th Year, Mr. B paid for the Insurance Premium in the
amount of 4 million pesos.
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On the 8th year, Mr. A dies which means Mr. B is happy since he
can get the money in the amount of 10 million pesos. (and Mr. B
paid only 9M – 5M for the sale and 4M for the premiums)
What is TAXABLE?
The Income the original beneficiary (Mr. A) got from transferring
his insurance AND the income the purchaser (Mr. B) gains from
the Insurance Policy.
MR. A‘s Case:
When he was alive and when he transferred his life insurance
policy to B, he was able to obtain 1 million pesos as his income.
This is so since Mr. A paid 4 million pesos for the Premium and he
sold it to Mr. B for 5 million pesos. 4 million as the capital of Mr. A
is deducted from 5 million which was how much he got from the
transfer.
This 1 million is now Mr. A‘s income which is CAPITAL INCOME
from Capital GAIN (sale of other personal property)
MR. B‘s Case:
When Mr. A transferred the policy to MR. B, latter now became
the beneficiary or the one who will reserve the 10 million pesos
when MR. A dies. Mr. B gets the 10 million BUT that whole
amount is NOT taxable since Mr. B had to put in capital for the
policy.
Mr. B paid 5 million for the transfer from Mr. A to him and he also
paid 4 Million for the payment of the premium until the 8th year
when Mr. A died. Therefore, Mr. B paid a total of 9 million pesos
which is his capital which will now be subtracted to 10 million
pesos which Mr. B earned from the Insurance Policy.
Now, Mr. B actually has 1 million pesos as has income and now
subject to tax.
INCOME =
Life Insurance Proceeds – (Purchase Price + Premiums Paid)
SUMMARY:
GR: Not taxable regardless of the beneficiaries
Conditions:
1. Paid to heirs
2. Paid upon death of the insured
3. Paid in a single sum or in instalment
Reason: It is more of an indemnity or compensation rather than gain
EXC: (When taxable)
1. Used to secure money obligation
2. Transfer for valuable consideration
Income from Life Insurance Proceeds
Proceeds of Life Insurance P xxx
Less: Actual Consideration (xxx)
Less: Premiums shouldered by transferees (xxx)
Income P xxx
TN: Excess is taxable. The portion of interest on life insurance
proceeds is taxable and included in the dumping ground computation.
AMOUNT RECEIVED AS RETURN OF PREMIUM
AMOUNT RECEIVED AS RETURN OF PREMIUM
The amount received by the insured, as a return of premiums paid by
him under life insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract.
TN: What is taxable is the excess of the amount received over the
amount paid. The excess forms part of the dumping ground
computation. The interest payment is also taxable.
Endowment funds/policy:
Life insurance that allows you to get proceeds if you do not die after a
particular period.
Example: If you are required to pay for 100k per year for 20 years
(total of 2 million pesos) and that you will receive 10M at the end of
that year, and then you outlive the policy after 20 years and you do
not die, you will get it.
You will have an income of 8M.
This is because 10M (endowment) – 2M (how much you paid for 20
years) = 8 Million pesos.
The 2 million pesos is return of premium/capital and not subject to
tax. This will not fall under letter A because no one died here.
GIFTS, BEQUESTS, AND DEVISES
GIFTS, BEQUESTS, AND DEVISES
The value of property acquired by gift, bequest, devise, or descent
shall be excluded from gross income, provided that income from such
property shall be included from gross income.
.
TThere is already direct tax due to it. There is no income to speak of.
The right you are exercising here is not related to your right to earn
income but on some other rights.
Gifts, etc. is under will if you are granted by some decedent which
takes effect only if someone dies. You earned something but not
because of your right to earn income but someone else‘s right to
transfer property. This act is taxable under estate tax, not income tax.
In the same way, if I am so generous to give you 1M. It increased
your net worth. It is because of my right to be generous not your right
to earn income. If you are given gifts, it will be subject to donor‘s tax,
not income tax. The donor, not the donee, is subject to tax.
Gift
Any property legally and validly transferred from one person to
another for free
Bequest
Personal property transferred from one person to another by will.
Devise
Real property transferred from one person to another by will.
COMPENSATION FOR INJURIES OR SICKNESS
COMPENSATION FOR INJURIES OR SICKNESS
Amounts received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal injuries
or sickness, plus the amounts of any damages received, whether by
suit or agreement, on account of such injuries or sickness are excluded
from gross income.
Generally not taxable
Only damages in relation to physical injuries are exempted (moral
damages are not exempted). It contemplates accidents involving
vehicles, someone will be held liable.
Example: If there is a manhole and you fell, granting someone was
negligent, if ever you will receive damages in relation to the injury.
Damages in relation to physical injury is not subject to tax.
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Other damages that you will get, that is a gray area. For example,
compensation for loss profit which forms parts of compensation
income but this is a gray area.
Sir thinks that this should not be subject to tax because this was not
borne out of your services rendered. It is just compensation because I
was involved in an accident, forms part of physical injuries.
Other damages that you get is still taxable if not related to physical
injury. Example: In labor case, payment of backwages, atty‘s fees,
moral damages, nominal damages will still be subject to tax because
not physical injury.
Exceptions:
1. Actual damages for loss of anticipated profits
2. Moral and exemplary damages awarded as a result of breach
of contract
3. Interest for non-taxable damages above
4. Damages as compensation for unrealized income
INCOME EXEMPT UNDER TREATY
INCOME EXEMPT UNDER TREATY
Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines
Most favoured nation clause which is one way of preventing or
avoiding international double taxation. It is an exclusion because both
sovereign states, being superior in their own right, entered into an
agreement.
We follow the pacta sunt servanda that we have to be in good faith
whenever we deal with international personalities. So if we agreed that
no taxes will be paid so it is appropriate to exclude them from taxes.
This also embodies the principle of reciprocity and comity.
RETIREMENT BENEFITS, PENSIONS, GRATUITIES
RETIREMENT BENEFITS
Retirement benefits received under Republic Act No. 7641 and those
received by officials and employees of private firms, whether individual
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer:
Provided, that the retiring official or employee has been in the service
of the same employer for at least ten (10) years and is not less than
fifty (50) years of age at the time of his retirement:
Provided, further, that the benefits granted under this subparagraph
shall be availed of by an official or employee only once.
For purposes of this Subsection, the term ' reasonable private benefit
plan' means a pension, gratuity, stock bonus or profit-sharing plan
maintained by an employer for the benefit of some or all of his officials
or employees, wherein contributions are made by such employer for
the officials or employees, or both, for the purpose of distributing to
such officials and employees the earnings and principal of the fund
thus accumulated, and wherein it is provided in said plan that at no
time shall any part of the corpus or income of the fund be used for, or
be diverted to, any purpose other than for the exclusive benefit of the
said officials and employees.
Any amount received by an official or employee or by his heirs from
the employer as a consequence of separation of such official or
employee from the service of the employer because of death, sickness
or other physical disability or for any cause beyond the control of the
said official or employee.
a. "The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens
who come to reside permanently in the Philippines from
foreign government agencies and other institutions, private
or public.
b. Payments of benefits due or to become due to any person
residing in the Philippines under the laws of the United
States administered by the United States Veterans
Administration.
c. Benefits received from or enjoyed under the Social Security
System in accordance with the provisions of Republic Act No.
8282.
d. Benefits received from the GSIS under Republic Act No.
8291, including retirement gratuity received by government
officials and employees.
Retirement plans covered by this provision:
1. Retirement Pay Law
2. CBA Retirement Plan
3. Reasonable Private Benefit Plan
Retirement Pay Law
Under the new retirement law, persons who are 60 years who have
rendered service of 5 years, extendable until 65 years mandatory
retirement.
CBA Retirement Plan
Retirement Plan entered into by the employer and the labor union. It
may provide different conditions, provided not more burdensome than
the Retirement Pay Law.
Reasonable Private Benefit Plan
It is another retirement benefit plan which has more stringent
requirements. This becomes a separate fund of the company. The
company cannot make use of it. In fact, there is an entity that may be
set up just for this – usually a bank.
Requirements of a reasonable private benefit plan
1st Must be reasonable private benefit plan
2nd Reasonable private benefit plan is only in the form pension,
gratuity, stock bonus or profit sharing plan
A reasonable private benefit plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein
contributions are made by such for the purpose of distributing to such
officials or employees, or both, and employees the earnings and
principal of the fund thus accumulated, and wherein it is provided in
said plan that at no time shall any part of the corpus or income of the
fund be used for, or be diverted to, any purpose other than for the
exclusive benefit of the said officials and employees.
This becomes a separate fund of the company because the company
cannot make use of it. In fact, there is an entity that may be set up
just for this usually a bank which will manage this
3rd A contributory plan
There must also be a contribution on the part of the employer, or
employee, or both. No amount shall inure to the benefit of a particular
employee or official and such must be established for the common
benefit of the employees or officials
4th Reasonable private benefit plan must be approved by BIR,
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Otherwise it will fall under the ordinary retirement law or RA 7641. The
company is not considered to have successfully set up a reasonable
private benefit plan.
5th It must also be availed of only once by the employee in his lifetime.
It is contained in the regulations, though not stated in the law. The
subsequent retirement benefits received from another private
employer is no longer exempt but subject to tax
6th The retiree official or employee must be at least 50 years of age,
with at least 10 years of service which is either continuous or not
because the law does not provide.
Illustration:
In one company, you can work there for 5 years, leave the company,
go back to the company, and work for another 5 years. You then now
comply with the requirement of 10 years of service.
IF Mr A is already 50 when he joined the company and stayed until he
was 60 (optional retirement age), his retirement benefit shall be
excluded if the private benefit plan is approved by BIR only if this is
the first time he will receive the benefit , because he complied with the
age requirement which is 50 years old, he was able to work for 10
years and it was approved by BIR.
Effect of previous retirement plan obtained from the
government
If same situation, prior to working in the private company, he already
received retirement benefit from the government which he
previously worked for, will he be exempt if he retires from the private
company at age 60? Yes, because the first one that was availed of was
given by the government and it will not be counted for purposes of the
exclusion.
These employees are not covered by the labor code but covered by
the Civil Service Law. It is not covered on the law on RA 7641 or new
retirement plan. The reasonable private plan benefit received is
considered as the first time for the application of this law. The
retirement benefit received from the government will not be counted
for purposes of the exclusion under NIRC, after all it is not private.
Separation pay
Amount received by an official or an employee or by his heirs from
the employer due to separation from service because of death,
sickness, or other physical disability or for any cause beyond the
control of the official or employee
Non-taxable benefits
Social Security Benefits, retirement gratuities, pensions, and other
similar benefits received by resident or non-resident citizens or
resident aliens from foreign institutions, whether public or private,
are not taxable.
SSS benefits under RA 8282
GSIS benefits under RA 8291
US Veterans benefit
Benefit you receive from the United States Veterans Administration
Office, Philippine Veterans benefits are also exempted.
Q: If you used to work in the US for 20 years and then you retire,
come back to the Philippines and you receive pension from US social
security services, will it be excluded?
A: Yes, under 32b6c. If you get benefit like pension, social security,
retirement, gratuity and from a foreign government, it is already
excluded.
General rule in fact is that everything for which you paid a
contribution, if there are benefits from them, it is always exempted.
Pag-ibig, Philihealth, GSIS, SSS are always exempted whenever you
get benefits.
Illustration:
Mr. A
30 years ABC Company 5 years Separation Pay of P300K
35 years XYZ Company 10 years Retirement pay of 1M
45 years ABC Company 5 years Retirement pay of 2M
Will the following be subject to tax?
The separation pay will not be subject to tax as per (b).
No age requirement here. The requirement is only the reason for
separation WON it is for just or lawful causes.
It could fall under retrenchment, redundancy or other labor saving
devices. Here, the reason for separation is involuntary or beyond the
control of official or employee. It could also be that the reason for
termination is death, sickness, physical disability.
If it falls under any of these two, then your separation will not be
taxable. But if severance is because you tendered your resignation,
clearly it is taxable. That‘s why some companies let you enroll in their
redundancy program if they like you, so not taxable.
The first retirement plan from XYZ is taxable because Mr. A is not yet
50. The last retirement plan is not taxable
10 years of service (5 plus 5 years) in ABC Corp plus 50 years old
therefore complied with the requirements.
Let us assume that the retirement plan for XYZ is subject to CBA
which provides that you may retire at age 50 or after rendering 10
years of service to the company, approved by BIR, this will not be
taxable. The retirement plan under ABC will now be taxable because
it will now be the second time that he availed of a retirement plan.
MISCELLANEOUS ITEMS
MISCELLANEOUS ITEMS:
A. Income derived by Foreign Government
B. Income derived by the Government or its Political Subdivisions
C. Prizes and Awards given in recognition of Religious, Charitable,
Scientific, Educational, Artistic, Literary, or Civic Achievements
D. Prizes and awards in Sports Competition
E. 13th Month Pay and other Benefits
F. GSIS, SSS, Medicare and Other Contributions
G. Gains from the Sale of Bonds, Debentures or other Certificates of
Indebtedness
H. Gains from Redemption of Shares in Mutual Fund
INCOME DERIVED BY FOREIGN GOVERNMENT
INCOME DERIVED BY FOREIGN GOVERNMENT
Income derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on deposits in
banks in the Philippines by:
Foreign governments,
Financing institutions owned, controlled, or enjoying refinancing
From foreign governments, and
International or regional financial institutions established by
foreign governments.
Example:
If South Korea has a deposit here for 2M and it earns 100k interest
after 10 years, interest will not be subject to tax because it is
exempted under 7a. Interest on deposits from foreign governments in
banks in the Philippines is excluded from taxes.
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If US government invested in the shares of PLDT and PLDT decided to
declare dividends, it will not be subject to tax because it is an income
from investment in the Philippines of a foreign government of shares
of stocks of corporation in the Philippines.
Concrete Example
Atlas Mitsubishi (Non-resident foreign corp. from Japan)
Bank of Japan
Atlas loaned from Mitsubishi 2M (non-resident foreign corporation) for
equipment to produce the product for Mitsubishi. (IOW, Mitsubishi is
client of Atlas). In turn, Mitsubishi loaned that money from Bank of
Japan, owned by government of Japan.
Q: Is the interest earned by Mitsubishi taxable?
A: Yes, because it is between Atlas and Mistubishi and not between
the Bank of Japan. The situs of interest is the residence of the debtor.
Had it been only Atlas paying directly to the Bank of Japan, then the
interest would have been exempt.
There is interest payment by Atlas equivalent to 10% per year paid to
Mitsubishi, amounting to 200k every year. This interest is TAXABLE
because it is not considered an investment of foreign government in
the Philippines.
You need to make a distinction since it is not the bank of Japan but
Mitsubishi which invested in the Philippines. The loan is granted not to
a Philippine company but to Mitsubishi, a company of Japan, and is not
considered an investment of government of Japan.
Interest will go to Mitsubishi, not to bank of Japan. BUT if the bank of
Japan loaned it to Atlas, it is tax exempt. But because in this case it
passed through Mitsubishi before getting to Atlas, the interest earned
by Mitsubishi is taxable.
If Mitsubishi is a domestic corporation or even a resident foreign
corporation doing business in the Philippines, and it makes payment of
interest to the bank of Japan, then it would not have been taxable.
The Philippine has no jurisdiction to tax the bank of Japan. If we will
allow this, all companies will deal with foreign corporation so that
whatever income is not taxable.
TN: It is a landmark case, CIR v. Mitsubishi Corporation.
GR 54908, Jan. 22, 1990. Read this case.
Refinancing is when a government renews its loan.
Example: Bank of Japan loaned 2M to Atlas. Di gihapon kabayad si
Atlas. Nag reloan na sad si Atlas, nisugod ra pud si Bank of Japan.
International or regional financial institutions established by foreign
governments is reciprocal law.
They are not subject to tax here since the Philippines is not subject to
tax there as well. Income earned by Asian Development Banks are not
subject to tax because they are owned by foreign government.
INCOME DERIVED BY THE GOVERNMENT OR
ITS POLITICAL SUBDIVISIONS
INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL
SUBDIVISIONS
Income derived from any public utility or from the exercise of any
essential governmental function accruing to the Government of the
Philippines or to any political subdivision thereof.
There are 2 entities covered:
1. Government of the Philippines – refers to the National
Government
2. Any political subdivision – cities, provinces, municipalities and
barangays. Any income earned by them in the exercise of
governmental function should not be subject to tax.
GOCCs
Distinguish whether the GOCC is exercising a government or
proprietary function. It must be engaged in a commercial activity for it
to be taxable.
Section 27c of the tax code provides that all corps, agencies, and
GOCCs, except SSS are taxable. As a rule, GOCCs are subject to tax.
Section 27c states that ―upon their taxable income as are imposed by
this Section upon corporations or associations engaged in a similar
business, industry, or activity.‖ Meaning, it must be a commercial
activity for it to be taxable.
Example:
SSS are not subject to tax but had it not been provided in Section 27c
that they are exempt, they would have been subject tax because they
are doing what other private corporations are doing.
The act of loaning will be subject to tax had you been a corporation,
even if a GOCC, is subject to tax. According to BIR, BSP may be
subjected to tax because its charter says that it can be subject to tax
after a certain period which already lapsed.
For Sir, it should not be the case. The act of loaning of BSP is not
commercial but governmental in essence because it needs to maintain
financial stability for the Philippines. Otherwise, all the banks will close.
Unlike for commercial banks which purpose is really for profit.
The fact that it is not taxable if it exercises governmental functions will
not fall under 32b7b because sec 32b7b only says of political
subdivision, so it (GOCC) will not fall under the exclusion.
Sec 32b 7(b) only pertains to GOCCs providing public utilities. But, for
GOCCs in general, you refer to Sec. 27c of Tax Code where it
specifically enumerates who are exempted from taxes.
It‘s different for political subdivisions (national government, local
government units, municipalities, cities, provinces and even
barangays) – they are exempted from taxes which are connected or
related to governmental taxes. If they will engage in proprietary
functions, they will be subject to tax. However, seldom does the BIR
go after them. It may be taken against them as a body after all if the
government produces income, it will still go to the government. It will
just be turnaround of the money.
At best, for the GOCC‘s to be exempted, it should fall under Sec 27c to
be exempted since it states that GOCC‘s are taxed when performing
commercial function.
Refer to Section 27 for legal basis for exemption
That is why PAGCOR is not there, it is already subject to tax. We also
learned that PAGCOR is only subject to tax for activities not related to
gaming operations. Its franchise actually says that it is exempted.
PRIZES AND AWARDS
V
PRIZES AND AWARDS
Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement
but only if:
i. The recipient was selected without any action on his part to enter
the contest or proceeding; and
ii. The recipient is not required to render substantial future services
as a condition to receiving the prize or award.
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Requisites of exemption: Example:

1. It must be related to recognition of religious, charitable, scientific, Rice subsidy of P1500 per month is not subject to tax and not
educational, artistic, literary, or civic achievement. included in withholding tax system. But if there is subsidy in excess
2. No action in your part to enter in the contest or proceeding, you of 1500, that excess is part of the determination of the 90k
never submitted any entry threshold.
3. Recipient is not required to render substantial future services as a
condition to receiving the prize or award. If you have 2000 subsidy, the 500 is not automatically taxable
since you have to consolidate at the end of the year. The (500 x 12
Q: Should Pia be exempted from taxes? months) 6000 can be exempted if it does not exceed 90k including
your 13th month pay.
A: No. It satisfied the first condition because it is actually a civil
achievement. However, she had to join the contest herself. She is even Illustration:
required to render future services for the entire duration of her reign.
How can she be exempted? Think about it. This might come out in the 13th month pay
next exam. 100k (after computing for 13th month
Given Facts: pay)
P1500 max rice subsidy
PRIZES AND AWARDS IN SPORTS COMPETITION
per month Rice subsidy
2000 per month
PRIZES AND AWARDS IN SPORTS COMPETITION P5000 max clothing Deduct 1500 since Deminimis allows up
allowance per year to 1500 exemption which makes the it
All prizes and awards granted to athletes in local and international now 500 per month
sports competitions and tournaments whether held in the Philippines To see if 500 per month is exempt from
or abroad and sanctioned by their national sports associations. Salary – 100k/month tax if it‘s not in excess of the 82000
Rice subsidy – 2k/month allotted for 13th month pay and other
TN: Exempted if award refers to tournaments or competitions held in Clothing allowance – benefits, multiply by 12 since it will be
the Philippines or abroad. 10k/year computed at the end of the year
6000 pesos for Rice Subsidy
Requisites:
1. Competition must be sanctioned by national sports association Clothing
2. Competition must be recognized by Philippine Olympic 10000 per year but 5000 pesos is allowed
Committee to be exempt therefore 5000 pesos is left
for calculation
Exemptions are construed against the taxpayer. The last requisite is
hard to prove. Total = 100,000 + 6,000 + 5,000
111, 000 – 90,000 = 21,000
P21,000 is the amount taxable
13TH MONTH PAY AND OTHER BENEFITS

13TH MONTH PAY AND OTHER BENEFITS GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
Gross benefits received by officials and employees of public and
private entities: Provided, however, That the total exclusion under this GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
subparagraph shall not exceed Ninety thousand pesos (P90,000)
which shall cover: GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of
individuals
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act When you look at your payroll, there will be deductions which are
No. 6686; done before computing the tax
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order
No. 28, dated August 13, 1986; SSS Contributions – 1000 Salary 100k
(iii) Benefits received by officials and employees not Philhealth – 500 Less 1.6k
covered by Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; HDMF – 100 Taxable 98.4k
and
(iv) Other benefits such as productivity incentives and Total: P1,6000 (subjected to tax table)
Christmas bonus.

Threshold is now P90,000 under the TRAIN Law

The previous amount exempted was P30, 000 to P82,000 for 13th GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER
month pay and other benefits such as Christmas bonus. There is CERTRTIFICATES OF INDEBTEDNESS
also additional exemption for productivity incentive of 10,000, for a
total of as much as 92,000 for threshold for amount exempted. GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER
CERTIFICATE OF INDEBTEDNESS
th
Now, the amount of exempt 13 month pay and other benefits is
increased to P90,000. Gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness with a maturity of
De minimis benefits more than five (5) years.
These are small amounts of benefits granted to employees. They
are tax-exempt to a certain effect. TN: What is exempted is only the gain on the transfer. The interest is
still taxable.

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Debentures are used for bonds, backed by general credit of the
issuer rather than a particular asset. They are unsecured liabilities.
This is like a bank letting someone owe money without any collateral
Q: How can debts be subjected to tax in the first place?
A: Debts are not seen as debts but possible investments on the person
who lends the money. Debts may be securitized which means it can be
covered by a certificate/evidence for which people can invest in.
People are interested in investing in debts because it can be at an
amount lower than the face value
Example
Mr. B‘s Debt to Mr. A is 1 million and with a fixed interval payment of
100k/mo. The maturity is for or a period of more than 5 years.
Mr. A can make a security (debt obligation) and he can assign such
right to someone else and he or she can readily collect the amount.
But Mr. A sold this security to Mr. C for 900,000. The difference of
P100,000 is the gain the other person will obtain.
If Mr. C sells it to someone for 1.1 Million, Mr. C earns 200,000. That
200,000 can be excluded from taxes granting the bond is good for 5
years, otherwise it is not exempted from taxes.
Bonds are debt securities while shares of stocks are equity securities.
It is this securitization of debt securities which caused the US
Subprime crisis because of lack of proper investigation and poor debt
policy of lenders.
GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND
GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND
Gains realized by the investor upon redemption of shares of stock in a
mutual fund company as defined in Section 22(BB) of this Code.
Reason for exemption: To encourage investment in mutual funds
Mutual fund – the public gets to be included in that fund.
There are businesses like PhilAm and most banks engage in
management of mutual fund because not everyone has the technical
know-how to trade in the capital market for shares, bonds.
People trust the professionals and the experts (banks, etc) to manage
their funds. Small investments are pooled together and then invested,
perhaps in the stock market.
Illustration:
38 people will invest 100,000 each which amounts to 3.8 Million.
Evidence of ownership of mutual funds is called shares represented by
a certificate. At the end of a certain period, you decide to sell it back to
the fund.
If you sell your shares to the fund and you gain and earn income, that
income is tax exempt. This is done by the government to encourage
people to invest in mutual funds and save their money. Mutual fund
owners are protected because they are small time investors.
Take note that it has to be a mutual fund.
ALLOWABLE DEDUCTIONS
ALLOWABLE DEDUCTIONS
Allowable deductions are items allowed by law to reduce gross income
in order to arrive at net income subject to tax. (Sec. 34, NIRC)
Reason: Law allows it to be claimed or deducted.
No deduction shall be allowed for taxpayers earning compensation
income arising from personal services rendered under an employer-
employee relationship.
Matching principle
Before income can be generated, you have to spend something for it.
You need to deduct your expenses from your income to arrive at your
net taxable income.
DEDUCTION V. EXCLUSION
Deduction is an outflow of wealth. It represents the money spent or
the taxpayer‘s expenses. It pertains to the computation of net income.
Exclusion is an inflow of wealth but is not considered as part of gross
income in computing taxable income because it does not fall within the
definition of income or is exempted by the fundamental law or statute.
It pertains to the computation of gross income.
DEDUCTION V. EXEMPTION
Exemptions refer to inflows of wealth not subject to tax because the
law expressly provides for its exemption.
Personal Exemptions are arbitrary amounts allowed for personal,
living or family expenses of the taxpayer. The amount has been
calculated to roughly cover the minimum subsistence of the taxpayer.
It can be claimed only by individual taxpayers.
BASIC PRINCIPLES
BASIC PRINCIPLES GOVERNING DEDUCTIONS
1. The taxpayer seeking the deduction must point to some
specific provisions of the law authorizing the deduction.
2. He must be able to prove, through substantial evidence, that
he is entitled to the deduction authorized or allowed by law.
Interpretation
Deductions are strictly construed against the taxpayer.
Withholding tax
Withholding tax must be strictly imposed when required under the law.
Otherwise, the salaries cannot be deducted from gross income. Also,
there is a penalty equivalent to the amount the employer failed to
withhold.
Related to trade or business
The conditions in the law must be satisfied. The deduction must be
used or related to your trade or business.
Example: Your business is leasing out real properties. You went to
collect rents from your lessee. When you went out, your child wanted
to buy the very colourful balloons. Can you deduct the cost of
balloons? No, it is not related to conduct of trade or business. There
could be other conditions.
KINDS OF ALLOWABLE DEDUCTIONS
KINDS OF DEDUCTIONS
1. Itemized Deductions
2. Optional Standard Deduction
Basic Personal and Additional Exemptions Repealed
Basic personal and additional exemptions have been repealed by the
TRAIN Law effective January 1, 2018.
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Taxable Estates & Trusts

ITEMIZED DEDUCTIONS
Taxable estates and trust can claim 40% OSD. Estates and trusts are
taxed like individuals.
ITEMIZED DEDUCTIONS [ExInTaLoBaChaRePenDepDep]
When option is made
Deductions from Gross Income (Section 34 (A) – (K), NIRC) To qualify for OSD, the taxpayer should apply at the first quarter of
1. Expenses the taxable year. It is irrevocable for the taxable year of choice.
2. Interest
3. Taxes For individuals, OSD would be better if the total expenses will not
4. Losses reach 40%.
5. Bad Debts
6. Charitable Contributions For corporate taxpayers, OSD would be beneficial if there is less cost
7. Research and Development of sales/service because there could be a higher tax base for OSD, and
8. Pensions there could be less operating expense.
9. Depreciation
10. Depletion Still, there are other considerations in determining whether or not to
avail of OSD even if figures would go against OSD. For example, your
Premiums on Hospitalization and Insurance Repealed substantiation is not in accordance with regulations like when they are
Premiums paid on hospitalization and insurance have been repealed by not in the name of the company or there is no substantiation at all.
the TRAIN Law effective January 1, 2018.
BASIC PERSONAL & ADDITIONAL EXEMPTIONS
Only for Business Income Earners
Only individuals/corporations earning business income can deduct
these. If purely compensation income earner, one cannot deduct TN: This has now been repealed by RA 10963 or the TRAIN Law.
these. However, to claim all these deductions, official receipts are
required to substantiate them, which is why most would instead BASIC PERSONAL EXEMPTION
choose the optional standard deduction.
P50,000
This presupposes that there is an income. It is granted to all individuals
OPTIONAL STANDARD DEDUCTION
who are earning income. It is granted on the account that you are a
person in order to cover your living expenses.
OPTIONAL STANDARD DEDUCTION (OSD)
ADDITIONAL EXEMPTION
In lieu of itemized deductions, the taxpayer may elect an optional
standard deduction of 40%. (Sec. 36 (L), NIRC) P25,000 per child, maximum of 4 children
Requirements: (All must be complied with)
 Individual – 40% OSD on Gross Sales or Receipts 1. Dependent child - legitimate, illegitimate, or legally adopted child
 Corporation – 40% OSD on Gross Income 2. Must be chiefly supported by the taxpayer (probably more than
50% support)
If a taxpayer elects to offset his losses against his profit from capital 3. Child must be living with the taxpayer
asset transactions, he may no longer claim OSD since OSD is in lieu of 4. Must not be more than 21 years old
the itemized deductions which include losses from sales or exchanges 5. Unmarried
of capital assets. 6. Must not be gainfully employed
Exception: Even if more than 21 years old but incapable of self-
support, can still be considered dependent when mentally
Basis of 40% OSD
incapacitated or with physical defect - something born with.

Gross Sales P xxx Basis of Individual OSD Physical disability - not something born with – out of accident.
Less: Cost of Sales (xxx) Physical disability is not covered under this law
Gross Profit P xxx. Basis of Corporate OSD
CHANGE OF STATUS
OSD for individuals is higher compared to the corporate OSD since it is
If the taxpayer marries or should have additional dependent(s) during
based on gross sales/receipts wherein no deduction has been made for
the taxable year, the taxpayer may claim the corresponding additional
cost of sales.
exemption, as the case may be, in full for such year.
Individuals
If the taxpayer dies during the taxable year, his estate may still claim
Resident citizens, non-resident citizens and resident aliens except
the personal and additional exemptions for himself and his
purely compensation income earners can claim 40% OSD on gross
dependent(s) as if he died at the close of such year.
sales or receipts. Non-resident aliens cannot claim OSD.
If the spouse or any of the dependents dies or if any of such
If an individual opted to use OSD, he can no longer deduct the cost of
dependents marries, becomes twenty-one (21) years old or becomes
sales or cost of services.
gainfully employed during the taxable year, the taxpayer may still
claim the same exemptions as if the spouse or any of the dependents
If an individual employs the accrual basis of accounting for his income
died, or as if such dependents married, became twenty-one (21) years
and deductions, the OSD shall be based on the gross sales during the
old or became gainfully employed at the close of such year.
taxable year. If he employs cash basis, the OSD shall be based on his
gross receipts during the year.
This is favorable to the taxpayer:
If at end of the year, you gave birth to twins, you can claim
Corporations
50k additional exemption for the whole year even if the twins
Domestic Corporations and resident foreign corporations can claim
were born by 11:59:59 pm on December 31.
40% OSD on their gross income. Non-resident foreign corporations
cannot claim OSD.
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Even if the status changes at the beginning of the year, such as
the dependent becomes 22 by January, the dependent can still
be included in the deduction.
Husband and wife can claim maximum of 4 children for both.
Only one can claim the 4. Husband can claim 2. Wife can claim
the other 2.
NON-DEDUCTIBLE ITEMS
Sec. 36, NIRC
Items Not Deductible. –
(A) General Rule. - In computing net income, no deduction shall in
any case be allowed in respect to –
(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.
(B) Losses from Sales or Exchanges of Property. - In computing net
income, no deductions shall in any case be allowed in respect of losses
from sales or exchanges of property directly or indirectly –
(1) Between members of a family. For purposes of this
paragraph, the family of an individual shall include only his
brothers and sisters (whether by the whole or half-blood),
spouse, ancestors, and lineal descendants; or
(2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
value of the outstanding stock of which is owned, directly or
indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between
two corporations more than fifty percent (50%) in value of
the outstanding stock of which is owned, directly or
indirectly, by or for the same individual if either one of such
corporations, with respect to the taxable year of the
corporation preceding the date of the sale of exchange was
under the law applicable to such taxable year, a personal
holding company or a foreign personal holding company;
(4) Between the grantor and a fiduciary of any trust; or
(5) Between the fiduciary of and the fiduciary of a trust and the
fiduciary of another trust if the same person is a grantor
with respect to each trust; or
(6) Between a fiduciary of a trust and beneficiary of such trust.
Items Not Deductible from Gross Income
As a general rule in computing net income, no deduction shall in any
case be allowed with respect to:
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
EXC: Intangible drilling and development costs incurred in
petroleum operations
3. Any amount expended in restoring property or in making
good the exhaustion thereof for which an allowance is or has
been made
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, when the taxpayer is directly or indirectly a
beneficiary under such policy.
5. Losses from Sales or Exchanges of Property, directly or
indirectly (Related Parties)
a. Between members of a family
b. Between a direct stockholder with more than 50%
equity interest and his corporation
EXC: liquidation distributions
c. Between corporations owned by the same
individual, direct or indirect, with more than 50%
equity interest
EXC: liquidation distributions
d. Between grantor and a fiduciary of any trust
e. Between trusts if the grantor for such trusts are
the same
f. Between the fiduciary of a trust and beneficiary of
such trust
Personal, living or family expenses
Reason: Not an expense related to your trade, business or exercise of
profession.
It is also deemed accounted for in the exemption of P250,000 under
the TRAIN Law.
Amount paid out for new buildings or improvements
Exceptions:
1. Proprietary educational institutions (Sec. 34(A)(2))
2. Intangible drilling and development costs incurred in
petroleum operations (Sec. 34 (G)(1), NIRC)
The full amount of the capital expenditure for the new asset cannot be
claimed in the taxable year in which it is paid but will be spread out
over the life of the asset.
The depreciation for the current year will be an expense and can be
claimed as a deduction. So, it is not really correct to say that is not an
allowable deduction. Only that the deduction is not outright.
Amount expended in restoring property
The capital expenditure for extraordinary restoration cannot be
claimed as a deduction but forms part of the value of the property
which will be subject to depreciation. The expense is not deducted
outright but spread over the life of the asset.
Ex: Mining company digs out an entire mountain and then incurs costs
to restore the property back to its original form. The costs will form
part of the value of the property which will be subject to depletion.
Premiums paid on any life insurance policy
This is not deductible as it is a return of capital where the employer is
the beneficiary of the policy, directly or indirectly.
Ex. ABC Corporation insured the life of employee X, a key employee.
ABC pays the premium of P100,000 a year. The beneficiary is ABC
Corporation.
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1. Can ABC Corp claim the premiums paid as a deduction on its
taxable income?
No, because it is a return of capital. ABC Corp can recoup
whatever it expended for the life insurance premiums for
employee X since it is the beneficiary.
2. Can Mr. X consider the life insurance as income?
No, there is no gain on the part of Mr. X as he will not be
benefitted by the life insurance. The proceeds will not go to
him or his heirs or his estate but to ABC Corporation.
3. If there is another life insurance, are the proceeds taxable?
No, life insurance proceeds, regardless of the beneficiaries,
are excluded from gross income.
4. If ABC Corporation makes the parents of Mr. X the
beneficiaries, what are the tax implications?
ABC Corporation can now deduct the expense from their
income. Mr. X can consider the life insurance as income
which will be taxable since he can gain something. The
parents of Mr. X will not be taxed upon receipt of the
proceeds since such are excluded.
Losses from sales or exchanges of property directly or
indirectly (Related Parties)
Between members of a family
The family of an individual shall include only his
1. Brothers and sisters (whether by the whole or half-blood),
2. Spouse,
3. Ancestors, and
4. Lineal descendants
No deduction shall be allowed for losses arising from transactions
between family members.
Reason: It may be simulated by the nature of the relationship.
Ex. Real property which forms part of the exclusive property of the
wife worth P1M is sold to the husband for P100K. The P900K loss
cannot be claimed as a deduction by the wife since this is a transaction
involving family members.
TN: Aunts are not included because they are collateral relatives.
Cousins can deduct the loss.
Between a direct stockholder with more than 50% equity
interest and his corporation
No deduction shall be allowed for losses from sales or exchanges of
property between an individual and corporation more than 50% in
value of the outstanding stock of which is owned, directly or indirectly,
by or for such individual.
Except: In case of distributions in liquidation
Reason: There may be undue influence. A controlling shareholder may
dictate the price.
TN: ‗Direct or indirect‘ here refers to the status of ownership.
Ex. Shareholder directly owns the shares
S1 is the controlling shareholder of X Corporation who owns 60% of
the shares. S2, S3, S4, and S5 own 10% each.
Shareholders of X Corporation
S1 60%
S2 10%
S3 10%
S4 10%
S5 10%
Q: Can X Corporation and S1 deduct the loss resulting from the
dealings between them?
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a
controlling shareholder.
Ex. Shareholder indirectly owns the shares
S1 owns 50% of the shares of X Corporation. S2, S3, S4, S5 and Y
Corporation own 10% each. S1 also owns 75% of Y Corporation.
Shareholders of X Corporation
S1 50%
S2 10%
S3 10%
S4 10%
Y Corporation 10%
Shareholders of Y Corporation
S1 75%
S6 10%
S7 5%
S8 5%
S9 5%
Q: Can X Corporation and S1 deduct the loss resulting from the
dealings between them?
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a
controlling shareholder who owns a total of 65% of the shares of X
Corp. 50% of which is owned directly while 15% is owned indirectly.
The 15% interest is derived from the 20% ownership of Y Corp in X
Corp which is multiplied by the 75% interest of S1 in Y Corp.
[20%*75%=15%]
This is called the grandfather rule.
Between corporations owned by the same individual, direct or
indirect, with more than 50% equity interest
No deduction shall be allowed for losses from sales or exchanges of
property between two corporations more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by or for the
same individual if either one of such corporations, with respect to the
taxable year of the corporation preceding the date of the sale or
exchange was under the law applicable to such taxable year, a
personal holding or a company or a foreign personal holding company.
Except: In case of distributions in liquidation
TN: ‗ Direct or indirect‘ here refers to the gain or loss.
It must be a personal holding company. Otherwise, it will not fall under
the non-deductible items.
Holding company is a company engaged merely for investment
purposes. It exists for the sole purpose of controlling another company
or for owning property, rather than for the purpose of producing its
own goods or services.
A personal holding company is a corporation in which more than
50% of the value of its shares is owned by 5 or fewer individuals,
directly or indirectly, and which receives at least 60% of its adjusted
ordinary income from passive sources.
Ex. S1 owns 80% of X Corp. which is a personal holding company,
while S2, S3, S4 and S5 own 5% each.
Moreover, S1 owns 60% of Y Corp. while, S6, S7, S8 and S9 own 10%
each. X Corp. entered into a transaction with Y Corp. which resulted in
a loss of P2M.
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Shareholders of X Corporation
RESIDENT CITIZEN
(Personal Holding Company)
S1 80%
S2 5% Article IV, Section 1 of the 1987 Constitution
S3 5% The following are citizens of the Philippines:
S4 5% (1) Those who are citizens of the Philippines at the time of the
S5 5% adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
Shareholders of Y Corporation (3) Those born before January 17, 1973, of Filipino mothers, who
S1 60% elect Philippine citizenship upon reaching the age of majority;
S6 10% and
(4) Those who are naturalized in accordance with law.
S7 10%
S8 10%
S9 10% CITIZEN

Q: Can X Corp. deduct the loss from its dealings with Y Corp.? 1. Resident Citizen (RC)
A: No. The loss cannot be deducted since one of the corporations is a 2. Non-resident Citizen (NRC)
personal holding company and both X and Y Corporations are held by
the same individual, S1, who owns more than 50% interest in each. To be a citizen, whether RC or NRC, the above constitutional
requirements must be complied with.
Between grantor and a fiduciary of any trust
The parties to a trust are: RESIDENT CITIZEN (RC)
1. Grantor/trustor TN: RC is taxable for income within and without.
2. Trustee/fiduciary
3. Grantee/ beneficiary A Resident Citizen is a Filipino citizen who stayed permanently in the
Reason: Trustor may influence the trustee to incur loss. Philippines or stayed outside the Philippines for less than 183 days
during the taxable year.
Between trusts if the grantor for both is the same
No deduction shall be allowed for losses from transactions between the He is one who is physically present in the Philippines and established a
fiduciary of a trust and the fiduciary of another trust if the same domicile in the Philippines.
person is a grantor with respect to each trust
Residence for tax purpose requires physical presence in the
Philippines. One must establish residence here, more or less similar
Trust 1 Trust 2
with domicile. There must be animus revertendi.
A – trustor A – trustor
B – Fiduciary X - Fiduciary
C – Beneficiary Y – Beneficiary NON-RESIDENT CITIZEN

If there is a transaction between B and X (fiduciary), they cannot claim Section 22(E) of the NIRC
a loss because they have the same trustor A. The term ―non-resident citizen‖ means:

Between the fiduciary and beneficiary of a trust
In the same illustration above, when trust B transacts with C, or X
transacts with Y, any of them cannot claim the loss incurred.
Reason: Control may be exercised by one over the other
GRANDFATHER RULE
(1) A citizen of the Philippines who establishes to the satisfaction of
the Commissioner the fact of his physical presence abroad with a
definite intention to reside therein.
(2) A citizen of the Philippines who leaves the Philippines during the
taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis.

GRANDFATHER RULE (3) A citizen of the Philippines who works and derives income from
abroad and whose employment thereat requires him to be
The grandfather rule looks at the shareholders (S1) of the corporate physically present abroad most of the time during the taxable
shareholder (Y Corp.) in order to determine the percentage of year.
ownership in a specific corporation (X Corp.).
(4) A citizen who has been previously considered as non-resident
INCOME TAXATION FOR INDIVIDUALS citizen and who arrives in the Philippines at any time during the
taxable year to reside permanently in the Philippines shall
TAXABLE INDIVIDUALS likewise be treated as a non-resident citizen for the taxable year
in which he arrives in the Philippines with respect to his income
derived from sources abroad until the date of his arrival in the
TYPES OF TAXABLE INDIVIDUALS Philippines.
1. Resident Citizen (RC) (5) The taxpayer shall submit proof to the Commissioner to show his
2. Non-resident Citizen (NRC) intention of leaving the Philippines to reside permanently abroad
3. Resident Alien (RA) or to return to and reside in the Philippines as the case may be
4. Non-resident Alien (NRA) for purposes of this section.
a. Non-resident Alien Engaged in Trade or Business
(NRA-ETB) Sec. 23 (C) of the NIRC
b. Non-resident Alien Not Engaged in Trade or An individual citizen of the Philippines who is working and deriving
Business (NRA-NETB) income from abroad as an overseas contract worker is taxable only on
5. Special Employees income from sources within the Philippines: Provided, That a seaman
6. Estates and Trusts who is a citizen of the Philippines and who receives compensation for
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services rendered abroad as a member of the complement of a vessel 4. Working and deriving income from abroad as an overseas
engaged exclusively in international trade shall be treated as an contract worker.
overseas contract worker.  He is taxable only on income from sources within the
Philippines.
NON-RESIDENT CITIZEN (NRC)
TN: NRC is taxable only for income within the Philippines. 5. Receives compensation for services rendered abroad as a
seaman.
A non-resident citizen is one who:
1. Establishes to the satisfaction of the Commissioner the fact of He shall be treated as an overseas contract worker provided
his physical presence abroad with a definite intention to that the following are present:
reside therein. a. He is a member of the complement of a vessel
 Write letter to commissioner or photocopy passport and b. The vessel is engaged exclusively in international trade.
show when you leave
If he does not meet these qualifications, then he shall be
2. Leaves the Philippines during the taxable year to reside abroad, treated as a resident citizen.
either as an immigrant or for employment on a permanent
basis. Illustration:
 Immigrant – Immigrant visa does not matter when he/she Secondment abroad for 2 years starting on June 26, 2017
leaves, as long as he/she intended to be an immigrant.
 Permanent employment – when there is no definite period. 1/1/2017 6/26/2017 12/31/2017 12/31/2018 6/26/2019 12/31/2019
It is not merely contractual.
 Ex: Nurses who leave the country in the middle of the year
are deemed non-resident citizen.
NRC NRC NRC RC
3. Works and derives income from abroad and whose employment Stayed for 188 Stayed With respect to For income
requires him to be physically present abroad most of the time days abroad abroad the income abroad from date of
during the taxable year. June – 4 whole year until date of arrival
 Most of the time for taxable year = 183 days (365/2) July – 31 arrival Reside
 Higher because intention is for wider taxpayers taxable in Aug – 31 Previously NRC permanently
the Philippines Sept – 30 Arrived in in Philippines
 183 days doesn‘t need to be continuous as long as it is Oct – 31 Philippines during
Nov – 30 taxable year
within the year Dec – 30
 Temporary employment 188 days
 Seamen are considered temporary workers and belong
under this category
Jan – 31
Illustration Submit proof to the Commissioner Feb – 28
You are assigned to SG for a period of 2 yrs. You left the country The taxpayer shall submit proof to the Commissioner to show his
Mar – 31
April
intention of leaving the Philippines to reside permanently – 30 or to
abroad
July 2, 2015. Reason is to earn income abroad. Employment
return to and reside in the Philippines. May – 31
requires physical presence. Is it most of the year 2015 to be June – 26
considered a non-resident citizen. 147
 Count if reaches 183 days. Philippine Embassy/Consulate days
 July 2 to December 31 = 182 days; Resident Citizen for A Filipino employed as Philippine Embassy/Consulate service personnel
2015 of the Philippine Embassy/Consulate is not treated as a non-resident
 But if you left on July 1, you will be considered NRC. citizen, hence his income is taxable.
 For Jan 1 to Dec 2016, NRC in this case
SUMMARY
3. Has been previously classified as NRC and arrives in the The following are classified as NRC:
Philippines at any time during the taxable year to reside 1. Filipino citizen with physical presence abroad and intention
permanently in the Philippines. to reside therein
 He will be treated as NRC for the taxable year in which he 2. Filipino citizen leaves Philippines during taxable year as
arrives in the Philippines with respect to his income immigrant or permanent employee
derived from sources abroad until the date of his arrival in 3. Filipino citizen with temporary employment abroad (most of
the Philippines. the time = at least 183 days)
4. Previous NRC arrives in Philippines to reside permanently
Hybrid or Dual Personality of Taxpayer with respect to income from abroad until date of arrival
Same Illustration as above: Jan 1 to July 7, 2016 (end of the 5. Overseas Contract Worker
assignment to Singapore). 6. Seaman who is a Filipino citizen is considered OCW if
a. He receives compensation for services rendered
In this case, he was previously classified as NRC and will reside abroad as member of complement of vessel
permanently in the Philippines. b. Vessel is engaged exclusively in international trade

Therefore, this person is now a HYBRID NRC RESIDENT ALIEN

Will be considered as NRC up to July 2, 2017
From Jul 7 to December 31, 2017, RC
Regardless of the date of arrival in the Philippines for as
long as the intention of arrival is to reside permanently in
the Philippines within the taxable year
And will only apply if previously classified as NRC in the
previous taxable year.
Sec. 22 (F) of NIRC
The term ―resident alien‖ means an individual whose residence is
within the Philippines and who is not a citizen thereof.
RESIDENT ALIEN (RA)
TN: RA is taxable only for income within the Philippines.

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A resident alien is one who has a residence in the Philippines although
he is not a Filipino citizen.
He has no definite period of stay in the Philippines. He is not a mere
transient or sojourner. His definite purpose for staying requires an
extended stay and to that end, he makes his home temporarily in the
Philippines.
You established residence here in Philippines, for as long as you
intended to make Philippines as your residence, or if you established
presence in Philippines for 1 year. No hard and fast rule for residence
requirement.
Test is definite purpose or intention
The test is not the length of stay but the definite purpose or intention
to stay in the Philippines. If he has a definite purpose, then he is a
resident alien. An example is the kind of visa applied for.
NON-RESIDENT ALIEN
Sec. 22 (G) of NIRC
The term ―nonresident alien‖ means an individual whose residence is
not within the Philippines and who is not a citizen thereof.
Sec. 25 (A)(1) of NIRC
In General – A non-resident alien individual engaged in trade or
business in the Philippines shall be subject to an income tax in the
same manner as an individual citizen and a resident alien individual, on
taxable income received from all sources within the Philippines. A non-
resident alien individual who shall come to the Philippines and stay
therein for an aggregate period of more than one hundred eighty
(180) days during any calendar year shall be deemed a ‗nonresident
alien doing business in the Philippines; Section 22 (G) of this Code
notwithstanding.
Sec. 25 (B) of NIRC
Nonresident foreign individuals who have stayed within the Philippines
for only 180 days or less, and have no business income derived within
the Philippines.
NON-RESIDENT ALIEN (NRA)
A non-resident alien is one who is not a Filipino citizen and who does
not have a residence in the Philippines.
TN: NRA, whether or not engaged in trade or business, is taxable only
for income within the Philippines.
Classification
NRA may be further classified into:
1. Non-resident Alien Engaged in Trade or Business within the
Philippines (NRA-ETB)
2. Non-resident Alien Not Engaged in Trade or Business within
the Philippines (NRA-NETB)
Test is length of stay
The test to classify NRA is the length of stay in the Philippines,
whether he stays for more than 180 days or, 180 days or less.
NRA-ETB
NRA-ETB is a non-resident alien who is engaged in trade or business
and has business income in the Philippines.
NRA-ETB is one who has stayed within the Philippines for an aggregate
period of more than 180 days (360/2) during the taxable year.
NRA-ETB is subject to 0-35% tax on net taxable income within the
Philippines.
NRA-NETB
NRA-NETB is a non-resident alien who has stayed within the
Philippines for only 180 days or less and who has no business
income in the Philippines.
NRA-NETB is subject to a final tax rate of 25% of gross income within
the Philippines.
Why distinction is important
They are subject to different tax rates. NRA-ETB is taxed at the regular
income tax rate of 0%-35% for taxable income within the Philippines
while NRA-NETB is taxed with a final tax rate of 25% of gross income
from within the Philippines.
SUMMARY
1. NRA-ETB
a. More than 180 days
b. 0-35% tax on net income
2. NRA-NETB
a. 180 days or less
b. 25% final tax on gross income
SPECIAL EMPLOYEES
Sec. 22 (DD) of NIRC
The term ―regional or area headquarters‖ shall mean a branch
established in the Philippines by multinational companies and which
headquarters do not earn or derive income from the Philippines and
which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.
Sec. 22 (EE) of NIRC
The term ―regional operating headquarters‖ shall mean a branch
established in the Philippines by multinational companies which are
engaged in any of the following services: general administration and
planning; business planning and coordination; sourcing and
procurement of raw materials and components; corporate finance
advisory services; marketing control and sales promotion; training and
personnel management; logistic services; research and development
services and product development; technical support and
maintenance; data processing and communication; and business
development.
SPECIAL EMPLOYEES
Special employees are alien individuals or Filipino citizens who are
subject to 15% tax based on their gross compensation income when:
1. They are employed occupying managerial and/or technical
positions with regional or area headquarters of multi-
national corporations, petroleum service contractors and
subcontractors, or offshore banking units.
2. If the special taxpayer is an alien, all of his gross
compensation income received is subject to 15% final tax.
3. If the taxpayer is a Filipino citizen, he has the option to be
taxed at 15% final tax based on his gross compensation
income received or at a regular income tax rate (0%-35%)
based on the net taxable compensation income if his gross
annual taxable compensation is at least P975,000 (whether
or not actually received).
15% preferential tax rate vetoed
Under the TRAIN Law, the preferential tax treatment shall not apply
for employees of ROHQ, RAHQ, OBU and Petroleum service
contractors and subcontractors which registered with the SEC
beginning January 1, 2018.
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Present and future qualified employees of existing ROHQ, RAHQ, OBU,
and Petroleum service contractors and subcontractors as of December
31, 2017 shall enjoy preferential tax treatment.
Regional or Area Headquarters (RAHQs)
Refer to a branch established in the Philippines by multinational
companies which
1. Headquarters do not earn income from the Philippines
2. Act as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the Asia-
Pacific Region and other foreign markets.
TN: It is merely a liaison or communication office in the Asia Pacific.
It has no business operations in the Philippines.
Regional Operating Headquarters (ROHQs)
Refer to a branch established in the Philippines by multinational
companies which are engaged in any of the following services:
1. general administration and planning;
2. business planning and coordination;
3. sourcing and procurement of raw materials and
components;
4. corporate finance advisory services;
5. marketing control and sales promotion;
6. training and personnel management;
7. logistic services;
8. research and development services and product
development;
9. technical support and maintenance;
10. data processing and communication; and
11. business development.
TN: It actually operates in the Philippines.
In short, regional operating headquarters are income-generating while
regional or area headquarters are non-income generating, but they are
still headquarters for multinational companies.
Multi-national companies
These are foreign corporations having branches in the Asia Pacific and
other parts of the world. Actually, if a foreign corporation has a branch
in the Philippines, it can be claimed as a multinational company.
Foreigners or aliens
Aliens occupying technical or managerial positions can automatically
claim the 15% rate, provided that you are employed in a regional
operating or regional area headquarters of a multinational company, or
if you are employed in an offshore banking unit, or a company
engaged in petroleum or geothermal operations (examples: Shell,
Chevron, Procter and Gamble).
Filipinos
TN: These tests are no longer applicable beginning January 1, 2018.
B. Position and function test – employee must be occupying
managerial or technical position.
The requirement before was that you must be occupying both
managerial and technical position but now you can claim if you
are occupying either position.
The function must be actually exercised and you must have the
responsibilities of a managerial or technical position.
C. Compensation test – employees must be paid in their contract
(whether actual or not, as long as stipulated in the contract) the
amount of P975,000 per annum which is the minimum amount.
D. Exclusivity test – you are only hired by that company,
exclusively. It could happen than you have two employers which
are both multinational companies, then you can still qualify to
have the 15% rate.
The 15% rate is based on compensation from this company. It does
not apply to other incomes you earn.
If you are employed by an offshore banking unit, Citibank, which paid
you 975k per year and then you sell kutsinta to your co-employees and
you earn 500k per year, how will you be subject to tax? You still
complied with the requirements because you were employed
exclusively by Citibank. Where will you base the 15%? This will only be
applied to the compensation income, excluding your sales from the
kutsinta.
Are you allowed to claim deductions for your 15%? No, because it is
based on gross compensation income.
SUMMARY
1. Alien – 15% of gross compensation income
2. Filipino – either
a. 15% FT on gross compensation income; or
b. 0%-35% on net taxable compensation income
i. If gross annual taxable compensation is
at least P975,000
Managerial and/or technical positions with
1. Regional or area headquarters (RAHQs) of multi-national
corporations
2. Regional operating headquarters (ROHQs) of multi-national
corporations
3. Petroleum service contractors and subcontractors or
4. Offshore banking units (OBUs)
ESTATES AND TRUSTS
ESTATES AND TRUSTS
Estates and trusts are taxable as individuals.
ESTATES
ESTATE
An estate is composed of all properties, rights and obligations including
those properties, earnings or obligations that have accrued thereto
since the opening of the succession. The estate is to be transferred
from the decedent to his successors.
It is created upon the death of a person who is a resident citizen.
An estate will only be taxable when it is under administration or
settlement. Once it has been transferred it will not be taxable as an
estate anymore and will no longer be a separate taxpayer.
Illustration
The taxpayer dies on June 30, 2016. He died leaving behind a 10-door
apartment which earns P100,000 per month. This is his only income.
How will the income be taxed for the taxable year?
The income earned from January 1, 2016 to June 30, 2016 will be
attributable to the decedent and he will be taxed as a resident citizen.
So, the rental income of P600,000 will be taxed on his person.
However, the income earned after June 30, 2016 until December 31,
2016 will be taxed on his estate, for as long as his estate is still under
administration or settlement. Thus, the remaining P600,000 will be
considered as income of his estate not on his person.
Basic Personal Exemption Repealed
The exemption of P20,000 allowed from the income of the estate or
trust has been repealed by the TRAIN Law effective January 1, 2018.
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TRUSTS
Article 1440 of the Civil Code
A person who establishes a trust is called the trustor; one in whom
confidence is reposed as regards property for the benefit of another
person is known as the trustee; and the person for whose benefit the
trust has been created is referred to as the beneficiary.
TRUSTS
A trust is an obligation imposed or a right to administer over a
property given to a person for the benefit of another.
Three instances:
1. Where the income is accumulated or held for future
distribution by the trustee
2. Where it is up to the fiduciary whether there will be
distribution or not
3. Where the income is collected by a guardian of an infant
which is to be held or distributed as the court may direct
Parties to a trust:
Trustor or Grantor
Trustee or Fiduciary
Beneficiary or Grantee
Q: For purposes of taxation who is the subject of tax?
A: None of them. It is the trust which is considered as the Income
Tax payer.
How to set up a trust
Go to a Trust Company and open a trust. The trust is for the benefit of
a certain individual.
Consolidation of income of two or more trusts
When there are two or more trusts created by the same person for the
same beneficiary, the taxable income of all trusts shall be consolidated
and the tax shall be computed based on the consolidated income.
The proportionate amount of the tax based on the consolidated
income shall be assessed and collected from each trustee.
Ex. Trustor X created trusts 1, 2, and 3 for the benefit of his child Y.
All trusts will be consolidated into one and will be treated as one
taxpayer.
SUMMARY
GR: A trust once created can be considered a separate taxpayer.
EXC: Consolidation of trusts when the trusts are created by the same
person for the same beneficiary
TRUST INCOME SUBJECT TO INCOME TAX
Sec. 60 (A) of the NIRC
Imposition of Tax. -
(A) Application of Tax. - The tax imposed by this Title upon individuals
shall apply to the income of estates or of any kind of property held in
trust, including:
(1) Income accumulated in trust for the benefit of unborn or
unascertained person or persons with contingent interests, and income
accumulated or held for future distribution under the terms of the will
or trust;
(2) Income which is to be distributed currently by the fiduciary to the
beneficiaries, and income collected by a guardian of an infant which is
to be held or distributed as the court may direct;
(3) Income received by estates of deceased persons during the period
of administration or settlement of the estate; and
(4) Income which, in the discretion of the fiduciary, may be either
distributed to the beneficiaries or accumulated.
Unborn or unascertained persons
Remember the Civil Code provision on who has personality.
Supposedly a baby has no personality. But an unborn can be given
personality for all purposes not only contract when he has 7 months
intrauterine life and must live at least 24 hours.
But if the contract is for the benefit of the unborn it does not require
an intrauterine period. Any unborn/unascertained person is granted
the benefit but it can‘t be burdened with liability.
Income to be distributed
Income to be distributed directly to beneficiaries and the amount of
income collected by a guardian of an infant which is to be held or
distributed as the court may direct.
It is supposed to be included in the income subject to tax of the trust.
Example: Part of trust, the condominium unit if for benefit of the child.
It was mentioned as a condition of trust that every income earned by
the condo unit will be distributed to the child.
Rent Income per month 10,000
Yearly Income of child 120,000
Will it be part of the gross income of the trust?
Yes, but before you compute the taxable income, this distribution of
income will just be deducted. Add it to Total Gross Income but at the
end of the computation, you still end up deducting it. It‘s a hassle but
that is what is meant by the law when it said that the income which is
to be distributed must be shown that it was part of gross income but
you will deduct them as items distributed to the beneficiary.
So, you will add 120,000 to total gross income and then deduct it as a
distribution to the beneficiary. If not considered at all, this will not
change the answer but this must be shown for administrative
purposes.
Income during administration or settlement
Q: What happens if a person dies and his estate can‘t be settled right
away?
A: Under the law, only estate settled extrajudicially can be subject to
income tax. Now, in practice, both judicial and extrajudicial are
required to file ITR for as long as you are not able to settle taxes for a
particular estate, you will have to register the estate as if it‘s another
tax payer. Estates have a different TIN (Tax Identification Number).
Q: During the period of settlement, the period that you were not able
to settle estate just yet and estate has earned income. Will it be
subject to tax?
A: Yes, just like any other individual. Sec 60(A3) of the NIRC on the
imposition of tax, provides for the application of tax on ―income
received by estates of deceased persons during the period of
administration or settlement of the estate…‖
There is not much of a problem when you are talking about estate.
The fact that the estate earns income means that it is subject to tax. It
is automatic.
Income either to be distributed or accumulated
Take note, in number 2, it is required that it be distributed. Here in,
number 4, you will always include the income whether distributed or
not. The good thing is that, if it‘s distributed, it can be claimed as
deduction.
TRUST INCOME EXEMPTED FROM INCOME TAX
Sec. 60 (B) of the NIRC
The tax imposed by this Title shall not apply to employee's trust which
forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
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(1) if contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in
accordance with such plan, and
(2) if under the trust instrument it is impossible, at any time prior to the
satisfaction of all liabilities with respect to employees under the trust,
for any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the
exclusive benefit of his employees:
Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed to
the extent that it exceeds the amount contributed by such employee or
distributee.
Employee‟s trust
This is how companies circumvent the law on nationality requirement
of the Constitution, the 60/40. What the company does is that they
make use of employee‘s trust as stock holder to hold the 60%.
Conditions:
1. The employer has to contribute or employees may contribute
or both employer and employee.
AND
2. No part of the principal, the corpus, or income can be
distributed for the benefit of anyone other than the
employee.
Important: The conditions are both to be complied with because it
mentions AND. There is contribution required and no part of the
principal, the corpus, or income can be distributed for the benefit of
anyone other than the employee. It is only for the purpose of pension.
If you use the principal or its profit for other purposes than for pension
or profit sharing plan of employee, it becomes subjected to tax,
whatever income earned. Currently, Employee‘s trusts are managed by
bank.
If there‘s an employee trust and it is actually the one holding your
retirement benefit if it complies with the retirement benefit then there
is actually no tax to be paid.
But if the retirement plan does not comply with the requirements for
exemption (not reasonable private benefit plan duly approved by BIR)
but they set up this trust any income received by the employee from
trust will be subject to tax.
COMPUTATION AND PAYMENT
Sec. 60 (C) of the NIRC
Computation and Payment. –
(1) In General. - The tax shall be computed upon the taxable income
of the estate or trust and shall be paid by the fiduciary, except as
provided in Section 63 (relating to revocable trusts) and Section 64
(relating to income for the benefit of the grantor).
(2) Consolidation of Income of Two or More Trusts. - Where, in the
case of two or more trusts, the creator of the trust in each instance is
the same person, and the beneficiary in each instance is the same, the
taxable income of all the trusts shall be consolidated and the tax
provided in this Section computed on such consolidated income, and
such proportion of said tax shall be assessed and collected from each
trustee which the taxable income of the trust administered by him
bears to the consolidated income of the several trusts.
How to compute income
Income = Total amount received now less contributions made.
Example: If you have 100 years of employment in the company and
you pay 100 as contribution and you receive 100,000, how much is
subject to tax?
Total Amount received 100,000
Total Contributions − 10,000
Income Subject to tax 90,000
So end up NOT paying taxes.
The trust itself is not subject to tax granting it complies with the
conditions on SEC 60B.
Consolidation of Income of Two or More Trusts
If you are the same trustor for each of the trust and you have the
same beneficiary for each of the trust regardless of the difference in
trustee, the income will be consolidated.
Trusts set up by Y for the benefit of X. These can be consolidated
because the same trustor and the same beneficiary.
Trust A Trust B Consolidated
Income 500,000 500,000 1,000,000
Distribution to X 100,000 200,000 (300,000)
Taxable Income 700,000
How is this taxed?
The taxable income of P700,000 will be subject to 0-35% tax rate.
USUAL. This is the income (500k) and part of it is already distributed
(100k), meaning 100k is accounted for in the income 500k, so add
both income and deduct distributions from income. What is distributed
is part of the income already. Where will you get distribution, from
income-the total amount earned by the trust. So there is no need to
add distributions in the total income.
ANOTHER. The 500K income does not account for the 100k
distribution as distributed so add the 100k to 500k.
While the usual situation happens take note of how it was written in
the problem. If it says the income mentioned already excludes
distribution then add the distribution to total. Law says add the income
distributed as part of the Gross Income of the trust.
REVOCABLE TRUSTS
Sec. 63 of the NIRC
Revocable trusts.
Where at any time the power to revest in the grantor title to any part
of the corpus of the trust is vested
(1) in the grantor either alone or in conjunction with any person not
having a substantial adverse interest in the disposition of such part of
the corpus or the income therefrom, or
D. in any person not having a substantial adverse interest in the
disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the
taxable income of the grantor.
REVOCABLE TRUSTS
Important: Trust as a separate entity must be an irrevocable trust.
In other words, if we talk about trust being subjected to tax as a
separate entity, it must be an irrevocable trust. Otherwise, if it is
revocable, it does not become a separate taxpayer and the income is
included as part of the income of the trustor.
Illustration
A condominium unit is placed in trust and the trustor‘s children are
revocable beneficiaries.
This means that the beneficiaries can be changed and the trustor can
make use of the profit instead. The control of the trust is still with the
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trustor. It‘s as if he never placed it in a trust and it was as if he
allowed others to manage it but everything is still under the trustor‘s
control.
Here, it is not considered a separate tax payer. The trust is just an
extension of his personality as a trustor/grantor.
The law deems it that if the trustor is able to control the income or
corpus of the trust and to the extent of even the beneficiary, then it
cannot be considered as a separate taxpayer.
This is the reason why only an irrevocable trust may be considered a
separate taxpayer. This may be subject to abuse because one can set
up a lot of trusts.
INCOME FOR THE BENEFIT OF GRANTOR
Sec. 64 of the NIRC
(A) Where any part of the income of a trust
(1) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be held or accumulated for future distribution to the
grantor, or
(2) may, or in the discretion of the grantor or of any person not having
a substantial adverse interest in the disposition of such part of the
income, be distributed to the grantor, or
(3) is, or in the discretion of the grantor or of any person not having a
substantial adverse interest in the disposition of such part of the
income may be applied to the payment of premiums upon policies of
insurance on the life of the grantor, such part of the income of the
trust shall be included in computing the taxable income of the grantor.
` 120,000. This amount can be claimed as deduction.
(B) As used in this Section, the term 'in the discretion of the
grantor' means in the discretion of the grantor, either alone or in
conjunction with any person not having a substantial adverse interest
in the disposition of the part of the income in question.
INCOME FOR THE BENEFIT OF GRANTOR
This means that the trust has earned an income but the grantor makes
use of the income for the payment of his life insurance. If you made
your child a beneficiary when the income is just used for the payment
of your life insurance, there is no separate entity for the trust. It is an
extension of your personality. The income this property may generate
is still under your control and it is still for your benefit.
For purposes of determining whether it will be treated as a separate
entity or not, it must be that the trustor has no control over the
principal and income of the tax payer.
DEDUCTIONS ALLOWED TO ESTATES & TRUSTS
Sec. 61 of the NIRC
Taxable Income. - The taxable income of the estate or trust shall be
computed in the same manner and on the same basis as in the case of
an individual, except that:
(A) There shall be allowed as a deduction in computing the taxable
income of the estate or trust the amount of the income of the estate
or trust for the taxable year which is to be distributed currently by the
fiduciary to the beneficiaries, and the amount of the income collected
by a guardian of an infant which is to be held or distributed as the
court may direct, but the amount so allowed as a deduction shall be
included in computing the taxable income of the beneficiaries, whether
distributed to them or not. Any amount allowed as a deduction under
this Subsection shall not be allowed as a deduction under Subsection
(B) of this Section in the same or any succeeding taxable year.
(B) In the case of income received by estates of deceased persons
during the period of administration or settlement of the estate, and in
the case of income which, in the discretion of the fiduciary, may be
either distributed to the beneficiary or accumulated, there shall be
allowed as an additional deduction in computing the taxable income of
the estate or trust the amount of the income of the estate or trust for
its taxable year, which is properly paid or credited during such year to
any legatee, heir or beneficiary but the amount so allowed as a
deduction shall be included in computing the taxable income of the
legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the
deductions mentioned in Subsections (A) and (B) of this Section shall
not be allowed: Provided, That the amount of any income included in
the return of said trust shall not be included in computing the income
of the beneficiaries.
DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS
1. Income to be distributed directly to beneficiaries and the
amount of income collected by a guardian of an infant which
is to be held or distributed as the court may direct
2. Income either to be distributed to the beneficiary or
accumulated on the discretion of the fiduciary
Income to be distributed
If there is any income distributed by the trust or estate to any heirs or
beneficiaries then this can be claimed as a deduction.
Example
A condominium unit is placed in trust and the trustor‘s children are
beneficiaries. You stated in the trust that the income of this property
will be distributed to the children and the total Income distributed is
If the only income of the trust is 120,000 and it is distributed to the
beneficiaries, the taxable income is zero.
Q: Does this mean the government is prejudiced since no tax is paid
by the trust?
A: No. Since the beneficiary will be the taxed, it is considered an
income on their part. While it is allowed as a deduction to the trust, it
is considered an income of the beneficiary. Taxes are collected not on
trust but on the beneficiary. The government still finds a way to collect
taxes.
Income either to be distributed or accumulated
If ever there will be distributions to any person other than the
beneficiary, or in the case of estate, it is possible that it is to be
distributed other than the heirs, those distributions can be considered
as a deduction. But while there is a deduction, there is tax to be paid
for it but it is on the part of person receiving such property.
It is the recipient that is subject to tax and not the trust itself.
Q: What is the purpose of creating trust when income is distributed
and the taxable person is the recipient and not the trust?
A: It is actually a tax planning tool to minimize the tax.
Trust administered in a foreign country
Q: Does this mean that the trust is not considered anymore as a tax
payer?
A: No. It will be considered as a tax payer but the income that you will
claim in the Philippines will be net of the taxes paid abroad.
Example:
Total income abroad 100,000
Taxes paid (abroad) (40,000)
Net Income 60,000
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In the Philippines, the 60,000 is considered taxable income. No

deductions is allowed under (A) and (B) because it was already
claimed in the foreign country. It was already taxed abroad, so in the
Philippines, only the net income is subject to tax.

EMPHASIZED BY SIR

Trust is taxable if it is irrevocable trust.

What is considered as its income?
Income of the property under trust and even the income ought to be
distributed are also considered its income.

What is considered deduction to person who created the

trust?
The one where it is included in income but deducted. Only the
distribution is deducted.

What is added as income of the trustor?

Only happens if Y sets up a trust and Y has control over how income is
distributed. So the trust is not a separate entity but an extension of
the income of Y.

You include the distribution for purposes of determining GROSS

Income but deduct it for purposes of taxation. What is being taxed is
the amount less the distribution

When trustor has control over the entire trust. No computation

separate for the trust everything is considered as income of the
trustor. If in this case trustor gave the income to someone else, on the
part of the recipient it will be considered as taxable income. But trustor
cannot claim it as a deduction. It is as if you are subject to tax for the
entire income and then someone else earned anther income. The
same amount is taxed twice.

INCOME TAX RATES

TAX RATES OF INDIVIDUALS

Source: https://www.pwc.com/ph/en/tax-alerts/assets/pwcph_tax-alert-34.pdf

1. RC – 0-35% of net income within & without

VAT Threshold of P3,000,000
2. NRC – 0-35% on net income within
The option to be taxed at 8% on the business income is only available
3. RA – 0-35% of net income within
if the gross income of the taxpayer does not exceed P3,000,000.
4. NRA-ETB – 0-35% of net income within
5. NRA-NETB – 25% of gross income within
Otherwise, if the total income exceeds the threshold, then the
6. Estates & Trusts – 0-35% of net income
taxpayer cannot opt for the 8% tax rate even if he is a self-employed
7. Special Employees – 15% of gross compensation income
individual or professional or mixed income earner.
INCOME TAX RATES
Illustration
The compensation income is 1M and the business income is 2.5M. The
taxpayer availed of OSD.

Tax Due
Using the Graduated Income Tax Rates

Gross Income P 2,500,000

Less Allowable Deduction (2.5M*40%OSD) (1,000,000)
Taxable Business Income P 1,500,000
Compensation Income 1,000,000
Total Taxable Income P 2,500,000
Less Threshold (excess over 2,000,000) (2,000,000)
Total P 500,000
Multiplied by Tax Rate 32%
Total P 160,000
Add Threshold (490,000) 490,000
Total Tax Due and Payable P 670,000

Tax Due
Using the 8% Optional Tax Rate

Business Income P 2,500,000

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 66 (250,000)
Less Threshold (in excess of 250,000)
|P a g e
Taxable Business Income P 2,250,000
Multiplied by Optional Tax Rate 8%
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018

Tax Due COMPENSATION INCOME

Using the 8% Optional Tax Rate
COMPENSATION INCOME
Business Income P 2,500,000
Less Threshold (in excess of 250,000) (250,000) It refers to all remuneration for services rendered by an employee for
Taxable Business Income P 2,250,000 his employer, unless specifically excluded under the Tax Code.
Multiplied by Optional Tax Rate 8%
Tax Due on Business Income P 180,000 Existence of employer-employee relationship
There is compensation income when there is an employer-employee
Compensation Income P 1,000,000 relationship. The four-fold test and the two-tiered test can be used to
Less Threshold (excess over 800,000) (800,000) determine the existence of the employer-employee relationship.
Total P 200,000
The four-fold test consists of:
Multiplied by Tax Rate 30%
(1) the selection and engagement of the employee;
Total P 60,000
(2) the payment of wages;
Add Threshold (130,000) 130,000
(3) the power of dismissal; and
Tax Due on Compensation Income P 190,000
(4) the power to control the employee‘s conduct.

Tax Due on Business Income P 180,000 The two-tiered test pertains to the
Add Tax Due on Compensation Income 190,000 (1) economic dependency test and (2) control test.
Total Tax Due and Payable P 370,000
How compensation is paid
Compensation income can either be paid in cash or in kind.
Since the taxpayer is a mixed income earner whose income does not
exceed the 3M VAT threshold, he can choose to be taxed on his If paid in cash, then the amount of the money received is the
compensation and business income at the graduated income tax rates compensation income.
of 0-35% using the tax table or apply the 8% optional tax rate on his
business income. If paid in kind, then the compensation income is equivalent to the
monetary value of the property under the doctrine of cash equivalent.
Even if he opts for the 8% tax, such is only applied to the business
income. His compensation income will still be subject to the graduated How to tax income if it‟s not in cash
income tax rates. At the rate of its Fair Market Value (FMV)

Here, choosing the 8% tax rate on the business income is more Q: What if instead of money, you received jewelry, car, house and lot,
beneficial since the tax due is only P370,000 which is lesser than the or some other things from your employer, in addition to your
tax due of P670,000 under the graduated income tax rates. compensation, how much is the compensation?

Rev. Reg. 8-2018 A: Compensation is equivalent to the fair market value of the property.
Take note of Rev Reg No. 8-2018. If the taxpayer avails of the 8%
income tax rate, no deduction of 250,000 for the mixed income earner. DOCTRINE OF CASH EQUIVALENT

The option of 8% income tax rate is applicable only to taxpayer‘s All items considered as income which you do not receive as cash has
income from business, and the same is in lieu of the income tax under to be valued in cash for purposes of taxation.
the graduated income tax rates and the percentage tax.
COMPENSATION IN KIND
The amount of P250,000 allowed as deduction under the law for
taxpayers earning solely from self-employment or practice of Stock options
professions, is not applicable for mixed income earner under the 8% Promissory note
income tax rate option. Cancellation of debt
Tax liability as compensation
The P250,000 is already incorporated in the first tier of the graduated
income tax rates applicable to compensation income. STOCK OPTIONS

INCLUSIONS Stock options are taxable as compensation income taxed only if there
is a benefit to the employee such as when he can buy the share at a
more favorable price than the public.
GROSS INCOME FOR INDIVIDUALS [CGGIRRDAPPP]
How computed
1. Compensation for services in whatever form The tax will be on the amount of the difference between the book
2. Gross income derived from the conduct of trade or business or value or the FMV of the stock, whichever is higher, and the exercise
the exercise of a profession price (price which you are allowed to buy the stock). The tax is
3. Gains derived from dealings in property imposed whether or not the stock option is exercised.
4. Interests
5. Rents Example: When the option gives you the right to purchase the stock at
6. Royalties P100 when the price outside is P500. You would not have the option if
7. Dividends you were not an employee of the company.
8. Annuities
9. Prizes and winnings Important: Even if you do not exercise this option, you will still be
10. Pensions subject to tax because the benefit has already been in your control. It
11. Partner‘s distributive share from the net income of the general was only that you chose not to avail of the benefit. At the time it was
professional partnership granted, there was already a benefit to you so you are already taxable.

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PROMISSORY NOTE
Compensation is equivalent to the face value of the promissory note,
unless it is discounted. For a discounted promissory note, the cash
discounted value will be the amount of compensation.
CANCELLATION OF DEBT
Cancellation of debt is considered an income when you render services
and in exchange, your debt is forgiven.
Example: Supposedly, I have a P10k obligation and I am supposed to
pay you in cash. Instead, I rendered services and you are now
supposed to pay me. In this case, we might as well cancel the
obligation instead of receiving the cash and giving it back as payment.
I would not have paid the debt had I not rendered the service. This is
considered as compensation income.
Q: Do we consider employer-employee relationship?
A: Yes. Compensation income presupposes EE relationship. However, it
doesn‘t mean that if there is no EE relationship, there is no income. It
is just that it is termed differently as professional income as
independent contractor.
Q: What if there is no service required?
A: This is purely out of liberality. Thus, it is not taxable under income
tax but subject to donor‘s tax.
TAX LIABILITY AS COMPENSATION
This happens when the employer shoulders your tax on compensation
instead of you getting less than your gross monthly salary. The
employee receives income net of taxes. The amount shouldered by the
employer is subject to tax.
Example: If you have a gross monthly salary of 100k, less tax, net
amount is only 65k (assuming it is taxed at 35%). If you will receive
the same 100k every month, it means that the employer has
shouldered your 35K tax.
The portion of the tax shouldered by your employer should have been
part of your income. However, there seems to be an issue here if you
consider this as income so this should be taxed in the first place.
To make it simple, it seems that your compensation is grossed up.
Under the employment contract, it should state that the amount you
will receive is already net of tax and your employer will shoulder the
tax instead of them withholding it from you.
So, the 100K is divided by 65%, the amount of 155K is your actual
salary coming from the employer. This is like a fringe benefit. You are
supposed to pay tax of 54k but instead the employer shoulders this tax
liability.
SUMMARY
 Cash – actual value of the cash received
 Promissory note – face value of the promissory note
 EXC: Discounted PN – cash discounted value
 Stock options – taxed only if the employee can buy the share
at a more favorable price than the public
 Cancellation of debt – value of debt forgiven
 Tax Liability as compensation – amount of tax shouldered by
employer
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
MODE OF COMPENSATION INCOME COLLECTION/PAYMENT
Withholding tax
There is withholding of tax which shall be collected at source the
moment the wages are paid. The taxes are retained by the employer
who will remit the taxes withheld to the BIR.
However, there shall be no withholding where the total compensation
income of an individual does not exceed the statutory minimum wage
or P5,000 per month, whichever is higher.
Quarterly remittance
Previously, the remittance of the taxes withheld was done monthly.
However, Sec. 58 of the NIRC has been amended by the TRAIN Law
such that the remittance shall now be done quarterly.
The final and creditable withholding tax returns (except for withholding
tax on compensation and withholding VAT) shall be due quarterly on
or before the last day of the month following the close of the calendar
quarter. The first quarterly return covering the months of January to
March 2018 should be due on April 30, 2018. These used to be filed
monthly.
Excessive withholding
Any excess on the taxes withheld shall be returned or credited within 3
months from May 15.
The refund shall be made by the BIR within 3 months from May 15
through warrants (tax credit).
Although the date mentioned in Sec. 79 of the NIRC which is April 15
has not been amended by the TRAIN Law, the date under Sec. 74 has
been amended from April 15 to May 15. For consistency, the relevant
date for the return of the excess of the taxes withheld under Sec. 79
shall also be May 15.
Q: When is the last payroll period?
A: December 31
Q: When is the last day of refund from the employer to the
employees?
A: January 15
FRINGE BENEFITS
FRINGE BENEFITS
Any good, service or other benefit furnished or granted in cash or in
kind by an employer to an individual employee (except rank and file
employees) such as, but not limited to, the following:
[HEVHIMEHEL]
1. Housing
2. Expense account
3. Vehicle of any kind
4. Household personnel, such as maid, driver and others
5. Interest on loan at less than market rate to the extent of the
difference between the market rate and actual rate granted
6. Membership fees, dues and other expenses borne by the
employer for the employee in social and athletic clubs or
other similar organizations
7. Expenses for foreign travel
8. Holiday and vacation expenses
9. Educational assistance to the employee or his dependents
10. Life or health insurance and other non-life insurance
premiums or similar amounts in excess of what the law
allows
TN: The list under Sec. 33 (B) of the NIRC is not exclusive.
These items are also found in Revenue Regulation 03-98 which talks
about fringe benefits.
Important: Fringe benefits refer to benefits given to an employee
other than a rank and file employee.
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Managerial employee
He is one who is vested with powers and prerogatives to lay down and
execute management policies and or fire, transfer, suspend, layoff,
discharge, assign or fire employees. He is the employee vested with
the power to determine the employer-employee relationship because
of his powers. He has the power to execute management policies
which can include salaries and wages. All aspects of EE relationship
are within his control.
Supervisory employee
He recommends managerial action but it should not be considered as
merely routinary or clerical in nature, but which requires use of
independent judgment.
Rank and file employee
Those who are neither managerial nor supervisory employees
VALUATION OF FRINGE BENEFITS
VALUATION OF FRINGE BENEFITS
Fringe Benefit Valuation
In money or directly paid for by the
Amount granted or paid for
employer
In property other than money and
Fair market value of the
ownership is transferred to the
property
employee
Other than money but there is no Depreciated value of the
transfer of ownership property
In money
When the fringe benefit is in the form of money, the value is the
amount granted or paid for.
Ex: If I give you a grocery allowance, the value of the fringe benefit is
the amount that I gave.
If you give a receipt to the employer and he pays for it, the amount
paid for is the value of the fringe benefit. But, take note that this is not
the amount subjected to tax.
Other than money with transfer of ownership
When the benefit granted is property or something other than money
and ownership is transferred to the employee, the value of the fringe
benefit is equal to the fair market value of the property which is the
higher between the assessed value and zonal value.
Ex: Houses and other properties.
Other than money without transfer of ownership
When the benefit furnished by employer is something other than
money where ownership is not transferred to the employee, the value
of the fringe benefit is equal to the depreciation of the property.
If your employer allows you to use a car, you will be benefitted by the
ease and comfort of using a car. While you use it, the value of the car
diminishes. The value you receive is equal to the value which the
property diminishes by your use of such property.
COMPUTATION OF FRINGE BENEFIT TAX
COMPUTATION OF FRINGE BENEFIT TAX
Fringe benefit tax (FBT) is computed by multiplying the grossed-up
monetary value (GUMV) by 35%. GUMV is determined by dividing the
monetary value by 65%.
In other words, FBT is computed by first determining the GUMV and
then, multiplying the GUMV by the tax rate.
Another way to determine FBT is to deduct the net monetary value
from the GUMV. The difference will be the FBT.
Either way, the GUMV is to be computed first.
Fringe Benefit Tax
Grossed-up Monetary Value (GUMV) 100%
Less Fringe Benefit Tax (FBT) (35%)
Monetary Value (MV) 65%
FBT is now 35%
Under the TRAIN Law effective January 1, 2018, fringe benefits given
to non-rank and file employees are subject to 35% final tax rate.
Previously, 32% was the and 68% was used for determining GUMV.
NRA-NETB & Special Employees
NRA-NETB is subject to FBT of 25% while special employees are
subject to 15%. Consequently, 75% will be used for determining the
GUMV of NRA-NETB and 85% will be used in the case of special
employees.
Example:
Resident Citizen Employee given housing privilege but ownership is not
transferred
A managerial employee is given a housing benefit in the form of rent
worth P10,000. To get the net monetary value, we have to multiply it
by 50% since ownership is not transferred to such employee. Hence,
the net monetary value of rental allowance is P5,000.
Since fringe benefit tax can be computed by first determining the
GUMV, we have to divide the net monetary value of 5,000 by 65%.
This will result to GUMV of P7,692.31.
There are two ways to arrive at the FBT. One way is to deduct the
GUMV of P7,692.31 from the net monetary value of 5,000 which will
yield FBT of P2,692.31. Another way is to multiply the GUMV of
P7,692.31 by 35% which will also result to the same FBT of P2,692.31.
Non-resident Alien Not Engaged in Trade and Business
For non-resident aliens not engaged in trade or business who received
fringe benefit tax, they are subject to 25% fringe benefit tax and we
use the same computation above. We just have to replace the 65%
with 75% and 35% with 25%.
For instance, a non-resident alien not engaged in trade or business is
given a housing benefit in the form of rent worth P10,000. To get the
net monetary value, we have to multiply it by 50% since ownership is
not transferred to such employee. Hence, the net monetary value of
rental allowance is P5,000.
Since fringe benefit tax can be computed by getting first the GUMV,
we have to divide the net monetary value of P5,000 by 75% because
the fringe benefit tax imposed is 25%. Hence, the GUMV is 6,666.67.
There are two ways to determine the FBT. One way is to deduct the
GUMV of P6,666.67 from the net monetary value of P5,000 which
will result to FBT of P1,666.67. Another way is to multiply the GUMV of
P6,666.67 by 25% which will also result to the same FBT of P1,666.67.
Special Employees
For special employee who received fringe benefit tax, they are
subject to 15% fringe benefit tax. The same computation will be
used. Only the tax rates will vary. The GUMV will be divided by 85%.
FBT CONCEPT SUMMARY
Taxable amount is the GUMV of the fringe benefit granted/furnished.
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(b) If the employer owns a residential property and the same is

The FBT is 35% of the GUMV of the benefit
The GUMV is the benefit expense of the employer which is also the
income of the employee.
The liability of the employer is to withhold the corresponding income
tax from the fringe benefit earned by the employee.
The fringe benefit income tax is a final tax on gross taxable income.
assigned for the use of his employee as his usual place of
residence, the annual value of the benefit shall be five per cent
(5%) of the market value of the land and improvement, as
declared in the Real Property Tax Declaration Form, or zonal
value as determined by the Commissioner pursuant to Section
6(E) of the Code (Authority of the Commissioner to Prescribe
Real Property Values), whichever is higher. The monetary
value of the fringe benefit shall be fifty per cent (50%) of the
value of the benefit.

 The monetary value of the housing fringe benefit is

HOUSING
equivalent to the following:
Monetary value = [5% (FMV or Zonal value) x 50%]
HOUSING PRIVILEGE
(c) If the employer purchases a residential property on installment
Guidelines in the valuation of the Housing Privilege basis and allows his employee to use the same as his usual
place of residence, the annual value of the benefit shall be five
Monetary Value per cent (5%) of the acquisition cost, exclusive of interest. The
Annual Value monetary value of fringe benefit shall be fifty per cent (50%)
Case of Benefit
of Benefit of the value of the benefit.
(Monthly)
Employer leases residential 50% x Monthly
(d) If the employer purchases a residential property and transfers
property for use of the - rental paid by the
ownership thereof in the name of the employee, the value of
employee employer
the benefit shall be the employer's acquisition cost or zonal
5% of FMV of 50% x Monthly value as determined by the Commissioner pursuant to Section
Employer owns residential land and value of the 6(E) of the Code (Authority of the Commissioner to Prescribe
property which was assigned improvements or benefit* Real Property Values), whichever is higher. The monetary
to an officer for his use as zonal value, value of the fringe benefit shall be the entire value of the
residence whichever is *Monthly value = benefit.
higher Annual value/2
Employer purchases (e) If the employer purchases a residential property and transfers
residential property on 5% of acquisition ownership thereof to his employee for the latter's residential
50% x Monthly use, at a price less than the employer's acquisition cost, the
installment basis and allows cost excluding
value of the benefit value of the benefit shall be the difference between the fair
the employee to use the interest
same as his residence market value, as declared in the Real Property Tax Declaration
Form, or zonal value as determined by the Commissioner
Purchases residential Acquisition cost or pursuant to Sec. 6(E) of the Code (Authority of the
property and transfers the - FMV, whichever is Commissioner to Prescribe Real Property Values), whichever is
ownership to the employee higher higher, and the cost to the employee. The monetary value of
Purchases residential the fringe benefit shall be the entire value of the benefit.
property and transfers FMV of CIR and
ownership thereof to his FMV of Assessor, (f) Housing privilege of military officials of the Armed Forces of the
employee for the latter‘s - whichever is higher Philippines (AFP) consisting of officials of the Philippine Army,
residential use at a price less minus the cost to Philippine Navy and Philippine Air Force shall not be treated as
than the employer‘s the employee taxable fringe benefit in accordance with the existing doctrine
acquisition cost that the State shall provide its soldiers with necessary quarters
which are within or accessible from the military camp so that
they can be readily on call to meet the exigencies of their
General Rule: Housing privileges are taxable as fringe benefits.
military service.
Exceptions:
 What if you are a private in the Philippine
1. Housing privilege of AFP, Philippine Navy and Philippine Air
Army and you are granted a sleeping space in
Force
the barracks, is this fringe benefit?
2. Housing unit situated inside or within the maximum of 50
meters from the perimeter of the business or factory
No, because the tax exemption privilege is only
3. Temporary housing for an employee who stays in a housing
granted to officials of Philippine Army, Navy and Air
unit for 3 months or less
Force. It has to be a managerial or supervisory
4. Housing privilege granted to rank-and-file employees
position. (Private is the lowest rank or position in the
Army)
TN: The housing privilege given to rank-and-file employees is not a
fringe benefit but form part of compensation income.
The general rule is that housing privileges are taxable fringe
benefits, but exceptions are provided for as enumerated above
Revenue Regulation 03-98:
(sections f, g and h).
(a) If the employer leases a residential property for the use of his
(g) A housing unit which is situated inside or adjacent to the
employee and the said property is the usual place of residence
premises of a business or factory shall not be considered as a
of the employee, the value of the benefit shall be the amount
taxable fringe benefit. A housing unit is considered adjacent to
of rental paid thereon by the employer, as evidenced by the
the premises of the business if it is located within the
lease contract. The monetary value of the fringe benefit shall
maximum of fifty (50) meters from the perimeter of the
be fifty per cent (50%) of the value of the benefit.
business premises.

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(h) Temporary housing for an employee who stays in a housing
unit for three (3) months or less shall not be considered a
taxable fringe benefit.
 The revenue regulation does not even mention that
the employee is travelling but it is interpreted to
mean that the employee is travelling because of the
short and temporary time that the employee is
assigned. Because this is temporary and this is also
for business considerations, it is deemed for the
convenience of the employer.
(i) A housing unit which is situated inside or adjacent to the
premises of a business or factory shall not be considered as a
taxable fringe benefit. A housing unit is considered adjacent to
the premises of the business if it is located within the
maximum of fifty (50) meters from the perimeter of the
business premises.
 A company personnel is still exempt from fringe
benefit tax if he is asked to stay in a location more
than 50 meters from the company perimeter due to
safety and health hazards.
 If a The BIR took the position that this is considered
within the exception for the reason that it is for the
convenience of the employer. This is set by
regulation, not by law. This is deemed for the
convenience of the employer, the benefit is exempt
from fringe benefit tax. Take note, according to sir,
that there is fringe benefit here but it is just that it is
exempt.
Q: If you are asked by the priest in USC to live in the front
building, will this privilege be subject to FBT?
A: No, because it is within the premises of the employer‘s
premises. The fifty meter radius rule does not even have to be
considered because this rule applies only when the property is
adjacent, such as when it is outside the campus.
Valuation of housing privilege
It is the amount of rental multiplied by 50%.
Reason: Whether or not it is for the convenience of the employer, you
will really need to live somewhere else.
For all intents and purposes, the benefit is for both you and the
company. As such, this should be divided. 50% accounts for the
portion that you were really benefitted, and the 50% exemption is for
the fact that the employer is also deemed benefitted by it.
If the benefit, whether for personal or business purpose, is not
determined, there is a presumption that both the employer and
company are benefitted.
If a company leases a condo unit and pays for it, the fringe benefit is
the amount of rental that is paid by the company. Because there is no
transfer of ownership, the additional consideration for purposes of
valuing is the amount of rental which is considered as the amount of
fringe benefit. But for taxation purposes, there is there is a concept of
monetary value which is the tax base of the fringe benefit tax.
Rule on housing privilege
Housing privilege is subject to fringe benefit tax, but there are
exceptions. When you are computing for the amount, it depends
whether ownership is transferred or not. Or if in the case that it is just
leased out, only the rent is deemed as fringe benefit and you multiply
it by 50%. If the house and lot is transferred to you, the fringe benefit
is the entire amount of the benefit given.
If only the right to use is given to you (ownership is still with the
company but they allow employees to use it), that is the time that the
depreciation value is used.
The general rule on valuation if ownership is transferred is to use FMV,
but if there is no transfer of ownership, use depreciation value.
EXPENSE ACCOUNT
EXPENSE ACCOUNT
(a) In general, expenses incurred by the employee but which are
paid by his employer shall be treated as taxable fringe benefits,
except when the expenditures are duly receipted for and in the
name of the employer and the expenditures do not partake the
nature of a personal expense attributable to the employee.
(b) Expenses paid for by the employee but reimbursed by his
employer shall be treated as taxable benefits except only when
the expenditures are duly receipted for and in the name of the
employer and the expenditures do not partake the nature of a
personal expense attributable to the said employee.
(c) Personal expenses of the employee (like purchases of groceries
for the personal consumption of the employee and his family
members) paid for or reimbursed by the employer to the
employee shall be treated as taxable fringe benefits of the
employee whether or not the same are duly receipted for in the
name of the employer.
(d) Representation and transportation allowances which are fixed
in amounts and are regular received by the employees as part
of their monthly compensation income shall not be treated as
taxable fringe benefits but the same shall be considered as
taxable compensation income subject to the tax imposed under
Sec. 24 of the Code.
Expense account
Another fringe benefit is an expense account granted for the usage of
manager of miscellaneous items.
When you are asked to liquidate your expenses, those cannot be
considered a fringe benefit.
Note that these expenses must be related to the business of the
employer so that the business can claim these as business expenses.
An example of this is the transportation allowance given to you and
you are given a cap of P1,000 per month and you are asked to present
receipts and liquidate. This is fringe benefit but not subject to fringe
benefit tax because you are asked to liquidate it and this is not a
benefit for you.
A fringe benefit only happens when you are given an amount
without you having to liquidate it.
If you are only asked to present receipts for purposes of knowing the
amount of your expense, then that is different.
When you are given an amount which you are allowed to use and you
present receipts so you can receive the amount, such is not a fringe
benefit because you are asked to liquidate. These expenses will be
later on considered as expenses of the company.
If your groceries are paid for by the employer and it is for the
employee‘s personal use, then it is clearly a fringe benefit, subject to
tax. If there are expenses that are personal to the employee but are
paid for by the employer, or if the employer gives you money so you
can pay for these benefits, then it is a fringe benefit.
There are certain expenses which are in that form but are not
considered subject to fringe benefit tax. Representation and
transportation allowance (RATA) which are fixed in amount and
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are regularly received by an employee are part of monthly
compensation and are subject to income tax.
Take note that fringe benefit is given on top of the monthly
compensation tax.
the value of the motor vehicle. Otherwise, if
ownership is not transferred, fringe benefit is only
the depreciation value of the car. This is because of
your use, you are benefitted by the use of the car
and this is shown through the depreciation.

There are also certain instances when you buy groceries and you (d) If the employer shoulders a portion of the amount of the
are to liquidate and present receipt. These are not part of the purchase price of a motor vehicle the ownership of which is
expenses of the company so the company cannot claim them as placed in the name of the employee, the value of the benefit
business expenses. These are fringe benefits subject to tax. shall be the amount shouldered by the employer. The
monetary value of the fringe benefit shall be the entire value of
the benefit regardless of whether the motor vehicle is used by
MOTOR VEHICLE OF ANY KIND
the employee partly for his personal purpose and partly for the
benefit of his employer.
MOTOR VEHICLE OF ANY KIND
(e) If the employer owns and maintains a fleet of motor vehicles
Guidelines in the Valuation of Motor Vehicles for the use of the business and the employees, the value of the
benefit shall be the acquisition cost of all the motor vehicles
Monetary Value of the notnormally used for sales, freight, delivery service and other
Case non-personal used divided by five (5) years. The monetary
Benefit
value of the fringe benefit shall be fifty per cent (50%) of the
Purchases the motor vehicle in the Acquisition cost
value of the benefit.
name of the employee
Provides the employee with cash for Amount of cash received by  The monetary value of the motor vehicle fringe benefit
the purchase of a motor vehicle in the employee is equivalent to the following:
the name of the employee MV = [(A)/5] X 50%
Shoulders a portion of the amount Amount shouldered by the Where:
of the purchase price of a motor employee MV = Monetary value
vehicle in the name of the employee A = acquisition cost
Purchase the car on instalment in Acquisition cost (exclusive of
(f) If the employer leases and maintains a fleet of motor vehicles for
the name of the employee interest) divided by 5 years
the use of the business and the employees, the value of the
Owns and maintains a fleet of motor Acquisition cost of all motor benefit shall be the amount of rental payments for motor vehicles
vehicles for the use of the business vehicles not normally used in not normally used for sales, freight, delivery, service and other
and the employees business divided by 5 years x non-personal use. The monetary value of the fringe benefit shall
50% be fifty per cent (50%) of the value of the benefit.
Leases and maintains a fleet of Amount of rental payment for
motor vehicles for the use of the motor vehicles not normally (g) The use of aircraft (including helicopters) owned and maintained
business and the employees used in business x 50% by the employer shall be treated as business use and not be
subject to the fringe benefits tax.
Use of yacht whether owned and Depreciation of yacht at an
maintained or leased by the estimated useful life of 20
 It will never be fringe benefit subject to fringe benefit
employer years
tax because the regulation then looks at the fact that
only few companies use aircrafts. But it seems that
(a) If the employer purchases the motor vehicle in the name of the today, especially in Manila, big companies are using
employee, the value of the benefit is the acquisition cost helicopters because of traffic congestion.
thereof. The monetary value of the fringe benefit shall be the
entire value of the benefit, regardless of whether the motor Airline companies that grant free trips are expense accounts and
vehicle is used by the employee partly for his personal purpose this does not fall under this category of fringe benefit. The
and partly for the benefit of his employer. employees do not use the aircraft exclusively for themselves.
They use their free flights along with other passengers.
(b) If the employer provides the employee with cash for the
purchase of a motor vehicle, the ownership of which is placed (h) The use of yacht whether owned and maintained or leased by the
in the name of the employee, the value of the benefits shall be employer shall be treated as taxable fringe benefit. The value of
the amount of cash received by the employee. The monetary the benefit shall be measured based on the depreciation of a
value of the fringe benefit shall be the entire value of the yacht at an estimated useful life of 20 years.
benefit regardless of whether the motor vehicle is used by the
employee partly for his personal purpose and partly for the  It is fringe benefit if you are allowed to use the yacht
benefit of his employer, unless the same was subjected to a for your personal benefit. This presupposes that you
withholding tax as compensation income under Revenue are using the yacht for a month, or for several days.
Regulations No. 2-98.  The value of the fringe benefit is equal to the
depreciation value (presupposes that there is no
(c) If the employer purchases the car on installment basis, the transfer of ownership here), with an estimated life of
ownership of which is placed in the name of the employee, the 20 years.
value of the benefit shall be the acquisition cost exclusive of
interest, divided by five (5) years. The monetary value of the Examples:
fringe benefit shall be the entire value of the benefit regardless
of whether the motor vehicle is used by the employee partly If you are given transportation allowance but still required to
for his personal purpose and partly for the benefit of his liquidate, it will not be considered a fringe benefit. If you need to
employer. justify why you have to go to that place, say for example, you need to
specify that you are going to SEC to register your employer‘s business,
 It matters also if ownership is transferred or not. If then this is not fringe benefit.
ownership is transferred, fringe benefit is equal to
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If a transportation allowance is given and you are not required to
liquidate, such is in the form of a fringe benefit subject to fringe
benefit tax.
If you are allowed to use the company car/ motor vehicle strictly for
business purposes, such is not a fringe benefit. There is no
benefit on your part.
It can be a benefit if you can use it for personal purposes and the
company does not impose restrictions on how you use it.
If you are free to use the motor vehicle after office hours then
there is still a fringe benefit here.
In the case of Medical Representatives, the companies keep a pool of
vehicles which the sales persons can make use. This is not a
fringe benefit because the purpose of the car is for sales purposes,
even if the company allows you to bring it home. Usually the company
will declare to the BIR that these are company vehicles with
corresponding company expenses. Another issue here is the fact that
the persons granted these cars are not managers. Even if sales
managers are granted motor vehicles, such privilege will still not be
considered a fringe benefit because this is used for sales and it is
pursuant to the nature and business of the employer and not
for the convenience of the employer.
If the employer leases and maintains a fleet of motor vehicles for the
use of the business and the employees, the value of the benefit shall
be the amount of rental payments for motor vehicles not normally
used for sales, freight, delivery, service and other non-personal use.
The monetary value of the fringe benefit shall be 50% of the value of
the benefit. This means that sales representatives are not included.
SUMMARY
Taxable fringe benefit
1. Can be used for personal purposes
2. No restrictions on its use
Instances include:
1. Given transportation allowance but not required to liquidate
2. Free to use the motor vehicle after office hours
Not taxable fringe benefit if
1. For the convenience of the employer
2. Used in trade or business of employer
Instances include:
1. Motor vehicle not exclusively used by an employee but used
also by other employees
2. Fleet of vehicle for marketing or sales department
3. Given transportation allowance and required to liquidate
4. Use company car/vehicle strictly for business purposes
HOUSEHOLD EXPENSES
HOUSEHOLD EXPENSES
Expenses of the employee which are borne by the employer for
household personnel, such as salaries of household help, personal
driver of the employee, or other similar personal expenses (like
payment for homeowners association dues, garbage dues, etc.) shall
be treated as taxable fringe benefits.
INTEREST ON LOAN AT LESS THAN MARKET RATE
INTEREST ON LOAN AT LESS THAN MARKET RATE
1. If the employer lends money to his employee free of interest or
at a rate lower than twelve per cent (12%), such interest
foregone by the employer or the difference of the interest
assumed by the employee and the rate of twelve per cent
(12%) shall be treated as a taxable fringe benefit.
2. The benchmark interest rate of twelve per cent (12%) shall
remain in effect until revised by a subsequent regulation.
3. This regulation shall apply to installment payments or loans with
interest rate lower than twelve per cent (12%) starting January
1, 1998.
12% interest for fringe benefit
The current market rate is 6% but the revenue regulation has not yet
been changed, so we will use 12% for fringe benefits.
MEMBERSHIP FEES
MEMBERSHIP FEES
Membership fees, dues, and other expenses borne by the employer for
his employee, in social and athletic clubs or other similar
organizations.
These expenditures shall be treated as taxable fringe benefits of the
employee in full.
Membership fee contemplates that you become a member of a sports
gym for your health. There are some companies that instead of doing
that, they just put up a gym in their own building.
Q: Your employer pays for your membership in Cebu Country Club, so
you could play golf with the clients of your employer, is this fringe
benefit?
A: It depends on the reason of the grant of the membership fee. If the
benefit is pursuant to the nature of the business of the employer, it is
not clearly a benefit to you but to the employer because you are asked
to play with the clients of the employer. It is not a taxable fringe
benefit. If you are to play anytime you want with anyone, then that
becomes a taxable fringe benefit.
Necessary for the position not subject to FBT
If it is necessary for his/her position, then considered for the benefit of
the employer or pursuant to the nature of the business of the
employer, thus, not subject to Fringe Benefit Tax.
It is not intended for social organizations, for fellowship and the like. If
you pay IBP membership fee and your being a lawyer is not pursuant
to the nature of the business, it is not considered as fringe benefit and
subject to ordinary income tax. It is most likely compensation income.
If necessary for your position, then not subject to tax since it is now
considered as expense of the business.
EXPENSES FOR FOREIGN TRAVEL
EXPENSES FOR FOREIGN TRAVEL
(a) Reasonable business expenses which are paid for by the
employer for the foreign travel of his employee for the purpose
of attending business meetings or conventions shall not be
treated as taxable fringe benefits. In this instance, inland travel
expenses (such as expenses for food, beverages and local
transportation) except lodging cost in a hotel (or similar
establishments) amounting to an average of US$300.00 or less
per day, shall not be subject to a fringe benefit tax. The
expenses should be supported by documents proving the actual
occurrences of the meetings or conventions.
(b) The cost of economy and business class airplane ticket shall not
be subject to a fringe benefit tax. However, 30 percent of the
cost of first class airplane ticket shall be subject to a fringe
benefit tax.
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(c) In the absence of documentary evidence showing that the
employee's travel abroad was in connection with business
meetings or conventions, the entire cost of the ticket, including
cost of hotel accommodations and other expenses incident
thereto shouldered by the employer, shall be treated as taxable
fringe benefits. The business meetings shall be evidenced by
official communications from business associates abroad
indicating the purpose of the meetings. Business conventions
shall be evidenced by official invitations/communications from
the host organization or entity abroad. Otherwise, the entire
cost thereof shouldered by the employer shall be treated as
taxable fringe benefits of the employee.
(d) Travelling expenses which are paid by the employer for the
travel of the family members of the employee shall be treated
as taxable fringe benefits of the employee.
(e) The expenses for travel contemplate a situation where you are
being sent by employer for a business convention. The reason is
because you are pursuing the business of the employer.
Excess of US$300 is fringe benefit
There are instances that though it is considered pursuant to the nature
of the business of the employer, it will still be subject to fringe benefit
tax. It is when your inland travel expenses while you're abroad
exceeds the amount of 300 USD, then that becomes fringe benefit, at
least the excess.
Problem
How much is considered Fringe Benefit here?
 Local transportation (airport to hotel, hotel to
convention) = 100USD
 Food & drinks = 300 USD
 Lodging = 1500 USD
 1st class ticket = 300,000 pesos x 30% = 90,000 Fringe
benefit
Under the Revenue Regulation, it says that in this instance, in land
travel expense such as expenses for food, beverages and local
transportation except lodging cost in a hotel and similar establishment
amounting to an average of 300 USD /day shall not be subject to
Fringe benefit tax.
So, add 100 and 300, and then subtract 300, only 100 USD is
considered as Fringe Benefit because you don't include lodging.
This is because you are in a foreign country so it is presumed that you
don't have a place to stay. Lodging is always considered for the benefit
of the employer but inland travel expenses, including food and drinks
and transportation, only 300 is considered for the benefit of the
employer, anything in excess will be deemed fringe benefit.
In the case of the first class ticket, only 30% of the value of the first
class ticket will be considered as fringe benefit. Business and economy
class tickets are considered for the benefit of the employer.
Entire cost of family travel is fringe benefit
If an employee travels with his family, the entire cost of the expenses
of the family excluding you the employee will be considered as fringe
benefit if paid for by your employer.
HOLIDAY & VACATION EXPENSES
HOLIDAY AND VACATION EXPENSES
Holiday and vacation expenses of the employee borne by his employer
shall be treated as taxable fringe benefits.
TN: Everything is considered as fringe benefit since it is not pursuant
to the purpose of the business of the employer.
EDUCATIONAL ASSISTANCE
EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR
HIS DEPENDENTS
(a) The cost of the educational assistance to the employee which
are borne by the employer shall, in general, be treated as
taxable fringe benefit. However, a scholarship grant to the
employee by the employer shall not be treated as taxable fringe
benefit if the education or study involved is directly connected
with the employer's trade, business or profession, and there is a
written contract between them that the employee is under
obligation to remain in the employ of the employer for period of
time that they have mutually agreed upon. In this case, the
expenditure shall be treated as incurred for the convenience
and furtherance of the employer's trade or business.
(b) The cost of educational assistance extended by an employer to
the dependents of an employee shall be treated as taxable
fringe benefits of the employee unless the assistance was
provided through a competitive scheme under the scholarship
program of the company.
TN: It is a Fringe benefit since it is for the benefit of the employee.
Educational assistance to employee
GR: Cost of the educational assistance to the employee borne by the
employer is taxable fringe benefit.
EXC: Scholarship granted to the employee by the employer, provided
the following conditions are met:
1. The education or study involved is directly connected with
the employer‘s trade, business or profession; and
2. There is a written contract between them to the effect that
the employee is under obligation to remain in the employ of
the employer for the period that they have mutually agreed
upon.
In this case, the expenditure shall be treated as incurred for
the convenience and furtherance of the employer‘s trade or
business.
Q: When is it considered non-taxable fringe benefit?
A: There has to be a lock-in contract (written contract whereby you
are required to stay in the company in consideration of the assistance.
No period required). It‘s not enough though. It must be that you are
pursuing a course which is related to the business of the employer.
Educational assistance to dependents
GR: Cost of Educational assistance extended by an employer to the
dependents of an employee is taxable fringe benefit.
EXC: The assistance was provided through a competitive scheme
under the scholarship program of the company.
Example: Scholarship grants where many will apply or only for those
who pass the exam and where there is a grade requirement.
Q: If it a benefit provides that all dependents of the employees can be
granted with scholarship, provided that they should to maintain a
grade of 1.9/subject, is it a fringe Benefit?
A: According to BIR, it is a Fringe benefit but not subject to fringe
benefit tax because it is still under a competitive scheme since the
students are required to maintain a grade.
No required level.
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HEALTH OR LIFE INSURANCE
HEALTH OR LIFE INSURANCE
Life or health insurance and other non-life insurance premiums or
similar amounts in excess of what the law allows — The cost of life or
health insurance and other non-life insurance premiums borne by the
employer for his employee shall be treated as taxable fringe benefit,
except the following:
(a) contributions of the employer for the benefit of the employee,
pursuant to the provisions of existing law, such as under the Social
Security System (SSS), (R.A. No. 8282, as amended) or under the
Government Service Insurance System (GSIS) (R.A. No. 8291), or
similar contributions arising from the provisions of any other existing
law; and
(b) the cost of premiums borne by the employer for the group
insurance of his employees.
Beneficiary
If beneficiary is the heir, it is considered income of the employee
because he clearly benefits from it.
If employee is managerial or supervisory, fringe benefit subject to tax.
But if beneficiary is the company, then it is not considered as fringe
benefit since employee does not benefit from it.
If for group of employees, not a fringe benefit subject to tax because
it is not personal to each of the employees.
SSS contributions not subject to FBT
Not subject to Fringe benefit tax because it is statutorily mandated.
EXEMPTION FROM FRINGE BENEFIT TAX
FRINGE BENEFITS NOT SUBJECT TO TAX
(1) Fringe benefits which are authorized and exempted from income
tax under the code or any special laws.
 Retirement benefits granted to managerial employees
are considered fringe benefit, but prior to retirement,
there is still employer-employee relationship.
 Granting that you are able to comply with all the
requirements, it is not subject to Fringe benefit tax
because it is already excluded in income tax law.
(2) Contributions of the employer for the benefit of the employee to
retirement, insurance and hospitalization benefit plans.
 This applies to a group of employees.
(3) Benefits given to the rank and file employees, whether granted
under a collective bargaining agreement or not.
 They are not fringe benefits in the first place as they
are given to rank and file employees.
(4) Benefits granted to employee as required by the nature of, or
necessary to the trade, business or profession of the employer.
(5) Benefits granted for the convenience of the employer.
(6) De minimis benefits as defined in the rules and regulations to be
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.
The Secretary of Finance is authorized to promulgate, upon
recommendation of the Commissioner, such rules and regulations as
are necessary to carry out efficiently and fairly the provisions of this
Section, taking into account the peculiar nature and special need of
the trade, business or profession of the employer.
DE MINIMIS BENEFITS
De minimis benefits, in a form of facilities or privileges, are furnished
or offered by the employer to its employees that are of relatively small
value and are offered or furnished merely as a means of promoting
goodwill, contentment or efficiency of his employees. These benefits
are not subject to fringe benefit tax.
Sec. 33 of NIRC, RR 5-2011, 8-2012 and 1-2015
1. Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year.
 It only refers to unused vacation leave credits and not
sick leave credits.
2. Monetized value of vacation and sick leave credits paid to
government officials and employees.
3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month.
4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.
5. Uniform and Clothing allowance not exceeding P5,000 per
annum.
6. Actual medical assistance, e.g. medical allowance to cover
medical and healthcare needs, annual medical/executive check-
up, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum.
 When the employer pays for maternity check-up of
the employee, it is considered as de minimis benefits,
provided that there is actual medical assistance.
7. Laundry allowance not exceeding P300 per month.
8. 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 received by the
employee under an established written plan which does not
discriminate in favor of highly paid employees.
 Because you are very efficient in your work the
company decided to give you a gift certificate of
Shangri-la good for 1 day, P10,000, it does not form
part of de minimis since it is provided that it must be a
tangible personal property other than cash or gift
certificate.
9. Gifts given during Christmas and major anniversary celebrations
not exceeding P5,000 per employee per annum.
 Christmas gifts and not Christmas bonus.
10. Daily meal allowance for overtime work and night/graveyard
shift not exceeding twenty-five percent (25%) of the basic
minimum wage on a per region basis.
11. Benefits received by an employee by virtue of a collective
bargaining agreement (CBA) and productivity incentive schemes
provided that the total monetary value received from both CBA
and productivity incentive schemes combined do not exceed
P10,000.00 per employee per taxable year.
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Threshold of P90,000
PASSIVE INCOME
The list of de minimis benefits is exclusive. The threshold now under
the TRAIN Law is P90,000. The amount in excess of P90,000 will be
subject to the normal income tax rate or fringe benefit tax, as the case PASSIVE INCOME
may be.
The types of passive income are:
Example: Determine the tax due given the following: 1. Royalties
Monthly compensation income - P80,000 2. Prizes
Rice subsidy – P2,000/month 3. Winnings
Uniform allowance – P10,000 4. Interest
Medical allowance to employee – P15,000 5. Long-term deposits or investments
Laundry allowance – P800/month 6. Dividends
Productivity incentive – P15,000 7. Capital Gains
Christmas bonus – P10,000
TAX RATES
Tax Due
For RC, NRC & RA
Rank & File Employee

Types of Passive Income Rate

Compensation Income
(P80,000x12 months) P 960,000 Interest from currency deposits, trust funds and deposit 20%
13th Month Pay P 80,000 substitutes
Christmas Bonus 10,000
Excess of de minimis benefits: Royalties
Rice Subsidy 6,000 a. In general 20%
Uniform Allowance 5,000 b. Books, literary & musical compositions 10%
Medical Allowance 5,000 Prizes & Winnings
Laundry Allowance 6,000 a. P10,000 or less 0-35%
Productivity Incentive 5,000 b. In excess of P10,000 20%
Total P 117,000
Less Threshold (90,000) 27,000 PCSO & Lotto Winnings
Taxable Income P 987,000 a. P10,000 or less Exempt
b. In excess of P10,000 20%

Taxable Income P 987,000 Interest Income from foreign currency deposit 15%
Less Threshold (excess over 2,000,000) (800,000)
Total P 187,000 Cash & Property Dividends
Multiplied by Tax Rate 30% a. To individuals from domestic corporations 10%
b. To domestic corporations from another DC 0%
Total P 56,100
Add Threshold (490,000) 130,000 On capital gains presumed to have been realized from sale,
Total Tax Due and Payable P 186,100 exchange or other disposition of real property (capital asset) 6%
On capital gains for shares of stock not traded in the stock
exchange 15%
De Minimis Benefits
Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
Taxable Non-taxable
substitutes, investment management accounts and other
Rice subsidy (P2,000x12mos) P 6,000 P 18,000
investments evidenced by certificates Exempt
Uniform allowance (P10,000) 5,000 5,000
Medical allowance to employee 5,000 10,000
Upon pre-termination before the 5th year, there should be
(P15,000)
imposed on the entire income from proceeds of the long-
Laundry (P800x12mos) 6,000 3,600
term deposit based on the remaining maturity thereof:
Productivity incentive (P15,000 5,000 10,000
Holding Period
Total P 27,000 P 46,600
a. 4 years to less than 5 years 5%
b. 3 years to less than 4 years 15%
For managerial employees, the excesses will be subject to FBT. The c. Less than 3 years 20%
rate of the excess would depend on the type of individual. This is the
position of the BIR as provided in a revenue regulation. TN: Winnings, other than PCSO and Lotto, are subject to 20% final tax
regardless of the amount.
SUBJECT TO OTHER TAXES (RR 5-98)
For NRA-ETB
The exemption of any fringe benefit from the fringe benefit tax shall
not be interpreted to mean exemption from any other income tax Types of Passive Income Rate
imposed under the Code except if the same is likewise expressly
exempted from any other existing law. Interest from currency deposits, trust funds and deposit 20%
substitutes
Thus, if the fringe benefit is exempted from the fringe benefit tax, the
same may still form part of the employee‘s gross compensation income Interest Income from long-term deposit or investment in the
subject to income tax. Hence, it is likewise subject to withholding tax form of savings, common or individual trust funds, deposit
on compensation income payment. substitutes, investment management accounts and other
investments evidenced by certificates Exempt

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Upon pre-termination before the 5th year, there should be TN: Whichever is higher
imposed on the entire income from proceeds of the long-
term deposit based on the remaining maturity thereof: 3. CG from Sale of Other properties
Holding Period a. Rate: 0-35% based on
a. 4 years to less than 5 years 5% b. Things to remember: Ordinary gains and capital gains
b. 3 years to less than 4 years 15% can be added. Ordinary loss and capital gains can be
c. Less than 3 years 20% joined. But capital loss cannot be deducted from
ordinary gains.
On capital gains presumed to have been realized from sale, c. Sec. 39 (B): Percentage taken into account
exchange or other disposition of real property (capital asset) 6% i. Held for not more than 12 months: 100%
ii. Held for more than 12 months: 50%
On capital gains for shares of stock not traded in the stock d. Sec. 39 (D): In case of Capital Loses, the amount of
exchange 15% Net Capital Loss Carry-Over cannot exceed ordinary
gains.
For NRA-NETB i. Can only be carried over for a period of 1 year.

Types of Passive Income Rate TAXATION AT SOURCE

On the gross amount of income derived from all sources 25%
within the Philippines TAXATION AT SOURCE

On capital gains presumed to have been realized from sale, 1. Final Withholding Tax
exchange or other disposition of real property (capital asset) 6% 2. Creditable Withholding Tax
On capital gains for shares of stock not traded in the stock a. Withholding Tax On Compensation
exchange 15% b. Expanded Withholding Tax
c. Withholding Tax on Government Money Payments
(GMP) – Percentage Taxes
Q: If you won Bingo in the US while you were on vacation for P10M, d. Withholding tax on GMP – Value Added Tax (GVAT)
how will it be taxed of you are a resident citizen?
KINDS OF WITHHOLDING TAX
A: The 10M will be form part of the income subject to 0-35% tax rates
and will not be considered passive income since it is earned outside of Withholding Tax on Compensation is the tax withheld from
the Philippines. income payments to individuals arising from an employer-employee
relationship.
SUMMARY
Passive income earned outside the Philippines – 0-35% Expanded Withholding Tax is a kind of withholding tax which is
prescribed on certain income payments and is creditable against the
Passive income earned within the Philippines – 20%, except: income tax due of the payee for the taxable quarter/year in which the
particular income was earned.
1. Royalties on books, literary & musical compositions – 10%
2. Prizes & winnings (P10,000 or less) – 0-35% Final Withholding Tax is a kind of withholding tax which is
3. PCSO & lotto winnings (P10,000 or less) – exempt prescribed on certain income payments and is not creditable against
4. Interest income from FCDU – 15% the income tax due of the payee on other income subject to regular
5. Cash & Property dividends rates of tax for the taxable year. Income Tax withheld constitutes the
a. To RC, NRC, RA from DC – 10% full and final payment of the Income Tax due from the payee on the
b. To NRA-ETB from DC – 20% particular income subjected to final withholding tax.
c. To NRA-NETB from DC – 25%
d. To DC from DC – 0% Withholding Tax on Government Money Payments (GMP) -
e. To individuals from RFC – 0-35% Percentage Taxes - is the tax withheld by National Government
- Apply the tax situs rule: Agencies (NGAs) and instrumentalities, including government-owned
i. Income within if ratio is more than 85% and controlled corporations (GOCCs) and local government units
ii. Income without if ratio is less than 50% (LGUs), before making any payments to non-VAT registered
iii. Partly income within & income without if taxpayers/suppliers/payees
ratio is between 50% and 85%
Withholding Tax on GMP - Value Added Taxes (GVAT) - is the
tax withheld by National Government Agencies (NGAs) and
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before
Capital Gains transactions:
making any payments to VAT registered taxpayers/suppliers/payees on
1. CG from Sales of Shares of Stocks
account of their purchases of goods and services.
a. Must not be listed or traded in the local stock
exchange.
b. Rate: 15% based on Net Gain: GSP – Cost TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
c. If listed and traded in the stock exchange:
i. 60% of 1% based on Gross Selling Price.
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
2. CG from Sale of Real property
1. Income payments to a RC, NRC & RA
a. Rate: 6% based on either:
a. Interest on any peso bank deposit
i. Sec. 24 (D): Gross Selling Price
b. Royalties
ii. Sec. 6 (E)(1): FMV as determined by
c. Prizes (except prizes amounting to P10,000 or less
Commissioner of BIR
which are subject to tax)
iii. Sec. 6 (E)(2): FMV as determined by Prov. or
City Assessors
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d. Winnings (except winnings not exceeding P10,000

EXEMPT ENTITIES FROM CGT
from PCSO & Lotto which are exempt)
e. Interest income on foreign currency deposit
f. Interest income from long term deposit (except those EXEMPT ENTITIES FROM CGT
with term of 5 years or more)
g. Cash and/or property dividends 1. Dealer in securities, regularly engaged in the buying and
h. Capital gains assumed to have been realized from the selling of securities
sale, exchange or other disposition of real property 2. Entity exempt from the payment of income tax under
existing investment incentives and other special laws
2. Income payments to NRA-ETB 3. Individual or non-individual exchanging real property solely
a. On certain passive income for shares of stocks resulting in corporate control
b. Cash and/or property dividends 4. Government entity or GOCC selling real property
c. Share in the distributable net income of partnership 5. Disposition of the real property which is gratuitous in nature
d. Interest on any bank deposits 6. Disposition of real property pursuant to the CARP law
e. Royalties 7. Proceeds of the sale of the principal residence have been
f. Prizes (except prizes amounting to P10,000 or less fully utilized in acquiring or constructing new principal
which is subject to tax) residence within 18 calendar months from the date of sale or
g. Winnings (except winnings not exceeding P10,000 disposition
from PCSO & Lotto which are exempt)
h. Interest on long term deposits (except those with term
OTHER INCOME
of 5 years or more)
i. Capital gains presumed to have been realized from the
sale, exchange or other disposition of real property OTHER INCOME

3. Income derived from all sources within the Philippines by 1. Rent income other than royalties
NRA-NETB 2. Interest income other than interest income on bank deposit
a. On gross amount of income derived from all sources 3. Dividend income
within the Philippines 4. Income from other sources and this include:
b. On capital gains presumed to have been realized from a. Bad debts recovered
the sale, exchange or disposition of real property b. Illegal gains derived from gambling
located in the Philippines c. Tax refunds
d. Compensation for private property expropriated by the
4. Income derived by alien individual employed by special government for public use
corporations e. Damages
f. Cancellation of indebtedness
5. Fringe benefits granted to the employee (except rank & file)
INTEREST INCOME FROM LONG-TERM DEPOSIT
6. Informer‘s reward
- 10% of the revenues, surcharges or fees recovered
and/or fine or penalty imposed and collected or LONG-TERM DEPOSITS OR INVESTMENTS
P1,000,000 per case, whichever is lower
Example
7. Cash or property dividends paid by a Real Estate Investment Mr. X has a 10-year time deposit of P1,000,000 which earns interest at
Trust (REIT) pursuant to Sec. 13 of RR 13-2011 P100,000 per year. Mr. X held it for 3 years before he sold it to Mr. Y.
Mr. Y held it for 5 years before he, in turn, sold it to Mr. Z. Mr. Z held
it for 2 years until the date of maturity. How will income be taxed?
CAPITAL GAINS
The interest income of Mr. X will be taxed at 12% since he held it for 3
Types of Capital Gains Rate Basis years. Mr. Y is exempt since the holding period is 5 years. Mr. Z is
subject to a tax rate of 20% since he held it for 2 years.
Sale of shares of stocks not listed
and traded in the local exchange or 15% Net Capital Gains It does not matter how long the time deposit is. What matters is how
listed but not traded in local stock long you held into it.
exchange
TN: The same goes for deposit substitutes, the tax would also depend
Sale of shares of stocks listed and 60% Gross Selling Price on the holding period
traded in the stock exchange of 1%
Sale of real property located in the 6% GSP or FMV, BAD DEBTS RECOVERED
Philippines whichever is higher

Sale of other capital assets BAD DEBTS RECOVERED

Holding period:
a. More than 12 months 0-35% 50% of capital gain Once recovered, bad debts can be considered as income, as well as,
b. 12 months or less 0-35% 100% of capital gain allowed as deductions. It is subject to income tax but only to the
extent of the tax benefit.
Formula:
Tax benefit rule
Under the Tax Benefit Rule, a taxpayer is subject to income tax to the
extent of tax benefit when bad debts are recovered. There is benefit
when bad debts are recovered because the taxpayer is allowed by law
to deduct the bad debts which lower its taxable income.

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How to compute the benefit on bad debts? Note: Do not show these computations during bar exam or Atty.
TN: This computation applies to tax refund as well. Amago's exam. This is only intended to understand the computation of
tax benefit from bad debts being recovered.
2015 2016 2017 2017
Income 100,000 (100,000) 20,000 20,000 ILLEGAL GAINS FROM GAMBLING
Bad debts (50,000) (50,000) (50,000) (50,000)
Taxable 50,000 (150,000) (30,000) (30,000)
GAMBLING
Income
Amount
Gambling is taxable. The NIRC does not distinguish between legal or
recovered in 30k 30k 30k 40k
illegal gambling. As long as there is income, it is taxable.
2018

100 – 50 (100) – (50k) 20 – (50) 20 – (50) TAX REFUNDS

Actual
= 50k = (150k) or = (30k) or = (30k) or
0 0 0 TAX REFUND
What if
Tax refund is taxable to the extent of the tax benefit.
What if you
did not
Taxes that cannot be deducted [PESSIV]
declare as 100 – 20 (100) – (20) 20 - (20k) 20 - 10
A. Philippine income tax
bad debts = 80k = (120k) =0 = 10k
B. Estate and donor's tax
the one you
C. Stock Transaction Tax
recovered?
D. Special assessment
Difference E. Income tax paid to foreign government claimed as tax
between credit
what if and
F. Value Added Tax
actual 30k 0 0 10k
When the above enumerations are deducted and there is a refund,
Suppose in 2018 now, based on the table above, the taxpayer there is no tax benefit since it is not allowed as deduction in the first
recovered bad debts of 30K in 2015, 30K in 2016 and 30K in 2017. place. It is not part of taxable income even though there is a refund.
How will you compute the benefit on bad debts?
Q: Is the tax refund from a local business tax paid in excess taxable?
The taxpayer shall compare first the 'what if' to the 'actual'. The 'what
if' refers to difference of the amount between the bad debts and the A: Yes. Since local business tax is not enumerated in the taxes that
amount of bad debts being recovered. The 'actual' refers to the same cannot be deducted then a taxpayer may deduct local business tax.
computation within the taxable year.
Q: If you were able to recover a tax that you previously deducted, is
For instance in 2015: that considered taxable income then?
1. 'What if' means 100K minus (20K) = 80K
N.B. (20K) is derived from (50K) [bad debts in 2015] minus A: Yes, to the extent of the tax benefits. We apply the Tax Benefit Rule
30K [bad debts recovered in 2018]. and use the same computation in bad debts.
2. 'Actual' means 100K minus (50K) = 50K
3. Then, we have to get the difference between the 'what if' and Computation of tax benefit
the 'actual' which is 30K. It is derived from 80K minus 50K. The computation shown under bad debts is also applicable to tax
4. Therefore, 30K is the tax benefit received by the taxpayer refund. Just change the bad debts to taxes because tax refunds also
subject to taxable income. follow the tax benefit rule and taxes are allowed as deductions.

For instance in 2016:
1. 'What if' means (100K) minus (20K) = (120K)Loss
N.B. (20K) is derived from (50K) [bad debts in 2016] minus
30K [bad debts recovered in 2018].
2. 'Actual' means (100K) minus (50K) = (150K)Loss
3. Since both 'what if' and 'actual' are at loss or negative, then it
will be treated as zero (0).
4. Therefore, it is not subject to taxable income.
For instance in 2017:
B. 'What if' means 20K minus (20K) = 0
N.B. (20K) is derived from (50K) [bad debts in 2017] minus
30K [bad debts recovered in 2018].
C. 'Actual' means 20K minus (50K) = (30K)Loss
D. Since 'what if' has no income and 'actual' are at loss or
negative, then the 'actual' will be treated as zero (0). As a
result, zero income already.
E. Therefore, it is not subject to taxable income.
What if the bad debts collected in 2017 amounted to 40K, would that
change your answer? Yes. It is because the 'what if' will become 10K
while the 'actual' will be the same as zero (0). Then, we have to get
the difference between the 'what if' and the 'actual' which is 10K.
Clearly, there is already a tax benefit subject to taxable income.
Compare the income with the tax deduction (the ―actual‖ income) and
the income without the tax deduction (the ―would be‖ income. The
difference, if any is the taxable income.
Thus, if the ―actual‖ income is more than the ―would be‖ income, the
difference is taxable income.
Example: In year 1, you had an operating income of P100,000 and tax
deduction of P50,000. This resulted to a taxable income of P50,000. In
year 2, you got a tax refund of P10,000. How much is the taxable
income for year 2?
A: The taxable income is P10,000. Since you received a tax refund of
P10,000 in year 2, the tax refund will be removed from the deductions
in year 1. So only P40,000, which is the tax deduction of P50,000 less
the tax refund of P10,000, will be deducted from the income of
P100,000 in year 1.
As a result, the ―would-be‖ taxable income of year 1 is P60,000.
Comparing the ―would-be‖ taxable income with the ―actual‖ income of
P50,000 will yield a difference of P10,000. The difference will form part
of your taxable income.

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COMPENSATION IN EXPRORPRIATION CASES Pure Compensation Income Earner

Using the Graduated Income Tax Rates
COMPENSATION IN EXPRORIATION CASES
Compensation Income
The just compensation for private property expropriated by the (Net of Mandatory Deductions) P xxx
government for public use is subject to tax. It will be treated as a sale Multiplied by the tax Rate (0-35%) x%
to the government. Income Tax Due P xxx
Less Tax Withheld (xxx)
If the private real property expropriated is residential, it will be treated Income Tax Due and Payable P xxx
as capital gains subject to 6% Capital Gains Tax based on the gross
selling price or zonal value as determined by BIR or assessed value as
determined by local assessor, whichever is higher.
Self-employed Individuals
If the real property expropriated is used in trade or business, it will be Using the Graduated Income Tax Rates
treated as ordinary gains subject to 0-35% income tax.
Gross Income P xxx
The only kind of property that cannot be expropriated is cash.
Less Allowable Deduction (xxx)
Net Taxable Income P xxx
SUMMARY
Multiplied by the tax Rate (0-35%) x%
o Only cash cannot be expropriated.
o Tax depends on type of property Income Tax Due P xxx
 Personal property – 0-35% Less Withholding taxes, Tax Credits (xxx)
 Residential property – 6% CGT Income Tax Due and Payable P xxx
 Used in trade or business – 0-35%
 Capital Asset – option to use rate of 6% or 0-35%
- Most would likely use the dumping ground because you Self-employed Individuals
get to deduct the cost.
Using the 8% Optional Tax Rate
- The 6% CGT is based on presumed gain.
Gross Income P xxx
DAMAGES Less Threshold (in excess of 250,000) (250,000)
Taxable Business Income P xxx
DAMAGES Multiplied by Optional Tax Rate 8%
Income Tax Due P xxx
General rule: Damages are subject to tax.

Exception: Damages received from physical injuries are excluded from TAX ON NRA-NETB
tax under the law
TAX ON NRA-NETB
Are the following taxable?
A non-resident alien not engaged in trade or business in the Philippines
1. Moral damages due to sleepless night or exemplary damages – Yes
is taxed at a final tax of 25% based on his gross income within, except
2. Payment of back wages or nominal damages in a labor case –Yes
for alien employed by regional or area headquarters (RAHQs)
3. Moral damages relating to a physical injury case – No
established in the Philippines by multinational company, offshore
Except Lucrum cessans or loss of profits
banking units (OBUs), petroleum service contractor and subcontractor
since they are taxed at 15% of salaries within.
CANCELLATION OF INDEBTEDNESS
SUMMARY
GR: 25% of gross income
CANCELLATION OF INDEBTEDNESS
EXC: 15% of salaries within
1. Alien employed in RAHQ
Rules
2. OBUs
3. Petroleum service contractor and subcontractor
A. If the reason for cancellation is due to the services rendered by
the debtor, it is subject to income tax.
PROCEDURE FOR FILING INCOME TAX RETURN
B. If the reason for cancellation is due to the generosity or liberality
of the creditor, it is not subject to income tax but subject to INDIVIDUALS REQURED TO FILE ITR
donor's tax.

C. When the corporation extended a debt to one of its stock holders
and eventually condone the debt, it is subject to dividend income
tax of 10% or 20% or 25% as the case may be.
D. When the stock holder extended a debt to its corporation and
eventually condoned the debt, it is considered as part of
investment that shall not be subject to tax since it is a capital.
INCOME TAX COMPUTATION
Sec. 51 (A) (1) of the NIRC
Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
(a) Every Filipino citizen residing in the Philippines;
(b) Every Filipino citizen residing outside the Philippines, on his income
from sources within the Philippines;
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and
(d) Every nonresident alien engaged in trade or business or in the
exercise of profession in the Philippines.

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TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
Who are required to file Tax Returns?
All individual taxpayers are required to file income tax return, except
NRA NETB since the final tax is withheld at source.
INDIVIDUALS NOT REQUIRED TO FILE ITR
Sec. 51 (A) (2) of the NIRC
The following individuals shall not be required to file an income tax
return:
(a) An individual whose taxable income does not exceed P250,000:
Provided that a citizen of the Philippines and any alien individual
engaged in business or practice of profession within the Philippines
shall file an income tax return regardless of the amount of the gross
income;
(b) An individual with respect to pure compensation income, as
defined in Section 32(A)(1), derived from such sources within the
Philippines, the income tax on which has been correctly withheld under
the provisions of Section 79 of this Code: Provided, That an individual
deriving compensation concurrently from two or more employers at
any time during the taxable year shall file an income tax return;
(c) An individual whose sole income has been subjected to final
withholding tax pursuant to Section 57(A) of this Code; and
(d) A minimum wage earner as defined in Section 22(HH) of this Code
or an individual who is exempt from income tax pursuant to the
provisions of this Code and other laws, general or special.
Sec. 51 (A) (3) of the NIRC
The forgoing notwithstanding, any individual not required to file an
income tax return may nevertheless be required to file an information
return pursuant to rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner.
INDIVIDUALS NOT REQUIRED TO FILE ITR
1. An individual who is a minimum wage earner.
2. An individual whose taxable income does not exceed
P250,000, provided that a citizen of the Philippines and any
alien individual engaged in business or practice of profession
within the Philippines shall file an income tax return
regardless of the amount of the gross income
3. An individual whose income has been subjected to final
withholding tax
4. Those who are qualified under ―substituted filing‖
Does not exceed P250,000
The taxpayer whose income does not exceed P250,000 is not required
to file since is exempted.
Professional & Business Income Earner
An individual engaged in business or the practice of profession is
required to file ITR regardless of the amount of gross income so that
the government can verify if they are claiming the proper deductions.
Pure Compensation Income Earner
General Rule: An individual earning pure compensation income is
required to file ITR, regardless of the amount of income, since he is
qualified under substituted filing. It is the employer who files.
The TRAIN Law added an additional section for substituted filing. It
wanted to clarify that the certificate of withholding filed by the
employer duly stamped received by the BIR is tantamount to the filing
of an ITR by the employee. The taxpayer can therefore present it as
proof of payment of tax.
Exception: When the employee has two or more employers during the
taxable year, he is required to file an ITR. This is because of the
possibility that he might be earning total income of more than
P250,000 from his employers.
When BPE existed, the income earned by the taxpayer might be
claimed by each employer and such BPE can only be claimed once.
Now, it is to ensure that the 250,000 exemption is only claimed once
as it can happen that both employers can separately claim. The BIR
must make sure that he is taxed according to the correct tax bracket.
Subject to FWT
Those earning income solely subject to final withholding tax are not
required to file ITR.
Ex. Housewives receiving remittances from their spouses abroad and
placing such in the bank. They are earning interest income but are not
required to file an ITR because the taxes due are already withheld by
the bank. This is only true if all your income are subject to final tax.
Ex. If you also earn income from a sari-sari store, then you are
required to file an ITR regardless of the income earned since it is
considered business income.
Minimum wage earner
Minimum wage earners are not required to file an ITR because they
are exempt from taxes. However, they are required to file an
information return.
SUMMARY
A. Individuals not required to file ITR:
 GR: All individuals are required to file an ITR. (RC, NRC, RA,
NRA-ETB)
 EXC: NRA-NETB
 REASON: Income of NRA-NETB is subject to final
withholding tax of 25% withheld at source.
B. Individuals not required to file ITR:
 Taxable income does not exceed P250,000
o EXC: Business or professional income, regardless
of amount of gross income
 Pure compensation income earner
o EXC: 2 or more employers any time during the
taxable year
 Sole income subjected to final withholding tax
 Minimum wage earner or tax-exempt individual
WHERE TO FILE
Sec. 51 (B) of the NIRC
Except in cases where the Commissioner otherwise permits, the return
shall be filed with an authorized agent bank, Revenue District Officer,
Collection Agent or duly authorized Treasurer of the city or
municipality in which such person has his legal residence or principal
place of business in the Philippines, or if there be no legal residence or
place of business in the Philippines, with the Office of the
Commissioner.
WHERE TO FILE
1. Authorized Agent Bank (AAB)
2. Revenue District Officer (RDO)
3. Treasurer
4. Office of the Commissioner
Authorized Agent Bank (AAB)
AAB has jurisdiction over the RDO. BIR is prohibited from accepting
cash/ check payments in order to prevent or minimize opportunities for
corruption. At least with AABs, the funds are directly deposited to the
government coffers.
Revenue District Officer (RDO)
The ITR is filed with the RDO where your principal place of business is
located. You can go to the RDO if you don‘t have payment.
Q: How do you update the RDO now that you are now working in
Cebu with another employer if you were registered by your previous
employer in the RDO of Manila where his principal place of business is?
UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 81 | P a g e
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A: You need to write the RDO of your previous employer requesting
for the transfer of your registration to the RDO in Cebu. They will then
conduct an automatic audit.
Q: What happens if you transfer your business in Cebu to Mandaue?
A: The RDO of Cebu will audit your business before transferring you to
the RDO of Mandaue to ensure that you have cleared your account.
Once you are transferred, the RDO of Cebu will lose jurisdiction.
Treasurer
Municipal and city treasurers can be deputized to receive income tax
returns and payments.
Office of the Commissioner
The ITR can be filed with the Office of the Commissioner in Quezon
City when there is no principal place of business in the Philippines.
WHEN TO FILE
Sec. 51 (C) of the NIRC
(1) The return of any individual specified above shall be filed on or
before the fifteenth (15th) day of April of each year covering income
for the preceding taxable year.
(2) Individuals subject to tax on capital gains;
(a) From the sale or exchange of shares of stock not traded thru a
local stock exchange as prescribed under Section 24(c) shall file a
return within thirty (30) days after each transaction and a final
consolidated return on or before April 15 of each year covering all
stock transactions of the preceding taxable year; and
(b) From the sale or disposition of real property under Section 24(D)
shall file a return within thirty (30) days following each sale or other
disposition.
Sec. 58 (A), par. 3 of the NIRC
The return for final and creditable withholding taxes shall be filed and
the payment made not later than the last day of the month following
the close of the quarter during which the withholding was made.
WHEN TO FILE
1. Individual
a. On or before May 15 starting 2019
b. On or before April 15 until 2018
2. Corporation
a. On the 15th day of the 4th month
3. Capital Gains
a. Sale or exchange of shares of stock not traded thru a
local stock exchange
i. Within 30 days after each transaction
ii. Final consolidated return on or before April 15
b. Sale or disposition of real property
i. Within 30 days following each sale or other
disposition
4. Taxes withheld at source
a. Not later than the last day of the month following the
close of the quarter
Under the TRAIN law, the ITR must be filed on or before May 15.
Although the date of April 15 in Sec. 51 has not been amended, when
you file under Sec. 74, you are supposed to make an estimate
declaration of your estimated income on or before May 15 of the
taxable year starting 2019.
OTHER PROVISIONS
Sec. 51 (D) of the NIRC
Husband and Wife. - Married individuals, whether citizens, resident or
nonresident aliens, who do not derive income purely from
compensation, shall file a return for the taxable year to include the
income of both spouses, but where it is impracticable for the spouses
to file one return, each spouse may file a separate return of income
but the returns so filed shall be consolidated by the Bureau for
purposes of verification for the taxable year.
Sec. 51 (E) of the NIRC
Return of Parent to Include Income of Children. - The income of
unmarried minors derived from property received from a living parent
shall be included in the return of the parent, except (1) when the
donor's tax has been paid on such property, or (2) when the transfer
of such property is exempt from donor's tax.
Sec. 51 (F) of the NIRC
Persons Under Disability. - If the taxpayer is unable to make his own
return, the return may be made by his duly authorized agent or
representative or by the guardian or other person charged with the
care of his person or property, the principal and his representative or
guardian assuming the responsibility of making the return and
incurring penalties provided for erroneous, false or fraudulent returns.
Sec. 51 (G) of the NIRC
Signature Presumed Correct. - The fact that an individual's name is
signed to a filed return shall be prima facie evidence for all purposes
that the return was actually signed by him.
Sec. 56 (A) (2) of the NIRC
Installment of Payment. - When a tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation, may
elect to pay the tax in two (2) equal installments, in which case, the
first instalment shall be paid at the time the return is filed and the
second installment on or before October 15 following the close of the
calendar year, if any installment is not paid on or before the date fixed
for its payment, the whole amount of the tax unpaid becomes due and
payable together with the delinquency penalties.
Husband and Wife
GR: Joint filing
EXC: Where it is impracticable
Minors
GR: Income included in return of parent
EXC: For property where
1. Donor‘s tax has been paid on the property or
2. Transfer of the property is exempt from donor‘s tax
Minors can file separately since there is no age requirement in the tax
code. However, the BIR will not issue a Tax Identification Number
(TIN) to a minor which is necessary for filing an income tax return. So,
their income is added to the parents.
Persons under Disability
GR: Taxpayer can file his own ITR
EXC: When he is unable to make his own return
1. Duly authorized agent or representative
2. Guardian or other person charged with the care of his
person or property
Pay-as-you-file system
Taxes are paid when you file.
Installment payments
When a tax due is in excess of P2,000, the taxpayer other than a
corporation can pay in 2 equal installments on May 15 and October 15.
Frequency of filing
The ITR is filed quarterly for business or professional income earners
and annually for compensation income earners.
Number of Copies
The ITR is filed in triplicate, two copies for the BIR and one copy for
the taxpayer. The tax code only requires duplicate copies but for
regulation purposes, triplicate copies have been required.
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TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018
INCOME TAXATION FOR CORPORATIONS
INTRODUCTION & DEFINITION OF TERMS
Sec. 22 (B) (C) (D) (H) (I) of the NIRC
(B) The term 'corporation' shall include partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas
en participacion), association, or insurance companies, but does not
include general professional partnerships and a joint venture or
consortium formed for the purpose of undertaking construction
projects or engaging in petroleum, coal, geothermal and other energy
operations pursuant to an operating consortium agreement under a
service contract with the Government. 'General professional
partnerships' are partnerships formed by persons for the sole purpose
of exercising their common profession, no part of the income of which
is derived from engaging in any trade or business.
(C) The term 'domestic,' when applied to a corporation, means created
or organized in the Philippines or under its laws.
(D) The term 'foreign,' when applied to a corporation, means a
corporation which is not domestic.
(H) The term 'resident foreign corporation' applies to a foreign
corporation engaged in trade or business within the Philippines.
(I) The term 'nonresident foreign corporation' applies to a foreign
corporation not engaged in trade or business within the Philippines.
DEFINITION OF TERMS
Corporation
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence. (Sec. 2,
Corporation Code)
For taxation purposes, a corporation shall include
 partnerships, no matter how created or organized,
o except general professional partnerships
 joint-stock companies,
 joint accounts (cuentas en participacion),
 association, or
 insurance companies,
But does not include
 general professional partnerships and
 a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to
an operating consortium agreement under a service contract
with the Government.
TN: The definition under the tax code is not limited to corporations per
se. It can include other entities that do not possess a separate juridical
personality.
General Professional Partnerships
'General professional partnerships' are partnerships formed by persons
for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business.
Joint Ventures
A joint venture is created when two corporations, while registered and
operating separately, are placed under one sole management which
operates the business affairs of said companies as though they
constitute a single entity, thereby obtaining substantial economy and
profits in the operation.
It is a business activity that is organized or established only for a
temporary or short period of time. It is dissolved once its business
objective is accomplished.
Joint Account
A joint account is created when two persons form or create a common
fund and such persons engage in a business for profit. This may result
in a taxable unregistered association or partnership.
Joint Stock Companies
It is the midway between a corporation and a partnership, a ―hybrid
personality.‖ It is somewhat a corporation because this is managed by
a Board of Directors and such persons may transfer their share/s
without the consent of others, and somewhat a partnership because it
is an association, and persons or members of the same contribute
fund, money to a common fund.
Emergency Operation
This may be formed by two corporations with separate personalities. If
they form that emergency operation (it is really a special activity) to
engage in joint venture, corporation may be taxed only from the
income derived from such business. The income derived from such
emergency operations should also be included in that taxable income
subject to corporate income tax. In the same way that has a separate
and distinct personality; if it‘s a part of that emergency operation, the
income derived from such special activity should also be included in
the income of that corporation, subject to corporate income tax, even
if it is not registered with the SEC.
EXCLUSIONS FROM THE TERM CORPORATION
EXCLUSIONS FROM THE TERM CORPORATION
1 – Joint Venture
(For the purposes of undertaking construction project)
Corporation itself ordinarily owns the land but there are some
individuals who own it but they (corporation) undertake to develop the
land and subdivide it and once the land is ready for sale, whatever is
the sales proceeds once it has been developed, they will just share the
profits with the owner of the land. They enter in this Joint Venture
Agreement. At one part, what was contributed by the owner of the
land (which is the ownership) while the other party it contributes to
the cost of developing the land.
But ordinarily, when you transfer property to one fund, you will be
treated as a partnership and it is supposedly subject to tax.
The law deems it that no, in this type of conveying property to a
particular fund, you don‘t treat it as if a partnership. Because the
undertaking is a construction project, the law deems it that it should
not be taxed but does that mean that there no tax in such operations?
No. There is still tax but on the level of the entities who formed the
Joint Venture. The owner will be subject to tax separately and then the
one who developed the property will also be taxed separately on
whatever income was distributed to them.
While it says exclusions from the term corporation, it does not mean
there is no tax imposed, it‘s just taxed on a different level. Different
type of taxpayer is being taxed when everyone is excluded from the
term corporation.
Not corporate income tax applies but it is individual taxation (of course
if that entity happens to be a corporation then it would be still taxed as
a corporation) but not on his operations together with someone who is
in Joint Venture with him on that construction project. They would still
be taxed as corporation, but only separately, not jointly.
General Rule: An unincorporated joint venture is taxed like a
corporation.
The share of the joint venture partners will no longer be taxable to
them because they partake of dividends if paid to a domestic or
resident corporation.
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Exception: When formed for the purpose of undertaking a construction
project or engaging in petroleum operations pursuant to the
consortium agreement with the Philippine Government is not subject to
the corporate income tax.
Only the joint venture partners will be taxed on their respective shares
in the income of the joint ventures.
Reason: To enable local contractors to compete with large foreign
contractors which are usually big, otherwise, the local contractors
cannot bid in large construction projects on their own.
BIR Revenue regulations require that they be registered or licensed by
the Philippine Contractors Accreditation Board (PCAB) to ensure that
they are engaged in the construction business.
2 – Consortium for the operations engaging in petroleum,
coal, geothermal, and other energy operations pursuant to an
operating/consortium agreement under the service contract
with the government
This refers to certain entities providing public utilities like electricity
and its distribution. When the National Power Corporations sub-
transmission assets - the one being used to distribute the line; the
asset used to hold the electricity and distribute it, there are certain
entities which on the consortium to buy these sub-transmission assets.
If you look at the Tax Code, they will not be treated as forming a
separate entity subject to tax because it is providing public utilities.
They agreed to service the public when in fact it is the government
who should do that. It will not be treated as a separate entity just like
the joint venture. They are joined together in a certain operation, they
own sub-transmission assets then they will allow the passage of
electricity under their assets. It‘s like contributing asset to a common
fund.
Reason: The government wanted support on its energy projects.
There must be service contract with the government. Otherwise, such
joint venture or consortium is not exempt from corporate income tax.
Q: Will they be subject to tax as one entity?
No, because under the law, when there is a consortium for the
purpose of operating petroleum, coal, geothermal and other energy
operation under service contracts with the government, it is excluded
from the term corporation.
Q: Are these types of operation really exempted from taxes?
A: No, because separately, these entities forming the consortium will
still be taxed once the income is distributed - not treated as dividends
but as ordinary income.
TAXABLE CORPORATIONS
CLASSES OF CORPORATE TAXPAYERS
1. Domestic Corporation – taxed for income within and without the
Philippines
2. Resident Foreign Corporation – taxed for income within only
3. Non-resident Foreign Corporation - taxed for income within only
Reasons for distinction:
A. To know when can they be taxed (income within/ within or
without Philippines)
B. Different tax base and rate will apply
 DC is taxed at 30% based on net income for those
earned within and without
 RFC within is taxed based on 30% net income
 NRFC are taxed at 30% gross income within Philippines
Domestic Corporations
Domestic corporations are those which are registered and/or organized
under Philippine laws. It is presupposed that if the corporation is
registered and/or organized here, then the operations must be here.
Foreign Corporations
In general, these refer to those which are organized and/or registered
in laws other than the Philippines.
They need to register with SEC to conduct business in the Philippines.
The following are the ways by which a foreign corporation can legally
do business in the Philippines:
1. Incorporate with a domestic corporation (set up a
subsidiary)
2. Establish a branch in the Philippines
3. Set up a representative office which does not earn income
but only exists for communication or as a liaison of the
foreign corporation.
Resident foreign corporations
Refer to those which are doing business in the Philippines.
It should pass the test of regularity. There should be continuous or
regular operations. A foreign corporation having a branch here is a
means of having regular or continuous operation but it is not
necessarily a branch because it could be a representative office.
Under Foreign Investment Act, there are 2 ways a foreign corporation
can do business here. It‘s either by having a branch or a
representative office. If it has either one of these, it is deemed to be a
RFC automatically.
Q: Does that mean that if you are not registered in the Philippines
SEC, you will not be subject to tax?
A: No, because if that‘s the case then all of the foreign corporations
will never register with the Philippine SEC because if they will register
then they are subject to tax and if they won‘t register then they won‘t
be subject to tax. Again, the laws on which the corporation is
registered matters. To be a resident foreign corporation, it must be
doing business in the Philippines, otherwise, you will only be
considered NRFC.
Non-resident foreign corporation
Refer to those not engaged in trade or business in the Philippines.
They can be taxed on their isolated transactions in the Philippines.
Example: There is a foreign corporation which happens to have shares
of stocks in a domestic corp. It does not necessarily mean that they
are doing business here in the Philippines as their income is dependent
on the operations of the Philippine company.
So there is a domestic corporation set up here and shares of stock
were bought by a foreign corporation (shares of stocks owned by a
foreign corporation but the business is registered here – this is allowed
under Foreign Investment Act). If that corporation distributes income
to its stockholder, is the distribution subject to tax?
Supposedly if NRFC, you are still supposed to subject them to tax
based on their income here in the Philippines. The Corporation will
have to withhold the amount and the rate would be 30% based on its
gross income. It means that in isolated cases, the corporation can still
be subject to tax whether it has actual presence here in the Phil or
not. If there is no actual presence, then it is automatically an NRFC if
they have an isolated transaction.
Howden v. CIR
The source of an income is the property, activity or service that
produced the income.
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Appellants should not confuse activity that creates income
with business in the course of which an income is realized. An activity
may consist of a single act; while business implies continuity of
transactions. An income may be earned by a corporation in the
Philippines although such corporation conducts all its businesses
abroad. Precisely, Section 24 of the Tax Code does not require a
foreign corporation to be engaged in business in the Philippines in
order for its income from sources within the Philippines to be taxable.
It subjects foreign corporations not doing business in the Philippines to
tax for income from sources within the Philippines.
PARTNERSHIPS & CO-OWNERSHIPS
CO-OWNERSHIP
CO-OWNERSHIP
A co-ownership exists when more than one person acquired the right
to own a piece of property or mass of properties.
General Rule: Co-ownership is tax-exempt
Reason: It is formed an organized not for profit but for common
enjoyment or preservation of a property.
Any income incident to the co-ownership forms part of the ordinary
income of the co-owners taxed at 0-35%.
Exceptions:
1. When the income of the co-ownership is invested by the co-
owners in other income-producing activities; or
2. When there is no attempt to divide the inherited property for
more than 10 years and the said property was not under any
administration proceedings nor held in trust, an unregistered
partnership is deemed to exist
PARTNERSHIP
PARTNERSHIP
By the contract of partnership, two or more persons bind themselves
to contribute money, property, or industry into a common fund with
the intention of dividing the profits among themselves. (Art. 1767, CC)
Two Types of Partnership under the Tax Code
1. General Professional Partnership – partnership formed by
persons for the sole purpose of exercising their common
profession, no part of the income of which is derived from
engaging in any trade or business.
2. General Co-partnership or Taxable or Business or Trade
Partnership (compania colectiva) – partnership wherein part
or all of its income is derived from the conduct of trade or
business. The income is taxed like a corporation.
SUMMARY OF TAX LIABILITIES
General Professional Partnership
 GPP is exempt from income tax.
 GPP is required to file a tax return for its income for the
purpose of furnishing information as to the share in the
gains or profits that each partner shall include in his
individual tax return.
 For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
computed in the same manner as that of a corporation.
Trade Partnership
 It is considered as a corporation and therefore liable to
corporate tax of 30% on net taxable income.
 It is also subject to MCIT of 2% on gross income starting
from the 4th year of its business operation.
LIABILITY OF PARTNERS
General Professional Partnership
 Partners in a GPP shall be liable for income tax only in their
separate and individual capacities.
 Each partner shall report his distributive share, actually or
constructively received in the net income of the partnership
as gross income.
 The share of a partner shall be subject to 8% creditable
withholding tax.
 The partner is deemed to have elected the itemized
deductions unless he declares his distributive share
undiminished by his share of the itemized deductions.
 A 40% OSD is deductible from the distributive share of the
gross income if such gross income was not previously
reduced by the partnership‘s itemized deduction.
Trade Partnership
 Partners are considered as stockholders.
 The profits distributed to them by the partnership are
considered dividends subject to final tax of 10%.
TAXABLE AS CORPORATIONS
No specific form required
There is no specific form of partnership required because the tax code
provides that partnerships are included in the term corporation ―no
matter how created or organized.‖
Tax of partnerships
There is no separate taxation for partnerships as they are taxed like a
corporation. We also need to make a distinction on whether it is
domestic, resident foreign or non-resident foreign.
 Domestic Partnership – 30% of net income within & without
 Resident Foreign Partnership – 30% of net income within
 Non-resident Foreign Partnership – 30% of gross income within
Constructive Receipt Doctrine
The point of difference between a corporation and a partnership, under
the tax code, lies in the fact that partnerships adhere to the
constructive receipt doctrine. Even if there is no actual declaration of
dividends or distribution of income by the partnership, such income is
deemed to have been automatically received by the partners for
purposes of taxation. In corporations, dividends must be declared first.
Tax of Partners
Partners in a partnership are taxed depending on the type of
individual. RC, NRC, RA & NRA-ETB is taxed at 10% while a NRA-NETB
is taxed at 20%.
GPP Partners
Partners in a GPP are taxed at 0-35% dumping ground computation.
They cannot avail of the 8% gross income taxation since the GPP
already accounts for allowable deductions in the level of the
partnership. What has been distributed to the partners in a GPP is
already net of the allowable deductions.
Evangelista v. CIR
Facts: Petitioners are siblings who borrowed from their father a certain
sum for the purpose of buying real properties. Within February 1943 to
April 1994, they bought parcels of land from different persons, the
management of said properties was charged to their brother Simeon.
The properties were then leased or rented to various tenants.
Issue: Whether or not there is a partnership.
Held: Yes. Petitioners have agreed to, and did, contribute money and
property to a common fund. Their purpose was to engage in real
estate transactions for monetary gain and then divide the same among
themselves as indicated by the following circumstances:
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1. The common fund was not something they found already in
existence nor a property inherited by them pro indiviso. It
was created purposely by jointly borrowing a substantial
portion in order to establish said common fund;
2. They invested the same not merely in one transaction, but in
a series of transactions.
3. Said properties were not devoted to residential purposes, or
to other personal uses, of petitioners but were leased
separately to several persons;
4. They were under the management of one person where the
affairs relative to said properties have been handled as if the
same belonged to a corporation or business and enterprise
operated for profit;
5. Existed for more than 10 years, or, to be exact, over 15
years, since the first property was acquired, and over 12
years, since Simeon Evangelista became the manager;
6. Petitioners have not testified or introduced any evidence,
either on their purpose in creating the set up already
adverted to, or on the causes for its continued existence.
Obillos v. CIR
Facts: Petitioners are siblings who sold the lots they inherited from
their father. They derived a total profit of P33,584 for each of them.
They treated the profit as capital gain and paid an income tax thereof.
Held: No, there was no partnership. Petitioners were co-owners and to
consider them partners would obliterate the distinction between co-
ownership and partnership. The petitioners were not engaged in any
joint venture since the sale was an isolated transaction. The sharing of
gross returns does not of itself establish a partnership, whether or not
the persons sharing them have a joint or common right or interest in
any property from which the returns are derived. There must be an
unmistakable intention to form partnership or joint venture.
Oña v. CIR
After an extrajudicial settlement the co-heirs used the inheritance or
the incomes derived therefrom as a common fund to produce profits
for themselves, it was held that they were taxable as an unregistered
partnership.
Gatchalian v. CIR
Facts: Jose Gatchalian and 14 others bonded together to purchase a
sweepstakes ticket for P2 and registered the same as Jose Gatchalian
and Co. This ticket eventually won 3rd prize amounting to P50,000
which they divided in accordance with their aliquot share in the cost of
the ticket.
Held: When the petitioners bonded together and contributed to the
cost of, they formed an unregistered partnership.
AFISCO Insurance v. CIR
Facts: 41 non-life insurance companies entered into Quota Share
Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation, to cover for All Risk Insurance Policies over machinery
erection, breakdown and boiler explosion. The treaties required
petitioners to form a pool, to which AFISCO and the others complied.
Held: The pool is a partnership as evidenced by a common fund, the
existence of executive board and the fact that while the pool is not in
itself, a reinsurer and does not issue any insurance policy, its work is
indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have
received their premiums.
DOMESTIC CORPORATIONS
DOMESTIC CORPORATION
Tax rate: 30%
Tax base: Net taxable income
Source: Income within and without
RESIDENT FOREIGN CORPORATIONS
RESIDENT FOREIGN CORPORATION
Tax rate: 30%
Tax base: Taxable income
Source: Income within
The tax for a resident foreign corporation is similar to a domestic
corporation but only for income earned within the Philippines. The rule
for passive income is also similar.
Interest Income
Interest income from bank deposits are subject to 20% final tax but
interest income earned from deposits under the foreign currency
depositary unit is subject to 15% tax rate.
Income derived by a depositary bank from an expanded foreign
currency deposit system is exempt from tax if it transacts with non-
residents, offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the BSP to
transact with OBUs.
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with local
commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact
business with foreign currency deposit system units and other
depository banks under the expanded foreign currency deposit system,
including interest income from foreign currency loans granted by such
depository banks under said expanded foreign currency deposit system
to residents, shall be subject to a final income tax at the rate of
10%)of such income.
Royalties
Royalties are subject to 20% final tax
Capital gains from sale of shares of stock not traded in stock
exchange
The tax for capital gains derived from the sale of shares of stock not
traded in the stock exchange is 15%.
Capital Gains from Sale of real property
It is subject to the 30% tax because it is not considered a passive
income for purposes of foreign corporations because it is not provided
in the tax code. This transaction is not impossible but not ordinary
because they can still own condominiums.
Intercorporate Dividends
A resident foreign corporation earning dividends from a domestic
corporation is also exempt. If a domestic corporation earns income
from RFC, it will be taxed at 30% subject to the dumping ground
corporation.
Dividend income earned by RFC from another RFC is still taxed at 30%
because the taxes for these transactions are not found in the tax code.
Absent such provisions, we apply the general rule of taxing it at 30%,
dumping ground computation.
NONRESIDENT FOREIGN CORPORATIONS
NON-RESIDENT FOREIGN CORPORATION
Rate: 30%
Tax base: Gross income
Source: Income within
The tax for a resident foreign corporation is similar to a domestic
corporation but only for income earned within the Philippines. The rule
for passive income is also similar.
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Interest Income All income enumerated in Sec. 32 (A), except compensation and
Interest income from bank deposits is subject to 30% NCIT. pensions, can be earned by a corporation.

Interest income under the expanded foreign currency deposit system Gross income depends on the type of business. This is important since
is tax-exempt. this could be the tax base of the corporation or another entity.

Royalties
Gross Income
Royalties are subject to 30% NCIT.
Merchandising Concern
Capital gains from sale of shares of stock not traded in stock
exchange Gross Sales P xxx
The tax for capital gains derived from the sale of shares of stock not Less Cost of Sales (xxx)
traded in the stock exchange is 15%. Gross Income P xxx.

Capital Gains from Sale of real property

It is treated as other income subject to the 30% NCIT. Gross Income
Manufacturing Concern
Intercorporate Dividends
Dividends received from DC is subject to 15% FT if the foreign Gross Sales P xxx
corporation allows a tax credit of at least 15% of the taxes deemed Less Cost of Goods manufactured and Sold (xxx)
paid in the Philippines by the NRFC. Gross Income P xxx.

GROSS INCOME
Gross Income
Sec. 27 (A) of the NIRC Service Entity
xxx
For purposes of this Section, the term 'gross income' derived from Gross Receipts P xxx
business shall be equivalent to gross sales less sales returns, discounts Less Cost of Services (xxx)
and allowances and 'cost of goods sold.' ‗Cost of goods sold' shall Gross Income P xxx.
include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use.
PERTINENT ITEMS OF GROSS INCOME
For a trading or merchandising concern, 'cost of goods sold' shall
include the invoice cost of the goods sold, plus import duties, freight in Not all enumerated items of gross income under Sec. 32 apply to all
transporting the goods to the place where the goods are actually sold, kinds of taxpayers. (Note: dumping ground computation here refers to
including insurance while the goods are in transit. 30% tax rate for corporations and not 0-35%)

For a manufacturing concern, 'cost of goods manufactured and Compensation income

sold' shall include all costs of production of finished goods, such as
raw materials used, direct labor and manufacturing overhead, freight
cost, insurance premiums and other costs incurred to bring the raw
materials to the factory or warehouse.
In the case of taxpayers engaged in the sale of service, 'gross
income' means gross receipts less sales returns, allowances and
discounts.
Sec. 32 (A) of the NIRC
Except when otherwise provided in this Title, gross income means all
income derived from whatever source, including (but not limited to)
the following items:
No compensation income in corporations because this is earned under
an employer-employee relationship
Gross income derived from the conduct of trade, business or
exercise of the profession
This is sales or receipts (for services) less the cost directly used in
producing the product.
Gains derived from dealings in property
Corporations can have properties; such as buildings. When they sell
the building, they will earn income from dealings in property. It will not
form part of the gross income for the purposes of taxation but will be
subject to capital gains tax.

(1) Compensation for services in whatever form paid, including, but Interests
not limited to fees, salaries, wages, commissions, and similar items; If the business of the corporation is financing, and they extend loans
(2) Gross income derived from the conduct of trade or business or the to individuals or other entities, they can earn interest income. It will
exercise of a profession; form part of the 30% dumping ground taxation. Deposits in the bank
(3) Gains derived from dealings in property; are passive income subject to a different tax rate.
(4) Interests;
(5) Rents; Rents
(6) Royalties; When a corporation is engaged in the business of leasing out
(7) Dividends; properties then it can earn rent income. This forms part of the 30%
(8) Annuities; dumping ground computation, not passive income.
(9) Prizes and winnings;
(10) Pensions; and Dividends
(11) Partner's distributive share from the net income of the general Corporation can sell their shares to other corporations and if they
professional partnership. declare dividends, these will not form part of the 30%.
---
GROSS INCOME Annuities
When the company‘s investment gets periodic payments of income
Gross income refers to all income derived from whatever source. then it can still earn annuities. Ordinarily, when businesses do
[CGGIRRDAPPP] investments, they can either receive interest income or dividends and

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not usually annuities. They are not limited from earning annuities
because there can still be investment opportunities which gives them
periodic payments of income.
Prizes and winnings
Corporations may win prizes which require participation on the part of
a corporation. These will be given to the corporation as an entity.
There are winnings when they are earned as a matter of chance - like
a raffle ticket bought by a representative.
Pension
Corporations can‘t earn them.
PASSIVE INCOME
PASSIVE INCOME
Interest Income from Peso Deposits
Interest income derived from peso currency bank deposit (saving
deposits of corporations) is subject to final withholding tax of 20%.
The interest income of deposit substitutes is subject to 20% final tax,
unless there are less than 20 lenders wherein it is taxed at 30%.
Interest income from foreign currency deposit is subject to 15% final
withholding tax. This is to encourage foreign reserves.
Income from Expanded Foreign Currency Depositary Unit
This income is derived by a depositary bank. Do not confuse this with
the interest income derived by a domestic corporation from a
depositary bank under a foreign currency deposit subject to a tax of
15%. Under this, it is the bank itself that is earning income.
If you are a depository bank and you earn income under EFCD system
for foreign currency transactions, your tax will depend on whom you
are transacting with.
If you are transacting with non-residents, off -shore banking units in
the Philippines, local commercial banks including branches of foreign
banks authorized by BSP, then you will be exempted from all taxes.
If you are transacting with residents, you are subject to the dumping
ground computation of 30%. You will see that under the exemption, if
it relates to a loan transaction, interest income will be subject to final
tax of 10%. Take note that this 10% rate is applicable only to loan
transaction and only for an interest income to residents.
Royalties
Royalties sourced within the Philippines are subject to final tax of 20%
regardless of where that royalty is from, whether or not from books,
literary works and musical composition. These are passive royalty
income which is subject to a final tax. There is no distinction of the
royalties in the case of corporations since corporations do not write
books or create literatures. Only individuals can.
If a corporation allows the franchise of their name, then they may earn
royalties. The rate depends on whether it is an active or passive
royalty. If it is a passive royalty, then it is subject to 20% final tax. If
it is an active royalty, it forms part of gross income which is subject to
30% normal tax.
Prizes & Winnings
Prizes and winnings form part of the dumping ground computation
since it is not listed as passive income for purposes of corporations in
the tax code.
Capital gains from the sale of shares of stock not traded in the
stock exchange
The tax rate is 15% of the net capital gains.
Q: Corp. Y is a stockholder of Corporation X. If Corporation Y has
2,000 shares with a par value of 1 peso per share, the total value of
the shares is P2,000. To earn capital gains, you sell the shares not in a
local stock exchange but in some other market exchange. If you sell it
directly to an individual, Mr. A, how will it be taxed?
A: First, you have to establish that there is net capital gains. The cost
of the shares is 2,000. We must determine the amount for which the
shares were sold. The total cost is P2,000 (2,000xP1) and gross selling
price is P20,000, your Net Capital gains is 18,000. This will be taxed at
15%. So P18,000 x 5% is P2,700 which is the capital gains tax.
Q: You have a total of 6,000 shares. The previous transaction
happened on January 1, 2015. If on June, you sold shares in the
amount of 2,000 shares but this time, the amount is for 100,000. The
cost would still be 2,000 so your gain is 98,000. How will it be taxed?
A: Under the TRAIN Law, it will be taxed at a flat rate of 15%. Before,
there was a threshold of P100,000 wherein the first P100,000 gain for
the year was subject to 5% tax and the excess was subject to 10%.
YEach of these transactions will have separate income tax returns. A
return will be made within 30 days after the transaction.
Capital gains realized from sale of real property
The tax depends on the type of real property sold. If it is an ordinary
asset, then it is subject to 30% tax. If it is a capital asset, then it is
subject to a final tax of 6%. The 6% is based on the highest amount
among the gross selling price, the assessed value given by the local
assessor, and the zonal value determined by the BIR.
Even if you sell the property at a loss, you will still be taxed because
there is a presumed gain when you sell real property. The law for
individuals also applies for corporations for treatment of capital gains.
Q: If there is an improvement on a property of a corporation which is
not used in trade or business and such improvement was sold with the
parcel of land, how will it be taxed? Let‘s say the improvement is a
wall or fence.
A: Improvement is subject to 30% while the parcel of land is subject
to 6% based on either GSP, FMV BIR, FMV local assessor whichever is
higher.
The reason for the distinction is because under Sec 27 D (5), Capital
gains realized from the sale exchange or disposition of Lands and/or
Buildings is subject to 6% capital gains tax unlike in individual
taxation, ―Real property‖ is used without distinction which may cover
improvement on the land or building such as machineries, etc. The Tax
code is specific on the ―LANDS and/or BUILDINGS‖ part, if the property
does not belong to either then it is subject to 30% rate under the
dumping ground computation.
Q: How about other capital assets that may be sold by a corporation,
how are they taxed?
A: Taxed at the rate of 30% under the dumping ground computation.
So, the fence in the above example just like any other improvements
like machineries will be subjected to the tax rate of 30%.
TN: Improvements will fall under ―other capital assets‖
Q: Do we subject these improvements to the rule on holding period?
A: No, because tax code is specific that such will not apply to a
corporation.
Q: if there is a net capital loss, can it be carried over?
A: No, the net capital loss carry-over is only applicable to taxpayers
other than a corporation.
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Dividends (Intercorporate Dividends) Example:

Dividend income can be earned by a corporation through a corporation
owning shares of another corporation. Intercorporate dividends are not Shareholders of Number of Cash
subject to tax. Corporation X Shares Held Dividends
A 100 10,000
From To Rate B 100 10,000
DC DC Exempt C 100 10,000
DC RFC Exempt D 100 10,000
DC NRFC Subject to the tax sparing rule: E 100 10,000
 15% if it allows Corporation Y 2,000 200,000
 30% Gross income if it does not allow
RFC DC 30% Net income Corporation X decides to give dividends to all stockholders in the
RFC RFC 30% subject to the rule on situs of the dividends amount of 100 per share. Mr. A, B, C, D and E will earn P10,000 while
RFC NRFC 30% subject to the rule on situs of dividends the corporation Y will be exempt from tax. The individual shareholders
earning dividend income will be taxed at 10% if they are resident
NRFC DC 30% subject to the rule on reciprocity
citizen, non-resident citizen, or resident alien. 20% will apply if they
NRFC RFC No jurisdiction
are NRA-ETB and 25% for NRA-NETB.
NRFC NRFC No jurisdiction
Reason: Dividends are just being deferred. While the 200,000 is
Rules:
distributed by Corp. X to Corp. Y, such will also be distributed as
1. Domestic –> domestic = Exempt
income to the stockholders of Corp. Y. The moment it is distributed to
2. Domestic –> resident foreign = Exempt
Corp. Y‘s stockholders or it trickles down to individuals, it is the time
3. Domestic –> non-resident foreign = 15% or 30% depending on
that it will be subject to tax. If Corp. Y will give the dividends to Corp.
when the tax sparring rule applies
Z, a domestic corporation, there will still be no tax because it has not
4. Resident foreign –> domestic corp = 30%
yet been distributed to an individual.
5. Resident foreign –> resident foreign = 30% if you can establish
that the income is earned within the Philippines and depending on
TN: Dividends are only taxable then when it reaches individuals.
the rule on situs on dividends, you look at the income of the
foreign corporation for the last 3 years and if you can establish
SAMPLE PROBLEM
that the income earned within the Philippines is:

Under the Tax Code (Sec 42 A (2)(b)) Total Sales 1,000,000

Determine the gross income of the corporation for the last three years Cost of Goods Sold 400,000
and the percentage of income earned within the PH: Salaries and Wages 100,000
Utilities 50,000
A. If income earned is 50% or less, then it is deemed income Interest Income from bank deposit 10,000
outside the Philippines Dividend income from X Corp 10,000

B. If income earned is more than 50%, then it is deemed income Q: Compute for the tax due and payable of the corporation.
inside the Philippines

Under the Regulation (BIR RR 2-98) Tax Due

Normal Corporate Income Tax
2. 50% or less – income outside the Philippines
3. More than 50% to 85% - income partly within and partly without Gross Sales P 1,000,000
4. More than 85% - income within the Philippines Less Cost of Goods Sold 400,000
Gross Income P 600,000
RESIDENT FOREIGN -> NON-RESIDENT FOREIGN: Less Salaries & Wages (100,000)
Less Utilities Expense (50,000)
Determine if it has situs within the Philippines, otherwise the Taxable Income P 450,000
Philippines does not have jurisdiction Multiplied by the Tax Rate 30%
Tax Due and Payable P 135,000
NON-RESIDENT FOREIGN -> DOMESTIC CORP: 30%

NON-RESIDENT FOREIGN -> NON-RESIDENT FOREIGN:

Tax Due
Philippines has no jurisdiction because they are not supposed to have Item Subject to Final Tax
any activities within the Philippines.
Item subject to final tax:
Q: Why is the rule on situs of dividends not applicable when it is from Interest Income from Bank Deposit P 10,000
RFC to DC? Multiplied by the Tax Rate 20%
Tax Due P 2,000
A: DC is taxed on income earned from all sources, within and without.

Q: X. Corp is RFC declaring dividends to Y Corp., another RFC. Which

financial statement will you look at? Tax Due
Normal Corporate Income Tax
A: We look at the financial statement of X Corp. which declared the
dividends. Since Y Corp. is a resident foreign corporation we need to Item exempt from tax:
determine whether the income is earned within or without the Dividend Income from X Corp. P 10,000
Philippines. RFC is taxed only on income within. Tax Due P 0

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A: The corporation has taxes due and payable in the amount of
P135,000 on its net taxable income and P2,000 on its interest income
from bank deposit subject to final tax. The income from the dividends
from X Corp. is exempt since it is an intercorporate dividends which
will be taxed only when it is distributed to individual stockholders.
You cannot actually add the tax due from the items subject to the
dumping ground computation with that of the items subject to final
tax. It‘s like adding apples and oranges. But, there are domestic
corporations which are not subject to that type of computation.
20-LENDER RULE
20-LENDER RULE
To be considered a ―deposit substitute‖, the borrowing must be made
from twenty (20) or more individual or corporate lenders at any one
time. Mere flotation of a debt instrument is not considered to be a
―public‖ borrowing and is not deemed a ―deposit substitute‖ if there
are only 19 or less individual or corporate lenders at any one time.
Any person holding any interest, whether legal or beneficial, on a debt
instrument or holding thereof either by assignment or participation,
with or without recourse, shall be considered as lender, and thus, be
counted in applying the 19-lender rule.
20% CWT shall apply on interest income from all other debt
instruments which do not fall within the coverage of ―deposit
substitutes‖ paid or payable to persons residing in the Philippines. The
withholding tax is due when the interest is paid or payable or is
accrued or recorded as an expense in the books of the payor.
The phrase ‗at any one time‘ for purposes of determining the 20-lender
rule, would refer to every transaction executed in the primary or
secondary market relative to the purchase or sale of the
securities. There is a deemed public borrowing and the bonds are
considered deposit substitutes when funds are simultaneously obtained
from 20 or more lenders through any of the transactions connected in
the issuance/trading of the government bonds (e.g., issuance by the
Bureau of Treasury; sale/distribution of government dealers; and
trading in the secondary market).
BDO v. Republic
The term ‗deposit substitutes‘ shall mean an alternative form of
obtaining funds from the public (the term 'public' means borrowing
from 20 or more individual or corporate lenders at any one time) other
than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower‘s own account, for the purpose of
relending or purchasing of receivables and other obligations, or
financing their own needs or the needs of their agent or dealer.
Under the 1997 National Internal Revenue Code, Congress specifically
defined ―public‖ to mean ―twenty (20) or more individual or corporate
lenders at any one time.‖ Hence, the number of lenders is
determinative of whether a debt instrument should be considered a
deposit substitute and consequently subject to the 20% FWT.
RULE ON SITUS OF DIVIDENDS
RULE ON SITUS OF DIVIDENDS
Determine the gross income of the corporation for the last three years
and the percentage of income earned within the PH:
(According to a BIR Revenue Regulation 2-98)
 Income within if ratio is more than 85%
 Income without if ratio is less than 50%
 Partly income within & income without if ratio is between
50% and 85%
ALLOWABLE DEDUCTIONS
ALLOWABLE DEDUCTIONS
These are the amounts which you can deduct from the gross income in
order to arrive at the taxable income of the taxpayer.
ITEMIZED DEDUCTIONS
Expenses
Comes in the form of rentals of a building or salaries and wages to the
employees
Interest Expense
Incurred when they enter into debt transactions which require them to
pay interest
Taxes
For taxes incurred (they can deduct real property taxes and local
business taxes) but should not include Philippines Income Tax, Estate
& donor‘s tax, stock transaction tax, special assessment, income tax
paid in a foreign country claimed as tax credit and VAT
Losses
Incurred in the course of trade or business
Example: a building was razed by fire and the amount not
compensated by insurance is considered the loss
Bad Debts
If there are certain receivables from entities or individuals which may
have already been insolvent, but not necessarily judicially declared as
insolvent, and after exercising due diligence, you cannot collect, then
you can treat them as bad debts.
Charitable Contributions
Deductible in full, if given to the government either local or national or
any political subdivision as long as it pertains priority projects in the
field of education, science; or if it is given to accredited foreign
organizations and non-government organizations such as the Ramon
Magsaysay Foundation, Caritas, Bantay Bata, etc.
It is subject to limitations if they don‘t fall in the list; for individuals, it
is 10% based on taxable income but before deductions for charitable
contributions and for corporations, it is 5%.
Research and development
These are expenses for the discovery of knowledge and development;
costs of exploration, cost of exploring and finding a particular property
are not considered research and development expenses for purposes
of allowable deductions.
Example: You paid someone to build a cellphone and whatever is the
cost of building that cellphone will be considered part of your research
& development.
What if part of your operations is into mining? Part of your research is
you have to find a possible mining site. The cost of finding the mining
site will not form part of your research and development but does that
mean you cannot deduct it? No, you can deduct it but it will form part
of your expenses, even the cost of the land itself will not form part of
research and development.
Pension trust
There is a separate section for pensions granted for employees.
Pension can refer to current service cost and past service cost. The
total cost which you pay in order to set up this pension trust can be
allowed as a deduction.
Depreciation
Pieces of equipment used are subject to depreciation.
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In relation to the earlier example, if you can‘t deduct it under R & D KINDS OF ORDINARY EXPENSES [CARTERS]
then deduct it under depreciation.
A. Compensation for services rendered
Depletion B. Advertising and promotional expenses
In mining sites, equipment used in the mining wasting assets like C. Rent expense
mineral ores may be accounted it under depletion. D. Travelling expense
E. Entertainment, amusement and recreation expense
OPTIONAL STANDARD DEDUCTION F. Repairs and maintenance expense
G. Supplies and materials
The OSD for corporations is 40% based on gross income. Only DC and
RFC can avail of the 40% OSD. NRFC cannot.
COMPENSATION FOR SERVICES RENDERED
Q: How about proprietary educational institutions, OBUs, ROHQs and
PEZA-registered companies? COMPENSATION FOR SERVICES RENDERED

A: It depends on whether the corporation is subject to a preferential
tax rate based on gross income. OSD is applicable only when the
corporation is subject to the normal corporate income tax. The
exception is in the case of proprietary educational institutions which
are taxed at 10% of the net income.
EXPENSES
EXPENSES
Business Expense
Refer to all the ordinary and necessary expenses paid for or incurred
during the taxable year in carrying on or which are directly attributable
to the development, management, operation and/or conduct of the
trade, business or the exercise of a profession.
Capital Expenses
These are expenditures for the extraordinary repairs which are
capitalized and subject to depreciation. These tend to increase the
value or prolong the life of the taxpayer‘s property.
Ordinary Expenses
Refer to the expenses which are normal, usual or common to the
business, trade or profession of the taxpayer. An expense is ordinary
when it is commonly incurred in the trade or business of the taxpayer
as distinguished from capital expenditures. The payments need not be
normal or habitual in the sense that the taxpayer will have to make
them often. The payment may be unique or non-recurring to the
particular taxpayer affected.
Ex. Gasoline is an ordinary expense for delivery van of the
manufacturing company but not it sari-sari store.
Special requisites for deductibility:
a. Must be reasonable, meaning, this must not be ostensible
b. It is, in fact, payments for personal services actually
rendered.
Special requisites for deductibility of bonuses to employees:
a. The bonuses are made in good faith.
b. They are given for personal services actually rendered.
c. They do not exceed a reasonable compensation for the
services rendered, when added to the stipulated salaries,
measured by the amount and quality of services performed
in relation to the taxpayer‘s business.
d. Bonuses must be given in good faith and in determining
whether the bonuses will form part of the compensation for
services rendered, you need to consider the (1) nature of
the business, (2) financial capacity of the taxpayer, and (3)
extent of the services rendered
e. General economic condition
Deductible expenses under compensation for personal
services:
1. Salaries, wages, commissions, professional fees, vacation-
leave pay, retirement pay and other compensation
2. Bonuses are deductible expenses if paid-in good faith as
additional compensation for services rendered
3. Pensions and compensation for injuries, if not compensated
for by insurance or otherwise
4. GUMV of fringe benefit provided for, as long as the final tax
imposed has been paid.
ADVERTISING & PROMOTIONAL EXPENSES

Necessary Expenses ADVERTISING & PROMOTIONAL EXPENSES

Refer to those which are useful and appropriate in the conduct of the
taxpayer‘s trade or business. When the expenditure is appropriate or
helpful to the development of the taxpayer's business or that the same
is proper for the purpose of realizing a profit or minimizing a loss.
Ex. Raw materials in the manufacturing company but not vacation
expenses of janitor to the US.
Extraordinary Expenses
Refer to those which are not normal, usual or common to the
business, trade or profession of the taxpayer. These are amortized or
depreciated.
REQUISITES FOR DEDUCTIBILITY
A. It must be ordinary and necessary
B. It must be paid or incurred during the taxable year
C. It must be paid or incurred in carrying on or which are directly
attributable to the development, management, operation and/or
conduct of the trade, business or exercise of profession
D. It must be supported by adequate invoices or receipts
E. It is not contrary to law, public policy or moral
F. The tax required to be withheld on the expense paid or payable is
shown to have been remitted to the BIR.
Advertising and promotional expenses can be claimed as expense
deduction if it will build good will to the company. If the good will
exceeds 1 year, then the advertising and promotional expenses shall
be divided in the number of years as deductible expenses.
To be deductible outright:
a. Must be reasonable and
b. Must be incurred to stimulate current sales and not to
establish goodwill or future sales
Example: When the prediction of advertising and promotional
expenses will build good will to the company for 10 years and it spent
1M, the allowable deduction is 100K for every year. However,
advertising and promotional expenses for Valentine's Day will not
exceed good will to the next Valentine's Day. Hence, it will only be
treated as period cause which is allowed to be deducted as expense
within the taxable period.
RENT EXPENSE
RENT EXPENSE

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Requisites for deductibility:
a. Rental payment is required as a condition for continued use
or possession.
b. The purpose is for trade, business or profession; meaning
the property is used in trade or business
c. The taxpayer must not be the owner of the property or he
has no equitable title over the property.
d. This is subject to withholding tax of 5%.
Operating Lease is a contract that allows for the use of an asset, but
does not convey ownership of the asset. The lessee has not taken or is
not taking title over the property. You pay rent but do not claim
ownership over the property no matter how long you have been
paying the rent.
Finance Lease is pretty much a sale on installment. There is a
transfer of ownership. Legal title is lodged in the finance lessor. Lessee
is entitled to the possession and use of the property in exchange for
periodic payment to allow lessor to recover the purchase price.
TRAVELLING EXPENSE
TRAVELLING EXPENSE
Requisites:
a. Must be reasonable and necessary
b. Must be incurred or paid ―while away from home‖
Home refers to the station assignment or post/principal
place of business, not your residence.
c. Must be paid or incurred in the conduct of trade or business
ENTERTAINMENT, AMUSEMENT, & RECREATION
ENTERTAINMENT, AMUSEMENT AND RECREATION (EAR)
EXPENSES
Requisites:
It must be paid or incurred during the taxable year
It must be paid or incurred in carrying on or which are
directly attributable to the development, management,
operation and/or conduct of the trade, business or exercise
of profession
It must be supported by adequate invoices or receipts
It is not contrary to law, public policy or moral
3. It must not have been paid, directly or indirectly, to an
official or employee of the national government or similar
entity if it constitutes a bribe, kickback or other similar
payment.
4. The appropriate amount of withholding tax, if applicable,
should have been withheld therefrom and paid to the BIR.
5. Provided that, the deductible expense of sale of goods shall
not exceed 0.50% of net sales (i.e. Gross sales less sales
returns/allowances and sales discount) while sale of services
shall not exceed 1% of net revenue (i.e. Gross revenue less
discount). If both sale of goods and sale of services, it is
proportional based on net sales or net revenue.
Q: How about bringing the client to a bikini bar, is that allowed?
A: Yes, it is allowed because you are trying to establish goodwill with
the client in furtherance of your business. The intention is to market
your company or product, not necessarily what is being offered in the
bikini bar. It may be considered as EAR expense. Such guests must not
include the employees of the company or family members but there
must be someone from the company accompanying the clients. The
benefit of the employee is only incidental and not primary.
Q: In case such EAR expenses were given to employees, how will it be
treated?
A: They are treated as fringe benefits.
Limitation (Ceiling)
 Engaged in sale of goods/properties –0.5% of net sales
 Engaged in sale of service – 1% of net revenue
 Mixed – use the apportionment formula but in no case shall
exceed the respective ceilings
Example: X Corp. is engaged in the sale of goods and services with net
sales of P100,000 and net revenue of P100,000. The actual EAR
expense for the taxable quarter is P10,000. How much will be allowed
as a deduction?
A: Only a total of P1,500 will be allowed as deduction. The amount
cannot exceed the ceiling for the sale of goods of P500 and sale of
services of P1,000.
REPAIRS & MAINTENANCE EXPENSE
REPAIRS & MAINTENANCE EXPENSES
Repairs expense is allowed as deductible expense either:
a. In ordinary repairs – the cost of repair increases the life of
an asset for a period not more than one year. It will be
treated as period cause subject to deduction within the
taxable year.
b. In extraordinary repairs – the cost of repair increases the life
of an asset for a period more than one year. It will be
treated as part of the cost of the asset and subject to
depreciation.
SUPPLIES & MATERIALS
SUPPLIES & MATERIALS
Supplies and material must be actually consumed during the taxable
year in order to be deductible.
COHAN RULE
COHAN RULE
Some expenses need not be supported by official receipts or sales
invoice as long as it can be substantiated with other adequate records
which prove that such were purchased by the company and the goods
received were actually converted to the product sold. However, this
does not apply in all instances. It is only to the extent of 50% of the
expenses.
Background
George M. Cohan was a very well known Broadway star in the early
1900s. His most famous performance is ―Give My Regards to
Broadway.‖ Interestingly, his legacy is also closely connected to tax
law. Cohan was audited by the IRS and was told that he was not
allowed to deduct many of his business and entertainment related
expenses because he did not keep all of the necessary receipts. Mr.
Cohan appealed this ruling and the courts actually sided with him,
forcing the IRS has to accept estimates of his expenses.
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The Cohan Rule is now a law that allows taxpayers to deduct some of
their business-related expenses even if the receipts have been lost or
misplaced so long as they are reasonable and credible.
INTEREST EXPENSE
INTEREST
Interest must be expressly stipulated in writing. It must be legally due.
Interest expense can only be deducted in full if the taxpayer incurs
interest expense but does not earn interest income. Otherwise, the tax
arbitrage rule will apply wherein the allowable deduction will be
reduced by 33% of the interest income earned.
This is to prevent taxpayers from creating a tax shield by loaning
money from a bank and subsequently loaning it back to earn interest
income. The interest expense reduces taxable income while the
interest income is only subject to 20% final tax.
Requisites for deductibility:
A. It must relate to indebtedness.
B. The indebtedness must be related to the taxpayer's trade or
business
C. The indebtedness must be that of the taxpayer
D. The interest should be legally due on the indebtedness
E. The interest must have been stipulated in writing
F. The interest is paid or accrued during the taxable year
G. The indebtedness must not be made under the arrangement with
related taxpayer.
H. The indebtedness must not be incurred to finance petroleum
operation or exploration
Non-deductible interest expense
1. Interest expense on preferred stock
2. When there is no agreement in writing to pay interest
3. Interest expense on loan entered into between related taxpayers
4. Interest paid or calculated for cost-keeping purposes
5. Interest paid in advance through discount
6. Interest on obligation to finance petroleum exploration
7. Interest on unclaimed salaries of employees
8. 33% of the interest income subject to final tax
Theoretical interest
Theoretical interest is an interest computed for the purposes of
determining the opportunity cost of investing in a business. This is not
paid or incurred. Theoretical interest income and theoretical interest
expense is no longer applicable in our jurisdiction since the interest
must be stipulated in writing to be demandable.
Kuenzle & Streiff, Inc. v. CIR
The rule is that interest payment on unpaid salaries and bonus
participation cannot be allowed as a deduction if at all times the
company or corporation who is supposed to make payments on these
unclaimed salaries and bonuses has sufficient money to pay it. But the
employees were not able to claim it through their own fault.
The rule is that whenever there is money supposedly not due to you
and it is not yet claimed, it will earn interest assuming the employer
deposits it in the bank. The moment the employee claims the
salary/bonus, it will now include the interest.
The question now is that, whether or not the employer can claim the
interest as a deduction for purposes of income tax, the SC said no if
the company always had money to pay for the salaries. It‘s just that
the employees did not go and claim it. In reality, the employer usually
does not impose interest on salaries. But if ever the reason for the
non-payment of salaries is because of bankruptcy or the company is
having a bad year in terms of operation, then in that case the interest
expense may be allowed as a deduction.
TAX ARBITRAGE RULE
TAX ARBITRAGE RULE
The taxpayer's allowable deduction for interest expense shall be
reduced by an amount equal to 33% of the interest income earned by
him which has been subjected to final tax. It means that, instead of
deducting 100% of the interest expense, you can only deduct 100%
interest expense less the 33% interest income subjected to final
withholding tax.
You are able to get the benefit of 30% because of the deduction but
the interest income is subject only to 20% final tax. There is a
difference of 10%. This is how to get the 33%.
Q: Does Tax Arbitrage Rule apply to all interest expense? Does it mean
that taxpayer can deduct 100%?
A: No. Tax Arbitrage Rule does not apply when:
1. Interest expense is for unpaid taxes
2. Interest income is not subject to final withholding tax
Actually, if the taxpayer has no interest expense in relation to bank
transaction, the Tax Arbitrage Rule does not apply. The purpose of Tax
Arbitrage Rule is to avoid circumvention of the law for tax benefit
between the difference of interest deduction and interest income.
Requisites for Tax Arbitrage Rule to apply
A. There must be an interest payment to be made to the bank
B. The interest income must be earned from the bank and
C. There must be interest income subject to final withholding tax.
Arbitrage is an activity or scheme where a certain investor takes
advantage on the difference of the rates and prices from one market
to another market.
TAXES
TAXES
Taxes paid or incurred within the taxable year in connection with the
taxpayer's profession, trade or business are deductible from the gross
income.
Except:
A. Philippine Income Tax
B. Estate and Donor‘s Tax
C. Special Assessment
D. Stock Transaction Tax
E. Value Added Tax
F. Foreign Income Tax if claimed as tax credit
TN: When we relate deductions from taxes, it should not include
surcharge and other penalties but it can include interest.
Requisites for deductibility:
a. Must be paid or incurred during the taxable year
b. Must be taxes paid or incurred in connection with the trade,
business or profession of the taxpayer
TAX CREDIT
TAX CREDIT
The source of tax credit is foreign income tax paid, war profit tax,
excess profit tax paid to the foreign country. It is a deduction from
Philippine income tax.
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Who may claim? Example: A fire occurred in your house. The losses you incurred
1. Citizens cannot be deducted from income of your business because your
2. Domestic Corporations business is separate from your personal properties for purposes of
3. Members of GPPs taxation. But if it is your store which was burned, then you can deduct
4. Beneficiaries of estates and trusts the damage sustained by your store. If there is an insurance, it
5. NRA-ETB and RFC but only for income within the Philippines reduces the amount of losses you can deduct for tax purposes.

Limitation Requisites for deductibility

Foreign income tax paid is not always the amount that may be
claimed. It must not be more than the ratio of foreign income to the a. Must be incurred in the trade, business, or profession of the
total income multiplied by the Philippine income tax. taxpayer
b. Must be actually sustained and charged off within the
taxable year and not mere anticipated losses
c. Must be evidenced by a closed and completed transaction
d. Must not be compensated by insurance or other forms of
indemnity
e. If partly compensated, only the amount not compensated by
Per Country Limitation insurance is deductible
The amount of the credit in respect to the tax paid or incurred to any f. In the case of casualty loss, taxpayer must filed a sworn
country shall not exceed the same proportion of the tax against which declaration of loss within 45 days after the date of discovery
such credit is taken, which the taxpayer's taxable income from sources of the casualty or robbery, theft or embezzlement
within such country bears to his entire taxable income for the same
taxable year.
NET OPERATING LOSS CARRY-OVER

NET OPERATING LOSS CARRY OVER (NOLCO)

You have to compute for the limit for each country. The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
Global Limitation been previously offset as deduction from gross income shall be carried
The total amount of the credit shall not exceed the same proportion of over as a deduction from gross income for the next three (3)
the tax against which such credit is taken, which the taxpayer's taxable consecutive years immediately following the year of such loss.
income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year. Whenever your business incurs operating loss, then that can be
claimed as a deduction for the succeeding year. When expenses is
greater than your revenue, then there is a loss. The government
allows you to spread out this loss for a period of three (3) years by
allowing you to deduct the NOLCO.
Example:
Country Income Tax Paid Tax Credit Any net loss incurred in a taxable year during which the taxpayer was
USA 1,000,000 400,000 150,000 exempt from income tax shall not be allowed as a deduction.
Japan 1,000,000 100,000 100,000
Philippines 2,000,000 600,000 Total: 250,000 Q: Does the three year period need to be continuous?

Per Country Limit: A: Yes, the three year period cannot be extended. It is always the
three years after you incurred the loss.

Period to avail
NOLCO can be claimed for the next 3 consecutive years immediately
following the year of loss.

Global Limit: When NOLCO is not deductible

The tax credit allowed is 250,000. You choose whichever is lower
between the total of the ―per country limit‖ and the ―global limit.‖ The
total per country limit is 250,000 while the global limit is 300,000.
LOSSES
LOSSES
Losses actually sustained during the taxable year and not
compensated for by insurance or other forms of indemnity shall be
allowed as deductions:
1. Incurred during tax holiday
2. Tax is based on gross income or receipts
3. OSD is claimed
4. MCIT is imposed
5. Substantial change in ownership (75%)
Year of tax exemption
NOLCO cannot be deducted in the year the taxpayer is exempted from
tax. Losses incurred during the year of tax exemption cannot be
deducted as NOLCO.
No substantial change of ownership
 Not less than 75% in nominal value of outstanding issued
shares, if the business is in the name of a corporation, is
held by or on behalf of the same persons or

A. Incurred in trade, profession or business of individual taxpayer.  Not less than 75% of the paid up capital of the corporation,
B. Of property connected with the trade, business or profession, if the business is in the name of a corporation, is held by or
if the loss arises from fires, storms, shipwreck or other on behalf of the same persons
casualties or from robbery, theft or embezzlement.

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Instances of substantial change of ownership
 Individual – transfer of ownership of the sole proprietorship
to another; all or nothing
 Partnership – when there is change of partners, the
partnership is dissolved
 Corporation – more than 75% of the shares of stock are
transferred from one stockholder to another
NOLCO cannot be availed of whenever there is a substantial change in
ownership, for the reason that laws can no longer disadvantage the
current owner, the one that was actually disadvantaged was the
previous owner. That may be why the previous owner transferred the
shares due to the losses he may have incurred previously.
Illustration:
2015 2016 2017 2018 2019
Loss (100,000) (10,000)
Income 50,000 20,000 30,000
Q – In 2016, is there a net operating loss that can be deducted?
A – Yes, 50,000. And the remaining balance of NOLCO is
50,000.
Q – In 2017, is there net operating loss that can be deducted?
A – Yes, 20,000. The remaining balance of the NOLCO is 30,000
Q – In 2018, is there net operating loss that can be deducted?
A – None, because it is already a loss and in fact it added to the
balance of your NOLCO. However, you must not co mingle the two
losses because there is only a limit of three years.
Q – In 2019, is there a NOLCO that you can deduct?
A – Yes, 10,000. The amount came from the loss from 2018 which you
can deduct from the income in 2019.
Q – What happens with the remaining NOLCO from 2015?
A – It will be forfeited (the right to use the 30,000 losses)
Q – In 2015, an individual taxpayer is still under Income Tax Holiday.
Can you claim NOLCO?
A – The law provides that when the individual is exempted on the year
he incurred the loss, no NOLCO may be allowed as a deduction for the
succeeding year.
Another illustration:
1. If you incurred a loss of 400,000 in Year 1, can you deduct this
loss in Year 2 when you are exempted from taxes?
No. The loss cannot be deducted since you are exempted.
2. How about in Year 3 when you availed of OSD?
No. OSD is in lieu of itemized deductions so the losses are
already accounted for.
3. If you have a net income of 200,000 in Year 4 and there is still
no deduction, can NOLCO be applied?
Yes, to the extent of 200,000.
4. Can you still avail of NOLCO during Year 5?
No. NOLCO is allowed as a deduction only for the next 3
consecutive taxable years immediately following the year of such
loss. The remaining amount is forfeited.
LOSSES FROM SECURITIES
LOSSES ARISING FROM SECURITIES
When the securities which can be in the form of shares of stocks or
loan receivables be considered as worthless, the losses can be
deducted. It will be worthless when the company losses operations in
which the shares belong.
Ex. The shares of stocks of Jollibee become worthless when a law is
passed by the Congress banning the fast food industry.
You will know that it is already worthless when these shares cannot be
sold anymore because there exists no available market for it even it is
not through a declaration made by law.
Ex. Shares of stocks of diskette companies
Value of Loss that you can deduct: The cost of acquiring the security.
LOSSES FROM SHARE TRANSACTIONS
LOSSES FROM SHARE TRANSACTIONS
Losses from share transactions can be claimed as deduction upon
realization of the loss.
Shrinkage in value of shares of stocks cannot be used to claim for the
deduction as loss because you haven't realized it yet. Only if you sold
it then if there is any loss, you can claim it as a deduction.
Ex. You bought the share at 100 and sold it at 50, here you incurred a
loss of 50.
How will you report it?
Since it is shares of stock being part of the equity of the company, it is
considered as a capital loss which shall be deducted in your capital
gains. And if ever there is no capital gains, then it is considered as a
capital loss which cannot be deducted from your ordinary gains but it
can be carried over for the next year. It means that it can be claimed
as NOLCO which you can only recover for a period of one year.
LOSSES FROM WASH SALES
LOSSES FROM WASH SALES
A wash sale is the buying or selling of the same type of stock or
security at a loss within 30 days before the date of sale or 30 days
after date of sale. It cannot be claimed as allowable deduction.
A wash sale is a price manipulation activity prohibited under the
Security Regulation Code (R.A 8799). It is a practice where a
person or entity who is not a dealer of securities disposes of such
securities. It occurs when the taxpayer disposes shares of stock or
securities and within 30 days before or after such disposition
acquires substantially identical stocks or securities. That‘s why it is
termed as a 61-day sale.
TN: The 30 days before and 30 days after period.
Important: This does not include dealers of securities. Only
spectators who can manipulate sale of shares transactions by means of
washed sales.
Example:
2/20 Bought PLDT Shares 10/Sh x 10,000 100,000
3/20 Sold PLDT Shares 20/Sh x 5,000 100,000
4/19 Sold PLDT Shares 5/Sh x 5,000 25,000
5/19 Bought PLDT Shares 10/Sh x 10,000 100,000
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You sold the shares on April 19, but you purchased again another set
of shares on May 19. The 25,000 loss incurred on April 19 from wash
sales cannot be used to reduce your income at the time you sold it on
March 20. The wash sale would be based on April 19 and May 19 when
you sold the shares and purchased it back thereafter.
Considering that the period is covered by the 61-day period, the
25,000 loss cannot be used to reduce the income. As such, you will
still be taxed based on the 50,000 income.
That is wash sale and any loss from any wash sale transaction cannot
be used as a deduction. People do this to make it appear that there is
a transaction or activity pertaining to their shares. Actively traded
shares are more attractive to investors but in reality these are just
manipulated. Just take note of that prohibition because first and
foremost, wash sales are illegal.
WAGERING LOSSES
WAGERING LOSSES
Losses from wagering transactions shall be allowed only to the extent
of the gains from such transactions.
There could be no wagering loss which is related to your business
unless you are engaged in an illegal business.
Illegal wagering loss cannot be deducted from wagering gain.
Q: You are engaged in the business of financing money for casinos.
You give money to whoever may be betting and the guy was able to
incur a loss of 1M. Can he claim the 1M peso loss as a deduction?
A: Yes, but only if he has incurred wagering gains. How would this
happen? You must be regularly engaged in gambling.
CASUALTY LOSSES
CASUALTY LOSSES
The loss is caused by fortuitous event or force majeure.
Requisites for deductibility
a. Report to taxing authorities within 45 days from occurrence
of the loss
b. Related to trade and business
c. Evidenced by a closed and completed transaction (perfected
sale)
d. Actually sustained during the taxable year
e. Must not be compensated by insurance or other forms of
indemnity
ABANDONMENT LOSSES
ABANDONMENT LOSSES
In the event a contract area where petroleum operations are
undertaken is partially or wholly abandoned, all accumulated
exploration and development expenditures shall be allowed as a
deduction.
BAD DEBTS
BAD DEBTS
Bad debts actually ascertained to be worthless and charged off within
the taxable year except those not connected with profession, trade or
business and those sustained in a transaction entered into between
parties. The recovery of bad debts previously allowed as 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 tax benefit of said
deduction.
Tax Benefit Rule
If you were benefited by the deductions made when you claim it as
bad debts, then you will be able to recognize it as income. If there is
no benefit as you were already at a loss, you cannot claim recovery of
bad debts later on.
Requisites for the deductibility of bad debts
a. Arise from a valid and subsisting obligation
b. Ascertained to be worthless
c. Charged off and uncollectible within the taxable year
d. Uncollectible in the near future
e. Arise from trade or business of profession of taxpayer
When are bad debts ascertained to be worthless?
A court order is necessary and the regular procedure is as follows:
1. Creditor sends a statement of Account to the debtor which
states the maturity date and amount due.
2. If no payment is made, then the creditor sends a collection
letter to the debtor.
3. Still no payment is made, then the creditor‘s lawyer will send
a formal demand letter to the debtor.
4. Still failed to pay, then an action is filed in court for
collection.
5. No payment despite the order of court, then the account will
be considered as bad debt.
When the debtor files for the declaration of insolvency in court, and
after the rehabilitation, the liabilities still exceed the assets, then the
debtor is considered insolvent and the account will be considered bad
debt.
It is a requirement that moment you ascertain the worthlessness of a
debt on the same period you must claim it as bad debts. Otherwise,
you will lose the right to consider it as an allowable deduction. So, in
the year that you ascertained that the debt is uncollectible, make sure
that it is also claimed as bad debts.
Q: You have a bet with your friend on who will win the Binibining
Pilipinas, and your bet won. Your bet amounted to 100,000, and who
ever loses would pay such amount. Now, you are demanding payment
but X cannot pay you anymore. Can you claim that as bad debts?
A: No, because such debt is not born out of a valid and subsisting
obligation and because such debt is not connected with my trade,
business, or exercise of profession.
Q: What if your debtor dies, does that make your debt worthless?
A: No, because you can charge the debt against the estate of the
deceased.
Near future
There is no hard and fast rule as long as it cannot be collected by next
year, then it can be considered bad debts.
DEPRECIATION
DEPRECIATION
Depreciation is the gradual diminution of the useful value of the
property used in trade, business or profession of the taxpayer, arising
from wear and tear or natural obsolescence. The term is also applied
to amortization of the value of intangible assets, the use of which in
trade or business is definitely limited in duration.
There is a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear of property used in the trade or business.
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When you buy a property, that‘s really a cost in the first place, Cost – P1,000,000
however, the law cannot allow you to deduct it outright. That‘s why Useful Life – 10 years
you have to account for how long that property will be considered Salvage Value – P100,000
useful, because you will spread that cost during the period that it is
useful. After all, you will be able to use it during the time it is
considered useful, so here when you actually account for depreciation
you are just spreading the cost. It is a cost-spreading mechanism. It is
just apportioning the cost of your property throughout its life. TN: No Computation for Depreciation in the exams. This is just for you
to imagine the method or how it is done.
For example: If you bought machinery that is good for 10 years for
1,000,000 pesos, you won‘t be able to deduct that on the year you
DECLINING BALANCE METHOD
purchased it, after all that machinery can be used for the next 10
years. What we‘re doing here is to account for depreciation and try to
spread-out the cost throughout the useful life of the property. DECLINING BALANCE METHOD

Requisites for deductibility Under the declining balance method, a fixed or uniform rate is
a. Property must be used in trade, business or profession of the multiplied by the declining carrying amount of the asset in order to
taxpayer arrive at the annual depreciation.
b. There must be depreciable properties
c. Allowance for depreciation must be reasonable Formula:
d. Depreciation must be charged off during the taxable year
e. Statement of the allowance must be attached to the return
f. Method for computing the allowance for depreciation must
be in accordance with the method prescribed by the
Secretary of Finance upon the recommendation of the BIR
Commissioner
TN: It is actually the taxpayer who recommends to the CIR.
Example:
FACTORS OF DEPRECIATION Cost – P1,000,000
Useful Life – 10 years
Depreciable amount
Depreciable amount or cost is the cost of an asset or other amount
substituted for cost, less its residual value. Year 1:

Salvage value Year 2:

Salvage or residual value is the estimated net amount currently
obtainable if the asset is at the end of the useful life. It is the value of
the asset at the end of its useful life.
Year 3:
Useful life
Useful life is either the period over which an asset is expected to be
available for use by the entity, or the number of production or similar
units expected to be obtained from the asset by the entity
TN: Notice that the amount of depreciation also declines.

METHODS OF DEPRECIATION DOUBLE DECLINING BALANCE METHOD

Under the double declining balance method, the rate is doubled.

METHODS OF DEPRECIATION
In the example above, the rate will be 20%.
1. Straight line method
Year 1:
2. Declining balance method
3. Sum of the years digit method
Year 2:
4. Any other method that may be prescribed by the Secretary of
Finance upon the recommendation of the Commissioner.

STRAIGHT LINE METHOD Year 3:

STRAIGHT LINE

Under the straight line method, the annual depreciation expense is

calculated by allocating the depreciable amount equally over the
number of years of estimated useful life. In other words, straight line
depreciation is a constant charge over the useful life of the asset. It
accounts for passage of time rather than usage.
Formula:
Example:
SUM OF THE YEARS‟ DIGIT METHOD
SUM OF THE YEARS‟ DIGIT METHOD
The sum of the years‘ digits method provides for depreciation that is
computed by multiplying the depreciable amount by a series of
fractions whose numerator is the digit in the useful life of the asset
and whose denominator is the sum of the digits in the useful life of the
asset. The fractions are developed by getting the sum of the digits in
the useful life of the asset. This actually uses the sequence formula.

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Formula: Wasting Assets

Wasting assets are material objects of economic value and utility to
man produced by nature. They are natural resources which usually
include coal, oil, ore, precious metals like gold and silver, and timber.
They are so called because these are physically consumed and once
consumed, the assets can no longer be replaced. If ever, they can be
replaced only by the process of nature. Natural resources cannot be
produced by man.
Example:
Cost – P1,000,000 Cost Depletion Method
Useful Life – 5 years The method allowed under the tax code is the cost depletion method.
This is similar to the unit of production method.

The depletable amount of the wasting asset is divided by the units

Year 1: estimated to be extracted to obtain a depletion rate per unit. The
depletion rate per unit is then multiplied by the units extracted during
the year to arrive at the depletion for the period. The depletable
amount is equivalent to the cost of the asset less salvage value, if any.
Year 2:
Formula:

Year 3:

Year 4:
Example: A parcel of land has a total mineral ore deposit of
10,000,000. The asset used to extract the mineral ore deposit is
valued at 10,000,000. A total mineral ore of 789,000 was extracted
Year 5: during the year.

You begin with the highest until to the lowest until you reached the 5 th
year or the ratio of 1/15.
UNITS OF PRODUCTION METHOD
UNITS OF PRODUCTION METHOD
Under this method, depreciation per unit is computed by dividing the
depreciable amount by the estimated useful life in terms of units of
output. The depreciation rate per unit is then multiplied by the yearly
output to get the annual depreciation. The output or production
method results in a charge based on the expected use or output.
Formula:
CHARITABLE & OTHER CONTRIBUTIONS
CHARITABLE AND OTHER CONTRIBUTIONS
This is the only deduction that does not have to be related to the tax
payer‘s trade, business, or exercise of profession. In the first place,
when you donate to charity it makes no qualification on what sort of
trade, business, or exercise of profession the donor has. If it did, it
would be difficult to donate to charitable institutions. However, the
type of organization you are giving your donation and the purpose of
such donation would matter since it will affect the amount to be
recognized as a deduction.

Kinds of Charitable Contributions

1. Ordinary – those subject to limitations as to the amount
deductible from gross income (5%/10%)
2. Special – deductible in full from gross income

Example: In a soft drinks company, after producing 10 Million Bottles,
the machine used will already be deemed fully depreciated. The value
of machine is 10 Million Pesos. 2M bottles were produced.
DEPLETION
Requisites for Deductibility
a. Contribution or gift must actually be paid
b. Must be given to organizations specified in the tax code
c. Net income of the institution must not inure to the benefit of
any private stockholder or individual
d. Must be made within the taxable year
e. Must be evidenced by adequate records or receipts
f. Must not exceed 10% in the case of individuals and 5% in
the case of a corporation, of the taxpayer‘s taxable income
(except where the donation is deductible in full) to be
determined without the benefit of the contribution.

DEPLETION DEDUCTIBLE IN FULL

Depletion is the exhaustion of natural resources like mines and oil and
gas as well as result of production or severance from such mines or DEDUCTIBLE IN FULL
wells. These are non-replaceable assets. This is applicable to wasting
asset entities 1. Recipient is:

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Government of the Philippines or to any of its agencies or political D. Character building/youth and sports development
subdivisions, including fully-owned government corporations, E. Charitable
exclusively to finance, to provide for, or to be used in undertaking F. Social welfare
priority activities G. Religious
H. Rehabilitation of Veterans
For priority activities in: I. Social welfare institution
A. Science
B. Education If the conditions under those deductible in full is not complied with
C. Culture Subject to limitation:
D. Health a. Individual – 10% of taxable income from trade,
E. Economic Development business or profession before contribution or before the
F. Human Settlement deduction of the charitable contribution
G. Youth and Sports Development b. Corporation – 5% of taxable income from trade
business or profession before contribution or before the
2. Recipient is: deduction of the charitable contribution
An accredited non-government organization, organized/operated for
(purposes) How it is done?
A. Scientific In arriving with the taxable income, all deductions (EX-IN-TA-LO-BA-
B. Education RE-PEN-DEP-DEP) are allowed except the Charitable Contributions.
C. Cultural From the taxable income, you make the deductions multiplied
D. Character building/youth and sports development by10% or 5%. Choose whichever is lower between the computation
E. Charitable or the contribution.
F. Social welfare
G. Health
RESEARCH AND DEVELOPMENT
H. Research

And satisfying the following conditions: RESEARCH AND DEVELOPMENT

A. Organized and operated exclusively for the aforementioned
purposes or a combination thereof, no part of the net income of
which inures to the benefit of any private individual;
B. The donation must be utilized not later than the 15 th day of the
3rd month following the close of its taxable year.(taxable year of
the NGO concern not the taxpayer)
C. The administrative expense must not exceed 30% of total
expenses.
D. Upon dissolution, assets would be distributed to another non-
profit domestic corporation organized for similar purpose or
purposes, or to the state for public purpose ,or would be
distributed by a court to another organization to be used in such
manner as in the judgment of said court shall best accomplish
the general purpose for which the dissolved organization was
organized.
3. Recipient is
Foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties,
or commitments entered into by the Government of the Philippines and
the foreign institutions or international organizations or in pursuance of
special laws.
DEDUCTIBLE SUBJECT TO LIMITATION
DEDUCTIBLE SUBJECT TO LIMITATION
1. Recipient is:
Government of the Philippines; Any of its agencies or political
subdivisions
For a non-priority activity
In any of the areas mentioned under those deductible in full and
exclusively for a public purpose
2. Recipient is
An accredited non-government organization, organize/operated for
(purposes)
A. Scientific
B. Education
C. Cultural
Research or development expenditures which are paid or incurred by
him during the taxable year in connection with his trade, business or
profession shall be allowed as deduction during the taxable year when
paid or incurred.
Research and development costs refer to any costs related to
innovating products or services.
Limitation
The deduction shall not apply
1. Any expenditure or the acquisition or improvement of land, or
for the improvement of property to be used in connection with
research and development of a character which is subject to
depreciation and depletion; and
2. Any expenditure paid or incurred for the purpose of ascertaining
the existence, location, extent, or quality of any deposit of ore or
other mineral, including oil or gas.
Important: These cannot be claimed as deductions anymore under
research and development because it is already considered as expense
of the company and claiming it again will amount to double
deductions.
TYPES OF R&D
1. Not chargeable to capital account –deducted outright
Ex. Project feasibility study
2. Chargeable to a capital account – spread out or
amortized over a period of 60 months
Not considered R&D
1. Cost of land/improvement
 Improvement is part of an asset subject to depreciation
 Land is not subject to depreciation but is a capital
expenditure which is never allowed as deduction
2. Cost of property subject to depreciation
 Part of depreciation expense
3. Cost of ascertaining the existence, location, extent or quality
of any deposit of ore or other minerals
 Part of cost depletion
Basically, they are not allowed as deductions under R&D costs because
they are already part of the other itemized deductions.

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The PSC must be spread out over a period of 10 years. Using the
PENSION TRUSTS
Corregidor method, divide the PSC by 10 years. From the year 2015
down to the year 2025, the deduction you can claim additional
PENSION TRUSTS deduction of 100,000 (1M/10years).

A pension trust is a trust fund established by the employer for the The amortization of the PSC will be added to the CSC. Hence, you can
retirement of the employees. claim a total deduction of 300,000 per year from 2015-2025.

This would refer to any reasonable amount transferred or paid in to In 2026, the amount that can be claimed as deduction will now only
such trust during the taxable year in excess of such contributions, but be P200,000 because the PSC has already been fully amortized.
only if such amount
PREMIUMS ON HEALTH & HOSPITALIZATION
1. Has not theretofore been allowed as a deduction, and
2. Is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment is PREMIUMS ON HEALTH AND HOSPITALIZATION
made.
The amount of premiums not to exceed P2, 400 per family or P200 a
Company usually sets up pension trust for their employees and it month paid during the taxable year.
usually accounts for the current services or particular years of service
that the employee has rendered. But then it is also possible that the Conditions:
employer has set up the pension trust years after the years you have A. That said nuclear family has a gross income of not more than
started the company or past services were already rendered. P250,000 for the taxable year
B. The taxpayer must be the person who availed of health or
Current Service Cost is the cost of the services rendered from the hospitalization benefit
time the pension trust is set up until its retirement.
Repealed
Past Service Cost is the cost of the services relating to those prior to This has already been repealed under the TRAIN Law. No one avails of
the setting up of the pension trust. it anyway since the requirements are too stringent for such a small
amount of benefit.
It would seem that it violates the matching principle if I‘m allowed to
deduct it this year when I set-up the trust, because after all the
CORPORATE INCOME TAX RATES
service were done prior to the setting up of the trust, but then again if
we look at the taxpayer, he actually incurs it and previously, he wasn‘t
allowed to deduct it as well. CORPORATE INCOME TAX RATES

Requisites for deductibility General Rule:

a. Employer must have established a pension or retirement  DC – 30% of net income within & without, with deductions
plan to provide for the payments of reasonable pensions to  RFC - 30% of net income within, with deductions
his employees  NRFC – 30% of gross income within, without deductions
b. Pension plan is reasonable and actuarially sound
c. Contribution must be made by the employer to the pension Exceptions:
fund  15% optional tax on gross income
d. Must be funded by the employer  2% minimum corporate income tax
e. Amount contributed must no longer be subject to the control
and disposition of the employer TAX REGIMES
f. Payment has not yet been allowed as deduction
g. Deduction is apportioned in equal parts over a period of 10 1. Normal Corporate Income Tax (NCIT) – 30% of net income or
consecutive years beginning with the year in which the gross income
transfer or payment is made 2. Optional Corporate Income Tax – 15% of gross income
3. Minimum Corporate Income Tax (MCIT) – 2% of gross income
CORREGIDOR METHOD
NORMAL CORPORATE INCOME TAX
CORREGIDOR METHOD
NORMAL CORPORATE INCOME TAX
This is the method where the past service cost is amortized over a
period of 10 years. The normal corporate income tax is 30%.

Example: The tax base for domestic corporations is net income within and
Current Service Cost (CSC) – 200,000/year without. For resident foreign corporations, it is based on net income
Past Service Cost (PSC) – 1,000,000 within. For non-resident foreign corporations, it is based on gross
income within.
Pension Trust
OPTIONAL CORPORATE INCOME TAX
2015-2025 2026
Past Service Cost P 100,000 P - OPTIONAL CORPORATE INCOME TAX
(1M/10years)
Current Service Cost 200,000 200,000 Domestic corporations and resident foreign corporations have the
Total P 300,000 P 200,000 option to be taxed at 15% of gross income, provided certain
conditions are satisfied.

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Rules
 Option is available only for DC and RFC.
 Option to be taxed on gross income shall be available only to
firms whose ratio of cost of sales to gross sales or receipts
from all sources does not exceed 55%.
 Option shall be irrevocable for 3 consecutive taxable years
during which the corporation is qualified under the scheme.
Conditions to be satisfied
1. Tax effort ratio of 20% of GNP
2. Ratio of 40% of income tax collection to total tax revenues
3. VAT tax effort ratio of 4% of GNP
4. 0.9% ratio of the Consolidated Public Sector Financial Position
to GNP
Not available to NRFC
This option is not available to Non-Resident Foreign Corporations
because they are already subject to 30% tax based on Gross Income.
The government will definitely not allow NRFC from availing of this
option because all NRFC will just avail of this smaller rate instead of
the 30% Income Tax on their Gross Income.
Cost ratio does not exceed 55%
The ratio of the firm‘s cost of sales to gross sales or receipts from all
sources must not exceed 55% in order to be taxed at 15%.
Irrevocable for 3 years
If the corporation incurs very high expenses on the succeeding years,
it may end up at a disadvantage for choosing this option because the
expenses are not accounted for when it is taxed based on gross
income.
MINIMUM CORPORATE INCOME TAX
MINIMUM CORPORATE INCOME TAX (MCIT)
A minimum corporate income tax rate of 2% of the gross income at
the end of the taxable year is imposed on a corporation beginning the
4th taxable year immediately following the year in which such
corporation commenced its business operations.
The MCIT is paid when the minimum income tax is greater than the
NCIT of 30% of the net taxable income.
Purpose
The purpose of the MCIT is to curtail the fraudulent mechanisms of
corporations done in order to avoid paying the right amount of taxes
due to the government. This is to discourage corporations from
overstating their expenses since the MCIT is imposed on the gross
income where the expenses have not yet been deducted.
When availed of
MCIT is availed of at the beginning of the 4th taxable year immediately
following the year in which such corporation commenced its business
operations. In other words, MCIT is imposed on the 5th year of
operations.
A company is considered to have started its business operations on the
date of its registration with the BIR or the actual commencement of
the business, whichever is earlier.
Relief from MCIT
The Secretary of Finance is authorized to suspend the imposition of
MCIT on a corporation which suffers losses
1. On account of prolonged labor dispute (more than 6 months)
2. Because of force majeure,
3. Because of legitimate business reverses.
CARRY FORWARD EXCESS MCIT
Excess MCIT can be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.
The excess MCIT can only be credited if the NCIT is higher than the
MCIT. In that case, the tax paid will be net of the excess MCIT.
If MCIT is higher than the NCIT for the year, then the excess MCIT
cannot be credited but will continue to be carried over until the 3-year
period expires.
The credit of the excess MCIT is based on the First-In First-Out
method such that the excess MCIT incurred first will also be the first to
be credited against the NCIT for the taxable year.
EXCEPTIONS TO MCIT
1. Proprietary Educational Institutions
a. 10% of net income – exempt from MCIT
b. 30% of net income – not exempt from MCIT
2. Non-profit hospitals
a. 10% of net income – exempt from MCIT
b. 30% of net income – not exempt from MCIT
3. PEZA-registered entities
a. 5% income from registered activities – exempt from MCIT
b. 30% income from unregistered activities – not exempt
from MCIT
4. OBUs – exempt from MCIT whether taxed at 10% or tax
exempt
5. International Carriers – exempt from MCIT since it is taxed
at 2.5% of Gross Philippine Billings
TN: Corporations subject to special tax rates are exempt from MCIT.
Proprietary educational institutions & non-profit hospitals
For domestic corporations, these include proprietary educational
institutions and non-profit hospitals subject to the tax rate of 10% on
their net taxable income when the income derived from unrelated
trade, business, or activity does not exceed 50% of the gross income.
This is because MCIT can only be imposed if the corporation is subject
to the NCIT of 30% of net taxable income.
However, if the income of proprietary educational institutions and non-
profit hospitals from unrelated trade, business, or activity exceeds
50% of the gross income, MCIT can now be applied since they will be
subject to 30% tax on their net taxable income.
PEZA-registered entities
Another exception is the case of a PEZA-registered entity since it is
subject to a preferential tax rate of 5% of gross income in lieu of all
taxes. However, it can be subject to NCIT if it is engaged in
unregistered activities. The MCIT can be applied on the 5th year of
operations when the net income is less than 2% of the gross income
from unregistered activities.
OBUs and international carriers
MCIT is also not applicable to offshore banking units generally taxed at
10% and international carriers subject to tax of 2.5% on gross
Philippine billings.
Illustration:
2017 is the fourth year of its business operations.
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MCIT SPECIAL RULES

2017 2018 2019 Tax Base Tax Rate

Gross Sales 10,00,000 10,00,000 10,00,000
Cost of Sales (5,000,000) (2,000,000) (2,000,000) Specia l DC s
Gross Income 5,000,000 8,000,000 8,000,000 Proprietary Educational 10% or
Net Income
Allowable Deductions (5,000,000) (7,800,000) (7,900,000) Institution 30%
Net Income - 200,000 100,000 10% or
NCIT (30% of NI) - 60,000 30,000 Non-profit Hospital Net Income
30%
MCIT (2% of GI) - 160,000 160,000
Specia l R FCs
Excess MCIT -
From 2018 - 100,000 100,000 International Carriers Gross Philippine Billings 2.5%
From 2019 - 130,000 Income derived from
Tax Due - 160,000 160,000 foreign currency
Exempt
transactions with non-
2020 2021 2022 residents, OBUs, including
Gross Sales 10,00,000 10,00,000 10,00,000 branches of foreign banks
Cost of Sales (3,000,000) (4,000,000) (2,000,000) authorized by BSP to
Gross Income 7,000,000 6,000,000 6,000,000 Offshore Banking Units transact with OBUs
Allowable Deductions (6,500,000) (5,000,000) (3,000,000)
Net Income 500,000 1,000,000 3,000,000 Income derived from
10%
foreign currency loans
NCIT (30% of NI) 150,000 300,000 900,000
MCIT (2% of GI) 140,000 120,000 120,000
Income of non-residents
Excess MCIT Exempt
from OBUs
From 2018 (100,000) - -
From 2019 ( 50,000) ( 80,000) - Tax on Branch Profits Total profits applied or
15%
Tax Due - 220,000 900,000 Remittances earmarked for remittance
Regional or Area
Not applicable Exempt
Headquarters
TN: You cannot lump together the excess MCIT since the excess MCIT
expires differently. Regional Operating
Net Income 10%
Headquarters
th
In 2017, MCIT is not yet applicable in 2017 since it is the 4 year of Specia l NRF Cs
operations. MCIT applies only on the 5th year of operations in 2018.
Non-resident
Since there is a net loss, there is no tax to be paid for the year.
Cinematographic Film
Gross Income 25%
Owner, Lessor or
In 2018, MCIT can now be applied since it is the 4 th taxable year after
Distributor
the start of its business operations. Since MCIT is higher than NCIT,
the tax due for the year will be P160,000. Non-resident Owner or
Lessor of Vessels Gross Rentals, Lease or
4.5%
There is excess MCIT of P100,000 which is the difference between the Chartered to Filipino Charter Fees
MCIT paid of P160,000 and NCIT of P60,000. It will be carried forward Nationals or Corporations
for the 3 immediately succeeding years until 2021. Non-resident Owner or
Lessor of Aircraft, Gross Rentals or Fees 7.5%
In 2019, the tax due is P160,000. Excess MCIT from 2018 of P100,000 Machinery and Equipment
cannot be applied this year since MCIT is higher than NCIT. It will
continue to be carried forward until its expiration in 2021.
SPECIAL DOMESTIC CORPORATIONS
In addition, there is an excess of P130,000 which is the difference
between the MCIT of P160,000 and NCIT of P30,000 for the year will PROPRIETARY EDUCATIONAL INSTITUTION & HOSPITALS
be carried forward for the 3 immediately succeeding taxable years until
it expires in 2022.
Section 27(B) of the NIRC
Proprietary educational institutions and hospitals which are nonprofit
In 2020, there is no tax to be paid due to the application of the excess
shall pay a tax of ten percent (10%) on their taxable income except
MCIT from previous years. The excess MCIT from 2018 of P100,000
those covered by Subsection (D) hereof: Provided, That if the gross
and excess MCIT from 2019 of P50,000 can be applied to the NCIT of
income from unrelated trade, business or other activity exceeds fifty
P150,000 since NCIT is higher than MCIT for the year.
percent (50%) of the total gross income derived by such educational
institutions or hospitals from all sources, the tax prescribed in
The excess MCIT can be deducted to the extent of the tax due under
Subsection (A) hereof shall be imposed on the entire taxable income.
the NCIT. The remaining excess MCIT from 2019 of P80,000 will
For purposes of this Subsection, the term 'unrelated trade, business or
continue to be carried forward until its expiry in 2022.
other activity' means any trade, business or other activity, the conduct
of which is not substantially related to the exercise or performance by
In 2021, the tax due is P220,000. The excess MCIT from 2019 of
such educational institution or hospital of its primary purpose or
P80,000 can be applied to the NCIT since the NCIT of P300,000 is
function. A 'proprietary educational institution ' is any private school
higher than the MCIT of P120,000 for the year.
maintained and administered by private individuals or groups with an
issued permit to operate from the Department of Education, Culture
In 2022, the tax due is equivalent to the NCIT of P900,000 which is
and Sports (DECS), or the Commission on Higher Education (CHED), or
higher than the MCIT of P120,000. There is no more excess MCIT
the Technical Education and Skills Development Authority (TESDA), as
carried forward from the previous years.
the case may be, in accordance with existing laws and regulations.

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PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS
Proprietary educational institutions and non-profit hospitals are subject
to a tax rate of 10% based on taxable income.
The general rule is that it is subject to a 10% tax if it complies with
the predominance test with the unrelated activities as basis.
Otherwise, it is subject to 30% tax.
Predominance test
If the gross income from unrelated trade, business, or other activities
exceeds 50% of the total gross income from all sources, then it is
subject to the 30% of net income.
Otherwise, if the gross income from unrelated trade, business, or other
activities does not exceed 50%, then it is taxable at 10% of net
income.
Q: The University of Cebu earns rent income from unrelated activities
at the amount of 1,000,000. Aside from that, it earns educational
income from tuition fees, sales of books and library fees amounting to
1,000,000. How will this be subject to tax?
Formula:
A: The tax rate will be 10% of the net taxable income. Since the
income from unrelated trade activities did not exceed 50% of the
gross income, it passed the predominance test.
Q: If the income from unrelated activities is 2,000,000, how will it be
taxed?
A: The tax will be at 30% of the net taxable income. It did not pass
the predominance test since the income from unrelated activities of
66.67% more than 50%.
Important: Take note that this rule not only applies to proprietary
educational institutions but also to hospitals which are also non-profit.
Chong Hua, according to sir, is a non-profit hospital.
Unrelated Trade, Business or other Activity
Conduct of trade, business or other activity is not substantially related
to the exercise or performance of the primary purpose or function.
Lung Center v. Quezon City
As a general principle, a charitable institution does not lose its
character as such and its exemption from taxes simply because it
derives income from paying patients, so long as the money received is
devoted to charitable objects and no money inures to the private
benefit of the persons managing or operating the institution. As well as
the reason of donation in the form of subsidies granted by the
government.
The petitioner failed to prove that the entirety of its real property is
actually, directly and exclusively used for charitable purposes. While
portions of the hospital are used for the treatment of patients and the
dispensation of medical services to them, whether paying or non-
paying, other portions thereof are being leased to private individuals
for their clinics and a canteen.
Hence, the portions of the land leased to private entities as well as
those parts of the hospital leased to private individuals are not exempt
from such taxes. On the other hand, the portions of the land occupied
by the hospital and portions of the hospital used for its patients,
whether paying or non-paying, are exempt from real property taxes.
CIR v. St. Luke‟s Medical Center
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. It is a
corporation that is not ―operated exclusively‖ for charitable or social
welfare purposes insofar as its revenues from paying patients are
concerned. However, an institution under Section 30(E) or (G) does
not lose its tax exemption if it earns income from its for-profit
activities. It remains a proprietary non-profit hospital 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.
CIR v. De La Salle University
The tax exemption granted by the Constitution to non-stock, non-profit
educational institutions is conditioned only on the actual, direct and
exclusive use of their assets, revenues and income for educational
purposes. Unlike the exemption that may be availed of by proprietary
educational institutions, it is not subject to limitations imposed by law.
Hence, the income and revenues of DLSU proven to have been used
actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
TN: Only formal educational institutions can avail of the exemption.
GOVERNMENT-OWNED OR CONTROLLED CORPORATION
Sec. 27 (C) of the NIRC
Government-owned or -Controlled Corporations, Agencies or
Instrumentalities. — The provisions of existing special or general laws
to the contrary notwithstanding, all corporations, agencies, or
instrumentalities owned or controlled by the Government, except the
Government Service Insurance System (GSIS), the Social Security
System (SSS), the Philippine Health Insurance Corporation (PHIC), and
the local water districts shall pay such rate of tax upon their taxable
income as are imposed by this Section upon corporations or
associations engaged in a similar business, industry, or activity.
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS,
AGENCIES OR INSTRUMENTALITIES
General Rule:
GOCCs, agencies or instrumentalities are taxed at 30% like any other
corporation.
Exceptions:
1. Government Service Insurance System (GSIS)
2. Social Security System (SSS)
3. Philippine Health Insurance Corporation (PHIC)
4. National Power Corporation (NAPOCOR)
5. Local Water Districts (RMC 28-2010, RA 10026)
6. Cooperatives (RA 6938) with conditions
7. Foundations created for scientific advancement (RA 2067)
PAGCOR
Philippine Amusement and Gaming Corporation (PAGCOR) is exempt
from taxes for income related to gaming operations as provided for in
its charter. If it earns income from other sources then such would be
subject to 30% tax because this is the tax for other gaming
corporations. PAGCOR was previously part of the exemptions provided
in the tax code but it was recently changed by an act of congress and
the extent of their exemption was clarified by the SC in a recent case.
PCSO
Philippine Charity Sweepstakes Office (PCSO) was removed from the
exemptions under the tax code. It is no longer exempt from corporate
income tax under the TRAIN law.
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SPECIAL RESIDENT FOREIGN CORPORATIONS
INTERNATIONAL CARRIERS
Sec. 28 (A) (3) of the NIRC)
International Carrier. - An international carrier doing business in the
Philippines shall pay a tax of two and one-half percent (2 1/2%) on its
'Gross Philippine Billings' as defined hereunder:
(a) International Air Carrier. — 'Gross Philippine Billings' refers to the
amount of gross revenue derived from carriage of persons, excess
baggage, cargo and mail originating from the Philippines in a
continuous and uninterrupted flight, irrespective of the place of sale or
issue and the place of payment of the ticket or passage document:
Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if
the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the
Philippines, but transshipment of passenger takes place at any port
outside the Philippines on another airline, only the aliquot portion of
the cost of the ticket corresponding to the leg flown from the
Philippines to the point of transshipment shall form part of Gross
Philippine Billings.
(b) International Shipping. — 'Gross Philippine Billings' means gross
revenue whether for passenger, cargo or mail originating from the
Philippines up to final destination, regardless of the place of sale or
payments of the passage or freight documents.
INTERNATIONAL CARRIERS
International air carrier and international shipping are taxed at 2.5%
of Philippine Gross Billings.
Q: The value of the ticket paid by a passenger travelling from the
Philippines to the US via Hongkong (connecting flight) is 100,000.
Coming to the Philippines, he paid another 100,000 passing through
Korea. Will the international carrier which flies these flights be subject
to tax in the Philippines?
A: The trip from Philippines to Hongkong in an uninterrupted and
continuous flight will be subject to tax here in the country. The
100,000 will be apportioned for the value from the Philippines to
Hongkong. For the trip from HK to US, the Philippines has no
jurisdiction because this is a resident foreign corporation.
On the second part, there will be no income that is taxable in the
Philippines because the point of origin is the US and then the second
flight originated from Korea. The law provides that the point of origin
must be the Philippines.
OFFSHORE BANKING UNITS
Sec. 28 (A) (4) of the NIRC
Offshore Banking Units. — The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized
by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
transactions with local commercial banks, including branches of foreign
banks that may be authorized by the Bangko Sentral ng Pilipinas (BSP)
to transact business with offshore banking units, including any interest
income derived from foreign currency loans granted to residents, shall
be subject to a final income tax at the rate of ten percent (10%) of
such income.
Any income of nonresidents, whether individuals or corporations, from
transactions with said offshore banking units shall be exempt from
income tax.
OFFSHORE BANKING UNITS
Make a distinction on who these offshore banking units are transacting
with. If it is transacting with non-residents then they are exempt
unless otherwise provided by the BSP. Interest income on foreign
loans is subject to final tax of 10% if you are transacting with residents
in relation to their interest income from foreign loans.
Tax Exempt
Income derived by a depositary bank from an expanded foreign
currency deposit system is exempt from tax if it transacts with non-
residents, offshore banking units, local commercial banks, including
branches of foreign banks that may be authorized by the BSP to
transact with OBUs.
Income of non-residents from transactions with OBUs is exempt.
10% Tax
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with local
commercial banks including branches of foreign banks that may be
authorized by the BSP to transact business with foreign currency
deposit system units and other depository banks under the expanded
foreign currency deposit system, including interest income from foreign
currency loans granted by such depository banks under said expanded
foreign currency deposit system to residents, shall be subject to a final
income tax at the rate of 10% of such income.
BRANCHES OF FOREIGN CORPORATIONS
Sec. 28 (A) (5) of the NIRC
Tax on Branch Profits Remittances . — Any profit remitted by a branch
to its head office shall be subject to a tax of fifteen percent (15%)
which shall be based on the total profits applied or earmarked for
remittance without any deduction for the tax component thereof
(except those activities which are registered with the Philippine
Economic Zone Authority). The tax shall be collected and paid in the
same manner as provided in Sections 57 and 58 of this Code:
Provided, That interests, dividends, rents, royalties, including
remuneration for technical services, salaries, wages, premiums,
annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, profits, income and capital gains received by a foreign
corporation during each taxable year from all sources within the
Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the
Philippines.
BRANCHES OF FOREIGN CORPORATIONS
Branches enter into transactions which allow them to earn income
subject to tax. Most likely they will return that income they earned
here to their home office. They will remit it to their home office. If that
happens, it will be subject to tax.
Foreign corporations may engage in business here in the country in
two ways: branch office or representative office. A representative
office will not earn income since they are here for purposes of liaising
with costumers. Otherwise, they are subject to tax.
Branch profit remittance tax
The branch profit remittance tax is 15% of the total profits earmarked
for remittance whether it is actually remitted or not.
Q: A company registered in the British Virgin Islands (USA) has a
branch here in the Philippines. The Philippine branch earns an income
of 1M but it decided to remit P500,000 to its home office. How much is
the branch profit tax applicable?
A: Only the 500,000 will be taxed as the tax is based on the
earmarked profit. Earmarked means that there is an intention for the
amount will be remitted. Even without actual remittance, they will still
be subject to tax at a rate of 15%.
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Subsidiary
A subsidiary is a corporation set-up here in the Philippines. It is a
domestic corporation where the shares are owned by a foreign
corporation and it is a separate entity. A branch is an extension of the
home office abroad and it is not a separate entity.
When a corporation is a stockholder of a corporation, the subsidiary
will distribute income to its principal through dividends and not
remittance. It is taxed at 30% or at 15% depending on the
applicability of the tax sparing rule. It is as if it is a domestic
corporation distributes income through dividends to a non-resident
foreign corporation.
Tax sparing rule
The domestic corporation giving out dividends to the NRFC, the latter
may be subject to tax because it is the one earning income. It is taxed
either at 15% or 30%. A rate of 15% will be applied if there is
reciprocity in the sense that the foreign country where the NRFC is
domiciled allowed the same credit or more favorable to Filipino
corporations. This concept is similar to personal exemptions granted to
NRA NETB under the reciprocity rule for individuals.
If the country of NRFC allows credit to Filipino corporations, then 15%
rate is allowed. This is computed by deducting the amount spared of
15% from the regular tax rate of 30% which will result to 15%.
SPECIAL NONRESIDENT FOREIGN CORPORATIONS
NONRESIDENT CINEMATOGRAPHIC FILM OWNERS, ETC.
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR OR
DISTRIBUTOR
A cinematographic film owner, lessor, or distributor shall pay a tax of
25% of its gross income from all sources within the Philippines.
Example: You want to watch Batman vs Superman. The owner of the
film will have to lease it to someone here in the Philippines, but they
need not be considered as resident foreign corporations. DC is the
owner of that film and it is shown in the Philippines, so they allowed
cinemas in the Philippines to show it. They can be considered as non-
resident cinematographic film owner, lessor or distributor and so they
can subject to the 25% tax based on their gross income.
TN: The income is not the sale of the tickets, because the ticket sales
belong to the cinemas. The film owner will only get a portion of the
income earned by the cinemas.
NONRESIDENT OWNER OR LESSOR OF VESSELS

If you have a subsidiary distributing income to principal, the rate is
15% or 30%. When would you advice your client that it is better set-
up a branch here in the Philippines rather than a subsidiary?
First, ask about the country of the NRFC and check if there is
reciprocity. If it is the US and there is reciprocity, then you can advise
that they can set-up either a subsidiary or a branch. In actual practice,
you will realize that it is better to set-up a subsidiary than a branch
because the requirements for the latter are difficult to comply with.
Otherwise, if there is no reciprocity, then it would be better to set-up a
branch where the tax is at 15%.
NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED
BY PHILIPPINE NATIONALS OR CORPORATIONS
A non-resident owner or lessor of vessels shall be subject to a tax of
4 1/2% of gross rentals, lease or charter fees from leases or charters
to Filipino citizens or corporations, as approved by the Maritime
Industry Authority.
However, Maritime Industry Authority does not allow non-resident
foreign corporations to own vessels in the Philippines.
NONRESIDENT OWNER OR LESSOR OF AIRCRAFTS, ETC

RAHQs & ROHQs NONRESIDENT OWNER OR LESSOR OF AIRCRAFT,

MACHINERY AND EQUIPMENT
Sec. 28 A (6) of the NIRC
(a) Regional or area headquarters as defined in Section 22(DD) Entities which allows aircrafts and vessels to be leased here in the
shall not be subject to income tax. Philippines will be subject to 7 ½% on gross rentals or fees from
(b) Regional operating headquarters as defined in Section sources within the Philippines.
22(EE) shall pay a tax of ten percent (10%) of their taxable
income. Items 2 and 3 are not very much applicable in the Philippines because
not much engage in such business because at most companies here in
the Philippines buy the property from abroad and not lease them. But
REGIONAL OR AREA HEADQUARTERS (RAHQs) AND
nonetheless, still memorize the rates.
REGIONAL OPERATING HEADQUARTERS (ROHQs) OF
MULTINATIONAL COMPANIES
PASSIVE INCOME
RAHQs are exempt from tax while ROHQs are subject to 10%
tax on net income.
PASSIVE INCOME TAX RATES
TN: Income must be derived from the Philippines.
ROHQ meaning they are earning income from their operations and
they conduct activities that are income generating and so they will be
subject to tax on such income. Passive Income DC RFC NRFC
Interest Income on
RAHQ are not subject to tax because they are not supposed to engage Bank Deposit (Peso 20% 20% 30%
in such activities otherwise they will violate the license granted to Account
them in the Philippines. Interest Income on
Bank Deposit Under
Area headquarters are not earning income here in the Philippines the Expanded 15% 15% Tax Exempt
because it is only for liaising and cooperation purposes. If it starts to Foreign Currency
earn income then it is subject to a 30% and not 10% because it is Deposit System
registered as area headquarters. It will not be converted to an
operating headquarter. Royalties 20% 20% 30%
Capital Gains from
Ex. Procter & Gamble is a regional operating headquarters of a Sale of Shares of 15% 15% 15%
multinational company so it is subject to a rate of 10%. Stock
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Capital Gains from 6% of GSP

Sale of Real or ZV, A holding company‘s purpose is to hold investments. You are supposed
30% 30% to issue dividends to stockholders. If you do not do that, you are said
Property Not Used whichever
in Trade or Business is higher to be accumulating beyond the reasonable means of the business.
15% on
The presumption is only prima facie and not conclusive. You can
total profits
always justify the reason for non-distribution.
Branch Profit applied for
Not
Remitted by a or Not Applicable
Applicable IMMEDIACY TEST
Branch Office earmarked
for
Whether the funds will be used within a period of 1 year but there is
remittance
really no hard and fast rule on the period. The test is whether there is
Subject to Tax accumulation of funds beyond the reasonable needs of the business.
Sparing Rule
15% if foreign It says that you look at immediate need of the business. Non-
corporation declaration is justified granting that you have expansion projects, loan
Dividends Received
Exempt Exempt allows a tax obligations and contingencies.
from DC
credit of at least
15% of the taxes Q: Is it automatic that a company withholding dividends will be said to
deemed paid in have improperly accumulated earnings?
the Philippines
A: No, there must be a comparison to be made first of the earnings
and paid up capital which are found in a company‘s financial
TAX ON IMPROPERLY ACCUMULATED EARNINGS
statements.

IMPROPERLY ACCUMULATED EARNINGS TAX
Improperly accumulated earnings tax (IAET) is a penalty tax imposed
on corporations for permitting its earnings to accumulate instead of
being distributed for the purpose of avoiding income tax on its
shareholders or members. It is a penalty imposed to discourage
accumulation of income beyond the reasonable needs of the business.
This is a penalty to corporation if it fails to declare dividends to
shareholders. It is not automatic for a corporation to be subject to
IAET if it doesn‘t declare dividends.
We use the immediacy test and look at the purpose for the non-
declaration.
Standard for knowing whether it is beyond reasonable means
There will be no IAET imposed if the company is holding earnings
within reasonable means of business. Compare the par-value (the paid
up capital of the company) with the earnings also known as retained
earnings.
The balance sheet, located in the financial statement, tells us the
financial position of the company, indicating its assets, liabilities and
the capital contributed by the owners.
In the portion for stockholders‘ equity, you will see paid-up capital and
retained earnings. To be technical about it, your paid-up capital will
have several components: common shares, preference shares
depending on the type of shares issued by the corporation.
The retained earnings accounts for the total income that the company
had for the past years of operation. All incomes from past to present
will be accumulated, that is why it is termed retained earnings,
meaning it is held by the company and not distributed.
In applying IAET, earnings found in the Retained Earnings account will
be compared with the paid-up capital. Ordinarily, it is equivalent to the
par values of the shares of stock. A par value is an assigned value of
the shares which are determined by the incorporators, as stated in the
articles of incorporation of the corporation. These articles are like the
birth certificate of the corporation.

Q: If shareholders invested 1M and the corporation never declared

EVIDENCE OF PURPOSE TO AVOID INCOME TAX
Sec. 29 (C) of the NIRC
Evidence of Purpose to Avoid Income tax
1. Prima Facie Evidence. - the fact that any corporation is a
mere holding company or investment company shall be
prima facie evidence of a purpose to avoid the tax upon its
shareholders or members.
2. Evidence Determinative of Purpose. - The fact that the
earnings or profits of a corporation are permitted to
accumulate beyond the reasonable needs of the business
shall be determinative of the purpose to avoid the tax upon
its shareholders or members unless the corporation, by the
clear preponderance of evidence, shall prove the contrary.
HOLDING COMPANIES
In a holding company, the tax code provides that the mere holding is a
prima facie evidence of improperly accumulated earnings.
You will have the burden of proving that you are holding earnings for
reasonable business. The fact of holding alone is a prima facie
evidence. There is no need to compare paid-up capital with retained
earnings.
dividends from Year 1 to Year 10 so it has retained earnings of 10M, is
there improperly accumulated tax?
A: Yes, you are said to be holding beyond the reasonable means of the
business by simply comparing RE to the paid up capital because RE is
more than 100% already. You are now considered improperly
accumulating earnings.
Exceptions
IAET is inapplicable even if RE is greater than paid-up capital
1. Expansion projects – company is justified because it is
very costly to expand your business
2. Loan obligations or debt covenants which compel you
not to declare dividends until the loan has been repaid –
most likely, the creditors will of the corporation will not allow
distribution to stockholders without first satisfying repaying
their loans
3. Contingencies – includes those for contingencies such as
typhoons, other natural calamities, or pending litigations;
this needs to be justified for its appropriation (Retained
Earnings in the financial statement becomes RE-
Appropriated which can only be used for a specific purpose).

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In sum, when RE is in excess of paid-up capital, this is only prima facie 5. Resident foreign corporation registered as branches because
evidence for application of IAET. Corporations may not be subject to it has no capital of its own in the Philippines.
this tax if they can prove the three conditions previously mentioned.
6. Publicly held corporations
TRUST FUND DOCTRINE
7. International Carriers because they are taxed at 2.5% based
on Gross Philippine Billings
TRUST FUND DOCTRINE
8. Non-stock non-profit educational institutions if income from
Corporate assets are held as a trust fund for the benefit of unrelated activities is 50% or less of the total gross income
shareholders and creditors and the corporate officers have a fiduciary using the predominance test
duty to deal with them properly. The subscribed capital stock of the
corporation is a trust fund for the payment of debts of the corporation Tax on partnership
which the creditors have the right to look up to satisfy their credits. A and B trading partnership has the following income:
The creditors can use it to reduce the debts, unless it has passed into
the hands of a bona fide purchaser without notice. Gross Sales 1,000,000
Cost of Sales 500,000
This is the reason for the comparison of the paid-up and retained Gross Income 500,000
earnings. Creditors can go up to the paid-up capital. The corporations Expenses 200,000
are only required to maintain the paid up capital for the protection of Taxable Income 300,000
the creditors and capital/ investment cannot be withdrawn. This is the Tax rate 30%
trust fund doctrine which provides that you cannot diminish your paid- Taxable Due and Payable 90,000
up capital. Net Income after tax 210,000

CORPORATIONS SUBJECT TO IAET Constructive receipt doctrine

The 210,000 income will be distributed to partners A and B.
Partnerships follow constructive receipt doctrine. It is as if they already
CORPORATE TAXPAYERS THAT ARE SUBJECT TO IAET
received the income of the partnership even if it is not actually
declared. It is as if A and B already earned 105,000 each.
Those that are subjected to Net Income Tax
5) Domestic Corporation
Partners A and B will be taxed on the year that the partnership earned
6) Resident Foreign Corporations
income at a rate of 10% final tax. It is as if it is a dividend received
7) Proprietary Educational Institutions
from a corporation.
8) Non-stock, non-profit educational institutions – if income
from unrelated activities is more than 50% of the Total
The 10% is applicable to resident citizen, resident alien, or non-
Gross Income because it will be subject to the 30% NCIT
resident citizen, 20% if NRA-ETB and 25% for NRA-NETB.
Note: IAET is just like MCIT it is also applied to Corporations which
Q: Can a partnership be subject to IAET?
are subject to NIT. If 30% NIT is used or 2% MCIT, IAET can apply.
A: No, because there is constructive receipt of dividend. It is as if the
Important: If they are not subject to Normal Income Tax (NIT), IAET
amount has already been distributed for tax purposes and so there is
does not apply.
no accumulation of earnings here. In fact, you already paid taxes for
the income. There is no IAET for general professional partnership or
EXCEPTIONS TO IAET trading partnership because both follow constructive receipt doctrine.

Moreover, there is no retained earnings and paid-up capital for

Sec. 29 (B) (2) of the NIRC partnership because you don‘t base it on shares of stocks. There is
The improperly accumulated earnings tax as provided for under this partner‘s equity and shareholder‘s equity. Partnership will only have
Section shall not apply to: partner‘s interest.
1) Publicly-held corporations;
2) Banks and other nonbank financial intermediaries; and General professional partnership
3) Insurance companies. Will your answer change if this is a general professional partnership? If
A and B formed a law firm with the following:
EXCEPTIONS TO IAET
Gross Receipts 1,000,000
IAET is not applicable to the following: Cost of Services 500,000
Gross Income 500,000
1. Partnerships, whether general professional or trading Expenses 200,000
partnership Taxable Income 300,000

This is because of the constructive Receipt Doctrine where
partners received income constructively. There is no retained
earnings and paid up capital in a partnership, there is only
partners interest hence this cannot be compared to RE.
2. Bank and non-bank financial institutions
3. Insurance companies
4. PEZA registered companies because they are subject to 5%
tax on gross income
A general professional is not subject to tax so there is no tax due and
payable for this type of partnership. When it is distributed to partners
A and B, it will still follow constructive receipt doctrine. It will be
distributed by dividing 300,000 equally. Each partner receives 150,000
and this amount will be treated as an ordinary income of an individual
– this is the partner‘s distributive share in a general professional
partnership. This will then be subject to the dumping ground
computation of 0-35%.
Take note of the difference between the two types of partnerships and
how they are taxed.

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Q: Is it possible that the payment is lesser than the par value?

COMPUTATION
Sec. 29 (D) of the NIRC
Improperly Accumulated Taxable Income. — For purposes of this
Section, the term 'improperly accumulated taxable income' means
taxable income adjusted by:
(1) Income exempt from tax
(2) Income excluded from gross income
(3) Income subject to final tax; and
(4) The amount of net operating loss carry-over deducted
And reduced by the sum of:
(1) Dividends actually or constructively paid; and
(2) Income tax paid for the taxable year.
A: Yes, but they would be considered watered stocks and it is illegal.
Under the Corporation Code, if shares are issued for the first time,
these should not be issued at below par value. But it is possible to sell
it at lower or higher amount subsequent to the first issuance.
Illustration
Very Easy, Inc., a resident foreign corporation already operating for a
decade, was struggling for 2 years due to the calamities which beset
its principal place of business and has incurred an operating loss of
P100,000 during the said year. It already applied 60% of the operating
loss during the succeeding years.
Given the following:

Provided, however, that for corporations using the calendar year basis, Gross Sales P8,000,000
the accumulated earnings tax shall not apply on improperly Sales Returns and Allowances 200,000
accumulated income as of December 31, 1997. In the case of Sales Discounts 300,000
corporations adopting the fiscal year accounting period, the improperly Cost of Goods Sold 2,500,000
accumulated income not subject to this tax, shall be reckoned, as of Business Expenses 500,000
the end of the month comprising the twelve (12)-month period of Dividends from Domestic Corp 35,000
fiscal year 1997-1998 Interest Income:
Interest Income from Long-term Investments
Rate: IAET is 10% of improperly accumulated earnings. (More than 5 years) 10,000
Philippine Currency Deposit 15,000
This is a penalty tax so the government wants to tax you for all of your Capital Gains on Sale of Land held for 12 years
income. You add back NOLCO because it is supposed to be only a (Selling price is P6,000,000) 200,000
reprieve given by the government before because you incurred losses. Capital Gains on Sale of Shares directly to buyer 200,000
However, this NOLCO was actually deducted when you computed for Dividends paid and constructively paid 300,000
your taxable income.
The equity section of Very Easy Inc.‘s current statement of financial
Taxable income: Items of Gross income less allowable deductions position reflects the following:

Exempt income: Inter-corporate dividends Common shares P1,000,000

Retained Earnings – Unappropriated 1,600,000
Excluded: Life insurance proceeds (LAGCIRM) Retained Earnings – Appropriated for Expansion Projects 1,000,000
Total Shareholders‘ Equity 3,600,000
Final tax: Passive income, interest income from bank deposits,
royalties, prizes and winnings, etc. Discuss the taxability of Very Easy, Inc. for 2018.

Income tax actually paid: Tax imposed for taxable and passive First, we will compute the taxable income.
income; if you paid MCIT, you will use this in the computation
Taxable Income
Important: This is sir‘s favorite tax because it will show sir if we
understand corporate taxation because a lot of things must be Gross Sales P 8,000,000
considered. It is, according to sir, a very comprehensive tax. Less: Sales Returns and Allowances (200,000)
Sales Discounts (300,000)
IAET Net Sales P 7,500,000
Less: Cost of Goods Sold (2,500,000)
Taxable income P xxx Gross Income P 5,000,000
Add: Less: Business Expenses (500,000)
Income exempt from tax xxx Net Income 4,500,000
Income excluded from gross income xxx Add: Capital Gain on Sale of Land 200,000
Income subject to final tax xxx Less: NOLCO (100,000*40%) (40,000)
NOLCO xxx Taxable Income P 4,660,000
Less:
Dividends actually or constructively paid (xxx) MCIT
Income tax actually paid (xxx) Take note that Very Easy Inc. has been operating for a decade, so it
can already avail of NOLCO. Moreover, 60% had already been applied,
Improperly accumulated taxable income P xxx
so Gross
for theIncome
current year, only the remaining 40% will beP deducted.
5,000,000
Multiplied by the tax rate 10%
Multiplied by the Tax Rate 2%
Improperly accumulated earnings tax P xxx
Tax Due
Second, we and Payable the tax due and payable. ItPis based
will compute 100,000
on the
NCIT of 30% since Very Easy, Inc. is a resident foreign corporation.
Paid-up capital IAET
This is the par value of the share stated in the articles of incorporation. NCIT
For IAET, you only account for the par value. The excess of the paid Taxable income P 4,660,000
up capital is called the share premium which are all found in the Add:
Taxable Income P 4,660,000
financial statement. In the exam, sir will tell us the amount of paid-up Income exempt
Multiplied by thefrom tax:
Tax Rate 30%
capital and there is no need for us to compute. Dividend Income 35,000
Tax Due and Payable P 1,398,000
Interest income on long-term investment 10,000
Income excluded from gross income -
Income subject to final
UNIVERSITY OF SANtax:CARLOS COLLEGE OF LAW 108 | P a g e
Interest Income from Phil. Currency deposit 15,000
Capital Gains on sale of shares 200,000
NOLCO 40,000
TAXATION LAW I l Atty. Amago l Updated by JCV 2017-2018

After computing the NCIT, we will compare it with the MCIT.

INCOME TAX EXEMPT ENTITIES

MCIT
Sec. 30 of the NIRC
Exemptions from Tax on Corporations. — The following organizations
Gross Income P 5,000,000 shall not be taxed under this Title in respect to income received by
Multiplied by the Tax Rate 2% them as such:
Tax Due and Payable P 100,000
(A) Labor, agricultural or horticultural organization not organized
Since MCIT of P100,000 is lower than the NCIT of P1,398,000, the tax principally for profit;
due will be based on the NCIT.
(B) Mutual savings bank not having a capital stock represented by
Third, we will look for indications of improperly accumulated earnings. shares, and cooperative bank without capital stock organized
At this point, we will compare the retained earnings not appropriated and operated for mutual purposes and without profit;
for reasonable needs of the business with the paid-up capital.
(C) A beneficiary society, order or association, operating for the
exclusive benefit of the members such as a fraternal
Compare RE with Paid-up Capital organization operating under the lodge system, or a mutual aid
association or a nonstock corporation organized by employees
RE – unappropriated P 1,600,000 providing for the payment of life, sickness, accident, or other
Paid-up capital 1,000,000 benefits exclusively to the members of such society, order, or
Difference P 600,000 association, or nonstock corporation or their dependents

(D) Cemetery company owned and operated exclusively for the

There is an excess of P600,000. This is an indication that earnings benefit of its members.
have been accumulated beyond the reasonable needs of the business.
(E) Non-stock corporation or association organized and operated
Fourth, we will compute for the improperly accumulated earnings. exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net
Improperly Accumulated Earnings income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Taxable income P 4,660,000
(F) Business league, chamber of commerce, or board of trade, not
Add:
organized for profit and no part of the net income of which
Income exempt from tax:
inures to the benefit of any private stockholder or individual.
Dividend Income 35,000
Interest income on long-term investment 10,000
(G) Civic league or organization not organized for profit but operated
Income excluded from gross income -
exclusively for the promotion of social welfare.
Income subject to final tax:
Interest Income from Phil. Currency deposit 15,000
(H) A non-stock and nonprofit educational institution.
Capital Gains on sale of shares 200,000
NOLCO 40,000
(I) Government educational institution.
Total P 4,960,000
Less: (J) Farmers' or other mutual typhoon or fire insurance company,
Dividends actually or constructively paid (35,000) mutual ditch or irrigation company, mutual or cooperative
Income tax actually paid:
telephone company, or like organization of a purely local
NCIT (1,398,000) character, the income of which consists solely of assessments,
Final tax on interest income on Peso Deposit (3,000) dues, and fees collected from members for the sole purpose of
Final tax on sale of shares (30,000) meeting its expenses; and
Improperly Accumulated Taxable Income P 3,229,000
(K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
We will follow the formula stated in the tax code so we will not include
products of its members and turning back to them the proceeds
the appropriation for the expansion projects in the computation.
of sales, less the necessary selling expenses on the basis of the
quantity of produce finished by them.
Fifth, we will determine the IAET for the year.
Notwithstanding the provisions in the preceding paragraphs, the
IAET income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their
Improperly Accumulated Taxable Income P 3,229,000 activities conducted for profit regardless of the disposition made of
Multiplied by the Tax Rate 10% such income, shall be subject to tax imposed under this Code.
Improperly Accumulated Earnings Tax P 322,900
EXEMPTIONS FROM TAX ON CORPORATIONS

Therefore, Very Easy, Inc. will pay IAET of P322,900 on its improperly
accumulated earnings.
In addition, Very Easy, Inc. will pay NCIT of P1,398,000 on its net
income for the year, as well as final taxes of P3,000 for the interest
income on its Philippine Currency deposit and P30,000 for the capital
gains on the sale of shares directly to the buyer.
Generally, corporations under this title shall not be taxed because they
are not intended for profit. If ever they earn income it is simply used
to realize their purpose or perpetrate whatever is their occupation.
Even if the Tax Code provides that these are exempted from taxes,
there are instances when these corporations can be subjected to tax:

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1. Earned income of whatever kind and character by using their
property, real or personal.
Ex. use cemetery as a venue for a concert
2. Income from activities conducted for profit.
Example: Fraternal Organizations registered under the BIR for
them to be subject to tax, they should be earning income. They
sell reviewer, the proceeds for that will be taxed.
Common denominator among all of them is that they‘re not intended
for profit, usually for the benefit of their members only or to help
government extend services to the people as in the case of educational
institutions.
Even if non-stock, non-profit educational institutions are not included
or expressly mentioned in the tax code, they are still exempt because
they are exempt under the 1987 Constitution.
Moreover, Article XIV, Section 4 of the Constitution provides that: ―All
revenues and assets of non-stock, non-profit educational institutions
used actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon the
dissolution or cessation of the corporate existence of such institutions,
their assets shall be disposed of in the manner provided by law.‖
Non-stock, non-profit educational institutions are not subject to tax or
costumes duties for all revenues including real property tax for as long
as the income are actually, directly or exclusively used for educational
purposes. So, even if they are not listed in the tax code, they will still
be exempted because of the provision in the constitution.
Q: There is a cemetery corporation and a concert organizer asks that
the cemetery be the venue for a concert, paying 1M for the use of the
property. The cemetery will use the proceeds for maintenance. Will
this be taxable as income of the cemetery corporation?
A: Yes, as provided in the last paragraph of Sec 30 of the Tax Code
that income of whatever kind and character of the foregoing
organizations from any of their properties, real or personal, even if not
for profit, may still be subject to tax.
This is income from the use of property, regardless of disposition of
income, is subject to tax.
If the cemetery corporation itself is organizing the concert and then it
sells tickets for the concert, this will be subject to tax even if it will be
for the building of the chapel in the cemetery. Regardless of the
disposition of the income, it is still subject to tax.
While they are exempted from taxes, if they earn income from use of
property or from any activity for profit, regardless of the disposition of
the income, it will be subject to tax.
ACCOUNTING PERIOD
Sec. 43 of the NIRC
General Rule. — The taxable income shall be computed upon the basis
of the taxpayer's annual accounting period (fiscal year or calendar
year, as the case may be) in accordance with the method of
accounting regularly employed in keeping the books of such taxpayer;
but if no such method of accounting has been so employed, or if the
method employed does not clearly reflect the income, the computation
shall be made in accordance with such method as in the opinion of the
Commissioner clearly reflects the income. If the taxpayer's annual
accounting period is other than a fiscal year, as defined in Section
22(Q), or if the taxpayer has no annual accounting period, or does not
keep books, or if the taxpayer is an individual, the taxable income shall
be computed on the basis of the calendar year.
ACCOUNTING PERIOD
General taxable period of taxpayers is 12 months (year) that is why it
is called a taxable year.
Calendar Year
A calendar year is an accounting period of 12 months ending on the
last day of December.
It is from January 1 to December 31.
Fiscal Year
A fiscal year is an accounting period of 12 months ending on the last
day of any month other than December.
For example, the period is from May 1 to April 30 of the following year.
Accounting period
Individuals can only choose calendar year and there are no exceptions
here. Corporations can choose either fiscal or calendar year.
We use calendar or fiscal year because income tax is based on your
yearly profits. You need to know your 12-month period to know if it
falls in the yearly profit of the taxpayer.
Deductions
Deductions incurred during the taxable year or the 12-month period
may be deducted for the income during the year. If it is an individual
taxpayer, it must be from those made during the January 1 to
December 31. Corporations may choose any 12-month period.
CHANGE OF ACCOUNTING PERIOD
Sec. 47 of the NIRC
Final or Adjustment Returns for a Period of Less than Twelve (12)
Months. —
(1) Returns for Short Period Resulting from Change of
Accounting Period. — If a taxpayer, other than an
individual, with the approval of the Commissioner, changes
the basis of computing net income from fiscal year to
calendar year, a separate final or adjustment return shall be
made for the period between the close of the last fiscal year
for which return was made and the following December 31.
If the change is from calendar year to fiscal year, a separate
final or adjustment return shall be made for the period
between the close of the last calendar year for which return
was made and the date designated as the close of the fiscal
year. If the change is from one fiscal year to another fiscal
year, a separate final or adjustment return shall be made for
the period between the close of the former fiscal year and
the date designated as the close of the new fiscal year.
(2) Income Computed on Basis of Short Period. — Where
a separate final or adjustment return is made under
Subsection (A) on account of a change in the accounting
period, and in all other cases where a separate final or
adjustment return is required or permitted by rules and
regulations prescribed by the Secretary of Finance, upon
recommendation of the Commissioner, to be made for a
fractional part of a year, then the income shall be computed
on the basis of the period for which separate final or
adjustment return is made.
CHANGE OF ACCOUNTING PERIOD
There are three situations contemplated under the tax code.
1. Change from fiscal year to calendar year
2. Change from calendar year to fiscal year
3. Change from one fiscal year to another fiscal year
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Short period return
The taxpayer must file a short period return (less than twelve months)
in order to change their taxable year type.
If you want to change your accounting period from calendar year to
fiscal year, say from January to December calendar year to June to
May fiscal year, the short period return covers January 1 to May 31.
It is from your last/old ending (Jan 1) to your new ending (May 31) of
the same year, following the rule that you have to exclude the first day
include the last day. Supposedly you end in December but now you
will be ending in June.
If you want to change your accounting period from fiscal year to
calendar year, say from June 1 to May 31 fiscal year to January 1 to
December 31 calendar year, the short period return covers June 1 to
December 31.
If you want to change your accounting period from one fiscal year, for
example, ending on May 31 to another fiscal year ending on November
31, then the short period return will cover the period from May 31 to
November 31.
CORPORATE INCOME TAX RETURNS
Frequency of Filing
Corporations shall file their income tax returns quarterly.
When Filed
The corporate quarterly income tax declaration shall be filed within 60
days from the close of each of the first 3 quarters of the taxable year.
The final adjustment return shall be filed on or before the 15 th day of
the 4th month following the close of the taxable year.
Fiscal Adjustment Return
When the quarterly tax payments made is not equal to the total tax
due for the taxable year, the corporation has the option to:
1. Pay the balance of the tax still due or
2. Carry-over the excess credit or
3. Be credited or refunded with the excess
Once the option to carry-over and apply the excess quarterly income
tax against income tax due for the taxable quarters of the succeeding
taxable years has been made, such option shall be considered
irrevocable for that taxable period and no application for cash refund
or issuance of a tax credit certificate shall be allowed.
TN: The option is not automatic and it is irrecoverable for the quarter.
Where filed
The quarterly income tax declaration and final adjustment return shall
be filed with the
1. Authorized Agent Banks – if there is payment
2. Revenue District Officer – if there is no payment
3. Collection Agent or Duly Authorized Treasurer – city or
municipality having jurisdiction over the location of the
principal office of the corporation or place where its main
books of accounts and other data from which the return is
prepared are kept
4. Office of the Commissioner – if there is no legal residence or
principal place of business in the Philippines
Pay-as-you-file
The income tax due on the corporate quarterly returns and the final
adjustment income tax returns shall be paid at the time the declaration
or return is filed.
METHODS OF ACCOUNTING
TYPES OF ACCOUNTING METHOD
TYPES OF ACCOUNTING METHOD
Cash Basis
This method generally reports income upon cash collection and reports
expenses upon payment.
You account for income whenever you receive income/cash. When you
dispense cash, you recognize an expense.
Accrual Basis
This method generally reports income when earned and reports
expenses when incurred.
You account for income the moment there is a right to earn that
income and you claim deductions when there is an obligation to pay,
regardless of whether there is cash received or dispensed. This follows
the rule on constructive receipt.
Mixed/Hybrid
Combination of the cash and accrual method
Other Methods
The taxpayer may use special methods of reporting income when the
nature of its operation is peculiar to the business industry. These
methods include the following:
1. Percentage of completion (POC) method – used in
accounting for long-term contracts
2. Installment method – used in accounting for
a. Sales of dealers in personal property
b. Casual sales of personal property
c. Sales of realty
d. Sales of real property considered as capital asset
LONG-TERM CONTRACTS
Sec. 48 of the NIRC
Accounting for Long-term Contracts. - Income from long-term
contracts shall be reported for tax purposes in the manner as provided
in this Section. As used herein, the term ' long-term contracts'
means building, installation or construction contracts covering a period
in excess of one (1) year. Persons whose gross income is derived in
whole or in part from such contracts shall report such income upon the
basis of percentage of completion. The return should be accompanied
by a return certificate of architects or engineers showing the
percentage of completion during the taxable year of the entire work
performed under contract. There should be deducted from such gross
income all expenditures made during the taxable year on account of
the contract, account being taken of the material and supplies on hand
at the beginning and end of the taxable period for use in connection
with the work under the contract but not yet so applied. If upon
completion of a contract, it is found that the taxable [net] income
arising thereunder has not been clearly reflected for any year or years,
the Commissioner may permit or require an amended return.
LONG-TERM CONTRACTS
Long-term contracts refer to building, installation or construction
contracts covering a period of more than one year.
If the contract itself has a period of more than one year, that‘s
considered a long-term contract. If it involves service of constructing,
then it is called a construction contract.
Income from Long-term Contracts
When income is derived from long-term construction contracts, it is
generally reported on the basis of percentage of completion made
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every year that will be evidenced by the certificates of engineers or Percentage of Completion: (as provided)
architects. The reportable income is calculated by deducting from the 1st year: 30%
contract price the actual cost of construction. 2nd year: 30%
3rd year: 20%
For taxation purposes, the Percentage of Completion Method is used. 4th year: 20%
Duration of Contract: 4 Years
PERCENTAGE OF COMPLETION METHOD
3rd Step: Determine Income per year
The gross income is reported gradually based on the accomplished We already determined the total income. That is 20 for the whole
percentage of construction. The burden of paying tax is spread over contract. Lastly, we need to know what is the income received by the
the term of the contract. Contractor per year. In most cases, the income would just be
proportional to the work done per year. That means, for example,
Illustration: 30% of work done in the 1st year, means 30% of the total income is
given or earned by the contractor for that year. In other words, for the
Percentage of Completion Method
1st year, 30% of 20M is 6M. The contractor earned 6M income for that
Long-term Construction Contract year. If you add everything diba? This is still 20M? This is just broken
down according to work done per year.
2017 2018
Contract Price P 50,00,000 P 50,00,000 Income per year = Percentage of work Done for that particular year x
Cost of Construction (30,000,000) (30,000,000) Income
Gross Income P 20,000,000 P 20,000,000
Multiply by Payment Received by Contractor:
Percentage of Completion 30% 30% 1st year: 30%work done so income earned is 30% of 20M = 6M
Gross Income to Date P 6,000,000 P 6,000,000 2nd year: 30% work done so income earned is 30% of 20M = 6M
Multiply by Tax Rate 30% 30% 3RD year: 20% work done so income earned is 20% of 20M = 4M
Tax Due P 1,800,000 P 1,800,000 4th year: 20% work done so income is earned 20% of 20M = 4M

2019
2019 2020
2020 4th Step: Determine Tax on Income per Year
Contract
Contract Price
Price P
P 50,00,000
50,00,000 P
P 50,00,000
50,00,000 What‘s left to do is to tax the income per year. Multiply the income per
Cost of
Cost of Construction
Construction (30,000,000)
(30,000,000) (30,000,000)
(30,000,000) year by 30% (Corporate Income Tax Rate). For example the income of
Gross Profit P 20,000,000 P 20,000,000 1st year is 6M, 30% of 6M is 1.8M. This is the tax per year. Assuming
Multiply by
Multiply by there are no other expenses to be deducted from taxable income. The
Percentage
Percentage ofof Completion
Completion 20%
20% 20%
20% income tax per year will total 6M, which is actually 30% of your total
Gross Income
Gross Income toto date
date P
P 4,000,000
4,000,000 P
P 4,000,000
4,000,000 income of 20M. We just broke it down according to percentage of
Multiply by Tax Rate 30% 30% work, so that the tax can be paid by installments using Percentage of
Tax Due
Due P 1,200,000 P 1,200,000 Completion Method
Tax P 1,200,000 P 1,200,000
st
1 step: Determine Income Tax for year = Corporate income tax rate X income per year
First we must determine the Contract Price and the cost of
construction to determine the income. These are stated in the long 1st Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 1 st year)
term contract, and these figures represent the whole contract price 2nd Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 2 nd year)
and the whole cost of construction, not just per year. Then let‘s 3rd Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 3 rd year)
subtract Total Contract Price and Cost of Construction, to get the 4th Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 4 th year)
income. Then let‘s assume that this is the only income that the
contractor gets. The income is 20 Million for the whole undertaking. Understand this principle, because basically, you are just paying the
tax in proportion to the income that you have received for that year.
Total Contract Price (TCP) – Cost of Construction (CoC) = Income There is no difference in the total tax that you actually have to pay for
the whole transaction. You just broke it down. You did not yet receive
Total Contract Price: 50 Million the full payment for the year so why pay tax for the whole thing in
Cost of Construction: 30 Million that same year? The provision gives you this option. If you understand
TCP – CoC = Income = 20 Million this, that it can be applicable to Transactions on Installment basis of
sales of Dealers and even to casual sales of real and personal property
2nd Step: Determine Percentage of Completion with just some minor differences and qualifications peculiar to each
The next step would be to determine the percentage of completion. provision. Just change the income per year to installments paid.
(Sir did not mention this directly, but he also deemed the duration of
the contract as one of the important factors to note). (Retention amount in contracts of construction discussion omitted
since deemed not relevant)
What we need to determine is the percent of completion for that year
only. In other words, how much work was done for that year. So, for Anyway as lawyers, you will only be asked what to use on long term
the first year how much work was done? Let‘s just say 30 percent. Contracts. And your answer should be Percentage of Completion Basis.
How about the second year? What was the work done? Let‘s just say
another 30 %. The Percentages of completion are given in this To get the tax due per year, multiply the percentage of completion per
problem. year to the total contract price then multiply it by the gross profit rate
and finally multiply it by the tax rate.
This is the percent of work done per year in relation to the building
(100%). This data means that for example, in the 1 st year, 30% of the In short: Tax Due = Percentage of Completion x Total Contract Price x
building was constructed. Subsequently, another 30% of the building Gross Profit Rate x Tax Rate
was done on the 2nd year. Hence by the 2 nd year, a total of 60% of
the building has already been constructed. Apply by analogy to the Contract Price P 50,000,000 100%
rest of the years in the example. Therefore, after four years, the total Less: Costs (30,000,000) (60%)
would then be 100% percentage of work, meaning, the building would Gross Profit P 20,000,000 40% Gross Profit Rate
be done in 4 years.

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Cumulative Current Gross GP Current Tax Tax SALES OF REALTY & CASUAL SALES OF PERSONAL PROPERTY
POC POC Profit Rate GP Rate Due
2017 30% - 15M 40% 6M 30% 1.8M This provision covers:
2018 60% 30% 15M 40% 6M 30% 1.8M 1. A casual sale (meaning you don‘t regularly sell real property)
2019 80% 20% 10M 40% 4M 30% 1.2M or other casual disposition of personal property (not included
2020 100% 20% 10M 40% 4M 30% 1.2M in the inventory) for a price exceeding P1,000 or
20M 6M 2. A sale or other disposition of real property

Provided that the initial payments of either case do not exceed 25%
SALES OF DEALERS IN PERSONAL PROPERTY of the selling price

Sec. 49 (A) of the NIRC Initial Payments

Sales of Dealers in Personal property. - Under rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income
therefrom in any taxable year that proportion of the installment
payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the total
contract price.
Sec. 49 (D) of the NIRC
Change from Accrual to Installment Basis . - If a taxpayer entitled to
the benefits of Subsection (A) elects for any taxable year to report his
taxable income on the installment basis, then in computing his income
for the year of change or any subsequent year, amounts actually
received during any such year on account of sales or other dispositions
of property made in any prior year shall not be excluded.
SALES OF DEALERS IN PERSONAL PROPERTY
The provision covers transactions wherein:
1. The contract has a stipulation for payment in installments
and
2. The seller regularly sells personal property on installment
INSTALLMENT METHOD
Under the installment method, the taxpayer may report income over
the several taxable years in which collections are made based on the
terms of payment.
Generally, the reportable income derived on installment sale is the
proportion of installment collection actually received during the year in
relation to the gross profit and contract price.
Formula
These refer to the payments received in cash or property (other than
evidence of indebtedness of the buyer) during the taxable year in
which the sale is made. It includes the downpayment and installments
received in the year of sale.
Illustration:
For example, the contract of sale for Personal Property provides that
the ―Selling Price is 1M with a Down Payment of 10%, where 10%
installments are to be paid every year for the next 9 years starting on
the year of sale.‖ Cost is 500k.
Selling Price = 1M
Down Payment = 10% of selling Price = 100k
Installments = 10% of selling Price = 100k
There is a stipulation for a Down Payment of 100k (10% of 1M).
However, there is also a stipulation that the 1st installment of 100k
should be paid within the year of sale. Therefore, the Initial Payments
include the Down Payment and the First Installment as these are the
payments made within the year. Always take into account the
installments paid within the year.
In this case, the total Initial Basis (Synonymous with Initial Payments)
is 200k which is 20% of the total selling price. Hence, this provision
can still apply because it has not exceeded 25%. If it were otherwise,
we go to deferred sale, which means just one payment of tax. You pay
tax for the whole thing despite not having received income yet from
the installments.
Now let‘s proceed to the main problem. We are the seller here since
we are the ones who get income out of this.
Accounting method used is different, but same results for easier
understanding. This is similar to the formula used in long term
contracts. Mathematically, there are other faster ways to solve but that
still depends on what is given in the problem. So these steps are used
to emphasize that you pay tax only to the amount of income you
received for that particular year, and for uniformity

1st step: Determine Total Income/Gross profit:

To find the tax, multiply taxable income with the applicable tax rate.
So if it is corporation, use 30%, if it is individual, use 0%-35%. If it is
sale of shares of stock, then use 15%.
SALES OF REALTY & CASUAL SALES
We already know that in the particular problem above, the installment
basis can be applied. So, first we must determine our income. Deduct
the cost of 500K(given in the problem) from the Selling price of 1M.
This is the total income, assuming you did not have any other
expenses that can be deducted besides the cost. In this problem, total
income is 500k.

Selling Price = 1M
Sec. 49 (B) of the NIRC
Down Payment = 10% of selling Price = 100k
In the case (1) of a casual sale or other casual disposition of personal
Installments = 10% of selling Price = 100k
property (other than property of a kind which would properly be Cost = 500K
included in the inventory of the taxpayer if on hand at the close of the
taxable year), for a price exceeding One thousand pesos (PhP1,000),
Selling Price – Cost = Total Income
or (2) of a sale or other disposition of real property, if in either case
1M – 500k = 500K
the initial payments do not exceed twenty-five percent (25%) of the
selling price, the income may, under the rules and regulations
2nd step: Determine Percentage of Installments Paid per year
prescribed by the Secretary of Finance, upon recommendation of the
This is similar to percentage of work done in long term contracts.
Commissioner, be returned on the basis and in the manner above
prescribed in this Section. As used in this Section, the term 'initial
Now we determine the percentage of installments paid within each
payments' means the payments received in cash or property other
year. Why do we do this? Because again, we only pay tax in proportion
than evidences of indebtedness of the purchaser during the taxable
to the income that we receive for that year. The amount in peso of the
period in which the sale or other disposition is made.
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installment received does not really matter in this problem since the
percentages are already given in the contract.
However, if the percentages of Down Payments and Installments are
not given in the problem and what instead is given is the amount of
payment in peso (highly unlikely), just convert that to percentage.
Amount of payments in the year in peso received divided by Total
Selling price. That‘s the percentage.
For the first year, we already know that we take into account the
Down payment and the 1st installment. So that means we actually
received 20% of the total selling price for that year. For the rest of the
years, there is payment of 10%. So basically, we receive 100k for the
succeeding years after the year of sale. This is the case since there is
nothing in the problem that states that there are other payments made
within the 2nd year, 3rd year, etc.
1st year: 10% +10% = 20%
2nd year: 10%
3rd year: 10%
4th year: 10%
And so on and so forth until the 9th year
3rd Step: Determine Taxable Income per year
So now, we determine the income you have received each year, in
relation to the total income. For example, if we get 10% of the total
selling price through installment, it also follows that we earn 10% of
the income. Because for 1M income, we get 500k profit. In other
words, we ask the question again, how much of the total income have
you received in that particular year? We multiply the percentage of the
installment we received by the total income, which is 500k in this case.
This is like multiplying the percentage of the amount of work done, to
the total income in long term contracts.
Hence, for the 1st year, we received 100k as income from the 200k
initial payments paid. On the 2nd year, we have 50k income, for the
100k installment. If you add all these, this is still 500k total income.
1st year: 20% of 500k = 100k
2nd year: 10% of 500k = 50k
3rd year: 10% of 500k = 50k
4th year: 10% of 500k = 50k
5th year: 10% of 500k = 50k
6th year: 10% of 500k = 50k
7th year: 10% of 500k = 50k
8th year: 10% of 500k = 50k
9th year: 10% of 500k = 50k
4th Step: Determine the tax on income per year:
Here, we will multiply the applicable tax rate to the income per year.
In this case, this is corporation so multiply 30% to each taxable
income per year and you will get the tax to be paid per year. For
example in the first year, multiply 100k by 30%. Therefore you pay
30k as tax for the 1st year. Apply by analogy to the other years.
Actually, if you add all the taxes per year, you actually end up with
120k, which is 30% of the Total Income/Gross Profit of 500k.
Tax on income per year = Taxable Income Per Year x Tax Rate
1st year: 100k (30%) = 30k tax due on the first year
2nd – 9th year: 50k (30%) = 15k tax due on the 2nd year
SALE OF REAL PROPERTY CONSIDERED CAPITAL ASSET
Sec. 49 (C) of the NIRC
An individual who sells or disposes of real property, considered as
capital asset, and is otherwise qualified to report the gain therefrom
under Subsection (B) may pay the capital gains tax in installments
under rules and regulations to be promulgated by the Secretary of
Finance, upon recommendation of the Commissioner.
SALES OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET
Illustration: Real Property is sold for 1Million as Selling Price. There is a
stipulation that it shall be paid in 20% installment per year, for 5
years.
Cost = 500k
Zonal Value = 500k
Assessed Value = 700k
Steps:
We determine if the provisions are applicable. 20% is the initial
payment. Which means that installment basis for paying tax is
applicable because it less than or equal to 25%. If the given in
the problem is amount in Peso of the initial payment, compute for
the percentage by following the prior example in sale of personal
property.
Most importantly in this case, we do not anymore subtract the
Cost from the Selling Price because Taxable Income in this case is
not based on Income/Gross Profit. What is applicable here is
Capital Gains Tax, which is 6% of the Zonal Value, Assessed
Value, or Gross Selling Price, whichever is higher.
We determine the total CG tax to be paid which is 6% of Gross
selling price, because in this case, it is the highest.
6% of 1M = 60k
Multiply the installment paid in percentage to the Total CGT. The
result would be the CGT payable for the year. In this case, All
installments are 20%, so you just multiply 20% to Total CGT, in
this case 60,000, and you will arrive at the CGT payable for the
year. It‘s just like dividing the Total CGT by 5 equal installments.
In this case, 12k is the tax payable for each year since all are
equal 20% installments.
20% (60k) = 12k Tax payable for each of the 5 years
What if the installments are not uniform or equal per year? First
get the percentage of the payments in relation to the Gross
selling Price, then multiply it to the Total CGT. You will then arrive
at the CGT payable for that year. For example, given these
additional stipulations in the contract, solve for the CGT per year.
1st installment: 100k
2nd installment: 200k
3rd installment: 250k
4th installment: 250k
5th installment: 200k
Formula
The total of this is still 60,000 which is equivalent to the Total Capital
Gains Tax. The tax is only broken down and spread over the period.
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TAX FREE EXCHANGE

X FREE EXCHANG
TAX FREE EXCHANGE

As a general rule Capital Gains are taxable and Losses are allowed as
deductions. But there are losses not allowed as deductions and there
are gains not subject to tax.

Capital Gains not subject to tax Determine first:

Two instances where there is Tax Free Exchange
1. Merger or Consolidation 1. If five or less of the ten people who transferred the property
2. Exchange of Property for Control accounts for 51% of the shares of the company. Then the
transfers are tax free.
TAX FREE EXCHANGE IN MERGER AND CONSOLIDATION
Example:
Merger: One corporation is subsumed by the other A1 has 10 shares
Example: X and Y merge, the resulting company is either X or Y A6 has 10 shares
A3 has 10 shares
Consolidation: The resulting company is a brand new company A7 has 10 shares
Example: If X and Y consolidate, the resulting Corporation would be Z. A5 has 11 shares

Take note that in a merger or consolidation there is always a Merger The total is 51 shares which is 51% of 100 total shares of
or Consolidation Plan. Corporation X. If just one person accounts for 51%, then it is
tax exempt.
Illustration:
X and Y merged and Y is the surviving Corporation. X happens to own 2. If we need to account for more than five people in order to
a parcel of land worth 1M pesos which it will transfer to Y because of reach 51% shares. Then the transfers are still subject to
the merger. Y owns shares of stock which are not newly issued, which capital gains tax.
it will give to the shareholders of X.
Example:
Normally, the transfer of real property is subject to 6% Capital gains a. A1 has 5 shares
tax and the transfer of shares would be subject to 15% capital gains b. A6 has 5 shares
tax but these transactions are not subject to capital gains tax under c. A3 has 10 shares
these situations. d. A7 has 5 shares
e. A5 has 5 shares

The total is 30 shares, which is 30% of 100 shares in

Corporation X. The transfers are not tax free.

Q: What if what were transferred by the stockholders of Y are not

shares but securities? What if Debt securities (eg. Bonds, Treasury
Bills) and equity securities (eg. Options, Warrants)?

A: It will still not be subject to tax.

TAX FREE EXCHANGE IN EXCHANGE OF PROPERTY FOR

CONTROL

The controlling interest of ―more than 50%‖ contemplated under the

tax code for tax free changes refer to 51% and not 50%+1.

Example: 10 people, named A1 to A10, transferred real property worth

1 million pesos to X corporation in exchange for 51% of the shares of
X corporation. So then, the 10 people will gain control over the
corporation because under the Tax code, Control is ownership of 51%
of the equity interest of the company. Are the transfers tax free?

UNIVERSITY OF SAN CARLOS COLLEGE OF LAW 115 | P a g e