III.

Taxes

a. s34 (C)

(C) Taxes.-

(1) In General. - Taxes paid or incurred within the taxable year in connection with the taxpayer's profession, trade
or business, shall be allowed as deduction, except
(a) The income tax provided for under this Title;
(b) Income taxes imposed by authority of any foreign country; but this deduction shall be allowed in the
case of a taxpayer who does not signify in his return his desire to have to any extent the benefits of
paragraph (3) of this subsection (relating to credits for taxes of foreign countries);
(c) Estate and donor's taxes; and
(d) Taxes assessed against local benefits of a kind tending to increase the value of the property
assessed.
Provided, That taxes allowed under this Subsection, when refunded or credited, shall be included as part
of gross income in the year of receipt to the extent of the income tax benefit of said deduction.

(2) Limitations on Deductions. - In the case of a nonresident alien individual engaged in trade or business in the
Philippines and a resident foreign corporation, the deductions for taxes provided in paragraph (1) of this
Subsection (C) shall be allowed only if and to the extent that they are connected with income from sources within
the Philippines.

(3) Credit Against Tax for Taxes of Foreign Countries. - If the taxpayer signifies in his return his desire to have
the benefits of this paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and of a domestic
corporation, the amount of income taxes paid or incurred during the taxable year to any foreign country;
and
(b) Partnerships and Estates. - In the case of any such individual who is a member of a general
professional partnership or a beneficiary of an estate or trust, his proportionate share of such taxes of the
general professional partnership or the estate or trust paid or incurred during the taxable year to a foreign
country, if his distributive share of the income of such partnership or trust is reported for taxation under
this Title.
An alien individual and a foreign corporation shall not be allowed the credits against the tax for the taxes
of foreign countries allowed under this paragraph.

(4) Limitations on Credit. - The amount of the credit taken under this Section shall be subject to each of the
following limitations:
(a) The amount of the credit in respect to the tax paid or incurred to any country shall not exceed
the same proportion of the tax against which such credit is taken, which the taxpayer's taxable
income from sources within such country under this Title bears to his entire taxable income for
the same taxable year; and
(b) The total amount of the credit shall not exceed the same proportion of the tax against which
such credit is taken, which the taxpayer's taxable income from sources without the Philippines
taxable under this Title bears to his entire taxable income for the same taxable year.

(5) Adjustments on Payment of Incurred Taxes. - If accrued taxes when paid differ from the amounts claimed
as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the
Commissioner; who shall redetermine the amount of the tax for the year or years affected, and the amount of tax
due upon such redetermination, if any, shall be paid by the taxpayer upon notice and demand by the
Commissioner, or the amount of tax overpaid, if any, shall be credited or refunded to the taxpayer. In the case of
such a tax incurred but not paid, the Commissioner as a condition precedent to the allowance of this credit may
require the taxpayer to give a bond with sureties satisfactory to and to be approved by the Commissioner in such
sum as he may require, conditioned upon the payment by the taxpayer of any amount of tax found due upon any
such redetermination. The bond herein prescribed shall contain such further conditions as the Commissioner may
require.

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 (6) Year in Which Credit Taken. - The credits provided for in Subsection (C)(3) of this Section may, at the option
of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year
which the taxes of the foreign country were incurred, subject, however, to the conditions prescribed in Subsection
(C)(5) of this Section. If the taxpayer elects to take such credits in the year in which the taxes of the foreign
country accrued, the credits for all subsequent years shall be taken upon the same basis and no portion of any
such taxes shall be allowed as a deduction in the same or any succeeding year.

(7) Proof of Credits. - The credits provided in Subsection (C)(3) hereof shall be allowed only if the taxpayer
establishes to the satisfaction of the Commissioner the following:
(a) The total amount of income derived from sources without the Philippines;
(b) The amount of income derived from each country, the tax paid or incurred to which is claimed as a
credit under said paragraph, such amount to be determined under rules and regulations prescribed by the
Secretary of Finance; and
(c) All other information necessary for the verification and computation of such credits.

b. Allowable Deduction

Requisites for Deductibility

1. Payments must be for taxes

The word “taxes” means taxes proper and no deduction should be allowed for amounts representing interest,
surcharge, or penalties incident to delinquency.

2. Tax must be imposed by law on, and payable by the taxpayer

Taxes are deductible as such only by the persons upon whom they are imposed by law. Indirect taxes, like the VAT,
passed on by sellers are not deductible by the buyers from their gross income.

3. Paid or incurred during the taxable year in connection with taxpayer’s trade, business or profession.
4. Taxes are not specifically excluded by law from being deducted from the taxpayer’s gross income.

Taxes NOT Deductible

1. Philippine Income Tax

2. Foreign income tax IF taxpayer avails of the foreign tax credit
3. Estate and donor’s tax
4. Special assessments and taxes assessed against local benefits of a kind that tends to increase the value of the
property assessed.
5. Excess electric consumption tax
6. Final taxes being in the nature of income tax

c. Allowable Tax Credit

Tax Credit – It is the right of an income taxpayer to deduct from income tax payable the foreign income tax he has
paid to his foreign country subject to limitation.

When Credit for Taxes may be Taken:

The credit for taxes may ordinarily be taken either in the return for the year in which the taxes accrued or on which the
taxes were paid, depending on the taxpayer’s accounting method being adopted.

Who can claim?

1. resident citizens

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 2. resident aliens under the principle of reciprocity
3. domestic corporations including partnerships except general professional partnership
4. beneficiaries of estates and trusts
5. members of general professional partnerships

Who are not entitled?

1. non-resident citizens
2. aliens, whether residents or non-residents
3. foreign corporations, whether residents or non-residents

Reason: These taxpayers are subject to Philippine income tax only on income derived from sources within the
Philippines.

BIR requirements include proof of:

1. total amount of income derived from foreign sources

2. the amount of income derived from each country, the foreign tax paid or incurred, which is claimed as a credit
3. all other information necessary for the verification and computation of such credit

Limitation of Tax Credit

Limitation A: Per country limitation

Taxable Income from foreign Country

______________________________ X Philippine Income Tax

Taxable Income from all sources

Limitation B: Over-all Limitation

Taxable Income from Outside Sources

_______________________________ X Philippine Income Tax

Taxable income from all sources

RULES:

One foreign country – the allowed credit is the lower between limit A and the foreign income tax paid.

Two or more foreign countries – determine first the lower between limit B and the total foreign income taxes paid.
Then compare the result with limit A, the lower amount is the allowed credit.

d. CIR v. Lednicky GR L-18169 July 31, 1964

PONENTE: J. REYES, J.B.L.

FACTS:

G. R. No. L-18286: The respondents, V. E. Lednicky and Maria Valero Lednicky, are husband and wife, both American
citizens residing in the Philippines, and have derived all their income from Philippine sources for the taxable years in
question.

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Respondents, filed their income tax return for 1956, reporting a gross income of P1,017,287. 65. Pursuant to the
petitioner's assessment notice, the respondents paid the total amount of P326,247.41, inclusive of the withheld taxes.
Later the respondents Lednickys filed an amended income tax return for 1956, which consists of the claimed deduction of
P205,939.24 paid in 1956 to the United States government as federal income tax for 1956. Simultaneously with the filing
of the amended return, the respondents requested the refund of P112,437.90. Petitioner CIR failed to answer the claim for
refund, thus respondents filed their petition with the Tax Court.

G. R. No. L-18169: The same respondents-spouses filed their domestic income tax return for 1955, reporting a gross
income of P1,771,124.63. Later they filed an amended income tax return, on the basis of that amended return, they paid
P570,252.00, inclusive of withholding taxes. After audit, the petitioner determined a deficiency of P16,116.00, which
respondents paid.

However, during that year the Lednickys filed with the U.S. Internal Revenue Agent in Manila their federal income tax
return for the years 1947, 1951, 1952, 1953, and 1954 on income from Philippine. Payment of these federal income taxes,
including penalties and delinquency interest in the amount of P264,588.82, were made in 1955 to the U.S. Director of
Internal Revenue, Baltimore, Maryland, through the National City Bank of New York, Manila Branch. Exchange and bank
charges in remitting payment totaled P4,143.91.

Thus, the said respondents amended their Philippine income tax return for 1955 to include the following deductions: U.S.
Federal income taxes P471,867.32; Interest accrued up to May 15, 1955 P40,333.92; Exchange and bank charges
P4,143.91 for a total of P516,345.15, and therewith filed a claim for refund of the sum of P166,384.00, which was later
reduced to P150,269.00. The respondents brought this suit in the Tax Court.

G. R. No. 21434: The facts are similar, but refer to respondents Lednickys' income tax return for 1957 for which
respondents paid a total sum of P196,799.65. In 1959, they filed an amended return for 1957, claiming deduction of
P190,755.80, representing taxes paid to the U.S. Government on income derived wholly from Philippine sources. On the
strength thereof, respondents requested the refund of P90 520.75 as overpayment. The Tax Court again decided for
respondents.

TAX COURT’S RULING: The Tax Court held that they may be deducted because of the undenied fact that the
respondent spouses did not "signify" in their income tax return a desire to avail themselves of the benefits on Credits
against tax for taxes of foreign countries -- Alien resident of the Philippines.

ISSUE:

Whether or not private respondents are qualified to avail of the tax credit in the Philippines.

RULING:

NO. We agree with appellant Commissioner that the Construction and wording of Section 30 (c) (1) (B) of the Internal
Revenue Act shows the law's intent that the right to deduct income taxes paid to foreign government from the taxpayer's
gross income is given only as an alternative or substitute to his right to claim a tax credit for such foreign income taxes
under section 30 (c) (3) and (4); so that unless the alien resident has a right to claim such tax credit if he so chooses, he is
precluded from deducting the foreign income taxes from his gross income. For it is obvious that in prescribing that such
deduction shall be allowed in the case of a taxpayer who does not signify in his return his desire to have to any extent the
benefits of paragraph (3) (relating to credits for taxes paid to foreign countries), the statute assumes that the taxpayer in
question also may signify his desire to claim a tax credit and waive the deduction; otherwise, the foreign taxes would
always be deductible, and their mention in the list of non-deductible items in Section 30(c) might as well have been
omitted, or at least expressly limited to taxes on income from sources outside the Philippine Islands.

Had the law intended that foreign income taxes could be deducted from gross income in any event, regardless of the
taxpayer's right to claim a tax credit, it is the latter right that should be conditioned upon the taxpayer's waiving the
deduction; in which Case the right to reduction under subsection (c-1-B) would have been made absolute or unconditional
(by omitting foreign taxes from the enumeration of non-deductions), while the right to a tax credit under subsection (c-3)
would have been expressly conditioned upon the taxpayer's not claiming any deduction under subsection (c-1).

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To allow an alien resident to deduct from his gross income whatever taxes he pays to his own government amounts to
conferring on the latter the power to reduce the tax income of the Philippine government simply by increasing the tax rates
on the alien resident. Every time the rate of taxation imposed upon an alien resident is increased by his own government,
his deduction from Philippine taxes would correspondingly increase, and the proceeds for the Philippines diminished,
thereby subordinating our own taxes to those levied by a foreign government. Such a result is incompatible with the status
of the Philippines as an independent and sovereign state.

DISPOSITIVE PORTION: The decisions of the Court of Tax Appeals are reversed, and, the disallowance of the refunds
claimed by the respondents Lednicky is affirmed, with costs against said respondents-appellees.

e. Guitterez v. Collector 14 SCRA 33

Facts:

Lino Gutierrez was engaged in the business of leasing property for which he paid real estate broker’s privilege tax.
He filed his income tax returns for 1951-1954 and paid the corresponding tax declared.
On July 10,1956, the Commissioner assessed against Gutierrez deficiency income tax.
• 1951 – 1,400

• 1952 – 672

• 1953 – 5,161

• 1954 – 4,608

The deficiency tax came about by the disallowance of deductions from gross income representing depreciation, expenses
he allegedly incurred in carrying on his business and the addition to the gross income of receipts which he did not report
in his income tax returns.
Aside from the disallowance which the Collector classified as personal and capital expenditures, Gutierrez did not declare
in his ITR the income of his wife, overstatement of purchase price or real estate and understatement of profits from sale of
real estate (1953 and 1954)
Gutierrez instituted an appeal to the CTA. Later, Commissioner issued a warrant of distraint and levy on one of the
properties of Gutierrez.
CTA upheld in toto the assessment of the Commissioner. Hence this appeal.

ISSUES:

Are the claims of Gutierrez for deduction proper and allowable?

COURT:

SEC. 30. Deductions from gross income. — In computing net income there shall be allowed as deductions —
(a) Expenses:

(1) In general. — All the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any
trade or business, including a reasonable allowance for salaries or other compensation for personal services actually
rendered; travelling expenses while away from home in the pursuit of a trade or business; and rentals or other payments
required to be made as a condition to be continued use of possession, for the purposes of the trade or business, or
property to which the taxpayer has not taken or is not taking title or in which he has no equity.

To be deductible: an expense must be

(1) ordinary and necessary;

(2) paid or incurred within the taxable year
(3) paid or incurred in carrying on a trade or business

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transportation expenses to attend funeral of his friends and cost of admission tickets to operas WERE EXPENSES
RELATIVE TO HIS PERSONAL AND SOCIAL ACTIVITIES.

Procurement and installation of an iron door to his residence is PURELY PERSONAL EXPENSE. PERSONAL, LIVING
OR FAMILY EXPENSES ARE NOT DEDUCTIBLE.

Expenses incurred in attending the National Convention of Filipino businessmen, luncheon meeting and cruise WERE
MADE IN THE PURSUIT OF HIS BUSINESS.

Car expenses, salary of his driver and car depreciation: there is no clear showing that the car was devoted more for the
taxpayer’s business than for his personal needs. Taxpayer’s car was utilized both for PERSONAL and BUSINESS
NEEDS. Therefore, ½ of the driver’s salary, car expenses and car depreciation is allowed as deduction.

electrical supplies, paint, lumber, plumbing, cement, tiles, gravel, masonry and labor used to repair the taxpayer's rental
apartments did not increase the value of such apartments, or prolong their life: merely kept the apartments in an ordinary
operating condition. EXPENSES INCURRED ARE DEDUCTIBLE AS NECESSARY EXPENDITURES FOR THE
MAINTENANCE OF THE TAXPAYER'S BUSINESS.

Litigation expenses to collect apartment rentals and to eject delinquent tenants are ORDINARY AND NECESSARY
EXPENSES IN PURSUING HIS BUSINESS

NOT DEDUCTIBLE:

1. expenses in watching over laborers in construction work

2. real estate tax which remained unpaid by the former owner of Gutierrez’s rental property
3. iron bars, venetian blind and water pump augmented the value of the apartments where they were installed
4. expenses for the relocation, survey and registration of property
5. depreciation of Gutierrez’s residence because it was not used in his trade or business

fines and penalties which he paid for late payments of taxes: while SECTION 30 allows taxes to be deducted from gross
income, it does not specifically allow fines and penalties to be so deducted. Deductions from gross income are matters of
legislative grace; what is not expressly granted by Congress is withheld.

alms to an indigent family and various individuals, contributions and donations: are not deductible as their recipients have
not been shown to be among those specified by law.

Contributions are deductible when given to the Government of the Philippines or any of its political subdivisions for
exclusively public purposes, to domestic corporations or associations organized and operated exclusively for religious,
charitable, scientific, athletic, cultural or educational purposes, or for the rehabilitation of veterans, or to societies for the
prevention of cruelty to children or animals, no part of the net income of which inures to the benefit of any private
stockholder or individual.

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