TAXATION LAW 2

D. ITEMS OF GROSS INCOME by the insurer under an agreement to pay interest thereon, the
interest payments shall be included in gross income.

SECTION 32. GROSS INCOME. –

(2) Amount Received by Insured as Return of Premium. -
The amount received by the insured, as a return of premiums paid
(A) General Definition. - Except when otherwise provided in this by him under life insurance, endowment, or annuity contracts,
Title, gross income means all income derived from whatever source, either during the term or at the maturity of the term mentioned in
including (but not limited to) the following items: the contract or upon surrender of the contract.

(1) Compensation for services in whatever form paid, (3) Gifts, Bequests, and Devises. - The value of property
including, but not limited to fees, salaries, wages, commissions, and acquired by gift, bequest, devise, or descent: Provided, however,
similar items; That income from such property, as well as gift, bequest, devise or
(2) Gross income derived from the conduct of trade or descent of income from any property, in cases of transfers of
business or the exercise of a profession; divided interest, shall be included in gross income.
(3) Gains derived from dealings in property;
(4) Interests; (4) Compensation for Injuries or Sickness. - amounts
(5) Rents; received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for personal
(6) Royalties; injuries or sickness, plus the amounts of any damages received,
(7) Dividends; whether by suit or agreement, on account of such injuries or
(8) Annuities; sickness.
(9) Prizes and winnings;
(10) Pensions; and (5) Income Exempt under Treaty. - Income of any kind, to
(11) Partner's distributive share from the net income of the the extent required by any treaty obligation binding upon the
general professional partnership. Government of the Philippines.

SECTION. 32 (B) Exclusions from Gross Income. - The following (6) Retirement Benefits, Pensions, Gratuities, etc. -
items shall not be included in gross income and shall be exempt a. Retirement benefits received under Republic Act No.
from taxation under this Title: 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
(1) Life Insurance. - The proceeds of life insurance policies retiring official or employee has been in the service of the same
paid to the heirs or beneficiaries upon the death of the insured, employer for at least ten (10) years and is not less than fifty (50)
whether in a single sum or otherwise, but if such amounts are held years of age at the time of his retirement: Provided, further, That the
benefits granted under this subparagraph shall be availed of by an
 TAXATION LAW 2

official or employee only once. For purposes of this Subsection, the f. Benefits received from the GSIS under Republic Act No.
term 'reasonable private benefit plan' means a pension, gratuity, 8291, including retirement gratuity received by government
stock bonus or profit-sharing plan maintained by an employer for officials and employees.
the benefit of some or all of his officials or employees, wherein
contributions are made by such employer for the officials or
(7) Miscellaneous Items. –
employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus a. Income Derived by Foreign Government. - Income derived
accumulated, and wherein its is provided in said plan that at no time from investments in the Philippines in loans, stocks, bonds or other
shall any part of the corpus or income of the fund be used for, or be domestic securities, or from interest on deposits in banks in the
diverted to, any purpose other than for the exclusive benefit of the Philippines by (i) foreign governments, (ii) financing institutions
said officials and employees. owned, controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial
institutions established by foreign governments.
b. 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 b. Income Derived by the Government or its Political
death sickness or other physical disability or for any cause beyond Subdivisions. - Income derived from any public utility or from the
the control of the said official or employee. exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision
thereof.
c. The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or c. Prizes and Awards. - Prizes and awards made primarily in
nonresident citizens of the Philippines or aliens who come to reside recognition of religious, charitable, scientific, educational, artistic,
permanently in the Philippines from foreign government agencies literary, or civic achievement but only if:
and other institutions, private or public.
(i) The recipient was selected without any action on his
d. Payments of benefits due or to become due to any person part to enter the contest or proceeding; and
residing in the Philippines under the laws of the United States (ii) The recipient is not required to render substantial
administered by the United States Veterans Administration. future services as a condition to receiving the prize or
award.
e. Benefits received from or enjoyed under the Social
Security System in accordance with the provisions of Republic Act d. Prizes and Awards in sports Competition. - All prizes and
No. 8282. awards granted to athletes in local and international sports
competitions and tournaments whether held in the Philippines or
abroad and sanctioned by their national sports associations.
 TAXATION LAW 2

e. 13th Month Pay and Other Benefits. - Gross benefits a. COMPENSATION FOR PERSONAL SERVICES
received by officials and employees of public and private entities:
Provided, however, That the total exclusion under this
subparagraph shall not exceed Ninety thousand pesos (P90,000) - MONEY
which shall cover:
(i) Benefits received by officials and employees of the - IN KIND
national and local government pursuant to Republic Act
No. 6686; i. “CONVENIENCE OF THE EMPLOYER” RULE

(ii) Benefits received by employees pursuant to HENDERSON V. COLLECTOR, 1 SCRA 649

Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986;
Facts: Arthur Henderson is the President of the American Intl.
Underwriters for the Phils. w/c represents a group of American cos.
(iii) Benefits received by officials and employees not engaged in the business of general insurance (exc. in life insurance).
covered by Presidential Decree No. 851, as amended he receives a basic annual salary of P30,000 and allowance for
by Memorandum Order No. 28, dated August 13, 1986; house rentals and utilities. Although he and his wife are childless
and and are only two in the family, they lived in a large apartment
provided for by his employer. As company president, he and his
(iv) Other benefits such as productivity incentives and wife had to entertain and put up houseguests for the company. The
Christmas bonus. (as amended by RA No 10963) BIR now seeks to collect taxes on the allowances for rental and
utilities expenses.
f. GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS,
Medicare and Pag-Ibig contributions, and union dues of individuals. Held: The exigencies of Henderson's high executive position, not to
mention social standing, demanded and compelled them to live in a
more spacious and pretentious quarters like the ones they had
g. Gains from the Sale of Bonds, Debentures or other
occupied. Because they had to entertain and put up houseguests, the
Certificate of Indebtedness. - Gains realized from the same or
employer had to grant him allowances for rental and utilities in
exchange or retirement of bonds, debentures or other certificate of
addition to his annual basic salary to take care of those expenses for
indebtedness with a maturity of more than five (5) years.
rental and utilities in excess of their personal needs. Hence, the fact
that the taxpayers had to live or did not have to live in the
h. Gains from Redemption of Shares in Mutual Fund. - Gains apartment chosen by the employer is of no moment, for no part of
realized by the investor upon redemption of shares of stock in a the allowance redounded to the benefit of the Hendersons. Neither
mutual fund company as defined in Section 22 (BB) of this Code. was there an amount retained by them. Their bills for rental were
paid directly by the employer to the creditor.
 TAXATION LAW 2

HENDERSON V. COLLECTOR, 1 SCRA 649 incidental to his duties of increasing and sustaining the business
of his employer.
Rental allowances and travel allowances by a company are not part
of taxable income. 3) His wife merely accompanied him to New York on a business
trip as his secretary, and at the employer-corporation’s request,
FACTS: for the wife to look at details of the plans of a building that his
employer intended to construct. Such must not be considered
• Sps. Arthur Henderson and Marie Henderson filed their annual
taxable income.
income tax with the BIR. Arthur is president of American
International Underwriters for the Philippines, Inc., which is a  
domestic corporation engaged in the business of general non-life • The Collector of Internal Revenue merely allowed the entrance fee
insurance, and represents a group of American insurance as nontaxable. The rent expense and travel expenses were still held
companies engaged in the business of general non-life insurance. to be taxable. The Court of Tax Appeals ruled in favor of the
taxpayers, that such expenses must not be considered part of
• The BIR demanded payment for alleged deficiency taxes. In their taxable income. Letters of the wife while in New York concerning
computation, the BIR included as part of taxable income: 1) Arthur’s the proposed building were presented as evidence.
allowances for rental, residential expenses, subsistence, water,
electricity and telephone expenses 2) entrance fee to the Marikina ISSUE: Whether or not the rental allowances and travel allowances
Gun and Country Club which was paid by his employer for his furnished and given by the employer-corporation are part of taxable
account and 3) travelling allowance of his wife income?

• The taxpayers justifications are as follows: HELD: NO. Such claims are substantially supported by evidence.
1) as to allowances for rental and utilities, Arthur did not receive
money for the allowances. Instead, the apartment is furnished and These claims are therefore NOT part of taxable income. No part of
paid for by his employer-corporation (the mother company of the allowances in question redounded to their personal benefit, nor
American International), for the employer corporation’s purposes. were such amounts retained by them. These bills were paid directly
The spouses had no choice but to live in the expensive apartment, by the employer-corporation to the creditors. The rental expenses
since the company used it to entertain guests, to accommodate and subsistence allowances are to be considered not subject to
officials, and to entertain customers. According to taxpayers, only income tax. Arthur’s high executive position and social standing,
P 4,800 per year is the reasonable amount that the spouses would demanded and compelled the couple to live in a more spacious and
be spending on rental if they were not required to live in those expensive quarters. Such ‘subsistence allowance’ was a SEPARATE
apartments. Thus, it is the amount they deem is subject to tax. The account from the account for salaries and wages of employees. The
excess is to be treated as expense of the company. company did not charge rentals as deductible from the salaries of
the employees. These expenses are COMPANY EXPENSES, not
2) The entrance fee should not be considered income since it is an income by employees which are subject to tax.
expense of his employer, and membership therein is merely
 TAXATION LAW 2

ii. REVENUE REGULATTION 02-98 corporation transfers to its employees its own stock as
remuneration for services rendered by the employee, the amount of
such remuneration is the fair market value of the stock at the time
(A) Compensation Income Defined. — In general, the term
the services were rendered.
"compensation" means all remuneration for services performed by
an employee for his employer under an employer-employee
relationship, unless specifically excluded by the Code. (2) Living quarters or meals. — If a person receives a salary as
remuneration for services rendered, and in addition thereto, living
quarters or meals are provided, the value to such person of the
The name by which the remuneration for services is designated is
quarters and meals so furnished shall be added to the remuneration
immaterial. Thus, salaries, wages, emoluments and honoraria,
paid for the purpose of determining the amount of compensation
allowances, commissions (e.g. transportation, representation,
subject to withholding. However, if living quarters or meals are
entertainment and the like); fees including director's fees, if the
furnished to an employee for the convenience of the employer, the
director is, at the same time, an employee of the
value thereof need not be included as part of compensation income.
employer/corporation; taxable bonuses and fringe benefits except
those which are subject to the fringe benefits tax under Sec. 33 of
the Code; taxable pensions and retirement pay; and other income of (3) Facilities and privileges of a relatively small value. — Ordinarily,
a similar nature constitute compensation income. facilities and privileges (such as entertainment, medical services, or
so called "courtesy" discounts on purchases), furnished or offered
by an employer to his employees generally, are not considered as
The basis upon which the remuneration is paid is immaterial in
compensation subject to withholding if such facilities or privileges
determining whether the remuneration constitutes compensation.
are of relatively small value and are offered or furnished by the
Thus, it may be paid on the basis of piece-work, or a percentage of
employer merely as a means of promoting the health, goodwill,
profits; and may be paid hourly, daily, weekly, monthly or annually.
contentment, or efficiency of his employees.
Remuneration for services constitutes compensation even if the
relationship of employer and employee does not exist any longer at
the time when payment is made between the person in whose Where compensation is paid in property other than money, the
employ the services had been performed and the individual who employer shall make necessary arrangements to ensure that the
performed them. amount of the tax required to be withheld is available for payment
to the Commissioner.
(1) Compensation paid in kind. — Compensation may be paid in
money or in some medium other than money, as for example, (4) Tips and gratuities. — Tips or gratuities paid directly to an
stocks, bonds or other forms of property. If services are paid for in a employee by a customer of the employer which are not accounted
medium other than money, the fair market value of the thing taken for by the employee to the employer are considered as taxable
in payment is the amount to be included as compensation subject to income but not subject to withholding.
withholding. If the services are rendered at a stipulated price, in the
absence of evidence to the contrary, such price will be presumed to
(5) Pensions, retirement and separation pay. — Pensions,
be the fair market value of the remuneration received. If a
retirement and separation pay constitute compensation subject to
 TAXATION LAW 2

withholding, except those provided under Subsection B of this (7) Vacation and sick leave allowances. — Amounts of "vacation
section. allowances or sick leave credits" which are paid to an employee
constitute compensation. Thus, the salary of an employee on
vacation or on sick leave, which are paid notwithstanding his
(6) Fixed or variable transportation, representation and other
absence from work, constitutes compensation. However, the
allowances —
monetized value of unutilized vacation leave credits of ten (10) days
or less which were paid to the employee during the year are not
(a) IN GENERAL, fixed or variable transportation, representation subject to income tax and to the withholding tax.
and other allowances which are received by a public officer or
employee or officer or employee of a private entity, in addition to
(8) Deductions made by employer from compensation of employee.
the regular compensation fixed for his position or office, is
— Any amount which is required by law to be deducted by the
compensation subject to withholding.
employer from the compensation of an employee including the
withheld tax is considered as part of the employee's compensation
(b) Any amount paid specifically, either as advances or and is deemed to be paid to the employee as compensation at the
reimbursements for travelling, representation and other bonafide time the deduction is made.
ordinary and necessary expenses incurred or reasonably expected
to be incurred by the employee in the performance of his duties
(9) Remuneration for services as employee of a nonresident alien
are not compensation subject to withholding, if the following
individual or foreign entity. — The term "compensation" includes
conditions are satisfied:
remuneration for services performed by an employee of a
nonresident not such alien individual or foreign entity is engaged in
(i) It is for ordinary and necessary travelling and representation trade or business within the Philippines. Any person paying
or entertainment expenses paid or incurred by the employee in compensation on behalf of a non-resident alien individual, foreign
the pursuit of the trade, business or profession; and partnership, or foreign corporation which is not engaged in trade or
business within the Philippines is subject to all provisions of law
and regulations applicable to an employer.
(ii) The employee is required to account/liquidate for the
foregoing expenses in accordance with the specific
requirements of substantiation for each category of expenses (10) Compensation for services performed outside the Philippines.
pursuant to Sec. 34 of the Code. The excess of actual expenses — Remuneration for services performed outside the Philippines by
over advances made shall constitute taxable income if such a resident citizen for a domestic or a resident foreign corporation or
amount is not returned to the employer. Reasonable amounts of partnership, or for a non-resident corporation or partnership, or for
reimbursements/ advances for travelling and entertainment a non-resident individual not engaged in trade or business in the
expenses which are pre-computed on a daily basis and are paid Philippines shall be treated as compensation which is subject to tax.
to an employee while he is on an assignment or duty need not A non-resident citizen as defined in these regulations is taxable only
be subject to the requirement of substantiation and to on income derived from sources within the Philippines. In general,
withholding. the situs of the income whether within or without the Philippines, is
determined by the place where the service is rendered.
 TAXATION LAW 2

REVENUE REGULATION NO. 03-98: (3) Vehicle of any kind;

Implementing Section 33 of the National Internal Revenue (4) Household personnel, such as maid, driver and others;
Code, as Amended by Republic Act No. 8424 Relative to the (5) Interest on loan at less than market rate to the extent of the
Special Treatment of Fringe Benefits (January 1, 1998) difference between the market rate and actual rate granted;
(6) Membership fees, dues and other expenses borne by the
SPECIAL TREATMENT OF FRINGE BENEFITS employer for the employee in social and athletic clubs or other
similar organizations;
Imposition of Fringe Benefits Tax — A final withholding tax is (7) Expenses for foreign travel;
hereby imposed on the grossed-up monetary value of fringe benefit (8) Holiday and vacation expenses;
furnished, granted or paid by the employer to the employee, except (9) Educational assistance to the employee or his dependents; and
rank and file employees as defined in these Regulations, whether
(10) Life or health insurance and other non-life insurance premiums
such employer is an individual, professional partnership or a
or similar amounts in excess of what the law allows.
corporation, regardless of whether the corporation is taxable or not,
or the government and its instrumentalities except when:
Coverage — These Regulations shall cover only those fringe
benefits given or furnished to managerial or supervisory employees
(1) the fringe benefit is required by the nature of or necessary to the
and not to the rank and file.
trade, business or profession of the employer; or
(2) when the fringe benefit is for the convenience or advantage of
the employer. The fringe benefit tax shall be imposed at the The term, "RANK AND FILE EMPLOYEES" means all employees who
are holding neither managerial nor supervisory position. The Labor
following rates:
Code of the Philippines, as amended, defines "managerial employee"
as one who is vested with powers or prerogatives to lay down and
Effective 1/1/1998 - 34%; 1/ 1/1999 - 33%; 1/1/2000 - 32%. execute management policies and/or to hire, transfer, suspend, lay-
off, recall, discharge, assign or discipline employees. "Supervisory
employees" are those who, in the interest of the employer,
Definition of Fringe Benefit — In general, except as otherwise
effectively recommend such managerial actions if the exercise of
provided under these regulations, for purposes of this Section, the
such authority is not merely routinary or clerical in nature but
term "FRINGE BENEFIT" means any good, service, or other benefit
requires the use of independent judgment.
furnished or granted by an employer in cash or in kind, in addition
to basic salaries, to an individual employee (except rank and file
employee as defined in these regulations) such as, but not limited to Moreover, these regulations do not cover those benefits properly
the following: forming part of compensation income subject to withholding tax on
compensation in accordance with Revenue Regulations No. 2-98.
(1) Housing;
(2) Expense account; Fringe benefits which have been paid prior to January 1, 1998 shall
not be covered by these Regulations.
 TAXATION LAW 2

The grossed-up monetary value of the fringe benefit shall be (1) If the fringe benefit is granted in money, or is directly paid for by
determined by dividing the monetary value of the fringe benefit by the employer, then the value is the amount granted or paid for.
the following percentages and in accordance with the following
schedule:
(2) If the fringe benefit is granted or furnished by the employer in
property other than money and ownership is transferred to the
Effective 1/1/1998 - 66%; 1/ 1/ 1999 - 67%; 1/ 1/2000 - 68%. employee, then the value of the fringe benefit shall be equal to the
fair market value of the property as determined in accordance with
Sec. 6 (E) of the Code (Authority of the Commissioner to Prescribe
The grossed-up monetary value of the fringe benefit represents the
Real Property Values).
whole amount of income realized by the employee which includes
the net amount of money or net monetary value of property which
has been received plus the amount of fringe benefit tax thereon (3) If the fringe benefit is granted or furnished by the employer in
otherwise due from the employee but paid by the employer for and property other than money but ownership is not transferred to the
in behalf of his employee, pursuant to the provisions of this Section. employee, the value of the fringe benefit is equal to the depreciation
value of the property.
Determination of the Amount Subject to the Fringe Benefit Tax
— Taxation of fringe benefit received by a non-resident alien
In general, the computation of the fringe benefits tax would entail individual who is not engaged in trade or business in the
(a) valuation of the benefit granted and (b) determination of the Philippines —
proportion or percentage of the benefit which is subject to the A fringe benefit tax of twenty-five percent (25%) shall be imposed
fringe benefit tax. That the Tax Code allows for the cases where only on the grossed-up monetary value of the fringe benefit. The said tax
a portion (i.e. less than 100 per cent) of the fringe benefit is subject base shall be computed by dividing the monetary value of the fringe
to the fringe benefit tax is clearly stated in Section 33 (a) of R.A. benefit by seventy-five per cent (75%).
8424 which stipulates that fringe benefits which are "required by
the nature of, or necessary to the trade, business or profession of
the employer, or when the fringe benefit is for the convenience or
advantage of the employer" are not subject to the fringe benefit tax.
Thus, in cases where the fringe benefits entail joint benefits to the
employer and employee, the portion which shall be subject to the
fringe benefits tax and the guidelines for the valuation of fringe
benefits are defined under these rules and regulations.

Unless otherwise provided in these regulations, the valuation of

fringe benefits shall be as follows:
 TAXATION LAW 2

Taxation of fringe benefit received by (1) an alien individual E. INTEREST INCOME

employed by regional or area headquarters of a multinational
company or by regional operating headquarters of a a. TAXABLE
multinational company; (2) an alien individual employed by an
offshore banking unit of a foreign bank established in the b. NOT TAXABLE
Philippines; (3) an alien individual employed by a foreign
service contractor or by a foreign service subcontractor c. IMPUTED INTEREST IN INTER COMPANY LOANS/ADVANCES
engaged in petroleum operations in the Philippines; and (4)
any of their Filipino individual employees who are employed Section 50. Allocation of Income and Deductions. – In the
and occupying the same position as those occupied or held by case of two or more organizations, trades or businesses
the alien employees. — (whether or not incorporated and whether or not organized in
A fringe benefit tax of fifteen per cent (15%) shall be imposed on the the Philippines) owned or controlled directly or indirectly by
grossed-up monetary value of the fringe benefit. The said tax base the same interests, the Commissioner is authorized to
shall be computed by dividing the monetary value of the fringe distribute, apportion or allocate gross income or deductions
benefit by eighty-five per cent (85%). between or among such organization, trade or business, if he
determines that such distribution, apportionment or allocation
is necessary in order to prevent evasion of taxes or clearly to
Taxation of fringe benefit received by employees in special reflect the income of any such organizations, trades or
economic zones — Fringe benefits received by employees in businesses.
special economic zones, including Clark Special Economic Zone and
Subic Special Economic and Free Trade Zone, are also covered by
these regulations and subject to the normal rate of fringe benefit tax
or the special rates of 25% or 15% as provided above.
(For further info. see the original RR 03-98)
 TAXATION LAW 2

REVENUE MEMORANDUM ORDER NO. 63-99: d. CIR vs. FILINVEST

Determination of Taxable Income on Inter-Company Loans
or Advances applying Sec. 50 of the NIRC, as amended CIR VS FILINVEST
Coverage:
DIGEST: Filinvest Development Corporation extended advances in
This paper applies to all forms of bona fide indebtedness and favor of its affiliates and supported the same with instructional
includes: letters and cash and journal vouchers. The BIR assessed Filinvest for
1. Loans or advances of money or other consideration (w/n deficiency income tax by imputing an “arm’s length” interest rate on
evidenced by a written instrument);
its advances to affiliates. Filinvest disputed this by saying that the
2. Indebtedness arising in the ordinary course of business
out of sales, leases, or the rendition of services by or CIR lacks the authority to impute theoretical interest and that the
between members of the group or any other similar rule is that interests cannot be demanded in the absence of a
transaction; stipulation to the effect.
3. But does not apply to alleged indebtedness w/c was in
fact a contribution of capital or a distribution by a ISSUE: Can the CIR impute theoretical interest on the advances
corporation w/ respect to its shares. made by Filinvest to its affiliates?

This order adopts the arm's length distribution by a corporation HELD: NO. Despite the seemingly broad power of the CIR to
w/ respect to its shares shall be the rate of interest w/c was distribute, apportion and allocate gross income under (now) Section
charged or would have been charged at the time the indebtedness 50 of the Tax Code, the same does not include the power to impute
arose in Independent transaction w/ or between related theoretical interests even with regard to controlled taxpayers’
unrelated parties under similar circumstances.
transactions. This is true even if the CIR is able to prove that interest
All relevant factors will be considered, incl. the amount and expense (on its own loans) was in fact claimed by the lending entity.
duration of the loan, the security involved, the credit standing of The term in the definition of gross income that even those income
the borrower, and the interest rate prevailing at the situs of the “from whatever source derived” is covered still requires that there
lender or creditor for comparable loans. must be actual or at least probable receipt or realization of the item
For domestic transactions, the standard of interest rate is the of gross income sought to be apportioned, distributed, or allocated.
Bank Reference Rate prescribed by the Central Bank. Sec. 50
Finally, the rule under the Civil Code that “no interest shall be due
applies to both taxable entities and tax exempt organizations.
unless expressly stipulated in writing” was also applied in this case.

The Court also ruled that the instructional letters, cash and journal
vouchers qualify as loan agreements that are subject to DST.
 TAXATION LAW 2

SAME; SAME exchanges its shares of stock for property/ies of the transferor; (c)
the transfer is made by a person, acting alone or together with
Taxation; Taxes, being burdens, are not to be presumed beyond others, not exceeding four persons; and, (d) as a result of the
what the applicable statute expressly and clearly declares; While it exchange the transferor, alone or together with others, not
is true that taxes are the lifeblood of the government, it has been exceeding four, gains control of the transferee.
held that their assessment and collection should be in accordance
with law as any arbitrariness will negate the very reason for Same; Rulings, circulars, rules and regulations promulgated by the
government itself.—Even if we were, therefore, to accord Bureau of Internal Revenue (BIR) have no retroactive application if
precipitate credulity to the CIR’s bare assertion that FDC had to so apply them would be prejudicial to the taxpayers; Exceptions
deducted substantial interest expense from its gross income, there to the rule.—In its appeal before the CA, the CIR argued that the
would still be no factual basis for the imputation of theoretical foregoing ruling was later modified in BIR Ruling No. 108-99 dated
interests on the subject advances and assess deficiency income 15 July 1999, which opined that inter-office memos evidencing
taxes thereon. More so, when it is borne in mind that, pursuant to lendings or borrowings extended by a corporation to its affiliates
Article 1956 of the Civil Code of the Philippines, no interest shall be are akin to promissory notes, hence, subject to documentary stamp
due unless it has been expressly stipulated in writing. Considering taxes. In brushing aside the foregoing argument, however, the CA
that taxes, being burdens, are not to be presumed beyond what the applied Section 246 of the 1993 NIRC from which proceeds the
applicable statute expressly and clearly declares, the rule is likewise settled principle that rulings, circulars, rules and regulations
settled that tax statutes must be construed strictly against the promulgated by the BIR have no retroactive application if to so
government and liberally in favor of the taxpayer. Accordingly, the apply them would be prejudicial to the taxpayers. Admittedly, this
general rule of requiring adherence to the letter in construing rule does not apply: (a) where the taxpayer deliberately misstates
statutes applies with peculiar strictness to tax laws and the or omits material facts from his return or in any document required
provisions of a taxing act are not to be extended by implication. of him by the Bureau of Internal Revenue; (b) where the facts
While it is true that taxes are the lifeblood of the government, it has subsequently gathered by the Bureau of Internal Revenue are
been held that their assessment and collection should be in materially different from the facts on which the ruling is based; or
accordance with law as any arbitrariness will negate the very (c) where the taxpayer acted in bad faith. Not being the taxpayer
reason for government itself. who, in the first instance, sought a ruling from the CIR, however,
FDC cannot invoke the foregoing principle on non-retroactivity of
Same; Requisites for the non-recognition of gain or loss under BIR rulings.
Section 34 (c) (2) of the 1993 National Internal Revenue Code
(NIRC).—As even admitted in the 14 February 2001 Stipulation of Same; Tax revenues are not intended to be liberally construed; the
Facts submitted by the parties, the requisites for the non- rule is settled that the findings and conclusions of the Court of Tax
recognition of gain or loss under the foregoing provision are as Appeals (CTA) are accorded great respect and are generally upheld
follows: (a) the transferee is a corporation; (b) the transferee by the Court, unless there is a clear showing of a reversible error or
 TAXATION LAW 2

an improvident exercise of authority.—Alongside the principle that F. INCOME UNDER LEASE AGREEMENT (Section 49, RR 2)
tax revenues are not intended to be liberally construed, the rule is
settled that the findings and conclusions of the CTA are accorded a. RENT
great respect and are generally upheld by this Court, unless there is
a clear showing of a reversible error or an improvident exercise of b. OBLIGATION OF LESSOR TO THIRD PARTIES ASSUMED
authority. Absent showing of such error here, we find no strong and AND PAID BY LESSEE
cogent reasons to depart from said rule with respect to the CTA’s
finding that no deficiency income tax can be assessed on the gain on c. ADVANCE RENTAL
the supposed dilution and/or increase in the value of FDC’s
shareholdings in FAC which the CIR, at any rate, failed to establish. d. LEASEHOLD IMPROVEMENTS – OPTION TO REPORT
Bearing in mind the meaning of “gross income” as above discussed, INCOME FOR RIGHT OF REVERSION OF IMPROVEMENTS TO
it cannot be gainsaid, even then, that a mere increase or LESSOR:
appreciation in the value of said shares cannot be considered
income for taxation purposes. Since “a mere advance in the value of OPTION 1: Report Fair Market Value Upon Completion
the property of a person or corporation in no sense constitute the OPTION 2: Report Over Remaining Life of Lease
‘income’ specified in the revenue law,” it has been held in the early Depreciated Value after Expiration of Lease Period
case of Fisher vs. Trinidad, that it “constitutes and can be treated
merely as an increase of capital.” Hence, the CIR has no factual and INCOME UNDER LEASE AGREEMENT (SEC. 49, RR-2)
legal basis in assessing income tax on the increase in the value of
FDC’s shareholdings in FAC until the same is actually sold at a profit. Section 49. Improvements by lessees. - When buildings are
erected or improvements made by a lessee in pursuance of an
agreement with the lessor, and such buildings or improvements
are not subject to removal by the lessee, the lessor may at his
option report the income therefrom upon either of the following
bases:

(a) The lessor may report as income at the time when such
buildings or improvements are completed the fair market value
of such buildings or improvements subject to the lease. (Option
1: Report FMV upon completion)

(b) The lessor may spread over the life of the lease the estimated
depreciated value of such buildings or improvements at the
termination of the lease and report as income for each of the lease
 TAXATION LAW 2

all adequate part thereof. (Option 2: Report over the Remaining

Useful Life of the Lease Depreciated Value after Expiration of the
Lease Period- Note: This is the salvage value.)

If for any other reason than a bona fide purchase from the lessee
by the lessor the lease is terminated, so that the lessor comes into
possession or control of the property prior to the time originally
fixed for the termination of the lease, the lessor receives
additional income for the year in which the lease is so terminated
to the extent that the value of such buildings or improvements
when he became entitled to such possession exceeds the amount
already reported as income on account of the erection of such
buildings or improvements. No appreciation in value due to
causes other than the pre-mature termination of the lease shall be
included.

Conversely, if the building or improvements are destroyed prior

to the expiration of the lease, the lessor is entitled to deduct as
a loss for the year when such destruction takes place the amount
previously reported as income because of the erection of such
buildings or improvements, less any salvage value subject to the
lease to the extent that such loss was not compensated for by
insurance. If the buildings or improvements destroyed were
acquired prior to March 1, 1913, the deduction shall be based on
the cost or the value subject to the lease to the extent that such
loss was not compensated for by insurance.