exemptions are thus construed strictissimi juris against the taxpayer

DIFFERENT TAXES UNDER THE NIRC and liberally in favor of the taxing authority.

TAXES UNDER THE NATIONAL INTERNAL REVENUE CODE 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
A. Income tax
exception.
A. Individuals
B. Corporation
Case discussion: The confusion as to petitioner‘s entitlement to a
C. Other persons
refund could altogether have been avoided had it presented its tax
B. Business taxes
return for 1990. The grant of a refund is founded on the assumption
A. Value-added tax
that the tax return is valid, i.e., that the facts stated therein are true
B. Other percentage taxes
and correct. Without the tax return, it is error to grant a refund since
C. Transfer taxes
it would be virtually impossible to determine whether the proper taxes
A. Donor‘s tax have been assessed and paid.
B. Estate tax
Pelizloy Realty v. Province of Benguet
TN: Taxation is a destructive power of the State which interferes with Re: Scope of authority of a province to impose amusement tax
personal and property rights of the people and takes a portion of their
property from them for the support of the government. Being a
The power to tax is an attribute of sovereignty, and as such, inheres
destructive power, it can be used to kill an activity or business if it
in the State. Such, however, is not true for provinces, cities,
wants to. Thus, it must be exercised with caution.
municipalities and barangays as they are not the sovereign. Rather,
they are mere territorial and political subdivisions of the Republic of
DEFINITION OF TAXATION the Philippines.

A municipal corporation, unlike a sovereign state, is clothed with no

TAXATION inherent power of taxation. The charter or statute must plainly show
an intent to confer that power or the municipality cannot assume it.
Taxation is the inherent power of the State exercised by the And the power when granted is to be construed strictissimi juris. Any
legislature to demand enforced contributions from the people to raise doubt or ambiguity arising out of the term used in granting that power
revenue in order to defray the necessary expenses of the must be resolved against the municipality. Therefore, the power of a
Government. province to tax is limited to the extent that such power is delegated to
Taxes it either by the Constitution or by statute.
Taxes are the enforced proportional contributions from properties and
persons levied by the State by virtue of its sovereignty for the support Case discussion: Resorts, swimming pools, bath houses, hot springs
of the government and all public needs. and tourist spots do not belong to the same category or class as
theatres, cinemas, concert halls, circuses, and boxing stadia. It follows
Taxation refers to the power to collect money, while tax is the money that they cannot be considered as among the ‗other places of
itself. amusement‘ contemplated by Section 140 of the LGC and which may
properly be subject to amusement taxes.
Q: Can LGU validly enact a law imposing amusement tax on local
swimming pools not provided in the LGC or other laws? NATURE OF THE POWER OF TAXATION

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 NATURE OF THE POWER OF TAXATION
legislative branch of the national government. Only Congress has an 00
unlimited power to exercise the power to tax. A. Inherent attribute of sovereignty
B. Legislative in character
Q: May a legislative body enact laws to raise revenue in the absence C. Subject to constitutional and inherent limitations
of a constitutional provision granting such body the power to tax?

A: Yes. Taxation is inherent in the State, being an attribute of INHERENT ATTRIBUTE OF SOVEREIGNTY
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 INHERENT ATTRIBUTE OF SOVEREIGNTY
as grants of power to the Government, but merely constitute as
limitations upon a power which would otherwise be practically without The power of taxation is an essential and inherent attribute of
limit. sovereignty, belonging as a matter of right to every independent
government. It exists apart from constitutions and without being
Paseo Realty v. CA expressly conferred by the people. Hence, it can be exercised by the
Re: How tax refunds are construed government even if the Constitution is entirely silent on the subject.

Taxation is a destructive power which interferes with the personal and Basis – Lifeblood theory
property rights of the people and takes from them a portion of their The power to tax proceeds upon the theory that the existence of a
property for the support of the government. And since taxes are what government is a necessity. No sovereign State can continue to exist
we pay for civilized society, or are the lifeblood of the nation, the law without the means to pay its expenses, and for those means, it has
frowns against exemptions from taxation and statutes granting tax the right to compel all citizens and property within its limit to
contribute.
 C. Administrative regulations (Assessment and Collection)
Manifestations
A. Taxes can be imposed even in the absence of a constitutional Q. What are the two tests of a valid delegation?
provision.
B. The state can select the object and subject matter of taxation. 1. Completeness test – the law should already be complete in all
Thus, unlimited. its terms and conditions before it leaves Congress so that when
C. No injunction in the collection of taxes. the law reaches the hands of the delegate, the latter has nothing
EXC: There is a pending case filed in the CTA to enjoin the else to do but to enforce the same.
collection of tax.
D. Taxation is not subject to set-off. 2. Sufficient standard test – even if the law is not complete in
EXC: When both debts are due and demandable and has itself, but any delegation of authority may be upheld as valid if
been fully liquidated. such delegation is accompanied by sufficient standards as to map
TN: There can be no compensation as the out the boundaries of the exercise of the delegate‘s delegated
Government and the people are not principal authority.
debtors and creditors of each other.
TN: These standards may take the form of legislative policies as
Concurring and Dissenting Opinion of Justice Leonen in Manila may be mentioned in the law itself or in another related law
Memorial v. Sec of DSWD which would recite the circumstances under which such
The power to tax is plenary and unlimited in its range, acknowledging delegated authority may be validly performed.
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 Basis of the legislative power to tax
imposes the tax) to its constituency who are to pay it. Nevertheless, it Taxes are a grant of the people who are taxed and the grant must be
is circumscribed by constitutional limitations. At the same time, like made by the immediate representatives of the people. Hence, it
any other statute, tax legislation carries a presumption of should be our representatives who must levy and impose taxes.
constitutionality.
Scope of Taxation
The power to tax is a principal attribute of sovereignty. Such inherent Subject to constitutional and inherent restrictions, the power of
power of the State anchors on its "social contract‖ with its citizens taxation is regarded as supreme, unlimited and comprehensive. The
which obliges it to promote public interest and common good. principal check on its abuses rests only on the responsibility of the
members of the legislature to their constituents.
DOCTRINE OF EQUITABLE RECOUPMENT
Extent of the legislative power to tax
Subject to constitutional and inherent restrictions, the legislature has
DOCTRINE OF EQUITABLE RECOUPMENT the discretion to determine the incidence of the power to tax.

Where the refund of a tax illegally or erroneously collected from or A. Purpose – tax must be for a public purpose. The legislative
overpaid by a taxpayer is barred by prescription, a tax presently being body‘s determination, however, on the question of what is a
assessed against a taxpayer may be recouped or set-off. public purpose is not conclusive. The courts can inquire into
whether the purpose is really public or private.
A claim for refund barred by prescription may be allowed to offset
unsettled tax liabilities. This doctrine finds no application in the Judicial action is limited only to a review where it involves:
Philippines. 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
LEGISLATIVE IN CHARACTER application of a tax law
B. Subjects and objects of taxation – refer to the coverage
LEGISLATIVE IN CHARACTER and the kind or nature of the tax. They may be persons,
property, businesses, transactions, or the exercise of rights or
The power to tax is peculiarly and exclusively legislative and cannot be privileges.
exercised by the executive or judicial branch of the government.
Hence, only Congress, our national legislative body, can impose taxes. A state is free to select the subject of taxation and it has been
However, the levy of a tax may also be made by a local legislative repeatedly held that the inequalities which result from the
body, subject to such limitations as may be provided by law. singling out of one particular class for taxation or exemption
infringe no constitutional limitation so long as such is
Reason: The power is granted by the people to the legislature, the reasonable and not arbitrary.
representative of the people.
C. Amount and rate of tax – as a general rule, the legislature
GR: The power to tax is essentially a legislative function and which may levy a tax of any amount or rate it sees fit. If the taxes are
the central legislative body cannot delegate to other branches. oppressive or unjust, the only remedy is the ballot box and the
election of new representatives. However, the tax must be
EXC: (Permissive delegation of the power to tax) reasonable, one that would not go against the deprivation of
property without due process of law.
A. Local governments in respect to matters of local concern
TN: Through the Local Government Code of 1991 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
B. When allowed by the Constitution
the mode or method by which the tax shall be collected, and to
TN: To the President with respect to tariff rates, import and
designate the officers through whom its will shall be enforced.
export quotas, flexible tariff clause, etc.
 Congress should provide sufficient standards on how taxes are
supposed to be collected. THEORIES OF TAXATION
Examples: withholding tax, creditable, etc.

E. Situs of taxation – refers to the place of taxation. In THEORIES OF TAXATION

determining the same, the nature of the taxes must be
considered.
A. Lifeblood theory
Examples: Community tax – residence of the taxpayer
B. Necessity theory
Real property tax – location of the property
C. Benefits received or compensation theory
F. Apportionment of the tax – refers to the determination of
which portion of the society gets to be benefited by the tax. It LIFEBLOOD THEORY
could either of general or limited application.

G. Grant tax exemption or condonation – The power to tax LIFEBLOOD THEORY

carries with it the power to grant exemption therefrom.
Exemptions are interpreted strictly against the taxpayer and Taxes are the lifeblood of the government and their prompt and
liberally in favor of the government. certain availability is an imperious need. Without taxes, the
government would be paralyzed for lack of motive power to activate
H. Kind of tax to be collected – it can be based on income, and operate it.
sales, import or export, etc.
CIR v. Metro Star Superama
Provision of administrative and judicial remedies that may be availed Taxes are the lifeblood of the government and so should be collected
by the taxpayers and the government 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.
SUBJECT TO CONSTITUTIONAL & INHERENT LIMITATIONS
But even as we concede the inevitability and indispensability of
taxation, it is a requirement in all democratic regimes that it be
CONSTITUTIONAL AND INHERENT LIMITATIONS
exercised reasonably and in accordance with the prescribed
procedure. If it is not, then the taxpayer has a right to complain and
These limitations are those provided in the fundamental law or implied the courts will then come to his succor. For all the awesome power of
therefrom, while the rest spring from the nature of the taxing power the tax collector, he may still be stopped in his tracks if the taxpayer
itself although they may or may not be provided in the Constitution. can demonstrate that the law has not been observed.

Inherent limitations Case discussion: The Tax Code requires that the taxpayer must first
A. Public purpose be informed that he is liable for deficiency taxes through the sending
B. Exemption from taxation of government entities of a Preliminary Assessment Notice. He must be informed of the
C. Non-delegation of the legislative power to tax facts and the law upon which the assessment is made. To proceed
D. International comity heedlessly with tax collection without first establishing a valid
E. Territorial jurisdiction assessment is evidently violative of the cardinal principle in
administrative investigations – that taxpayers should be able to
Constitutional limitations present their case and adduce supporting evidence.
Direct Constitutional limitations
NECESSITY THEORY
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
NECESSITY THEORY
the passage of a law granting tax exemption C. Rule of
uniformity and equity in taxation
D. Progressive system of taxation The power to tax proceeds upon the theory that the existence of a
government is a necessity. No sovereign State can continue to exist
E. Exemption of religious, charitable and education entities,
without the means to pay its expenses, and for those means, it has
nonprofit cemeteries, and churches from property taxation
the right to compel all citizens and property within its limit to
F. Exemption is non-stock, non-profit education institution from
contribute.
taxation
G. Non-imprisonment for non-payment of a poll tax
BENEFITS RECEIVED THEORY / COMPENSATION THEORY /
H. Non-impairment of the jurisdiction of the SC in tax cases
I. Prohibition on the use of special purpose fund RECIPROCITY THEORY / SYMBIOTIC RELATIONSHIP
J. Power of the President to veto any particular items in a revenue DOCTRINE
or tariff bill

Indirect Constitutional limitations BENEFITS RECEIVED OR COMPENSATION THEORY

A. Due process of law This theory is the basis of taxation and is founded on the reciprocal
B. Equal protection of the laws duties of protection and support between the State and its
C. Non-impairment of the obligations of contracts inhabitants.
D. Non-infringement of religious freedom
E. No appropriation for religious purposes TN: Inhabitants and not citizens because even aliens are taxed.
F. Non-infringement of the freedom of the press
Concurring and Dissenting Opinion of Justice Leonen in Manila
Memorial v. Sec of DSWD SECONDARY PURPOSE OF TAXATION
It is said that taxes are what we pay for civilized society. Without
taxes, the government would be paralyzed for lack of the motive NON-REVENUE RAISING
power to activate and operate it. Hence, despite the natural TN: Also known as the sumptuary purpose of taxation.
reluctance to surrender part of one's hard-earned income to the
taxing authorities, every person who is able to must contribute his A. Regulation –Taxes can be used to curtail or improve a
share in the running of the government. particular industry. Taxes can be levied with a regulatory
purpose to provide means for the rehabilitation and stabilization
The government, for its part, is expected to respond in the form of of a threatened industry which is affected with public interest.
in/tangible benefits intended to improve the lives of the people and
enhance their moral and material values. This symbiotic relationship is Example: to protect local industries, higher taxes is imposed on
the rationale of taxation and should dispel the erroneous notion that it foreign investors in order to level the playing field and prevent
is an arbitrary method of exaction by those in the seat of power. unfair competition; re-pricing.

Take Note: Tio v. Videogram Regulatory Board

Theory of Taxation – Lifeblood/Necessity The public purpose of a tax may legally exist even if the motive
Theory Basis of Taxation – Benefits Received Theory which impelled the legislature to impose the tax was to favor
one industry over another.
PURPOSE AND OBJECTIVE OF TAXATION
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
THE FOUR (4) R‟S OF TAXATION 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
THE FOUR (4) R‟S OF TAXATION: police power.
TN: According to Atty. Amago, these refer more to the effects of
taxation. Case discussion: The levy of the 30% tax is for a public
A. Revenue – purpose of taxation is to raise revenue in order to purpose. It was imposed primarily to answer the need for
defray the expenses of the government. regulating the video industry, particularly because of the
rampant film piracy, the flagrant violation of intellectual
B. Redistribution – people who earn more, pay more taxes, so property rights, and the proliferation of pornographic video
their wealth is used for the benefit of everyone, including the tapes. And while it was also an objective of the decree to
less wealthy individuals. protect the movie industry, the tax remains a valid imposition.

TN: This is the justification of estate tax. B. Promotion of general welfare – Taxation can be used as an
Reason: Those who earn more are given more opportunities by implement of police power for the purpose of promoting general
the State, so they should give more to the Government. welfare. But sometimes, the use of the power of taxation as an
implement of taxation can destroy industry.
C. Re-pricing – higher taxes are imposed on articles which are
considered dangerous to the health of the people, i.e. alcoholic Example: 20% Senior Citizen Discount
drinks, cigarettes, etc. To address externalities and prevent
citizens from using such dangerous products, higher taxes may Panhandle Oil v. Mississipi
be imposed to curtail such practice. The end goal is to change Re: Marshall Dictum
the behavior of the citizens or to promote a certain policy.
―The power to tax involves the power to destroy.‖
D. Representation – Our representatives are the ones imposing
the tax, but since the people are the ones putting them in McCulloch v. Maryland
power, the people can demand something from them – efficient Re: Holmes Dictum
and effective government service. There is the sense of
accountability. ―The power of taxation does not involve the power to destroy
―No taxation without representation‖ as
long as this court sits.‖
TN: The purpose of taxation to raise revenue to defray the expenses
of the Government has evolved to include social justice. Reyes v. Almanzor
Re: How were the doctrines reconciled?
PRIMARY PURPOSE OF TAXATION
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
REVENUE RAISING
is the Court‘s role to see to it that the exercise of the power
does not transgress these limitations.
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 How to reconcile
of the power of taxation.
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
Of the three inherent powers of the State, only the power of taxation particular act to the extent that industries can really close
has for its purpose the raising of revenue. down.
 Hence, the power to tax is a power to destroy only if you are extent, that the courts scarcely venture to declare that it is subject to
looking at the power to tax as an implement of police power. any restrictions whatever, except such as rest in the discretion of the
But in all other instances, no because the court will always be authority which exercises it.
there to see whether the inherent and constitutional limitations
are violated.
ASPECTS OF TAXATION
C. Reduction of social inequalities – Progressive system of
taxation prevents the undue concentration of wealth in the ASPECTS OF TAXATION [LAC]
hands of a few individuals. Progressivity is the keystone on the
principle that those who are able to pay, shoulders the bigger A. Levy or imposition
portion of the burden. Whatever one earns is for the benefit of B. Assessment
all. C. Collection

D. Encourage economic growth – Refers to exemptions and Levy or imposition

incentives granted to foreign investors to entice them to invest Refers to the enactment of a law by Congress. The power to levy
in the country. This is also to encourage higher reserves of taxes which involves tax policy is essentially legislative in character,
foreign currencies, so the value of the peso in relation to although it may be delegated to executive agencies with respect to
foreign exchange will be higher. The more foreign reserves, the administrative matters, provided that adequate guidelines or
higher the value of the currency. safeguards prescribed are followed in the administration of tax laws.
Example: Creation of economic zones like PEZA (Subordinate legislation)

SCOPE OF TAXATION Tax administration

It is exercised by the executive department of government,
particularly the BIR with respect to internal revenue taxes.
SCOPE OF TAXATION [CUPS]
A. Assessment – applying the law passed by Congress to the
A. Comprehensive specific person, property or activity covered by it. Involves the
determination of how much tax is due.
B. Unlimited
TN: In the Philippines, we follow self-assessment. If ever it is
C. Plenary
not enough, there is the involuntary assessment by the BIR.
D. Supreme

Q: When is the exercise of power of taxation legal or valid? B. Collection – process or method of implementing the tax laws
for the purpose of satisfying the tax obligations, as when
A: When it complies with the inherent and constitutional limitations
money is actually taken from the taxpayers.
Pepsi Cola v. Municipality of Tanauan
Agencies involved in the collection of taxes are:
The power of taxation is an essential and inherent attribute of
a. Bureau of Internal Revenue
sovereignty, belonging as a matter of right to every independent
government, without being expressly conferred by the people. It is a b. Bureau of Customs
power that is purely legislative and which the central legislative body c. Provincial, City, and Municipal Assessor and Treasurers
cannot delegate either to the executive or judicial department of
government without infringing upon the theory of separation of TN: Other aspects of taxation:
powers. (1) Payment – involves the act of compliance by the taxpayer of
his tax obligation, as when he actually pays his taxes;
The exception, however, lies in the case of municipal corporations, to (2) Refund – Taxes paid will be returned to the taxpayers as
which, said theory does not apply. Legislative powers may be when there is an erroneous or illegal collection of taxes.
delegated to local governments in respect of matters of local concern.
This is sanctioned by immemorial. By necessary implication, the
BASIC PRINCIPLES OF A SOUND TAX SYSTEM
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. BASIC PRINCIPLES OF A SOUND TAX SYSTEM
TN: In the bar exam, most people answer only the three principles.
Case discussion: The plenary nature of the delegated power of local
governments would not suffice to invalidate the law as confiscatory A. Fiscal adequacy – It means that the revenues generated
and oppressive. In delegating the authority, the State is not limited to should be sufficient to meet the demands of public expenditure.
the measure of that which is exercised by itself. When it is said that Taxes should not be too much nor too less. Also, it must be
the taxing power may be delegated to municipalities and the like, it elastic or capable of expanding or contracting annually in
means that there may be delegated power to impose and collect taxes response to variations in public expenditures and to address
the legislature may deem expedient. Thus, municipalities may be contingencies.
permitted to tax subjects which for reasons of public policy the State
has not deemed wise to tax for more general purposes. B. Theoretical justice or equity – The tax burden should be
distributed in proportion to the taxpayer‘s ability to pay.
Plenary – the legislative body has the power to impose taxes as they Similarly situated taxpayers should pay equal taxes, while those
may deem expedient. After all, they can determine the subjects and who have more should pay more.
objects of taxation.
C. Administrative feasibility – It means that tax laws should be
Tio v. Videogram Regulatory Board capable of convenient, just and effective administration. One
A tax does not cease to be valid merely because it regulates, which can be easily implemented to assure smooth flow of
discourages, or even definitely deters the activities taxed. The power funds to the Treasury, in such a way that it can be enforced
to impose taxes is one so unlimited in force and so searching in uniformly by the government, convenient as to time and
 manner, and not unduly burdensome upon, or discouraging to enacted under the police power. The power of taxation, on the other
business activity. hand, is circumscribed by inherent and constitutional limitations.

D. Economic efficiency – A combination of fiscal adequacy and The imposition of the levy was an exercise by the State of its taxation
administrative feasibility. The cost of collecting taxes should not power. While it is true that the power of taxation can be used as an
be higher than the benefits derived from it. implement of police power, the primary purpose of the levy is revenue
generation. If the purpose is primarily revenue, or if revenue is at
least, one of the real and substantial purposes, then the exaction is
DISTINGUISHED FROM OTHER INHERENT POWERS properly called a tax.

Philippine Airlines v. Edu

TAXATION V. POLICE POWER The imposition of a vehicle registration fee is not an exercise by the
State of its police power, but of its taxation power. The legislative
Taxation Police Power intent and purpose behind the law requiring owners of vehicles to pay
for their registration is mainly to raise funds for the construction and
Promotion of general
Purpose Raise Revenue maintenance of highways and to a much lesser degree, pay for the
welfare
operating expenses of the administering agency. Fees may be
Limited to the cost of properly regarded as taxes even though they also serve as an
Amount of exaction Unlimited regulation instrument of regulation.

Non-impairment of Inferior to the Superior to the Taxation may be made the implement of the state's police power/ If
contracts nonimpairment nonimpairment the purpose is primarily revenue, or if revenue is, at least, one of the
clause clause real and substantial purposes, then the exaction is properly called a
Scope tax. Such is the case of motor vehicle registration fees.
(Rights which cannot
Liberty and
be taken away Property rights TN: Motor vehicle registration fee and chauffeur‘s license fee are
without due process Property rights
powers of taxation, whereas the special permit fee and additional fee
of law) for charge of registration is an exercise of police power because such
Can be bargained or fees are very minimal to be revenue-raising.
compromised and
Bargain be subject to Cannot be bargained CIR v. Central Luzon Corp.
(Surrender) abatement The privilege enjoyed by senior citizens does not come directly from
Ex. Tax amnesty the State, but rather from the private establishments concerned.
Altruistic feeling of Accordingly, the tax credit benefit granted to these establishments can
Compensation Enjoyment of contributing to society‘s be deemed as their just compensation for private property taken by
(Benefits) government services welfare the State for public use. The taxation power can also be used as an
implement for the exercise of the power of eminent domain. Tax
Property taken Generally money Any kind of property measures are but enforced contributions exacted on pain of penal
sanctions and clearly for a public purpose.

TAXATION V. EMINENT DOMAIN Carlos Superdrug v. DSWD

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
Taxation Eminent Domain basic reason for the passage of the law is social justice and general
The government and welfare of the senior citizens. Hence, property rights must bow to the
Who can exercise Only the government even public utility primacy of police power because property rights, though sheltered by
companies due process, must yield to general welfare.

Purpose Raise revenues Public convenience Manila Memorial Park v. Sec of DSWD
The 20% discount is a price regulatory measure affecting the ability of
Non-impairment of Inferior to the Inferior to the private establishments to price their products and services relative to
contracts nonimpairment nonimpairment a special class of individuals, the senior citizens, for which the
clause clause Constitution affords preferential concern.
Owner of the private
Taxpayers These establishments have the capacity to revise their pricing strategy
Persons affected property
so that whatever reduction in profits they may sustain can be
recouped through higher mark-ups or from other products not subject
Planters Products v. Fertiphil Corp.
of discounts. As a result, the discounts resulting from sales to senior
Police power and the power of taxation are inherent powers of the
citizens will not be confiscatory or unduly oppressive. In sum, the
State. These powers are distinct and have different tests for validity.
20% discount and tax deduction are valid exercises of police power of
Police power is the power of the State to enact legislation that may
the State absent a clear showing that it is arbitrary, oppressive or
interfere with personal liberty in order to promote the general welfare,
confiscatory. The Central Luzon case was a mere obiter dictum.
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
conduct, while taxation is revenue generation. The ―lawful subjects‖ TAXES DEFINED
and ―lawful means‖ tests are used to determine the validity of a law
The enforced proportional contributions, generally payable in money G. Levied for public purpose – The public purpose of the
and paid at regular periods or intervals, levied from persons and imposition is implied in the levy of tax. A tax levied for a private
property or the exercise of a right or privilege, by the State which has purpose constitutes taking of property without due process of
jurisdiction over the subject or object of taxation, through the law.
legislative body of the State, for the support of the government and
for all public needs.
REQUISITES OF A VALID TAX
TN: All taxes are revenues, but not all revenues are taxes.

A. Internal Revenue taxes – Provided under the NIRC

REQUISITES OF A VALID TAX? [PUJ-DL]
a. Income tax
b. Business tax
1. It must be for a public purpose
c. Transfer tax
2. The rule on taxation should be uniform
d. Donors and estate tax
3. Subject taxed must be within the jurisdiction of the taxing
e. Percentage tax
authority
f. Excise tax
4. The assessment and collection must be in consonance with the
g. Documentary stamp tax
due process clause
5. The tax must not infringe the inherent and constitutional
B. Local/Municipal taxes – Provided under the LGC limitations of the power of taxation

C. Tariff and customs duties – Provided under the TCC

Taxes and tax incentives under special laws CLASSIFICATION OF TAXES

Common example is the PEZA law which provides 5% tax in lieu of all
taxes for businesses catered within its territory. AS TO SUBJECT MATTER OR OBJECT

ESSENTIAL CHARACTERISTICS OF TAXES 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
ESSENTIAL CHARACTERISTICS OF TAXES in which they may be engaged. Ex: Community tax

A. Enforced contribution – Not dependent upon the will or B. Property – tax levied on property, real or personal, in
contractual assent of the person taxed. Hence, whether the proportional to its value or in accordance with some rule of
taxpayer likes it or not, he is compelled to pay taxes. It is a apportionment.
legal and mandatory obligation. Ex: Real estate tax

B. Generally payable in money – Tax is a pecuniary burden C. Excise – tax imposed upon the performance of an act, the
payable in money. enjoyment of a privilege, or the engagement in an occupation
or business.
Exceptions: Ex: Income tax, donor‘s tax, estate tax.
1. Tax credit certificate or backpay certificate – When
taxes are paid in excess of that due, the government AS TO BURDEN OR INCIDENCE
issues a certificate where said excess in taxes will be
deducted from the taxes payable the following year. A. Direct – tax demanded from the very person who, as intended
should pay the tax which he cannot shift to another.
2. Tax liens – Forfeiture of property by reason of failure to Ex: Income tax, estate tax, donor‘s tax, community tax
pay real property tax – but this property will be sold and
the proceeds shall be used to satisfy the tax obligation. B. Indirect – tax demanded in the first instance from one person
with the expectation that he can shift the burden to someone
C. Proportionate in character – It is assessed in accordance else, not as taxes, but as part of the purchase price.
with some reasonable rule of apportionment which is usually Ex: VAT, percentage tax, excise tax, customs duties
based on the ability of the taxpayer to pay.
AS TO TAX RATE
D. Levied on persons, property, exercise of a right or
privilege, act or transactions – within the taxing authority‘s A. Specific – tax imposed by the head or number, or by some
jurisdiction in accordance with the principle of territoriality. standard of weight or measurement. Requires statistics. No
need for an appraisal.
Ex. Persons – Cedula; Property – Real Property Tax; Exercise of Ex: Wines, fermented liquors, etc.
a right or privilege – Income tax, Donor‘s Tax
B. Ad valorem – tax of a fixed proportion of the value of the
E. Levied by the State which has jurisdiction over the property with respect to which the tax is assessed. It requires
subject or object of taxation the intervention of assessors or appraisers to estimate the value
of such property before the amount due from each taxpayer
F. Levied by the lawmaking body of the State – The power can be determined. Ad valorem – ―according to value‖
to tax is a legislative power but is also granted to local Ex: Income tax, real estate tax, excise tax on automobiles
governments, subject to such guidelines and limitations as law
may provide. 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
 safety, as to require regulation for the protection and promotion
AS TO GRADUATION of such public interest.

A. Proportion – based on a fixed percentage of the amount of B. Imposition must bear a reasonable relation to the probable
the property receipts or other basis to be taxed. expenses of regulation, taking into account not only the costs of
Ex: Real estate tax, corporate tax (fixed at 30% regardless direct regulation but also its incidental consequences as well.
of how much income the corporation earns)
TN: A charge of a fixed sum which bears no relation at all to the cost
B. Progressive – rate of which increases as the tax base or of inspection and regulation may be held to be a tax rather than an
bracket increases. exercise of the police power.
Ex: Income tax
Fees may be regarded as taxes
C. Regressive – tax rate decreases as the tax base or bracket Fees may be properly regarded as taxes even though they also serve
increases. as an instrument of regulation. If the revenue is the primary purpose,
Ex: VAT (regressive as to its effect) or if revenue is at least one of the real and substantial purposes, then
the exaction is properly called a tax.
A regressive tax must not be confused with regressive system of
taxation. In a society where the majority of the people have low Lutz v. Araneta
incomes, it exists when there are more indirect taxes imposed than Police power may be exercised for the purpose of requiring licenses
direct taxes. Since the low-income sector of the population as a whole for which license fees may have to be paid. The amount of the license
buys more consumption goods on which the indirect taxes are fees for the regulation of useful occupations should only be sufficient
collected, the burden of indirect taxes rests more on them than on the to pay for the cost of the license & the necessary expense of police
more affluent groups. surveillance and regulation. For non-useful occupations, the license
fee may be sufficiently high to discourage the activity sought to be
regulated.
TAX DISTINGUISHED FROM OTHER IMPOSITIONS

TAX V. TOLL FEE

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 Toll is a sum of money for the use of something, generally applied to
valid tax (PUJ-DL) need not be complied with. the consideration which is paid for the use of a road, bridge or the
like, of a public nature.
TAX V. LICENSE FEE
Tax Toll Fee

License is in the nature of a special privilege, or authority to do what A demand of

Basis A demand of sovereignty
is within its terms. It makes lawful an act which would otherwise be proprietorship
unlawful. A license granted by the State is always revocable. Depends upon the cost of
construction or
License fee – charge imposed under the police power for regulation. Amount Unlimited
maintenance of the
public improvement used
Tax License Fee For the use of the
Purpose For raising revenue
property of another
Purpose Revenue-raising Regulation
Imposed by the
Basis Power of Taxation Police Power Imposed by the
Authority Government or private
Government
Limited to the cost of the individuals or entities
Amount Unlimited license and expenses of
Time of Paid after the start of the Paid before and after
regulation
Payment business use
Paid before the Effect of
Time of Paid after the start of the
commencement of the Non- Business is suspended Use is prohibited
Payment business
business
payment
Effect of Does not make the Can be bargained
Makes the business illegal
Nonpayment business illegal through a substantial
Surrender Can be waived
Can be bargained consideration
through a substantial Cannot be bargained (with compensation)
Surrender
consideration (without compensation)
(with compensation) TAX V. COMPROMISE PENALTY
Government can grant Government cannot grant
Exemptions
exemptions exemptions
Compromise penalty is the amount collected by the BIR in lieu of
Primary purpose test (To be considered a license fee) criminal prosecution for violations committed by taxpayers.

A. The imposition must relate to an occupation or activity that so This is a sanction imposed as a punishment for violation of a law or
engages the public interest in health, morals, development and acts deemed injurious. This is paid in lieu of prosecution.
Perpetual Succour vs. CIR
Set-off Not subject to set-off Subject to set-off
Compromise penalties are amounts collected by the BIR in lieu of
criminal prosecution for violations committed by taxpayers, the Can be imprisoned for
payment of which is based on a compromise agreement validly Effect of Cannot be imprisoned for
non-payment of tax,
entered into between the taxpayer and the CIR. Nonpayment non-payment of debt
except poll tax
Imposed by public Imposed by private
Authority
authority individuals
Tax Compromise Penalty
NIRC governs the Civil Code governs the
Prescription
For forestalling prescriptive periods prescriptive periods
Purpose For raising revenue
prosecution
Draws interest if stipulated
Does not draw interest
Imposed only by the Imposed by the Interest in writing or when there is
Authority unless delinquent
Government Government default
Cannot be subject to
Set-off Can be subject to set-off Francia v. IAC
set-off or compensation
The income tax liability cannot be compensated with the amount
Enforceability Involuntary Voluntary owed by the government as compensation for his expropriated
property. Taxes are of distinct kind, essence and nature than
ordinary obligations. Taxes and debts cannot be the subject of
TAX V. SPECIAL ASSESSMENT
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.
Special assessment – a charge imposed on lands specially benefited
by public works or improvements financed by the government. It is not
a personal liability of the person assessed. His liability is limited only to TAX V. SUBSIDY
the land involved. It is based wholly on benefits and not necessity.

Subsidy is a sum of money granted by the government or a public

Tax Special Assessment
body to assist an industry or business so that the price of a
Basis Based on necessity Based wholly on benefits commodity or service may remain low or competitive

Levied on persons, It is a pecuniary aid or directly granted by the government to an

Subject property, or the exercise Levied only on land individual or private commercial enterprise and even to foreign
of a right or privilege establishments deemed beneficial to the public.
Limited or Exceptional as
Scope General application to the time and place Tax subsidy is a reduction in the amount of tax that a business has to
(specific area for 5 years pay, allowed by the government, especially to create jobs.

Limited to recovery of Tax is not given or granted by the government, but rather collected
expenditures (maximum by the government from its people
Amount Unlimited
of 60% of the costs of the
improvement for 5 years)
Tax Subsidy
Cannot be surrendered
Surrender Can be surrendered
without compensation Source People Foreign Nations
Enforceability Mandatory Voluntary
Republic v. Bacolod
The purpose of a special assessment is to finance the improvement
of particular properties, with the benefits of the improvements TAX V. REVENUE
accruing or inuring to the owners thereof, who, after all, pay the
assessment. The purpose of an ordinary tax on the other hand, is to
provide the Government with revenues needed for the financing of Revenue refers to all funds or income derived by the government,
state affairs. Thus, while the refusal of a citizen to pay his ordinary whether from tax or from whatever source and whatever manner.
taxes may not indeed be sanctioned because it would impair
government functions, the same would not hold true in the case of a Tax is a type of revenue.
refusal to comply with a special assessment. TN: All taxes are revenues, but not all revenues are taxes.

TAX V. DEBT TAXATION V. INTERNAL REVENUE

Internal Revenue refer to taxes imposed by the legislature other

Tax Debt
than duties on imports and exports.
Based on contract or
Basis Based on law
judgment TTax is broader than internal revenue.
Assignability Not assignable Generally assignable
TAX V. CUSTOMS DUTIES
Mode of May be paid in money or
Generally paid in money
Payment in kind
Customs Duties is a tax levied on imports (and, sometimes, on benefit of individuals, even though in a remote or collateral way, the
exports) by the customs authorities of a country to raise state public may be benefited thereby.
revenue, and/or to protect domestic industries from more efficient or
predatory competitors from abroad. TN: Public purpose has now evolved to include social justice. Social
Justice is the broader term.
Customs duty is based generally on the value of goods or upon the
weight, dimensions, or some other criteria of the item (such as the Planters Products v. Fertiphil Corp.
size of the engine, in case of automobiles). The term "public purpose" is not defined. It is an elastic concept
that can be hammered to fit modern standards. It does not only
pertain to those purposes which are traditionally viewed as essentially
Tax Customs Duties
government functions, such as building roads and delivery of basic
Type National and Local National services, but also includes those purposes designed to promote social
justice. Thus, public money may now be used for the relocation of
Scope General or Specific Specific in Scope illegal settlers, low-cost housing and urban or agrarian reform.
Authority BIR or LGU Bureau of Customs
TAX V. TARIFF While the categories of what may constitute a public purpose are
continually expanding in light of the expansion of government
functions, the inherent requirement that taxes can only be exacted for
a public purpose still stands. Public purpose is the heart of a tax law.
Tariff is a tax imposed on imported goods and services. Tariffs are
When a tax law is only a mask to exact funds from the public, when
used to restrict trade, as they increase the price of imported goods
its true intent is to give undue benefit and advantage to a private
and services, making them more expensive to consumers. They are
enterprise, the law will not satisfy the requirement of "public
one of several tools available to shape trade policy.
purpose".

Tax Tariffs Case discussion: the LOI provides that the imposition of the P10 levy
was conditional and dependent upon PPI becoming financially viable.
Type National and Local National This suggests that the levy was actually imposed to benefit PPI.
Scope General or Specific Specific in Scope 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
Authority BIR or LGU Bureau of Customs LOI clearly indicate that the levy was exacted for the benefit of a
private corporation.
LIMITATIONS ON THE POWER OF TAXATION
TEST TO DETERMINE PUBLIC PURPOSE

CONSTITUTIONAL AND INHERENT LIMITATIONS 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
These limitations are those provided in the fundamental law or implied
each advantage to individuals might incidentally serve the public
therefrom, while the rest spring from the nature of the taxing power
itself although they may or may not be provided in the Constitution.
Case discussion: The appropriation of amount for the construction on
a land owned by private individual is invalid imposition since it results
INHERENT LIMITATIONS in the promotion of private enterprise; it benefits the property of a
particular individual. The provision that the land thereafter be donated
to the government does not cure this defect. The rule is that if the
INHERENT LIMITATIONS 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 refer to those limitations which are based on other hand, if what is incidental is the promotion of a private
taxation‘s nature as a power. They exist despite the absence of an enterprise, the tax law shall be deemed ―for public purpose‖.
express constitutional provision thereon. Hence, they need not be
contained in any law or constitution. Determination that the tax is for public purpose
A. Proceeds of the tax must be used for the support of the
Violation of any of the inherent limitations amounts to a taking of government, specifically on its governmental functions
property without due process of law and therefore void. B. Proceeds of the tax must be for any of the recognized objects of
the government
The inherent limitations are the following: [PENIT] C. Proceeds of the tax must be to promote the welfare of the
community
A. Public purpose
B. Exemption from taxation of government entities TN: The test is not as to who receives the money, but the character or
C. Non-delegation of the legislative power to tax the purpose of which it is expected. Also, the test is not the immediate
D. International comity result of the expenditure but the ultimate result.
E. Territorial jurisdiction
Q: When is the reckoning period to determine the purpose of the
levy?
PUBLIC PURPOSE
A: To determine if it is for public purpose, it must be reckoned from
the date the law is passed and not from the time of implementation.
THE LEVY MUST BE FOR A PUBLIC PURPOSE
Lutz v. Araneta
The right of taxation can only be used in aid of a public object. It Re: For public purpose although it is for a specific industry
cannot be exercised in aid of enterprises strictly private and for the
 One who has sustained or is in imminent danger of sustaining and
The tax is levied with a regulatory purpose, to provide means for the injury as a result of the act complained of. To be a proper party, one
rehabilitation and stabilization of the threatened sugar industry. In must have legal standing.
other words, the act is primarily an exercise of the police power. The
protection and promotion of the sugar industry is a matter of public Taxpayers have sufficient interest in preventing the illegal expenditure
concern. Sugar production is one of the great industries of the of moneys raised by taxation and may therefore question the
Philippines, with sugar occupying a leading position among its export constitutionality of statutes requiring expenditure of public money.
products. It is a great source of the state‘s wealth, hence, its
promotion, protection and advancement redounds greatly to the Important concepts to remember:
general welfare. 1. The public funds must be derived from taxation
2. Does not apply to donations and contributions made by public
Thus, the legislature may determine within reasonable bounds what is individuals or private entities
necessary for its protection and expedient for its promotion. Here, the 3. Taxpayer is not relieved from the obligation to pay tax just
legislative discretion must be allowed full play, subject only to the test because of his belief that it is being misappropriated
of reasonableness. 4. A taxpayer has no legal standing to question acts which do not
involve the use of public funds.
Q: Why is it that only those people engaged in the sugar industry are
the ones burdened to pay the tax?
NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
A: That the tax to be levied should burden the sugar producers
themselves can hardly be a ground of complaint. Indeed, it appears
rational that the tax be obtained precisely from those who are to be NON-DELEGATION OF THE LEGISLATIVE POWER TO TAX
benefited from the expenditure of the funds derived from it. At any
rate, it is inherent in the power to tax that a state be free to select the The power of taxation peculiarly and exclusively belongs to the
subjects of taxation, and it has been repeatedly held that inequalities legislative body of the government and therefore may not be
which result from a singling out of one particular class for taxation or delegated as a rule.
exemption infringe no constitutional limitation.
General rule: The power of taxation is vested in the legislative
Caltex v. COA branch of the national government and therefore cannot be
Taxation is no longer envisioned as a measure to raise revenue to delegated.
support the existence of the government. Taxes may be levied with a Exceptions:
regulatory purpose to provide means for the rehabilitation and 1. Delegation to local governments
stabilization of a threatened industry which is affected with public 2. Delegation to the President
interest as to be within the police power of the State. 3. Delegation to administrative bodies

The oil industry is greatly imbued with public interest as it vitally Matters which cannot be delegated
affects the general welfare. Any unregulated increase in oil prices 1. Nature of taxation
could hurt the lives of a majority of the people and cause economic 2. Object and purpose
crisis of untold proportions. It would have a chain reaction in terms of 3. Subject or coverage
demands for wage increase and upward spiralling of the cost of basic 4. Amount or rate of tax
commodities. Hence, the stabilization of oil prices is of prime concern 5. Manner, means and agencies of collection
which the state, via its police power, may properly address. 6. Situs

CONCEPTS RELATIVE TO PUBLIC PURPOSE EXCEPTIONS

1. Inequalities resulting from the singling out of one particular Delegation to Local Government Units
class for taxation or exemption infringe no constitutional Article 10, Section 5, Constitution
limitation
2. Individual taxpayers need not derive direct benefits from the Each LGU shall have the power to create its own sources of revenues
tax and to levy taxes, fees, charges, subject to such guidelines and
3. Public purpose is continually expanding, areas formerly left to limitations as the Congress may provide, consistent with the basis
private initiative may not be undertaken by the government if it policy of local autonomy.
is to meet the increasing social challenges of the time.
4. Public purpose is determined at the time of the enactment of TN: Hence, the Congress passed the Local Government Code of 1991
the tax law and not at the time of its implementation. which embodies the guidelines on how LGUs can exercise such power.

TAXPAYER‟S SUIT Q: Can a municipality pass an ordinance imposing a tax on any sale or
transfer of real property located within its territory?
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 A: No. The Local Tax Code only allows provinces and cities to impose
the public money is used for public purpose or not. a tax on the transfer of ownership of real property. Municipalities are
prohibited from imposing said tax that provinces are specifically
The act complained of is directly involved in the illegal disbursement authorized to levy. While it is true that the Constitution has given
of public funds. However, the public funds must be derived from broad powers of taxation to LGUs, this delegation however is subject
taxation. to such limitations as may be provided by law.

Proper party 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. The Republic, like any individual, may form a corporation with
Otherwise, the municipality cannot assume it. Its power to tax must personality and existence distinct from its own. The separate
always yield to a legislative act which is superior, having been passed personality allows a GOCC to hold and possess properties in its own
upon by the State itself which has the inherent power to tax. name and thus permit greater independence and flexibility in its
operations. It may therefore be stated that tax exemption of property
Delegation to the President owned by the Republic refers to ―properties owned by the
A. The authority of the President to fix tariff rates, import and Government and by its agencies which do not have separate and
export quotas, tonnage and wharfage dues, and other duties or distinct personalities (unincorporated entities)‖
imposts.
(Article VI, Section 28(2), 1987 Constitution) Case discussion: When a land is reserved, the land remains the
absolute property of the government. The latter does not part with its
B. Flexible tariff clause – the authority given to the President, upon title by reserving them, but simply gives notice that it desires them for
the recommendation of NEDA, to adjust the tariff rates under a certain purpose. As its title remains with the Republic, the reserved
Sec. 401 of the Code in the interest of national economy, general land is covered by the tax exemption. The reserved land is tax-exempt
welfare and/or national security. but the warehouse constructed on such reserved land should be
assessed real estate tax as such improvement does not belong to the
Reason: Impelled by necessity. These matters pertain to Republic.
international trade. In the enactment of laws, the process
attendant thereto is very cumbersome. If we let Congress fix Hence:
tariff rate, it would take a really long time. But any such A. TAX EXEMPT – GOCCs with original charter; attached to the
delegation to the President must be done by Congress through government; unincorporated
the enactment of a law. B. TAXABLE – GOCCs with special charter; personality distinct
from the government; incorporated
Delegation to administrative bodies
Limited to the administrative implementation that calls for some Government entities exempted from income tax:
degree of discretionary powers under sufficient standards expressed A. GSIS
by law or implied from the policy and purposes of the Act. B. SSS
A. Power to value property for purposes of taxation C. PHIC
B. Power to assess and collect taxes D. PCSO
C. Power to perform an innumerable details of computation, E. PAGCOR (but not exempted from business tax)
appraisal and adjustment
PAGCOR v. BIR
When Congress delegates legislative powers to the various There was no need for Congress to grant tax exemption to PAGCOR
administrative agencies, i.e. BIR, BOC, what is delegated is the power with respect to its income from gaming operations as the same is
of ―subordinate legislation.‖ already exempted from all taxes of any kind or form, income or
otherwise, whether national or local, under its Charter, save only for
It confers upon the administrative bodies the power and authority to the five percent (5%) franchise tax.
fill in the details which are lacking in the law and which Congress may
not have the competence or opportunity to fill in. Where a general law is enacted to regulate an industry, it is common
EXEMPTION FROM TAXATION 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,
EXEMPTION FROM TAXATION OF GOVERNMENT ENTITIES if no provision or amendment is stated in the franchise to effect the
TN: Refers only to real estate tax 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.
If the taxing authority is the National Government

In this regard, we agree with petitioner that if the lawmakers had

GR: Agencies and instrumentalities of the government performing
intended to withdraw petitioner's tax exemption of its gaming income,
governmental functions are tax exempt. If performing proprietary
then Section 13 of PD 1869 should have been amended expressly in
function, taxable.
R.A. No. 9487, or the same, at the very least, should have been
mentioned in the repealing clause of R.A. No. 9337.
A. Governmental function – tax exempt
B. Proprietary function – taxable
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
EXC: Even if performing proprietary function, if the franchise or law operations, pursuant to P .D. 1869, as amended, is not repealed
creating them exempts them – tax exempt.
2. Petitioner's income from gaming operations is subject to the five
percent (5%) franchise tax only
Reason: Otherwise, it would necessitate the imposition of new taxes 3. Petitioner's income from other related services is subject to
in order to pay for the tax imposed on them. There would be a corporate income tax only
continuing cycle of imposing taxes.
Bar Question:
If the taxing authority is the LGU
A tobacco corporation bought a parcel of land and donated the same
RA 7160 expressly prohibits LGUs from levying tax on the National to a municipality for the sole purpose of devoting said land as a
Government, its agencies and instrumentalities and other LGUs. relocation site. Through an ordinance, the municipality ordained that
the lots be finally transferred and donated to the beneficiaries.
NDA v. Cebu City Determine the tax consequence of the foregoing disposition with
Re: GOCCs with respect to tax exemption respect to the municipality.
The Municipality is not subject to any donor‘s tax on the value of the of the taxpayer but upon his relation as a citizen to the state. As such
land it subsequently donated, it being exempt from taxes as a political citizen, he is entitled, wherever he may be, inside or outside of his
subdivision of the National Government. country, to the protection of his government.

Reasons:
INTERNATIONAL COMITY
1. Tax laws do not operate beyond a country‘s territorial limits
2. Property which is wholly and exclusively within the jurisdiction of
INTERNATIONAL COMITY another state receives none of the protection for which a tax is
supposed to be compensation.
The respect accorded by nations to each other because they are
sovereign equals. Thus, one state cannot exercise its sovereign Foreign embassies
powers over another, and hence the property or income of a foreign Foreign embassies are not subject to tax because they are considered
state or government may not be subject of taxation by another state. extensions of the foreign country they represent.

TN: Under international comity, a state must recognize the generally Situs of taxation
accepted tenets of international law, among which are the principles Within the territorial jurisdiction, the taxing authority may determine
of sovereign equality among states and freedom from suit without the situs. Situs of taxation literally means the place of taxation.
their consent – these limit the authority of a government to effectively
impose taxes on a sovereign state.
CONSTITUTIONAL LIMITATIONS
Reasons:
1. Doctrine of sovereign equality among states – as DIRECT CONSTITUTIONAL LIMITATIONS
between equals, there is no sovereign. One state cannot
exercise its sovereign powers over another. Direct constitutional limitations

2. Non-suability of States – under international law, a foreign A. Revenue bill must originate exclusively in the House of
government may not be sued without its consent. Hence, it is Representatives but the Senate may propose or amendments
useless to impose a tax which could not be collected. B. Concurrence of a majority of all the members of Congress for
the passage of a law granting tax exemption
3. Usage among states – when a foreign sovereign enters the C. Rule of uniformity and equity in taxation
territorial jurisdiction of another, there is an implied D. Progressive system of taxation
understanding that the former does not intend to degrade its E. Exemption of religious, charitable and educational entities,
dignity by placing itself under the jurisdiction of another. nonprofit cemeteries, and churches from property taxation.
F. Exemption of non-stock, non-profit educational institutions
Bar Question: from taxation
A multinational corporation doing business in the Philippines donated G. Non-imprisonment for non-payment of a poll tax
100 shares of stock of said corporation to Mr. Cortez, its resident H. Non-impairment of the jurisdiction of the SC in tax cases
manager in the Philippines. What is the tax liability if any of the said I. Prohibition on the use of special fund
corporation? J. Power of the President to veto any particular items in a
revenue or tariff bill
Foreign corporations effecting a donation are subject to donor‘s tax
only if the property donated is located in the Philippines. Accordingly, REVENUE BILLS MUST ORIGINATE FROM THE HOUSE OF
donation of a foreign corporation of its own shares of stocks in favor REPRESENTATIVES
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. Article VI, Section 24(4) of the 1987 Constitution
TERRITORIAL JURISDICTION All appropriation, revenue or tariff bills shall originate from the House
of Representatives, but the Senate may propose or concur with
amendments.
TERRITORIAL JURISDICTION

A state may not tax property lying outside its borders or lay an excise TN: What‘s required to originate from HREP is the bill and not the law
or privilege tax upon the exercise or enjoyment of a right or privilege or statute.
derived from the laws of another state and therein exercised and
enjoyed. Tolentino v. Secretary of Finance
Re: VAT originating from the Senate and not the HREP
General Rule: Taxation may be exercised only within the territorial
jurisdiction of the taxing authority. To insist that a revenue statute and not only the bill which initiated
the legislative process culminating in the enactment of the law must
Exceptions: Where privity of relationship exists. Hence, a person substantially be the same with the house bill, would be to deny
may be taxed where there is between him and the taxing state a senate‘s power not only to concur with amendments but also to
privity of relationship justifying the levy. Thus, a citizen‘s income may propose amendments. It would violate the co-equality of legislative
be taxed even if he resides abroad as the personal jurisdiction of his power of the two houses and in fact make the HREP superior to the
government over him remains. Senate.

TN: In this case, the basis of the power to tax is not dependent on the It is not the statute that must originate in the HREP but the bill. The
source of the income, location of the property or upon the residence 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 A: Yes. Uniformity in taxation does not prohibit the classification of the
bill in anticipation of its receipt of the bill from the HREP, as long as objects of taxation or the entities or subjects upon which taxes are
action by the Senate is withheld until receipt of the bill coming from imposed. However, to withstand any constitutional infirmity, such
the HREP. classification must comply with certain guidelines.

What is prohibited is for the Senate to enact revenue measures on its A. It is based upon substantial distinctions which make real
own without a bill originating from the HREP. But once he revenue bill differences
was passed by the HREP and sent to the Senate, the latter can pass B. These are germane to the purpose of the legislation or
its own version on the same subject matter by virtue of its power to ordinance
propose or concur with amendments. This is in consonance with the C. The classification applies, not only to present conditions, but,
principle of co-equality between the two branches of Congress. also, to future conditions substantially identical to those of the
present
MAJORITY VOTE OF CONGRESS FOR TAX EXEMPTIONS 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
Article VI, Section 28 (4) of the 1987 Constitution No law
districts, decided to impose a tax, to be paid by the driver, on all
granting any tax exemption shall be passed without the concurrence
private cars entering the city during peak hours from 8:00 am to 9:00
of a majority of all the members of Congress.
am from Mondays to Fridays, but it exempts those cars carrying more
than two occupants, excluding the driver. Is the ordinance valid?

Votes required No. The ordinance is in violation of the rule of uniformity and equality,
A. For the grant of tax exemption – absolute majority of the which requires that all subjects or objects of taxation, similarly
members of Congress (50+1 of all the members voting situated must be treated alike and must not be classified in an
separately) arbitrary manner. The ordinance exempts cars carrying more than two
B. For withdrawal of tax exemption – relative majority or majority occupants and taxes only private cars, exempting public vehicles,
of the quorum although both contribute to the traffic problem.

TN: Tax amnesties, tax condonations and tax refunds are considered Also, the tax is imposed not on the registered owner but the driver,
grants in the nature of tax exemptions. Hence, absolute majority is who has no control over the route of the vehicle. The ordinance does
required. not just violate the rule of uniformity, the same is likewise unjust.

UNIFORM, EQUITABLE AND PROGRESSIVE SYSTEM EXEMPTION FROM REAL PROPERTY TAXES

Article VI, Section 28 (1) of the 1987 Constitution The rule of Article VI, Section 28 (3) of the 1987 Constitution Charitable
taxation shall be uniform and equitable. The Congress shall evolve a institutions, churches, parsonages, or convents appurtenant thereto,
progressive system of taxation. 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.
A. Uniformity in taxation – all taxable articles or kinds of
property of the same class shall be taxed at the same rate.
TN: This is a self-executing provision.
B. Equity – uniformity in taxation is effected through the
apportionment of the tax burden among the taxpayers which Important principles:
must under the Constitution must be equitable – fair, just, A. The tax exemption of religious, charitable and educational
reasonable and proportionate to the taxpayer‘s ability to pay. institutions covers real property tax only. B. The test is usage and
not ownership.
C. Progressive – There shall be more direct taxes than indirect C. The exemption extends to facilities which are incidental to or
taxes, with ability to pay as the principal criterion. Hence, the reasonably necessary for the accomplishment of said purpose.
tax rate increases as the tax bracket increases.

Q: Is progressive system of taxation directory or mandatory? Test of Exemption Nature of Use Scope of Exemption

A: It is merely directory because we even have regressive taxes Real property taxes on
(VAT), the lesser money you have, the more you can feel the impact. facilities which are:
Actual, direct, and a. Actual
It is regressive as to effect. Such a provision is placed in the Use of the property, exclusive use for
Constitution as moral incentives to legislation and not as judicially b. Incidental
and not the religious, charitable
enforceable rights. c. Reasonably
ownership. and educational
TN: This does not mean that there should be no indirect taxes. There necessary for the
purposes
can still be indirect taxes as long as it is minimized. In other words, accomplishment of
having a progressive system means that the direct taxes are more said purpose
than the indirect taxes.
TN: The owner of the property does not matter.
Q: Is classification allowed? The exemption attaches to the property and not to the owner.
Example: restrictive interpretation of the phrase "exclusively used for
educational purposes", reasonable emphasis has always been made
Land owned by Caritas Health Shield/USC
that exemption extends to facilities which are incidental to and
Rented out to different entities
reasonably necessary for the accomplishment of the main purposes.
(Are the lots exempt from Real Property Taxes?) Otherwise
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
stated, the use of the school building or lot for commercial purposes is required by law to have a pool of physicians who comprises the
neither contemplated by law, nor by jurisprudence. required medical departments in various medical fields.

Thus, while the use of the second floor of the main building in the case The fact that the physicians are holding office in a separate building
at bar for residential purposes of the Director and his family, may find does not take away the essence and nature of their services vis-à-vis
justification under the concept of incidental use, which is the over-all operation of the hospital and the benefits to the hospital‘s
complimentary to the main or primary purpose— educational, the lease patients. Their transfer to a more spacious and, perhaps, convenient
of the first floor thereof to the Northern Marketing Corporation cannot place and location for the benefit of the hospital‘s patients does not
by any stretch of the imagination be considered incidental to the remove them from being an integral part of the overall operation of
purpose of education. the hospital.

Hence, the school building as well as the lot where it is built should be Respondent‘s charge of rentals for the offices and clinics its accredited
taxed not because the second floor of the same is being used by the physicians occupy cannot be equated to a commercial venture, which
Director and his family for residential purposes, but because the first is mainly for profit.
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 First, CHHMAC is only for its consultants or accredited doctors and
of the assessed tax be returned to the school involved. medical specialists. Second, the charging of rentals is a practical
necessity: (1) to recoup the investment cost of the building, (2) to
TN: The property need not be indispensable. It is enough that it is cover the rentals for the lot CHHMAC is built on, and (3) to maintain
incidental and reasonably necessary to the purpose. the CHHMAC building and its facilities. Third, as correctly pointed out
by respondent, it pays the proper taxes for its rental income. And,
Phil. Lung Center v. QC fourth, if there is indeed any net income from the lease income of
Philippine Lung Center is not tax exempt. Under the Constitution, in CHHMAC, such does not inure to any private or individual person as it
order to be entitled to exemption from real property tax, there must be will be used for respondent‘s other charitable projects.
clear and unequivocal proof that:
1. It is a charitable institution and American Bible Society v. City of Manila, 1957
2. Its real properties are actually, directly and exclusively used for Facts: American Bible Society is engaged in the distribution and sales
charitable purposes. of bibles and religious articles. The City Treasurer of Manila informed
the plaintiff that it was conducting the business of general
While portions of the hospital are used for treatment of patients and merchandise without providing itself with the necessary Mayor's
the dispensation of medical services to them, whether paying or permit and municipal license, in violation of Ordinance No. 3000, as
nonpaying, other portions thereof are being leased to private amended, and Ordinance No. 2529, as amended, and required
individuals and enterprises. plaintiff to secure the corresponding permit and license.
Exclusive is defined as possessed and enjoyed to the exclusion of
others, debarred from participation or enjoyment. If real property is Held: The constitutional guaranty of the free exercise and enjoyment
used for one or more commercial purposes, it is not exclusively used of religious profession and worship carries with it the right to
for the exempted purposes but is subject to taxation. The words disseminate religious information. Any restraint of such right can only
"dominant use" or "principal use" cannot be substituted for the words be justified like other restraints of freedom of expression on the
"used exclusively" without doing violence to the Constitution and the grounds that there is a clear and present danger of any substantive
law. evil which the State has the right to prevent.

What is meant by actual, direct and exclusive use of the property is the It may be true that in the case at bar the price asked for the bibles
direct and immediate and actual application of the property itself to the and other religious pamphlets was in some instances a little bit higher
purposes for which the charitable institution is organized. It is not the than the actual cost of the same, but this cannot mean that appellant
use of the income from the real property that is determinative of was engaged in the business or occupation of selling said
whether the property is used for tax-exempt purposes. "merchandise" for profit. For this reason we believe that the provisions
of City of Manila Ordinance No. 2529, cannot be applied to appellant,
TN: In the Herrera case, the meaning of ―exclusive use‖ is the for in doing so it would impair its free exercise and enjoyment of its
―principal‖ or ―dominant‖ use. In fact, it likewise considers incidental religious profession and worship as well as its rights of dissemination
use. Hence, as long as it is related to the principal purpose, then it can of religious belief.
be exempted. However, in the Lung center case, ―exclusively‖ is
synonymous to ―solely‖. Hence, to be exempted from real property
EXEMPTION OF NON-STOCK, NON-PROFIT EDUCATIONAL
tax, the property should be solely for charitable purpose and not just
INSTITUTIONS
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 Article XIV, Section 4 (3) of the 1987 Constitution All revenues
considers commercial in nature contrary to respondent's position that it and assets of non-stock, non-profit educational institutions used
is a special real property entitled to a 10% assessment rate for realty actually, directly and exclusively for educational purposes shall be
tax. exempt from taxes and duties.

Issue: Whether or not a medical arts center built by a hospital to house Proprietary educational institutions, including those cooperatively
its doctors a separate commercial establishment or an appurtenant to owned, may likewise be entitled to such exemptions, subject to the
the hospital. limitations provided by law, including restrictions on dividends and
provisions for reinvestment.
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
categorized as "commercial" since a tertiary hospital like CHH is
 Subject to conditions prescribed by law, all grants, endowments,
Jollibee University of Cebu
donations, or contributions used actually, directly, and exclusively for
Not exempt Not exempt

consultants of the hospital and the ones who can treat CHH's patients Iglesia ni Cristo Idle Land
confined in it. This fact alone takes away CHHMAC from being NotImportant
exempt principles: Not exempt

holding clinics in CHHMAC are those duly accredited by CHH. They are
educational purposes shall be exempt from tax. Summary of rules:
A. The exemption covers income, property, and donor‘s taxes, custom A. If non-stock, non-profit educational institution – tax exempt
duties, and other taxes imposed by either or both the national B. Even if for profit – preferential rate at 10% provided its
government or political subdivisions on all revenues, assets, gross income from unrelated trade must not exceed 50%
property or donations, used actually, directly and exclusively for of its total gross income
educational purposes. The 10% preferential tax rate does not apply to the following:
A. The passive income derived by the educational institution,
TN: In case of religious and charitable entities and non-profit which is subject to final income tax, i.e. rent income or
cemeteries, the exemption is limited only to property tax. interest in income
B. Engaged in unrelated trade or business or other activity
B. The exemption does not cover revenues derived from, or assets where the gross income from such exceeds 50% of the
used in, unrelated activities or enterprise. total gross income

C. Lands, buildings, and improvements actually, directly and Distinguish Article VI from Article XIV.
exclusively used for educational purposes are exempt from
property tax (Sec 28 (3) Art VI), whether the educational
Article VI, Section 28 (3) Article XIV, Section 4(3)
institution is proprietary or non-profit.

D. The test is usage and not ownership. Charitable institutions, churches,

and parsonages or convents
appurtenant thereto, mosques,
E. Similar tax exemptions may be extended to proprietary
nonprofit cemeteries, and all lands, Non-stock, non-profit educational
educational institutions by law subject to such limitations as it buildings, and improvements, institutions
may provide, including restrictions on dividends and provisions for actually, directly, and exclusively
reinvestment. The restrictions are designed to insure that the
used for religious, charitable, or
taxexemption benefits are used for educational purposes.
educational purposes.

Example: UC (Proprietary)
Income, property, donor‘s taxes
Not tax exempt but given a special rate of 10%. Property taxes
and customs duties
School building/area – exempted from property tax
Rent income of UC – taxable at 30% (normal
corporate Perpetual Succour v. CIR
income tax) TN: This is a CTA decision. Not yet affirmed by the SC.

TN: Where an educational institution is private and non-profit but When a hospital is proprietary or private, which is not for profit and its
a stock corporation, it is subject to income tax but at a gross income from unrelated trade, business or other activity does not
preferential rate of 10%. Same thing is true for charitable exceed 50% of its total gross income from all sources, it is subject to
hospitals or institutions. 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,
Requisites for the application of the 10% preferential rate:
operated exclusively for religious or charitable purpose, no part of its
1. It must be private
net income or asset belong to or inure to the benefit of any specific
2. It has permit to operate as an educational institution
person, then the hospital will fall under the provision of Section 30 (E)
3. It is non-profit
of the NIRC.
4. Its gross income from unrelated trade or business must not
Sec 30. The following organizations shall not be taxed under this Title
exceed 50% of its total gross income from all sources,
in respect to income received by them as such: (E) Non-stock
otherwise, it will be subject to the 30% corporate income
corporation or association organized and operated exclusively for
tax rate
religious, charitable, scientific, athletic, or cultural purposes, or for the
rehabilitation of veterans, no part of its net income or asset shall
Example: belong to or inures to the benefit of any member, organizer, officer or
Land owned by USC any specific person.
Rented out to different entities
(Are the rentals subject to tax?) The admission of pay-patients does not detract from the charitable
Depends on the use of the Income character of a hospital, if all its funds are devoted exclusively to the
maintenance of the institution as a public charity. In other words,
If ADE used for educational purposes where the rendering of charity is its primary object, and the funds
Jollibee University of Cebu derived from payments made by patients able to pay are devoted to
the benevolent purposes of the institution, the mere fact that a profit
Tax exempt Tax Exempt
has been made will not deprive the hospital of its benevolent
Iglesia ni Cristo Idle Land character.
Tax Exempt Taxable
CIR v. CA
If not ADE used for educational purposes
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 income derived from profit-generating activities of non -stock non-
charitable non-profit corporation – subject to income tax. profit educational institutions are all subject to income tax.

Held: Yes. Under the NIRC, income of whatever kind and character of Important: On 8 June 2011, the Court of Tax Appeals en banc
non-stock non-profit institutions from any of their properties, real or promulgated a Decision holding that a non-stock non-profit
personal, or from any of their activities conducted for profit, educational institution is entitled to the constitutional tax exemption,
regardless of the disposition made of such income, shall be subject to regardless of
the tax. source, as long as the institution is able to prove that these revenues
were actually, directly and exclusively used for educational purposes.
Hence, rental income derived by a tax-exempt organization from the However, until this is affirmed by the Supreme Court, the BIR will
lease of its properties, real or personal, is not exempt from income continue and has continued to tax all income of educational
taxation, even if such income is exclusively used for the institutions from activities conducted for profit.
accomplishment of its objectives.
NON-IMPRISONMENT FOR NON-PAYMENT OF POLL TAX
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 Article III, Section 20 of the 1987 Constitution
actually, directly, and exclusively for educational purposes. No person shall be imprisoned for debt or non-payment of a poll tax.

To begin with, YMCA is not even an educational institution within the Poll tax is a tax of a fixed amount fixed on persons residing within a
purview of the Constitution. The term educational institution, when specified territory, whether resident or not, without regard to their
used in laws granting tax exemptions, refers to a school, seminary, property or the occupation of business which they may be engaged. It
college or educational establishment. Therefore, YMCA cannot be is a tax imposed on persons whether residing or not residing in a
deemed one of the educational institutions covered by the particular place as evidenced by a community tax certificate or
constitutional provision under consideration. cedula.

TN: YMCA cannot avail of Art VI, Sec 28 since it covers only real NON-IMPAIRMENT OF THE JURISDICTION OF THE SC
property taxes.

Q. Are income derived from profit-generating activities of

nonstock non-profit educational institutions subject to
Article VIII, Section 2 of the 1987 Constitution
income tax? There seems to be a conflict between the Constitution
and the NIRC regarding this matter. 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.
If you look at the Constitution, it provides that: ―All revenues and
assets of non-stock, non-profit educational institutions used actually,
Article VIII, Section 5 (2) of the 1987 Constitution
directly, and exclusively for educational purposes shall be exempt
The Supreme Court shall have the following powers:
from taxes and duties.‖
(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
It is clear that the Constitution does not distinguish with respect to the
lower courts in xxx
source or origin of the income. Hence, whether the income was
(b) all cases involving the legality of any tax, impost, assessment or
derived from profit-generating activities or not, it will still be tax
toll or any penalty imposed in relation thereto.
exempt.
The NIRC, while echoing said exemption, however provided a
Article VI, Section 30 of the 1987 Constitution
condition, to wit: ―The income of whatever kind and character of the
No law shall be passed increasing the appellate jurisdiction of the
foregoing organizations from any of their properties, real or personal,
Supreme Court without its advice and concurrence.
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.‖
San Miguel Corp v. Avelino
In other words, the NIRC is trying to say is that income derived by a Even the legislative body cannot deprive the SC of its appellate
non-stock, non-profit educational institutions from profit-generating jurisdiction over all cases coming from inferior courts where the
activities are now taxable. It in effect made a distinction with respect constitutionality or validity of an ordinance or the legality of any tax,
to the source or origin of the income, a distinction that the impost, assessment, or toll is in question.
Constitution itself did not make. This would appear contradictory to
the allencompassing exemption provided in the Constitution. Q. What is the scope of judicial review in taxation?
Limited only to the interpretation and application of tax laws. Its
Applying the doctrine of constitutional supremacy, the condition power does not include inquiry into the policy of legislation. Neither
imposed by the Tax Code requiring such institutions to limit the can it legitimately question or refuse to sanction the provisions of any
sources of their income to educational activities only should be law consistent with the Constitution.
deemed void and of no effect for running contrary to the
constitutional exemption. PROHIBITION ON THE USE OF SPECIAL PURPOSE FUND

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
Article VI, Section 29 (3) of the 1987 Constitution All money
finally resolved, those advertisements, rental income and other such
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 No person shall be deprived of life, liberty or property without due
balance, if any, shall be transferred to the general funds of the process of law, nor shall any person be denied the equal protection of
Government. the laws.

POWER OF THE PRESIDENT TO VETO ANY PARTICULAR ITEMS TWO KINDS OF DUE PROCESS
IN A REVENUE OR TRARRIFF BILL
A. Substantive due process – an act is done under the
authority of a valid law or the Constitution itself.

Article VI, Section 27 (2) of the 1987 Constitution The Requires that a tax statute must be within the constitutional
President shall have the power to veto any particular item or items in authority of Congress to pass
an appropriation, revenue, or tariff bill, but the veto shall not affect It must be reasonable, fair and just
the item or items to which he does not object. 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

General rule: The President has to approve or disapprove a bill in its
limitations is an infringement of substantive due process.
entirety.
Example of Non-compliance with Substantantive Due
Exceptions: (where partial or item veto is allowed)
Process: Imposition of tax for private purpose
A. Appropriation bill
B. Revenue bill
B. Procedural due process – an act is done after compliance
C. Tariff bill
with fair and reasonable methods or procedure prescribed by
law.
TN: The Line-item veto power of the President should be a direct
constitutional limitation.
Requires notice and hearing or at least an opportunity to be
CIR v. Manila Golf and Country Club heard
Whether the presidential veto referred to the entire section or merely
to the imposition of 20% tax on gross receipts of operators of Example of Non-compliance with Procedural Due Process:
restaurants, bars, etc Forfeiture of property of the taxpayer for non-payment of
The CTA opined that the President could not veto words or phrases in tax without giving notice to the taxpayer or giving a chance
a bill but only an entire item. Obviously, what the CTA meant by to explain.
"item" was an entire section.
Q. What are the requirements of due process in taxation?
We do not agree. The presidential veto referred merely to the A. It must be for a public purpose
inclusion of hotels, motels and rest houses in the 20% caterer's tax B. Imposed within the taxing authority‘s territorial jurisdiction C.
bracket but not to the whole section. Assessment or collection is not arbitrary or oppressive

An "item" in a revenue bill does not refer to an entire section imposing Q. Give instances of violations of the due process clause.
a particular kind of tax, but rather to the subject of the tax and the 1. If the law violates the inherent limitations on taxation.
tax rate. In the portion of a revenue bill which actually imposes a tax, 2. If the tax amounts to confiscation of property
a section identifies the tax and enumerates the persons liable therefor 3. If the subject of confiscation is outside the jurisdiction of the
with the corresponding tax rate. To construe the word "item" as taxing authority
referring to the whole section would tie the President's hand in 4. If the tax is imposed for a purpose other than a public purpose
choosing either to approve the whole section at the expense of also 5. If the law which is applied retroactively imposes just and
approving a provision therein which he deems unacceptable or veto oppressive taxes
the entire section at the expense of foregoing the collection of the
kind of tax altogether. IMPORTANT PRINCIPLES

INDIRECT CONSTITUTIONAL LIMITATIONS 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
INDIRECT CONSTITUTIONAL LIMITATIONS

B. There must be proof of arbitrariness, otherwise, the

A. Due process of law
presumption of constitutionality applies.
B. Equal protection of the laws
C. Non-impairment of the obligations of contracts
C. Due process requires hearing before adoption of legislative
D. Non-infringement of religious freedom
rules by administrative bodies of interpretative rulings
E. No appropriation for religious purposes
F. Non-infringement of the freedom of the press
D. Compliance of strict procedural requirements must be followed
to avoid a collision course between the state‘s power to tax and
DUE PROCESS OF LAW 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
Article III, Section 1 of the 1987 Constitution
Sison v. Ancheta income payable, is the very essence of the withholding tax method of
The due process clause may be invoked where a taxing statute is so tax collection.
arbitrary that it finds no support in the Constitution, as where it can
be shown to amount to the confiscation of property. However, where TN: CWT is not a tax but a manner of imposing taxes.
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 Net Income Tax Payable
persuasive character as would lead to such a conclusion. Absent such
a showing, the presumption of validity must prevail. Income P xxx
Less Exclusions ( xxx )
Chamber of Real Estate v. Romulo Gross Income P xxx
A group of real estate brokers questioned the validity of the imposition Less Allowable Deductions ( xxx )
of minimum corporate income tax (MCIT) of 2% on corporations‘
Net Income P xxx
gross income and a creditable withholding tax (CWT) on sales of real
Less Personal & Additional Exemptions ( xxx )
properties. They contend that the MCIT violates the due process
clause because it levies income tax even if there is no realized gain Taxable Net Income P xxx
since the basis for the income tax is the gross selling price instead of Multiplied by Appropriate Tax Rate ( xxx )
the net taxable income. Income Tax Due P xxx
Less Creditable Withholding Tax or Tax Credits ( xxx )
On the issue of MCIT Net Income Tax Payable P xxx
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 MCIT
evasion and minimizes tax avoidance schemes achieved through
sophisticated and artful manipulations of deductions and other Gross Sales P xxx
stratagems. Less : Cost of Goods Sold (xxx )
Gross Profit P xxx
In fact, there is even a safeguard where the MCIT commences only on Multiplied by MCIT rate 2%
the fourth taxable year immediately following the year in which the MCIT P xxx .
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. EQUAL PROTECTION OF THE LAWS

MCIT is constitutional because of the following reasons:

1. There was a legitimate governmental end.

Article III, Section 1 of the 1987 Constitution
No person shall be deprived of life, liberty, or property without due
2. MCIT is not a tax on the capital but on gross income.
process of law, nor shall any person be denied the equal protection of
the laws.
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
Equal protection of the laws
3. Tax deductions on gross income are a matter of legislative grace.
TN: Congress has the power to condition, limit or deny • The equal protection clause means that no person or class of
deductions from gross income in order to arrive at the net that it persons shall be deprived of the same protection of laws which
chooses to tax is enjoyed by other persons or other classes in the same place
and in the like circumstances.
4. Petitioner did not present any proof or any empirical data to • All persons subject to legislation shall be treated alike under
show that the implementation of the MCIT resulted in the similar circumstances and conditions both in the privileges
confiscation of their property. conferred and liabilities imposed.
• All persons, businesses, and properties should be taxed at the
5. Consistent with US Practice where they have Alternative same rate, so long as they belong to the same classification.
Minimum Tax (AMT) System. Our tax laws are patterned after US • Equality among equals.
tax laws.
Requirements for a valid classification
On the issue of CWT A. Classification rests on substantial distinctions which make real
differences
The collection of income tax via the CWT on a per transaction basis, B. Classification is germane to achieve the legislative purpose
i.e., upon consummation of the sale, is not contrary to the Tax Code. C. The law applies, all things being equal, to both present and
Withholding tax is just a manner of collection. It is still an income tax, future conditions
only that it was made in installment basis. D. The classification applies equally well to all those belonging to
the same class.
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 Criteria for equal protection
installments on the annual tax which may be due at the end of the A. When the law operates uniformly
taxable year. The withholding agent buyer‘s act of collecting the tax at On all persons
the time of the transaction, by withholding the tax due from the Under similar circumstances
 B. All persons are treated in the same manner on reasonable classification. And the classification, to be reasonable,
The conditions not being different (1) must rest on substantial distinctions; (2) must be germane to the
Both in privileges conferred and liabilities purposes of the law; (3) must not be limited to existing conditions
imposed only; and (4) must apply equally to all members of the same class.
Favouritism and preferences are not allowed
Act No. 1639 satisfies these requirements.
Q: Does the equal protection clause require territorial
uniformity of laws? A. Classification rests on substantial distinctions which make real
differences
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 The classification rests on real or substantial, not merely
material differences between territories, there is no violation of the imaginary or whimsical, distinctions. It is not based upon
constitutional clause. "accident of birth or parentage," as counsel for the appellant
asserts, but upon the degree of civilization and culture. "The
1 Cooley 608 term 'non-Christian tribes' refers, not to religious belief, but, in
The doctrine does not require that persons or properties different in a way, to the geographical area, and, more directly, to natives
fact be treated in laws as though they were the same. Indeed, to treat of the Philippine Islands of a low grade of civilization, usually
them the same or alike may offend the Constitution. What the living in tribal relationship apart from settled communities."
Constitution prohibits is class legislation which discriminates against
some and favors others. As long as there are rational or reasonable B. Classification is germane to achieve the legislative purpose
grounds for so doing, Congress may, therefore, group the persons or
properties to be taxed and it is sufficient ―if all of the same class are Designed to insure peace and order in and among the
subject to the same rate and the tax is administered impartially upon nonChristian tribes. It has been the sad experience of the past,
them as the observations of the lower court disclose, that the free
use of highly intoxicating liquors by the non-Christian tribes
Chamber of Real Estate v. Romulo have often resulted in lawlessness and crimes, thereby
Petitioner claims that the revenue regulations are violative of the hampering the efforts of the government to raise their standard
equal protection clause because the CWT is being levied only on real of life and civilization.
estate enterprises. Specifically, petitioner points out that
manufacturing enterprises are not similarly imposed a CWT on their C. The law applies, all things being equal, to both present and
sales, even if their manner of doing business is not much different future conditions
from that of a real estate Enterprise. Like a manufacturing concern, a
real estate business is involved in a continuous process of production It is intended to apply for all times as long as those conditions
and it incurs costs and expenditures on a regular basis. The only exist. The Act was not predicated, as counsel for appellant
difference is that "goods" produced by the real estate business are asserts, upon the assumption that the non-Christians are
house and lot units. "impermeable to any civilizing influence." On the contrary, the
Legislature understood that the civilization of a people is a slow
The taxing power has the authority to make reasonable classifications process and that hand in hand with it must go measures of
for purposes of taxation. Inequalities which result from singling out a protection and security.
particular class for taxation, or exemption, infringe no constitutional
limitation. The real estate industry is, by itself, a class and can be D. The classification applies equally well to all those belonging to
validly treated differently from other business enterprises. the same class
E.
What distinguishes the real estate business from other manufacturing The Act applies equally to all members of the class is evident
enterprises, for purposes of the imposition of the CWT, is not their from a perusal thereof. That it may be unfair in its operation
production processes but the prices of their goods sold and the against a certain number of non-Christians by reason of their
number of transactions involved. The income from the sale of a real degree of culture, is not an argument against the equality of its
property is bigger and its frequency of transaction limited, making it application.
less cumbersome for the parties to comply with the withholding tax
scheme. Ormoc Sugar Company v. Conejos
A perusal of the requisites instantly shows that the questioned
On the other hand, each manufacturing enterprise may have tens of ordinance does not meet them, for it taxes only centrifugal sugar
thousands of transactions with several thousand customers every produced and exported by the Ormoc Sugar Company, Inc. and none
month involving both minimal and substantial amounts. To require the other. At the time of the taxing ordinance's enactment, Ormoc Sugar
customers of manufacturing enterprises, at present, to withhold the Company, Inc., it is true, was the only sugar central in the city of
taxes on each of their transactions with their tens or hundreds of Ormoc. Still, the classification, to be reasonable, should be in terms
suppliers may result in an inefficient and unmanageable system of applicable to future conditions as well.
taxation and may well defeat the purpose of the withholding tax
system. The taxing ordinance should not be singular and exclusive as to
exclude any subsequently established sugar central, of the same class
People v. Cayat as plaintiff, from the coverage of the tax. As it is now, even if later a
Facts: Cayat was a native of Baguio, Benguet, Mountain Province. He similar company is set up, it cannot be subject to the tax because the
was accused for violating Act No. 1639 which declared unlawful for any ordinance expressly points only to Ormoc Sugar Company, Inc. as the
native of the Philippine islands who is a member of a non-Christian entity to be levied upon.
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 Tiu v. CA
which the members of the tribes have been accustomed. Petitioners challenged the constitutionality of EO 97-A for allegedly
being violative of their right to equal protection of the laws. Petitioners
It is an established principle of constitutional law that the guaranty of contended that the provisions of EO 97 -A confining the application of
the equal protection of the laws is not violated by a legislation based
R.A. 7227 which grants tax incentives within the secured area and
excluding the residents of the zone outside of the secured area is General Rule: The power to tax is pursuant to a law and therefore
discriminatory. the obligation to pay taxes is imposed by law. Thus, the
nonimpairment clause does not apply because it refers to obligations
Substantial distinctions which make real differences brought about by contracts and not law.
There are substantial differences between the big investors who are
being lured to establish and operate their industries in the so-called Exception:
"secured area" and the present business operators outside the area. In cases of tax exemptions granted for a valuable consideration
On the one hand, we are talking of billion-peso investments and because it takes the form and essence of a contract.
thousands of new jobs. On the other hand, definitely none of such
magnitude. In the first, the economic impact will be national; in the Tolentino v. Secretary of Finance
second, only local. Even more important, at this time the business The non-impairment clause has never been thought as a limitation on
activities outside the "secured area" are not likely to have any impact the exercise of the State's power of taxation, except where a tax
in achieving the purpose of the law, which is to turn the former exemption has been granted for a valid consideration.
military base to productive use for the benefit of the Philippine
economy. Rules to remember:
A. If the exemption was granted for a valuable consideration on the
Germane to the purpose of the law basis of a contract – it cannot be revoked by passing another
It was reasonable for the President to have delimited the application law. The non-impairment clause applies.
of some incentives to the confines of the former Subic military base. It B. If the exemption is granted by virtue of a contract between a
is this specific area which the government intends to transform and private corporation and the government – it cannot be revoked
develop from its status quo ante as an abandoned naval facility into a unilaterally by the government. The non-impairment clause
self-sustaining industrial and commercial zone. applies.
C. If the basis of the tax exemption is a mere franchise granted by
Why the seeming bias for big investors? Undeniably, they are the Congress – it can be unilaterally revoked by the government
ones who can pour huge investments to spur economic growth in the
country and to generate employment opportunities for the Filipinos, CONGRESS CAN REVOKE FRANCHISE
the ultimate goals of the government for such conversion.

The law applies to both present and future conditions Article XII, Section 11 of the 1987 Constitution
The objective is to establish a "self-sustaining, industrial, commercial,
No franchise, certificate, or any other form of authorization for the
financial and investment center" in the area. There will, therefore, be
operation of a public utility shall be granted except to citizens of the
a long-term difference between such investment center and the areas
Philippines or to corporations or associations organized under the laws
outside it.
of the Philippines at least sixty per centum of whose capital is owned
by such citizens, nor shall such franchise, certificate, or authorization
Classification applies equally well to all those belonging to the same be exclusive in character or for a longer period than fifty years.
class Neither shall any such franchise or right be granted except under the
The classification applies equally to all the resident individuals and condition that it shall be subject to amendment, alteration, or
businesses within the "secured area. The residents, being in like
repeal by the Congress when the common good so requires. The
circumstances or contributing directly to the achievement of the end
State shall encourage equity participation in public utilities by the
purpose of the law, are not categorized further. Instead, they are all
general public. The participation of foreign investors in the governing
similarly treated, both in privileges granted and in obligations
body of any public utility enterprise shall be limited to their
required.
proportionate share in its capital, and all the executive and managing
officers of such corporation or association must be citizens of the
TN: What is the purpose of the law? To convert former US military Philippines.
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 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
1. Compelling State Interest Test – State balances the public
exempted from the payment thereof under its legislative franchise.
interest against religious freedom. The need to advance the
The "in lieu of all taxes" clause in a legislative franchise should
constitution and public interest. In case there are less restrictive
categorically state that the exemption applies to both local and
means to advance a right under the constitution.
national taxes; otherwise, the exemption claimed should be strictly
construed against the taxpayer and liberally in favor of the taxing
2. Rational Basis Test – The classification is valid if it is rationally authority.
related to a constitutionally permissible state interest.
Ex. Senior Citizens Act
Republic Act No. 7716, otherwise known as the "Expanded VAT Law",
did not remove or abolish the payment of local franchise tax. It merely
3. Quasi-Suspect Case – Available if needed. Based on replaced the national franchise tax that was previously paid by
gender/legitimacy. It points out a specific constitutionally granted telecommunications franchise holders and in its stead imposed a ten
state interest such as protection of women where there is a valid percent (10%) VAT in accordance with Section 108 of the Tax Code.
classification between men and women. VAT replaced the national franchise tax, but it did not prohibit nor
abolish the imposition of local franchise tax by cities or municipaties. *
NON-IMPAIRMENT OF THE OBLIGATIONS OF CONTRACTS 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
Article III, Section 10 of the 1987 Constitution No such guidelines and limitations as the Congress may provide. The
law impairing the obligation of contracts shall be passed. imposition of local franchise tax is not inconsistent with the advent of
the VAT, which renders functus officio the franchise tax paid to the The contention as to restraint "upon the free exercise of religion," with
national government. VAT inures to the benefit of the national respect to the same ordinance, was presented in the case of Coleman
government, while a local franchise tax is a revenue of the local v. City of Griffin, 55 Ga. App. 123, and the appeal was dismissed for
government unit. want of a substantial federal question.

MCIA v. Marcos
NO APPROPRIATION FOR RELIGIOUS PURPOSES
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. Article VI, Section 29 (2) of the 1987 Constitution No money
shall be paid out of the Treasury except in pursuance of an
Cagayan Electric Power v. Commissioner appropriation made by law.
The Congress could impair petitioner‘s legislative franchise by making
it liable for income tax. The Constitution provides that franchise is No public money or property shall be appropriated, applied, paid, or
subject to amendment, alteration or repeal by Congress when the employed, directly or indirectly, for the use, benefit, or support of any
public interest so requires. sect, church, denomination, sectarian institution, or system of religion,
or of any priest, preacher, minister, other religious teacher, or
Christ Church v. Philadelphia dignitary as such, except when such priest, preacher, minister, or
The exemption granted is in the nature of a unilateral tax exemption. dignitary is assigned to the armed forces, or to any penal institution,
Since the exemption given is spontaneous on the part of the or government orphanage or leprosarium.
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 General rule: No appropriation is allowed in favor of any sect,
impairment of the obligation of contract is the revocation of an church, or any priest, minister, etc.
exemption which is founded on a valuable consideration because it
takes the form and essence of a contract. Exception: when such priest is assigned to the armed forces, penal
institution or government orphanage or leprosarium.
NON-INFRINGEMENT OF RELIGIOUS FREEDOM
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,
Article III, Section 5 of the 1987 Constitution the appropriation made by the government for the visit is justified.
No law shall be made respecting an establishment of religion, or Also, the visit has for itself a secular purpose which is for tourism. The
prohibiting the free exercise thereof. The free exercise and enjoyment benefit to the Catholic Church is merely incidental. The principal
of religious profession and worship, without discrimination or primary effect neither advances nor fosters religion.
preference, shall forever be allowed. No religious test shall be required
for the exercise of civil or political rights. NON-INFRINGEMENT OF THE FREEDOM OF THE PRESS

Non-establishment clause: No law shall be made respecting an

establishment of religion, or prohibiting the free exercise thereof. Article III, Section 4
No law shall be passed abridging the freedom of speech, of expression
Free exercise clause: The free exercise and enjoyment of religious or of the press.
profession and worship, without discrimination or preference, shall
forever be allowed.
Freedom of the Press
TN: The free exercise clause is the basis of tax exemptions. 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
American Bible Society v. City of Manila impose prior restraint.
The imposition of license fees on the distribution and sale of bibles
and other religious literature by a non-stock, non-profit missionary Example: Imposing a very high tax which in effect curtails the
organization not for purposes of profit, amounts to a condition or freedom of the press.
permit for the exercise of their right, thus violating the constitutional
guarantee of the free exercise and enjoyment of religious profession TN: But it does not mean that the press is exempted from tax.
and worship which carries with it the right to disseminate religious The press is subject to tax but it should be reasonable and not
beliefs and information. oppressive nor arbitrary.
TN: It violates the non-establishment of religion clause and
religious freedom. 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
Tolentino v. Secretary of Finance such as when license fees are required before one sell magazines or
The free exercise of religion clause, however, does not prohibit newspapers.
imposing a generally applicable sales tax on the sale of religious
materials by religious organizations. The sale of religious articles can
SITUS OF TAXATION
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.
SITUS OF TAXATION
Coleman v. City of Griffin
Persons, properties or activities can only be taxed within the place of application of our income tax law. Hence, the claim for tax refund
the taxing authority or within its territorial jurisdiction. Within the should be denied.
territorial jurisdiction, the taxing authority may determine the situs.
Situs of taxation literally means ―place of taxation‖. KINDS OF TAX AND THEIR SITUS

It is the place and authority that has a right to impose taxes. It usually 1. Poll or community tax – residence of the taxpayer regardless
refers to the place of taxation. It involves the determination of who of citizenship.
has jurisdiction of a particular object or subject of taxation. 2. Business tax – place of business
3. Excise tax – where the act is performed or the occupation is
TN: There are multiple situs in the Philippines pursued
4. Income tax – source of income, citizenship, or residence
Basic rule: The state where the subject to be taxed has a situs may 5. Transfer tax (donor‟s or estate tax) – residence, citizenship
rightfully levy and collect the tax, and the situs is necessarily in the or location of the property
state which has jurisdiction or which exercises dominion over the 6. Franchise tax – the state which granted the franchise
subject in question. 7. Value added tax – where the transaction is made. However, if
the property is not to be consumed in the Philippines, then it
TN: A Filipino citizen earning income abroad can still be a subject of should not be taxed in the Philippines (cross border doctrine or
tax in the Philippines not because of geographical location but due to destination principle)
the jurial concept or nexus or bond between the taxing authority and 8. Sales tax – where the sale is consummated. Presumption: sale
the taxpayer. of personal property
9. Interest income – residence of the borrower who pays the
Q. Why is it important to know the situs or place of taxation? interest, irrespective of the place where the obligation was
1. To know if the taxing authority really has the authority to tax contracted.
2. Because there are exceptions or exemptions which only apply to 10. Property tax – could either be real or personal property tax.
a specific locality
A. Real property tax – place where the real property is located
Q. What are the factors that determine situs? (lex rei sitae)
1. Nature of the tax B. Personal property tax
2. Subject matter of the tax (person, property, act or activity)
3. Possible protection and benefit that may accrue both to the i. Tangible personal property – where the property is
government and the taxpayer physically
4. Citizenship of the taxpayer located although the owner resides in another jurisdiction
5. Residence of the taxpayer
6. Source of income ii. Intangible personal property –

Factors in the Philippines for Purposes of Situs of Income Tax GR: Domicile of the owner because movables follow the person.
EXC:
1. Domiciliary Theory – the residence of the taxpayer is the basis 1. When the law provides for the situs of
of the tax the subject of tax
2. Nationality Theory – the citizenship of the taxpayer is the 2. When the property has acquired a
basis of the tax business situs in another jurisdiction
3. Source Theory – the source of the income of the taxpayer is
the basis of the tax Examples:

CIR v. Baier-Nickel A. Franchise exercised in the Philippines even if the franchise

The "source of income" relates to the property, activity or service that owner or holder is not from the Philippines
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
B. Shares of stocks, obligations, bonds issued by domestic
service was performed that determines the source of the income.
corporations

The decisive factual consideration here is not the capacity in which

– taxed in the Philippines
respondent received the income, but the sufficiency of evidence to
prove that the services she rendered were performed in Germany.
C. Shares of stocks, obligations, bonds issued by foreign
corporations where 85% of its business is located in the
The settled rule is that tax refunds are in the nature of tax exemptions
Philippines – taxed in the Philippines
and are to be construed strictissimi juris against the taxpayer. To
D. Shares or right in a partnership business or industry
those therefore, who claim a refund rest the burden of proving that established in the Philippines – taxed in the Philippines
the transaction subjected to tax is actually exempt from taxation.
even if the holders or owners thereof are not Filipino

The faxed documents presented by respondent did not constitute

E. Shares, obligations, bonds issued by foreign corporations
substantial evidence, or that relevant evidence that a reasonable mind
used which acquired business situs when sanctioned in the
might accept as adequate to support the conclusion that it was in
furtherance of foreign corporation – taxed in the
Germany where she performed the income producing service which
Philippines
gave rise to the reported monthly sales in the months of March and
May to September of 1995.
TN: Even if owners are not domiciled in the Philippines, they will still be
taxed in the Philippines, subject to the Reciprocity Rule (citizen of such
She thus failed to discharge the burden of proving that her income
country which grants exemption to the intangible personal
was from sources outside the Philippines and exempt from the
properties of Filipinos in their country will also be exempted)
Summary of Rules DOUBLE TAXATION

It means taxing twice for the same tax period the same thing or
Kind of Tax Situs
activity, when it should be taxed but once, for the same purpose and
with the same kind of character of tax.
Place where the real
Real Property
property is located The same object or property is taxed twice by the same taxing
Person Place where property is authority for the same purpose and for the same taxing period.
Tangible al physically located although
Property the owner resides in Two kinds of double taxation:
PROPERT another jurisdiction
Y TAX 1. Strict sense (direct duplicate taxation)
GR: Domicile of the owner Double taxation in the objectionable or prohibited sense; It is
Intangible Personal
(Movables follow the illegal for being oppressive and inequitable.
Property person)
(e.g. credits, bills,
stocks, promissory A. The same property must be taxed twice when it should be
EXC:
notes) taxed once
1. When the property has B. Both taxes must be imposed on the same property or
acquired a business situs in subject matter
another jurisdiction C. For the same purpose
2. When the law provides D. By the same State, Government, or taxing authority
for the situs of the object E. Within the same territory, jurisdiction or taxing district
F. During the same taxing period
Where the act is performed
G. Of the same kind or character of tax
Excise Tax or the occupation is
pursued
2. Broad sense (Indirect duplicate taxation) There is double
Source of the income, taxation in the broad sense if any of the elements for direct
Income Tax nationality or residence of duplicate taxation is absent. It extends to all cases in which
the taxpayer there are two or more pecuniary impositions, for example, a tax
upon the same property imposed by two different states.
Location of the property,
Donor‘s Tax nationality or residence of TN: The Constitution does not prohibit double taxation in the
the taxpayer broad sense.
Location of the property,
EXCISE Estate Tax nationality or residence of Examples:
TAX the taxpayer a. Corporate income is taxed at 30% and the income
distributed to the shareholders is taxed at 10%.
Where the transaction is
b. LGU imposes tax on businesses and the businesses
made
are taxed by the national government.

Cross-border Doctrine or TN: Double taxation in its strict sense is undoubtedly unconstitutional
Destination Principle – If but that in the broader sense is not necessarily so. Where double
VAT the goods are taxation (in its strict sense) occurs, the taxpayer may seek relief under
not to the uniformity rule or the equal protection guarantee.
be consumed in
the Philippines, then it Important principles
should not be taxed in the
Philippines A. Only direct double taxation is not allowed because it amounts
State which granted the to confiscation of property without due process of law. It
Franchise Tax violates the due process clause.
franchise
Where the sale is B. You can question the validity of double taxation if there is
consummated violation of the equal protection clause, or uniformity of
Sales Tax taxation
Presumption: Sale of
personal property C. Doubts as to whether double taxation has been imposed should
OTHERS
be resolved in favor of the taxpayer.
Business Tax Place of business

o Residence of taxpayer, CONSTITUTIONALITY OF DOUBLE TAXATION

r regardless of the source
Poll, Capitation
of income or location of
Community Tax No Constitutional Prohibition
the property of the
taxpayer It is not prohibited by the Constitution. Hence, it may not be invoked
as a defense against the validity of a tax law.
DOUBLE TAXATION
Though not prohibited, it is not favored. It should be avoided and
TWO KINDS OF DOUBLE TAXATION prevented whenever possible.
 b. Income earned by foreign performers in the
A. Doubts as to whether double taxation has been imposed should Philippines
be resolved in favor of the taxpayer.
Decided Cases: Only Indirect Double Taxation
B. Direct duplicate taxation where double taxation in the strict A. Taxpayers with warehousing business although carried on in
sense occurs, the taxpayer may seek relief under the uniformity relation to the operation of its sugar central, is a distinct and
rule or the equal protection guarantee separate taxable business – different subject, although the same
owner.
Q: Is double taxation unconstitutional? TN: There can be no double taxation where the State
merely imposes a tax on every separate and distinct
A: No, double taxation cannot be used as a ground to declare the law business in which a party is engaged in.
unconstitutional.
B. A license tax may be levied upon a business or occupation
However, yes, double taxation is unconstitutional in relation to the although the land or the property used in connection therewith is
equal protection clause. subject to property tax.
TN: License tax applies to the business, property tax is for
Q: Is double taxation constitutionally prohibited? the land – different subject, object or purpose although the
burden is carried by one entity.
A: There is no constitutional prohibition against double taxation in the
Philippines. It is something not favored, but is permissible, provided C. Both a license fee and a tax may be imposed in the same
some other constitutional requirement is not thereby violated. business or occupation for selling the same article.
TN: License fee is not a tax.
Pepsi Cola v. Mun. of Tanauan
Double taxation, standing alone and not being forbidden by our D. When every bottle or container of intoxicating beverages is
fundamental law, is not a valid defense against the legality of a tax subject to local tax and at the same time the business of selling
measure. But from it might emanate such defenses against taxation such product is also subject to liquor‘s license
as oppressiveness and inequality of the tax. TN: Different taxing authority and purpose.

E. A tax imposed in both the occupation of fishing and the fish

INSTANCES OF DOUBLE TAXATION
pond.
TN: Different object and subject
Instances of double taxation
1. A tax on mortgage as personal property when the mortgaged F. A local ordinance imposing a tax in the storage of copra where it
property is also taxed at its full value as real estate appears that the finished products manufactured out of the copra
2. A tax upon a corporation for its property and upon its is also subject to VAT.
shareholders for their shares TN: Different subject matter and purpose
3. A tax upon a corporation for its capital stock as a whole and
upon the shareholders for their shares G. A lessor pays real estate tax, real estate dealer‘s tax and income
4. A tax upon depositors in a bank for their deposits and a tax tax on the rentals.
upon the bank for the property in which such deposits are TN: Different kind and character. Real estate tax is a tax
invested on the property, dealer‘s tax is a tax on the privilege to
5. An excise tax upon certain use of property and a property tax engage in business, income tax is a tax on the privilege
upon the same property to earn income.
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 MODES OF ELIMINATING DOUBLE TAXATION
the local tax imposed by an ordinance on every bottle of beverage to
be sold. Is there double taxation?
1. Allowing reciprocal exemption either by law or by treaty
A: Yes. There is indirect double taxation because it is imposed by
different taxing authorities and the purpose is different, one is for the The Philippines has a lot of tax treaties with other States.
sales and the other is for the fact of selling. Hence, it does not make
the local ordinance invalid. 2. Allowance of tax credit for foreign taxes paid

Domestic and International double taxation o Tax Credit – deduction from tax payable. It reduces the
A. Domestic double taxation – arises when the taxes are imposed amount payable directly. It is a full deduction of the
by the local or the national government. amount paid abroad. This is the best option.

B. International double taxation – imposition of comparable taxes 3. Allowance of deduction for foreign taxes paid
in two or more states on the same taxpayer with respect to the
same subject matter and for an identical period.
o Tax Credit – deduction from taxable income. The
Allowed because they are imposed by different taxing amount of taxes paid abroad is used to reduce tax
authorities (domestic and international) payable in the Philippines. Here, the amount paid abroad
Measures allowed by the government are tax refund or is multiplied by the tax rate in the Philippines.
credit but not to declare it invalid.
4. Reduction of Philippine tax rate
Examples
a. Income earned by Manny Pacquiao abroad is
subject to income tax both by US and Philippines
 Ex. Dividend income of a foreign corporation from dividends issuances must ensure that the reliefs granted under tax treaties are
received from a domestic corporation in the Philippines – the accorded to the parties entitled thereto. The BIR must not impose
tax rate is only 15% instead of the usual 30%, subject to the additional requirements that would negate the availment of the reliefs
rule on reciprocity. This is under the tax sparing rule. provided for under international agreements. More so, when the
RPGermany Tax Treaty does not provide for any pre-requisite for the
Tax Credit availment of the benefits under said agreement.

Sales P 1,000,000. The denial of the availment of tax relief for the failure of a taxpayer to
apply within the prescribed period under the administrative issuance
Less Allowable Deduction (100,000)
would impair the value of the tax treaty. At most, the application for a
Taxable Income P 900,000. tax treaty relief from the BIR should merely operate to confirm the
Multiplied by the Tax Rate 30% entitlement of the taxpayer to the relief.
Tax Due and Payable P 270,000.
Less Tax Credit (100,000) CIR v. Johnson & Son, Inc.
Tax Payable Facts: Pursuant to the license agreement entered into by private
P 170,000.
respondent S.C. Johnson and Son, U.S.A., the private respondent was
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
Tax Deduction royalties were subjected by the government to a 25% withholding tax.

Sales P 1,000,000. Consequently, from July, 1992 to May, 1993, the private respondent
Less Allowable Deduction (100,000) paid a total withholding tax in the amount of P1,603,433.00. However,
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.
Multiplied by the Tax Rate 30% Issue: Whether or not private respondent is entitled to a tax refund.
Tax Payable P 240,000.
Held: No. The Court ruled that the RP-US and the RP-West Germany
Tax credit is preferable since it yields to lesser amount of tax payable. Tax Treaties do not contain similar provisions on tax crediting. Article
24 of the RP-Germany Tax Treaty, expressly allows crediting against
German income and corporation tax of 20% of the gross amount of
MOST FAVORED NATION CLAUSE
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
with respect to relief for double taxation, does not provide for similar
MOST FAVORED NATION CLAUSE crediting of 20% of the gross amount of royalties paid.
A method of establishing equality of trading opportunity among states
by guaranteeing that if one country is given better trade terms by Since the RP-US Tax Treaty does not give a matching tax credit of
another, then all other states must get the same terms. 20% for the taxes paid to the Philippines on royalties as allowed
under the RP-West Germany Tax Treaty, private respondent cannot
This is applied to those doing business in the Philippines who are be deemed entitled to the 10% rate granted under the latter treaty for
parties or signatories to a bilateral treaty. the reason that there is no payment of taxes on royalties under similar
circumstances.
Purpose of the Most Favored Nation Clause
To grant to the contracting party treatment not less favorable than Tax refunds are in the nature of tax exemptions. As such they are
that which has been or may be granted to the "most favored" among regarded as in derogation of sovereign authority and to be construed
other countries. It is intended to establish the principle of equality of strictissimi juris against the person or entry claiming the exemption.
international treatment by providing that the citizens or subjects of The burden of proof is upon him who claims the exemption in his
the contracting nations may enjoy the privileges accorded by either favor and he must be able to justify his claim by the clearest grant of
party to those of the most favored nation. organic or statute law.

Deutsche bank case Private respondent is claiming for a refund of the alleged overpayment
Deutsche bank asked for a refund of taxes, believing that it made an of tax on royalties; however, there is nothing on record to support a
overpayment of the branch profit remittance tax and requested a claim that the tax on royalties under the RP-US Tax Treaty is paid
confirmation of its entitlement to the preferential tax rate of 10% under similar circumstances as the tax on royalties under the RP-West
under the RP-Germany Tax Treaty. The CTA ruled that prior Germany Tax Treaty.
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. FORMS OF ESCAPE FROM TAXATION

Issue: Whether the failure to apply for a tax treaty relief will deprive
corporations of the benefit of a tax treaty. FORMS OF ESCAPE FROM TAXATION

Held: No. The filing of a tax treaty relief application is not a condition A. Shifting
precedent to the availment of a preferential tax rate. B. Capitalization
C. Transformation
A state that has contracted valid international obligations is bound to D. Tax Evasion
make in its legislations those modifications that may be necessary to E. Tax Avoidance
ensure the fulfillment of the obligations undertaken. Thus, laws and F. Tax Exemption
 Onward Backward Shift
Consumer –> Retailer –> Wholesaler–>Manufacturer/Producer
SHIFTING

C. Onward shifting – When the tax is shifted two or more times

either forward or backward. More than one shift.
SHIFTING

Example: A transfer from producer to wholesaler involves one

The process where the tax burden is transferred from the statutory
shift; from producer to wholesaler then to retailer, two shifts; if
taxpayer to another without violation of law. Statutory taxpayer – the
the tax is transferred again to the consumer by the retailer, there
original taxpayer required under the law to pay the tax or to remit the
are three shifts in all.
tax to the government.

TN: Applicable only to indirect taxes like business or percentage taxes. CAPITALIZATION
Direct taxes cannot be shifted, i.e. income tax.
Applicable only when there is an exchange of goods or services. CAPITALIZATION

Impact of taxation The reduction in the price of the taxed object equal to the capitalized
The point on which a tax is originally imposed. In so far as the law is value of future taxes which the purchaser expects to be called upon to
concerned, the taxpayer, the subject of tax, is the person who must pay. It occurs when the tax falls on an income-producing property, i.e.
pay the tax to the government. commercial building.

This is the point in the taxation process where the tax is imposed. The buyer naturally takes into account the taxes that he will be paying
Ex. Enactment of laws on the property when he becomes the owner thereof in determining
TN: Applicable only in indirect taxation. 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.
Incidence of taxation
That point on which the tax burden finally rests or settles down. It Examples:
takes place when shifting has been effected from the statutory a. Buying depreciable goods like 1M car, payable every year
taxpayer to another. b. Buying a property with a repurchase agreement after 5
years on the condition that the seller will pay all real
TN: But there may be incidence without shifting, as in transformation. property taxes for 5 years.
In case of business taxes, incidence of taxation falls on the final
consumer. Value of Property P 1,000,000.
Less RPT for 5 years (20,000x5) (100,000) Amount
Relationship between impact, shifting and incidence of a tax Payable (Price) P 900,000.
The impact is the imposition of the tax or the initial phenomenon. TN: It is a special kind of backward shift.
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.
TRANSFORMATION
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. TRANSFORMATION

THREE KINDS OF SHIFTING Method of escape in taxation whereby the manufacturer or producer
upon whom the tax has been imposed, fearing the loss of his market
A. Forward shifting – the transfer of the burden of tax from the should he add the tax to the price, pays the tax and endeavors to
units of production to the units of distribution to the consumer. recoup himself by improving his process of production thereby turning
out his units of products at a lower cost.
When the burden of the tax is transferred from a factor of In such a case, the loss occasioned by the tax may be offset by the
production through the factors of distribution until it finally gains resulting from the economics of production. The taxpayer
settles on the ultimate purchaser or consumer. escapes, not by shifting but by transforming the tax into a gain
Ex. VAT, percentage tax through the medium of production.

Onward Forward Shift Example: Videoke – the greater in number, the lesser the cost.
Manufacturer/Producer –> Wholesaler –> Retailer –> Consumer
TAX AVOIDANCE
B. Backward shifting – The transfer of the burden of tax from the
consumer back to the units of distribution to the units of
production.
TAX AVOIDANCE
When the burden of the tax is transferred from the consumer or
purchaser through the factors of distribution to the factor of The exploitation by the taxpayer of legally permissible alternative tax
production rates or methods of assessing taxable property or income in order to
TN: This seldom happens. Usually, it can happen when the avoid or reduce tax liability. It is politely called ―tax minimization‖
buyer haggles for a discount from the retailer. and is not punishable by law.

Ex. Consumer/purchaser may shift tax imposed on him to retailer Examples:

by purchasing only after the price is reduced, and from the latter • A person refrains from engaging in some activity or
to the wholesaler, and finally to the manufacturer or producer. 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 Such scheme is tainted with fraud.
business.  Donate below P100,000 to be exempt
from donor‘s tax. Here, it is obvious that the objective of the sale to Altonaga was to
• Pay minimum wage to employees then just give allowances/ reduce the amount of tax to be paid especially that the transfer from
de minimis benefits (not included in 13th month pay unless him to RMI would then subject the income to only 5% individual
there is agreements as part of company practice/policy) capital gains tax, and not the 35% corporate income tax.

Delphers Traders Corp. v. IAC Altonaga's sole purpose of acquiring and transferring title of the
The Supreme Court upheld the estate planning scheme resorted to by subject properties on the same day was to create a tax shelter.
the Pacheco family in converting their property to shares of stock in a Altonaga never controlled the property and did not enjoy the normal
corporation which they themselves owned and controlled. By virtue of benefits and burdens of ownership. The sale to him was merely a tax
the deed of exchange, the Pacheco co-owners saved on inheritance ploy, a sham, and without business purpose and economic substance.
taxes. The SC said that the records do not point to anything wrong Doubtless, the execution of the two sales was calculated to mislead
and objectionable about the estate planning scheme resorted to. The the BIR with the end in view of reducing the income tax liability.
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 In a nutshell, the intermediary transaction, i.e, the sale of Altonaga,
permits cannot be doubted. which was prompted more on the mitigation of tax liabilities than for
legitimate business purposes constitutes one of tax evasion.
TAX EVASION
TAX EVASION V. TAX AVOIDANCE

TAX EVASION
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
The use by the taxpayer of illegal or fraudulent means to defeat or order not to pay the toll as long as you don‘t get caught. On the other
lessen the payment of a tax. It is also known as ―tax dodging.‖ It is hand, if there are two bridges where one is imposing a lesser toll fee
punishable by law. than the other, it is tax avoidance if you choose to pass through the
bridge paying a lesser toll.
Examples:
• Deliberate failure to report a taxable income or property
• Deliberate reduction of income that has been received EXEMPTION FROM TAXATION
• Online sellers who do not declare income, do not pay taxes
and those who do not have business permits (illegal) TAX EXEMPTION
• Declare sales less than 30% of the amount
• Declare expenses of more than 30% of the sale TAX EXEMPTION
• Non-issuance of receipts – There is a penalty of P10,000
The grant of immunity to particular persons or corporations or to
Elements of Tax Evasion (How to Establish Tax Evasion) person or corporations of a particular class from a tax which persons
A. The end to be achieved is to lessen payment of taxes Example: and corporations generally within the same state or taxing district are
the payment of less than that known by the taxpayer to be obliged to pay.
legally due, or in paying no tax when such is due.
B. An accompanying state of mind described as being ―evil,‖ ―in Act of the state of divesting itself of its prerogative to impose taxes.
bad faith,‖ ―willful‖ or ―deliberate and not accidental.‖
C. A course of action (or failure of action) which is unlawful. • Broad Sense – Tax not applied on a particular property. Tax
on particular property or object within the same jurisdiction but
Q: Should fraud be proved by direct evidence? not taxed by the taxing authority.
(How to Prove Tax Evasion) Ex. Tax on property used by the Government when the
other properties in the same area are subject to tax
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 • Narrow Sense – Exemption of a particular class. An entire
can only present circumstantial evidence or make use of presumptions class of the same conditions are exempted from taxes
under tax laws. supposedly imposed on a bigger class.
Ex: Under declaration over 30% - fraud is presumed under the law Important principles
A. It is an immunity or privilege
Republic v. Gonzales B. It is freedom from a financial charge or burden to which others
The substantial under declaration of income in the income tax returns are subjected
of the taxpayer for four (4) consecutive years coupled with his C. Allowed only when there is a clear provision of the law.
intentional overstatement of deductions justifies the finding of fraud. D. Strictly construed against the taxpayer.
E. It is not necessarily discriminatory as long as there is a
Perez v. CTA and Collector reasonable foundation or rational basis.
The failure of the taxpayer to declare for taxation purposes his true
and actual income derived from his business for two consecutive years Double Nexus rule
has been held as an indication of his fraudulent intent to cheat the Person claiming exemption must prove:
government of its due taxes. 1. The law granting the exemption
2. You fall within the law or you qualify in the exemption
CIR v. Toda
The scheme resorted to by CIC in making it appear that there were Taxation is the rule and exemption, the exception
two sales of the subject properties, i.e. from CIC to Altonaga, and Taxation is the rule and exemption, the exception, and therefore, he
then from Altonaga to RMI cannot be considered a legitimate tax who claims exemption must be able to justify his claim or right
planning.
thereto, by a grant expressed in terms ―too plain to be mistaken and NATURE OF THE POWER TO GRANT TAX EXEMPTION
too categorical to be misinterpreted.‖ If not expressly mentioned in
the law, it must at least be within its purview by clear legislative National Government
intent. 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
NATURE OF TAX EXEMPTION implies the power to prescribe who or what persons or property shall
not be taxed.

NATURE OF TAX EXEMPTION 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
A. Mere personal privilege of the grantee – cannot be
legislative power to exempt is as broad as its power to tax.
assigned or transferred without the consent of the Legislature.
The legislative consent to the transfer may be given either in
Local Government
the
original act granting the exemption or in a subsequent law 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
B. Generally revocable by the government –
therefrom, unless forbidden by some provision of the Constitution or
EXC: Unless founded on a contract with valuable consideration
the law.
which is protected from impairment. But the contract must
contain the essential elements of other contracts.
The legislature may delegate is power to grant tax exemptions to the
same extend that it may exercise the power to exempt.
EXC to EXC: A legislative franchise which is in the nature of a
contract. It may be repealed or amended pursuant to the
Q: Is the power to grant tax exemption inherent in all levels of the
Constitution (see Sec. 11, Art. XII).
Government?
C. Implies a waiver on the part of the government of its
A: No. It is inherent only in the national government as the power to
right to collect taxes due to it, and, in this sense, is
tax includes the power to grant tax exemptions. However, upon valid
prejudicial thereto. Hence, it exists only by virtue of an express
delegation of the power to tax, the local government can grant tax
grant and must be strictly construed.
exemptions unless prohibited.

D. Not necessarily discriminatory, provided it has reasonable

GR: Inherent in national government only Source
foundation or rational basis. As long as it complies with equal
of power to tax: State sovereignty
protection clause and there is valid classification. Where,
EXC: Delegation to local government
however, no valid distinction exists, the exemption may be
Source of power to tax: Constitution
challenged as violative of the equal protection guarantee or the
uniformity rule.
Basco v. PCGG
In a compromise agreement between the Philippine Government,
Bar Question:
represented by the PCGG, and the Marcos heirs, the PCGG granted tax
ABC Corp. was granted tax exemption by the government as an
exemptions to the assets which will be apportioned to the Marcos
incentive for newly established companies. It purchased materials by
heirs.
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
The Supreme Court ruled that the PCGG has absolutely no power to
should not be liable to pay the sales tax. Is the claim tenable?
grant tax exemptions, even under the cover of its authority to
compromise ill-gotten wealth cases.
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
The grant of tax exemption is the exclusive prerogative of the
on the seller who is not exempt from taxes. Since XYA is directly liable
Congress. In fact, the Supreme Court even stated that Congress itself
for the sales tax and no tax exemption privilege is ever given to it,
cannot grant tax exemptions is in the case at bar because it will
therefore, its claim that the sale is exempt is not tenable. A tax
violate the equal protection clause of the Constitution.
exemption is construed in strictissimi juris and it cannot be permitted
to exit upon vague implications.
RATIONALE OF TAX EXEMPTION
Bar Question:
Supposing XYZ Corp paid the sales tax. ABC Corp later found however RATIONALE OF TAX EXEMPTION
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
Such exemption will benefit the body of the people and not particular
refund from the BIR in an amount corresponding to the tax passed on
individuals or private interest and that the public benefit is sufficient to
to it, since it is tax exempt. Is the claim of ABC Corp meritorious?
offset the monetary loss entailed in the grant of the exemption.
Its avowed purpose is some public benefit or interest which the
No, the claim of ABC Corp is not meritorious. Although the tax was
lawmaking body considers sufficient to offset the monetary loss
shifted to ABC by the seller, what is paid by it is not a tax but a part of
entailed in the grant of the exemption.
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
As long as public interest is subserved and the benefit that the
Corp is not said taxpayer, it has no capacity to file a claim for refund.
government acquires outweigh the monetary loses due to the
exemption.
NATURE OF THE POWER TO GRANT TAX EXEMPTION TN: These are the non-revenue raising purposes of taxation.
 GROUNDS FOR TAX EXEMPTION
B. Partial exemption – when certain persons, property or
transactions are exempted, expressly or implied, from certain
GROUNDS FOR TAX EXEMPTION taxes in part.
Ex. Basic personal exemption and additional exemption
A. It may be based on contract.
When the charter provides for such exemption TN: In such a AS TO OBJECT
case, the public which is represented by the
government is supposed to receive a full equivalent therefor A. Personal exemption – granted directly in favor of certain
persons
B. It may be based on some ground of public policy. Ex. Basic personal exemption of 50k and additional exemption
The exemption is provided in the law itself or the constitution. of 25k for each dependent up with a maximum of 4
dependents; However, these have been repealed by the
TN: To encourage new industries or to foster charitable TRAIN Law effective January 1, 2018.
institutions. Here, the government need not receive any
consideration in return for the tax exemption B. Impersonal exemption – granted directly in favor of a certain
class of property Ex. Property
C. It may be created in a treaty on grounds of reciprocity or to TN: There cannot be simultaneous exemption under two laws
lessen the rigors of international or multiple taxation. TN:
Recognition of international comity CONSTRUCTION OF TAX EXEMPTION STATUTES

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 CONSTRUCTION OF TAX EXEMPTION STATUTES
used as a basis or justification for tax exemption, a law may validly
authorize the condonation of taxes on equitable considerations. General rule
Tax exemption statutes are construed strictly against the taxpayer and
liberally in favor of the government.
KINDS OF TAX EXEMPTION
A. In the construction of tax statutes, in case of doubt, exemptions
are not favored and are construed strictissimi juris against the
AS TO MANNER OF CREATION
taxpayer.
B. The fundamental theory is that all taxable property should bear
A. Express or affirmative – when certain persons, property or its share in the cost and expenses of the government.
transactions are, by express provision, exempted from all or
C. Taxation is the rule and exemption the exception, and
certain taxes.
therefore, he who claims exemption must be able to justify his
- When the provision itself provides for exemption TN: May claim or right thereto, by a grant expressed in terms ―too plain
be made by provisions of the Constitution, statutes, to be mistaken and too categorical to be misinterpreted.
treaties, ordinances, franchises, or contracts.
D. Claims for an exemption must be able to point out some
provision of law creating the right, and cannot be allowed to
B. Implied exemption or exemption by omission – when a exist upon a mere vague implication or inference.
tax is levied on certain classes of persons, properties or E. Refunds are in the nature of exemption, and must be construed
transactions without mentioning the other classes. Every tax strictly against the grantee/taxpayer.
statute, in a very real sense, makes exemptions since all those
not mentioned are deemed exempted. Exceptions
- When the law did not include it in the list of those A. When the law itself expressly provides for a liberal construction,
exempted. Ex. PAGCOR that is, in case of doubt, it shall be resolved in favor of
exemption.
TN: The omission may be either accidental or intentional. B. When the exemption is in favor of the government itself or its
Exemptions are not presumed, but when public property is agencies, or of religious, charitable, and educational institutions
involved, exemption is the rule, and taxation, the exception. because the general rule is that they are exempt from tax.
C. When the exemption is granted under special circumstances to
C. Contractual – in the real sense of the term and where the special classes of persons.
nonimpairment clause of the Constitution can rightly be D. If there is an express mention or if the taxpayer falls within the
invoked, are those agreed to by the taxing authority in purview of the exemption by clear legislative intent, the rule on
contracts, such as those contained in government bonds or strict construction does not apply.
debentures, lawfully entered into by them under enabling laws E. If exemption refers to public property (in case of public
in which the government, acting in its private capacity, sheds property, the general rule is exemption and taxation is the
its cloak of authority and waives its governmental immunity. exception)
F. Solutio indebiti
TN: These contractual tax exemptions, however, are not to be
confused with tax exemptions granted under franchises. A Q: When will you apply the strict construction?
franchise partakes of the nature of a grant which is beyond the
purview of the non-impairment clause of the Constitution.
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
AS TO SCOPE OR EXTENT strict construction.
Strict interpretation does not apply to the government and its
A. Total exemption – when certain persons, property or agencies
transactions are exempted, expressly or implied, from all taxes
entirely. Maceda v. Macaraig
Petitioner cannot invoke the rule on strictissimi juris with respect to TN: There is already a finding that the person has evaded the
the interpretation of statutes granting tax exemptions to the NPC. The payment of tax or violated a tax law. The taxes due are still collected
rule on strict interpretation does not apply in the case of exemptions since only the penalties are forgiven.
in favor of a political subdivision or instrumentality of the government.
Republic v. IAC
Davao Gulf v. Commissioner A tax amnesty partakes of an absolute forgiveness or waiver by the
A tax cannot be imposed unless it is supported by the clear and Government of its right to collect what otherwise would be due it, and
express language of a statute. On the other hand, once the tax is in this sense, prejudicial thereto, particularly to give tax evaders, who
unquestionably imposed, a claim for exemption from tax payments wish to relent and are willing to reform a chance to do so and become
must be clearly shown and based on language in the law too plain to a part of the new society with a clean slate.
be mistaken.
TN: When we say absolute forgiveness, this is retrospective. It looks
Since the partial refund authorized under Section 5, RA 1435 is in the back to your previous liabilities and if given a tax amnesty, it is as if
nature of a tax exemption, it must be construed strictissimi juris you did not incur those liabilities at all.
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 Tax amnesty not favored
statute stated in a language too clear to be mistaken. 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
TAX EXEMPTIONS ARE GENERALLY REVOCABLE
liberally in favor of the taxing authority.

CIR v. Marubeni Corp.

General rule:
Tax exemptions are generally revocable by the government.
For the right of taxation is inherent in government. The State cannot
strip itself of the most essential power of taxation by doubtful words.
Exception: He who claims an exemption (or an amnesty) from the common
If founded on a contract which is protected from impairment, it cannot burden must justify his claim by the clearest grant of organic or state
be revoked unilaterally. But the contract must contain the essential law. It cannot be allowed to exist upon a vague implication. If a doubt
elements of other contracts. arises as to the intent of the legislature, that doubt must be resolved
in favor of the state.
Exception to the exception:
A legislative franchise which is in the nature of a contract. It may be DISTINGUISHED FROM TAX EXEMPTION
repealed or amended pursuant to the Constitution (Sec. 11, Art. XII).

RESTRICTIONS ON REVOCATION OF TAX EXEMPTION Tax Amnesty Tax Exemption

Immunity from all criminal and
A. Non-impairment clause – Applies in contractual tax civil obligations arising from
exemptions or those agreed to by the taxing authority in Immunity from all civil liability
nonpayment of taxes
contracts, such as those contained in government bonds or (Immunity from all civil, criminal, only
debentures, lawfully entered into by them under enabling laws in and administrative liabilities)
which the government, acting in its private capacity, sheds its
cloak of authority and waives its governmental immunity. A privilege, a freedom from a
A general pardon given to all
charge or burden of which others
taxpayers are subjected
TN: Where the tax exemption is provided by law, the
nonimpairment clause will not apply. Applies to past tax periods, hence Generally prospective in
of retroactive application application
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. TAX REMISSION OR TAX CONDONATION

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 TAX REMISSION OR CONDONATION
general law, even if the terms of the general act are broad
enough to include the intent to repeal or alter the special law, To desist from exacting, inflicting or enforcing something. The
there would still be no revocation. remission of taxes due and payable to the exclusion of taxes already
collected does not constitute unfair discrimination. Such a set of taxes
TN: If you want to revoke the tax exemption granted by a special is a class by itself and the law would be open to attack as class
law, another special law revoking the same must be passed. It legislation only if all taxpayers belonging to one class were not treated
cannot be done by implied revocation. alike.

Remission or condonation simply means forgiving the taxpayer out of

TAX AMNESTY 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
TAX AMNESTY amount to class legislation.
TN: The taxes are no longer collected since they are forgiven.
A tax amnesty is a general pardon or intentional overlooking by the
State of its authority to impose penalties on persons otherwise guilty In the nature of a tax exemption
of evasion or violation of a revenue or tax law.
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.
 Important principles:
NATURE, CONSTRUCTION & APPLICATION OF TAX LAWS
A. Generally prospective in operation
APPLICATION OF TAX LAWS
NATURE OF INTERNAL REVENUE LAW

General rule: Taw laws are prospective in operation because the

NATURE OF INTERNAL REVENUE LAW nature and amount of the tax could not be foreseen and
understood by the taxpayer at the time the transactions which the
Internal revenue laws are not political in nature. Tax laws are civil and law seeks to tax was completed.
not penal in nature. Even if there is change in government control, it
remains to be implemented. Exception: While it is not favored, a statute may nevertheless
operate retroactively provided it is expressly declared or is clearly
Not political in nature the legislative intent.
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 Exception to the exception: A tax law should not be given
even if we are occupied by another State, the taxation laws will retroactive application when it would be so harsh and oppressive,
continue. It is as if there is no stoppage of the tax law. Thus, our tax for in such case, the constitutional limitation of due process would
laws continued in force during the Japanese occupation. be violated.

Hilado v. Collector Q: BIR issued a ruling that printing companies are not covered by a
It is well-known that our internal revenue laws are not political in nature ew tax law. Relying on this ruling, DEF Printers did not pay said tax.
and as such, continued in force during the period of enemy occupation Subsequently however the BIR reversed the ruling and issued a
and in effect were actually enforced by the occupying government. new one stating that the tax covers printing companies. Could the
Income tax returns that were filed during that period and income tax BIR now assess DEF Printers for back taxes corresponding to the
payments made were considered valid and legal. Such tax laws are years before the new ruling?
deemed to be the laws of the occupied territory and not of the
occupying enemy. A. No. The reversal of a ruling shall not be given a retroactive
application, if said reversal will be prejudicial to the taxpayer.
Civil and not penal in nature Therefore, the BIR cannot assess DEF Printers for back taxes
Tax laws are civil and not penal in nature, although there are penalties because it would be violative of the principle of non-retroactivity of
provided for their violation. The purpose of tax laws in imposing rulings and doing so would result in grave injustice to the taxpayer
penalties for delinquencies is to compel the timely payment of taxes or who relied on the first ruling in good faith.
to punish evasion or neglect of duty in respect thereof.

Republic v. Oasan MANDATORY AND DIRECTORY PROVISIONS OF TAX LAWS

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. A. Directory provisions – those designed merely for the
Tax laws are civil in nature. information or direction of officers or to secure methodical and
systematic modes of proceedings.
CONSTRUCTION & APPLICATION OF TAX LAWS Ex. Revenue memorandum circulars issued by BIR to guide
personnel on matters of regulation.

CONSTRUCTION OF TAX LAWS B. Mandatory provisions – those intended for the security of the
citizens or which are designed to ensure equality of taxation or
No person or property is subject to taxation unless within the terms or certainty as to the nature and amount of each person‘s tax.
plain import of a taxing statute. Taxes, being burdens, they are not to Ex. Remedies under the tax code (security); tax rate (equality)
be presumed beyond what the statute expressly and clearly declares.
LEGISLATIVE APPROVAL BY RE-ENACTMENT
General rule:
In case of doubt, tax laws are to be construed strictly against the Where a statute is susceptible of the meaning placed upon it by a
government and liberally in favor of the taxpayer. ruling of the government agency charged with its enforcement and
the legislature thereafter re-enacts the provisions without
Exceptions: substantial change, such action is to some extent confirmatory that
A. Where the language of the statute is plain and there is no doubt the ruling carries out the legislative purpose.
as to the legislative intent
B. Where the taxpayer claims exemption from taxation. TN: The legislature is presumed to have full knowledge of the
existing revenue regulations interpreting the provisions of law, and
TN: In case of tax exemptions, the rule is strictly against the taxpayer with its subsequent substantial re-enactment, there is a
and liberally in favor of the government. presumption that the lawmakers have approved and confirmed the
rules in question as carrying out the legislative purpose.
Reason: The taxpayer should not be burdened by unreasonable
interpretations of authorities. RULES & REGULATIONS
TN: Penal provisions and the statute of limitations are construed in favor
of the taxpayer.

EXCLUSIVE AUTHORITY OF THE SECRETARY OF FINANCE

B. When the language is plain, rule on strict construction against the
TO
government does not apply
PROMULGATE RULES AND REGULATIONS
C. Public purpose is always presumed
D. Provisions of the tax act are not to be extended by implication
This is without prejudice to the power of the Commissioner of
E. Tax laws are special laws and therefore prevail over general laws.
Internal Revenue to make rulings or opinions in connection with the
implementation of the provisions of internal revenue laws, including
Sec. 244 of the NIRC Republic v. Phil Shell Petroleum
The Secretary of Finance, upon recommendation of the CIR, shall Tax regulations (issued by the CIR/DOF Secretary) whose purpose is to
promulgate all needful rules and regulations for the effective enforce or implement existing law must:
enforcement of the provisions of this Code. (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
rulings on the classification of articles for sales tax and similar purposes. of law, and so they must be applied and enforced. They are,
therefore, just as binding as if the regulations had been written in
A. Promulgation: Secretary of Finance the law itself.
B. Recommendation: Commissioner of Internal Revenue
C. Administrative rulings: Commissioner of Internal Revenue NECESSITY AND FUNCTION OF REGULATIONS

REVENUE REGULATIONS Purpose of the Implementing rules and regulations:

1. To properly enforce and execute the laws
General Rule: Revenue regulations are general interpretations of the 2. To clarify and explain the law
BIR issued by the CIR or by its delegate 3. To carry into effect the law‘s general provisions by providing details
of administration and procedure
Exception: When it tramples novel issues or is intended to revoke or
amend or modify a previous ruling. FORCE AND EFFECT OF REGULATIONS

TN: Once implemented, it forms part of the law. It can be questioned. Revenue Memorandum Circular 20-86 was issued to govern the drafting,
The CIR has exclusive jurisdiction but it is subject to review by the issuance and implementation of revenue tax issuances, including:
Secretary of Finance except for a tax assessment appeal which is 1. Revenue regulations
cognizable by the CTA and those in relation to a local ordinance which is 2. Revenue audit memorandum orders
subject to review by the Secretary of Justice. 3. Revenue memorandum circulars and orders

Jurisdiction to Question Revenue Regulations – CIR TN: Except when the law otherwise expressly provides, the
Subject to Review by GR: aforesaid revenue tax issuances shall not begin to be operative until
Sec of Finance EXC: after due notice thereof may be fairly assumed.
• CTA – tax assessment appeal
• Sec of Justice – only in relation to a local ordinance Due notice of the said issuances may be fairly presumed only
after the following procedures have been taken:
Tax Rulings 1. Copies of the tax issuance have been sent through registered
Tax rulings are specific positions by the BIR on matters or facts to a mail to the following business and professional organizations:
specific taxpayer. It is applicable only to the particular taxpayer. a. Philippine Institute of Certified Public Accountants
b. Integrated bar of the Philippines
REQUISITES FOR VALIDITY & EFFECTIVITY OF REGULATIONS c. Philippine chamber of commerce and industry
d. American chamber of commerce
A. It must be issued under authority of law e. Federation of Filipino-Chinese chamber of commerce
B. It must be within the scope and purview of the law; not contrary to f. Japanese chamber of commerce and industry in the
law and the Constitution Philippines
C. It must be published in the OG or newspaper of general circulation 2. However, other persons or entities may request a copy of the
TN: Interpretative rules or those merely internal in nature may said issuances
simply be posted in conspicuous places in the agency itself. 3. The BIR shall issue a press release covering the highlights
D. Where the regulations impose penal sanctions, the law itself must and features of the new tax issuance in any newspaper of
declare as punishable the violation of the administrative rule or general circulation
regulation and should fix or define the penalty thereof. 4. Effectivity of date of enforcement of the new issuance shall
take place 30 days from the date the issuance has been sent
Roxas v. Rafferty to the above-enumerated organizations
The omission to follow mandatory provisions renders invalid the act or
proceeding to which it relates while the omission to follow directory TN: IRR and administrative regulation are not the same. You have
provisions does not involve such consequence. 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
Two kinds of administrative issuances revenue regulation however is not to implement the whole IRR but
1. Legislative rules – rules in the nature of subordinate legislation specific provisions only.
designed to implement a primary legislation by providing the details
thereof. Before it is adopted, there must be a hearing under the AC
BIR RULINGS
of 1987.

2. Interpretative rules – are rules and regulations construing or ADMINISTRATIVE RULINGS AND OPINIONS
interpreting the provisions of a statute to be enforced and is are
binding on all concerned until they are changed. Designed to Known as BIR rulings. Less general interpretation of tax laws being
provide guidelines to the law, which the administrative agency is in used from time to time by the CIR. They are usually rendered on
charge of enforcing. They have the effect of law and are entitled to request of taxpayers to clarify certain provisions of a tax law. These
great respect and have in their favor the presumption of legality. rulings may be revoked by the Secretary of Finance if the latter
finds them not in accordance with law.
 upon courts, must be given weight as the construction came from the
If there is a provision in the tax law which is not clear, you can send branch of the government which is called upon to implement the law.
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
DECISION OF THE SC AND THE CTA
they will address and clarify your concerns.

But when it comes to BIR and administrative rulings, it applies only

DECISIONS OF THE SC AND CTA
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 Decisions of the Supreme Court applying or interpreting existing tax
Company A cannot presume that it is also tax exempt. Company B laws are binding on all subordinate courts and have the force and
should likewise ask from the BIR a ruling pertaining to its own effect of law. As provided for in Article 8 of the Civil Code, they ―form
company. part of the law of the land‖. They constitute evidence of what the law
means.
Power to revoke the rulings of his predecessor
The same is also true with respect to decisions of the Court of Tax
The Commissioner may revoke, repeal or abrogate the acts or previous
Appeals.. However, by the nature of its jurisdiction, the decisions of
rulings of his predecessors in office because the construction of the
this court are still appealable to the Supreme Court by a petition for
statute by those administering it is not binding on their successors if,
review on certiorari. Decisions of the CTA have persuasive value
thereafter, such successors are satisfied that a different construction of
the law should be given.
Important:
Rulings in the form of opinions are also given by the Secretary of Justice 1. Follow the hierarchy of the courts
who is the chief legal officer of the Government. 2. If it is a question pertaining to the constitutionality of a ruling or
IRR, raise it immediately before the regular courts
Reason: This is possible because the government will not be stopped by 3. But if it pertains to questions on the tax payable computations,
the acts or mistakes of its agents. 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
Non-retroactivity of repeal of regulations or rulings General Rule:
you can go the SC.
No retroactivity if the repeal, revocation, modification ore reversal of
4. But in the SC, it should only be purely questions of law
regulations or rulings is prejudicial to the taxpayer.

Exceptions: INCOME TAXATION – GENERAL OVERVIEW

1. Where the taxpayer deliberately misstates or omits material facts
from his return or in any document required of him by the BIR DEFINITION OF INCOME TAX
2. Where the facts subsequently gathered by the BIR are materially
different from the facts on which the ruling is based INCOME TAX
3. Where the taxpayer acted in bad faith
A tax on all yearly profits arising from property, professions, trades or
ADMINISTRATIVE INTERPRETATION AND THE COURTS 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

ADMINISTRATIVE INTEPRETATION AND THE COURTS net) of taxpayers during the taxable year. A final income tax may
also be imposed on certain one-time transactions like the sale of
The power to interpret the provisions of the Tax Code and other tax real property classified as capital asset.
laws is under the exclusive and original jurisdiction of the Commissioner
of Internal Revenue subject to review by the Secretary of Finance. It is also defined as a tax on income, whether gross or net,
Different from the IRR realizable in one year. It is not exclusive to those that arise out of
When it comes to administrative interpretation, rulings or property, profession, etc. since it also includes those you find by
opinions are not binding to the courts. However, it is given great mere luck like hidden treasures.
weight in making the decision.
An income tax is one levied on the income from property or an
Commissioner v. CA occupation. It is a direct tax upon the thing called income.
The authority of the Minister of Finance, in conjunction with the CIR, to
promulgate rules and regulations for the effective enforcement of
NATURE OF INCOME TAX
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 NATURE OF INCOME TAX
courts. Much more fundamental than either of the above however, is
that all such issuances must not override, but must remain consistent National tax
with the law they seek to apply and implement. Administrative rules & The BIR has the authority to collect nationwide under RA 8424 or the
regulations are intended to carry out, and not to modify or supplant the National Internal Revenue Code.
law.
Excise tax
La Suerte v. CTA Tax on the privilege or the right to earn something
When an administrative agency renders an opinion by means of a
circular or memorandum, it merely interprets existing law and no Direct tax
publication is therefore necessary for its validity. Construction by an Impact and incidence is on the taxpayer and tax cannot be shifted,
executive branch of the gov‘t of a particular law, although not binding making it personal
General tax for an investment which he has made including those do not have
Levied on all kinds of income; it is source blind. There is tax so long as specific owners but comes in the hands of a finder.
there‘s flow of wealth, increase in income, even if the source is illegal.
It refers to all earnings derived from service rendered, capital, or both
TN: It is self-assessing or self-computed as the taxpayer including gain derived from sale or exchange of personal or real
determines how much is the income and tax property classified as either ordinary or capital asset.

PURPOSES OF INCOME TAX INCOME V. CAPITAL

PURPOSES OF INCOME TAX

Capital denotes the original investment or fund used in order to
generate earnings which is called income. It is the fund or property
Fiscal purpose existing at one point in time. It is what you put up to generate income.
To provide or raise revenue
Amounts received as a return of capital are not income.
Non-fiscal purpose
1. To offset sales and consumption of taxes which are
Income Capital
regressive.
Application: The consumer gets the burden of tax because they Flow Fund
cannot transfer it. The wholesalers, manufacturers may shift the Service or fruit of wealth Wealth
burden down the line but they get to pay the income tax and this Tree fruit
offsets the effect of regressive taxes.
INCOME V. REVENUE
2. To mitigate the evils arising in the unequal distribution of
income and wealth.
This is redistribution of wealth. This follows ability to pay, Revenue refers to the amount received by the business from selling
those who earn more are taxed more which will be used to main goods or services to its customers during the period
benefit everyone.
Income Revenue
DEFINITION OF INCOME All funds accruing to the treasury Earnings of individual persons,
of the government derived from partnership, corporation or estate
IN THE BROAD SENSE tax, donation, grants and any and trust whether or not subject
other source to tax
IN THE BROAD SENSE

SOURCES OF INCOME TAX LAWS

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.
SOURCES OF INCOME TAX LAWS
TN: According to hierarchy:
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. A. Constitution – the most supreme source of our tax laws

Wealth – anything of value that you possess or own. B. Legislations/Statutes from Congress – National Internal
Revenue Code and other special laws like the exemption
Gain – what is earned on selling such assets which is not an inventory granted to economic zones
of the business
These are subject to income tax on activities not exempted
Profit – what is left after deducting such expenses from revenue which from their grant since they can have the 5% rate in lieu of
made the receipt of revenue. other taxes

Illustration: If you sell a cup of coffee for P10, the 10 is not your total C. Administrative rules and regulations – Those issued by BIR,
income. Since you have to consider the cost of sale or your capital (such and other administrative agencies to interpret tax laws.
as your expenses for the cup, stirrer etc.). If you spent 5 pesos for your
capital, only P5 is considered as income. 1. Revenue regulations – issued by Sec of Finance with
recommendation of the Commissioner of Internal Revenue
Remember:
Sales – Cost of Sales = Income 2. Revenue memorandum orders, memorandum rulings, and
Allowable Deductions = Taxable Income memorandum circulars – issued by BIR

D. Judicial decisions – only SC decisions since they form part of

IN THE STRICT SENSE
the law of the land.

E. Tax Treaties or Agreements

IN THE STRICT SENSE

In the strict sense, income refers to the amount of money coming to the DEFINITION OF TERMS
taxpayer for services performed or an activity which he is engaged in or
 DEFINITION OF TERMS IN TITLE II Only Resident Citizens and Domestic Corporations are taxed for income
earned within and without the Philippines. The rest are taxed for income
The definitions laid down in Title II, Chapter 1 are good for title II earned within the Philippines only.
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 SYSTEMS OF INCOME TAXATION
be used as a supplement to understand other terms. These terms
are discussed as they are used in a particular Codal provision.
SCHEDULAR INCOME TAX SYSTEM
GENERAL PRINCIPLES OF INCOME TAXATION
Follows a schedule of tax rates, the tax code treats every category of
income earners individually.

Sec. 23 of the NIRC The items are classified based on kind or category of income and this is
General Principles of Income Taxation in the Philippines - subject to different tax rates based on the income classification. When
Except when otherwise provided in this Code: one files their tax return, there are as many tax returns as there are tax
rates for several income types.
(A) A citizen of the Philippines residing therein is taxable on all
income derived from sources within and without the Philippines; GLOBAL INCOME TAX SYSTEM

(B) A nonresident citizen is taxable only on income derived from The taxpayer is required to lump all items of income and a
sources within the Philippines; single/proportional/uniform income tax rate is imposed. Only one return
is filed.
(C) An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable SEMI-SCHEDULAR AND SEMI-GLOBAL
only on income derived from sources within the Philippines: (Applicable in 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 There are several items of income which are lumped by kind and
the complement of a vessel engaged exclusively in international subjected to a similar rate.
trade shall be treated as an overseas contract worker;
This is still just similar to following a schedular tax system because we
(D) An alien individual, whether a resident or not of the still classify them and then subject them to different tax rates and then
Philippines, is taxable only on income derived from sources within when all incomes are lumped such as business and compensation
the income, we subject this lump to a uniform rate.
Philippines;
Therefore, it is schedular in the sense that we lump different items of
(E) A domestic corporation is taxable on all income derived from income per type or category and it is global in the sense that we
sources within and without the Philippines; and subject all the items in this lump to one tax rate

(F) A foreign corporation, whether engaged or not in trade or Passive incomes such as royalties, interests and dividends are
business in the Philippines, is taxable only on income derived however subject to different tax rates. This cannot be lumped and
from sources within the Philippines. so we follow a schedular tax rate here

Passive income earned by non-stock, non-profit educational

GENERAL PRINCIPLES OF INCOME TAXATION institutions are either subject or not subject to tax. No definite SC
decision yet. It may be answered either way.

Resident KINDS OF INCOME TAX METHODS

(RC)
Citizen
Non- KINDS OF INCOME TAX METHODS
resident
(NRC) Gross income taxation
Individual
Engaged in This is a system based on gross income, which doesn‘t allow deductions
Resident Trade or
(RA) but allows exclusions.
Business within
Alien the Philippines
Taxpayer Non- (NRA-ETB) Gross Income = Income – Exclusions (e.g. Capital)
resident
(NRA)
Domestic Not Engaged in A final tax is imposed on the gross amount of specified types of
(DC) Trade or income such as interest income, royalty, prizes, dividends, and
Corporation Business within capital gains. (Schedular system)
Resident the Philippines
(RFC) (NRA-NETB)
Foreign
Net income taxation
Non- Net Income = Gross Income – Deductions
resident
(NRFC)
Certain deductions are allowed and subtracted from the aggregate of
incomes not subject to final tax, and the tax computed based on the
resulting net income. (Global system)
In the Philippines, net income taxation is used more. There are other P360,000 – 50,000 (personal exemption) = P310,000 (This amount is
expenses which are not part of direct cost so you are given deductions now taxable)
(indirect costs such as those you pay to your lawyers, etc). 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
This will allow deductions and encourage people to pay taxes. When pure compensation earners are subjected to modified gross income.
you follow gross income taxation, you might be overburdened by The rest, net income is used.
the huge taxes you pay and you will feel disheartened. But this type
of taxation is still followed in the Philippines. MCIT follows gross Net income taxation for taxpayers that derive income from
income taxation to curtail some evils. business, trade or professional income

FEATURES OF OUR PRESENT INCOME TAXATION For those who earn income through business, trade or business, they
follow the net income.

COMPREHENSIVE TAX SITUS Illustration:

Sir Amago, an employee earns compensation income as his allowance
FOLLOWS A COMPREHENSIVE TAX SITUS 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
Uses nationality, residence and source rules in determining where or tax. But for the portion for the business income, he can deduct
what income are considered taxable or not. electricity, rent, depreciation, etc. These expenses are allowed to be
deducted. I will add both incomes and whatever is the result, deduct
There are a lot of factors to account for prior to determining if the personal and basic exemption:
income is taxable in the Philippines or not.
Compensation Income = Income A
The general principles of income taxation discusses who are the
individuals taxable within and without, including those for the Business Income (Business Income – Deductions (expenses) =
corporation. Income B Total Income = Income A + Income B Income
A + Income B – P50,000 (BPE) = Taxable income
Illustration:
For individuals, resident-citizens are taxable within and without; Non- Follows pay-as-you-file system
resident, taxable sourced within.
The moment you file your income tax return, you pay taxes due. Pay
Residency, citizenship, and source of income are factors considered and file to the bank. Those who go to BIR are those individuals or
to determine how the person is taxed. The fact that there are entities that either those incurred a loss or do not pay any taxes at all.
several factors to consider before taxing a person is the reason why They have correctly paid their taxes as they have estimated in their
the income taxation system of the Philippines is comprehensive but income tax return.
corporation have a fixed tax rate.
If no tax to pay – go to BIR.
Semi-schedular or semi-global but mostly schedular. If you have tax to pay – go to authorized banks.
INDIVIDUAL INCOME TAXATION
In some cases, Withholding System (Pay as you earn)
This is a way of collecting tax and is not another type of tax.
BASIC FEATURES OF INDIVIDUAL INCOME TAXATION
Compensation income earners are subjected to withholding tax. Persons
Progressive who are leasing out their properties—persons or corporations—
Proportional to income earned by individual. The income tax imposed is earn net income. They are subjected to income tax but there is
proportional to the income earned by the individual. Progressive system withholding tax required by them which is being withheld by the lessee.
is much more clearly illustrated in individual than corporation. Lessees are required to withhold equivalent to 5%.

Income increases, tax rate increases. In other words, it follows a CORPORATE INCOME TAX
scheduler system.
TN: Starting 2018, there is a new income tax schedule.
BASIC FEATURES OF CORPORATE INCOME TAX
Modified Gross Income Taxation for Pure Compensation Earners
A modified gross income taxation is used for pure compensation earners Fixed rate of 30% (Proportional)
because deductions such as return of capital are not allowed. The progressive system still exists for Corporate Income taxation even
The computation for gross income only have exclusions. though the rate is fixed because the how much a corporation is taxed
still increases by the income it earns
Normally, return of capital is deducted from gross income. BUT for pure
compensation earners, there is no return of capital since these Net Income for Corporate Income Taxation Can deduct itemized
individuals do not have any capital to put in (you only use yourself as deductions under Sec 34
your capital).
Pay-as-you file system
The compensation pure compensation earners get are taxable right Pay the tax the moment you file the income tax return
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. CRITERIA USED IN IMPOSING INCOME TAX

Illustration: COMPREHENSIVE SYSTEM OF IMPOSING INCOME TAX

30, 000/mo. income * 12 mos. = P360,000
 1. Citizenship or Nationality Principle – a citizen of the If you are in a better position than where you were originally or net
Philippines is subject to Philippine income tax worth increases in value than what you used to have.
a. On his worldwide income, if he resides in the
Philippines, or Clearly presented if there is investment, Invested 100 then got 400,
b. Only on his Philippine-source income, if he there is a 300 gain or profit. But, even if you do not have any
qualifies as a non-resident citizen; hence, his investment like you found a bar of gold in the street. It increased your
foreign-source income shall be exempt net worth. No investment so the entire value is considered an
investment.
2. Residence or Domicile Principle – an alien is subject to
income tax because of his residence in the Philippines. Gain or profit actually or constructively received
 Actual – there is actual possession of the wealth
Thus, a resident alien is liable to pay Philippine income  Constructive- no actual possession but already in your control.
tax only on his income from sources within the Philippines Examples: Income deposited in a bank; shares of stock
but is exempt from tax on his income from sources
outside the Philippines. Q: You own shares of stock. Purchased for P100. You look at stock
exchange, the value is P1,000. Is there gain or profit?
3. Source of Income Principle – an alien is subject to A: Yes, since you are in a better position than before.
Philippine income tax because he derives income from sources
within the Philippines. Q. Did it comply with the 2 nd criteria of actual or constructive receipt?
A: No. It is complied only when you sell it.
Thus, a non-resident alien or non-resident foreign
corporation is liable to pay Philippine income tax on You can only realize the profit in this case is when you separate it from
income from sources within the Philippines, such as the capital. You can separate when you sell the shares, you can deduct
dividend, interest, rent or royalty, despite the fact that he the cost and the remaining is the realized gain.
has not set foot in the Philippines.
Buying stocks at 100 pesos per share, then when the right time comes
and the share increases to 1000 pesos per share, the only way you
SOURCES OF INCOME realize profit is when you sell your shares and get the profit out of that
sale. In that sense, you get to control both capital and gain by physically
SOURCES OF INCOME segregating them.

Source is the property, activity, or service that produces the income. You can physically segregate income from capital whereas if not yet
sold, it is something inchoate. You do not own the amount (P1,000) yet
A. Capital but you own the shares which could potentially be an income.
B. Labor
C. Both labor and capital Income is realized:
D. Dealings in property 1. If there is control of income
2. It is borne out of a completed transaction
Necessity of determining source of income
As defined in general principles of income taxation, there are Other ways to earn income:
individuals or entities taxable only for income sourced within the Contract of loan – Interest payment is the source of income. The
Philippines while some are within and without the country moment it is executed, deemed realized. When transaction is
Therefore, we need to know where the income is sourced to know completed, contract perfected, there is already control I the sense that
where the income can be taxed, here in the Philippines or abroad by if due and demandable, can demand payment of interest.
another taxing authority. If services are rendered in the Philippines by a
non-resident citizen, this is taxed by the Philippines Income is not exempted by any treaty or law
Not taxable income
Example: OFW is a non-resident under Tax code. If you have a property NIRC provides for exclusion, and some exceptions. All those
leased in the Philippines. It is taxable in the Philippines because income (sec 32B), while they are considered income under first
property is located here and the source is the property or to be strict, two criteria, cannot tax them.
the activity of leasing out is the source which is conducted here in the
Philippines. So, taxable because being a non-resident, taxable within but
KINDS OF TAXABLE INCOME OR GAIN
his compensation while working abroad, not taxable here. Outside the
Philippines, so not taxable here.
TAXABLE INCOME

CRITERIA TO DETERMINE IF INCOME IS TAXABLE

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
HOW TO TELL IF INCOME IS TAXABLE laws.

1. There is gain or profit GENERAL CLASSIFICATION OF GAINS

2. Gain or profit is realized or received (actually or constructively)
3. Such gain or profit is not exempted by any treaty or law 1. Capital gains – gain or income from sale or exchange of capital
assets
TN: These three must be complied with before income can be said to be 2. Ordinary gains – gains or income from sale or exchange of
taxable. properties or services which are not considered as capital assets
(categorized as ordinary assets)
There is gain or profit
 GROSS INCOME MODES OF PAYING COMPENSATION INCOME

DUMPING GROUND COMPUTATION A. If paid in cash – amount of money received

B. If in kind – monetary equivalent of the property
Gross Income P xxx
Less Allowable Deduction COMPENSATION IN KIND
(xxx) P xxx x
Taxable Income % 1. Stock options – taxed only if there is a benefit to the
Multiplied by the Tax Rate P xxx. employee such as when he can buy the share at a more
Tax Due and Payable favorable price than the public

TN: For discussion purposes only. Do not write ‗using dumping 2. Promissory note – face value of the promissory note, unless
ground computation‘ in the exam as this is only a term coined by discounted wherein the cash discounted value will be used
Atty. Amago to facilitate discussion.
3. Cancellation of debt – value of debt forgiven
INCLUSIONS
4. Tax liability as compensation – amount of tax shouldered by
employer
ITEMS OF GROSS INCOME [CGGIRRDAPPP]

1. Compensation for services in whatever form DOCTRINE OF CASH EQUIVALENT

2. Gross income derived from the conduct of trade or business or
the exercise of a profession
3. Gains derived from dealings in property DOCTRINE OF CASH EQUIVALENT
4. Interests 5. Rents
6. Royalties All items considered as income which you do not receive as cash has to
7. Dividends be valued in cash for purposes of taxation. After all, taxes are payable in
8. Annuities money. It must have a cash equivalent before a tax is imposed; usually
9. Prizes and winnings the fair market value.
10. Pensions
11. Partner‘s distributive share from the net income of the general Valuation of real property
professional partnership Under Sec. 60 of the NIRC, the valuation of real property is the higher
of zonal value and assessed value. But assessed value is technically
TN: Pertinent items of income are not exclusive. It is income when it wrong because this is what appears at the back of the tax declaration
increases the wealth or the assets. multiplied by an assessment level. But what is used is only the amount
appearing at the back of the tax declaration without having to multiply it
by an assessment level.
COMPENSATION INCOME
In some instances, it has to be compared with gross selling price for tax
COMPENSATION INCOME purposes. For personal properties, the law is not strict with regards to
how it is valued, as compared with that of real properties.
Compensation income refers to all remuneration for services
rendered by an employee for his employer, unless specifically Fair Market Value
excluded under the Tax Code. It is the value of the property where a seller, who is not compelled to
sell, is willing to sell and the buyer, who is not compelled to buy, is
There is compensation income when there is an employer-employee willing to buy.
relationship. Compensation income can only be earned by an
individual. Only natural persons can become an employee. Example: If there is a property worth 100k and the seller is willing to
TESTS TO DETERMINE EXISTENCE OF EMPLOYER-EMPLOYEE sell it at 90k and a buyer is also willing to buy it at 90k, that 90k
RELATIONSHIP becomes the fair market value.

Four-Fold Test
CONVENIENCE OF THE EMPLOYER RULE
1. Selection and engagement of the employee
2. Payment of wages CONVENIENCE OF THE EMPLOYER RULE
3. Power of dismissal
4. Power to control the employee‘s conduct There are certain allowances given by the employer to the
employees which benefit the employer. These allowances are not
Two-Tiered Test taxable on the part of the employee but the employer as it is
primarily for the employer‘s benefit.
1. Economic Dependency Test – whether or not the employee is
dependent on the employer for continued employment in BUSINESS INCOME
the employer‘s line of business

TAXABLE INCOME COMPUTATION

2. Control Test – whether or not the employer has the power to
For Manufacturing, Merchandising, or Mining Business
control the employee‘s conduct not only as to the result of the
work to be done but also as to the means and methods by
which the work is to be accomplished Taxable Income
 For Manufacturing, Merchandising, or Mining Business The income is deemed received even if there is no actual distribution or
receipt of the income.
Gross Sales P xxx
Less: Cost of Goods Sold For General Professional Partnership, the partnership income is deemed
(xxx) P xxx distributed to the partners automatically. Even if not declared, the share
Gross Profit xxx of the partner in the partnership income goes to the partner.
Add: Other Income P xxx.
Gross Income Subject to Tax INCOME FROM DEALINGS IN PROPERTY

COST OF GOODS SOLD COMPUTATION

DEALINGS IN PROPERTY
Cost of Goods Sold
For Merchandising Concern Dealings in property refer to the disposal through the sale or exchange
of ordinary assets or capital assets.
Beginning Inventory P xxx TN: The gains depend on the type of property sold.
Add: Net Purchases
xxx P xxx Goodwill – there may be gain or loss when the business sold
Cost of Goods Sold Available for Sale (xxx)
Less: Ending Inventory Example
P xxx.
Cost of Goods Sold 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?
Cost of Goods Sold
The gain is 300,000. Selling price of 700,000 less the book value of
For Manufacturing Concern
400,000 equals a gain of 300,000.
Direct Materials used P xxx
Direct Labor xxx Direct Overhead Gain or Loss on Sale
xxx P xxx
Total Manufacturing Cost xxx Gross Selling Price (GSP) P 700,000
Beginning Work-in-process (WIP) Inventory P xxx Less: Book Value* (400,000)
Cost of Goods Placed in Process (xxx) Gain or Loss P 300,000
Less: Ending WIP Inventory
P xxx
Cost of Goods Manufactured
xxx
Add: Finished Goods Inventory
P xxx *Book Value
Cost of Goods Available for Sale
(xxx)
Less: Ending Inventory Purchase Price (Acquisition Cost) P 1,000,000
Cost of Goods Sold P xxx
Less: Accumulated Depreciation ** (600,000)
Book Value P 400,000 .

PARTNERSHIP INCOME

Straight - Line Method

PARTNER‟S SHARE IN GPP
**Accumulated Depreciation
Partnerships follow the constructive receipt doctrine wherein the Cost P 1,000,000
income is deemed automatically distributed to the partners even if Less: Salvage Value -
there be no actual distribution. Depreciable Amount P 1,000,000
Divided by: Useful Life in years 10
Tax rate Depreciation Expense (for the year) P 100,000
It is taxed at 0-35%, part of the dumping ground computation. Multiplied by: Number of Years used 6
Accumulated Depreciation P 600,000 .
Situs
Where the profession is undertaken
The depreciation of the property has to be taken into account since it
TWO FORMS OF PARTNERSHIP was already used for 6 years. The annual depreciation under the
straight-line method is 100,000, computed as the depreciable amount of
1. Trade Partnership – partnership wherein part or all of its 1,000,000 divided by the useful life of 10 years. The annual depreciation
income is derived from the conduct of trade of business expense is multiplied by 6 years which yields an accumulated
2. General Professional Partnership – formed by persons for depreciation of 600,000. This accumulated depreciation of 600,000 will
the sole purpose of exercising their common profession of be deducted from the acquisition cost of 1,000,000 in order to arrive at
which no part of its income is derived from engaging in any the book value of the property at the end of the 6 th year which is
trade or business 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

CONSTRUCTIVE RECEIPT DOCTRINE 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
CONSTRUCTIVE RECEIPT DOCTRINE should be considered.
 ORDINARY ASSETS
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
ORDINARY ASSETS materials enumerated above, considered ordinary gain.

1) Stock in trade included in the inventory at the end of GR: Ordinary if in relation to earning an income not involving capital
taxable year asset

Ex: Stock of sardines Examples of ordinary income

You originally have 100 cans of sardines. Then you are left 1) Compensation income
with 2 cans of sardines at the end of the year. What do you 2) Business income
consider as ordinary assets? 2 cans of sardines because they 3) Professional
are the only assets left in your possession. 4) Passive – as a rule are ordinary, unless used as capital

If sold or eaten, it can no longer be called your asset. Your

CAPITAL ASSETS
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.
Sec. 39 A (1) of the NIRC
2) Properties primarily held for sale to customers in the The term 'capital assets' means property held by the taxpayer (whether
ordinary course of his trade or business. or not connected with his trade or business), but does not include stock
in trade of the taxpayer or other property of a kind which would
Ex: Sale of house and lot properly be included in the inventory of the taxpayer if on hand at the
You have 10 houses, and you sold the one in Cebu in Cristina close of the taxable year, or property held by the taxpayer primarily for
North but you are not engaged in real estate business. sale to customers in the ordinary course of his trade or business, or
property used in the trade or business, of a character which is subject to
It will be considered capital because the asset is not primarily the allowance for depreciation provided in Subsection (F) of Section 34;
held for sale and it is not in the ordinary course of business or real property used in trade or business of the taxpayer.
because you are not engaged in real estate business.

Ex: Shares of stocks. Three types of assets subject to capital gains:

Investment house, you ordinary sell securities. When you sell 1. Income from dealings in shares of stock of domestic corporation
shares of stock/securities, considered ordinary because these whether or not through the stock exchange
securities are primarily held for sale in the ordinary course of 2. Income from dealings in real property located in the Philippines
business. and
3. Income from dealings in other capital assets other than (a) and
If engaged in real estate instead and you sell condo units in (b).
Ayala and you were able to sell, these will be considered
ordinary. While they are real property but because you are TN: This gives a negative definition: ―but does not include…‖ - gives an
engaged in the business, this is primary held in the ordinary enumeration of what are ordinary assets. If does not fall under any,
course of your business. considered capital assets. For you to answer the exam, memorize the
ordinary assets.
Ex: Securities. You may be able to stock the certificates, but not
the stock themselves. Capital assets are assets which are not used in business but does not
include enumerated ordinary assets. If not one of the ordinary assets,
3) Property used in trade or business subject to it is capital asset (opposites define each other)
depreciation – that is when there is a decline of value
of
HOLDING PERIOD OF CAPITAL ASSETS
property because of passage of time or because of usage

Example of property that depreciates: cars, cellphones.

For Individual Taxpayer
TN: Land does not depreciate, it ordinarily appreciates rather
Apply the holding period
than depreciate. Most personal properties depreciate
• Held for 12 months or less – report gain or loss at 100%
however Rolex watches and other luxury items does not.
• Held for more than 12 months – report gain or loss at 50%
Is it automatic that they are considered ordinary assets
For Corporate Taxpayer
because they don‘t depreciate? No. It must be one which is
Holding period is not applicable. Capital gain and loss are to be reported
used in trade or business.
in full amount regardless of the number of years the capital asset is
held.
4) Real property used in trade or business

Example: Land even if not primarily held for sale. If it is the NET CAPITAL GAIN (LOSS)
building where your shipping business is located, still ordinary
assets because it is used in trade or business.
PREFERENTIAL TAX TREATMENT FOR CAPITAL GAIN (LOSS)
Take note: Everything used in trade or business falls under ordinary Rules for individual taxpayers
assets. You just have to identify under which criteria it falls. Memorize 1. Net capital gain is added to ordinary gain but net capital loss is not
the 4 because it will help you identify WON capital or ordinary assets. deductible from ordinary gain.
 Capital gains are to be reduced by capital loss incurred during the
2. Net ordinary loss is deductible from ordinary gain taxable year. Capital loss allowed as deduction from the capital
gains only.
3. Capital losses are deductible only to the extent of the capital gain. PASSIVE INCOME

4. For the individual, the reportable percentages of capital gain or loss

shall be: PASSIVE INCOME
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 Passive Income is subject to a final withholding tax. It shall not be
included in the gross income of the taxpayer.
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 Important: Passive income sourced outside the Philippines will be
observed: included as gross income subject to the dumping ground computation.
a. The taxpayer is other than a corporation
b. The amount of loss does not exceed the income before It is subject to the 0-35%. This rule is applicable only to resident
exemptions at the year when the loss was sustained citizens or domestic corporations because resident citizens and domestic
c. The holding period should not exceed twelve months corporations are taxable on income derived from sources within and
without the Philippines.
Example:
Holding Cost GSP Gain It is still considered as an income tax however, the manner of collecting
Period (Loss) passive income is different from the manner of collecting the normal
income that is subjected to the dumping ground computation.
Rolex 10 years P300,000 P450,000 P150,000 It is collected through withholding and deemed final.
Watch
Jewelry 2 years P100,000 P200,000 P100,000
INTEREST INCOME
Car 9 months P1,500,000 P900,000 (P600,000)

INTEREST INCOME
Net Capital Loss Carry Over (NCLCO)
Interest income is the compensation for the use of money or for
Gain (Loss)
forbearance of the use thereof.
Rolex Watch (150,000 x 50%)* P 75,000
Jewelry (100,000 x 50%)* P 50,000
Interest Income from Banks
Car (600,000 x 100%)*
Interest from bank deposits or other financial institutions is subject to a
Net Capital Loss Carry Over P final withholding tax of 20%. What is contemplated here is interest from
deposit, trust fund and other deposit substitutes.
*The holding period is taken into account.
Interest Income From Non-Banks
Income Interest income out of a loan transaction is not a passive income. Thus,
Year 1 it shall not be subject to a final tax but subject to the normal tax rate of
0-35% per dumping ground computation.
Ordinary Income P 300,000*
Example: A extended a loan to B worth 1M subject to 10% per annum.
*No NCLCO because there is only ordinary income Hence, A has an interest income of 100K for one year which represents
the interest. The 100K is subject to income tax of 0-35%.

Foreign Currency Deposit Units (FCDU)

Year 2
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
Gain (Loss)
not citizenship.
Ordinary Income P 300,000
Net Capital Gain P 100,000
Interest income of a non-resident under FCDU is exempted from tax.
NCLCO* (100,000) -
Summary
Taxable Income P 300,000 • If Philippine currency deposits – 20%
• If foreign currency deposits – 15%
*NCLCO can only be applied to the extent of the capital gain. • Non-banking institutions – 0-35%

TAX TREATMENT OF ORDINARY AND CAPITAL ASSETS

RENT INCOME

Gain or Loss from Ordinary Asset Transactions

RENT INCOME
Ordinary gains form part of business income subject to normal tax.
Ordinary loss is allowed as deduction from other business income
Rent income refers to the consideration for the use of the property of
and capital gains.
another. The rent paid by the lessee is income for the lessor.
Gain or Loss From Capital Asset Transactions
LEASEHOLD IMPROVEMENT
When the lessee built permanent improvements on the leased property Royalty is the compensation for the use of intellectual property.
which will become the property of the lessor upon the expiration of the Situs: Place of use
lease, the value of the improvement should be reported as income of
the lessor using either outright method or spread out method. Kinds of Royalty Income
1. Active Royalty Income – 0-35% for individuals or 30% for
How to Report Income from Leasehold Improvement corporations
2. Passive Royalty income – 20% final tax
1. Outright Method – income shall be recognized at the time Royalties on books as well as other literary works and musical
of the completion of the improvement composition – 10% final tax

2. Spread-out Method – income is spread over the term of The royalty must be earned within the Philippines
the lease Otherwise, the said passive income will form part of the gross income of
the taxpayer that will be subject to the dumping ground computation,
The estimated book value of the leasehold improvement provided such taxpayer is a resident citizen or a domestic corporation.
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 Rule in case of active royalty
an aliquot part thereof If is an active royalty, such as a business engaged in extending
franchises like Jollibee, royalties earned will be included in the dumping
Example: ground computation. They are active in earning royalties and this
Mr. Y, the lessee, will erect a building on a leased parcel of land owned becomes a regular source of income.
by Mr. X, the lessor.
DIVIDENDS
Property – 100k
Lease term – 20 years
Building – 10M finished on the 5th year of the lease term
DIVIDENDS
Useful Life of the Building – 20 years
Refer to any distribution made by a stock corporation out of its earnings
Q: How much is taxable Income under the two methods?
or profits from earnings and payable to its stockholders.

A: Under the outright method, the taxable income on the year of

This is income earned by an owner of the corporation from his shares. It
completion of the building is 2,500,000. While, under the spread-
is the share in the profits in a corporation as declared by the Board of
out method, the taxable income is 166,667.
Directors. Dividends can be in the form of cash or property.

Outright Method Note

If what are distributed are its own shares, then it is stock dividends. If
Cost of the Leasehold Improvement P 10,000,000 what are distributed are shares of another corporation, then it is
Less: Accumulated Depreciation property dividends.
at end of lease term* (7,500,000)
Income to be Reported P 2,500,000 Situs
1. Dividend from Domestic Corporation – purely within
2. Dividend from Foreign Corporation
a. More than 80% - incomevwithin
Spread - out Method b. More than 50% up to 80% - partly within and partly
without
Cost of the Leasehold Improvement P 10,000,000 c. 50% or less – income without
Less: Accumulated Depreciation
at end of lease term* (7,500,000)
Value of Building at end of lease term P 2,500,000 CASH/PROPERTY DIVIDENDS
Divided by: Term of Lease in years 15
Income to be reported P 166,666.67
CASH/PROPERTY DIVIDENDS

Straight -Line Method To individuals from domestic corporations

*Accumulated Depreciation Dividends shall be subject to a final withholding tax of
• 10% - RC, NRC, and RA
Cost P 1,000,000 (Resident Citizens, Non-resident citizens and
Less: Salvage Value - Resident Aliens)
Depreciable Amount P 10,000,000 • 20% - NRA – ETB
Divided by: Useful Life in years 20 (Non-resident alien engaged in trade or business
Depreciation Expense (for the year) P 2,500,000 in the Philippines)
Multiplied by: Number of Years used 15 • 25% - NRA –NETB
Accumulated Depreciation P 7,500,000 . (Non-resident alien not engaged in trade or
business in the Philippines)

ROYALTIES To domestic corporation from another domestic corporation

Dividends are exempt as it will only be taxed when it is distributed to
the stockholders
ROYALTIES

Rule if dividends are in the form of property

They will be subject to a final withholding tax based on the fair market The treasury share is the property of the corporation already. When the
value of the property. 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
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 LIQUIDATING DIVIDENDS
dumping ground computation.
LIQUIDATING DIVIDENDS
Rule in case of foreign corporation
It gets complicated when it is foreign corporation. You will need to apply Return of stockholders investment. It arises from the disruption of
the rule on situs with regard to foreign corporations. Apply the 50% and assets by a corporation to its stockholders upon corporate dissolution.
85% rule.
Important: Share in trade partnership is taxed the same way Return of capital if
as dividends. This is different from a general professional 1. If it is higher than cost
partnership. They are not subject to passive income tax (they follow 2. When the corporation is a wasting asset corporation which
constructive receipt doctrine: even when you declare or not, you is a type of business that will diminish like mining.
are taxed), and they are subject to dumping ground computation of Rule
0-35%. 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
STOCK DIVIDENDS difference between what the stockholder spent and what the
stockholder has.
STOCK DIVIDENDS
SCRIP DIVIDEND
General Rule: Stock dividends are exempt from tax

Exceptions:
SCRIP DIVIDEND
1. Cancellation or redemption of stocks – treated as cash
dividends
It is issued in the form of promissory note and is table to the extent of
TN: If it exceeds the taxable year, it will be
its fair market value. It is taxable in the year when the warrant was
deemed as a sale of share rather than a dividend issued. Like cash dividends it is based on the face value of the
promissory note which is the same as the fair market value.
2. Change in capital structure of the corporation – when
there is an option to get cash or stock dividends, entire
INDIRECT DIVIDENDS
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 INDIRECT DIVIDENDS
thing to do is to declare stock dividends, then redeem
your shares, so in effect it becomes stock redemption. Those other dividends representing payments or rights received by the
taxpayer, which are really dividends. They are taxed like cash/property
3. Stockholders receive a different kind of stock than that dividends.
which they already own – net effect is that it will
They are not actually declared as dividends by the corporation but can
change the equity structure of the corporation
become dividends by its nature, such as
1. Forgiveness of debt of stockholder
Example:
2. Personal use of corporate properties
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 TAX SPARING RULE
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 TAX SPARING RULE
because A has only 100 shares (1/5), B has 200 shares already
(2/5) and C has 200 shares already (2/5). 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
As a result, the stock dividend will be subject to tax based on on reciprocity.
applicable final tax rate on dividends for individual taxpayers (10%
or 20% or 25% FWT as the case may be. Reason: To encourage foreign investors. And to make it equal with the
branch profit remittance tax of 15%, otherwise, the foreign corporations
Treasury Shares will only create branches, not subsidiaries, in the country.
These are shares of corporation being bought back by such corporation.
ANNUITIES
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
bylaws. As a result, the corporation is now holding its own share ANNUITIES
which is commonly called as a Treasury Share.
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 PENSIONS
promises to pay a periodic payment of income.

TN: Need not be yearly as long as it is periodic. PENSIONS

This is given not on account of services rendered under an Pensions are periodic payments of income on account of
employeremployee relationship. It is subject to tax under the ground employeremployee relationship.
computation.
Situs: Where the service is rendered
Tax rate
A. For individual taxpayer – 0-35% RETIREMENT BENEFITS
B. Non-resident alien not engaged in trade or business – 25%.
Situs: Where the contract is made With Reasonable Private Benefit Plan
Retirement benefits may be exempt subject to the following conditions:
PRIZES 1. Reasonable private benefit plan
2. Approved by the BIR
3. Employee who received the reasonable private benefit plan
PRIZES must be at least 50 years old
4. Such employee must have rendered service for at least 10
Prizes represent remuneration for an effort reflecting one‘s superiority. years, which need not be continuous
It involves a showcase of skills or talents. 5. The benefit can only be availed once in a lifetime
Situs: The place where the prize is given.
TN: There are not a lot of questions regarding pensions in the bar
Prizes not subject to tax exam. What usually come out are retirement benefits.
1. Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary or civic Without Reasonable Private Benefit Plan
achievement – but only if he was selected without any action If there is no reasonable benefit plan, you can still be exempt if there is
on his part to enter the contest and he is not required to a collective bargaining agreement (CBA) on the matter, provided the
render substantial future services as a condition to receiving benefit under the CBA is more favorable.
the prize or award.
1. There is an existing CBA
2. Prizes and awards in sports competitions sanctioned by the 2. Employee must have rendered at least 5 years of service
national sports associations. 3. Employee is at least 60 years old

Prizes and awards other than the two mentioned above BENEFITS RECEIVED FROM GSIS, SSS
If the taxpayer won any prizes or awards that are not included above,
such prizes or awards shall be subject to: Benefits or pensions received from foreign governments by one working
abroad or corporations are exempt.
A. P10,000 or less – 0-35%
B. In excess of P10,000 – 20% final tax Separation Pay
Depends on the reason for termination
Example: • Beyond the control of the employee – exempt
Prizes won by Miss Universe Pia Wurtzbach is taxable as an ordinary • Within the control of the employee – subject to tax
income that will be subjected to the dumping grousnd computation.
Those received on account of death, etc. are exempt from tax
Always remember that all passive income sourced outside or
without the Philippines shall be treated as an ordinary income and LONG-TERM DEPOSITS OR INVESTMENTS
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. LONG-TERM DEPOSIT OR INVESTMENTS

WINNINGS 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
WINNINGS certificates which was pre-terminated by the holder before the 5 th year
at the rates herein prescribed:
Winnings are rewards for an event that is based on chance or fortune.
Holding Period Tax Rate
The full amount of winnings shall be subject to the final withholding tax 4 years to less than 5 years 5%
of 20%.
3 years to less than 4 years 12%

Except: PCSO and lotto winnings Less than 3 years 20%

• 10,000 or less – exempt from tax
The basis for the rate is the holding period of the taxpayer
• In excess of P10,000 – 20% final tax
If the holding period is at least five years, it is not anymore subject to
Situs: Where it is given 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 exchange. The cost of the shares is P100, 000.00, but you were
to Mike after 2 years. How much is Feds subjected to tax? able to sell it for P400, 000.00. What is the applicable tax rate?

A: 20% tax because the holding period of Mr. X is less than 3 years. The income should be subjected to the 0-35% tax rate, part of the
dumping ground computation. The income is outside the
Important: The controlling factor in determining the tax rate for each Philippines. It will be difficult to compel anyone. While it is not
taxpayer would be their individual holding period. Each person will be shares of stock listed and traded in the local stock exchange (NY
taken individually. stock exchange being foreign), the same is still not under capital
gains tax because it‘s outside the Philippines.
CAPITAL GAINS TAX
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
CAPITAL GAINS
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
Capital gains may be derived from the following: be listed and at the same time traded.
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
Q: PLDT shares are listed in Philippines stock exchange. If you have
the stock exchange.
shares here and you sold it directly to your seatmate. What tax rate
3. Capital gains from sale of other capital assets. is applicable?

SALES OF SHARES OF STOCKS 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
SALES OF SHARES OF STOCKS 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
The shares of stocks must not be listed or traded in the local stock traded. Although it will never happen that a share which is not
exchange. Shares of stocks represent equity interest in a corporation. 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
Note: These are annual rates and the net income is aggregated. listed and not traded there.
Subject to a flat rate of 15%
Sales of shares of stocks not listed and traded in the local exchange or Q: If Jollibee shares are listed in the Philippine stock exchange and sold
listed but not traded in local stocks exchange is subject to capital gains through a broker in the stock exchange, how much is the tax due?
tax of 15%.
A: 60% of1%.
Example:
10,000 shares with a cost of P10/share are sold for P16/share. How Q: But if it is sold directly to a buyer, not through the local stock
much is the Capital Gains Tax? exchange, how will it be taxed?
A: 15% because it will fall under not listed or traded in the local stock
The CGT is P9,000. The cost of the shares which is P100,000 is exchange. While listed, it is not traded.
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 Q: If the shares involve a non-domestic corporation, probably a
of P60,000 in order to arrive at the CGT of P9,000. 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
Capital Gains Tax taxed?

A: 0-35% because again it is abroad.

Gross Selling Price (P16x10,000) P 160,000
Less: Cost (P10x10,000) (100,000 Summary:
) • 60% of 1% – listed and traded within the Philippines
Net Gain P 60,000 • 15% CGT – not listed or not traded in the local stock market
• 0-35% – if it involves a domestic corporation or a foreign
Multiplied by 15% tax rate 15% stock exchange
Capital Gains Tax P 9,000

SALE OF REAL PROPERTY

Rule if stocks are traded outside the Philippines (not local)

SALE OF REAL PROPERTY
If the stocks are traded outside the Philippines, it is included in the
gross income subject to dumping ground computation.
If it doesn‘t involve real properties, as in the case of real properties
defined under the local government code like machineries, properties
If a domestic corporation‘s stock is sold not through the local stock
which are reported or declared to the local government and is
exchange, it will be included as gross income subject to the
represented by a tax declaration which is applicable to both house and
dumping ground computation.
lot. The building, the house is also declared with a separate tax
declaration from the lot. It is also possible that machineries are declared
Example:
to be considered as real property.
You are a resident citizen. You bought shares listed in the New York
stock exchange. You also sold it through the New York stock
Involves only properties which are deemed capital assets Hence,
those not in the ordinary business or trade. 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
Subject to 6% capital gains tax be computed proportionately as expressed in this formula:
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:
8. The tax on the unlimited portion shall be paid within 30 days
1. Gross Selling Price after the expiration of the 18-month period.
2. Zonal value – Fair Market Value determined by BIR which is
otherwise termed as zonal value Important: The exemption applies only if you are selling your
3. Assessed value – Fair Market Value determined by the local principal residence to purchase a new residence.
assessor which is termed as assessed value (for discussion
purposes, although really has no technical name) Q: What if you sold your principal residence but you found your new
residence after 2 years?
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 A: Subjected to capital gains tax because you failed to comply
people don‘t disclose their real selling price. Instead, what they declare with the condition that it must be within 18 months from the time
is the zonal value since most likely it is higher than the assessed value you sold your old residence.
determined by the local assessor.
Q: What if the construction of the house is more than 18 months?
Presumed gain in sale of real property
This is really unfair because there is no gain but automatically you are A: There is no requirement that it must be reasonable. Problem is you
subjected to tax. It is possible you are earning a loss and yet you are must be able to spend the proceeds during the period.
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 “The historical cost or adjusted basis of the real property
bought your property for 1 Million and it is sold for 800, 000, where will sold or disposed will be carried over to the new principal
you base your tax? It will be based on 1 million pesos even if you sold it residence built or acquired”
at a loss because it is always gross selling price, zonal value or assessed
value. 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
PRINCIPAL RESIDENCE 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.
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 The reason for this is that if ever you will sell your new residential
individual including his family permanently resides, or whenever absent, property now, because the basis of the value is less, you will
wherein the said individual intends to return. always be subject to tax since cost is less. Though it does not
matter because your sale is based on gross selling price, zonal
It is the residential address of a natural person as certified by the value or assessed value, whichever is higher supposedly but
Barangay Chairman who has jurisdiction over the place, or the because you will include it there, the zonal value is very small.
Building Administrator (in lieu of said Punong Barangay) if the
residence is a condominium or the individual taxpayer‘s address Gross selling price now is the highest among them and it will
as indicated in the latest income tax return. be subjected to tax in terms of that higher value.
It just includes the value of your old house to your new house. So if you
Exempt from CGT avail of that, your principal house is worth 1 Million and you were able to
If it is the principal residential property of the taxpayer, the sell it for 2 Million pesos (total proceeds). You now want to buy a house
transaction is exempted from CGT. There are certain which is worth 1.6 Million, what will happen to the excess 400,000? It will
requirements which must be complied to prove that it is indeed be taxable because the requirement is that all proceeds must be fully
your residential property: utilized for purposes of your new principal residence. The excess will be
subject to tax.
1. Certification from the barangay that this is your principal
residence. 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.
2. It must be located in the Philippines.
Example:
3. The proceeds derived in the sale must be used to acquire a GSP = 2M Zonal value = 1.8 M
new Principal residence within 18 months. Assessed Value = 1.6 M Value of the new house = 1.6M

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.
 Summary:
The capital gains tax on the excess is P24,000. OG & CL – cannot join
OL & CL – cannot join
Another example: OG & CG – can join
Amount of property is 1M, after 5 years, you want to change principal OL & CG – can join
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 Example:
exemption. In addition to the requirements above, an additional Before you compute the taxes, there is a portion for capital gains
requirement is that it must be placed in an escrow account which is a and capital loss. Example if you receive jewelries (capital asset) for
conditional account—you cannot withdraw on that amount until the 100k when you were 18 years old and you were able to sell it at
condition was fulfilled. The supposed capital gains tax in favor of BIR so 120k after 1 year (Note: it matters how long you held on to it). Cost
that if ever, after 18 months, you are not able to purchase a new is 100k, gross selling price is 120k. Difficulty here is determining
principal residence, the BIR will just withdraw whatever is in that escrow whether it is ordinary or capital assets. How much is the tax due?
account.
Cost – P100k
The zonal value of the property is 6M, assessed value is 5.5M. If after 10 Gross selling price – P120k
months, you decided to purchase a house and lot worth 4M in Ma Luisa. P120k – P100k = P20k
How much is the Capitals Gains Tax due on the transaction provided?
Net gain is 20k. 20k is added to taxable income, and the sum is
Given: called net capital gains. Assuming ordinary income is 100k, total
Cost of the house = P1M GSP = P5M taxable income is 120k, subjected to the rate of 0-35%.
Cost of new principal residence = P4M ZV = P6M
AV = P5.5M Total tax due and demandable for this type of income is 18.5k. No
Excess (P5M - P4M = P1M) problem because you only have net capital gains.

Is there capital gains tax due on the transaction? Yes. 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

Capital Gains Tax is P72,000. period which will necessitate 50% deduction on gains. Better if you
hold on for more than 1 year because only 50% will be considered
Reason why it is not subjected to tax as the gain for taxation purposes. It means that only 10k (20k times
The reason why it is not subjected to tax is because you are still living in 50%) will be added.
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. Applicable only to individuals
Shelter is a necessity. 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
Q: But if what happens is that you sold your old house, purchased a new the
one less in value of a previous house? holding period requirement to account for.

A: That excess will be subjected to tax. So, never buy a house lesser in Capital Loss Carry Over
value than your old one. Otherwise, the basis for computing capital gains You have a capital loss of 30k. The rule is that you cannot deduct it
tax is higher. 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
Q: Why do we not deduct the original cost of the house? the capital loss to the next year.

A: Because the law deems it that there is a presumed gain regardless of In accounting parlance, this is known as NOCOLCO. There is NOLCO in
the cost of the property. The law is specific in saying that it should be allowable deductions, there is NOCOLCO for capital gains.
based on GSP, FMV, or AV, whichever is higher.
SALE OF OTHER PROPERTIES Limitations:
1. You can only carry it over for a period of 1 year.

SALE OF OTHER PROPERTIES TN: If beyond that, no carry-over anymore.

2. You can only carry it over to the extent of the net income on the year
Those like microphone, laptop, jewelry. If they will be sold, you will it was incurred.
be subject to tax if ever there is income. Rate is the dumping
ground computation of 0-35%. 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
Your capital loss can only be deducted from capital gains. should not exceed the ordinary income of the year the loss was
incurred.
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 Q: If on 2016, it is still an ordinary gain with no capital gains, what will
gains. How will it be subject to tax? happen to your 10k?
A: You cannot carry it over again.
Important: Ordinary gains and capital gains can be added.
Ordinary loss and capital gains can be joined. But the capital loss Q: If in 2017, you have a capital gain of 10k, can you still carry over the
cannot be deducted from ordinary gains. 10k from your 2015 loss?
A: No, because the limit is only 1 year.
 TN: Life insurance is tradition it that you must die first before the
Q: Had it been that there was a capital gain on 2016 for 50k? insurance is issued. (Unlike in an endowment fund – you pay then
A: Then 10k will be deducted. There will be a net capital gain of 40k, you can get the investment if you outlive the insurance) Whatever
added to 200k. You can now deduct—net capital loss carry over—net the proceeds of traditional life insurance – not subject to income
capital gains of 40k. Total taxable income is 240k. Capital loss can be tax.
deducted from capital gains but if there is no capital gain, you cannot
deduct capital loss. Company Insuring Employee Example

EXCLUSIONS 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
EXCLUSIONS [LAGCIRM]
benefitting from their beloved employee‘s death.
Sec 32 (B). Exclusions from Gross Income. — The following items shall
The amount paid for the life insurance is now treated as an
not be included in gross income and shall be exempt from taxation
EXPENSE and the income that they get after the employee‘s death
under this Title:
is not taxable because these are life insurance proceeds.
1. Life Insurance
The company may deduct it as an expense on their part.
2. Amount Received by Insured as Return of Premium
3. Gifts, Bequests, and Devises
If estate of the employee is the beneficiary = compensation
4. Compensation for Injuries or Sickness
(taxable) If the company makes the estate of the employee as the
5. Income Exempt under Treaty
beneficiary, the life insurance premium the company pays will now
6. Retirement Benefits, Pensions, Gratuities
be treated as COMPENSATION on the part of the employee and will
7. Miscellaneous Items
be taxed yearly as compensation.
a. Prizes and awards given in recognition of Religious,
Charitable, Scientific, Educational, Artistic, Literary or Civic
Insurance premium – Taxable
Achievements
b. Prizes and awards in sports competitions
Life insurance proceeds – Still not taxable since the law does not
c. Income derived by Foreign Government or its political
distinguish who the beneficiary is.
subdivisions from the exercise of any essential governmental
function or from any public utility
TN: Proceeds of life insurance are never taxable, regardless of the
d. Income derived from investments in the Philippines by
beneficiary.
Foreign Government or Financing institutions
e. Gains derived from redemption of shares of stock issued by a
When life insurance can be subject to tax
Mutual Fund Company
1. Insurer and insured agreed that the amount of the proceeds
f. Contributions to GSIS, SSS, PAG-IBIG, and Union Dues
shall be withheld by the insurer with the obligation to pay
g. Benefits in the form of 13th month pay and other benefits
interest in the same – the interest is the one subject to tax.
h. Gains derived from the sale, exchange, retirement bonds,
debentures or other certificate of indebtedness with a
Example:
maturity of more than 5 years
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,
Shall not be included in the gross income and shall be exempt from 2017. During this supervening period, there is interest of 20%
taxation. 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
TN: The exclusions are exclusive because they construed strictly against tax because this is the interest will be subject to tax.
the taxpayer while in favor of government.
(1) There is transfer of the insurance policy.
PROCEEDS OF LIFE INSURANCE
When one sells his insurance to another, the income that the
purchaser gains from the insurance is subject to tax. The
PROCEEDS OF LIFE INSURANCE income derived from this is now taxable since the insured is
now making a business out of the insurance policy.
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, Illustrative Problem:
but if such amounts are held by the insurer under an agreement to pay Mr. A is insured for a life insurance policy of 10 Million Pesos
interest thereon, the interest payments shall be included in gross which is due from payment for 10 years. From Year 1 to Year
income. 4, Mr. A paid for the premium for 4 Million pesos. On the 4 th
TN: Not taxable because it is an indemnity in lieu of death. 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
Example: Premium in the amount of 4 million pesos.
Kads secured a life insurance for the benefit of Marmie. Marmie was
designated as irrevocable beneficiary. If Kads dies, the life On the 8th year, Mr. A dies which means Mr. B is happy since he
insurance will pay his beneficiary 10K every month to Marmie. Is it can get the money in the amount of 10 million pesos. (and Mr. B
taxable for income tax purposes? No. paid only 9M – 5M for the sale and 4M for the premiums)

Whether or not revocable, it does not matter. Whoever is the What is TAXABLE?
beneficiary, it does not matter. Still not subject to income tax.
 The Income the original beneficiary (Mr. A) got from transferring
his insurance AND the income the purchaser (Mr. B) gains from the Endowment funds/policy:
Insurance Policy. Life insurance that allows you to get proceeds if you do not die after a
particular period.
MR. A‘s Case:
When he was alive and when he transferred his life insurance Example: If you are required to pay for 100k per year for 20 years
policy to B, he was able to obtain 1 million pesos as his income. (total of 2 million pesos) and that you will receive 10M at the end of
This is so since Mr. A paid 4 million pesos for the Premium and he that year, and then you outlive the policy after 20 years and you do
sold it to Mr. B for 5 million pesos. 4 million as the capital of Mr. A not die, you will get it.
is deducted from 5 million which was how much he got from the
transfer. You will have an income of 8M.
This is because 10M (endowment) – 2M (how much you paid for 20
This 1 million is now Mr. A‘s income which is CAPITAL INCOME years) = 8 Million pesos.
from Capital GAIN (sale of other personal property)
The 2 million pesos is return of premium/capital and not subject to
MR. B‘s Case: tax. This will not fall under letter A because no one died here.
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 GIFTS, BEQUESTS, AND DEVISES
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.
GIFTS, BEQUESTS, AND DEVISES
Mr. B paid 5 million for the transfer from Mr. A to him and he also
The value of property acquired by gift, bequest, devise, or descent
paid 4 Million for the payment of the premium until the 8 th year
shall be excluded from gross income, provided that income from
when Mr. A died. Therefore, Mr. B paid a total of 9 million pesos
such property shall be included from gross income.
which is his capital which will now be subtracted to 10 million
pesos which Mr. B earned from the Insurance Policy.
.
TThere is already direct tax due to it. There is no income to speak
Now, Mr. B actually has 1 million pesos as has income and now
of. The right you are exercising here is not related to your right to
subject to tax.
earn income but on some other rights.
INCOME =
Gifts, etc. is under will if you are granted by some decedent which
Life Insurance Proceeds – (Purchase Price + Premiums Paid)
takes effect only if someone dies. You earned something but not
because of your right to earn income but someone else‘s right to
SUMMARY:
transfer property. This act is taxable under estate tax, not income
GR: Not taxable regardless of the beneficiaries Conditions:
tax.
1. Paid to heirs
2. Paid upon death of the insured
In the same way, if I am so generous to give you 1M. It increased
3. Paid in a single sum or in instalment
your net worth. It is because of my right to be generous not your
Reason: It is more of an indemnity or compensation rather than gain right to earn income. If you are given gifts, it will be subject to
EXC: (When taxable) donor‘s tax, not income tax. The donor, not the donee, is subject to
1. Used to secure money obligation tax.
2. Transfer for valuable consideration
Gift
Income from Life Insurance Proceeds Any property legally and validly transferred from one person to another
for free
Proceeds of Life Insurance P xxx
Less: Actual Consideration (xxx) Bequest
Less: Premiums shouldered by transferees (xxx) Personal property transferred from one person to another by will.
Income P xxx
Devise
Real property transferred from one person to another by will.

TN: Excess is taxable. The portion of interest on life insurance proceeds COMPENSATION FOR INJURIES OR SICKNESS
is taxable and included in the dumping ground computation.

AMOUNT RECEIVED AS RETURN OF PREMIUM COMPENSATION FOR INJURIES OR SICKNESS

Amounts received, through Accident or Health Insurance or under

AMOUNT RECEIVED AS RETURN OF PREMIUM Workmen's Compensation Acts, as compensation for personal
injuries or sickness, plus the amounts of any damages received,
The amount received by the insured, as a return of premiums paid by whether by suit or agreement, on account of such injuries or
him under life insurance, endowment, or annuity contracts, either during sickness are excluded from gross income.
the term or at the maturity of the term mentioned in the contract or
upon surrender of the contract. Generally not taxable
Only damages in relation to physical injuries are exempted (moral
TN: What is taxable is the excess of the amount received over the damages are not exempted). It contemplates accidents involving
amount paid. The excess forms part of the dumping ground vehicles, someone will be held liable.
computation. The interest payment is also taxable.
Example: If there is a manhole and you fell, granting someone was
negligent, if ever you will receive damages in relation to the injury. Any amount received by an official or employee or by his heirs from the
Damages in relation to physical injury is not subject to tax. employer as a consequence of separation of such official or employee
Other damages that you will get, that is a gray area. For example, from the service of the employer because of death, sickness or other
compensation for loss profit which forms parts of compensation income physical disability or for any cause beyond the control of the said official
but this is a gray area. or employee.

Sir thinks that this should not be subject to tax because this was not a. "The provisions of any existing law to the contrary
borne out of your services rendered. It is just compensation because I notwithstanding, social security benefits, retirement
was involved in an accident, forms part of physical injuries. gratuities, pensions and other similar benefits received by
resident or nonresident citizens of the Philippines or aliens
Other damages that you get is still taxable if not related to physical who come to reside permanently in the Philippines from
injury. Example: In labor case, payment of backwages, atty‘s fees, foreign government agencies and other institutions,
moral damages, nominal damages will still be subject to tax because not private or public.
physical injury.
b. Payments of benefits due or to become due to any person
Exceptions: residing in the Philippines under the laws of the United
1. Actual damages for loss of anticipated profits States administered by the United States Veterans
2. Moral and exemplary damages awarded as a result of breach Administration.
of contract
3. Interest for non-taxable damages above c. Benefits received from or enjoyed under the Social
4. Damages as compensation for unrealized income Security System in accordance with the provisions of
Republic Act No.
INCOME EXEMPT UNDER TREATY 8282.

d. Benefits received from the GSIS under Republic Act No.

INCOME EXEMPT UNDER TREATY 8291, including retirement gratuity received by
government officials and employees.
Income of any kind, to the extent required by any treaty obligation
binding upon the Government of the Philippines Retirement plans covered by this provision:
1. Retirement Pay Law
Most favoured nation clause which is one way of preventing or avoiding 2. CBA Retirement Plan
international double taxation. It is an exclusion because both sovereign 3. Reasonable Private Benefit Plan
states, being superior in their own right, entered into an agreement.
Retirement Pay Law
We follow the pacta sunt servanda that we have to be in good faith Under the new retirement law, persons who are 60 years who have
whenever we deal with international personalities. So if we agreed that rendered service of 5 years, extendable until 65 years mandatory
no taxes will be paid so it is appropriate to exclude them from taxes. retirement.

This also embodies the principle of reciprocity and comity. CBA Retirement Plan
Retirement Plan entered into by the employer and the labor union.
It may provide different conditions, provided not more burdensome
RETIREMENT BENEFITS, PENSIONS, GRATUITIES than the Retirement Pay Law.

Reasonable Private Benefit Plan

RETIREMENT BENEFITS It is another retirement benefit plan which has more stringent
requirements. This becomes a separate fund of the company. The
Retirement benefits received under Republic Act No. 7641 and those company cannot make use of it. In fact, there is an entity that may
received by officials and employees of private firms, whether individual be set up just for this – usually a bank.
or corporate, in accordance with a reasonable private benefit plan
maintained by the employer: Requirements of a reasonable private benefit plan

Provided, that the retiring official or employee has been in the service 1st Must be reasonable private benefit plan
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: 2nd Reasonable private benefit plan is only in the form pension,
gratuity, stock bonus or profit sharing plan
Provided, further, that the benefits granted under this subparagraph
shall be availed of by an official or employee only once. A reasonable private benefit plan maintained by an employer for the
benefit of some or all of his officials or employees, wherein
For purposes of this Subsection, the term ' reasonable private benefit contributions are made by such for the purpose of distributing to
plan' means a pension, gratuity, stock bonus or profit-sharing plan such officials or employees, or both, and employees the earnings
maintained by an employer for the benefit of some or all of his officials and principal of the fund thus accumulated, and wherein it is
or employees, wherein contributions are made by such employer for the provided in said plan that at no time shall any part of the corpus or
officials or employees, or both, for the purpose of distributing to such income of the fund be used for, or be diverted to, any purpose
officials and employees the earnings and principal of the fund thus other than for the exclusive benefit of the said officials and
accumulated, and wherein it is provided in said plan that at no time employees.
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 US Veterans benefit
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 Benefit you receive from the United States Veterans Administration
Office, Philippine Veterans benefits are also exempted.
3rd A contributory plan
Q: If you used to work in the US for 20 years and then you retire,
There must also be a contribution on the part of the employer, or come back to the Philippines and you receive pension from US social
employee, or both. No amount shall inure to the benefit of a security services, will it be excluded?
particular employee or official and such must be established for the
common A: Yes, under 32b6c. If you get benefit like pension, social security,
benefit of the employees or officials retirement, gratuity and from a foreign government, it is already
excluded.
4th Reasonable private benefit plan must be approved by BIR, Otherwise
it will fall under the ordinary retirement law or RA 7641. The company is General rule in fact is that everything for which you paid a contribution,
not considered to have successfully set up a reasonable private benefit if there are benefits from them, it is always exempted.
plan. Pag-ibig, Philihealth, GSIS, SSS are always exempted whenever you
get benefits.
5th It must also be availed of only once by the employee in his lifetime.
Illustration:
It is contained in the regulations, though not stated in the law. The
subsequent retirement benefits received from another private Mr. A
employer is no longer exempt but subject to tax
30 years ABC Company 5 years Separation Pay of P300K
6 The retiree official or employee must be at least 50 years of age, with
th 35 years XYZ Company 10 years Retirement pay of 1M
at least 10 years of service which is either continuous or not because the 45 years ABC Company 5 years Retirement pay of 2M
law does not provide.
Will the following be subject to tax?
Illustration:
In one company, you can work there for 5 years, leave the company, go The separation pay will not be subject to tax as per (b). No age
back to the company, and work for another 5 years. You then now requirement here. The requirement is only the reason for
comply with the requirement of 10 years of service. separation WON it is for just or lawful causes.

IF Mr A is already 50 when he joined the company and stayed until he It could fall under retrenchment, redundancy or other labor saving
was 60 (optional retirement age), his retirement benefit shall be excluded devices. Here, the reason for separation is involuntary or beyond
if the private benefit plan is approved by BIR only if this is the control of official or employee. It could also be that the reason
the first time he will receive the benefit , because he complied with the for termination is death, sickness, physical disability.
age requirement which is 50 years old, he was able to work for 10 years
and it was approved by BIR. If it falls under any of these two, then your separation will not be
taxable. But if severance is because you tendered your
Effect of previous retirement plan obtained from the resignation, clearly it is taxable. That‘s why some companies let
government you enroll in their redundancy program if they like you, so not
taxable.
If same situation, prior to working in the private company, he already
received retirement benefit from the government which he The first retirement plan from XYZ is taxable because Mr. A is not yet
previously worked for, will he be exempt if he retires from the private 50. The last retirement plan is not taxable
company at age 60? Yes, because the first one that was availed of was 10 years of service (5 plus 5 years) in ABC Corp plus 50 years old
given by the government and it will not be counted for purposes of the therefore complied with the requirements.
exclusion.
Let us assume that the retirement plan for XYZ is subject to CBA
These employees are not covered by the labor code but covered by the which provides that you may retire at age 50 or after rendering 10
Civil Service Law. It is not covered on the law on RA 7641 or new years of service to the company, approved by BIR, this will not be
retirement plan. The reasonable private plan benefit received is taxable. The retirement plan under ABC will now be taxable
considered as the first time for the application of this law. The because it will now be the second time that he availed of a
retirement benefit received from the government will not be counted for retirement plan.
purposes of the exclusion under NIRC, after all it is not private.

Separation pay MISCELLANEOUS ITEMS

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 MISCELLANEOUS ITEMS:
other physical disability or for any cause beyond the
control of the official or employee A. Income derived by Foreign Government
B. Income derived by the Government or its Political Subdivisions
Non-taxable benefits C. Prizes and Awards given in recognition of Religious, Charitable,
Social Security Benefits, retirement gratuities, pensions, and other Scientific, Educational, Artistic, Literary, or Civic Achievements
similar benefits received by resident or non-resident citizens or resident D. Prizes and awards in Sports Competition
aliens from foreign institutions, whether public or private, are not E. 13th Month Pay and other Benefits
taxable. F. GSIS, SSS, Medicare and Other Contributions
SSS benefits under RA 8282 G. Gains from the Sale of Bonds, Debentures or other Certificates of
GSIS benefits under RA 8291 Indebtedness
 H. Gains from Redemption of Shares in Mutual Fund Refinancing is when a government renews its loan.

Example: Bank of Japan loaned 2M to Atlas. Di gihapon kabayad si

INCOME DERIVED BY FOREIGN GOVERNMENT Atlas. Nag reloan na sad si Atlas, nisugod ra pud si Bank of Japan.
International or regional financial institutions established by foreign
INCOME DERIVED BY FOREIGN GOVERNMENT governments is reciprocal law.

Income derived from investments in the Philippines in loans, stocks, They are not subject to tax here since the Philippines is not subject to
bonds or other domestic securities, or from interest on deposits in tax there as well. Income earned by Asian Development Banks are not
banks in the Philippines by: subject to tax because they are owned by foreign government.
Foreign governments,
Financing institutions owned, controlled, or enjoying INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL
refinancing
SUBDIVISIONS
From foreign governments, and
International or regional financial institutions established by
foreign governments. INCOME DERIVED BY THE GOVERNMENT OR ITS POLITICAL
SUBDIVISIONS
Example:
If South Korea has a deposit here for 2M and it earns 100k interest Income derived from any public utility or from the exercise of any
after 10 years, interest will not be subject to tax because it is essential governmental function accruing to the Government of the
exempted under 7a. Interest on deposits from foreign governments Philippines or to any political subdivision thereof.
in banks in the Philippines is excluded from taxes.
If US government invested in the shares of PLDT and PLDT decided to
There are 2 entities covered:
declare dividends, it will not be subject to tax because it is an income
1. Government of the Philippines – refers to the National
from investment in the Philippines of a foreign government of shares of
Government
stocks of corporation in the Philippines.
2. Any political subdivision – cities, provinces, municipalities and
barangays. Any income earned by them in the exercise of
Concrete Example
governmental function should not be subject to tax.
Atlas Mitsubishi (Non-resident foreign corp. from Japan)
Bank of Japan
GOCCs
Distinguish whether the GOCC is exercising a government or
Atlas loaned from Mitsubishi 2M (non-resident foreign corporation) for proprietary function. It must be engaged in a commercial activity
equipment to produce the product for Mitsubishi. (IOW, Mitsubishi is for it to be taxable.
client of Atlas). In turn, Mitsubishi loaned that money from Bank of
Japan, owned by government of Japan.
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.
Q: Is the interest earned by Mitsubishi taxable?
Section 27c states that ―upon their taxable income as are imposed
A: Yes, because it is between Atlas and Mistubishi and not between the by this Section upon corporations or associations engaged in a
Bank of Japan. The situs of interest is the residence of the debtor. Had similar business, industry, or activity.‖ Meaning, it must be a
it been only Atlas paying directly to the Bank of Japan, then the interest commercial activity for it to be taxable.
would have been exempt.
Example:
There is interest payment by Atlas equivalent to 10% per year paid to
SSS are not subject to tax but had it not been provided in Section
Mitsubishi, amounting to 200k every year. This interest is TAXABLE
27c that they are exempt, they would have been subject tax
because it is not considered an investment of foreign government in the
because they are doing what other private corporations are doing.
Philippines.
The act of loaning will be subject to tax had you been a
You need to make a distinction since it is not the bank of Japan but
corporation, even if a GOCC, is subject to tax. According to BIR,
Mitsubishi which invested in the Philippines. The loan is granted not to a
BSP may be subjected to tax because its charter says that it can be
Philippine company but to Mitsubishi, a company of Japan, and is not
subject to tax after a certain period which already lapsed.
considered an investment of government of Japan.
For Sir, it should not be the case. The act of loaning of BSP is not
Interest will go to Mitsubishi, not to bank of Japan. BUT if the bank of
commercial but governmental in essence because it needs to
Japan loaned it to Atlas, it is tax exempt. But because in this case it
maintain financial stability for the Philippines. Otherwise, all the
passed through Mitsubishi before getting to Atlas, the interest earned by
banks will close.
Mitsubishi is taxable.
Unlike for commercial banks which purpose is really for profit.
If Mitsubishi is a domestic corporation or even a resident foreign
The fact that it is not taxable if it exercises governmental functions
corporation doing business in the Philippines, and it makes payment of
will not fall under 32b7b because sec 32b7b only says of political
interest to the bank of Japan, then it would not have been taxable.
subdivision, so it (GOCC) will not fall under the exclusion.
The Philippine has no jurisdiction to tax the bank of Japan. If we will
Sec 32b 7(b) only pertains to GOCCs providing public utilities. But,
allow this, all companies will deal with foreign corporation so that
for GOCCs in general, you refer to Sec. 27c of Tax Code where it
whatever income is not taxable.
specifically enumerates who are exempted from taxes.
TN: It is a landmark case, CIR v. Mitsubishi Corporation.
It‘s different for political subdivisions (national government, local
GR 54908, Jan. 22, 1990. Read this case.
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 13TH MONTH PAY AND OTHER BENEFITS
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 Gross benefits received by officials and employees of public and private
government. It will just be turnaround of the money. entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed Ninety thousand pesos (P90,000) which
At best, for the GOCC‘s to be exempted, it should fall under Sec 27c shall cover:
to be exempted since it states that GOCC‘s are taxed when
performing commercial function. (i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act
Refer to Section 27 for legal basis for exemption No. 6686;
(ii) Benefits received by employees pursuant to Presidential
That is why PAGCOR is not there, it is already subject to tax. We Decree No. 851, as amended by Memorandum Order No.
also learned that PAGCOR is only subject to tax for activities not 28, dated August 13, 1986;
related to gaming operations. Its franchise actually says that it is (iii) Benefits received by officials and employees not covered
exempted. by Presidential Decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
PRIZES AND AWARDS (iv) Other benefits such as productivity incentives and
Christmas bonus.
V
PRIZES AND AWARDS Threshold is now P90,000 under the TRAIN Law The previous
amount exempted was P30, 000 to P82,000 for 13 th month pay and
other benefits such as Christmas bonus. There is also additional
Prizes and awards made primarily in recognition of religious,
exemption for productivity incentive of 10,000, for a total of as much
charitable, scientific, educational, artistic, literary, or civic
as 92,000 for threshold for amount exempted.
achievement but only if:
Now, the amount of exempt 13th month pay and other benefits is
i. The recipient was selected without any action on his part to
increased to P90,000.
enter the contest or proceeding; and
ii. The recipient is not required to render substantial future
De minimis benefits
services as a condition to receiving the prize or award.
These are small amounts of benefits granted to employees. They are
Requisites of exemption:
tax-exempt to a certain effect.
1. It must be related to recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement.
Example:
2. No action in your part to enter in the contest or proceeding, you
Rice subsidy of P1500 per month is not subject to tax and not
never submitted any entry
included in withholding tax system. But if there is subsidy in
3. Recipient is not required to render substantial future services as a
excess of 1500, that excess is part of the determination of the
condition to receiving the prize or award.
90k threshold.
Q: Should Pia be exempted from taxes?
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
A: No. It satisfied the first condition because it is actually a civil
12 months) 6000 can be exempted if it does not exceed 90k
achievement. However, she had to join the contest herself. She is even
including your 13th month pay.
required to render future services for the entire duration of her reign.
Illustratio
How can she be exempted? Think about it. This might come out in the
n:
next exam.
13th month pay
PRIZES AND AWARDS IN SPORTS COMPETITION 100k (after computing for 13th
Given Facts: month pay)
P1500 max rice subsidy
PRIZES AND AWARDS IN SPORTS COMPETITION per month Rice subsidy
2000 per month
All prizes and awards granted to athletes in local and international P5000 max clothing Deduct 1500 since Deminimis allows up
sports competitions and tournaments whether held in the Philippines or allowance per year to 1500 exemption which makes the
abroad and sanctioned by their national sports associations.
it now 500 per month
To see if 500 per month is exempt
TN: Exempted if award refers to tournaments or competitions held in
from tax if it‘s not in excess of the
the Philippines or abroad.
Salary – 100k/month 82000
Rice subsidy – 2k/month allotted for 13th month pay and other
Requisites:
Clothing allowance – benefits, multiply by 12 since it will be
1. Competition must be sanctioned by national sports association
10k/year computed at the end of the year
2. Competition must be recognized by Philippine Olympic
Committee 6000 pesos for Rice Subsidy

Clothing
Exemptions are construed against the taxpayer. The last requisite is
hard to prove. 10000 per year but 5000 pesos is
allowed to be exempt therefore 5000
pesos is left
13TH MONTH PAY AND OTHER BENEFITS for calculation
 Total = 100,000 + 6,000 + 5,000
111, 000 – 90,000 = 21,000 GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND
P21,000 is the amount taxable

GAINS FROM REDEMPTION OF SHARES IN MUTUAL FUND

GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
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.
GSIS, SSS, MEDICARE AND OTHER CONTRIBUTIONS
Reason for exemption: To encourage investment in mutual funds
GSIS, SSS, Medicare and Pag-Ibig contributions, and union dues of
individuals
Mutual fund – the public gets to be included in that fund.

When you look at your payroll, there will be deductions which are done
There are businesses like PhilAm and most banks engage in
before computing the tax
management of mutual fund because not everyone has the technical
know-how to trade in the capital market for shares, bonds.

SSS Contributions – 1000 Salary 100k People trust the professionals and the experts (banks, etc) to manage
Philhealth – 500 Less 1.6k their funds. Small investments are pooled together and then invested,
perhaps in the stock market.
HDMF – 100 Taxable 98.4k
Illustration:
38 people will invest 100,000 each which amounts to 3.8 Million.
Total: P1,6000 (subjected to tax table) 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.

GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER If you sell your shares to the fund and you gain and earn income, that
CERTRTIFICATES OF INDEBTEDNESS income is tax exempt. This is done by the government to encourage
people to invest in mutual funds and save their money. Mutual fund
GAINS FROM THE SALE OF BONDS, DEBENTURES OR OTHER owners are protected because they are small time investors.
CERTIFICATE OF INDEBTEDNESS
Take note that it has to be a mutual fund.
Gains realized from the sale or exchange or retirement of bonds,
debentures or other certificate of indebtedness with a maturity of ALLOWABLE DEDUCTIONS
more than five (5) years.

TN: What is exempted is only the gain on the transfer. The interest is ALLOWABLE DEDUCTIONS
still taxable.
Debentures are used for bonds, backed by general credit of the issuer Allowable deductions are items allowed by law to reduce gross income
rather than a particular asset. They are unsecured liabilities.
in order to arrive at net income subject to tax. (Sec. 34, NIRC)
This is like a bank letting someone owe money without any collateral
Reason: Law allows it to be claimed or deducted.
Q: How can debts be subjected to tax in the first place?
No deduction shall be allowed for taxpayers earning compensation
income arising from personal services rendered under an
A: Debts are not seen as debts but possible investments on the person employeremployee relationship.
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
Matching principle
are interested in investing in debts because it can be at an amount
Before income can be generated, you have to spend something for
lower than the face value
it. You need to deduct your expenses from your income to arrive at
your net taxable income.
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. DEDUCTION V. EXCLUSION

Mr. A can make a security (debt obligation) and he can assign such right Deduction is an outflow of wealth. It represents the money spent or
to someone else and he or she can readily collect the amount. But Mr. A the taxpayer‘s expenses. It pertains to the computation of net income.
sold this security to Mr. C for 900,000. The difference of P100,000 is the
gain the other person will obtain. Exclusion is an inflow of wealth but is not considered as part of
gross income in computing taxable income because it does not fall
If Mr. C sells it to someone for 1.1 Million, Mr. C earns 200,000. That within the definition of income or is exempted by the fundamental
200,000 can be excluded from taxes granting the bond is good for 5 law or statute.
years, otherwise it is not exempted from taxes. It pertains to the computation of gross income.

Bonds are debt securities while shares of stocks are equity securities. It
is this securitization of debt securities which caused the US Subprime DEDUCTION V. EXEMPTION
crisis because of lack of proper investigation and poor debt policy of
lenders.
Exemptions refer to inflows of wealth not subject to tax because the Premiums paid on hospitalization and insurance have been repealed by
law expressly provides for its exemption. the TRAIN Law effective January 1, 2018.

Personal Exemptions are arbitrary amounts allowed for personal, Only for Business Income Earners
living or family expenses of the taxpayer. The amount has been Only individuals/corporations earning business income can deduct
calculated to roughly cover the minimum subsistence of the these. If purely compensation income earner, one cannot deduct
taxpayer. these. However, to claim all these deductions, official receipts are
It can be claimed only by individual taxpayers. required to substantiate them, which is why most would instead
choose the optional standard deduction.

BASIC PRINCIPLES
OPTIONAL STANDARD DEDUCTION
BASIC PRINCIPLES GOVERNING DEDUCTIONS

OPTIONAL STANDARD DEDUCTION (OSD)

1. The taxpayer seeking the deduction must point to some
specific provisions of the law authorizing the deduction.
In lieu of itemized deductions, the taxpayer may elect an optional
standard deduction of 40%. (Sec. 36 (L), NIRC)
2. He must be able to prove, through substantial evidence, that
he is entitled to the deduction authorized or allowed by law.
• Individual – 40% OSD on Gross Sales or Receipts
• Corporation – 40% OSD on Gross Income
Interpretation
Deductions are strictly construed against the taxpayer.
If a taxpayer elects to offset his losses against his profit from capital
asset transactions, he may no longer claim OSD since OSD is in lieu of
Withholding tax
the itemized deductions which include losses from sales or exchanges of
Withholding tax must be strictly imposed when required under the
capital assets.
law. Otherwise, the salaries cannot be deducted from gross income.
Also, there is a penalty equivalent to the amount the employer
failed to withhold. Basis of 40% OSD

Related to trade or business Gross Sales P xxx Basis of Individual OSD

The conditions in the law must be satisfied. The deduction must be used Less: Cost of Sales (xxx)
or related to your trade or business. Gross Profit P xxx. Basis of Corporate OSD

Example: Your business is leasing out real properties. You went to

collect rents from your lessee. When you went out, your child
OSD for individuals is higher compared to the corporate OSD since it is
wanted to buy the very colourful balloons. Can you deduct the cost based on gross sales/receipts wherein no deduction has been made for
of balloons? No, it is not related to conduct of trade or business. cost of sales.
There could be other conditions.
Individuals
KINDS OF ALLOWABLE DEDUCTIONS Resident citizens, non-resident citizens and resident aliens except purely
compensation income earners can claim 40% OSD on gross sales or
receipts. Non-resident aliens cannot claim OSD.
KINDS OF DEDUCTIONS
If an individual opted to use OSD, he can no longer deduct the cost of
1. Itemized Deductions sales or cost of services.
2. Optional Standard Deduction
If an individual employs the accrual basis of accounting for his income
Basic Personal and Additional Exemptions Repealed Basic and deductions, the OSD shall be based on the gross sales during the
personal and additional exemptions have been repealed by the taxable year. If he employs cash basis, the OSD shall be based on his
TRAIN Law effective January 1, 2018. gross receipts during the year.
ITEMIZED DEDUCTIONS
Corporations
Domestic Corporations and resident foreign corporations can claim 40%
ITEMIZED DEDUCTIONS [ExInTaLoBaChaRePenDepDep] OSD on their gross income. Non-resident foreign corporations cannot
claim OSD.
Deductions from Gross Income (Section 34 (A) – (K), NIRC) Taxable Estates & Trusts
1. Expenses Taxable estates and trust can claim 40% OSD. Estates and trusts are
2. Interest taxed like individuals.
3. Taxes
4. Losses When option is made
5. Bad Debts To qualify for OSD, the taxpayer should apply at the first quarter of the
6. Charitable Contributions taxable year. It is irrevocable for the taxable year of choice.
7. Research and Development
8. Pensions For individuals, OSD would be better if the total expenses will not reach
9. Depreciation 40%.
10. Depletion
For corporate taxpayers, OSD would be beneficial if there is less
Premiums on Hospitalization and Insurance Repealed cost of sales/service because there could be a higher tax base for
OSD, and there could be less operating expense.
Still, there are other considerations in determining whether or not
to avail of OSD even if figures would go against OSD. For example, Sec. 36, NIRC
your substantiation is not in accordance with regulations like when Items Not Deductible . –
they are not in the name of the company or there is no (A) General Rule. - In computing net income, no deduction shall
substantiation at all. in any case be allowed in respect to –

BASIC PERSONAL & ADDITIONAL EXEMPTIONS (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
TN: This has now been repealed by RA 10963 or the TRAIN Law.
any property or estate; This Subsection shall not apply to
intangible drilling and development costs incurred in
BASIC PERSONAL EXEMPTION petroleum operations which are deductible under Subsection
(G) (1) of Section 34 of this Code.
P50,000 (3) Any amount expended in restoring property or in making
This presupposes that there is an income. It is granted to all good the exhaustion thereof for which an allowance is or has
individuals who are earning income. It is granted on the account that been made; or
you are a person in order to cover your living expenses. (4) Premiums paid on any life insurance policy covering the life of
any officer or employee, or of any person financially
ADDITIONAL EXEMPTION interested in any trade or business carried on by the taxpayer,
individual or corporate, when the taxpayer is directly or
P25,000 per child, maximum of 4 children indirectly a beneficiary under such policy.
Requirements: (All must be complied with)
1. Dependent child - legitimate, illegitimate, or legally adopted child (B) Losses from Sales or Exchanges of Property. - In computing
2. Must be chiefly supported by the taxpayer (probably more than net income, no deductions shall in any case be allowed in respect of
50% support) losses
3. Child must be living with the taxpayer from sales or exchanges of property directly or indirectly –
4. Must not be more than 21 years old
5. Unmarried (1) Between members of a family. For purposes of this
6. Must not be gainfully employed paragraph, the family of an individual shall include only his
Exception: Even if more than 21 years old but incapable of brothers and sisters (whether by the whole or half-blood),
selfsupport, can still be considered dependent when mentally spouse, ancestors, and lineal descendants; or
incapacitated or with physical defect - something born with. (2) Except in the case of distributions in liquidation, between an
individual and corporation more than fifty percent (50%) in
Physical disability - not something born with – out of accident. value of the outstanding stock of which is owned, directly or
Physical disability is not covered under this law indirectly, by or for such individual; or
(3) Except in the case of distributions in liquidation, between two
CHANGE OF STATUS corporations more than fifty percent (50%) in value of the
outstanding stock of which is owned, directly or indirectly, by
If the taxpayer marries or should have additional dependent(s) or for the same individual if either one of such corporations,
during the taxable year, the taxpayer may claim the corresponding with respect to the taxable year of the corporation preceding
additional exemption, as the case may be, in full for such year. the date of the sale of exchange was under the law applicable
to such taxable year, a personal holding company or a foreign
If the taxpayer dies during the taxable year, his estate may still personal holding company;
claim the personal and additional exemptions for himself and his (4) Between the grantor and a fiduciary of any trust; or
dependent(s) as if he died at the close of such year. (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
If the spouse or any of the dependents dies or if any of such respect to each trust; or
dependents marries, becomes twenty-one (21) years old or (6) Between a fiduciary of a trust and beneficiary of such trust.
becomes gainfully employed during the taxable year, the taxpayer
may still claim the same exemptions as if the spouse or any of the
dependents died, or as if such dependents married, became twenty- Items Not Deductible from Gross Income
one (21) years old or became gainfully employed at the close of As a general rule in computing net income, no deduction shall in any
such year. case be allowed with respect to:

This is favorable to the taxpayer: 1. Personal, living or family expenses

If at end of the year, you gave birth to twins, you can claim
50k additional exemption for the whole year even if the 2. Any amount paid out for new buildings or for permanent
twins were born by 11:59:59 pm on December 31. improvements, or betterments made to increase the value of
Even if the status changes at the beginning of the year, such as any property or estate
the dependent becomes 22 by January, the dependent can still EXC: Intangible drilling and development costs incurred in
be included in the deduction. petroleum operations
Husband and wife can claim maximum of 4 children for both.
Only one can claim the 4. Husband can claim 2. Wife can claim 3. Any amount expended in restoring property or in making good
the other 2. the exhaustion thereof for which an allowance is or has
been made

NON-DEDUCTIBLE ITEMS
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 No, because it is a return of capital. ABC Corp can recoup
such policy. whatever it expended for the life insurance premiums for
employee X since it is the beneficiary.
5. Losses from Sales or Exchanges of Property, directly or
indirectly (Related Parties) 2. Can Mr. X consider the life insurance as income?

a. Between members of a family 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
b. Between a direct stockholder with more than 50% him or his heirs or his estate but to ABC Corporation.
equity interest and his corporation
EXC: liquidation distributions 3. If there is another life insurance, are the proceeds taxable?

c. Between corporations owned by the same No, life insurance proceeds, regardless of the beneficiaries, are
individual, direct or indirect, with more than 50% excluded from gross income.
equity interest
EXC: liquidation distributions 4. If ABC Corporation makes the parents of Mr. X the
beneficiaries, what are the tax implications?
d. Between grantor and a fiduciary of any trust
ABC Corporation can now deduct the expense from their
income. Mr. X can consider the life insurance as income which
e. Between trusts if the grantor for such trusts are the
will be taxable since he can gain something. The parents of Mr.
same
X will not be taxed upon receipt of the proceeds since such are
excluded.
f. Between the fiduciary of a trust and beneficiary of
such trust
Losses from sales or exchanges of property directly or
indirectly (Related Parties)
Personal, living or family expenses
Reason: Not an expense related to your trade, business or exercise of
Between members of a family
profession.
The family of an individual shall include only his
1. Brothers and sisters (whether by the whole or half-blood),
It is also deemed accounted for in the exemption of P250,000 under the
TRAIN Law. 2. Spouse,
3. Ancestors, and
4. Lineal descendants
Amount paid out for new buildings or improvements
Exceptions:
1. Proprietary educational institutions (Sec. 34(A)(2)) No deduction shall be allowed for losses arising from transactions
between family members.
2. Intangible drilling and development costs incurred in
petroleum operations (Sec. 34 (G)(1), NIRC) Reason: It may be simulated by the nature of the relationship.

The full amount of the capital expenditure for the new asset cannot Ex. Real property which forms part of the exclusive property of the wife
be claimed in the taxable year in which it is paid but will be spread worth P1M is sold to the husband for P100K. The P900K loss cannot be
out over the life of the asset. claimed as a deduction by the wife since this is a transaction involving
family members.
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 TN: Aunts are not included because they are collateral relatives.
an allowable deduction. Only that the deduction is not outright. Cousins can deduct the loss.

Amount expended in restoring property Between a direct stockholder with more than 50% equity
interest and his corporation
The capital expenditure for extraordinary restoration cannot be
claimed as a deduction but forms part of the value of the property No deduction shall be allowed for losses from sales or exchanges of
which will be subject to depreciation. The expense is not deducted property between an individual and corporation more than 50% in value
outright but spread over the life of the asset. of the outstanding stock of which is owned, directly or indirectly, by or
for such individual.
Ex: Mining company digs out an entire mountain and then incurs
costs to restore the property back to its original form. The costs will Except: In case of distributions in liquidation
form part of the value of the property which will be subject to Reason: There may be undue influence. A controlling shareholder may
depletion. dictate the price.

Premiums paid on any life insurance policy TN: ‗Direct or indirect‘ here refers to the status of ownership.
This is not deductible as it is a return of capital where the employer is
the beneficiary of the policy, directly or indirectly. Ex. Shareholder directly owns the shares
S1 is the controlling shareholder of X Corporation who owns 60% of the
Ex. ABC Corporation insured the life of employee X, a key shares. S2, S3, S4, and S5 own 10% each.
employee. ABC pays the premium of P100,000 a year. The
beneficiary is ABC Corporation. Shareholders of X Corporation
S1 60%
1. Can ABC Corp claim the premiums paid as a deduction on its
S2 10%
taxable income?
S3 10%
 S4 10% directly or indirectly, and which receives at least 60% of its adjusted
ordinary income from passive sources.
S5 10%
Ex. S1 owns 80% of X Corp. which is a personal holding company, while
Q: Can X Corporation and S1 deduct the loss resulting from the dealings
S2, S3, S4 and S5 own 5% each.
between them?
Moreover, S1 owns 60% of Y Corp. while, S6, S7, S8 and S9 own
A: No. Neither X Corporation nor S1 can deduct such loss since S1 is a
10% each. X Corp. entered into a transaction with Y Corp. which
controlling shareholder.
resulted in a loss of P2M.
Ex. Shareholder indirectly owns the shares
S1 owns 50% of the shares of X Corporation. S2, S3, S4, S5 and Y Shareholders of X Corporation
Corporation own 10% each. S1 also owns 75% of Y Corporation. (Personal Holding Company)
S1 80%
Shareholders of X Corporation
S2 5%
S1 50%
S2 10% S3 5%
S3 10%
S4 10% S4 5%
Y Corporation 10%
S5 5%

Shareholders of Y Corporation
S1 75% Shareholders of Y Corporation
S6 10% S1 60%
S7 5% S6 10%
S8 5% S7 10%
S9 5% S8 10%
S9 10%
Q: Can X Corporation and S1 deduct the loss resulting from the dealings
between them?
Q: Can X Corp. deduct the loss from its dealings with Y Corp.?
A: No. The loss cannot be deducted since one of the corporations is a
A: No. Neither X Corporation nor S1 can deduct such loss since S1
personal holding company and both X and Y Corporations are held by
is a controlling shareholder who owns a total of 65% of the shares
the same individual, S1, who owns more than 50% interest in each.
of X Corp. 50% of which is owned directly while 15% is owned
indirectly. The 15% interest is derived from the 20% ownership of
Between grantor and a fiduciary of any trust The
Y Corp in X Corp which is multiplied by the 75% interest of S1 in Y
parties to a trust are:
Corp.
1. Grantor/trustor
[20%*75%=15%]
2. Trustee/fiduciary
3. Grantee/ beneficiary
This is called the grandfather rule.
Reason: Trustor may influence the trustee to incur loss.
Between corporations owned by the same individual, direct or
Between trusts if the grantor for both is the same No deduction
indirect, with more than 50% equity interest
shall be allowed for losses from transactions between the fiduciary of a
No deduction shall be allowed for losses from sales or exchanges of
trust and the fiduciary of another trust if the same
property between two corporations more than 50% in value of the
person is a grantor with respect to each trust
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 Trust 1 Trust 2
or exchange was under the law applicable to such taxable year, a A – trustor A – trustor
personal holding or a company or a foreign personal holding
B – Fiduciary X - Fiduciary
company.
C – Beneficiary Y – Beneficiary
Except: In case of distributions in liquidation
If there is a transaction between B and X (fiduciary), they cannot claim
TN: ‗Direct or indirect‘ here refers to the gain or loss. a loss because they have the same trustor A.

It must be a personal holding company. Otherwise, it will not fall under Between the fiduciary and beneficiary of a trust In the same
the non-deductible items. illustration above, when trust B transacts with C, or X transacts with Y,
any of them cannot claim the loss incurred.
Holding company is a company engaged merely for investment Reason: Control may be exercised by one over the other
purposes. It exists for the sole purpose of controlling another
company or for owning property, rather than for the purpose of GRANDFATHER RULE
producing its own goods or services.

A personal holding company is a corporation in which more than GRANDFATHER RULE

50% of the value of its shares is owned by 5 or fewer individuals,
The grandfather rule looks at the shareholders (S1) of the corporate (2) A citizen of the Philippines who leaves the Philippines during
shareholder (Y Corp.) in order to determine the percentage of the taxable year to reside abroad, either as an immigrant or
ownership in a specific corporation (X Corp.). for employment on a permanent basis.

(3) A citizen of the Philippines who works and derives income from
INCOME TAXATION FOR INDIVIDUALS abroad and whose employment thereat requires him to be
physically present abroad most of the time during the taxable
TAXABLE INDIVIDUALS
year.

TYPES OF TAXABLE INDIVIDUALS (4) A citizen who has been previously considered as non-resident
citizen and who arrives in the Philippines at any time during
1. Resident Citizen (RC) the taxable year to reside permanently in the Philippines shall
2. Non-resident Citizen (NRC) likewise be treated as a non-resident citizen for the taxable
3. Resident Alien (RA) year in which he arrives in the Philippines with respect to his
4. Non-resident Alien (NRA) income derived from sources abroad until the date of his
a. Non-resident Alien Engaged in Trade or Business arrival in the Philippines.
(NRA-ETB)
b. Non-resident Alien Not Engaged in Trade or (5) The taxpayer shall submit proof to the Commissioner to show
Business (NRA-NETB) his intention of leaving the Philippines to reside permanently
5. Special Employees abroad or to return to and reside in the Philippines as the case
6. Estates and Trusts may be for purposes of this section.
RESIDENT CITIZEN
Sec. 23 (C) of the NIRC
An individual citizen of the Philippines who is working and deriving
income from abroad as an overseas contract worker is taxable only
Article IV, Section 1 of the 1987 Constitution on income from sources within the Philippines: Provided, That a
The following are citizens of the Philippines: seaman who is a citizen of the Philippines and who receives
(1) Those who are citizens of the Philippines at the time of the compensation for
adoption of this Constitution;
(2) Those whose fathers or mothers are citizens of the Philippines;
(3) Those born before January 17, 1973, of Filipino mothers, who elect
Philippine citizenship upon reaching the age of majority; and
(4) Those who are naturalized in accordance with law.

CITIZEN

1. Resident Citizen (RC)

2. Non-resident Citizen (NRC)

To be a citizen, whether RC or NRC, the above constitutional

requirements must be complied with.

RESIDENT CITIZEN (RC)

TN: RC is taxable for income within and without.

A Resident Citizen is a Filipino citizen who stayed permanently in

the Philippines or stayed outside the Philippines for less than 183
days during the taxable year.

He is one who is physically present in the Philippines and established a

domicile in the Philippines.

Residence for tax purpose requires physical presence in the

Philippines. One must establish residence here, more or less similar
with domicile. There must be animus revertendi.

NON-RESIDENT CITIZEN

Section 22(E) of the NIRC

The term ―non-resident citizen‖ means:

(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.
services rendered abroad as a member of the complement of a vessel
engaged exclusively in international trade shall be treated as an Therefore, this person is now a HYBRID NRC

And will only apply if previously classified as NRC in the

previous taxable year. RESIDENT ALIEN (RA)
TN: RA is taxable only for income within the Philippines.

overseas contract worker. 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
NON-RESIDENT CITIZEN (NRC) intention of arrival is to reside permanently in the Philippines within
TN: NRC is taxable only for income within the Philippines. the taxable year
4. Working and deriving income from abroad as an overseas
A non-resident citizen is one who: contract worker.
1. Establishes to the satisfaction of the Commissioner the fact of his  He is taxable only on income from sources within the
physical presence abroad with a definite intention to reside Philippines.
therein.
• Write letter to commissioner or photocopy passport and 5. Receives compensation for services rendered abroad as a
show when you leave seaman.

2. Leaves the Philippines during the taxable year to reside abroad, He shall be treated as an overseas contract worker provided
either as an immigrant or for employment on a permanent that the following are present:
basis. a. He is a member of the complement of a vessel
• Immigrant – Immigrant visa does not matter when he/she b. The vessel is engaged exclusively in international trade.
leaves, as long as he/she intended to be an immigrant.
• Permanent employment – when there is no definite period. If he does not meet these qualifications, then he shall be
It is not merely contractual. treated as a resident citizen.
• Ex: Nurses who leave the country in the middle of the year
are deemed non-resident citizen. Illustration:
Secondment abroad for 2 years starting on June 26, 2017
3. Works and derives income from abroad and whose employment
requires him to be physically present abroad most of the time 1/1/2017 6/26/2017 12/31/2017 12/31/2018 6/26/2019 12/31/2019
during the taxable year.
• Most of the time for taxable year = 183 days (365/2)
• Higher because intention is for wider taxpayers taxable in
the Philippines
• 183 days doesn‘t need to be continuous as long as it is
within the year NRC NRC NRC RC
• Temporary employment Stayed for 188 Stayed With respect to For
• Seamen are considered temporary workers and belong days abroad income income abroad
abroad the from date of
under this category whole year until date of arrival
June – 4 arrival Reside
Illustration Previously NRC permanently
You are assigned to SG for a period of 2 yrs. You left the country July – 31
Arrived in in Philippines
July 2, 2015. Reason is to earn income abroad. Employment Aug – 31
Sept – 30 Philippines during
requires physical presence. Is it most of the year 2015 to be taxable year
Oct – 31
considered a non-resident citizen.
Nov – 30
• Count if reaches 183 days.
Dec – 30
• July 2 to December 31 = 182 days; Resident Citizen for
188 days
2015
• But if you left on July 1, you will be considered NRC.
• For Jan 1 to Dec 2016, NRC in this case
Submit proof to the Commissioner
3. Has been previously classified as NRC and arrives in the The taxpayer shall submit proof to the Commissioner to show his
Philippines at any time during the taxable year to reside intention of leaving the Philippines to reside permanently abroad or to
permanently in the Philippines. return to and reside in the Philippines.
 He will be treated as NRC for the taxable year in which he
arrives in the Philippines with respect to his income Philippine Embassy/Consulate
derived from sources abroad until the date of his arrival in A Filipino employed as Philippine Embassy/Consulate service personnel
the Philippines. of the Philippine Embassy/Consulate is not treated as a non-resident
citizen, hence his income is taxable.
Hybrid or Dual Personality of Taxpayer
Same Illustration as above: Jan 1 to July 7, 2016 (end of the SUMMARY
assignment to Singapore).
The following are classified as NRC:
1. Filipino citizen with physical presence abroad and intention
to reside therein
In this case, he was previously classified as NRC and will reside 2. Filipino citizen leaves Philippines during taxable year as
permanently in the Philippines. immigrant or permanent employee
 3. Filipino citizen with temporary employment abroad (most of TN: NRA, whether or not engaged in trade or business, is taxable only
the time = at least 183 days) for income within the Philippines.
4. Previous NRC arrives in Philippines to reside permanently
with respect to income from abroad until date of arrival Classification
5. Overseas Contract Worker NRA may be further classified into:
6. Seaman who is a Filipino citizen is considered OCW if 1. Non-resident Alien Engaged in Trade or Business within the
a. He receives compensation for services rendered Philippines (NRA-ETB)
abroad as member of complement of vessel 2. Non-resident Alien Not Engaged in Trade or Business within
b. Vessel is engaged exclusively in international trade the Philippines (NRA-NETB)

Test is length of stay

RESIDENT ALIEN
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
Sec. 22 (F) of NIRC
The term ―resident alien‖ means an individual whose residence is NRA-ETB is a non-resident alien who is engaged in trade or business
within the Philippines and who is not a citizen thereof. and has business income in the Philippines.
A resident alien is one who has a residence in the Philippines although
he is not a Filipino citizen.
NRA-ETB is one who has stayed within the Philippines for an
aggregate period of more than 180 days (360/2) during the taxable
He has no definite period of stay in the Philippines. He is not a mere year.
transient or sojourner. His definite purpose for staying requires an
extended stay and to that end, he makes his home temporarily in the
NRA-ETB is subject to 0-35% tax on net taxable income within the
Philippines.
Philippines.

You established residence here in Philippines, for as long as you

NRA-NETB
intended to make Philippines as your residence, or if you established
presence in Philippines for 1 year. No hard and fast rule for residence
NRA-NETB is a non-resident alien who has stayed within the
requirement.
Philippines for only 180 days or less and who has no business
income in the Philippines.
Test is definite purpose or intention
The test is not the length of stay but the definite purpose or intention
NRA-NETB is subject to a final tax rate of 25% of gross income within
to stay in the Philippines. If he has a definite purpose, then he is a
the Philippines.
resident alien. An example is the kind of visa applied for.
Why distinction is important
NON-RESIDENT ALIEN 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.
Sec. 22 (G) of NIRC
The term ―nonresident alien‖ means an individual whose residence is SUMMARY
not within the Philippines and who is not a citizen thereof. 1. NRA-ETB
a. More than 180 days
Sec. 25 (A)(1) of NIRC b. 0-35% tax on net income
In General – A non-resident alien individual engaged in trade or 2. NRA-NETB
business in the Philippines shall be subject to an income tax in the a. 180 days or less
same manner as an individual citizen and a resident alien individual, b. 25% final tax on gross income
on taxable income received from all sources within the Philippines. A
nonresident alien individual who shall come to the Philippines and stay SPECIAL EMPLOYEES
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. 22 (DD) of NIRC
Sec. 25 (B) of NIRC The term ―regional or area headquarters‖ shall mean a branch
Nonresident foreign individuals who have stayed within the Philippines established in the Philippines by multinational companies and which
for only 180 days or less, and have no business income derived within headquarters do not earn or derive income from the Philippines and
the Philippines. which act as supervisory, communications and coordinating center for
their affiliates, subsidiaries, or branches in the Asia-Pacific Region and
other foreign markets.

NON-RESIDENT ALIEN (NRA) Sec. 22 (EE) of NIRC

The term ―regional operating headquarters‖ shall mean a branch
A non-resident alien is one who is not a Filipino citizen and who does established in the Philippines by multinational companies which are
not have a residence in the Philippines. 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 In short, regional operating headquarters are income-generating while
personnel management; logistic services; research and development regional or area headquarters are non-income generating, but they are
services and product development; technical support and still headquarters for multinational companies.
maintenance; data processing and communication; and business
development. 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
SPECIAL EMPLOYEES in the Philippines, it can be claimed as a multinational company.

Special employees are alien individuals or Filipino citizens who are Foreigners or aliens
subject to 15% tax based on their gross compensation income when: Aliens occupying technical or managerial positions can automatically
claim the 15% rate, provided that you are employed in a regional
1. They are employed occupying managerial and/or technical operating or regional area headquarters of a multinational company, or
positions with regional or area headquarters of multinational if you are employed in an offshore banking unit, or a company engaged
corporations, petroleum service contractors and in petroleum or geothermal operations (examples: Shell, Chevron,
subcontractors, or offshore banking units. Procter and Gamble).

2. If the special taxpayer is an alien, all of his gross Filipinos

compensation income received is subject to 15% final tax. TN: These tests are no longer applicable beginning January 1, 2018.

3. If the taxpayer is a Filipino citizen, he has the option to be B. Position and function test – employee must be occupying
taxed at 15% final tax based on his gross compensation managerial or technical position.
income received or at a regular income tax rate (0%-35%)
based on the net taxable compensation income if his gross The requirement before was that you must be occupying both
annual taxable compensation is at least P975,000 (whether managerial and technical position but now you can claim if you
or not actually received). are occupying either position.

15% preferential tax rate vetoed The function must be actually exercised and you must have the
Under the TRAIN Law, the preferential tax treatment shall not apply responsibilities of a managerial or technical position.
for employees of ROHQ, RAHQ, OBU and Petroleum service
contractors and subcontractors which registered with the SEC C. Compensation test – employees must be paid in their contract
beginning January 1, 2018. (whether actual or not, as long as stipulated in the contract) the
amount of P975,000 per annum which is the minimum amount.
Present and future qualified employees of existing ROHQ, RAHQ, OBU,
and Petroleum service contractors and subcontractors as of December D. Exclusivity test – you are only hired by that company,
31, 2017 shall enjoy preferential tax treatment. exclusively. It could happen than you have two employers which
are both multinational companies, then you can still qualify to
Regional or Area Headquarters (RAHQs) have the 15% rate.
Refer to a branch established in the Philippines by multinational
companies which The 15% rate is based on compensation from this company. It does not
1. Headquarters do not earn income from the Philippines apply to other incomes you earn.
2. Act as supervisory, communications and coordinating center
for their affiliates, subsidiaries, or branches in the If you are employed by an offshore banking unit, Citibank, which paid
AsiaPacific Region and other foreign markets. 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
TN: It is merely a liaison or communication office in the Asia Pacific. complied with the requirements because you were employed
It has no business operations in the Philippines. exclusively by Citibank. Where will you base the 15%? This will only
be applied to the compensation income, excluding your sales from the
Regional Operating Headquarters (ROHQs) kutsinta.
Refer to a branch established in the Philippines by multinational
companies which are engaged in any of the following services: Are you allowed to claim deductions for your 15%? No, because it is
1. general administration and planning; based on gross compensation income.
2. business planning and coordination;
3. sourcing and procurement of raw SUMMARY
materials and components; 1. Alien – 15% of gross compensation income
4. corporate finance advisory services; 2. Filipino – either
5. marketing control and sales promotion; a. 15% FT on gross compensation income; or
6. training and personnel management; b. 0%-35% on net taxable compensation income
7. logistic services; i. If gross annual taxable compensation is
8. research and development services and at least P975,000
product development;
9. technical support and maintenance; 10. data processing Managerial and/or technical positions with
and communication; and 1. Regional or area headquarters (RAHQs) of multi-national
11. business development. corporations
2. Regional operating headquarters (ROHQs) of multi-national
TN: It actually operates in the Philippines. corporations
3. Petroleum service contractors and subcontractors or
4. Offshore banking units (OBUs)
 Beneficiary or Grantee
ESTATES AND TRUSTS
Q: For purposes of taxation who is the subject of tax? A: None of
ESTATES AND TRUSTS them. It is the trust which is considered as the Income Tax payer.

Estates and trusts are taxable as individuals. 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.
ESTATES
Consolidation of income of two or more trusts
ESTATE When there are two or more trusts created by the same person for
the same beneficiary, the taxable income of all trusts shall be
An estate is composed of all properties, rights and obligations consolidated and the tax shall be computed based on the consolidated
including those properties, earnings or obligations that have accrued income.
thereto since the opening of the succession. The estate is to be
transferred from the decedent to his successors. The proportionate amount of the tax based on the consolidated
income shall be assessed and collected from each trustee.
It is created upon the death of a person who is a resident citizen.
Ex. Trustor X created trusts 1, 2, and 3 for the benefit of his child Y.
An estate will only be taxable when it is under administration or All trusts will be consolidated into one and will be treated as one
settlement. Once it has been transferred it will not be taxable as an taxpayer.
estate anymore and will no longer be a separate taxpayer.
SUMMARY
Illustration GR: A trust once created can be considered a separate taxpayer. EXC:
The taxpayer dies on June 30, 2016. He died leaving behind a 10-door Consolidation of trusts when the trusts are created by the same
apartment which earns P100,000 per month. This is his only income. person for the same beneficiary
How will the income be taxed for the taxable year?
TRUST INCOME SUBJECT TO INCOME TAX
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, Sec. 60 (A) of the NIRC
2016 will be taxed on his estate, for as long as his estate is still under Imposition of Tax. -
administration or settlement. Thus, the remaining P600,000 will be (A) Application of Tax. - The tax imposed by this Title upon individuals
considered as income of his estate not on his person. shall apply to the income of estates or of any kind of property held in
trust, including:
Basic Personal Exemption Repealed (1) Income accumulated in trust for the benefit of unborn or
The exemption of P20,000 allowed from the income of the estate or unascertained person or persons with contingent interests, and
trust has been repealed by the TRAIN Law effective January 1, 2018. income accumulated or held for future distribution under the terms of
the will or trust;
TRUSTS (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
Article 1440 of the Civil Code (4) Income which, in the discretion of the fiduciary, may be
A person who establishes a trust is called the trustor; one in whom either distributed to the beneficiaries or accumulated.
confidence is reposed as regards property for the benefit of another
person is known as the trustee; and the person for whose benefit the Unborn or unascertained persons
trust has been created is referred to as the beneficiary.
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
TRUSTS intrauterine life and must live at least 24 hours.

A trust is an obligation imposed or a right to administer over a But if the contract is for the benefit of the unborn it does not require
property given to a person for the benefit of another. an intrauterine period. Any unborn/unascertained person is granted
the benefit but it can‘t be burdened with liability.
Three instances:
1. Where the income is accumulated or held for future Income to be distributed
distribution by the trustee Income to be distributed directly to beneficiaries and the amount of
2. Where it is up to the fiduciary whether there will be income collected by a guardian of an infant which is to be held or
distribution or not distributed as the court may direct.
3. Where the income is 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.

Parties to a trust: Example: Part of trust, the condominium unit if for benefit of the child.
Trustor or Grantor It was mentioned as a condition of trust that every income earned by
Trustee or Fiduciary the condo unit will be distributed to the child.
 Rent Income per month 10,000 Employee‟s trust
Yearly Income of child 120,000 This is how companies circumvent the law on nationality requirement
of the Constitution, the 60/40. What the company does is that they
Will it be part of the gross income of the trust? make use of employee‘s trust as stock holder to hold the 60%.
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 Conditions:
end of the computation, you still end up deducting it. It‘s a hassle but 1. The employer has to contribute or employees may
that is what is meant by the law when it said that the income which is contribute or both employer and employee. AND
to be distributed must be shown that it was part of gross income but 2. No part of the principal, the corpus, or income can be
you will deduct them as items distributed to the beneficiary. distributed for the benefit of anyone other than the
employee.
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 Important: The conditions are both to be complied with because it
change the answer but this must be shown for administrative mentions AND. There is contribution required and no part of the
purposes. 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.
Income during administration or settlement If you use the principal or its profit for other purposes than for
Q: What happens if a person dies and his estate can‘t be settled right pension or profit sharing plan of employee, it becomes subjected to
away? tax, whatever income earned. Currently, Employee‘s trusts are
A: Under the law, only estate settled extrajudicially can be subject to managed by bank.
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 If there‘s an employee trust and it is actually the one holding your
particular estate, you will have to register the estate as if it‘s another retirement benefit if it complies with the retirement benefit then there
tax payer. Estates have a different TIN (Tax Identification Number). is actually no tax to be paid.

Q: During the period of settlement, the period that you were not able But if the retirement plan does not comply with the requirements for
to settle estate just yet and estate has earned income. Will it be exemption (not reasonable private benefit plan duly approved by BIR)
subject to tax? but they set up this trust any income received by the employee from
trust will 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 COMPUTATION AND PAYMENT
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.
Sec. 60 (C) of the NIRC
The fact that the estate earns income means that it is subject to tax.
It is automatic. 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
Income either to be distributed or accumulated
as provided in Section 63 (relating to revocable trusts) and Section 64
Take note, in number 2, it is required that it be distributed. Here in,
(relating to income for the benefit of the grantor).
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. (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
TRUST INCOME EXEMPTED FROM INCOME TAX 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
Sec. 60 (B) of the NIRC administered by him bears to the consolidated income of the several
The tax imposed by this Title shall not apply to employee's trust which trusts.
forms part of a pension, stock bonus or profit-sharing plan of an
employer for the benefit of some or all of his employees
How to compute income
(1) if contributions are made to the trust by such employer, or Income = Total amount received now less contributions made.
employees, or both for the purpose of distributing to such employees
the earnings and principal of the fund accumulated by the trust in
Example: If you have 100 years of employment in the company and
accordance with such plan, and
you pay 100 as contribution and you receive 100,000, how much is
(2) if under the trust instrument it is impossible, at any time
subject to tax?
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
Total Amount received 100,000
taxable year or thereafter) used for, or diverted to, purposes other
Total Contributions
than for the exclusive benefit of his employees:
Income Subject to tax
Provided, That any amount actually distributed to any employee or
distributee shall be taxable to him in the year in which so distributed
So end up NOT paying taxes.
to the extent that it exceeds the amount contributed by such
employee or distributee.
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 Here, it is not considered a separate tax payer. The trust is just an
If you are the same trustor for each of the trust and you have the extension of his personality as a trustor/grantor.
same beneficiary for each of the trust regardless of the difference in
trustee, the income will be consolidated. 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
Trusts set up by Y for the benefit of X. These can be consolidated cannot be considered as a separate taxpayer.
because the same trustor and the same beneficiary.
This is the reason why only an irrevocable trust may be considered a
Trust A Trust B Consolidated separate taxpayer. This may be subject to abuse because one can set
up a lot of trusts.
Income 500,000 500,000 1,000,000
Distribution to X 100,000 200,000 (300,000)
INCOME FOR THE BENEFIT OF GRANTOR
Taxable Income 700,000

How is this taxed?

The taxable income of P700,000 will be subject to 0-35% tax rate. Sec. 64 of the NIRC
(A) Where any part of the income of a trust
USUAL. This is the income (500k) and part of it is already distributed (1) is, or in the discretion of the grantor or of any person not
(100k), meaning 100k is accounted for in the income 500k, so add having a substantial adverse interest in the disposition of such part of
both income and deduct distributions from income. What is distributed the income may be held or accumulated for future distribution to the
is part of the income already. Where will you get distribution, from grantor, or
income-the total amount earned by the trust. So there is no need to (2) may, or in the discretion of the grantor or of any person not
add distributions in the total income. having a substantial adverse interest in the disposition of such part of
the income, be distributed to the grantor, or
ANOTHER. The 500K income does not account for the 100k (3) is, or in the discretion of the grantor or of any person not
distribution as distributed so add the 100k to 500k. having a substantial adverse interest in the disposition of such part of
the income may be applied to the payment of premiums upon policies
While the usual situation happens take note of how it was written in of insurance on the life of the grantor, such part of the income of the
the problem. If it says the income mentioned already excludes trust shall be included in computing the taxable income of the grantor.
distribution then add the distribution to total. Law says add the `
income distributed as part of the Gross Income of the trust. (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
REVOCABLE TRUSTS conjunction with any person not having a substantial adverse interest
in the disposition of the part of the income in question.

Sec. 63 of the NIRC INCOME FOR THE BENEFIT OF GRANTOR

Revocable trusts.
Where at any time the power to revest in the grantor title to any part This means that the trust has earned an income but the grantor
of the corpus of the trust is vested makes use of the income for the payment of his life insurance. If you
(1) in the grantor either alone or in conjunction with any person not made your child a beneficiary when the income is just used for the
having a substantial adverse interest in the disposition of such part of payment of your life insurance, there is no separate entity for the
the corpus or the income therefrom, or trust. It is an extension of your personality. The income this property
D. in any person not having a substantial adverse interest in the may generate is still under your control and it is still for your benefit.
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 For purposes of determining whether it will be treated as a separate
taxable income of the grantor. entity or not, it must be that the trustor has no control over the
principal and income of the tax payer.

REVOCABLE TRUSTS DEDUCTIONS ALLOWED TO ESTATES & 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 Sec. 61 of the NIRC
separate entity, it must be an irrevocable trust. Otherwise, if it is Taxable Income. - The taxable income of the estate or trust shall be
revocable, it does not become a separate taxpayer and the income is computed in the same manner and on the same basis as in the case
included as part of the income of the trustor. of an individual, except that:

Illustration (A) There shall be allowed as a deduction in computing the

A condominium unit is placed in trust and the trustor‘s children are taxable income of the estate or trust the amount of the income of the
revocable beneficiaries. 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
This means that the beneficiaries can be changed and the trustor can collected by a guardian of an infant which is to be held or distributed
make use of the profit instead. The control of the trust is still with the as the court may direct, but the amount so allowed as a deduction
trustor. It‘s as if he never placed it in a trust and it was as if he shall be included in computing the taxable income of the beneficiaries,
allowed others to manage it but everything is still under the trustor‘s whether distributed to them or not. Any amount allowed as a
control. deduction under this Subsection shall not be allowed as a deduction
under Subsection (B) of this Section in the same or any succeeding Q: Does this mean that the trust is not considered anymore as a tax
taxable year. payer?

(B) In the case of income received by estates of deceased A: No. It will be considered as a tax payer but the income that you will
persons during the period of administration or settlement of the claim in the Philippines will be net of the taxes paid abroad.
estate, and in the case of income which, in the discretion of the
fiduciary, may be either distributed to the beneficiary or accumulated, Example:
there shall be allowed as an additional deduction in computing the
Total income abroad 100,000
taxable income of the estate or trust the amount of the income of the
Taxes paid (abroad) (40,000)
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 Net Income 60,000
income of the legatee, heir or beneficiary. In the Philippines, the 60,000 is considered taxable income. No
deductions is allowed under (A) and (B) because it was already
(C) In the case of a trust administered in a foreign country, the claimed in the foreign country. It was already taxed abroad, so in
deductions mentioned in Subsections (A) and (B) of this Section shall the Philippines, only the net income is subject to tax.
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 EMPHASIZED BY SIR
of the beneficiaries.
Trust is taxable if it is irrevocable trust.
What is considered as its income?
DEDUCTIONS ALLOWED TO ESTATES AND TRUSTS Income of the property under trust and even the income ought to
be distributed are also considered its income.
1. Income to be distributed directly to beneficiaries and the
amount of income collected by a guardian of an infant What is considered deduction to person who created the
which trust?
is to be held or distributed as the court may direct The one where it is included in income but deducted. Only
the distribution is deducted.
2. Income either to be distributed to the beneficiary or
accumulated on the discretion of the fiduciary What is added as income of the trustor?
Only happens if Y sets up a trust and Y has control over how
Income to be distributed income is distributed. So the trust is not a separate entity but an
If there is any income distributed by the trust or estate to any heirs or extension of the income of Y.
beneficiaries then this can be claimed as a deduction.
You include the distribution for purposes of determining GROSS
Example Income but deduct it for purposes of taxation. What is being
taxed is the amount less the distribution
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 When trustor
120,000. This amount can be claimed as deduction. has control
over the
entire trust.
If the only income of the trust is 120,000 and it is distributed to the
No
beneficiaries, the taxable income is zero.
computation
separate for
Q: Does this mean the government is prejudiced since no tax is paid
by the trust?
INCOME TAX RATES
A: No. Since the beneficiary will be the taxed, it is considered an the trust
income on their part. While it is allowed as a deduction to the trust, it everything is
is considered an income of the beneficiary. Taxes are collected not on considered as income of the trustor. If in this case trustor gave
trust but on the beneficiary. The government still finds a way to the income to someone else, on the part of the recipient it will
collect taxes. 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 either to be distributed or accumulated If ever there income and then someone else earned anther income. The
will be distributions to any person other than the beneficiary, or in the same amount is taxed twice.
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. TAX RATES OF INDIVIDUALS
Source: https://www.pwc.com/ph/en/tax-alerts/assets/pwcph_tax-alert-34.pdf
Q: What is the purpose of creating trust when income is distributed
and the taxable person is the recipient and not the trust?
1. RC – 0-35% of net income within & without
A: It is actually a tax planning tool to minimize the tax. VAT Threshold of P3,000,000
2. NRC – 0-35% on net income within
Trust administered in a foreign country
 3. RA – 0-35% of net income within The option to be taxed at graduated income tax 1. Compensation for
8% on the business income is only available if the gross rates. services in whatever
income of the taxpayer does not exceed P3,000,000. form
4. NRA-ETB – 0-35% of net income within Here, choosing the 8% 2. Gross income derived
tax rate on the business from the conduct of
5. NRA-NETB – 25% of gross income within income is more beneficial trade or business or
Otherwis since the tax due is only the exercise of a
e, if the P370,000 which is lesser profession
total than the tax due of 3. Gains derived from
income P670,000 under the dealings in property
exceeds graduated income tax 4. Interests 5. Rents
the rates. 6. Royalties
threshold 7. Dividends
, then Rev. Reg. 8-2018 8. Annuities
the Take note of Rev Reg No. 8- 9. Prizes and winnings
6. Estates & Trusts – 0-35% of net income 2018. If the taxpayer avails 10. Pensions
7. Special Employees – 15% of gross compensation income of the 8% income tax rate, 11. Partner‘s distributive
taxpayer cannot opt for the 8% tax rate even if he is a self- no deduction of 250,000 for share from the net
employed individual or professional or mixed income earner. the mixed income earner. income of the general
professional partnership
The option of 8% income COMPENSATION INCOME
INCOME TAX RATES tax rate is applicable only
Illustration to taxpayer‘s income from
business, and the same is COMPENSATION INCOME
P 2,500,00 in lieu of the income tax
0 under the graduated It refers to all remuneration
(2,000,00 income tax rates and the
0) Tax Due
P Using the Graduated Income Tax Rates
500,000
32% Gross Income P 2,500,000
P Less Allowable Deduction (2.5M*40%OSD) (1,000,000)
160,000 Taxable Business Income P 1,500,000
Compensation Income 1,000,000
490,000 Total Taxable Income
P Less Threshold (excess over 2,000,000)
670,000 Total
Multiplied by Tax Rate
Total
Add Threshold (490,000)
Total Tax Due and Payable
The compensation income is 1M and the business income is 2.5M.
The taxpayer availed of OSD. percentage tax. for services rendered by an
employee for his employer,
The amount of P250,000 unless specifically excluded
allowed as deduction under the Tax Code.
under the law for
Tax Due Total Tax Due and Payable
taxpayers earning solely Existence of employer-
Using the 8% Optional Tax Rate
from self-employment or employee relationship
Since the taxpayer
P 2,250,000
is a practice of professions, is There is compensation
Business Income mixed income earner not applicable for mixed income when there is an
2,500,000 whose income does8%not income earner under the employer-employee
Less Threshold (in excess of 250,000) exceed theP 3M 180,000 VAT 8% income tax rate relationship. The four-fold
(250,000) threshold, he can choose option. test and the two-tiered test
Taxable Business Income to be taxed on 1,000,000 his can be used to determine the
Multiplied by Optional Tax Rate compensationP and The P250,000 is already existence of the employer-
Tax Due on Business Income business income at(800,000)
the incorporated in the first tier employee relationship.
graduated Pincome tax of the graduated income tax
rates of 0-35% using 200,000
the rates applicable to The four-fold test consists of:
Compensation Income
tax table or apply the 8% 30 compensation income. (1) the selection and
Less Threshold (excess over 800,000)
optional tax rate on % his engagement of the
Total
business income.P employee;
Multiplied by Tax Rate INCLUSIONS
60,000 (2) the payment of wages;
Total
Even if he opts for the 8% (3) the power of dismissal;
Add Threshold (130,000) tax, such is only applied
130,000 and
Tax Due on Compensation Income to the business income. GROSS INCOME FOR
P (4) the power to control the
His compensation income INDIVIDUALS
190,000 employee‘s conduct.
Tax Due on Business Income will still be subject to the [CGGIRRDAPPP]
Add Tax Due on Compensation Income
180,000
P
190,000
P
370,000
The two-tiered test pertains between the book value or no EE relationship, there is  EXC: Dis
to the the FMV of the stock, no income. It is just that it is PN – cash discounted value
(1) economic dependency whichever is higher, and the termed differently as • Stock options – taxed
test and (2) control test. exercise price (price which professional income as only if the employee
you are allowed to buy the independent contractor. can buy the share at
How compensation is paid stock). The tax is imposed a more favorable
Compensation income can whether or not the stock Q: What if there is no price than the public
either be paid in cash or in option is exercised. service required? • Cancellation of debt
kind. – value of debt
Example: When the option A: This is purely out of forgiven
If paid in cash, then the gives you the right to liberality. Thus, it is not • Tax Liability as
amount of the money purchase the stock at P100 taxable under income tax but compensation –
received is the compensation when the price outside is subject to donor‘s tax. amount of tax
income. P500. You would not have shouldered by
the option if you were not an TAX LIABILITY AS employer
If paid in kind, then the employee of the company. COMPENSATION
compensation income is MODE OF
equivalent to the monetary Important: Even if you do This happens when the COMPENSATION INCOME
value of the property under not exercise this option, you employer shoulders your tax COLLECTION/PAYMENT
the doctrine of cash will still be subject to tax on compensation instead of
equivalent. because the benefit has you getting less than your
already been in your control. gross monthly salary. The
It was only that you chose MODE OF
How to tax income if it‟s employee receives income
not to avail of the benefit. At COMPENSATION INCOME
not in cash net of taxes. The amount
the time it was granted, COLLECTION/PAYMENT
At the rate of its Fair Market shouldered by the employer
there was already a benefit Withholding tax
Value (FMV) is subject to tax.
to you so you are already There is withholding of tax
taxable. which shall be collected at
Q: What if instead of money, Example: If you have a gross
source the moment the
you received jewelry, car, monthly salary of 100k, less
PROMISSORY NOTE wages are paid. The taxes
house and lot, or some other tax, net amount is only 65k
are retained by the employer
things from your employer, (assuming it is taxed at
who will remit the taxes
in addition to your Compensation is equivalent 35%). If you will receive the
withheld to the BIR.
compensation, how much is to the face value of the same 100k every month, it
the compensation? promissory note, unless it is means that the employer has
discounted. For a discounted However, there shall be no
shouldered your 35K tax.
promissory note, the cash withholding where the total
A: Compensation is compensation income of an
equivalent to the fair market discounted value will be the The portion of the tax
amount of compensation. individual does not exceed
value of the property. shouldered by your employer
the statutory minimum wage
should have been part of
or P5,000 per month,
DOCTRINE OF CASH CANCELLATION OF DEBT your income. However, there
whichever is higher.
EQUIVALENT seems to be an issue here if
Cancellation of debt is you consider this as income
Quarterly remittance
All items considered as considered an income when so this should be taxed in the
Previously, the remittance of
income which you do not you render services and in first place.
the taxes withheld was done
receive as cash has to be exchange, your debt is
monthly. However, Sec. 58 of
valued in cash for purposes forgiven. To make it simple, it seems
the NIRC has been amended
of taxation. that your compensation is
by the TRAIN Law such that
Example: Supposedly, I have grossed up. Under the
the remittance shall now be
COMPENSATION IN KIND a P10k obligation and I am employment contract, it
done quarterly.
supposed to pay you in cash. should state that the amount
Instead, I rendered services you will receive is already net
Stock options The final and creditable
and you are now supposed of tax and your employer will
Promissory note withholding tax returns
to pay me. In this case, we shoulder the tax instead of
Cancellation of debt (except for withholding tax
might as well cancel the them withholding it from
Tax liability as on compensation and
obligation instead of you.
compensation withholding VAT) shall be
receiving the cash and giving
due quarterly on or before
it back as payment. I would So, the 100K is divided by
STOCK OPTIONS the last day of the month
not have paid the debt had I 65%, the amount of 155K is
following the close of the
not rendered the service. your actual salary coming
Stock options are taxable as calendar quarter. The first
This is considered as from the employer. This is
compensation income taxed quarterly return covering the
compensation income. like a fringe benefit. You are
only if there is a benefit to months of January to March
supposed to pay tax of 54k
the employee such as when 2018 should be due on April
Q: Do we consider but instead the employer
he can buy the share at a 30, 2018. These used to be
employer-employee shoulders this tax liability.
more favorable price than filed monthly.
relationship? SUMMARY
the public.
• Cash – actual value
Excessive withholding
A: Yes. Compensation of the cash received
How computed Any excess on the taxes
income presupposes EE • Promissory note –
The tax will be on the withheld shall be returned or
relationship. However, it face value of the
amount of the difference doesn‘t mean that if there is promissory note
credited within 3 months 9. Educational In property other than money and COMPUTATION OF
from May 15. assistance to the ownership is transferred to the FRINGE BENEFIT TAX
employee or his employee
The refund shall be made by dependents Fringe benefit tax (FBT) is
the BIR within 3 months 10. Life or health Other than money but there is no computed by multiplying the
from May 15 through insurance and transfer of ownership grossed-up monetary value
warrants (tax credit). other non-life (GUMV) by 35%. GUMV is
insurance In money determined by dividing the
Although the date mentioned premiums or When the fringe benefit is in monetary value by 65%.
in Sec. 79 of the NIRC which similar amounts in the form of money, the value
is April 15 has not been excess of what the is the amount granted or In other words, FBT is
amended by the TRAIN Law, law allows paid for. computed by first
the date under Sec. 74 has determining the GUMV and
been amended from April 15 TN: The list under Sec. 33 Ex: If I give you a grocery then, multiplying the GUMV
to May 15. For consistency, (B) of the NIRC is not allowance, the value of the by the tax rate.
the relevant date for the exclusive. These items are fringe benefit is the amount
return of the excess of the also found in Revenue that I gave. Another way to determine
taxes withheld under Sec. 79 Regulation 03-98 which talks FBT is to deduct the net
shall also be May 15. about fringe benefits. If you give a receipt to the monetary value from the
employer and he pays for it, GUMV. The difference will be
Q: When is the last payroll Important: Fringe benefits the amount paid for is the the FBT.
period? refer to benefits given to an value of the fringe benefit.
A: December 31 employee other than a rank But, take note that this is not Either way, the GUMV is to
and file employee. the amount subjected to tax. be computed first.
Q: When is the last day of Managerial employee
refund from the employer to He is one who is vested with Other than money with
the employees? A: January powers and prerogatives to transfer of ownership Fringe Benefit
15 lay down and execute When the benefit granted is
management policies and or property or something other Grossed -up Monetary Value (GUMV)
fire, transfer, suspend, layoff, than money and ownership is Less Fringe Benefit Tax (FBT)
FRINGE BENEFITS
discharge, assign or fire transferred to the employee, Monetary Value (MV)
employees. He is the the value of the fringe
FRINGE BENEFITS employee vested with the benefit is equal to the fair
power to determine the market value of the property FBT is now 35%
employer-employee which is the higher between Under the TRAIN Law
Any good, service or other
relationship because of his the assessed value and zonal effective January 1, 2018,
benefit furnished or granted
powers. He has the power to value. fringe benefits given to non-
in cash or in kind by an
execute management policies Ex: Houses and other rank and file employees are
employer to an individual
which can include salaries properties. subject to 35% final tax rate.
employee (except rank and
and wages. All aspects of EE Previously, 32% was the and
file employees) such as, but
relationship are within his Other than money 68% was used for
not limited to, the following:
control. without transfer of determining GUMV.
[HEVHIMEHEL]
1. Housing ownership When the
Supervisory employee benefit furnished by NRA-NETB & Special
2. Expense account Employees
3. Vehicle of any kind He recommends managerial employer is something other
action but it should not be than money where NRA-NETB is subject to FBT
4. Household of 25% while special
personnel, such as considered as merely ownership is not transferred
routinary or clerical in nature, to the employee, the value of employees are subject to
maid, driver and 15%. Consequently, 75% will
others but which requires use of the fringe benefit is equal to
independent judgment. the depreciation of the be used for determining the
5. Interest on loan at GUMV of NRA-NETB and
less than market property.
Rank and file employee 85% will be used in the case
rate to the extent of special employees.
of the difference Those who are neither If your employer allows you
between the managerial nor supervisory to use a car, you will be
employees benefitted by the ease and Example:
market rate and
comfort of using a car. While Resident Citizen Employee
actual rate granted
you use it, the value of the given housing privilege but
6. Membership fees, VALUATION OF FRINGE
car diminishes. The value ownership is not transferred
dues and other BENEFITS
expenses borne by you receive is equal to the
value which the property A managerial employee is
the employer for
diminishes by your use of given a housing benefit in
the employee in VALUATION OF FRINGE such property. the form of rent worth
social and athletic BENEFITS P10,000. To get the net
clubs or other
monetary value, we have to
similar COMPUTATION OF FRINGE
Fringe Benefit multiply it by 50% since
organizations BENEFIT TAX ownership is not transferred
7. Expenses for In money or directly paid for by the
to such employee. Hence,
foreign travel employer
the net monetary value of
8. Holiday and
rental allowance is P5,000.
vacation expenses
Since fringe benefit tax can For special employee who residence, the annual
Purchases residential
be computed by first received fringe benefit tax, property and transfers value of the benefit
determining the GUMV, we they are subject to 15% ownership thereof to his shall be five per cent
have to divide the net fringe benefit tax. The same employee for the latter‘s (5%) of the market
monetary value of 5,000 by computation will be used. residential use at a price less value of the land and
65%. Only the tax rates will vary. than the employer‘s improvement, as
This will result to GUMV of The GUMV will be divided acquisition cost declared in the Real
P7,692.31. by 85%. Property Tax
Declaration Form, or
General Rule: Housing
There are two ways to arrive FBT CONCEPT SUMMARY zonal value as
privileges are taxable as
at the FBT. One way is to determined by the
fringe benefits.
deduct the GUMV of Taxable amount is the GUMV Commissioner
P7,692.31 from the net of the fringe benefit pursuant to Section
Exceptions:
monetary value of 5,000 granted/furnished. 6(E) of the Code
1. Housing privilege
which will yield FBT of (Authority of the
of AFP, Philippine
P2,692.31. Another way is to The FBT is 35% of the GUMV Commissioner to
Navy and Prescribe Real
multiply the GUMV of of the benefit Philippine Air Property Values),
P7,692.31 by 35% which will
also result to the same FBT Force whichever is higher.
The GUMV is the benefit
of P2,692.31. 2. Housing unit The monetary value
expense of the employer
situated inside or of the fringe benefit
which is also the income of
Non-resident Alien Not within the shall be fifty per cent
the employee.
Engaged in Trade and Business maximum of 50 (50%) of the value of
meters from the the benefit.
The liability of the employer
For non-resident aliens not perimeter of the
is to withhold the
engaged in trade or business business or factory • The
corresponding income tax
who received fringe benefit from the fringe benefit 3. Temporary housing monetary
tax, they are subject to 25% earned by the employee. for an employee value of the
fringe benefit tax and we use who stays in a housing
the same computation housing unit for 3 fringe
The fringe benefit income tax
above. We just have to months or less benefit is
is a final tax on gross taxable
replace the 65% with 75% 4. Housing privilege equivalent to
income.
and 35% with 25%. granted to rank- the
and-file employees following:
HOUSING Monetary value = [5%
For instance, a non-resident
alien not engaged in trade or TN: The housing privilege (FMV or Zonal value) x
business is given a housing given to rank-and-file 50%]
benefit in the form of rent HOUSING PRIVILEGE employees is not a fringe
worth P10,000. To get the benefit but form part of (c) If the employer
net monetary value, we have Guidelines in the compensation income. purchases a
to multiply it by 50% since valuation of the Housing residential property
ownership is not transferred Privilege Revenue Regulation 03- on installment basis
to such employee. Hence, 98: and allows his
the net monetary value of employee to use the
rental allowance is P5,000. Annual Value
(a) If the employer same as his usual
Case
of Benefit leases a residential place of residence,
Since fringe benefit tax can property for the use the annual value of
be computed by getting first Employer leases residential of his employee and the benefit shall be
the GUMV, we have to divide property for use of the the said property is five per cent (5%) of
the net monetary value of employee the usual place of the acquisition cost,
P5,000 by 75% because the 5% of FMV of residence of the exclusive of interest.
fringe benefit tax imposed is Employer owns residential land and employee, the value The monetary value
25%. Hence, the GUMV is property which was assigned improvements orof the benefit shall be of fringe benefit shall
6,666.67. to an officer for his use as zonal value, the amount of rental be fifty per cent
residence whichever is paid thereon by the (50%) of the value of
There are two ways to employer, as the benefit.
higher
determine the FBT. One way evidenced by the
Employer purchases
is to deduct the GUMV of 5% oflease contract. The (d) If the employer
residential property on
P6,666.67 from the net acquisition costmonetary value of purchases a
monetary value of P5,000 installment basis and allows the fringe benefit residential property
excluding
which will result to FBT of the employee to use the shall be fifty per cent and transfers
interest
P1,666.67. Another way is to same as his residence (50%) of the value of ownership thereof in
multiply the GUMV of Purchases residential the benefit. the name of the
P6,666.67 by 25% which will property and transfers the employee, the value
also result to the same FBT (b) If the employer owns of the benefit shall be
ownership to the employee
of P1,666.67. a residential property the employer's
and the same is acquisition cost or
Special Employees assigned for the use zonal value as
of his employee as determined by the
his usual place of Commissioner
 pursuant to Section stays in a housing from the
6(E) of the Code • What if unit for three (3) company
(Authority of the you are a months or less shall perimeter
Commissioner to private in not be considered a due to
Prescribe Real the taxable fringe safety and
Property Values), Philippine benefit. health
whichever is higher. Army and hazards.
The monetary value you are • The revenue
of the fringe benefit granted a regulation • If a The BIR
shall be the entire sleeping does not took the
value of the benefit. space in even position that
the mention that this is
(e) If the employer barracks, the considered
purchases a is this employee is within the
residential property fringe travelling exception
and transfers benefit? but it is for the
ownership thereof to interpreted reason that
his employee for the No, to mean that it is for the
latter's residential because the convenience
use, at a price less the tax employee is of the
than the employer's exemption travelling employer.
acquisition cost, the privilege is because of This is set
value of the benefit only the short by
shall be the granted to and regulation,
difference between officials of temporary not by law.
the fair market value, Philippine time that the This is
as declared in the Army, Navy employee is deemed for
Real Property Tax and Air assigned. the
Declaration Form, or Force. It Because this convenience
zonal value as has to be a is temporary of the
determined by the managerial and this is employer,
Commissioner or also for the benefit
pursuant to Sec. 6(E) supervisory business is exempt
of the Code position. consideratio from fringe
(Authority of the (Private is ns, it is benefit tax.
Commissioner to the lowest deemed for Take note,
Prescribe Real rank or the according to
Property Values), position in convenience sir, that
whichever is higher, the Army) of the there is
and the cost to the employer. fringe
employee. The The general rule is benefit here
monetary value of that housing (i) A housing unit which but it is just
the fringe benefit privileges are taxable is situated inside or that it is
shall be the entire fringe benefits, but adjacent to the exempt.
value of the benefit. exceptions are premises of a
provided for as business or factory Q: If you are asked
(f) Housing privilege of enumerated above shall not be by the priest in USC
military officials of (sections f, g and h). considered as a to live in the front
the Armed Forces of taxable fringe building, will this
the Philippines (AFP) (g) A housing unit which benefit. A housing privilege be subject
consisting of officials is situated inside or unit is considered to FBT?
of the Philippine adjacent to the adjacent to the
Army, Philippine Navy premises of a premises of the A: No, because it is
and Philippine Air business or factory business if it is within the premises of
Force shall not be shall not be located within the the employer‘s premises.
treated as taxable considered as a maximum of fifty (50) The fifty meter radius
fringe benefit in taxable fringe meters from the rule does not even have
accordance with the benefit. A housing perimeter of the to be considered because
existing doctrine that unit is considered business premises. this rule applies only
the State shall adjacent to the when the property is
provide its soldiers premises of the • A company adjacent, such as when it
with necessary business if it is personnel is is outside the campus.
quarters which are located within the still exempt
within or accessible maximum of fifty (50) from fringe Valuation of housing
from the military meters from the benefit tax if privilege
camp so that they perimeter of the he is asked It is the amount of rental
can be readily on call business premises. to stay in a multiplied by 50%.
to meet the location
exigencies of their (h) Temporary housing more than Reason: Whether or not it is
military service. for an employee who 50 meters for the convenience of the
employer, you will really need (a) In general, expenses transportation
to live somewhere else. incurred by the Expense account allowance (RATA) which
employee but which Another fringe benefit is an are fixed in amount and are
For all intents and purposes, are paid by his expense account granted for regularly received by an
the benefit is for both you and employer shall be the usage of manager of employee are part of
the company. As such, this treated as taxable miscellaneous items. monthly compensation and
should be divided. 50% fringe benefits, are subject to income tax.
accounts for the portion that except when the When you are asked to
you were really benefitted, expenditures are duly liquidate your expenses, Take note that fringe benefit
and the 50% exemption is for receipted for and in those cannot be considered a is given on top of the
the fact that the employer is the name of the fringe benefit. monthly compensation tax.
also deemed benefitted by it. employer and the
expenditures do not Note that these expenses There are also certain
If the benefit, whether for partake the nature of must be related to the instances when you buy
personal or business purpose, a personal expense business of the employer so groceries and you are to
is not determined, there is a attributable to the that the business can claim liquidate and present
presumption that both the employee. these as business expenses. receipt. These are not part
employer and company are An example of this is the of the expenses of the
benefitted. (b) Expenses paid for by transportation allowance company so the company
the employee but given to you and you are cannot claim them as
If a company leases a condo reimbursed by his given a cap of P1,000 per business expenses. These
unit and pays for it, the fringe employer shall be month and you are asked to are fringe benefits subject
benefit is the amount of rental treated as taxable present receipts and to tax.
that is paid by the company. benefits except only liquidate. This is fringe
Because there is no transfer when the benefit but not subject to MOTOR VEHICLE OF ANY
of ownership, the additional expenditures are duly fringe benefit tax because KIND
consideration for purposes of receipted for and in you are asked to liquidate it
valuing is the amount of the name of the and this is not a benefit for
rental which is considered as employer and the you.
expenditures do not MOTOR VEHICLE OF ANY
the amount of fringe benefit.
partake the nature of KIND
But for taxation purposes, A fringe benefit only
there is there is a concept of a personal expense happens when you are
monetary value which is the attributable to the Guidelines in the
given an amount without
tax base of the fringe benefit said employee. Valuation of Motor
you having to liquidate it.
tax. Vehicles
If you are only asked to
(c) Personal expenses of present receipts for purposes
Rule on housing privilege the employee (like of knowing the amount of
purchases of Case
Housing privilege is subject to your expense, then that is
fringe benefit tax, but there groceries for the different.
Purchases the motor vehicle in the Ac
are exceptions. When you are personal consumption
of the employee and name of the employee
computing for the amount, it When you are given an
depends whether ownership is his family members) amount which you are Provides the employee with cash for Am
transferred or not. Or if in the paid for or allowed to use and you the purchase of a motor vehicle in th
case that it is just leased out, reimbursed by the present receipts so you can the name of the employee
only the rent is deemed as employer to the receive the amount, such is Shoulders a portion of the amount Am
fringe benefit and you multiply employee shall be not a fringe benefit because of the purchase price of a motor em
it by 50%. If the house and treated as taxable you are asked to liquidate. vehicle in the name of the employee
lot is transferred to you, the fringe benefits of the These expenses will be later
fringe benefit is the entire employee whether or on considered as expenses Purchase the car on instalment in Ac
amount of the benefit given. not the same are duly of the company. the name of the employee in
receipted for in the Owns and maintains a fleet of motor Ac
If only the right to use is name of the If your groceries are paid vehicles for the use of the business ve
given to you (ownership is employer. for by the employer and it is bu
and the employees
still with the company but for the employee‘s personal 50
they allow employees to use (d) Representation and use, then it is clearly a Leases and maintains a fleet of Am
it), that is the time that the transportation fringe benefit, subject to
allowances which are motor vehicles for the use of m
depreciation value is used. tax. If there are expenses
fixed in amounts and the business and the employees us
that are personal to the
The general rule on valuation are regular received employee but are paid for Use of yacht whether owned De
if ownership is transferred is by the employees as by the employer, or if the and maintained or leased by the es
to use FMV, but if there is no part of their monthly employer gives you money employer ye
transfer of ownership, use compensation income so you can pay for these
depreciation value. shall not be treated benefits, then it is a fringe (a) If the employer
as taxable fringe benefit. purchases the motor
benefits but the same vehicle in the name
EXPENSE ACCOUNT shall be considered as
There are certain expenses of the employee, the
taxable compensation value of the benefit is
which are in that form but
EXPENSE ACCOUNT income subject to the the acquisition cost
are not considered subject
tax imposed under thereof. The
to fringe benefit tax.
Sec. 24 of the Code. monetary value of
Representation and
 the fringe benefit transferred or sales, freight, that today,
shall be the entire not. If delivery service and especially in
value of the benefit, ownership is other non-personal Manila, big
regardless of whether transferred, used divided by five companies are
the motor vehicle is fringe benefit (5) years. The using
used by the is equal to monetary value of helicopters
employee partly for the value the fringe benefit because of
his personal purpose of the shall be fifty per cent traffic
and partly for the motor (50%) of the value of congestion.
benefit of his vehicle. the benefit.
employer. Otherwise, Airline companies that
if • The monetary grant free trips are
(b) If the employer ownership value of the expense accounts and
provides the is not motor vehicle this does not fall under
employee with cash transferred fringe benefit this category of fringe
for the purchase of a , fringe is equivalent benefit. The employees
motor vehicle, the benefit is to the do not use the aircraft
ownership of which is only the following: MV exclusively for
placed in the name of depreciatio = [(A)/5] X themselves.
the employee, the n value of 50% Where: They use their free
value of the benefits the car. MV = flights along with other
shall be the amount This is Monetary passengers.
of cash received by because of value
the employee. The your use, A = (h) The use of yacht
monetary value of you are acquisition whether owned and
the fringe benefit benefitted cost maintained or leased
shall be the entire by the use by the employer shall
value of the benefit of the car (f) If the employer be treated as taxable
regardless of whether and this is leases and maintains fringe benefit. The
the motor vehicle is shown a fleet of motor value of the benefit
used by the through vehicles for the use shall be measured
employee partly for the of the business and based on the
his personal purpose depreciatio the employees, the depreciation of a
and partly for the n. value of the benefit yacht at an estimated
benefit of his shall be the amount useful life of 20
employer, unless the (d) If the employer of rental payments years.
same was subjected shoulders a portion of for motor vehicles not
to a withholding tax the amount of the normally used for • It is fringe
as compensation purchase price of a sales, freight, benefit if you
income under motor vehicle the delivery, service and are allowed to
Revenue Regulations ownership of which is other non-personal use the yacht
No. 2-98. placed in the name of use. The monetary for your
the employee, the value of the fringe personal
(c) If the employer value of the benefit benefit shall be fifty benefit. This
purchases the car on shall be the amount per cent (50%) of the presupposes
installment basis, the shouldered by the value of the benefit. that you are
ownership of which is employer. The using the
placed in the name of monetary value of (g) The use of aircraft yacht for a
the employee, the the fringe benefit (including month, or for
value of the benefit shall be the entire helicopters) owned several days.
shall be the value of the benefit and maintained by • The value of
acquisition cost regardless of whether the employer shall be the fringe
exclusive of interest, the motor vehicle is treated as business benefit is
divided by five (5) used by the use and not be equal to the
years. The monetary employee partly for subject to the fringe depreciation
value of the fringe his personal purpose benefits tax. value
benefit shall be the and partly for the (presupposes
entire value of the benefit of his • It will never that there is
benefit regardless of employer. be fringe no transfer of
whether the motor benefit ownership
vehicle is used by the (e) If the employer owns subject to here), with an
employee partly for and maintains a fleet fringe benefit estimated life
his personal purpose of motor vehicles for tax because of 20 years.
and partly for the the use of the the regulation
benefit of his business and the then looks at Examples:
employer. employees, the value the fact that
of the benefit shall be only few If you are given
• It matters the acquisition cost of companies transportation allowance but
also if all the motor vehicles use aircrafts. still required to liquidate,
ownership is notnormally used for But it seems it will not be considered a
fringe benefit. If you need payments for motor vehicles s Expenses of the employee
to justify why you have to go not normally used for sales, which are borne by the
to that place, say for freight, delivery, service and u employer for household
example, you need to specify other non-personal use. The s personnel, such as salaries of
that you are going to SEC to monetary value of the fringe e household help, personal
register your employer‘s benefit shall be 50% of the driver of the employee, or
business, then this is not value of the benefit. This I other similar personal
fringe benefit. means that sales n expenses (like payment for
representatives are not s homeowners association
If a transportation allowance included. t dues, garbage dues, etc.)
is given and you are not a shall be treated as taxable
required to liquidate, such SUMMARY n fringe benefits.
is in the form of a fringe Taxable fringe benefit c
benefit subject to fringe 1. e
INTEREST ON LOAN AT
benefit tax. C s
LESS THAN MARKET RATE
a
If you are allowed to use the n i
company car/ motor vehicle n
c INTEREST ON LOAN AT
strictly for business b
l LESS THAN MARKET RATE
purposes, such is not a e
fringe benefit. There is no u
benefit on your part. u d 1. If the employer lends
s e money to his employee
e : free of interest or at a
It can be a benefit if you
d rate lower than twelve
can use it for personal
1. Given per cent (12%), such
purposes and the company
f transportation interest foregone by
does not impose
o allowance but not the employer or the
restrictions on how you use
r required to difference of the
it.
liquidate interest assumed by
p 2. Free to use the the employee and the
If you are free to use the
e motor vehicle after rate of twelve per cent
motor vehicle after office
r office hours (12%) shall be treated
hours then there is still a
s Not taxable fringe benefit if as a taxable fringe
fringe benefit here.
o 1. benefit.
In the case of Medical n For
a the 2. The benchmark
Representatives, the
l convenienc interest rate of twelve
companies keep a pool of
e of the per cent (12%) shall
vehicles which the sales
p employer remain in effect until
persons can make use.
u 2. revised by a
This is not a fringe benefit
r Used subsequent regulation.
because the purpose of the
car is for sales purposes, p in trade or
even if the company allows o business of 3. This regulation shall
you to bring it home. Usually s employer apply to installment
the company will declare to e Instances payments or loans
the BIR that these are s include: with interest rate
company vehicles with 1. Motor vehicle not lower than twelve per
corresponding company 2. exclusively used by cent (12%) starting
expenses. Another issue here N an employee but January 1, 1998.
is the fact that the persons o used also by other
granted these cars are not employees 12% interest for fringe
managers. Even if sales r 2. Fleet of vehicle for benefit
managers are granted motor e marketing or sales The current market rate is
vehicles, such privilege will s department 6% but the revenue
still not be considered a t 3. Given regulation has not yet been
fringe benefit because this is r transportation changed, so we will use 12%
used for sales and it is i allowance and for fringe benefits.
pursuant to the nature c required to
and business of the t liquidate
MEMBERSHIP
employer and not for the i 4. Use company
convenience of the o car/vehicle strictly
employer. n for business MEMBERSHIP FEES
s purposes
If the employer leases and Membership fees, dues, and
maintains a fleet of motor o other expenses borne by the
HOUSEHOLD EXPENSES
vehicles for the use of the n employer for his employee,
business and the employees, in social and athletic clubs or
the value of the benefit shall i other similar organizations.
t HOUSEHOLD EXPENSES
be the amount of rental
These expenditures shall be paid for by the
treated as taxable fringe employer for the
benefits of the employee in foreign travel of his
full. employee for the
purpose of attending
Membership fee business meetings or
contemplates that you conventions shall not
become a member of a be treated as taxable
sports gym for your health. fringe benefits. In this
There are some companies instance, inland travel
that instead of doing that, expenses (such as
they just put up a gym in expenses for food,
their own building. beverages and local
transportation) except
Q: Your employer pays for lodging cost in a hotel
your membership in Cebu (or similar
Country Club, so you could establishments)
play golf with the clients of amounting to an
your employer, is this fringe average of US$300.00
benefit? or less per day, shall
not be subject to a
A: It depends on the reason fringe benefit tax. The
of the grant of the expenses should be
membership fee. If the supported by
benefit is pursuant to the documents proving the
nature of the business of the actual occurrences of
employer, it is not clearly a the meetings or
benefit to you but to the conventions.
employer because you are
asked to play with the clients (b) The cost of economy
of the employer. It is not a and business class
taxable fringe benefit. If you airplane ticket shall not
are to play anytime you want be subject to a fringe
with anyone, then that benefit tax. However,
becomes a taxable fringe 30 percent of the cost
benefit. of first class airplane
ticket shall be subject
Necessary for the position to a fringe benefit tax.
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
 (c) In the absence of documentary evidence showing that the TN: Everything is considered as fringe benefit since it is not pursuant
employee's travel abroad was in connection with business to the purpose of the business of the employer.
meetings or conventions, the entire cost of the ticket, including
cost of hotel accommodations and other expenses incident EDUCATIONAL ASSISTANCE
thereto shouldered by the employer, shall be treated as taxable
fringe benefits. The business meetings shall be evidenced by
EDUCATIONAL ASSISTANCE TO THE EMPLOYEE OR HIS
official communications from business associates abroad
DEPENDENTS
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 (a) The cost of the educational assistance to the employee which
cost thereof shouldered by the employer shall be treated as are borne by the employer shall, in general, be treated as
taxable fringe benefits of the employee. taxable fringe benefit. However, a scholarship grant to the
employee by the employer shall not be treated as taxable fringe
(d) Travelling expenses which are paid by the employer for the benefit if the education or study involved is directly connected
travel of the family members of the employee shall be treated with the employer's trade, business or profession, and there is a
as taxable fringe benefits of the employee. 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
(e) The expenses for travel contemplate a situation where you are
expenditure shall be treated as incurred for the convenience
being sent by employer for a business convention. The reason is
and furtherance of the employer's trade or business.
because you are pursuing the business of the employer.

(b) The cost of educational assistance extended by an employer to

Excess of US$300 is fringe benefit
the dependents of an employee shall be treated as taxable
There are instances that though it is considered pursuant to the
fringe benefits of the employee unless the assistance was
nature of the business of the employer, it will still be subject to fringe
provided through a competitive scheme under the scholarship
benefit tax. It is when your inland travel expenses while you're abroad
program of the company.
exceeds the amount of 300 USD, then that becomes fringe benefit, at
least the excess.
TN: It is a Fringe benefit since it is for the benefit of the employee.
Problem
Educational assistance to employee
How much is considered Fringe Benefit here?
GR: Cost of the educational assistance to the employee borne by the
• Local transportation (airport to hotel, hotel to
employer is taxable fringe benefit.
convention) = 100USD
• Food & drinks = 300 USD
EXC: Scholarship granted to the employee by the employer, provided
• Lodging = 1500 USD
the following conditions are met:
• 1st class ticket = 300,000 pesos x 30% = 90,000 Fringe
benefit
1. The education or study involved is directly connected with
the employer‘s trade, business or profession; and
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 2. There is a written contract between them to the effect that
amounting to an average of 300 USD /day shall not be subject to the employee is under obligation to remain in the employ of
Fringe benefit tax. the employer for the period that they have mutually agreed
upon.
So, add 100 and 300, and then subtract 300, only 100 USD is
considered as Fringe Benefit because you don't include lodging. In this case, the expenditure shall be treated as incurred for
the convenience and furtherance of the employer‘s trade or
business.
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 Q: When is it considered non-taxable fringe benefit?
drinks and transportation, only 300 is considered for the benefit of the
employer, anything in excess will be deemed 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.
In the case of the first class ticket, only 30% of the value of the first No period required). It‘s not enough though. It must be that you are
class ticket will be considered as fringe benefit. Business and economy pursuing a course which is related to the business of the employer.
class tickets are considered for the benefit of the employer.
Educational assistance to dependents
Entire cost of family travel is fringe benefit GR: Cost of Educational assistance extended by an employer to the
If an employee travels with his family, the entire cost of the expenses dependents of an employee is taxable fringe benefit.
of the family excluding you the employee will be considered as fringe
benefit if paid for by your employer. EXC: The assistance was provided through a competitive scheme
under the scholarship program of the company.

HOLIDAY & VACATION EXPENSES Example: Scholarship grants where many will apply or only for those
who pass the exam and where there is a grade requirement.

HOLIDAY AND VACATION EXPENSES Q: If it a benefit provides that all dependents of the employees can be
granted with scholarship, provided that they should to maintain a
Holiday and vacation expenses of the employee borne by his employer grade of 1.9/subject, is it a fringe Benefit?
shall be treated as taxable fringe benefits.
A: According to BIR, it is a Fringe benefit but not subject to fringe (4) Benefits granted to employee as required by the nature of, or
benefit tax because it is still under a competitive scheme since the necessary to the trade, business or profession of the employer.
students are required to maintain a grade.
(5) Benefits granted for the convenience of the employer.
No required level.
(6) De minimis benefits as defined in the rules and regulations to
HEALTH OR LIFE INSURANCE be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner.

HEALTH OR LIFE INSURANCE The Secretary of Finance is authorized to promulgate, upon

recommendation of the Commissioner, such rules and regulations as
Life or health insurance and other non-life insurance premiums or are necessary to carry out efficiently and fairly the provisions of this
similar amounts in excess of what the law allows — The cost of life or Section, taking into account the peculiar nature and special need of
health insurance and other non-life insurance premiums borne by the the trade, business or profession of the employer.
employer for his employee shall be treated as taxable fringe benefit,
except the following: DE MINIMIS BENEFITS

(a) contributions of the employer for the benefit of the De minimis benefits, in a form of facilities or privileges, are furnished
employee, pursuant to the provisions of existing law, such as under or offered by the employer to its employees that are of relatively small
the Social Security System (SSS), (R.A. No. 8282, as amended) or value and are offered or furnished merely as a means of promoting
under the Government Service Insurance System (GSIS) (R.A. No. goodwill, contentment or efficiency of his employees. These benefits
8291), or similar contributions arising from the provisions of any other are not subject to fringe benefit tax.
existing law; and
Sec. 33 of NIRC, RR 5-2011, 8-2012 and 1-2015
(b) the cost of premiums borne by the employer for the group
insurance of his employees. 1. Monetized unused vacation leave credits of employees not
exceeding ten (10) days during the year.
Beneficiary
If beneficiary is the heir, it is considered income of the employee • It only refers to unused vacation leave credits and not
because he clearly benefits from it. sick leave credits.

If employee is managerial or supervisory, fringe benefit subject to tax. 2. Monetized value of vacation and sick leave credits paid to
government officials and employees.
But if beneficiary is the company, then it is not considered as fringe
benefit since employee does not benefit from it. 3. Medical cash allowance to dependents of employees, not
exceeding P750 per employee per semester or P125 per month.
If for group of employees, not a fringe benefit subject to tax because
it is not personal to each of the employees. 4. Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month
amounting to not more than P1,500.
SSS contributions not subject to FBT
Not subject to Fringe benefit tax because it is statutorily mandated. 5. Uniform and Clothing allowance not exceeding P5,000 per
annum.
EXEMPTION FROM FRINGE BENEFIT TAX
6. Actual medical assistance, e.g. medical allowance to cover
medical and healthcare needs, annual medical/executive
FRINGE BENEFITS NOT SUBJECT TO TAX checkup, maternity assistance, and routine consultations, not
exceeding P10,000.00 per annum.
(1) Fringe benefits which are authorized and exempted from
income tax under the code or any special laws. • When the employer pays for maternity check-up of
the employee, it is considered as de minimis
• Retirement benefits granted to managerial employees benefits, provided that there is actual medical
are considered fringe benefit, but prior to retirement, assistance.
there is still employer-employee relationship.
• Granting that you are able to comply with all the 7. Laundry allowance not exceeding P300 per month.
requirements, it is not subject to Fringe benefit tax
because it is already excluded in income tax law. 8. Employees achievement awards, e.g., for length of service or
safety achievement, which must be in the form of a tangible
(2) Contributions of the employer for the benefit of the employee to personal property other than cash or gift certificate, with an
retirement, insurance and hospitalization benefit plans. annual monetary value not exceeding P10,000 received by the
employee under an established written plan which does not
• This applies to a group of employees. discriminate in favor of highly paid employees.

(3) Benefits given to the rank and file employees, whether granted • Because you are very efficient in your work the
under a collective bargaining agreement or not. 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
• They are not fringe benefits in the first place as they
are given to rank and file employees. a tangible personal property other than cash or gift
certificate.
 Productivity incentive (P15,000 5,000 10,000
9. Gifts given during Christmas and major anniversary celebrations Total P 27,000 P 46,600
not exceeding P5,000 per employee per annum.
• Christmas gifts and not Christmas bonus. For managerial employees, the excesses will be subject to FBT. The
rate of the excess would depend on the type of individual. This is
10. Daily meal allowance for overtime work and night/graveyard shift the position of the BIR as provided in a revenue regulation.
not exceeding twenty-five percent (25%) of the basic minimum
wage on a per region basis. SUBJECT TO OTHER TAXES (RR 5-98)

11. Benefits received by an employee by virtue of a collective The exemption of any fringe benefit from the fringe benefit tax
bargaining agreement (CBA) and productivity incentive schemes shall not be interpreted to mean exemption from any other income
provided that the total monetary value received from both CBA tax imposed under the Code except if the same is likewise
and productivity incentive schemes combined do not exceed expressly exempted from any other existing law.
P10,000.00 per employee per taxable year.
Threshold of P90,000 Thus, if the fringe benefit is exempted from the fringe benefit tax,
The list of de minimis benefits is exclusive. The threshold now the same may still form part of the employee‘s gross compensation
under the TRAIN Law is P90,000. The amount in excess of P90,000 income subject to income tax. Hence, it is likewise subject to
will be subject to the normal income tax rate or fringe benefit tax, withholding tax on compensation income payment.
as the case may be.
PASSIVE INCOME
Example: Determine the tax due given the following:
Monthly compensation income - P80,000
Rice subsidy – P2,000/month PASSIVE INCOME
Uniform allowance – P10,000
Medical allowance to employee – P15,000 The types of passive income are:
Laundry allowance – P800/month 1. Royalties
Productivity incentive – P15,000 2. Prizes
Christmas bonus – P10,000 3. Winnings
4. Interest
5. Long-term deposits or investments
Tax Due
6. Dividends
Rank & File Employee 7. Capital Gains

Compensation Income TAX RATES

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

Taxable Income P 987,000 PCSO & Lotto Winnings

Less Threshold (excess over 2,000,000) a. P10,000 or less Exempt
(800,000) P 187,000 b. In excess of P10,000 20%
Total 30%
Interest Income from foreign currency deposit 15%
Multiplied by Tax Rate P 56,100
Total 130,000 Cash & Property Dividends
Add Threshold (490,000) P a. To individuals from domestic corporations 10%
Total Tax Due and Payable 186,10 b. To domestic corporations from another DC 0%
0 On capital gains presumed to have been realized from sale,
exchange or other disposition of real property (capital asset) 6%
On capital gains for shares of stock not traded in the stock
De Minimis Benefits
exchange 15%

Taxable Non-taxable Interest Income from long-term deposit or investment in

Rice subsidy (P2,000x12mos) P 6,000 P 18,000 the form of savings, common or individual trust funds,
Uniform allowance (P10,000) 5,000 5,000 deposit substitutes, investment management accounts and
other investments evidenced by certificates Exempt
Medical allowance to employee 5,000 10,000
(P15,000)
Upon pre-termination before the 5 th year, there should be
Laundry (P800x12mos) 6,000 3,600
 d. To DC from DC – 0%
imposed on the entire income from proceeds of the
e. To individuals from RFC – 0-35% - Apply the tax
longterm deposit based on the remaining maturity thereof:
situs rule:
Holding Period
i. Income within if ratio is more than 85% ii.
a. 4 years to less than 5 years 5% Income without if ratio is less than 50%
b. 3 years to less than 4 years 15%
iii. Partly income within & income without if
c. Less than 3 years 20% ratio is between 50% and 85%

TN: Winnings, other than PCSO and Lotto, are subject to 20% final
tax regardless of the amount.

For NRA-ETB Capital Gains transactions:

1. CG from Sales of Shares of Stocks
a. Must not be listed or traded in the local stock
Types of Passive Income Rate
exchange.
Interest from currency deposits, trust funds and deposit 20% b. Rate: 15% based on Net Gain: GSP – Cost
substitutes c. If listed and traded in the stock exchange:
i. 60% of 1% based on Gross Selling Price.
Interest Income from long-term deposit or investment in the
form of savings, common or individual trust funds, deposit
substitutes, investment management accounts and other 2. CG from Sale of Real property
investments evidenced by certificates a. Rate: 6% based on either:
Exempt
i. Sec. 24 (D): Gross Selling Price
ii. Sec. 6 (E)(1): FMV as determined by
Upon pre-termination before the 5th year, there should be Commissioner of BIR iii. Sec. 6 (E)(2): FMV as
imposed on the entire income from proceeds of the determined by Prov. or City Assessors
longterm deposit based on the remaining maturity thereof: TN: Whichever is higher
Holding Period
a. 4 years to less than 5 years 5% 3. CG from Sale of Other properties
b. 3 years to less than 4 years 15% a. Rate: 0-35% based on
c. Less than 3 years 20% b. Things to remember: Ordinary gains and capital gains
can be added. Ordinary loss and capital gains can be
On capital gains presumed to have been realized from sale, joined. But capital loss cannot be deducted from
exchange or other disposition of real property (capital asset) 6% ordinary gains.
On capital gains for shares of stock not traded in the stock c. Sec. 39 (B): Percentage taken into account
exchange 15% i. Held for not more than 12 months: 100%
ii. Held for more than 12 months: 50%
For NRA-NETB d. Sec. 39 (D): In case of Capital Loses, the amount of
Net Capital Loss Carry-Over cannot exceed ordinary
gains.
Types of Passive Income Rate i. Can only be carried over for a period of 1 year.
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,
exchange or other disposition of real property (capital asset) 6%
TAXATION AT SOURCE
On capital gains for shares of stock not traded in the stock
exchange 15% 1. Final Withholding Tax
2. Creditable Withholding Tax
Q: If you won Bingo in the US while you were on vacation for P10M, a. Withholding Tax On Compensation
how will it be taxed of you are a resident citizen? b. Expanded Withholding Tax
c. Withholding Tax on Government Money Payments
A: The 10M will be form part of the income subject to 0-35% tax rates (GMP) – Percentage Taxes
and will not be considered passive income since it is earned outside of d. Withholding tax on GMP – Value Added Tax (GVAT)
the Philippines.
KINDS OF WITHHOLDING TAX
SUMMARY
Passive income earned outside the Philippines – 0-35% Withholding Tax on Compensation is the tax withheld from
income payments to individuals arising from an employer-employee
Passive income earned within the Philippines – 20%, except: relationship.

1. Royalties on books, literary & musical compositions – 10% Expanded Withholding Tax is a kind of withholding tax which is
2. Prizes & winnings (P10,000 or less) – 0-35% prescribed on certain income payments and is creditable against the
3. PCSO & lotto winnings (P10,000 or less) – exempt income tax due of the payee for the taxable quarter/year in which the
4. Interest income from FCDU – 15% particular income was earned.
5. Cash & Property dividends
a. To RC, NRC, RA from DC – 10% Final Withholding Tax is a kind of withholding tax which is
b. To NRA-ETB from DC – 20% prescribed on certain income payments and is not creditable against
c. To NRA-NETB from DC – 25% the income tax due of the payee on other income subject to regular
rates of tax for the taxable year. Income Tax withheld constitutes the - 10% of the revenues, surcharges or fees recovered and/or
full and final payment of the Income Tax due from the payee on the fine or penalty imposed and collected or P1,000,000
particular income subjected to final withholding tax. per case, whichever is lower

Withholding Tax on Government Money Payments (GMP) - 7. Cash or property dividends paid by a Real Estate
Percentage Taxes - is the tax withheld by National Government Investment
Agencies (NGAs) and instrumentalities, including government-owned Trust (REIT) pursuant to Sec. 13 of RR 13-2011
and controlled corporations (GOCCs) and local government units
(LGUs), before making any payments to non-VAT registered
CAPITAL GAINS
taxpayers/suppliers/payees

Withholding Tax on GMP - Value Added Taxes (GVAT) - is the

tax withheld by National Government Agencies (NGAs) and Types of Capital Gains Rate Basis
instrumentalities, including government-owned and controlled
corporations (GOCCs) and local government units (LGUs), before Sale of shares of stocks not listed
making any payments to VAT registered taxpayers/suppliers/payees on and traded in the local exchange or 15% Net Capital Gains
account of their purchases of goods and services. listed but not traded in local stock
exchange
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING Sale of shares of stocks listed and 60% Gross Selling Price
traded in the stock exchange of 1%
Sale of real property located in the 6% GSP or FMV,
TRANSACTIONS SUBJECT TO FINAL WITHHOLDING
Philippines whichever is higher
1. Income payments to a RC, NRC & RA Sale of other capital assets
a. Interest on any peso bank deposit Holding period:
b. Royalties a. More than 12 months 0-35% 50% of capital gain
c. Prizes (except prizes amounting to P10,000 or less b. 12 months or less 0-35% 100% of capital gain
which are subject to tax)
d. Winnings (except winnings not exceeding P10,000 Formula:
from PCSO & Lotto which are exempt)
e. Interest income on foreign currency deposit
f. Interest income from long term deposit (except those
with term of 5 years or more)
g. Cash and/or property dividends
h. Capital gains assumed to have been realized from the
sale, exchange or other disposition of real property EXEMPT ENTITIES FROM CGT

2. Income payments to NRA-ETB

EXEMPT ENTITIES FROM CGT
a. On certain passive income
b. Cash and/or property dividends
1. Dealer in securities, regularly engaged in the buying and
c. Share in the distributable net income of partnership
selling of securities
d. Interest on any bank deposits
2. Entity exempt from the payment of income tax under
e. Royalties
existing investment incentives and other special laws
f. Prizes (except prizes amounting to P10,000 or less
3. Individual or non-individual exchanging real property solely
which is subject to tax)
for shares of stocks resulting in corporate control
g. Winnings (except winnings not exceeding P10,000
4. Government entity or GOCC selling real property
from PCSO & Lotto which are exempt)
5. Disposition of the real property which is gratuitous in nature
h. Interest on long term deposits (except those with
6. Disposition of real property pursuant to the CARP law
term of 5 years or more)
7. Proceeds of the sale of the principal residence have been
i. Capital gains presumed to have been realized from
fully utilized in acquiring or constructing new principal
the sale, exchange or other disposition of real
residence within 18 calendar months from the date of sale
property
or
disposition
3. Income derived from all sources within the Philippines by
NRA-NETB
a. On gross amount of income derived from all sources OTHER INCOME
within the Philippines
b. On capital gains presumed to have been realized from
the sale, exchange or disposition of real property OTHER INCOME
located in the Philippines
1. Rent income other than royalties
4. Income derived by alien individual employed by special 2. Interest income other than interest income on bank deposit
corporations 3. Dividend income
4. Income from other sources and this include:
5. Fringe benefits granted to the employee (except rank & file) a. Bad debts recovered
b. Illegal gains derived from gambling
6. Informer‘s reward c. Tax refunds
d. Compensation for private property expropriated by the
government for public use
 e. Damages actual 30k 0 0 10k
f. Cancellation of indebtedness
Suppose in 2018 now, based on the table above, the taxpayer
INTEREST INCOME FROM LONG-TERM DEPOSIT recovered bad debts of 30K in 2015, 30K in 2016 and 30K in 2017.
How will you compute the benefit on bad debts?

LONG-TERM DEPOSITS OR INVESTMENTS 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
Example amount of bad debts being recovered. The 'actual' refers to the same
Mr. X has a 10-year time deposit of P1,000,000 which earns interest computation within the taxable year.
at 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 For instance in 2015:
held it for 2 years until the date of maturity. How will income be 1. 'What if' means 100K minus (20K) = 80K
taxed? N.B. (20K) is derived from (50K) [bad debts in 2015] minus
30K [bad debts recovered in 2018].
The interest income of Mr. X will be taxed at 12% since he held it for 2. 'Actual' means 100K minus (50K) = 50K
3 years. Mr. Y is exempt since the holding period is 5 years. Mr. Z is 3. Then, we have to get the difference between the 'what if' and
subject to a tax rate of 20% since he held it for 2 years. the 'actual' which is 30K. It is derived from 80K minus 50K.
4. Therefore, 30K is the tax benefit received by the taxpayer
It does not matter how long the time deposit is. What matters is how subject to taxable income.
long you held into it.
For instance in 2016:
TN: The same goes for deposit substitutes, the tax would also depend 1. 'What if' means (100K) minus (20K) = (120K)Loss N.B. (20K) is
on the holding period derived from (50K) [bad debts in 2016] minus 30K [bad debts
recovered in 2018].
2. 'Actual' means (100K) minus (50K) = (150K)Loss
BAD DEBTS RECOVERED
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.
BAD DEBTS RECOVERED
For instance in 2017:
Once recovered, bad debts can be considered as income, as well as, B. 'What if' means 20K minus (20K) = 0
allowed as deductions. It is subject to income tax but only to the N.B. (20K) is derived from (50K) [bad debts in 2017] minus
extent of the tax benefit. 30K [bad debts recovered in 2018].
C. 'Actual' means 20K minus (50K) = (30K)Loss
Tax benefit rule D. Since 'what if' has no income and 'actual' are at loss or
Under the Tax Benefit Rule, a taxpayer is subject to income tax to the negative, then the 'actual' will be treated as zero (0). As a
extent of tax benefit when bad debts are recovered. There is benefit result, zero income already.
when bad debts are recovered because the taxpayer is allowed by law E. Therefore, it is not subject to taxable income.
to deduct the bad debts which lower its taxable income.
What if the bad debts collected in 2017 amounted to 40K, would that
How to compute the benefit on bad debts? change your answer? Yes. It is because the 'what if' will become 10K
TN: This computation applies to tax refund as well. 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.
2015 2016 2017 2017 Clearly, there is already a tax benefit subject to taxable income.
Income 100,000 (100,000) 20,000 20,000
Bad debts (50,000) (50,000) (50,000) (50,000) Note: Do not show these computations during bar exam or Atty.
Amago's exam. This is only intended to understand the computation
Taxable 50,000 (150,000) (30,000) (30,000)
of tax benefit from bad debts being recovered.
Income
Amount
recovered in 30k 30k 30k 40k ILLEGAL GAINS FROM GAMBLING
2018
GAMBLING
100 – 50 (100) – (50k) 20 – (50) 20 – (50)
Actual
Gambling is taxable. The NIRC does not distinguish between legal or
= 50k = (150k) or = (30k) or = (30k) or illegal gambling. As long as there is income, it is taxable.
0 0 0
What if
TAX REFUNDS
What if
you did not
declare as 100 – 20 (100) – (20) 20 - (20k) 20 - 10 TAX REFUND
bad debts = 80k = (120k) =0 = 10k
the one you Tax refund is taxable to the extent of the tax benefit.
recovered?
Taxes that cannot be deducted [PESSIV]
Difference
A. Philippine income tax
between
B. Estate and donor's tax
what if and
C. Stock Transaction Tax
 D. Special assessment
E. Income tax paid to foreign government claimed as tax
credit
F. Value Added Tax

When the above enumerations are deducted and there is a refund,

there is no tax benefit since it is not allowed as deduction in the first
place. It is not part of taxable income even though there is a refund.

Q: Is the tax refund from a local business tax paid in excess taxable?

A: Yes. Since local business tax is not enumerated in the taxes that
cannot be deducted then a taxpayer may deduct local business tax.

Q: If you were able to recover a tax that you previously deducted, is

that considered taxable income then?

A: Yes, to the extent of the tax benefits. We apply the Tax Benefit
Rule and use the same computation in bad debts.

Computation of tax benefit

The computation shown under bad debts is also applicable to tax
refund. Just change the bad debts to taxes because tax refunds also
follow the tax benefit rule and taxes are allowed as deductions.

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.
 COMPENSATION IN EXPRORPRIATION CASES 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.
COMPENSATION IN EXPRORIATION CASES
INCOME TAX COMPUTATION
The just compensation for private property expropriated by the
government for public use is subject to tax. It will be treated as a sale
to the government.
Pure Compensation Income Earner
Using the Graduated Income Tax Rates
If the private real property expropriated is residential, it will be treated
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 Compensation Income
determined by local assessor, whichever is higher. (Net of Mandatory Deductions) P xxx Multiplied by the tax Rate (0-
35%) x%
If the real property expropriated is used in trade or business, it will be Income Tax Due P xxx
treated as ordinary gains subject to 0-35% income tax. Less Tax Withheld (xxx)
Income Tax Due and Payable P xxx
The only kind of property that cannot be expropriated is cash.

SUMMARY
o Only cash cannot be expropriated. Self-employed Individuals
o Tax depends on type of property Using the Graduated Income Tax Rates
• Personal property – 0-35%
• Residential property – 6% CGT Gross Income P xxx
• Used in trade or business – 0-35% Less Allowable Deduction
• Capital Asset – option to use rate of 6% or 0-35% (xxx) P xxx x
- Most would likely use the dumping ground because you Net Taxable Income %
get to deduct the cost. Multiplied by the tax Rate (0-35%) P xxx
- The 6% CGT is based on presumed gain. Income Tax Due (xxx)
Less Withholding taxes, Tax Credits
P xxx
DAMAGES Income Tax Due and Payable

DAMAGES
Self-employed Individuals
General rule: Damages are subject to tax. Using the 8% Optional Tax Rate

Exception: Damages received from physical injuries are excluded from Gross Income P xxx
tax under the law Less Threshold (in excess of 250,000)
(250,000) P xxx
Are the following taxable?
Taxable Business Income 8%
Multiplied by Optional Tax Rate P xxx
1. Moral damages due to sleepless night or exemplary damages – Yes Income Tax Due
2. Payment of back wages or nominal damages in a labor case –Yes
3. Moral damages relating to a physical injury case – No Except
Lucrum cessans or loss of profits TAX ON NRA-NETB

CANCELLATION OF INDEBTEDNESS
TAX ON NRA-NETB

CANCELLATION OF INDEBTEDNESS A non-resident alien not engaged in trade or business in the

Philippines is taxed at a final tax of 25% based on his gross income
Rules within, except for alien employed by regional or area headquarters
(RAHQs) established in the Philippines by multinational company,
A. If the reason for cancellation is due to the services rendered by offshore banking units (OBUs), petroleum service contractor and
the debtor, it is subject to income tax. subcontractor since they are taxed at 15% of salaries within.

B. If the reason for cancellation is due to the generosity or liberality SUMMARY

of the creditor, it is not subject to income tax but subject to GR: 25% of gross income
donor's tax. EXC: 15% of salaries within
1. Alien employed in RAHQ
C. When the corporation extended a debt to one of its stock holders 2. OBUs
and eventually condone the debt, it is subject to dividend income 3. Petroleum service contractor and subcontractor
tax of 10% or 20% or 25% as the case may be.
PROCEDURE FOR FILING INCOME TAX RETURN

INDIVIDUALS REQURED TO FILE ITR

 An individual engaged in business or the practice of profession is
required to file ITR regardless of the amount of gross income so that
Sec. 51 (A) (1) of the NIRC the government can verify if they are claiming the proper deductions.
Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return: Pure Compensation Income Earner
(a) Every Filipino citizen residing in the Philippines; General Rule: An individual earning pure compensation income is
(b) Every Filipino citizen residing outside the Philippines, on his income required to file ITR, regardless of the amount of income, since he is
from sources within the Philippines; qualified under substituted filing. It is the employer who files.
(c) Every alien residing in the Philippines, on income derived from
sources within the Philippines; and The TRAIN Law added an additional section for substituted filing. It
(d) Every nonresident alien engaged in trade or business or in the wanted to clarify that the certificate of withholding filed by the
exercise of profession in the Philippines. 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
Who are required to file Tax Returns?
taxable year, he is required to file an ITR. This is because of the
All individual taxpayers are required to file income tax return, except
possibility that he might be earning total income of more than P250,000
NRA NETB since the final tax is withheld at source.
from his employers.

INDIVIDUALS NOT REQUIRED TO FILE ITR 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
Sec. 51 (A) (2) of the NIRC must make sure that he is taxed according to the correct tax
The following individuals shall not be required to file an income tax bracket.
return:
(a) An individual whose taxable income does not exceed Subject to FWT
P250,000: Provided that a citizen of the Philippines and any alien Those earning income solely subject to final withholding tax are not
individual engaged in business or practice of profession within the required to file ITR.
Philippines shall file an income tax return regardless of the amount of
the gross income; Ex. Housewives receiving remittances from their spouses abroad and
(b) An individual with respect to pure compensation income, as placing such in the bank. They are earning interest income but are
defined in Section 32(A)(1), derived from such sources within the not required to file an ITR because the taxes due are already
Philippines, the income tax on which has been correctly withheld under withheld by the bank. This is only true if all your income are subject
the provisions of Section 79 of this Code: Provided, That an individual to final tax.
deriving compensation concurrently from two or more employers at any
time during the taxable year shall file an income tax return; Ex. If you also earn income from a sari-sari store, then you are
(c) An individual whose sole income has been subjected to final required to file an ITR regardless of the income earned since it is
withholding tax pursuant to Section 57(A) of this Code; and considered business income.
(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 Minimum wage earner
provisions of this Code and other laws, general or special. Minimum wage earners are not required to file an ITR because they
are exempt from taxes. However, they are required to file an
Sec. 51 (A) (3) of the NIRC information return.
The forgoing notwithstanding, any individual not required to file an
income tax return may nevertheless be required to file an information SUMMARY
return pursuant to rules and regulations prescribed by the Secretary of A. Individuals not required to file ITR:
Finance, upon recommendation of the Commissioner. • GR: All individuals are required to file an ITR. (RC, NRC, RA,
NRA-ETB)
• EXC: NRA-NETB
INDIVIDUALS NOT REQUIRED TO FILE ITR • REASON: Income of NRA-NETB is subject to final withholding
tax of 25% withheld at source. B. Individuals not required to
file ITR:
1. An individual who is a minimum wage earner.
• Taxable income does not exceed P250,000 o EXC: Business
2. An individual whose taxable income does not exceed
or professional income, regardless of amount of gross income
P250,000, provided that a citizen of the Philippines and any
alien individual engaged in business or practice of profession • Pure compensation income earner o EXC: 2 or more
within the Philippines shall file an income tax return employers any time during the taxable year
regardless of the amount of the gross income • Sole income subjected to final withholding tax
3. An individual whose income has been subjected to final • Minimum wage earner or tax-exempt individual
withholding tax
4. Those who are qualified under ―substituted filing‖ WHERE TO FILE

Does not exceed P250,000

The taxpayer whose income does not exceed P250,000 is not required
to file since is exempted. Sec. 51 (B) of the NIRC
Except in cases where the Commissioner otherwise permits, the
Professional & Business Income Earner 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 WHEN TO FILE
or place of business in the Philippines, with the Office of the
Commissioner. 1. Individual
a. On or before May 15 starting 2019
b. On or before April 15 until 2018
WHERE TO FILE 2. Corporation
a. On the 15th day of the 4th month
1. Authorized Agent Bank (AAB) 3. Capital Gains
2. Revenue District Officer (RDO) a. Sale or exchange of shares of stock not traded thru a
3. Treasurer local stock exchange
4. Office of the Commissioner i. Within 30 days after each transaction
ii. Final consolidated return on or before April 15
Authorized Agent Bank (AAB) b. Sale or disposition of real property
AAB has jurisdiction over the RDO. BIR is prohibited from accepting i. Within 30 days following each sale or other
cash/ check payments in order to prevent or minimize opportunities disposition
for corruption. At least with AABs, the funds are directly deposited to 4. Taxes withheld at source
the government coffers. a. Not later than the last day of the month following the
close of the quarter
Revenue District Officer (RDO)
The ITR is filed with the RDO where your principal place of business is Under the TRAIN law, the ITR must be filed on or before May 15.
located. You can go to the RDO if you don‘t have payment. 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
Q: How do you update the RDO now that you are now working in declaration of your estimated income on or before May 15 of the
Cebu with another employer if you were registered by your previous taxable year starting 2019.
employer in the RDO of Manila where his principal place of business
is? OTHER PROVISIONS
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? Sec. 51 (D) of the NIRC
Husband and Wife. - Married individuals, whether citizens, resident or
A: The RDO of Cebu will audit your business before transferring you to nonresident aliens, who do not derive income purely from
the RDO of Mandaue to ensure that you have cleared your account. compensation, shall file a return for the taxable year to include the
Once you are transferred, the RDO of Cebu will lose jurisdiction. 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
Treasurer
verification for the taxable year.
Municipal and city treasurers can be deputized to receive income tax
returns and payments.
Sec. 51 (E) of the NIRC
Office of the Commissioner Return of Parent to Include Income of Children . - The income of
unmarried minors derived from property received from a living
The ITR can be filed with the Office of the Commissioner in Quezon City
parent shall be included in the return of the parent, except (1) when
when there is no principal place of business in the Philippines.
the donor's tax has been paid on such property, or (2) when the
transfer of such property is exempt from donor's tax.
WHEN TO FILE
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
Sec. 51 (C) of the NIRC representative or by the guardian or other person charged with the
(1) The return of any individual specified above shall be filed on or care of his person or property, the principal and his representative or
before the fifteenth (15th) day of April of each year covering guardian assuming the responsibility of making the return and
income for the preceding taxable year. incurring penalties provided for erroneous, false or fraudulent
(2) Individuals subject to tax on capital gains; returns.
(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 Sec. 51 (G) of the NIRC
return within thirty (30) days after each transaction and a final Signature Presumed Correct. - The fact that an individual's name is
consolidated return on or before April 15 of each year covering all stock signed to a filed return shall be prima facie evidence for all purposes
transactions of the preceding taxable year; and that the return was actually signed by him.
(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 Sec. 56 (A) (2) of the NIRC
other disposition. Installment of Payment. - When a tax due is in excess of Two
thousand pesos (P2,000), the taxpayer other than a corporation,
Sec. 58 (A), par. 3 of the NIRC may elect to pay the tax in two (2) equal installments, in which case,
The return for final and creditable withholding taxes shall be filed and the first instalment shall be paid at the time the return is filed and
the payment made not later than the last day of the month following the second installment on or before October 15 following the close
the close of the quarter during which the withholding was made. 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 (I) The term 'nonresident foreign corporation' applies to a
becomes due and payable together with the delinquency penalties. foreign corporation not engaged in trade or business within the
Philippines.

Husband and Wife

GR: Joint filing DEFINITION OF TERMS
EXC: Where it is impracticable
Corporation
Minors A corporation is an artificial being created by operation of law, having
GR: Income included in return of parent the right of succession and the powers, attributes and properties
EXC: For property where expressly authorized by law or incident to its existence. (Sec. 2,
1. Donor‘s tax has been paid on the property or Corporation Code)
2. Transfer of the property is exempt from donor‘s tax
For taxation purposes, a corporation shall include
Minors can file separately since there is no age requirement in the • partnerships, no matter how created or organized, o
tax code. However, the BIR will not issue a Tax Identification except general professional partnerships
Number (TIN) to a minor which is necessary for filing an income tax • joint-stock companies,
return. So, their income is added to the parents. • joint accounts (cuentas en participacion ),
• association, or
Persons under Disability • insurance companies,
GR: Taxpayer can file his own ITR But does not include
EXC: When he is unable to make his own return • general professional partnerships and
1. Duly authorized agent or representative • a joint venture or consortium formed for the purpose of
2. Guardian or other person charged with the care of his person undertaking construction projects or engaging in petroleum,
or property coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract
Pay-as-you-file system with the Government.
Taxes are paid when you file.
TN: The definition under the tax code is not limited to corporations per
Installment payments se. It can include other entities that do not possess a separate juridical
When a tax due is in excess of P2,000, the taxpayer other than a personality.
corporation can pay in 2 equal installments on May 15 and October 15.
General Professional Partnerships
Frequency of filing 'General professional partnerships' are partnerships formed by persons
The ITR is filed quarterly for business or professional income earners for the sole purpose of exercising their common profession, no part of
and annually for compensation income earners. the income of which is derived from engaging in any trade or business.

Number of Copies Joint Ventures

The ITR is filed in triplicate, two copies for the BIR and one copy for A joint venture is created when two corporations, while registered and
the taxpayer. The tax code only requires duplicate copies but for operating separately, are placed under one sole management which
regulation purposes, triplicate copies have been required. operates the business affairs of said companies as though they
constitute a single entity, thereby obtaining substantial economy and
INCOME TAXATION FOR CORPORATIONS profits in the operation.
INTRODUCTION & DEFINITION OF TERMS
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.
Sec. 22 (B) (C) (D) (H) (I) of the NIRC Joint Account
(B) The term 'corporation' shall include partnerships, no matter A joint account is created when two persons form or create a
how created or organized, joint-stock companies, joint accounts common fund and such persons engage in a business for profit. This
(cuentas en participacion), association, or insurance companies, but may result in a taxable unregistered association or partnership.
does not include general professional partnerships and a joint venture
or consortium formed for the purpose of undertaking construction Joint Stock Companies
projects or engaging in petroleum, coal, geothermal and other energy It is the midway between a corporation and a partnership, a
operations pursuant to an operating consortium agreement under a ―hybrid personality.‖ It is somewhat a corporation because this is
service contract with the Government. 'General professional managed by a Board of Directors and such persons may transfer
partnerships' are partnerships formed by persons for the sole purpose their share/s without the consent of others, and somewhat a
of exercising their common profession, no part of the income of which partnership because it is an association, and persons or members of
is derived from engaging in any trade or business. the same contribute fund, money to a common fund.

(C) The term 'domestic,' when applied to a corporation, means Emergency Operation
created or organized in the Philippines or under its laws. This may be formed by two corporations with separate personalities.
If they form that emergency operation (it is really a special activity)
(D) The term 'foreign,' when applied to a corporation, means a to engage in joint venture, corporation may be taxed only from the
corporation which is not domestic. income derived from such business. The income derived from such
emergency operations should also be included in that taxable income
(H) The term 'resident foreign corporation' applies to a foreign subject to corporate income tax. In the same way that has a
corporation engaged in trade or business within the Philippines. 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 operating/consortium agreement under the service contract
income tax, even if it is not registered with the SEC. with the government
This refers to certain entities providing public utilities like electricity and
its distribution. When the National Power Corporations subtransmission
EXCLUSIONS FROM THE TERM CORPORATION
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
EXCLUSIONS FROM THE TERM CORPORATION consortium to buy these sub-transmission assets.

1 – Joint Venture If you look at the Tax Code, they will not be treated as forming a
(For the purposes of undertaking construction project) 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
Corporation itself ordinarily owns the land but there are some should do that. It will not be treated as a separate entity just like the
individuals who own it but they (corporation) undertake to develop joint venture. They are joined together in a certain operation, they own
the land and subdivide it and once the land is ready for sale, sub-transmission assets then they will allow the passage of electricity
whatever is the sales proceeds once it has been developed, they will under their assets. It‘s like contributing asset to a common fund.
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 Reason: The government wanted support on its energy projects. There
owner of the land (which is the ownership) while the other party it must be service contract with the government. Otherwise, such joint
contributes to the cost of developing the land. venture or consortium is not exempt from corporate income tax.

But ordinarily, when you transfer property to one fund, you will be Q: Will they be subject to tax as one entity?
treated as a partnership and it is supposedly subject to tax.
No, because under the law, when there is a consortium for the purpose
The law deems it that no, in this type of conveying property to a of operating petroleum, coal, geothermal and other energy operation
particular fund, you don‘t treat it as if a partnership. Because the under service contracts with the government, it is excluded from the
undertaking is a construction project, the law deems it that it should term corporation.
not be taxed but does that mean that there no tax in such
operations? Q: Are these types of operation really exempted from taxes?

No. There is still tax but on the level of the entities who formed the A: No, because separately, these entities forming the consortium will
Joint Venture. The owner will be subject to tax separately and then still be taxed once the income is distributed - not treated as dividends
the one who developed the property will also be taxed separately on but as ordinary income.
whatever income was distributed to them.
TAXABLE CORPORATIONS
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
CLASSES OF CORPORATE TAXPAYERS
term corporation.

1. Domestic Corporation – taxed for income within and without the

Not corporate income tax applies but it is individual taxation (of course
Philippines
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 2. Resident Foreign Corporation – taxed for income within only
who is in Joint Venture with him on that construction project. They 3. Non-resident Foreign Corporation - taxed for income within only
would still be taxed as corporation, but only separately, not jointly.
Reasons for distinction:
General Rule: An unincorporated joint venture is taxed like a
corporation. A. To know when can they be taxed (income within/ within or
without Philippines)
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 B. Different tax base and rate will apply
resident corporation. • DC is taxed at 30% based on net income for those
Exception: When formed for the purpose of undertaking a construction earned within and without
project or engaging in petroleum operations pursuant to the consortium • RFC within is taxed based on 30% net income
agreement with the Philippine Government is not subject to the • NRFC are taxed at 30% gross income within
corporate income tax. Philippines

Only the joint venture partners will be taxed on their respective shares Domestic Corporations
in the income of the joint ventures. Domestic corporations are those which are registered and/or
organized under Philippine laws. It is presupposed that if the
Reason: To enable local contractors to compete with large foreign corporation is registered and/or organized here, then the operations
contractors which are usually big, otherwise, the local contractors must be here.
cannot bid in large construction projects on their own.
Foreign Corporations
BIR Revenue regulations require that they be registered or licensed by In general, these refer to those which are organized and/or registered
the Philippine Contractors Accreditation Board (PCAB) to ensure that in laws other than the Philippines.
they are engaged in the construction business.
They need to register with SEC to conduct business in the Philippines.
2 – Consortium for the operations engaging in petroleum, coal,
geothermal, and other energy operations pursuant to an
The following are the ways by which a foreign corporation can legally
do business in the Philippines:
PARTNERSHIPS & CO-OWNERSHIPS
1. Incorporate with a domestic corporation (set up a subsidiary)
2. Establish a branch in the Philippines CO-OWNERSHIP
3. Set up a representative office which does not earn income
but only exists for communication or as a liaison of the
foreign corporation. CO-OWNERSHIP

Resident foreign corporations A co-ownership exists when more than one person acquired the right to
Refer to those which are doing business in the Philippines. own a piece of property or mass of properties.

It should pass the test of regularity. There should be continuous General Rule: Co-ownership is tax-exempt
or regular operations. A foreign corporation having a branch here is Reason: It is formed an organized not for profit but for common
a means of having regular or continuous operation but it is not enjoyment or preservation of a property.
necessarily a branch because it could be a representative office.
Any income incident to the co-ownership forms part of the ordinary
Under Foreign Investment Act, there are 2 ways a foreign income of the co-owners taxed at 0-35%.
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 Exceptions:
a RFC automatically. 1. When the income of the co-ownership is invested by the coowners
in other income-producing activities; or
Q: Does that mean that if you are not registered in the Philippines SEC, 2. When there is no attempt to divide the inherited property for more
you will not be subject to tax? than 10 years and the said property was not under any
administration proceedings nor held in trust, an unregistered
A: No, because if that‘s the case then all of the foreign corporations partnership is deemed to exist
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 PARTNERSHIP
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,
PARTNERSHIP
you will only be considered NRFC.
By the contract of partnership, two or more persons bind themselves to
Non-resident foreign corporation
contribute money, property, or industry into a common fund with
Refer to those not engaged in trade or business in the Philippines.
the intention of dividing the profits among themselves. (Art. 1767, CC)
They can be taxed on their isolated transactions in the Philippines.
Two Types of Partnership under the Tax Code
Example: There is a foreign corporation which happens to have
1. General Professional Partnership – partnership formed by
shares of stocks in a domestic corp. It does not necessarily mean
persons for the sole purpose of exercising their common
that they are doing business here in the Philippines as their income
profession, no part of the income of which is derived from
is dependent on the operations of the Philippine company.
engaging in any trade or business.
2. General Co-partnership or Taxable or Business or Trade
So there is a domestic corporation set up here and shares of stock
Partnership (compania colectiva) – partnership wherein part
were bought by a foreign corporation (shares of stocks owned by a
or all of its income is derived from the conduct of trade or
foreign corporation but the business is registered here – this is
business. The income is taxed like a corporation.
allowed under Foreign Investment Act). If that corporation
distributes income to its stockholder, is the distribution subject to
SUMMARY OF TAX LIABILITIES
tax?

Supposedly if NRFC, you are still supposed to subject them to tax General Professional Partnership 
based on their income here in the Philippines. The Corporation will GPP is exempt from income tax.
have to withhold the amount and the rate would be 30% based on • GPP is required to file a tax return for its income for the
its gross income. It means that in isolated cases, the corporation can purpose of furnishing information as to the share in the gains
still be subject to tax whether it has actual presence here in the Phil or profits that each partner shall include in his individual tax
or not. If there is no actual presence, then it is automatically an return.
NRFC if they have an isolated transaction. • For purposes of computing the distributive share of the
partners, the net income of the partnership shall be
Howden v. CIR computed in the same manner as that of a corporation.
The source of an income is the property, activity or service that
produced the income. Trade Partnership
• It is considered as a corporation and therefore liable to
Appellants should not confuse activity that corporate tax of 30% on net taxable income.
creates income with business in the course of which an • It is also subject to MCIT of 2% on gross income starting
income is realized. An activity may consist of a single act; while business from the 4th year of its business operation.
implies continuity of transactions. An income may be earned by a LIABILITY OF PARTNERS
corporation in the Philippines although such corporation conducts all its
businesses abroad. Precisely, Section 24 of the Tax Code does not General Professional Partnership
require a foreign corporation to be engaged in business in the • Partners in a GPP shall be liable for income tax only in their
Philippines in order for its income from sources within the Philippines to separate and individual capacities.
be taxable. It subjects foreign corporations not doing business in the
Philippines to tax for income from sources within the Philippines.
 • Each partner shall report his distributive share, actually or 1. The common fund was not something they found already in
constructively received in the net income of the partnership existence nor a property inherited by them pro indiviso. It was
as gross income. created purposely by jointly borrowing a substantial portion in
• The share of a partner shall be subject to 8% creditable order to establish said common fund;
withholding tax. 2. They invested the same not merely in one transaction, but in a
• The partner is deemed to have elected the itemized series of transactions.
deductions unless he declares his distributive share 3. Said properties were not devoted to residential purposes, or to
undiminished by his share of the itemized deductions. other personal uses, of petitioners but were leased separately
• A 40% OSD is deductible from the distributive share of the to several persons;
gross income if such gross income was not previously 4. They were under the management of one person where the
reduced by the partnership‘s itemized deduction. affairs relative to said properties have been handled as if the
same belonged to a corporation or business and enterprise
Trade Partnership operated for profit;
• Partners are considered as stockholders. 5. Existed for more than 10 years, or, to be exact, over 15 years,
• The profits distributed to them by the partnership are since the first property was acquired, and over 12 years, since
considered dividends subject to final tax of 10%. Simeon Evangelista became the manager;
6. Petitioners have not testified or introduced any evidence,
TAXABLE AS CORPORATIONS either on their purpose in creating the set up already adverted
to, or on the causes for its continued existence.
No specific form required
There is no specific form of partnership required because the tax Obillos v. CIR
code provides that partnerships are included in the term corporation Facts: Petitioners are siblings who sold the lots they inherited from their
―no matter how created or organized.‖ 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.
Tax of partnerships
There is no separate taxation for partnerships as they are taxed like a Held: No, there was no partnership. Petitioners were co-owners and to
corporation. We also need to make a distinction on whether it is consider them partners would obliterate the distinction between
domestic, resident foreign or non-resident foreign. coownership and partnership. The petitioners were not engaged in any
• Domestic Partnership – 30% of net income within & without joint venture since the sale was an isolated transaction. The sharing of
• Resident Foreign Partnership – 30% of net income within gross returns does not of itself establish a partnership, whether or not
• Non-resident Foreign Partnership – 30% of gross income within 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.
Constructive Receipt Doctrine
The point of difference between a corporation and a partnership,
Oña v. CIR
under the tax code, lies in the fact that partnerships adhere to the
After an extrajudicial settlement the co-heirs used the inheritance or
constructive receipt doctrine. Even if there is no actual declaration of
the incomes derived therefrom as a common fund to produce profits for
dividends or distribution of income by the partnership, such income is
themselves, it was held that they were taxable as an unregistered
deemed to have been automatically received by the partners for
partnership.
purposes of taxation. In corporations, dividends must be declared
first.
Gatchalian v. CIR
Facts: Jose Gatchalian and 14 others bonded together to purchase a
Tax of Partners
sweepstakes ticket for P2 and registered the same as Jose Gatchalian
Partners in a partnership are taxed depending on the type of
and Co. This ticket eventually won 3 rd prize amounting to P50,000
individual. RC, NRC, RA & NRA-ETB is taxed at 10% while a NRA-
which they divided in accordance with their aliquot share in the cost of
NETB is taxed at 20%.
the ticket.
GPP Partners
Held: When the petitioners bonded together and contributed to the cost
Partners in a GPP are taxed at 0-35% dumping ground computation. of, they formed an unregistered partnership.
They cannot avail of the 8% gross income taxation since the GPP
already accounts for allowable deductions in the level of the
AFISCO Insurance v. CIR
partnership. What has been distributed to the partners in a GPP is
Facts: 41 non-life insurance companies entered into Quota Share
already net of the allowable deductions.
Reinsurance Treaties with Munich, a non-resident foreign insurance
corporation, to cover for All Risk Insurance Policies over machinery
Evangelista v. CIR
erection, breakdown and boiler explosion. The treaties required
Facts: Petitioners are siblings who borrowed from their father a petitioners to form a pool, to which AFISCO and the others complied.
certain sum for the purpose of buying real properties. Within
February 1943 to April 1994, they bought parcels of land from
Held: The pool is a partnership as evidenced by a common fund, the
different persons, the management of said properties was charged
existence of executive board and the fact that while the pool is not in
to their brother Simeon.
itself, a reinsurer and does not issue any insurance policy, its work is
The properties were then leased or rented to various tenants.
indispensable, beneficial and economically useful to the business of the
ceding companies and Munich, because without it they would not have
Issue: Whether or not there is a partnership. received their premiums.

Held: Yes. Petitioners have agreed to, and did, contribute money
and property to a common fund. Their purpose was to engage in DOMESTIC CORPORATIONS
real estate transactions for monetary gain and then divide the same
among themselves as indicated by the following circumstances:
DOMESTIC CORPORATION
Tax rate: 30% Tax base: Gross income
Tax base: Net taxable income Source: Income within
Source: Income within and without
The tax for a resident foreign corporation is similar to a domestic
RESIDENT FOREIGN CORPORATIONS corporation but only for income earned within the Philippines. The
rule for passive income is also similar.
RESIDENT FOREIGN CORPORATION Interest Income
Interest income from bank deposits is subject to 30% NCIT.
Tax rate: 30%
Tax base: Taxable income Interest income under the expanded foreign currency deposit system is
Source: Income within tax-exempt.

The tax for a resident foreign corporation is similar to a domestic Royalties

corporation but only for income earned within the Philippines. The Royalties are subject to 30% NCIT.
rule for passive income is also similar.
Capital gains from sale of shares of stock not traded in stock
Interest Income exchange
Interest income from bank deposits are subject to 20% final tax but The tax for capital gains derived from the sale of shares of stock not
interest income earned from deposits under the foreign currency traded in the stock exchange is 15%.
depositary unit is subject to 15% tax rate.
Capital Gains from Sale of real property It is
Income derived by a depositary bank from an expanded foreign treated as other income subject to the 30% NCIT.
currency deposit system is exempt from tax if it transacts with
nonresidents, offshore banking units, local commercial banks, Intercorporate Dividends
including branches of foreign banks that may be authorized by the Dividends received from DC is subject to 15% FT if the foreign
BSP to transact with OBUs. corporation allows a tax credit of at least 15% of the taxes deemed
paid in the Philippines by the NRFC.
Income derived by a depository bank under the expanded foreign
currency deposit system from foreign currency transactions with
GROSS INCOME
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 Sec. 27 (A) of the NIRC xxx
granted by such depository banks under said expanded foreign For purposes of this Section, the term 'gross income' derived from
currency deposit system to residents, shall be subject to a final business shall be equivalent to gross sales less sales returns, discounts
income tax at the rate of 10%)of such income. and allowances and 'cost of goods sold.' ‗Cost of goods sold' shall
include all business expenses directly incurred to produce the
Royalties merchandise to bring them to their present location and use.
Royalties are subject to 20% final tax
For a trading or merchandising concern, 'cost of goods sold' shall
Capital gains from sale of shares of stock not traded in stock include the invoice cost of the goods sold, plus import duties, freight in
exchange transporting the goods to the place where the goods are actually sold,
The tax for capital gains derived from the sale of shares of stock not including insurance while the goods are in transit.
traded in the stock exchange is 15%.
For a manufacturing concern, 'cost of goods manufactured and
Capital Gains from Sale of real property sold' shall include all costs of production of finished goods, such as raw
It is subject to the 30% tax because it is not considered a passive materials used, direct labor and manufacturing overhead, freight cost,
income for purposes of foreign corporations because it is not insurance premiums and other costs incurred to bring the raw materials
provided in the tax code. This transaction is not impossible but not to the factory or warehouse.
ordinary because they can still own condominiums.
In the case of taxpayers engaged in the sale of service, 'gross income'
Intercorporate Dividends means gross receipts less sales returns, allowances and discounts.
A resident foreign corporation earning dividends from a domestic
corporation is also exempt. If a domestic corporation earns income Sec. 32 (A) of the NIRC
from RFC, it will be taxed at 30% subject to the dumping ground Except when otherwise provided in this Title, gross income means all
corporation. income derived from whatever source, including (but not limited to) the
following items:
Dividend income earned by RFC from another RFC is still taxed at
30% because the taxes for these transactions are not found in the (1) Compensation for services in whatever form paid, including, but not
tax code. Absent such provisions, we apply the general rule of taxing limited to fees, salaries, wages, commissions, and similar items; (2)
it at 30%, dumping ground computation. Gross income derived from the conduct of trade or business or the
exercise of a profession;
(3) Gains derived from dealings in property;
NONRESIDENT FOREIGN CORPORATIONS (4) Interests;
(5) Rents;
NON-RESIDENT FOREIGN CORPORATION (6) Royalties;
(7) Dividends;
Rate: 30% (8) Annuities;
(9) Prizes and winnings; Rents
(10) Pensions; and When a corporation is engaged in the business of leasing out
(11) Partner's distributive share from the net income of the general properties then it can earn rent income. This forms part of the 30%
professional partnership. dumping ground computation, not passive income.

--- Dividends
GROSS INCOME Corporation can sell their shares to other corporations and if they
declare dividends, these will not form part of the 30%.
Gross income refers to all income derived from whatever source.
[CGGIRRDAPPP] Annuities
All income enumerated in Sec. 32 (A), except compensation and When the company‘s investment gets periodic payments of income
pensions, can be earned by a corporation. then it can still earn annuities. Ordinarily, when businesses do
investments, they can either receive interest income or dividends
Gross income depends on the type of business. This is important since and not usually annuities. They are not limited from earning
this could be the tax base of the corporation or another entity. annuities because there can still be investment opportunities which
gives them periodic payments of income.

Gross Income Prizes and winnings

Merchandising Concern Corporations may win prizes which require participation on the part of a
corporation. These will be given to the corporation as an entity. There
Gross Sales P xxx are winnings when they are earned as a matter of chance - like a raffle
Less Cost of Sales (xxx ) ticket bought by a representative.
Gross Income P xxx .
Pension
Corporations can‘t earn them.
Gross Income
Manufacturing Concern PASSIVE INCOME
Gross Sales P xxx
Less Cost of Goods manufactured and Sold (xxx )
PASSIVE INCOME
Gross Income P xxx .

Interest Income from Peso Deposits

Interest income derived from peso currency bank deposit (saving
Gross Income deposits of corporations) is subject to final withholding tax of 20%.
Service Entity
The interest income of deposit substitutes is subject to 20% final tax,
Gross Receipts P xxx unless there are less than 20 lenders wherein it is taxed at 30%.
Less Cost of Services (xxx )
Gross Income P xxx . Interest income from foreign currency deposit is subject to 15% final
withholding tax. This is to encourage foreign reserves.

PERTINENT ITEMS OF GROSS INCOME Income from Expanded Foreign Currency Depositary Unit
This income is derived by a depositary bank. Do not confuse this with
Not all enumerated items of gross income under Sec. 32 apply to all the interest income derived by a domestic corporation from a
kinds of taxpayers. (Note: dumping ground computation here refers to depositary bank under a foreign currency deposit subject to a tax of
30% tax rate for corporations and not 0-35%) 15%. Under this, it is the bank itself that is earning income.

Compensation income If you are a depository bank and you earn income under EFCD system
No compensation income in corporations because this is earned under for foreign currency transactions, your tax will depend on whom you
an employer-employee relationship are transacting with.

Gross income derived from the conduct of trade, business or If you are transacting with non-residents, off -shore banking units in
exercise of the profession the Philippines, local commercial banks including branches of foreign
This is sales or receipts (for services) less the cost directly used in banks authorized by BSP, then you will be exempted from all taxes.
producing the product.
If you are transacting with residents, you are subject to the dumping
Gains derived from dealings in property ground computation of 30%. You will see that under the exemption, if
Corporations can have properties; such as buildings. When they sell it relates to a loan transaction, interest income will be subject to final
the building, they will earn income from dealings in property. It will tax of 10%. Take note that this 10% rate is applicable only to loan
not form part of the gross income for the purposes of taxation but transaction and only for an interest income to residents.
will be subject to capital gains tax.
Royalties
Interests Royalties sourced within the Philippines are subject to final tax of 20%
If the business of the corporation is financing, and they extend loans regardless of where that royalty is from, whether or not from books,
to individuals or other entities, they can earn interest income. It will literary works and musical composition. These are passive royalty
form part of the 30% dumping ground taxation. Deposits in the bank income which is subject to a final tax. There is no distinction of the
are passive income subject to a different tax rate. 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 Q: How about other capital assets that may be sold by a corporation,
royalty. If it is a passive royalty, then it is subject to 20% final tax. If it how are they taxed?
is an active royalty, it forms part of gross income which is subject to
30% normal tax. A: Taxed at the rate of 30% under the dumping ground
computation. So, the fence in the above example just like any other
Prizes & Winnings improvements like machineries will be subjected to the tax rate of
Prizes and winnings form part of the dumping ground computation 30%.
since it is not listed as passive income for purposes of corporations in
the tax code. TN: Improvements will fall under ―other capital assets‖

Capital gains from the sale of shares of stock not traded in the Q: Do we subject these improvements to the rule on holding period?
stock exchange
The tax rate is 15% of the net capital gains. A: No, because tax code is specific that such will not apply to a
corporation.
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 Q: if there is a net capital loss, can it be carried over?
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 A: No, the net capital loss carry-over is only applicable to taxpayers
sell it directly to an individual, Mr. A, how will it be taxed? other than a corporation.

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 Dividends (Intercorporate Dividends)
which the shares were sold. The total cost is P2,000 (2,000xP1) and Dividend income can be earned by a corporation through a corporation
gross selling price is P20,000, your Net Capital gains is 18,000. This owning shares of another corporation. Intercorporate dividends are not
will be taxed at 15%. So P18,000 x 5% is P2,700 which is the capital subject to tax.
gains tax.
From To Rate
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 DC DC Exempt
amount of 2,000 shares but this time, the amount is for 100,000. DC RFC Exempt
The cost would still be 2,000 so your gain is 98,000. How will it be DC NRFC Subject to the tax sparing rule:
taxed? • 15% if it allows
• 30% Gross income if it does not allow
A: Under the TRAIN Law, it will be taxed at a flat rate of 15%.
RFC DC 30% Net income
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 RFC RFC 30% subject to the rule on situs of the dividends
was subject to 10%. YEach of these transactions will have separate RFC NRFC 30% subject to the rule on situs of dividends
income tax returns. A return will be made within 30 days after the NRFC DC 30% subject to the rule on reciprocity
transaction. NRFC RFC No jurisdiction
NRFC NRFC No jurisdiction
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 Rules:
subject to a final tax of 6%. The 6% is based on the highest amount 1. Domestic –> domestic = Exempt
among the gross selling price, the assessed value given by the local 2. Domestic –> resident foreign = Exempt
assessor, and the zonal value determined by the BIR. 3. Domestic –> non-resident foreign = 15% or 30% depending on
when the tax sparring rule applies
Even if you sell the property at a loss, you will still be taxed because 4. Resident foreign –> domestic corp = 30%
there is a presumed gain when you sell real property. The law for 5. Resident foreign –> resident foreign = 30% if you can establish
individuals also applies for corporations for treatment of capital that the income is earned within the Philippines and depending on
gains. 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
Q: If there is an improvement on a property of a corporation which that the income earned within the Philippines is:
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 Under the Tax Code (Sec 42 A (2)(b))
a wall or fence. Determine the gross income of the corporation for the last three years
and the percentage of income earned within the PH:
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 A. If income earned is 50% or less, then it is deemed income outside
is higher. the Philippines

The reason for the distinction is because under Sec 27 D (5), Capital B. If income earned is more than 50%, then it is deemed income
gains realized from the sale exchange or disposition of Lands and/or inside the Philippines
Buildings is subject to 6% capital gains tax unlike in individual
taxation, ―Real property‖ is used without distinction which may Under the Regulation (BIR RR 2-98)
cover improvement on the land or building such as machineries, etc.
The Tax code is specific on the ―LANDS and/or BUILDINGS‖ part, if 2. 50% or less – income outside the Philippines
the property does not belong to either then it is subject to 30% rate 3. More than 50% to 85% - income partly within and partly without
under the dumping ground computation. 4. More than 85% - income within the Philippines
 Q: Compute for the tax due and payable of the corporation.
RESIDENT FOREIGN -> NON-RESIDENT FOREIGN:

Tax Due
Determine if it has situs within the Philippines, otherwise the
Philippines does not have jurisdiction Normal Corporate Income Tax

Gross Sales P 1,000,000

NON-RESIDENT FOREIGN -> DOMESTIC CORP: 30%
Less Cost of Goods Sold 400,000
Gross Income P 600,000
NON-RESIDENT FOREIGN -> NON-RESIDENT FOREIGN:
Less Salaries & Wages (100,000)
Less Utilities Expense (50,000)
Philippines has no jurisdiction because they are not supposed to have any Taxable Income P 450,000
activities within the Philippines. Multiplied by the Tax Rate 30%
Tax Due and Payable P 135,000
Q: Why is the rule on situs of dividends not applicable when it is from
RFC to DC?

A: DC is taxed on income earned from all sources, within and without. Tax Due
Item Subject to Final Tax
Q: X. Corp is RFC declaring dividends to Y Corp., another RFC. Which
financial statement will you look at? Item subject to final tax:
Interest Income from Bank Deposit P 10,000
A: We look at the financial statement of X Corp. which declared the Multiplied by the Tax Rate 20%
dividends. Since Y Corp. is a resident foreign corporation we need to Tax Due P 2 ,000
determine whether the income is earned within or without the
Philippines. RFC is taxed only on income within.
Tax Due
Example: Normal Corporate Income Tax

Shareholders of Number of Cash Item exempt from tax:

Corporation X Shares Held Dividends Dividend Income from X Corp. P 10,000
A 100 10,000 Tax Due P 0
B 100 10,000
A: The corporation has taxes due and payable in the amount of
C 100 10,000 P135,000 on its net taxable income and P2,000 on its interest income
D 100 10,000 from bank deposit subject to final tax. The income from the dividends
E 100 10,000 from X Corp. is exempt since it is an intercorporate dividends which will
Corporation Y 2,000 200,000 be taxed only when it is distributed to individual stockholders.

Corporation X decides to give dividends to all stockholders in the You cannot actually add the tax due from the items subject to the
amount of 100 per share. Mr. A, B, C, D and E will earn P10,000 dumping ground computation with that of the items subject to final tax.
while the corporation Y will be exempt from tax. The individual It‘s like adding apples and oranges. But, there are domestic
shareholders earning dividend income will be taxed at 10% if they corporations which are not subject to that type of computation.
are resident citizen, non-resident citizen, or resident alien. 20% will
apply if they are NRA-ETB and 25% for NRA-NETB. 20-LENDER RULE

Reason: Dividends are just being deferred. While the 200,000 is

distributed by Corp. X to Corp. Y, such will also be distributed as 20-LENDER RULE
income to the stockholders of Corp. Y. The moment it is distributed
to Corp. Y‘s stockholders or it trickles down to individuals, it is the To be considered a ―deposit substitute‖, the borrowing must be made
time that it will be subject to tax. If Corp. Y will give the dividends to from twenty (20) or more individual or corporate lenders at any one
Corp. Z, a domestic corporation, there will still be no tax because it time. Mere flotation of a debt instrument is not considered to be a
has not yet been distributed to an individual. ―public‖ borrowing and is not deemed a ―deposit substitute‖ if there
are only 19 or less individual or corporate lenders at any one time.
TN: Dividends are only taxable then when it reaches individuals.
Any person holding any interest, whether legal or beneficial, on a debt
SAMPLE PROBLEM 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.
Total Sales 1,000,
000 20% CWT shall apply on interest income from all other debt
Cost of Goods Sold 400, instruments which do not fall within the coverage of ―deposit
000 substitutes‖ paid or payable to persons residing in the Philippines. The
Salaries and Wages 100, withholding tax is due when the interest is paid or payable or is accrued
000 or recorded as an expense in the books of the payor.
Utilities 50,000
Interest Income from bank deposit 10,000 The phrase ‗at any one time‘ for purposes of determining the 20-lender
Dividend income from X Corp 10,000 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 If there are certain receivables from entities or individuals which
deposit substitutes when funds are simultaneously obtained from 20 or may have already been insolvent, but not necessarily judicially
more lenders through any of the transactions connected in the declared as insolvent, and after exercising due diligence, you cannot
issuance/trading of the government bonds (e.g., issuance by the collect, then you can treat them as bad debts.
Bureau of Treasury; sale/distribution of government dealers; and
trading in the secondary market). Charitable Contributions
Deductible in full, if given to the government either local or national
BDO v. Republic or any political subdivision as long as it pertains priority projects in
The term ‗deposit substitutes‘ shall mean an alternative form of the field of education, science; or if it is given to accredited foreign
obtaining funds from the public (the term 'public' means borrowing organizations and non-government organizations such as the Ramon
from 20 or more individual or corporate lenders at any one time) other Magsaysay Foundation, Caritas, Bantay Bata, etc.
than deposits, through the issuance, endorsement, or acceptance of
debt instruments for the borrower‘s own account, for the purpose of It is subject to limitations if they don‘t fall in the list; for individuals,
relending or purchasing of receivables and other obligations, or it is 10% based on taxable income but before deductions for
financing their own needs or the needs of their agent or dealer. charitable contributions and for corporations, it is 5%.

Under the 1997 National Internal Revenue Code, Congress specifically Research and development
defined ―public‖ to mean ―twenty (20) or more individual or corporate These are expenses for the discovery of knowledge and
lenders at any one time.‖ Hence, the number of lenders is development; costs of exploration, cost of exploring and finding a
determinative of whether a debt instrument should be considered a particular property are not considered research and development
deposit substitute and consequently subject to the 20% FWT. expenses for purposes of allowable deductions.

RULE ON SITUS OF DIVIDENDS 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.
RULE ON SITUS OF DIVIDENDS
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
Determine the gross income of the corporation for the last three years
site will not form part of your research and development but does that
and the percentage of income earned within the PH:
mean you cannot deduct it? No, you can deduct it but it will form part
(According to a BIR Revenue Regulation 2-98)
of your expenses, even the cost of the land itself will not form part of
• Income within if ratio is more than 85%  research and development.
Income without if ratio is less
than 50% Pension trust
• Partly income within & income without if There is a separate section for pensions granted for employees.
ratio is between Pension can refer to current service cost and past service cost. The
50% and 85% total cost which you pay in order to set up this pension trust can be
allowed as a deduction.

ALLOWABLE DEDUCTIONS Depreciation

Pieces of equipment used are subject to depreciation.
ALLOWABLE DEDUCTIONS In relation to the earlier example, if you can‘t deduct it under R & D
then deduct it under depreciation.
These are the amounts which you can deduct from the gross income in
order to arrive at the taxable income of the taxpayer. Depletion
In mining sites, equipment used in the mining wasting assets like
ITEMIZED DEDUCTIONS mineral ores may be accounted it under depletion.

OPTIONAL STANDARD DEDUCTION

Expenses
Comes in the form of rentals of a building or salaries and wages to the
employees The OSD for corporations is 40% based on gross income. Only DC and
RFC can avail of the 40% OSD. NRFC cannot.
Interest Expense
Q: How about proprietary educational institutions, OBUs, ROHQs and
Incurred when they enter into debt transactions which require them to
PEZA-registered companies?
pay interest

A: It depends on whether the corporation is subject to a preferential

Taxes
tax rate based on gross income. OSD is applicable only when the
For taxes incurred (they can deduct real property taxes and local
corporation is subject to the normal corporate income tax. The
business taxes) but should not include Philippines Income Tax,
exception is in the case of proprietary educational institutions which are
Estate & donor‘s tax, stock transaction tax, special assessment,
taxed at 10% of the net income.
income tax paid in a foreign country claimed as tax credit and VAT

Losses EXPENSES
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 EXPENSES

Bad Debts Business Expense

Refer to all the ordinary and necessary expenses paid for or incurred c. They do not exceed a reasonable compensation for the
during the taxable year in carrying on or which are directly attributable services rendered, when added to the stipulated salaries,
to the development, management, operation and/or conduct of the measured by the amount and quality of services performed in
trade, business or the exercise of a profession. relation to the taxpayer‘s business.
d. Bonuses must be given in good faith and in determining
Capital Expenses whether the bonuses will form part of the compensation for
These are expenditures for the extraordinary repairs which are services rendered, you need to consider the (1) nature of the
capitalized and subject to depreciation. These tend to increase the business, (2) financial capacity of the taxpayer, and (3)
value or prolong the life of the taxpayer‘s property. extent of the services rendered
e. General economic condition
Ordinary Expenses
Refer to the expenses which are normal, usual or common to the Deductible expenses under compensation for personal
business, trade or profession of the taxpayer. An expense is ordinary services:
when it is commonly incurred in the trade or business of the taxpayer 1. Salaries, wages, commissions, professional fees,
as distinguished from capital expenditures. The payments need not be vacationleave pay, retirement pay and other compensation
normal or habitual in the sense that the taxpayer will have to make 2. Bonuses are deductible expenses if paid-in good faith as
them often. The payment may be unique or non-recurring to the additional compensation for services rendered
particular taxpayer affected. 3. Pensions and compensation for injuries, if not compensated
Ex. Gasoline is an ordinary expense for delivery van of the for by insurance or otherwise
manufacturing company but not it sari-sari store. 4. GUMV of fringe benefit provided for, as long as the final tax
imposed has been paid.
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 ADVERTISING & PROMOTIONAL EXPENSES
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. Advertising and promotional expenses can be claimed as expense
Raw materials in the manufacturing company but not vacation deduction if it will build good will to the company. If the good will
expenses of janitor to the US. exceeds 1 year, then the advertising and promotional expenses shall
be divided in the number of years as deductible expenses.
Extraordinary Expenses
Refer to those which are not normal, usual or common to the business, To be deductible outright:
trade or profession of the taxpayer. These are amortized or a. Must be reasonable and
depreciated. b. Must be incurred to stimulate current sales and not to
establish goodwill or future sales
REQUISITES FOR DEDUCTIBILITY
Example: When the prediction of advertising and promotional
A. It must be ordinary and necessary expenses will build good will to the company for 10 years and it
B. It must be paid or incurred during the taxable year spent 1M, the allowable deduction is 100K for every year. However,
C. It must be paid or incurred in carrying on or which are directly advertising and promotional expenses for Valentine's Day will not
attributable to the development, management, operation and/or exceed good will to the next Valentine's Day. Hence, it will only be
conduct of the trade, business or exercise of profession treated as period cause which is allowed to be deducted as expense
D. It must be supported by adequate invoices or receipts within the taxable period.
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. RENT EXPENSE
KINDS OF ORDINARY EXPENSES [CARTERS]
RENT EXPENSE
A. Compensation for services rendered Requisites for deductibility:
B. Advertising and promotional expenses a. Rental payment is required as a condition for continued use
C. Rent expense or possession.
D. Travelling expense b. The purpose is for trade, business or profession; meaning the
E. Entertainment, amusement and recreation expense property is used in trade or business
F. Repairs and maintenance expense c. The taxpayer must not be the owner of the property or he
G. Supplies and materials has no equitable title over the property.
d. This is subject to withholding tax of 5%.

COMPENSATION FOR SERVICES RENDERED 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
COMPENSATION FOR SERVICES RENDERED 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
Special requisites for deductibility: the rent.
a. Must be reasonable, meaning, this must not be ostensible
b. It is, in fact, payments for personal services actually Finance Lease is pretty much a sale on installment. There is a transfer
rendered. of ownership. Legal title is lodged in the finance lessor. Lessee is
entitled to the possession and use of the property in exchange for
Special requisites for deductibility of bonuses to employees: periodic payment to allow lessor to recover the purchase price.
a. The bonuses are made in good faith.
b. They are given for personal services actually rendered. TRAVELLING EXPENSE
TRAVELLING EXPENSE 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
Requisites: services of P1,000.
a. Must be reasonable and necessary
b. Must be incurred or paid ―while away from home‖ Home REPAIRS & MAINTENANCE EXPENSE
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
REPAIRS & MAINTENANCE EXPENSES

ENTERTAINMENT, AMUSEMENT, & RECREATION 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
ENTERTAINMENT, AMUSEMENT AND RECREATION (EAR) treated as period cause subject to deduction within the
EXPENSES taxable year.
b. In extraordinary repairs – the cost of repair increases the
Requisites: life of an asset for a period more than one year. It will be
It must be paid or incurred during the taxable year treated as part of the cost of the asset and subject to
It must be paid or incurred in carrying on or which are directly depreciation.
attributable to the development, management, operation
and/or conduct of the trade, business or exercise of SUPPLIES & MATERIALS
profession
It must be supported by adequate invoices or receipts
It is not contrary to law, public policy or moral SUPPLIES & MATERIALS
3. It must not have been paid, directly or indirectly, to an
official or employee of the national government or similar
Supplies and material must be actually consumed during the taxable
entity if it constitutes a bribe, kickback or other similar
year in order to be deductible.
payment.
4. The appropriate amount of withholding tax, if applicable,
should have been withheld therefrom and paid to the BIR. COHAN RULE
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 COHAN RULE
shall not exceed 1% of net revenue (i.e. Gross revenue less
discount). If both sale of goods and sale of services, it is Some expenses need not be supported by official receipts or sales
proportional based on net sales or net revenue. invoice as long as it can be substantiated with other adequate
records which prove that such were purchased by the company and
Q: How about bringing the client to a bikini bar, is that allowed? the goods received were actually converted to the product sold.
However, this does not apply in all instances. It is only to the extent
A: Yes, it is allowed because you are trying to establish goodwill with of 50% of the expenses.
the client in furtherance of your business. The intention is to market
your company or product, not necessarily what is being offered in the Background
bikini bar. It may be considered as EAR expense. Such guests must not George M. Cohan was a very well known Broadway star in the early
include the employees of the company or family members but there 1900s. His most famous performance is ―Give My Regards to
must be someone from the company accompanying the clients. The Broadway.‖ Interestingly, his legacy is also closely connected to tax
benefit of the employee is only incidental and not primary. law. Cohan was audited by the IRS and was told that he was not
allowed to deduct many of his business and entertainment related
Q: In case such EAR expenses were given to employees, how will it be expenses because he did not keep all of the necessary receipts. Mr.
treated? Cohan appealed this ruling and the courts actually sided with him,
A: They are treated as fringe benefits. forcing the IRS has to accept estimates of his expenses.
Limitation (Ceiling)
• Engaged in sale of goods/properties –0.5% of net sales The Cohan Rule is now a law that allows taxpayers to deduct some of
• Engaged in sale of service – 1% of net revenue their business-related expenses even if the receipts have been lost or
• Mixed – use the apportionment formula but in no case shall misplaced so long as they are reasonable and credible.
exceed the respective ceilings
INTEREST EXPENSE

INTEREST
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 Interest must be expressly stipulated in writing. It must be legally due.
expense for the taxable quarter is P10,000. How much will be Interest expense can only be deducted in full if the taxpayer incurs
allowed as a deduction? 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 You are able to get the benefit of 30% because of the deduction but
income is only subject to 20% final tax. the interest income is subject only to 20% final tax. There is a
difference of 10%. This is how to get the 33%.
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 Q: Does Tax Arbitrage Rule apply to all interest expense? Does it mean
D. The interest should be legally due on the indebtedness that taxpayer can deduct 100%?
E. The interest must have been stipulated in writing
F. The interest is paid or accrued during the taxable year A: No. Tax Arbitrage Rule does not apply when:
G. The indebtedness must not be made under the arrangement with 1. Interest expense is for unpaid taxes
related taxpayer. 2. Interest income is not subject to final withholding tax
H. The indebtedness must not be incurred to finance petroleum
operation or exploration Actually, if the taxpayer has no interest expense in relation to bank
transaction, the Tax Arbitrage Rule does not apply. The purpose of
Non-deductible interest expense Tax Arbitrage Rule is to avoid circumvention of the law for tax
1. Interest expense on preferred stock benefit between the difference of interest deduction and interest
2. When there is no agreement in writing to pay interest income.
3. Interest expense on loan entered into between related taxpayers
4. Interest paid or calculated for cost-keeping purposes Requisites for Tax Arbitrage Rule to apply
5. Interest paid in advance through discount A. There must be an interest payment to be made to the bank
6. Interest on obligation to finance petroleum exploration B. The interest income must be earned from the bank and C.
7. Interest on unclaimed salaries of employees There must be interest income subject to final withholding
8. 33% of the interest income subject to final tax tax.

Theoretical interest Arbitrage is an activity or scheme where a certain investor takes

Theoretical interest is an interest computed for the purposes of advantage on the difference of the rates and prices from one market
determining the opportunity cost of investing in a business. This is not to another market.
paid or incurred. Theoretical interest income and theoretical interest
expense is no longer applicable in our jurisdiction since the interest
TAXES
must be stipulated in writing to be demandable.

Kuenzle & Streiff, Inc. v. CIR TAXES

The rule is that interest payment on unpaid salaries and bonus
participation cannot be allowed as a deduction if at all times the Taxes paid or incurred within the taxable year in connection with the
company or corporation who is supposed to make payments on these taxpayer's profession, trade or business are deductible from the
unclaimed salaries and bonuses has sufficient money to pay it. But the gross income. Except:
employees were not able to claim it through their own fault. A. Philippine Income Tax
B. Estate and Donor‘s Tax
The rule is that whenever there is money supposedly not due to you C. Special Assessment
and it is not yet claimed, it will earn interest assuming the employer D. Stock Transaction Tax
deposits it in the bank. The moment the employee claims the E. Value Added Tax
salary/bonus, it will now include the interest. F. Foreign Income Tax if claimed as tax credit

The question now is that, whether or not the employer can claim the TN: When we relate deductions from taxes, it should not include
interest as a deduction for purposes of income tax, the SC said no if the surcharge and other penalties but it can include interest.
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 Requisites for deductibility:
not impose interest on salaries. But if ever the reason for the non- a. Must be paid or incurred during the taxable year
payment of salaries is because of bankruptcy or the company is having b. Must be taxes paid or incurred in connection with the trade,
a bad year in terms of operation, then in that case the interest expense business or profession of the taxpayer
may be allowed as a deduction.

TAX CREDIT

TAX ARBITRAGE RULE TAX CREDIT

TAX ARBITRAGE RULE 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
The taxpayer's allowable deduction for interest expense shall be Philippine income tax.
reduced by an amount equal to 33% of the interest income earned Who may claim?
by him which has been subjected to final tax. It means that, instead 1. Citizens
of deducting 100% of the interest expense, you can only deduct 2. Domestic Corporations
100% interest expense less the 33% interest income subjected to 3. Members of GPPs
final withholding tax. 4. Beneficiaries of estates and trusts
5. NRA-ETB and RFC but only for income within the Philippines

Limitation
Foreign income tax paid is not always the amount that may be claimed. Example: A fire occurred in your house. The losses you incurred
It must not be more than the ratio of foreign income to the total cannot be deducted from income of your business because your
income multiplied by the Philippine income tax. business is separate from your personal properties for purposes of
taxation. But if it is your store which was burned, then you can
deduct the damage sustained by your store. If there is an insurance,
it reduces the amount of losses you can deduct for tax purposes.

Requisites for deductibility

a. Must be incurred in the trade, business, or profession of the

Per Country Limitation taxpayer
The amount of the credit in respect to the tax paid or incurred to any b. Must be actually sustained and charged off within the taxable
country shall not exceed the same proportion of the tax against which year and not mere anticipated losses
such credit is taken, which the taxpayer's taxable income from sources c. Must be evidenced by a closed and completed transaction
within such country bears to his entire taxable income for the same d. Must not be compensated by insurance or other forms of
taxable year. indemnity
e. If partly compensated, only the amount not compensated by
insurance is deductible
f. In the case of casualty loss, taxpayer must filed a sworn
declaration of loss within 45 days after the date of discovery
of the casualty or robbery, theft or embezzlement
You have to compute for the limit for each country.

Global Limitation NET OPERATING LOSS CARRY-OVER

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
NET OPERATING LOSS CARRY OVER (NOLCO)
income from sources without the Philippines taxable bears to his entire
taxable income for the same taxable year.
The net operating loss of the business or enterprise for any taxable
year immediately preceding the current taxable year, which had not
been previously offset as deduction from gross income shall be
carried over as a deduction from gross income for the next three (3)
consecutive years immediately following the year of such loss.
Example:
Whenever your business incurs operating loss, then that can be
Country Income Tax Paid Tax Credit
claimed as a deduction for the succeeding year. When expenses is
USA 1,000,000 400,000 150,000 greater than your revenue, then there is a loss. The government
Japan 1,000,000 100,000 100,000 allows you to spread out this loss for a period of three (3) years by
Philippines 2,000,000 600,000 Total: 250,000 allowing you to deduct the NOLCO.

Per Country Limit: Any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction.

Q: Does the three year period need to be continuous?

A: Yes, the three year period cannot be extended. It is always the three
years after you incurred the loss.
Global Limit:
Period to avail
NOLCO can be claimed for the next 3 consecutive years immediately
following the year of loss.
The tax credit allowed is 250,000. You choose whichever is lower
between the total of the ―per country limit‖ and the ―global limit.‖ When NOLCO is not deductible
The total per country limit is 250,000 while the global limit is 300,000. 1. Incurred during tax holiday
2. Tax is based on gross income or receipts
LOSSES 3. OSD is claimed
4. MCIT is imposed
5. Substantial change in ownership (75%)
LOSSES
Year of tax exemption
Losses actually sustained during the taxable year and not compensated NOLCO cannot be deducted in the year the taxpayer is exempted
for by insurance or other forms of indemnity shall be allowed as from tax. Losses incurred during the year of tax exemption cannot
deductions: be deducted as NOLCO.

A. Incurred in trade, profession or business of individual taxpayer. No substantial change of ownership

B. Of property connected with the trade, business or profession, if • Not less than 75% in nominal value of outstanding issued
the loss arises from fires, storms, shipwreck or other casualties shares, if the business is in the name of a corporation, is held
or from robbery, theft or embezzlement. by or on behalf of the same persons or
 • Not less than 75% of the paid up capital of the corporation, if Yes, to the extent of 200,000.
the business is in the name of a corporation, is held by or on
behalf of the same persons 4. Can you still avail of NOLCO during Year 5?

Instances of substantial change of ownership No. NOLCO is allowed as a deduction only for the next 3
• Individual – transfer of ownership of the sole proprietorship to consecutive taxable years immediately following the year of such
another; all or nothing loss. The remaining amount is forfeited.
• Partnership – when there is change of partners, the
partnership is dissolved LOSSES FROM SECURITIES
• Corporation – more than 75% of the shares of stock are
transferred from one stockholder to another LOSSES ARISING FROM SECURITIES

NOLCO cannot be availed of whenever there is a substantial change in When the securities which can be in the form of shares of stocks or
ownership, for the reason that laws can no longer disadvantage the loan receivables be considered as worthless, the losses can be
current owner, the one that was actually disadvantaged was the deducted. It will be worthless when the company losses operations
previous owner. That may be why the previous owner transferred the in which the shares belong.
shares due to the losses he may have incurred previously. Ex. The shares of stocks of Jollibee become worthless when a law is
passed by the Congress banning the fast food industry.
Illustration:
You will know that it is already worthless when these shares cannot
2015 2016 2017 2018 2019 be sold anymore because there exists no available market for it
even it is not through a declaration made by law.
Loss (100,000 (10,000)
Ex. Shares of stocks of diskette companies
)
Incom 50,000 20,000 30,000 Value of Loss that you can deduct: The cost of acquiring the security.
e

LOSSES FROM SHARE TRANSACTIONS

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? LOSSES FROM SHARE TRANSACTIONS
A – Yes, 20,000. The remaining balance of the NOLCO is 30,000
Losses from share transactions can be claimed as deduction upon
Q – In 2018, is there net operating loss that can be deducted? A – realization of the loss.
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 Shrinkage in value of shares of stocks cannot be used to claim for
because there is only a limit of three years. 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.
Q – In 2019, is there a NOLCO that you can deduct?
Ex. You bought the share at 100 and sold it at 50, here you incurred a
A – Yes, 10,000. The amount came from the loss from 2018 which you loss of 50.
can deduct from the income in 2019.
How will you report it?
Q – What happens with the remaining NOLCO from 2015? 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
A – It will be forfeited (the right to use the 30,000 losses) capital gains. And if ever there is no capital gains, then it is
considered as a capital loss which cannot be deducted from your
Q – In 2015, an individual taxpayer is still under Income Tax Holiday. ordinary gains but it can be carried over for the next year. It means
Can you claim NOLCO? that it can be claimed as NOLCO which you can only recover for a
period of one year.
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 LOSSES FROM WASH SALES
succeeding year.

LOSSES FROM WASH SALES

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? 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.
No. The loss cannot be deducted since you are exempted.
A wash sale is a price manipulation activity prohibited under the
2. How about in Year 3 when you availed of OSD? 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
No. OSD is in lieu of itemized deductions so the losses are already securities. It occurs when the taxpayer disposes shares of stock
accounted for. or securities and within 30 days before or after such disposition
acquires substantially identical stocks or securities. That‘s why it
3. If you have a net income of 200,000 in Year 4 and there is still no is termed as a 61-day sale.
deduction, can NOLCO be applied?
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
ABANDONMENT LOSSES
of washed sales.

Example
ABANDONMENT LOSSES
:
2/20 Bought PLDT Shares 10/Sh x 10,000 100,0
In the event a contract area where petroleum operations are
00
undertaken is partially or wholly abandoned, all accumulated
3/20 Sold PLDT Shares 20/Sh x 5,000 100,0
exploration and development expenditures shall be allowed as a
00
deduction.
4/19 Sold PLDT Shares 5/Sh x 5,000 25,0
00
5/19 Bought PLDT Shares 10/Sh x 10,000 100,0 BAD DEBTS
00

You sold the shares on April 19, but you purchased again another set of BAD DEBTS
shares on May 19. The 25,000 loss incurred on April 19 from wash Bad debts actually ascertained to be worthless and charged off within
sales cannot be used to reduce your income at the time you sold it on the taxable year except those not connected with profession, trade or
March 20. The wash sale would be based on April 19 and May 19 when business and those sustained in a transaction entered into between
you sold the shares and purchased it back thereafter. 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
Considering that the period is covered by the 61-day period, the 25,000 year of recovery to the extent of the income tax benefit of said
loss cannot be used to reduce the income. As such, you will still be deduction.
taxed based on the 50,000 income.
Tax Benefit Rule
That is wash sale and any loss from any wash sale transaction cannot If you were benefited by the deductions made when you claim it as
be used as a deduction. People do this to make it appear that there is a bad debts, then you will be able to recognize it as income. If there is
transaction or activity pertaining to their shares. Actively traded shares no benefit as you were already at a loss, you cannot claim recovery
are more attractive to investors but in reality these are just of bad debts later on.
manipulated. Just take note of that prohibition because first and
foremost, wash sales are illegal. Requisites for the deductibility of bad debts
a. Arise from a valid and subsisting obligation
WAGERING LOSSES b. Ascertained to be worthless
c. Charged off and uncollectible within the taxable year
d. Uncollectible in the near future
WAGERING LOSSES e. Arise from trade or business of profession of taxpayer

Losses from wagering transactions shall be allowed only to the extent When are bad debts ascertained to be worthless?
of the gains from such transactions. A court order is necessary and the regular procedure is as follows:
1. Creditor sends a statement of Account to the debtor which
There could be no wagering loss which is related to your business states the maturity date and amount due.
unless you are engaged in an illegal business. 2. If no payment is made, then the creditor sends a collection
letter to the debtor.
Illegal wagering loss cannot be deducted from wagering gain. 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.
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 5. No payment despite the order of court, then the account will
incur a loss of 1M. Can he claim the 1M peso loss as a deduction? be considered as bad debt.

A: Yes, but only if he has incurred wagering gains. How would this When the debtor files for the declaration of insolvency in court, and
happen? You must be regularly engaged in gambling. after the rehabilitation, the liabilities still exceed the assets, then the
debtor is considered insolvent and the account will be considered
bad debt.
CASUALTY LOSSES
It is a requirement that moment you ascertain the worthlessness of
a debt on the same period you must claim it as bad debts.
CASUALTY LOSSES Otherwise, you will lose the right to consider it as an allowable
deduction. So, in the year that you ascertained that the debt is
The loss is caused by fortuitous event or force majeure. uncollectible, make sure that it is also claimed as bad debts.

Requisites for deductibility Q: You have a bet with your friend on who will win the Binibining
a. Report to taxing authorities within 45 days from occurrence Pilipinas, and your bet won. Your bet amounted to 100,000, and
of the loss who ever loses would pay such amount. Now, you are demanding
b. Related to trade and business payment but X cannot pay you anymore. Can you claim that as bad
c. Evidenced by a closed and completed transaction (perfected debts?
sale)
d. Actually sustained during the taxable year A: No, because such debt is not born out of a valid and subsisting
e. Must not be compensated by insurance or other forms of obligation and because such debt is not connected with my trade,
indemnity business, or exercise of profession.
Q: What if your debtor dies, does that make your debt worthless? METHODS OF DEPRECIATION

A: No, because you can charge the debt against the estate of the 1. Straight line method
deceased. 2. Declining balance method
3. Sum of the years digit method
Near future 4. Any other method that may be prescribed by the Secretary of
There is no hard and fast rule as long as it cannot be collected by next Finance upon the recommendation of the Commissioner.
year, then it can be considered bad debts.
STRAIGHT LINE METHOD
DEPRECIATION

STRAIGHT LINE
DEPRECIATION

Under the straight line method, the annual depreciation expense is

Depreciation is the gradual diminution of the useful value of the
calculated by allocating the depreciable amount equally over the
property used in trade, business or profession of the taxpayer,
number of years of estimated useful life. In other words, straight line
arising from wear and tear or natural obsolescence. The term is also
depreciation is a constant charge over the useful life of the asset. It
applied to amortization of the value of intangible assets, the use of
accounts for passage of time rather than usage.
which in trade or business is definitely limited in duration.

Formula:
There is a depreciation deduction a reasonable allowance for the
exhaustion, wear and tear of property used in the trade or business.
When you buy a property, that‘s really a cost in the first place,
however, the law cannot allow you to deduct it outright. That‘s why you
have to account for how long that property will be considered useful,
because you will spread that cost during the period that it is useful. Example:
After all, you will be able to use it during the time it is considered Cost – P1,000,000
useful, so here when you actually account for depreciation you are just
Useful Life – 10 years
spreading the cost. It is a cost-spreading mechanism. It is just
Salvage Value – P100,000
apportioning the cost of your property throughout its life.

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
purchased it, after all that machinery can be used for the next 10 years.
TN: No Computation for Depreciation in the exams. This is just for you
What we‘re doing here is to account for depreciation and try to spread-
to imagine the method or how it is done.
out the cost throughout the useful life of the property.

Requisites for deductibility DECLINING BALANCE METHOD

a. Property must be used in trade, business or profession of the
taxpayer
DECLINING BALANCE METHOD
b. There must be depreciable properties
c. Allowance for depreciation must be reasonable
Under the declining balance method, a fixed or uniform rate is
d. Depreciation must be charged off during the taxable year
multiplied by the declining carrying amount of the asset in order to
e. Statement of the allowance must be attached to the return
arrive at the annual depreciation.
f. Method for computing the allowance for depreciation must be
in accordance with the method prescribed by the Secretary of
Formula:
Finance upon the recommendation of the BIR
Commissioner
TN: It is actually the taxpayer who recommends to the CIR.

FACTORS OF DEPRECIATION

Depreciable amount
Depreciable amount or cost is the cost of an asset or other amount
substituted for cost, less its residual value.

Salvage value Example:

Salvage or residual value is the estimated net amount currently Cost – P1,000,000
obtainable if the asset is at the end of the useful life. It is the value of Useful Life – 10 years
the asset at the end of its useful life.

Useful life Year 1:

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 Year
units expected to be obtained from the asset by the entity 2:

METHODS OF DEPRECIATION
Year
3:

You begin with the highest until to the lowest until you reached the 5 th
year or the ratio of 1/15.

TN: Notice that the amount of depreciation also declines.

UNITS OF PRODUCTION METHOD
DOUBLE DECLINING BALANCE METHOD
UNITS OF PRODUCTION METHOD
Under the double declining balance method, the rate is doubled.
In the example above, the rate will be 20%.
Under this method, depreciation per unit is computed by dividing the
depreciable amount by the estimated useful life in terms of units of
Year 1:
output. The depreciation rate per unit is then multiplied by the yearly
output to get the annual depreciation. The output or production
Year 2: method results in a charge based on the expected use or output.

Formula:

Year 3:

SUM OF THE YEARS‟ DIGIT METHOD

Example: In a soft drinks company, after producing 10 Million Bottles,
the machine used will already be deemed fully depreciated. The value of
SUM OF THE YEARS‟ DIGIT METHOD
machine is 10 Million Pesos. 2M bottles were produced.

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. DEPLETION

Formula:
DEPLETION

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
wells. These are non-replaceable assets. This is applicable to wasting
asset entities
Wasting Assets
Wasting assets are material objects of economic value and utility to
Example: man produced by nature. They are natural resources which usually
include coal, oil, ore, precious metals like gold and silver, and
Cost – P1,000,000
timber. They are so called because these are physically consumed
Useful Life – 5 years
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.
Year
1: Cost Depletion Method
The method allowed under the tax code is the cost depletion method.
This is similar to the unit of production method.

Year 2: The depletable amount of the wasting asset is divided by the units
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
Year 3: depletable amount is equivalent to the cost of the asset less salvage
value, if any.

Formula:
Year 4:

Year 5:
 C. Cultural
D. Character building/youth and sports development
E. Charitable
Example: A parcel of land has a total mineral ore deposit of F. Social welfare
10,000,000. The asset used to extract the mineral ore deposit is G. Health
valued at 10,000,000. A total mineral ore of 789,000 was extracted H. Research
during the year.
And satisfying the following conditions:
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;

CHARITABLE & OTHER CONTRIBUTIONS 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)
CHARITABLE AND OTHER CONTRIBUTIONS
C. The administrative expense must not exceed 30% of total
expenses.
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,
D. Upon dissolution, assets would be distributed to another
when you donate to charity it makes no qualification on what sort of
nonprofit domestic corporation organized for similar purpose or
trade, business, or exercise of profession the donor has. If it did, it
purposes, or to the state for public purpose ,or would be
would be difficult to donate to charitable institutions. However, the
distributed by a court to another organization to be used in such
type of organization you are giving your donation and the purpose of
manner as in the judgment of said court shall best accomplish
such donation would matter since it will affect the amount to be
the general purpose for which the dissolved organization was
recognized as a deduction.
organized.
Kinds of Charitable Contributions
3. Recipient is
1. Ordinary – those subject to limitations as to the amount
deductible from gross income (5%/10%) Foreign institutions or international organizations which are fully
deductible in pursuance of or in compliance with agreements, treaties,
2. Special – deductible in full from gross income
or commitments entered into by the Government of the Philippines and
the foreign institutions or international organizations or in pursuance of
Requisites for Deductibility
special laws.
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 DEDUCTIBLE SUBJECT TO LIMITATION
any private stockholder or individual
d. Must be made within the taxable year
e. Must be evidenced by adequate records or receipts DEDUCTIBLE SUBJECT TO LIMITATION
f. Must not exceed 10% in the case of individuals and 5% in
the case of a corporation, of the taxpayer‘s taxable income 1. Recipient is:
(except where the donation is deductible in full) to be Government of the Philippines; Any of its agencies or political
determined without the benefit of the contribution. subdivisions

DEDUCTIBLE IN FULL For a non-priority activity

In any of the areas mentioned under those deductible in full and
exclusively for a public purpose
DEDUCTIBLE IN FULL
2. Recipient is
1. Recipient is: An accredited non-government organization, organize/operated for
Government of the Philippines or to any of its agencies or political (purposes) A.
subdivisions, including fully-owned government Scientific
corporations, exclusively to finance, to provide for, or to be B. Education C.
used in undertaking priority activities Cultural
D. Character building/youth and sports development
For priority activities in: E. Charitable
A. Science F. Social welfare
B. Education G. Religious
C. Culture H. Rehabilitation of Veterans
D. Health I. Social welfare institution
E. Economic Development
F. Human Settlement If the conditions under those deductible in full is not complied with
G. Youth and Sports Development Subject to limitation:
a. Individual – 10% of taxable income from trade,
2. Recipient is: business or profession before contribution or before
An accredited non-government organization, organized/operated for the deduction of the charitable contribution
b. Corporation – 5% of taxable income from trade
(purposes) A.
business or profession before contribution or before
Scientific
the
B. Education
 deduction of the charitable contribution

How it is done?
In arriving with the taxable income, all deductions (EX-IN-TA-LO-
BARE-PEN-DEP-DEP) are allowed except the Charitable
Contributions. From the taxable income, you make the deductions
multiplied by10% or 5%. Choose whichever is lower between the
computation or the contribution.

RESEARCH AND DEVELOPMENT

RESEARCH AND DEVELOPMENT

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.
 PENSION TRUSTS The amortization of the PSC will be added to the CSC. Hence, you can
claim a total deduction of 300,000 per year from 2015-2025.

PENSION TRUSTS In 2026, the amount that can be claimed as deduction will now only
be P200,000 because the PSC has already been fully amortized.
A pension trust is a trust fund established by the employer for the
retirement of the employees. PREMIUMS ON HEALTH & HOSPITALIZATION

This would refer to any reasonable amount transferred or paid in to

such trust during the taxable year in excess of such contributions, but PREMIUMS ON HEALTH AND HOSPITALIZATION
only if such amount
The amount of premiums not to exceed P2, 400 per family or P200 a
1. Has not theretofore been allowed as a deduction, and month paid during the taxable year.
2. Is apportioned in equal parts over a period of 10 consecutive
years beginning with the year in which the transfer or payment is Conditions:
made. A. That said nuclear family has a gross income of not more than
P250,000 for the taxable year
Company usually sets up pension trust for their employees and it B. The taxpayer must be the person who availed of health or
usually accounts for the current services or particular years of service hospitalization benefit
that the employee has rendered. But then it is also possible that the
employer has set up the pension trust years after the years you have Repealed
started the company or past services were already rendered. This has already been repealed under the TRAIN Law. No one avails
of it anyway since the requirements are too stringent for such a small
Current Service Cost is the cost of the services rendered from the amount of benefit.
time the pension trust is set up until its retirement.
CORPORATE INCOME TAX RATES
Past Service Cost is the cost of the services relating to those prior to
the setting up of the pension trust.
CORPORATE INCOME TAX RATES
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 General Rule:
service were done prior to the setting up of the trust, but then again if • DC – 30% of net income within & without, with deductions
we look at the taxpayer, he actually incurs it and previously, he wasn‘t • RFC - 30% of net income within, with deductions
allowed to deduct it as well. • NRFC – 30% of gross income within, without deductions

Requisites for deductibility Exceptions:

a. Employer must have established a pension or retirement • 15% optional tax on gross income
plan to provide for the payments of reasonable pensions to • 2% minimum corporate income tax
his employees
b. Pension plan is reasonable and actuarially sound TAX REGIMES
c. Contribution must be made by the employer to the pension
fund 1. Normal Corporate Income Tax (NCIT) – 30% of net income or
d. Must be funded by the employer gross income
e. Amount contributed must no longer be subject to the 2. Optional Corporate Income Tax – 15% of gross income
control and disposition of the employer 3. Minimum Corporate Income Tax (MCIT) – 2% of gross income
f. Payment has not yet been allowed as deduction
g. Deduction is apportioned in equal parts over a period of 10
NORMAL CORPORATE INCOME TAX
consecutive years beginning with the year in which the
transfer or payment is made

NORMAL CORPORATE INCOME TAX

CORREGIDOR METHOD
The normal corporate income tax is 30%.

CORREGIDOR METHOD

This is the method where the past service cost is amortized over a
period of 10 years.

Example:
Current Service Cost (CSC) – 200,000/year
Past Service Cost (PSC) – 1,000,000

The PSC must be spread out over a period of 10 years. Using the
Corregidor method, divide the PSC by 10 years. From the year 2015
down to the year 2025, the deduction you can claim additional
deduction of 100,000 (1M/10years).
 Pension Trust
OPTIONAL CORPORATE INCOME TAX
2015-2025 2026
Past Service Cost P 100,000 P - overstating their expenses since the MCIT is imposed on the gross
(1M/10years) income where the expenses have not yet been deducted.
Current Service 200,000 200,000
Cost
Total P 300,000 P 200,000
OPTIONAL CORPORATE INCOME TAX

Domestic corporations and resident foreign corporations have the option to be taxed at 15% of gross income,
provided certain

conditions are satisfied.

The tax base for domestic corporations is net income within and When availed of
without. For resident foreign corporations, it is based on net income MCIT is availed of at the beginning of the 4th taxable year
within. For non-resident foreign corporations, it is based on gross immediately following the year in which such corporation commenced
income within. its business operations. In other words, MCIT is imposed on the 5th
Rules year of operations.
• Option is available only for DC and RFC.
• Option to be taxed on gross income shall be available only A company is considered to have started its business operations on
to firms whose ratio of cost of sales to gross sales or the date of its registration with the BIR or the actual commencement
receipts from all sources does not exceed 55%. of the business, whichever is earlier.
• Option shall be irrevocable for 3 consecutive taxable years
during which the corporation is qualified under the scheme. Relief from MCIT
The Secretary of Finance is authorized to suspend the imposition of
Conditions to be satisfied MCIT on a corporation which suffers losses
1. Tax effort ratio of 20% of GNP
2. Ratio of 40% of income tax collection to total tax revenues 1. On account of prolonged labor dispute (more than 6 months)
3. VAT tax effort ratio of 4% of GNP 2. Because of force majeure,
4. 0.9% ratio of the Consolidated Public Sector Financial 3. Because of legitimate business reverses.
Position to GNP

Not available to NRFC CARRY FORWARD EXCESS MCIT

This option is not available to Non-Resident Foreign Corporations
because they are already subject to 30% tax based on Gross Income. Excess MCIT can be carried forward and credited against the normal
income tax for the 3 immediately succeeding taxable years.
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 excess MCIT can only be credited if the NCIT is higher than the
the 30% Income Tax on their Gross Income. MCIT. In that case, the tax paid will be net of the excess MCIT.

Cost ratio does not exceed 55% If MCIT is higher than the NCIT for the year, then the excess MCIT
The ratio of the firm‘s cost of sales to gross sales or receipts from all cannot be credited but will continue to be carried over until the 3-year
sources must not exceed 55% in order to be taxed at 15%. period expires.

Irrevocable for 3 years The credit of the excess MCIT is based on the First-In First-Out
If the corporation incurs very high expenses on the succeeding years, method such that the excess MCIT incurred first will also be the first
it may end up at a disadvantage for choosing this option because the to be credited against the NCIT for the taxable year.
expenses are not accounted for when it is taxed based on gross
income. EXCEPTIONS TO MCIT

MINIMUM CORPORATE INCOME TAX 1. Proprietary Educational Institutions

a. 10% of net income – exempt from MCIT
b. 30% of net income – not exempt from MCIT
MINIMUM CORPORATE INCOME TAX (MCIT)
2. Non-profit hospitals
A minimum corporate income tax rate of 2% of the gross income a. 10% of net income – exempt from MCIT
at the end of the taxable year is imposed on a corporation beginning b. 30% of net income – not exempt from MCIT
the 4th taxable year immediately following the year in which such
corporation commenced its business operations. 3. PEZA-registered entities
a. 5% income from registered activities – exempt from MCIT
The MCIT is paid when the minimum income tax is greater than the b. 30% income from unregistered activities – not exempt
NCIT of 30% of the net taxable income. from MCIT

Purpose 4. OBUs – exempt from MCIT whether taxed at 10% or tax

The purpose of the MCIT is to curtail the fraudulent mechanisms of exempt
corporations done in order to avoid paying the right amount of taxes
due to the government. This is to discourage corporations from 5. International Carriers – exempt from MCIT since it is taxed
at 2.5% of Gross Philippine Billings
 From 2018 140,000 120,000
TN: Corporations subject to special tax rates are exempt from MCIT. 120,000

Proprietary educational institutions & non-profit hospitals For - -

domestic corporations, these include proprietary educational (100,000)
institutions and non-profit hospitals subject to the tax rate of 10% on From 2019 ( 80,000) -
their net taxable income when the income derived from unrelated Tax Due ( 50,000)
trade, business, or activity does not exceed 50% of the gross income.
- 220,000
900,000
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

TN: You cannot lump together the excess MCIT since the excess MCIT
nonprofit hospitals from unrelated trade, business, or activity exceeds
expires differently.
50% of the gross income, MCIT can now be applied since they will be
subject to 30% tax on their net taxable income.
In 2017, MCIT is not yet applicable in 2017 since it is the 4 th year of
operations. MCIT applies only on the 5th year of operations in 2018.
PEZA-registered entities
Since there is a net loss, there is no tax to be paid for the year.
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
In 2018, MCIT can now be applied since it is the 4 th taxable year
taxes. However, it can be subject to NCIT if it is engaged in
after the start of its business operations. Since MCIT is higher than
unregistered activities. The MCIT can be applied on the 5th year of
NCIT, the tax due for the year will be P160,000.
operations when the net income is less than 2% of the gross income
from unregistered activities.
There is excess MCIT of P100,000 which is the difference between
the MCIT paid of P160,000 and NCIT of P60,000. It will be carried
OBUs and international carriers
forward for the 3 immediately succeeding years until 2021.
MCIT is also not applicable to offshore banking units generally taxed
at 10% and international carriers subject to tax of 2.5% on gross
In 2019, the tax due is P160,000. Excess MCIT from 2018 of
Philippine billings.
P100,000 cannot be applied this year since MCIT is higher than
NCIT. It will continue to be carried forward until its expiration in
Illustration:
2021.
2017 is the fourth year of its business operations.
In addition, there is an excess of P130,000 which is the difference
MCIT between the MCIT of P160,000 and NCIT of P30,000 for the year
2019 will be carried forward for the 3 immediately succeeding taxable
2017 2018 10,00,000 years until it expires in 2022.
10,00,000 10,00,000 (2,000,000
(5,000,000) (2,000,000) ) In 2020, there is no tax to be paid due to the application of the
5,000,000 8,000,000 8,000,000 excess MCIT from previous years. The excess MCIT from 2018 of
P100,000 and excess MCIT from 2019 of P50,000 can be applied to
(5,000,000) (7,800,000) (7,900,000
the NCIT of P150,000 since NCIT is higher than MCIT for the year.
)
- 200,000
The excess MCIT can be deducted to the extent of the tax due
100,000
under the NCIT. The remaining excess MCIT from 2019 of P80,000
- 60,000 will continue to be carried forward until its expiry in 2022.
Gross Sales 30,000
Cost of Sales - 160,000 In 2021, the tax due is P220,000. The excess MCIT from 2019 of
Gross Income 160,000 P80,000 can be applied to the NCIT since the NCIT of P300,000 is
Allowable Deductions - higher than the MCIT of P120,000 for the year.
Net Income - 100,000
NCIT (30% of NI) - 100,000 In 2022, the tax due is equivalent to the NCIT of P900,000 which is
MCIT (2% of GI) higher than the MCIT of P120,000. There is no more excess MCIT
Excess MCIT 130,000 carried forward from the previous years.
From 2018 - 160,000
From 2019 160,000 SPECIAL RULES
Tax Due

2020 2021 2022 Tax Base Tax Rate

Gross Sales 10,00,000 10,00,000 10,00,000 Special DCs
Cost of Sales (3,000,000) (4,000,000) (2,000,000
Proprietary Educational 10% or
Gross Income ) Net Income
Institution 30%
7,000,000 6,000,000 6,000,000
Allowable Deductions (6,500,000) (5,000,000) (3,000,000 10% or
Non-profit Hospital Net Income
Net Income ) 30%
NCIT (30% of NI) 500,000 1,000,000 3,000,000 Special RFCs
MCIT (2% of GI) 150,000 300,000 International Carriers Gross Philippine Billings 2.5%
Excess MCIT 900,000
Offshore Banking Units Income derived from
 foreign currency
transactions with Exempt Predominance test
nonresidents, OBUs, If the gross income from unrelated trade, business, or other activities
including branches of exceeds 50% of the total gross income from all sources, then it is
foreign banks authorized subject to the 30% of net income.
by BSP to
transact with OBUs 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 derived from 10% income.
foreign currency loans
Q: The University of Cebu earns rent income from unrelated activities
Income of non-residents at the amount of 1,000,000. Aside from that, it earns educational
Exempt
from OBUs income from tuition fees, sales of books and library fees amounting to
1,000,000. How will this be subject to tax?
Tax on Branch Profits Total profits applied or
15%
Remittances earmarked for remittance
Formula:
Regional or Area
Not applicable Exempt
Headquarters
Regional Operating
Net Income 10%
Headquarters
Special NRFCs
Non-resident
Cinematographic Film A: The tax rate will be 10% of the net taxable income. Since the
Gross Income 25% income from unrelated trade activities did not exceed 50% of the gross
Owner, Lessor or
Distributor income, it passed the predominance test.
Non-resident Owner or
Q: If the income from unrelated activities is 2,000,000, how will it be
Lessor of Vessels Gross Rentals, Lease or
4.5% taxed?
Chartered to Filipino Charter Fees
Nationals or Corporations
Non-resident Owner or
Lessor of Aircraft, Gross Rentals or Fees 7.5% A: The tax will be at 30% of the net taxable income. It did not pass the
Machinery and Equipment predominance test since the income from unrelated activities of
66.67% more than 50%.

SPECIAL DOMESTIC CORPORATIONS Important: Take note that this rule not only applies to proprietary
educational institutions but also to hospitals which are also non-profit.
PROPRIETARY EDUCATIONAL INSTITUTION & HOSPITALS
Chong Hua, according to sir, is a non-profit hospital.

Unrelated Trade, Business or other Activity

Section 27(B) of the NIRC Conduct of trade, business or other activity is not substantially related
Proprietary educational institutions and hospitals which are nonprofit to the exercise or performance of the primary purpose or function.
shall pay a tax of ten percent (10%) on their taxable income except
those covered by Subsection (D) hereof: Provided, That if the gross Lung Center v. Quezon City
income from unrelated trade, business or other activity exceeds fifty As a general principle, a charitable institution does not lose its
percent (50%) of the total gross income derived by such educational character as such and its exemption from taxes simply because it
institutions or hospitals from all sources, the tax prescribed in derives income from paying patients, so long as the money received is
Subsection (A) hereof shall be imposed on the entire taxable income. devoted to charitable objects and no money inures to the private
For purposes of this Subsection, the term 'unrelated trade, business or benefit of the persons managing or operating the institution. As well as
other activity' means any trade, business or other activity, the conduct the reason of donation in the form of subsidies granted by the
of which is not substantially related to the exercise or performance by government.
such educational institution or hospital of its primary purpose or
function. A 'proprietary educational institution ' is any private school The petitioner failed to prove that the entirety of its real property is
maintained and administered by private individuals or groups with an actually, directly and exclusively used for charitable purposes. While
issued permit to operate from the Department of Education, Culture portions of the hospital are used for the treatment of patients and the
and Sports (DECS), or the Commission on Higher Education (CHED), dispensation of medical services to them, whether paying or
or the Technical Education and Skills Development Authority (TESDA), nonpaying, other portions thereof are being leased to private
as the case may be, in accordance with existing laws and regulations. individuals for their clinics and a canteen.

Hence, the portions of the land leased to private entities as well as

PROPRIETARY EDUCATIONAL INSTITUTION AND HOSPITALS 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
Proprietary educational institutions and non-profit hospitals are subject by the hospital and portions of the hospital used for its patients,
to a tax rate of 10% based on taxable income. whether paying or non-paying, are exempt from real property taxes.

The general rule is that it is subject to a 10% tax if it complies with the CIR v. St. Luke‟s Medical Center
predominance test with the unrelated activities as basis. St. Luke‘s fails to meet the requirements under Section 30(E) and (G)
Otherwise, it is subject to 30% tax. 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 SPECIAL RESIDENT FOREIGN CORPORATIONS
not lose its tax exemption if it earns income from its for-profit
INTERNATIONAL CARRIERS
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 Sec. 28 (A) (3) of the NIRC)
of 10% on its net income from its for-profit activities. 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
CIR v. De La Salle University 'Gross Philippine Billings' as defined hereunder:
The tax exemption granted by the Constitution to non-stock, non-
profit educational institutions is conditioned only on the actual, direct (a) International Air Carrier. — 'Gross Philippine Billings' refers
and exclusive use of their assets, revenues and income for educational to the amount of gross revenue derived from carriage of persons,
purposes. Unlike the exemption that may be availed of by proprietary excess baggage, cargo and mail originating from the Philippines in a
educational institutions, it is not subject to limitations imposed by law. continuous and uninterrupted flight, irrespective of the place of sale or
Hence, the income and revenues of DLSU proven to have been used issue and the place of payment of the ticket or passage document:
actually, directly and exclusively for educational purposes are exempt
from duties and taxes.
Provided, That tickets revalidated, exchanged and/or indorsed to
another international airline form part of the Gross Philippine Billings if
TN: Only formal educational institutions can avail of the exemption. the passenger boards a plane in a port or point in the Philippines:
Provided, further, That for a flight which originates from the
GOVERNMENT-OWNED OR CONTROLLED CORPORATION 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.
Sec. 27 (C) of the NIRC
Government-owned or -Controlled Corporations, Agencies or
(b) International Shipping . — 'Gross Philippine Billings' means
Instrumentalities. — The provisions of existing special or general
gross revenue whether for passenger, cargo or mail originating from
laws to the contrary notwithstanding, all corporations, agencies, or
the Philippines up to final destination, regardless of the place of sale
instrumentalities owned or controlled by the Government, except the
or payments of the passage or freight documents.
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 INTERNATIONAL CARRIERS
associations engaged in a similar business, industry, or activity.
International air carrier and international shipping are taxed at 2.5%
of Philippine Gross Billings.
GOVERNMENT-OWNED OR CONTROLLED CORPORATIONS,
AGENCIES OR INSTRUMENTALITIES 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
General Rule:
Korea. Will the international carrier which flies these flights be subject
GOCCs, agencies or instrumentalities are taxed at 30% like any other
to tax in the Philippines?
corporation.
A: The trip from Philippines to Hongkong in an uninterrupted and
Exceptions:
continuous flight will be subject to tax here in the country. The
1. Government Service Insurance System (GSIS)
100,000 will be apportioned for the value from the Philippines to
2. Social Security System (SSS)
Hongkong. For the trip from HK to US, the Philippines has no
3. Philippine Health Insurance Corporation (PHIC)
jurisdiction because this is a resident foreign corporation.
4. National Power Corporation (NAPOCOR)
5. Local Water Districts (RMC 28-2010, RA 10026)
On the second part, there will be no income that is taxable in the
6. Cooperatives (RA 6938) with conditions
Philippines because the point of origin is the US and then the second
7. Foundations created for scientific advancement (RA 2067) flight originated from Korea. The law provides that the point of origin
must be the Philippines.
PAGCOR
Philippine Amusement and Gaming Corporation (PAGCOR) is exempt
from taxes for income related to gaming operations as provided for in OFFSHORE BANKING UNITS
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 Sec. 28 (A) (4) of the NIRC
the extent of their exemption was clarified by the SC in a recent case. Offshore Banking Units. — The provisions of any law to the contrary
notwithstanding, income derived by offshore banking units authorized
PCSO by the Bangko Sentral ng Pilipinas (BSP), from foreign currency
Philippine Charity Sweepstakes Office (PCSO) was removed from the transactions with local commercial banks, including branches of
exemptions under the tax code. It is no longer exempt from corporate foreign banks that may be authorized by the Bangko Sentral ng
income tax under the TRAIN law. 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 office will not earn income since they are here for purposes of liaising
of ten percent (10%) of such income. with costumers. Otherwise, they are subject to tax.

Any income of nonresidents, whether individuals or corporations, from Branch profit remittance tax
transactions with said offshore banking units shall be exempt from The branch profit remittance tax is 15% of the total profits
income tax. earmarked for remittance whether it is actually remitted or not.

Q: A company registered in the British Virgin Islands (USA) has a

OFFSHORE BANKING UNITS 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
Make a distinction on who these offshore banking units are is the branch profit tax applicable?
transacting with. If it is transacting with non-residents then they are
exempt unless otherwise provided by the BSP. Interest income on A: Only the 500,000 will be taxed as the tax is based on the
foreign loans is subject to final tax of 10% if you are transacting with earmarked profit. Earmarked means that there is an intention for the
residents amount will be remitted. Even without actual remittance, they will still
in relation to their interest income from foreign loans. be subject to tax at a rate of 15%.
Subsidiary
Tax Exempt A subsidiary is a corporation set-up here in the Philippines. It is a
Income derived by a depositary bank from an expanded foreign domestic corporation where the shares are owned by a foreign
currency deposit system is exempt from tax if it transacts with corporation and it is a separate entity. A branch is an extension of the
nonresidents, offshore banking units, local commercial banks, home office abroad and it is not a separate entity.
including branches of foreign banks that may be authorized by the
BSP to transact with OBUs. When a corporation is a stockholder of a corporation, the subsidiary
will distribute income to its principal through dividends and not
Income of non-residents from transactions with OBUs is exempt. 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
10% Tax corporation distributes income through dividends to a non-resident
foreign corporation.
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 Tax sparing rule
authorized by the BSP to transact business with foreign currency The domestic corporation giving out dividends to the NRFC, the latter
deposit system units and other depository banks under the expanded may be subject to tax because it is the one earning income. It is taxed
foreign currency deposit system, including interest income from either at 15% or 30%. A rate of 15% will be applied if there is
foreign currency loans granted by such depository banks under said reciprocity in the sense that the foreign country where the NRFC is
expanded foreign currency deposit system to residents, shall be domiciled allowed the same credit or more favorable to Filipino
subject to a final income tax at the rate of 10% of such income. corporations. This concept is similar to personal exemptions granted
to NRA NETB under the reciprocity rule for individuals.

BRANCHES OF FOREIGN CORPORATIONS 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%.

Sec. 28 (A) (5) of the NIRC If you have a subsidiary distributing income to principal, the rate is
Tax on Branch Profits Remittances . — Any profit remitted by a 15% or 30%. When would you advice your client that it is better
branch to its head office shall be subject to a tax of fifteen percent setup a branch here in the Philippines rather than a subsidiary?
(15%) which shall be based on the total profits applied or earmarked
for remittance without any deduction for the tax component thereof First, ask about the country of the NRFC and check if there is
(except those activities which are registered with the Philippine reciprocity. If it is the US and there is reciprocity, then you can advise
Economic Zone Authority). The tax shall be collected and paid in the that they can set-up either a subsidiary or a branch. In actual
same manner as provided in Sections 57 and 58 of this Code: practice, you will realize that it is better to set-up a subsidiary than a
Provided, That interests, dividends, rents, royalties, including branch because the requirements for the latter are difficult to comply
remuneration for technical services, salaries, wages, premiums, with.
annuities, emoluments or other fixed or determinable annual, periodic
or casual gains, profits, income and capital gains received by a foreign Otherwise, if there is no reciprocity, then it would be better to set-up
corporation during each taxable year from all sources within the a branch where the tax is at 15%.
Philippines shall not be treated as branch profits unless the same are
effectively connected with the conduct of its trade or business in the
RAHQs & ROHQs
Philippines.

BRANCHES OF FOREIGN CORPORATIONS

Sec. 28 A (6) of the NIRC
(a) Regional or area headquarters as defined in Section 22(DD)
Branches enter into transactions which allow them to earn income
shall not be subject to income tax.
subject to tax. Most likely they will return that income they earned
(b) Regional operating headquarters as defined in Section
here to their home office. They will remit it to their home office. If
22(EE) shall pay a tax of ten percent (10%) of their taxable
that happens, it will be subject to tax.
income.
Foreign corporations may engage in business here in the country in
two ways: branch office or representative office. A representative
REGIONAL OR AREA HEADQUARTERS Entities which allows aircrafts and vessels to be leased here in the
(RAHQs) AND REGIONAL OPERATING Philippines will be subject to 7 ½% on gross rentals or fees from
HEADQUARTERS (ROHQs) OF sources within the Philippines.
MULTINATIONAL COMPANIES
Items 2 and 3 are not very much applicable in the Philippines because
RAHQs are exempt from tax while ROHQs are subject to 10% not much engage in such business because at most companies here
tax on net income. in the Philippines buy the property from abroad and not lease them.
But nonetheless, still memorize the rates.
ROHQ meaning they are earning income from their operations and
they conduct activities that are income generating and so they will be PASSIVE INCOME
subject to tax on such income.

RAHQ are not subject to tax because they are not supposed to engage
PASSIVE INCOME TAX RATES
in such activities otherwise they will violate the license granted to
TN: Income must be derived from the Philippines.
them in the Philippines.

Area headquarters are not earning income here in the Philippines Passive Income DC RFC NRFC
because it is only for liaising and cooperation purposes. If it starts to Interest Income on
earn income then it is subject to a 30% and not 10% because it is Bank Deposit (Peso 20% 20% 30%
registered as area headquarters. It will not be converted to an Account
operating headquarter.
Interest Income on
Ex. Procter & Gamble is a regional operating headquarters of a Bank Deposit
multinational company so it is subject to a rate of 10%. Under the
15% 15% Tax Exempt
Expanded Foreign
SPECIAL NONRESIDENT FOREIGN CORPORATIONS Currency
Deposit System
NONRESIDENT CINEMATOGRAPHIC FILM OWNERS, ETC. Royalties 20% 20% 30%
Capital Gains from
NONRESIDENT CINEMATOGRAPHIC FILM OWNER, LESSOR
Sale of Shares of 15% 15% 15%
OR DISTRIBUTOR
Stock

A cinematographic film owner, lessor, or distributor shall pay a tax of Capital Gains from 6% of GSP
25% of its gross income from all sources within the Philippines. Sale of Real or ZV,
Property Not Used whichever 30% 30%
Example: You want to watch Batman vs Superman. The owner of the in Trade or is higher
film will have to lease it to someone here in the Philippines, but they Business
need not be considered as resident foreign corporations. DC is the 15% on
owner of that film and it is shown in the Philippines, so they allowed total profits
cinemas in the Philippines to show it. They can be considered as Branch Profit applied for
nonresident cinematographic film owner, lessor or distributor and so Not
Remitted by a or Not Applicable
they can subject to the 25% tax based on their gross income. Applicable
Branch Office earmarked
for
TN: The income is not the sale of the tickets, because the ticket sales remittance
belong to the cinemas. The film owner will only get a portion of the
income earned by the cinemas. Subject to Tax
Sparing Rule
15% if foreign
NONRESIDENT OWNER OR LESSOR OF VESSELS corporation
Dividends Received
Exempt Exempt allows a tax
from DC
credit of at least
NONRESIDENT OWNER OR LESSOR OF VESSELS CHARTERED 15% of the taxes
BY PHILIPPINE NATIONALS OR CORPORATIONS deemed paid in
the Philippines
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 TAX ON IMPROPERLY ACCUMULATED EARNINGS
Industry Authority.

However, Maritime Industry Authority does not allow non-resident IMPROPERLY ACCUMULATED EARNINGS TAX
foreign corporations to own vessels in the Philippines.
Improperly accumulated earnings tax (IAET) is a penalty tax imposed
on corporations for permitting its earnings to accumulate instead of
NONRESIDENT OWNER OR LESSOR OF AIRCRAFTS, ETC
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.
NONRESIDENT OWNER OR LESSOR OF
AIRCRAFT, MACHINERY AND EQUIPMENT 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.
 In the portion for stockholders‘ equity, you will see paid-up capital and
We use the immediacy test and look at the purpose for the retained earnings. To be technical about it, your paid-up capital will
nondeclaration. have several components: common shares, preference shares
depending on the type of shares issued by the corporation.
Standard for knowing whether it is beyond reasonable means
There will be no IAET imposed if the company is holding earnings The retained earnings accounts for the total income that the company
within reasonable means of business. Compare the par-value (the paid had for the past years of operation. All incomes from past to present
up capital of the company) with the earnings also known as retained will be accumulated, that is why it is termed retained earnings,
earnings. meaning it is held by the company and not distributed.

In applying IAET, earnings found in the Retained Earnings account will

EVIDENCE OF PURPOSE TO AVOID INCOME TAX
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
Sec. 29 (C) of the NIRC the birth certificate of the corporation.
Evidence of Purpose to Avoid Income tax
1. Prima Facie Evidence. - the fact that any corporation is a Q: If shareholders invested 1M and the corporation never declared
mere holding company or investment company shall be dividends from Year 1 to Year 10 so it has retained earnings of 10M, is
prima facie evidence of a purpose to avoid the tax upon its there improperly accumulated tax?
shareholders or members.
2. Evidence Determinative of Purpose. - The fact that the A: Yes, you are said to be holding beyond the reasonable means of
earnings or profits of a corporation are permitted to the business by simply comparing RE to the paid up capital because
accumulate beyond the reasonable needs of the business RE is more than 100% already. You are now considered improperly
shall be determinative of the purpose to avoid the tax upon accumulating earnings.
its shareholders or members unless the corporation, by the
clear preponderance of evidence, shall prove the contrary. Exceptions
IAET is inapplicable even if RE is greater than paid-up capital

1. Expansion projects – company is justified because it is

HOLDING COMPANIES very costly to expand your business

In a holding company, the tax code provides that the mere holding is 2. Loan obligations or debt covenants which compel you
a prima facie evidence of improperly accumulated earnings. not to declare dividends until the loan has been repaid –
most likely, the creditors will of the corporation will not
You will have the burden of proving that you are holding earnings for allow distribution to stockholders without first satisfying
reasonable business. The fact of holding alone is a prima facie repaying their loans
evidence. There is no need to compare paid-up capital with retained
earnings. 3. Contingencies – includes those for contingencies such as
typhoons, other natural calamities, or pending litigations;
A holding company‘s purpose is to hold investments. You are this needs to be justified for its appropriation (Retained
supposed to issue dividends to stockholders. If you do not do that, Earnings in the financial statement becomes REAppropriated
you are said to be accumulating beyond the reasonable means of the which can only be used for a specific purpose).
business. In sum, when RE is in excess of paid-up capital, this is only prima
facie evidence for application of IAET. Corporations may not be
The presumption is only prima facie and not conclusive. You can subject to this tax if they can prove the three conditions previously
always justify the reason for non-distribution. mentioned.

IMMEDIACY TEST TRUST FUND DOCTRINE

Whether the funds will be used within a period of 1 year but there is
really no hard and fast rule on the period. The test is whether there is TRUST FUND DOCTRINE
accumulation of funds beyond the reasonable needs of the business.
Corporate assets are held as a trust fund for the benefit of
It says that you look at immediate need of the business.
shareholders and creditors and the corporate officers have a fiduciary
Nondeclaration is justified granting that you have expansion projects,
duty to deal with them properly. The subscribed capital stock of the
loan obligations and contingencies.
corporation is a trust fund for the payment of debts of the corporation
which the creditors have the right to look up to satisfy their credits.
Q: Is it automatic that a company withholding dividends will be said to The creditors can use it to reduce the debts, unless it has passed into
have improperly accumulated earnings? the hands of a bona fide purchaser without notice.

A: No, there must be a comparison to be made first of the earnings This is the reason for the comparison of the paid-up and retained
and paid up capital which are found in a company‘s financial earnings. Creditors can go up to the paid-up capital. The corporations
statements. are only required to maintain the paid up capital for the protection of
the creditors and capital/ investment cannot be withdrawn. This is the
The balance sheet, located in the financial statement, tells us the trust fund doctrine which provides that you cannot diminish your
financial position of the company, indicating its assets, liabilities and paidup capital.
the capital contributed by the owners.
 CORPORATIONS SUBJECT TO IAET Cost of Sales
Gross Income 500,000
Expenses
CORPORATE TAXPAYERS THAT ARE SUBJECT TO IAET Taxable Income 300,
000
Those that are subjected to Net Income Tax Tax rate 30%
5) Domestic Corporation Taxable Due and Payable
6) Resident Foreign Corporations Net Income after tax 210,000
7) Proprietary Educational Institutions
8) Non-stock, non-profit educational institutions – if income
from unrelated activities is more than 50% of the Total Constructive receipt doctrine
Gross Income because it will be subject to the 30% NCIT The 210,000 income will be distributed to partners A and B.
Partnerships follow constructive receipt doctrine. It is as if they
Note: IAET is just like MCIT it is also applied to Corporations which already received the income of the partnership even if it is not actually
are subject to NIT. If 30% NIT is used or 2% MCIT, IAET can apply. declared. It is as if A and B already earned 105,000 each.

Important: If they are not subject to Normal Income Tax (NIT), Partners A and B will be taxed on the year that the partnership earned
IAET does not apply. income at a rate of 10% final tax. It is as if it is a dividend received
from a corporation.
EXCEPTIONS TO IAET
The 10% is applicable to resident citizen, resident alien, or
nonresident citizen, 20% if NRA-ETB and 25% for NRA-NETB.

Q: Can a partnership be subject to IAET?

Sec. 29 (B) (2) of the NIRC
The improperly accumulated earnings tax as provided for under this
A: No, because there is constructive receipt of dividend. It is as if the
Section shall not apply to: amount has already been distributed for tax purposes and so there is
1) Publicly-held corporations; no accumulation of earnings here. In fact, you already paid taxes for
2) Banks and other nonbank financial intermediaries; and the income. There is no IAET for general professional partnership or
3) Insurance companies. trading partnership because both follow constructive receipt doctrine.

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

EXCEPTIONS TO IAET partnership because you don‘t base it on shares of stocks. There is
partner‘s equity and shareholder‘s equity. Partnership will only have
IAET is not applicable to the following: partner‘s interest.

1. Partnerships, whether general professional or trading General professional partnership

partnership Will your answer change if this is a general professional partnership?
If A and B formed a law firm with the following:
This is because of the constructive Receipt Doctrine where
partners received income constructively. There is no Gross Receipts 1,000,000
retained earnings and paid up capital in a partnership, there Cost of Services
is only partners interest hence this cannot be compared to Gross Income Expenses
RE. Taxable Income

2. Bank and non-bank financial institutions

3. Insurance companies 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
4. PEZA registered companies because they are subject to 5% A and B, it will still follow constructive receipt doctrine. It will be
tax on gross income distributed by dividing 300,000 equally. Each partner receives 150,000
and this amount will be treated as an ordinary income of an individual
5. Resident foreign corporation registered as branches – this is the partner‘s distributive share in a general professional
because it has no capital of its own in the Philippines. partnership. This will then be subject to the dumping ground
computation of 0-35%.
6. Publicly held corporations
Take note of the difference between the two types of partnerships
7. International Carriers because they are taxed at 2.5% and how they are taxed.
based on Gross Philippine Billings
COMPUTATION
8. Non-stock non-profit educational institutions if income from
unrelated activities is 50% or less of the total gross income
using the predominance test
Sec. 29 (D) of the NIRC
Tax on partnership Improperly Accumulated Taxable Income. — For purposes of this
A and B trading partnership has the following income: Section, the term 'improperly accumulated taxable income' means
taxable income adjusted by:
Gross Sales 1,000,000 (1) Income exempt from tax
 (2) Income excluded from gross income Interest Income from Long-term Investments
(3) Income subject to final tax; and (More than 5 years) 10,000
(4) The amount of net operating loss carry-over deducted Philippine Currency Deposit 15,000
Capital Gains on Sale of Land held for 12 years
And reduced by the sum of: (Selling price is P6,000,000) 200,0
(1) Dividends actually or constructively paid; and 00
(2) Income tax paid for the taxable year. Capital Gains on Sale of Shares directly to 200,0
buyer 00
Provided, however, that for corporations using the calendar year Dividends paid and constructively paid 300,0
basis, the accumulated earnings tax shall not apply on improperly 00
accumulated income as of December 31, 1997. In the case of
corporations adopting the fiscal year accounting period, the The equity section of Very Easy Inc.‘s current statement of financial
improperly accumulated income not subject to this tax, shall be position reflects the following:
reckoned, as of the end of the month comprising the twelve (12)-
month period of fiscal year 1997-1998 Common shares P1,000,000
Retained Earnings – Unappropriated 1,600,000
Retained Earnings – Appropriated for Expansion Projects 1,000,000
Rate: IAET is 10% of improperly accumulated earnings. Total Shareholders‘ Equity 3,600,000

This is a penalty tax so the government wants to tax you for all of Discuss the taxability of Very Easy, Inc. for 2018.
your income. You add back NOLCO because it is supposed to be only
a reprieve given by the government before because you incurred First, we will compute the taxable income.
losses. However, this NOLCO was actually deducted when you
computed for your taxable income.

Taxable income: Items of Gross income less allowable deductions

Exempt income: Inter-corporate dividends

Excluded: Life insurance proceeds (LAGCIRM)

Final tax: Passive income, interest income from bank deposits,

royalties, prizes and winnings, etc.

Income tax actually paid: Tax imposed for taxable and passive
income; if you paid MCIT, you will use this in the computation

Important: This is sir‘s favorite tax because it will show sir if we

understand corporate taxation because a lot of things must be
considered. It is, according to sir, a very comprehensive tax.

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

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:

Gross Sales P8,000,0

00
Sales Returns and Allowances 200,0
00
Sales Discounts 300,0
00
Cost of Goods Sold 2,500,0
00
Business Expenses 500,0
00
Dividends from Domestic Corp 35,0
Interest Income: 00
 Compare RE with Paid-up Capital
Taxable Income NCIT
RE – unappropriated P 4,660,00
1,600,000
Gross Sales P 8,000,000 Taxable
Paid-up Income
capital P 01,000,000
Less: Sales Returns and Allowances Multiplied
Difference by the Tax Rate P 600,000
(200,000) Tax Due and Payable P 30%
Sales Discounts 1,398,00
(300,000) 0
Net Sales P 7,500,000
Less: Cost of Goods Sold (2,500,000
There is an excess of P600,000. This is an indication that earnings
)
have been accumulated beyond the reasonable needs of the business.
Gross Income P 5,000,000
Less: Business Expenses
IAET (500,000)
Net Income 4,500,000
Taxable
Add: income
Capital Gain on Sale of Land P 200,000
xxx
Add:NOLCO (100,000*40%)
Less:
Income exempt from tax xxx
(40,000)
Income excluded
Taxable Income from gross income P xxx
4,660,00
Income subject to final tax 0 xxx
NOLCO xxx
Less:
Dividends actually or constructively paid (xxx)
Income tax actually paid (xxx)
Improperly accumulated taxable income P xxx
Multiplied by the tax rate 10%
Improperly accumulated earnings tax P 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, so for
the current year, only the remaining 40% will be deducted.

Second, we will compute the tax due and payable. It is based on the

NCIT of 30% since Very Easy, Inc. is a resident foreign corporation.

Paid-up capital
This is the par value of the share stated in the articles of
incorporation. For IAET, you only account for the par value. The
excess of the paid up capital is called the share premium which are
all found in the financial statement. In the exam, sir will tell us the
amount of paid-up capital and there is no need for us to compute.

After computing the NCIT, we will compare it with the MCIT. Fourth, we will compute for the improperly accumulated earnings.

MCIT Improperly Accumulated Earnings

Taxable income P 4,660,000

Gross Income P 5,000,000
Multiplied by the Tax Rate 2% Add:
Tax Due and Payable P 100,000 Income exempt from tax:
Dividend Income 35,000
Interest income on long-term investment 10,000
Income excluded from gross income -
Since MCIT of P100,000 is lower than the NCIT of P1,398,000, the tax Income subject to final tax:
due will be based on the NCIT. Interest Income from Phil. Currency deposit 15,000
Capital Gains on sale of shares 200,000
Third, we will look for indications of improperly accumulated NOLCO 40,000
earnings. At this point, we will compare the retained earnings not Total P 4,960,000
appropriated for reasonable needs of the business with the paid-up
Less:
capital.
Dividends actually or constructively paid (35,000)
Income tax actually paid:
NCIT (1,398,000
 )
Final tax on interest income on Peso Deposit (G) Civic league or organization not organized for profit but
(3,000) operated exclusively for the promotion of social welfare.
Final tax on sale of shares
(30,000) (H) A non-stock and nonprofit educational institution.
Improperly Accumulated Taxable Income P 3,229,00
0 (I) Government educational institution.

(J) Farmers' or other mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative
We will follow the formula stated in the tax code so we will not include telephone company, or like organization of a purely local
the appropriation for the expansion projects in the computation. character, the income of which consists solely of assessments,
dues, and fees collected from members for the sole purpose of
Fifth, we will determine the IAET for the year. meeting its expenses; and

(K) Farmers', fruit growers', or like association organized and

IAET operated as a sales agent for the purpose of marketing the
products of its members and turning back to them the proceeds
Improperly Accumulated Taxable Income P 3,229,000 of sales, less the necessary selling expenses on the basis of the
Multiplied by the Tax Rate 10% quantity of produce finished by them.
Improperly Accumulated Earnings Tax P 322,900
Notwithstanding the provisions in the preceding paragraphs, the
income of whatever kind and character of the foregoing organizations
from any of their properties, real or personal, or from any of their
Therefore, Very Easy, Inc. will pay IAET of P322,900 on its improperly activities conducted for profit regardless of the disposition made of
accumulated earnings. such income, shall be subject to tax imposed under this Code.

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 EXEMPTIONS FROM TAX ON CORPORATIONS
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
INCOME TAX EXEMPT ENTITIES 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:
Sec. 30 of the NIRC
Exemptions from Tax on Corporations. — The following 1. Earned income of whatever kind and character by using
organizations shall not be taxed under this Title in respect to income their property, real or personal.
received by them as such: Ex. use cemetery as a venue for a concert

(A) Labor, agricultural or horticultural organization not organized 2. Income from activities conducted for profit.
principally for profit;
Example: Fraternal Organizations registered under the BIR for
(B) Mutual savings bank not having a capital stock represented by them to be subject to tax, they should be earning income. They
shares, and cooperative bank without capital stock organized sell reviewer, the proceeds for that will be taxed.
and operated for mutual purposes and without profit;
Common denominator among all of them is that they‘re not intended
(C) A beneficiary society, order or association, operating for the for profit, usually for the benefit of their members only or to help
exclusive benefit of the members such as a fraternal government extend services to the people as in the case of
organization operating under the lodge system, or a mutual aid educational institutions.
association or a nonstock corporation organized by employees
providing for the payment of life, sickness, accident, or other Even if non-stock, non-profit educational institutions are not included
benefits exclusively to the members of such society, order, or or expressly mentioned in the tax code, they are still exempt because
association, or nonstock corporation or their dependents they are exempt under the 1987 Constitution.

(D) Cemetery company owned and operated exclusively for the Moreover, Article XIV, Section 4 of the Constitution provides that:
benefit of its members. ―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.
(E) Non-stock corporation or association organized and operated
Upon the dissolution or cessation of the corporate existence of such
exclusively for religious, charitable, scientific, athletic, or cultural
institutions,
purposes, or for the rehabilitation of veterans, no part of its net
their assets shall be disposed of in the manner provided by law.‖
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person.
Non-stock, non-profit educational institutions are not subject to tax or
costumes duties for all revenues including real property tax for as long
(F) Business league, chamber of commerce, or board of trade, not
as the income are actually, directly or exclusively used for educational
organized for profit and no part of the net income of which
purposes. So, even if they are not listed in the tax code, they will still
inures to the benefit of any private stockholder or individual.
be exempted because of the provision in the constitution.
 We use calendar or fiscal year because income tax is based on your
Q: There is a cemetery corporation and a concert organizer asks that yearly profits. You need to know your 12-month period to know if it
the cemetery be the venue for a concert, paying 1M for the use of the falls in the yearly profit of the taxpayer.
property. The cemetery will use the proceeds for maintenance. Will
this be taxable as income of the cemetery corporation? Deductions
Deductions incurred during the taxable year or the 12-month period
A: Yes, as provided in the last paragraph of Sec 30 of the Tax Code may be deducted for the income during the year. If it is an individual
that income of whatever kind and character of the foregoing taxpayer, it must be from those made during the January 1 to
organizations from any of their properties, real or personal, even if not December 31. Corporations may choose any 12-month period.
for profit, may still be subject to tax.
CHANGE OF ACCOUNTING PERIOD
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 Sec. 47 of the NIRC
for the building of the chapel in the cemetery. Regardless of the Final or Adjustment Returns for a Period of Less than Twelve (12)
disposition of the income, it is still subject to tax. Months. —
(1) Returns for Short Period Resulting from Change of
While they are exempted from taxes, if they earn income from use of Accounting Period. — If a taxpayer, other than an
property or from any activity for profit, regardless of the disposition of individual, with the approval of the Commissioner, changes
the income, it will be subject to tax. 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
ACCOUNTING PERIOD 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
Sec. 43 of the NIRC return was made and the date designated as the close of
General Rule. — The taxable income shall be computed upon the basis the fiscal year. If the change is from one fiscal year to
of the taxpayer's annual accounting period (fiscal year or calendar another fiscal year, a separate final or adjustment return
year, as the case may be) in accordance with the method of shall be made for the period between the close of the
accounting regularly employed in keeping the books of such taxpayer; former fiscal year and the date designated as the close of
but if no such method of accounting has been so employed, or if the the new fiscal year.
method employed does not clearly reflect the income, the
computation (2) Income Computed on Basis of Short Period. — Where
shall be made in accordance with such method as in the opinion of the a separate final or adjustment return is made under
Commissioner clearly reflects the income. If the taxpayer's annual Subsection (A) on account of a change in the accounting
accounting period is other than a fiscal year, as defined in Section period, and in all other cases where a separate final or
22(Q), or if the taxpayer has no annual accounting period, or does not adjustment return is required or permitted by rules and
keep books, or if the taxpayer is an individual, the taxable income regulations prescribed by the Secretary of Finance, upon
shall be computed on the basis of the calendar year. 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.
ACCOUNTING PERIOD

General taxable period of taxpayers is 12 months (year) that is why it CHANGE OF ACCOUNTING PERIOD
is called a taxable year.
There are three situations contemplated under the tax code.
Calendar Year 1. Change from fiscal year to calendar year
A calendar year is an accounting period of 12 months ending on the 2. Change from calendar year to fiscal year
last day of December. 3. Change from one fiscal year to another fiscal year

It is from January 1 to December 31. Short period return

The taxpayer must file a short period return (less than twelve months)
Fiscal Year in order to change their taxable year type.
A fiscal year is an accounting period of 12 months ending on the last
day of any month other than December. If you want to change your accounting period from calendar year to
fiscal year, say from January to December calendar year to June to
For example, the period is from May 1 to April 30 of the following May fiscal year, the short period return covers January 1 to May 31.
year.
It is from your last/old ending (Jan 1) to your new ending (May 31) of
Accounting period the same year, following the rule that you have to exclude the first
Individuals can only choose calendar year and there are no exceptions day include the last day. Supposedly you end in December but now
here. Corporations can choose either fiscal or calendar year. 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. Accrual Basis
This method generally reports income when earned and reports
If you want to change your accounting period from one fiscal year, for expenses when incurred.
example, ending on May 31 to another fiscal year ending on
November 31, then the short period return will cover the period from You account for income the moment there is a right to earn that
May 31 to November 31. income and you claim deductions when there is an obligation to pay,
regardless of whether there is cash received or dispensed. This follows
CORPORATE INCOME TAX RETURNS the rule on constructive receipt.

Mixed/Hybrid
Frequency of Filing Combination of the cash and accrual method
Corporations shall file their income tax returns quarterly.
Other Methods
When Filed The taxpayer may use special methods of reporting income when the
The corporate quarterly income tax declaration shall be filed within 60 nature of its operation is peculiar to the business industry. These
days from the close of each of the first 3 quarters of the taxable year. methods include the following:
1. Percentage of completion (POC) method – used in
accounting for long-term contracts
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. 2. Installment method – used in accounting for
a. Sales of dealers in personal property
b. Casual sales of personal property
Fiscal Adjustment Return
c. Sales of realty
When the quarterly tax payments made is not equal to the total tax
d. Sales of real property considered as capital asset
due for the taxable year, the corporation has the option to:

1. Pay the balance of the tax still due or LONG-TERM CONTRACTS

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 Sec. 48 of the NIRC
tax against income tax due for the taxable quarters of the succeeding Accounting for Long-term Contracts. - Income from long-term
taxable years has been made, such option shall be considered contracts shall be reported for tax purposes in the manner as provided
irrevocable for that taxable period and no application for cash refund in this Section. As used herein, the term ' long-term contracts'
or issuance of a tax credit certificate shall be allowed. means building, installation or construction contracts covering a period
in excess of one (1) year. Persons whose gross income is derived in
TN: The option is not automatic and it is irrecoverable for the quarter. whole or in part from such contracts shall report such income upon
the basis of percentage of completion. The return should be
Where filed accompanied by a return certificate of architects or engineers showing
The quarterly income tax declaration and final adjustment return shall the percentage of completion during the taxable year of the entire
be filed with the work performed under contract. There should be deducted from such
gross income all expenditures made during the taxable year on
1. Authorized Agent Banks – if there is payment account of the contract, account being taken of the material and
2. Revenue District Officer – if there is no payment supplies on hand at the beginning and end of the taxable period for
3. Collection Agent or Duly Authorized Treasurer – city or use in connection with the work under the contract but not yet so
municipality having jurisdiction over the location of the applied. If upon completion of a contract, it is found that the taxable
principal office of the corporation or place where its main [net] income arising thereunder has not been clearly reflected for any
books of accounts and other data from which the return is year or years, the Commissioner may permit or require an amended
prepared are kept return.
4. Office of the Commissioner – if there is no legal residence
or principal place of business in the Philippines
LONG-TERM CONTRACTS

METHODS OF ACCOUNTING Long-term contracts refer to building, installation or construction

contracts covering a period of more than one year.
TYPES OF ACCOUNTING METHOD
If the contract itself has a period of more than one year, that‘s
Pay-as-you-file
considered a long-term contract. If it involves service of constructing,
The income tax due on the corporate quarterly returns and the final
then it is called a construction contract.
adjustment income tax returns shall be paid at the time the
declaration or return is filed.
Income from Long-term Contracts
When income is derived from long-term construction contracts, it is
TYPES OF ACCOUNTING METHOD
generally reported on the basis of percentage of completion made
every year that will be evidenced by the certificates of engineers or
Cash Basis
architects. The reportable income is calculated by deducting from the
This method generally reports income upon cash collection and
contract price the actual cost of construction.
reports expenses upon payment.
For taxation purposes, the Percentage of Completion Method is used.
You account for income whenever you receive income/cash. When
you dispense cash, you recognize an expense.
PERCENTAGE OF COMPLETION METHOD 2nd year: 30%
3rd year: 20%
The gross income is reported gradually based on the accomplished 4th year: 20%
percentage of construction. The burden of paying tax is spread Duration of Contract: 4 Years
over the term of the contract.
3rd Step: Determine Income per year
Illustration: We already determined the total income. That is 20 for the whole
Percentage of Completion Method Long- contract. Lastly, we need to know what is the income received by the
term Construction Contract Contractor per year. In most cases, the income would just be
proportional to the work done per year. That means, for example,
2017 2018 30% of work done in the 1st year, means 30% of the total income is
Contract Price P 50,00,000 P 50,00,000 given or earned by the contractor for that year. In other words, for
Cost of Construction (30,000,000) (30,000,000) the 1st year, 30% of 20M is 6M. The contractor earned 6M income for
Gross Income P 20,000,000 P 20,000,000 that year. If you add everything diba? This is still 20M? This is just
broken down according to work done per year.
Multiply by
Percentage of Completion 30%
Income per year = Percentage of work Done for that particular year x
30% P 6,000,000 P 6,000,000
Income
Gross Income to Date 30%
Multiply by Tax Rate 30%
Payment Received by Contractor:
Tax Due P 1,800,000 P 1,800,00
1st year: 30%work done so income earned is 30% of 20M = 6M
2019 02020
2nd year: 30% work done so income earned is 30% of 20M = 6M
Contract Price P 50,00,000 P 50,00,000
3RD year: 20% work done so income earned is 20% of 20M = 4M
Cost of Construction (30,000,000) (30,000,000) 4th year: 20% work done so income is earned 20% of 20M = 4M
Gross Profit P 20,000,000 P 20,000,000
Multiply by 4th Step: Determine Tax on Income per Year
Percentage of Completion 20% What‘s left to do is to tax the income per year. Multiply the income
20% P 4,000,000 P 4,000,000 per year by 30% (Corporate Income Tax Rate). For example the
Gross Income to date 30% 30% income of 1st year is 6M, 30% of 6M is 1.8M. This is the tax per year.
Multiply by Tax Rate P 1,200,000 P 1,200,000 Assuming there are no other expenses to be deducted from taxable
Tax Due income. The income tax per year will total 6M, which is actually 30%
1st step: Determine Income of your total income of 20M. We just broke it down according to
First we must determine the Contract Price and the cost of percentage of work, so that the tax can be paid by installments using
construction to determine the income. These are stated in the long Percentage of
term contract, and these figures represent the whole contract price Completion Method
and the whole cost of construction, not just per year. Then let‘s
subtract Total Contract Price and Cost of Construction, to get the Tax for year = Corporate income tax rate X income per year
income. Then let‘s assume that this is the only income that the
contractor gets. The income is 20 Million for the whole 1st Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 1 st year)
undertaking. 2nd Year: 30% of 6m = 1.8M (Corporate Tax to be paid for 2 nd year)
3rd Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 3 rd year)
Total Contract Price (TCP) – Cost of Construction (CoC) = Income 4th Year: 30% of 4M = 1.2M (Corporate Tax to be paid for 4 th year)

Total Contract Price: 50 Million Understand this principle, because basically, you are just paying the
Cost of Construction: 30 Million tax in proportion to the income that you have received for that year.
TCP – CoC = Income = 20 Million 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
2nd Step: Determine Percentage of Completion the full payment for the year so why pay tax for the whole thing in
The next step would be to determine the percentage of completion. (Sir that same year? The provision gives you this option. If you
did not mention this directly, but he also deemed the duration of understand this, that it can be applicable to Transactions on
the contract as one of the important factors to note). Installment basis of sales of Dealers and even to casual sales of real
and personal property with just some minor differences and
What we need to determine is the percent of completion for that qualifications peculiar to each provision. Just change the income per
year only. In other words, how much work was done for that year. year to installments paid.
So, for the first year how much work was done? Let‘s just say 30
percent. How about the second year? What was the work done? (Retention amount in contracts of construction discussion omitted
Let‘s just say another 30 %. The Percentages of completion are since deemed not relevant)
given in this problem.
Anyway as lawyers, you will only be asked what to use on long term
This is the percent of work done per year in relation to the building Contracts. And your answer should be Percentage of Completion
(100%). This data means that for example, in the 1 st year, 30% of Basis.
the building was constructed. Subsequently, another 30% of the
building was done on the 2nd year. Hence by the 2 nd year, a total of To get the tax due per year, multiply the percentage of completion
60% of the building has already been constructed. Apply by per year to the total contract price then multiply it by the gross profit
analogy to the rest of the years in the example. Therefore, after rate and finally multiply it by the tax rate.
four years, the total would then be 100% percentage of work,
meaning, the building would be done in 4 years. In short: Tax Due = Percentage of Completion x Total Contract Price x
Percentage of Completion: (as provided) Gross Profit Rate x Tax Rate
1st year: 30%
Contract Price P 50,000,000 100% SALES OF REALTY & CASUAL SALES
Less: Costs (30,000,000) (60%)
Gross Profit P 20,000,000 40% Gross Profit Rate

Cumulative Current Gross GP Current Tax Tax Sec. 49 (B) of the NIRC
POC POC Profit Rate GP Rate Du In the case (1) of a casual sale or other casual disposition of personal
e property (other than property of a kind which would properly be
201 30% - 15M 40% 6M 30% 1.8 included in the inventory of the taxpayer if on hand at the close of the
7 M taxable year), for a price exceeding One thousand pesos (PhP1,000),
201 60% 30% 15M 40% 6M 30% 1.8 or (2) of a sale or other disposition of real property, if in either case
8 M the initial payments do not exceed twenty-five percent (25%) of the
selling price, the income may, under the rules and regulations
201 80% 20% 10M 40% 4M 30% 1.2
prescribed by the Secretary of Finance, upon recommendation of the
9 M
Commissioner, be returned on the basis and in the manner above
202 100% 20% 10M 40% 4M 30% 1.2
prescribed in this Section. As used in this Section, the term 'initial
0 M
payments' means the payments received in cash or property other
20M 6M than evidences of indebtedness of the purchaser during the taxable
period in which the sale or other disposition is made.
SALES OF DEALERS IN PERSONAL PROPERTY SALES OF REALTY & CASUAL SALES OF PERSONAL PROPERTY

This provision covers:

1. A casual sale (meaning you don‘t regularly sell real
property) or other casual disposition of personal property
Sec. 49 (A) of the NIRC
(not included in the inventory) for a price exceeding
Sales of Dealers in Personal property. - Under rules and regulations P1,000 or
prescribed by the Secretary of Finance, upon recommendation of the 2. A sale or other disposition of real property
Commissioner, a person who regularly sells or otherwise disposes of
personal property on the installment plan may return as income Provided that the initial payments of either case do not exceed 25%
therefrom in any taxable year that proportion of the installment of the selling price
payments actually received in that year, which the gross profit realized
or to be realized when payment is completed, bears to the total
Initial Payments
contract price.
These refer to the payments received in cash or property (other than
evidence of indebtedness of the buyer) during the taxable year in
Sec. 49 (D) of the NIRC
which the sale is made. It includes the downpayment and installments
Change from Accrual to Installment Basis . - If a taxpayer entitled to received in the year of sale.
the benefits of Subsection (A) elects for any taxable year to report his
taxable income on the installment basis, then in computing his income Illustration:
for the year of change or any subsequent year, amounts actually
For example, the contract of sale for Personal Property provides that
received during any such year on account of sales or other
the ―Selling Price is 1M with a Down Payment of 10%, where 10%
dispositions of property made in any prior year shall not be excluded.
installments are to be paid every year for the next 9 years starting on
the year of sale.‖ Cost is 500k.

SALES OF DEALERS IN PERSONAL PROPERTY Selling Price = 1M

Down Payment = 10% of selling Price = 100k
The provision covers transactions wherein: Installments = 10% of selling Price = 100k
1. The contract has a stipulation for payment in installments
and There is a stipulation for a Down Payment of 100k (10% of 1M).
2. The seller regularly sells personal property on installment However, there is also a stipulation that the 1st installment of 100k
INSTALLMENT METHOD should be paid within the year of sale. Therefore, the Initial Payments
include the Down Payment and the First Installment as these are the
Under the installment method, the taxpayer may report income payments made within the year. Always take into account the
over the several taxable years in which collections are made based installments paid within the year.
on the terms of payment. In this case, the total Initial Basis (Synonymous with Initial Payments)
is 200k which is 20% of the total selling price. Hence, this provision
Generally, the reportable income derived on installment sale is the can still apply because it has not exceeded 25%. If it were otherwise,
proportion of installment collection actually received during the year in we go to deferred sale, which means just one payment of tax. You
relation to the gross profit and contract price. pay tax for the whole thing despite not having received income yet
from the installments.
Formula
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
To find the tax, multiply taxable income with the applicable tax rate. contracts. Mathematically, there are other faster ways to solve but
So if it is corporation, use 30%, if it is individual, use 0%-35%. If it is that still depends on what is given in the problem. So these steps are
sale of shares of stock, then use 15%. 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: We already 4th Step: Determine the tax on income per year:
know that in the particular problem above, the installment basis can Here, we will multiply the applicable tax rate to the income per year.
be applied. So, first we must determine our income. Deduct the cost In this case, this is corporation so multiply 30% to each taxable
of 500K(given in the problem) from the Selling price of 1M. This is the income per year and you will get the tax to be paid per year. For
total income, assuming you did not have any other expenses that can example in the first year, multiply 100k by 30%. Therefore you pay
be deducted besides the cost. In this problem, total income is 500k. 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
Selling Price = 1M 120k, which is 30% of the Total Income/Gross Profit of 500k.
Down Payment = 10% of selling Price = 100k
Installments = 10% of selling Price = 100k Tax on income per year = Taxable Income Per Year x Tax Rate
Cost = 500K
1st year: 100k (30%) = 30k tax due on the first year
Selling Price – Cost = Total Income 2nd – 9th year: 50k (30%) = 15k tax due on the 2nd year
1M – 500k = 500K
SALE OF REAL PROPERTY CONSIDERED CAPITAL ASSET
2nd step: Determine Percentage of Installments Paid per year
This is similar to percentage of work done in long term contracts.

Now we determine the percentage of installments paid within each

year. Why do we do this? Because again, we only pay tax in Sec. 49 (C) of the NIRC
proportion to the income that we receive for that year. The amount in An individual who sells or disposes of real property, considered as
peso of the installment received does not really matter in this problem capital asset, and is otherwise qualified to report the gain therefrom
since the percentages are already given in the contract. under Subsection (B) may pay the capital gains tax in installments
under rules and regulations to be promulgated by the Secretary of
However, if the percentages of Down Payments and Installments are Finance, upon recommendation of the Commissioner.
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 SALES OF REAL PROPERTY CONSIDERED AS CAPITAL ASSET
Selling price. That‘s the percentage.
Illustration: Real Property is sold for 1Million as Selling Price. There is
For the first year, we already know that we take into account the a stipulation that it shall be paid in 20% installment per year, for 5
Down payment and the 1st installment. So that means we actually years.
received 20% of the total selling price for that year. For the rest of Cost = 500k
the years, there is payment of 10%. So basically, we receive 100k for Zonal Value = 500k
the succeeding years after the year of sale. This is the case since Assessed Value = 700k
there is nothing in the problem that states that there are other
payments made within the 2nd year, 3rd year, etc. Steps:
We determine if the provisions are applicable. 20% is the initial
1st year: 10% +10% = 20% payment. Which means that installment basis for paying tax is
2nd year: 10% applicable because it less than or equal to 25%. If the given in
3rd year: 10% the problem is amount in Peso of the initial payment, compute
4th year: 10% for the percentage by following the prior example in sale of
And so on and so forth until the 9th year personal property.

3rd Step: Determine Taxable Income per year Most importantly in this case, we do not anymore subtract the
So now, we determine the income you have received each year, in Cost from the Selling Price because Taxable Income in this case
relation to the total income. For example, if we get 10% of the total is not based on Income/Gross Profit. What is applicable here
selling price through installment, it also follows that we earn 10% of is Capital Gains Tax, which is 6% of the Zonal Value, Assessed
the income. Because for 1M income, we get 500k profit. In other Value, or Gross Selling Price, whichever is higher.
words, we ask the question again, how much of the total income have
you received in that particular year? We multiply the percentage of
We determine the total CG tax to be paid which is 6% of Gross
the installment we received by the total income, which is 500k in this
selling price, because in this case, it is the highest.
case. This is like multiplying the percentage of the amount of work
6% of 1M = 60k
done, to the total income in long term contracts.

Hence, for the 1st year, we received 100k as income from the 200k Multiply the installment paid in percentage to the Total CGT. The
initial payments paid. On the 2nd year, we have 50k income, for the result would be the CGT payable for the year. In this case, All
100k installment. If you add all these, this is still 500k total income. 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
1st year: 20% of 500k = 100k year. It‘s just like dividing the Total CGT by 5 equal installments.
2nd year: 10% of 500k = 50k In this case, 12k is the tax payable for each year since all are
3rd year: 10% of 500k = 50k equal 20% installments.
4th year: 10% of 500k = 50k 20% (60k) = 12k Tax payable for each of the 5 years
5th year: 10% of 500k = 50k
6th year: 10% of 500k = 50k What if the installments are not uniform or equal per year? First
7th year: 10% of 500k = 50k get the percentage of the payments in relation to the Gross
8th year: 10% of 500k = 50k selling Price, then multiply it to the Total CGT. You will then
9th year: 10% of 500k = 50k 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

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 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. The controlling interest of ―more than 50%‖ contemplated under the
tax code for tax free changes refer to 51% and not 50%+1.
TAX FREE EXCHANGE
Example: 10 people, named A1 to A10, transferred real property
X FREE EXCHANG worth 1 million pesos to X corporation in exchange for 51% of the
TAX FREE EXCHANGE shares of X corporation. So then, the 10 people will gain control over
the corporation because under the Tax code, Control is ownership of
As a general rule Capital Gains are taxable and Losses are allowed as 51% of the equity interest of the company. Are the transfers tax free?
deductions. But there are losses not allowed as deductions and there
are gains not subject to tax.

Capital Gains not subject to tax

Two instances where there is Tax Free Exchange
1. Merger or Consolidation
2. Exchange of Property for Control

TAX FREE EXCHANGE IN MERGER AND CONSOLIDATION

Determine first:
Merger: One corporation is subsumed by the other
Example: X and Y merge, the resulting company is either X or Y
1. If five or less of the ten people who transferred the property
Consolidation: The resulting company is a brand new company accounts for 51% of the shares of the company. Then the
Example: If X and Y consolidate, the resulting Corporation would be Z. transfers are tax free.

Take note that in a merger or consolidation there is always a Merger Example:

or Consolidation Plan. A1 has 10 shares
A6 has 10 shares
Illustration: A3 has 10 shares
X and Y merged and Y is the surviving Corporation. X happens to own A7 has 10 shares
a parcel of land worth 1M pesos which it will transfer to Y because of A5 has 11 shares
the merger. Y owns shares of stock which are not newly issued, which
it will give to the shareholders of X. The total is 51 shares which is 51% of 100 total shares of
Corporation X. If just one person accounts for 51%, then it is
Normally, the transfer of real property is subject to 6% Capital gains tax exempt.
tax and the transfer of shares would be subject to 15% capital gains
tax but these transactions are not subject to capital gains tax under 2. If we need to account for more than five people in order to
these situations. reach 51% shares. Then the transfers are still subject to
capital gains tax.

Example:
a. A1 has 5 shares
b. A6 has 5 shares
c. A3 has 10 shares
 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.