TAXATION 1 Transcripts | Atty. KMA | A.Y.

2020 - 2021

profits and the like. If there is one word that

you will keep on reading and hearing in our
MODULE 3.1
lectures, it’s the word “profit” and “gain” which
INCOME TAX basically refers to income yield. In short, if a
particular transaction generates any profit
simply because it's a loss, then it follows that
Definition there is no income tax liability because what we
subject to tax here is your profit. Kung binisay-
● A tax on yearly profits arising from on nato ni ang profit, ginansya na on top of your
property, professions, trades or puhunan. Income tax therefore is a tax on your
offices, or tax on a person’s income, income, but when we talk of income, this could
emoluments, profits and the like. either be gross or net, realized in one taxable
year. For example, we rendered a service but
● A tax on income, whether gross or
we haven’t been paid yet, do I have taxable
net, realized in one taxable year.
income or do I need to receive the payment
before I will recognize taxable income? This is
something we will discuss as we move along in
We will now tackle the overview of income
this module.
taxation, so the purpose of this module is to
orient you on the basic terms, underlying
principles as well as the elements when it
“Sir, what do you mean by income whether
comes to income taxation. In short, this time
gross or net?” When we say income, if it’s just
around, we will focus on the one particular item
on top of your capital, there is income there and
which is covered under Taxation 1 and that is
what you usually take into consideration are
INCOME TAX or INCOME TAXATION. In this
direct expenses directly related to the
module, I expect you to be familiar already with
generation of that income. Take note, there are
the distinctions on gross income and net income,
other indirect or fixed expenses that are not
the meaning of capital asset and ordinary asset
necessarily directly related to the generation of
as we will be discussing later on. The terms or
the income, but still, you pay. These are the
the topics that I aim to discuss in this module
usual deductions that the taxpayer is trying to
are all encompassing which means these topics
claim in order to arrive at that net figure known
usually apply to individual taxpayers as well as
as the net income. When it comes to income
corporate taxpayers applicable for both types of
taxation, there are income tax rates that are
taxpayers. That’s why this is quite important and
subject to tax the gross and there are also
please do try to remember these topics until the
income tax rates which subjects to tax the net.
very end of your study in income taxation.
Later on, we will have a discussion on how to
compute tax income and how to compute net
income.
Let’s proceed on an overview of income tax. Of
course, we go first to the definition of income
tax, which is a tax on yearly profits arising
What’s the nature of income tax?
from property, professions, trades or offices,
or tax on a person’s income, emoluments, “Income tax is source blind”

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

1
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

● Meaning to say generally, so long as Meaning to say, so long

you rate the income whether coming as there is no final consumption,
from legal or illegal means, that would the business tax
be taxable. If you generate an income may be shifted forward.
from peddling of drugs, or from Ofc it depends upon the tax
prostitution, is that income taxable? Yes. planning of the businessmen.
Are you required to declare such But income tax is different. This
income? Yes. Because again, income is a tax on your income or the
tax is source blind. Ofc, way taw sa income earned by the taxpayer,
saktong pangutok nga mu declare from meaning to say this is a
sales in drugs. That’s why we have reduction. You give a portion of
several money laundering schemes or your income to the government
mechanisms just to make it appeal that because you are privileged to
this money from corruption for example earn that income - you share in
is a legitimate source of income. public expenses that's why the
Though, kung ako, nangawat kog tax goes to the general fund.
kwarta sa imo, pwede ba ko ma subject
The employees earn compensation but the
to income tax? The answer is Yes.
employer who is paying to the BIR.
nangurakot ka, pwede ba ka ma subject
sa income tax? Yes. and later on we will
discuss what’s the underlying principle
on that rule. TAKE NOTE: Under Employee-employer
relationship, that's what we call the practice of
withholding. Practice of withholding where
withhold from the salary of the employee the
Income tax is:
income tax portion and the employer will submit
- National tax (imposed under teh it to BIR.
NIRC and collected by BIR )

- Excise tax (tax on privilege to

If the employee qualifies as substituted filing, if
earn an income. Ofc if you did
ha because not all circumstances maqualify si
not earn any income whether
employee, then the employee need not do filing
from employment or business,
submissions to the BIR. The filing or remittance
then it follows that you dont
made by the employer to the BIR is considered
have any income tax liability.
compliance already. But the burden thereof falls
- Direct tax - (one who bears the on the employee. Ngano man? Ang nakuhaan
burden of paying the tax is the sa tax si employee man, katong tax na gibayad
income earner. Unlike business ni employer to the BIR is a deductible expense
tax like VAT or OPT, pwede i on the side of the employer? The answer is no
shift to the final consumer. because that tax pertains to the tax from the
Kaning mga busines tax man salary of the employee. It is not an expense or
gud class, this is describe as not an outflow on the part of the employer.
tax on consumption. Ginhimo lang si employer na agent. This is

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

2
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

pursuant to the Principles of Sound - Amended Revenue Act of 1913

Administrative Feasibility. Lisod man kung ang
Act No. 2833
1 company may 5, 000 na employees, mag
tagsa tagsa sila file to the BIR, mayo lang na - Very first tax law enacted by the Phil.
kung may 100 mag file through voluntary filing Legislature before the Japanese
not to mention dili na well-versed when it comes invasion
to tax rules. To make it easy to monitor, to track,
the employer will be the one to file, to prepare CA No. 466
and etc. If there are any mis-declarations or - National Internal Revenue Code of 1939
any omissions, the BIR will go first to the
employer because the employer is the agent of - 1st ever codified; before it was codified
the BIR. Of course, ultimately the BIR can go to there were many issuances and
the employee. But admin feasibility cause by decisions by the then Collector [now
defeat because asa man makakwarta or maka Commissioner], SC and even the US
raise revenue si BIR, by going after individually SC w/c were deemed valid
the employees or by going after the employer
PD No. 1158 (NIRC of 1977); amended by
who could be financially or fiscally capable.
PD NO. 1994 (NIRC of 1986)
These are some mechanisms employed when it
comes to income tax collection. - Marcos era where he issued several
PDs on taxation

- But the NIRC 1986 was issued already

General Tax - the amount generated from
by Aquino, C.
income taxation goes to the general funds of the
government or disbursements for public purpose. RA 8424 amended by RA 9337 (NIRC of
1997); RA 10963 (2018 TRAIN Law); RA ____
(CREATE)
Historical Background of Philippine Income
- 9337 was more on the imposition and
Taxation
expansion of the coverage of the VAT

- Major overhaul was only recently

Our tax code is heavily based on the US heavily amended with TRAIN law.
Internal Revenue Code.
So, this is under tax reform under package
TIMELINE 1. TRAIN stands for Tax Reform for
US Revenue Act of 1913 Acceleration and Inclusion and generally,
the original proposition, TRAIN will only
- When we are occupied by the US; cover individual income taxation. But, if you
- Administered and enforced by internal will read through that, there were insertions
revenue officers of the Phil. Gov. pertaining not only to individual income
taxation but also to excise tax, even to
Revenue Act of 1916 & War Revenue Act
some extent, VAT.
of 1917

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

3
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

This year, hopefully, - because this is Are the provisions of NIRC usually
deemed helpful to small and medium based in the US? YES.
enterprises adversely affect the pandemic –
Kanang mga provision on minimum income
the President would sign the CREATE law.
tax, you will meet that later on Withholding
Currently, as of Feb 4, 2021, the bill has
tax—concept of creditable and concept of final
already passed the bicameral committee.
withholding—all of these are already contained
The final version was already submitted to in the US internal revenue code which somehow,
the president for his signature. So, we are we’ve copied. So, again, let’s wait and see for
just waiting for the RA number. the RA number for the create (?) law.

If you look at it, if there are many changes Income and Capital, distinguished.
in TRAIN law, more changes are coming in
in the CREATE bill. There were many What is the difference between income, which is
provisions in the in the bicameral provision being subjected to income tax and a capital
that are lifted lang sa Senate version, like: which is not subject to income tax?
changing the corporate tax rate, removing
When we talk of income, it means return on
the accumulated earning tax. At this point,
capital. So, if this is your capital and if your
you cannot yet appreciate this. capital earns this much income, then what will
Under the CREATE law, there is a new be subjected to income tax is only this portion,
exceeding the amount or exceeding the amount
section amended. It’s not just a line
of your capital. And usually, in the computation
amendment or a particular amendment to
of income, this capital of yours is termed as your
existing provisions of NIRC of 1997. Instead, cost of sales, cost of goods sold, or cost of
there’s an entirely new paragraph pertaining service—these are the terms of the capital
to grant of incentives, which our law maker that’s why it is called a direct deduction to the
hopes to attract more foreign investors. gross amount or income flow that you receive.

Personally, I am excited with the statement What I’m trying to say is that the capital that you
of Congressman Salceda who is the have, you will spend that for the direct expenses
Congressman of ways and means or direct cost. And eventually, your capital will
committee because he is expecting trillions be used up in incurring this cost of sales, cost of
of investments to pour in in the form of service, or this direct cost or expenses including
foreign investments because of this the indirect cost or indirect expenses which is
why this will have to be taken out in your gross
provision of the CREATE law pertaining to
sales or receipts in order to arrive at your gross
available incentives for investors. Let’s see
income or your net income which will be then
in the coming years. Perhaps, this may be a
subjected to tax.
source of your practice.
So, income again is the return on capital. This is
That’s a quick background of Philippine
described as flow or service of wealth, fruit of
Income Taxation.
the tree while the capital is the tree itself or the

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

4
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

source of profit. Which is why you do not subject the earner of the income, if you are an individual
the tree or the source of profit to income tax. or if you are a corporate tax payer.

Income is also described as the money flowing I've already mentioned the passive income. It's
to the taxpayer within a specified time, whether the profit or gain realized/generated that do not
payment for services, interest, or profit from require any active action, pursuit, or material
investment. Later on, we will be discussing the participation from the taxpayer, or by just a
different types of income because there is mere ownership of an asset. Like you own a
income that you can earn if “mangamot gyud piece of land. Wala kay gibuhat sa piece of land.
ka”. You work, you sell—and this are called You just sell it for a profit. Is there an income
ordinary income or regular income. However, there? The answer is YES. Pag palit nimo
there are also income that you earn by using nganha, you only paid Php 500,000. You sell it
your money to work for you and this is what the for a selling price of 1M. So kana pa lang, there
famous investors have been saying—you don’t is already a profit of Php 500,000. Is it subject to
need to do all the work, let your money do all income tax? The answer is YES. But will it be
the work. So, it means to day that if it’s already subject to the ordinary or regular income tax?
your money doing the work for you, simply DEPENDE. Because if you are not into ordinary
because you’ve invested it in a ‘mutual’ fund, for buying and selling of land or lot then pwede ma
example, or you’ve invested it in the stocks consider na siya as capital gain lang.
where it could earn profit. That could be
considered still as income but not anymore When we say capital gain, which is somehow
ordinary. That could be considered as passive related to passive income, this is realized from
income. Meaning to say, you don't exercise isolated or casual sale of the so-called
active participation in the generation thereof. capital asset. And we will distinguish later on
Is it still subject to income tax? The answer is capital asset from ordinary asset.
YES. But, the manner of collecting these tax
from ordinary income from your tax in the ● Ordinary - Actively participating in
passive income is a bit different and we will the generation of the income.
distinguish that later on. Hope we're clear on ● Passive - No action but you still earn
the difference of capital and income. because in this type of income, your
money is working for you in an
Talking about ordinary or regular income, this investment fund, etc.
is what I mentioned awhile ago. This is a profit ● Capital Gain - Gain you earned by
or gain realized from the ordinary course of owning the capital asset (Park that for
trade or business, exercise of profession or awhile, we will discuss and distinguish
employment. In short, that is your bread and later on from a capital asset to an
butter day in and day out activity. You earn the ordinary asset)
income.
Gross Income and Net Income are taxable
When we talk about ordinary or regular income, income. What's the difference? Although later
class, it is subject to what we call as the on I will show to you the formula, but gross
ordinary or regular income tax rates. The income generally takes into consideration
actual rate will just differ depending on who is lang the sales returns, allowances,

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

5
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

discounts, and direct cost of goods sold or What’s the difference between gross sales and
cost of services depending on taxpayer receipts?
classification as a reduction to your Gross
- Gross sales is used more in trading or
Sales/Receipts. So again, the cost of goods
manufacturing. Whereas when you are
sold or the cost of sales, these are the direct
into sale of service, you use the term
cost or expenses incurred in the generation of
gross receipts.
your income.
- But these differences will not actually
“Sir, pwede example?” matter when we look at the income tax
return because in income tax return, it is
Example:
already all encompassing -- gross
- You’re into sale of siopao sales/receipt/etc. Technically, in income
tax return, the difference need not be
- You manufacture the siopao identified. Determining the difference
- Direct cost/expenses in between gross sales and gross receipts
manufacturing: is only for study purposes.

- labor cost - salary for

your baker From your gross income, once you get the
- Materials and gross income by deducting sales returns,
ingredients allowances, discounts, and cost of goods sold
or cost of services, you can deduct, thereafter
- In selling siopao the allowable deductions. When these allowable
deductions are deducted from your gross
- Direct cost in selling
income, that is when you get the taxable or net
- Salary of the sales income.
person

- Display area for siopao

For taxation purposes, what is the term
- The direct costs above are the cost of commonly used?
goods sold or the cost of service. It
- It is taxable income.
could be the cost of labor, the cost of
materials, and even a portion of your - But there are some books which use net
fixed overhead that is directly income for accounting purposes. For
attributable to your activity, may it be accounting, the bottom figure, after
manufacturing, trading or service. If you making deductions of all the expenses,
deduct that from your gross sales or it is termed as net income. For quite
receipts, then the result is your gross some time also, Tax Code refers to
income. taxable income as net income. But
recently, they tried to distinguish the
income for taxation purposes and the
income for accounting purposes

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

6
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

because there are different underlying 3 Different systems of taxation:

principles in computing these income for
taxation and the income for accounting. 1) Global Tax System

Bear in mind that they are just the same, l Incomes are not classified or categorized
taxable income or net income. But of course in but grouped together into one taxable
our examination and even oral recitations, I income
would be more delighted if you are going to use
the term “taxable income” referring to the l Single or uniform tax is applicable to all
bottom figure after deducting in the allowable income
deductions from the gross income.
l Usually applies to corporation
Sir, tanan ba taxpayer earning income maka
2) Schedular Tax System
deduct ug allowable deduction? Not necessarily.
Because naa may taxpayers nga conditional
l Incomes are classified and categorized
ang deduction like employees, you cannot
into different taxable incomes
deduct your expenses while on employment;
you cannot deduct cost of your food; rent of l Tax rates vary depending on the
your house, and there is a reason thereto. Naa classification or category of taxable
lang kay ma deduct if you are an employee income
special deductions lang ni, specified under the
law kaning mga contributions, mandatory l Usually applies to individuals
contributions to the SSS, contributions of the
employee to philhealth, contributions of the 3) Semi Schedular or Semi-global Tax System
employee to pag-ibig. These are deductible.
Meaning, ang allowable deduction niya is limited l Incomes are categorized into ordinary or
lang to some extent. passive.

l Those income not subjected to Final Tax

are grouped and after allowable
Two kinds of deduction: deductions, a single tax rate (or
schedular rate) is used depending on
1) Itemized deduction the taxpayer while different rates are
applied for income subject to final tax.
2) Optional standard deduction(OSD)
l THIS IS ADOPTED IN THE PHILIPPINES.

ATTY: That also contributes to the complication

Systems of taxation of our tax system. Pero gi remedy na na nila
recently with the amendment of the train law
(Nigawas ni sa bar exam during the 90’s gipa
and with the amendment of the CREATE. Under
examine ang difference systems of taxation)
train law, with the aim to simplify these rates
gina uniform na na nila, like estate tax 6%
nalang, donor’s tax 6% nalang sad, ang rate

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

7
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

although pareha lang but there are some in the CREATE Bill is fixed, it is
conditions that differ that’s more on transfer considered proportional because as the
taxation. tax base increases, the tax liability
increases.

The Distinctions between these three

SCHEDULAR TAX SYSTEM
systems:
● Incomes are classified and categorized
When we talk of global tax system, in this case into different taxable incomes
the income are some sort of placed in one
basket, and all these income is being subjected ● Tax rates vary depending on the
to a single or uniform tax rate. Incomes classification or category of taxable
therefore are not classified or categorized but income
grouped together into one taxable income and ● Usually applies to individuals
there is a single or uniform tax rate. This is
usually applicable to corporations.
NOTE: For individuals, their income is typically
categorized/distinguished if it is compensation
For corporations, let’s say for example you income, business income, or professional
organize a corporation for business as a rule income. This is because for compensation
usually except for non-profit which in the first income earners, they cannot deduct for
place is exempt from taxation under certain expenses in relation to their employment other
conditions but for corporation there’s no than the mandatory contributions.
distinction. All income earned by the
corporations especially in it’s ordinary trade or
business will just have to be added and will be NOTE: Check schedule of rates for there are
multiplied by a singular or a uniform rate of 30% different tax rates for different ranges of tax
but once the CREATE bill becomes a law, it will bases. Each range of tax bases there is a
be reduced to 25% effective July 2020 or 20% corresponding tax formula.
effective July 2020 under certain conditions if
your business is maybe considered as medium
small enterprise. There is a threshold for both EXAMPLE: Schedular Tax System for
assets and income, separately. Compensation Income Earners - Individual

(Caveat: Atty. KMA did not provide for the

following images/tables. This was the student’s
Is it not a violation to the Rule that Congress own initiative. It won’t hurt to do your own
must evolve a progressive system of research to confirm.)
taxation?

- This Constitutional provision is just

DIRECTORY. What is necessary is Schedule to be used if you are computing for
PROPORTIONAL. And even if the rate values prior to 2018.

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

8
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Source: BIR Form 1700

(https://www.bir.gov.ph/images/bir_files/old_files
/pdf/82310BIR%20Form%201700.pdf)

Source:
https://taxsummaries.pwc.com/philippines/individ
Schedule to be used if you are computing for ual/taxes-on-personal-income
values after 2018 (this is after the TRAIN Law’s
effectivity).

NOTE: Under the TRAIN Law, if you are earning

business or professional income, you have the
option not to be taxed at the schedular rate, but
to be taxed at a fixed rate of 8% of your gross
sales or receipts in excess of 250,000 pesos.

SEMI-SCHEDULAR or SEMI-GLOBAL TAX

SYSTEM

● Incomes are categorized into ordinary

or passive.

● Those income not subjected to Final

Tax are grouped and after allowable
Source:
deductions, a single tax rate (for
https://taxsummaries.pwc.com/philippines/individ
schedular rate) is used depending on
ual/taxes-on-personal-income
the taxpayer while different rates are
applied for income subject to Final Tax.

● THIS IS ADOPTED IN THE

PHILIPPINES.

As I mentioned a while ago, we categorize first...

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

9
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

We categorize first the income whether Ordinary, you’re going to construct a building and
Capital, or Passive. In each of these you use that building as your factory
classification there is a different method of because in a sense it becomes an
collection and different applicable tax rates. In ordinary asset.
relation to Capital Gains I’ve mention it is a
gained earned from the sale of capital asset.
What then is a Capital Asset is defined under Ordinary Asset are those that cannot be
the tax code and you need to memorize this classified as Capital Asset. In short if you are
because this should form part on your core or going to dissect the definition of an ordinary
foundation in taxation. I tell you even in tax 2 asset all you need to do is to reverse the
you will have to ascertain if these asset is definition of the capital asset positively.
capital or ordinary asset, especially class in Meaning to say, ordinary asset are those
determining whether that transaction subject or that form part of the inventory in the end of
not to business tax. the year, real properties primarily held for
sale, personal properties subjected to
depreciation, and real properties used in
So when we talk of Capital Asset, this refers to trade and business, so those are considered
roughly, (although the specific definition is in the to be ordinary asset.
tax code but I simplified it on this manner para
easier to understand) capital asset, (negative
definition) Why do we need to distinguish? - Because,
again, if your gain is generated from the sale of
● Does not form part on the inventory, not
your capital asset then that is subject
primal
appropriately to capital gains tax, but if your
● Real Properties NOT primarily held for gains is from the sale of ordinary state, then that
sale – Meaning dili ka real estate is subject to ordinary or regular income tax even
developer, dili ka real estate seller business tax.

● Properties NOT subjected to

depreciation – this pertains more to
Note: balik-balikon jud nako ni nga mga
personal properties.
distinction. (Income v. tax / Ordinary Income v.
○ Ex. Ang sakyanan nimo, you Capital gains v. Passive income/ Global tax
used it for personal purpose, system v. Schedular tax system v. Semi-
you do not record it in the books schedular tax system/ Capital Asset v. Ordinary
of the company and you not Asset).
subject it to depreciation, so
that’s capital asset

● Real properties NOT used in trade or

business – meaning to say residential More importantly we’ve distinguished the capital
house, wala na nimo gamita sa trade asset from an ordinary asset.
and business nimo, then that remains to
be a capital asset. But it’s different if

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

10
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Balik-balikon gyud ni nako class na distinction interest of you pautang, or bank, their interest is
kay later on ma discuss man ta about Capital an ordinary income or regular income. But if we
Gain. And necessary that we know to deposit in a bank, it’s not our bread and butter,
distinguish a capital asset from an ordinary and we just deposited for investment purposes
asset. that’s more of passive income. What I’m trying
to point out here is that, there could be specific
types of income which can be tagged as regular
or ordinary income or can be tagged as passive
income depending on how the income was
generated. It’s primarily engaged in the
generation thereof. Meaning to say the taxpayer
is organized to lend money with interest or
registered to sale franchises, trademarks or
royalties, then that’s become ordinary. But if it's
just an isolated transaction without the active
participation of the taxpayer then most likely
that’s passive income.

Going back to compensation gains from

ordinary assets, interest, rents, royalties
(ordinary or passive).
Going back to the three types of income under
the NIRC Income Tax. As what I’ve mentioned
here on this slide we have the so called an CGGIRDAPPP
Ordinary or Regular Income which is (choppy)
C- Compensation
of course ordinary or regular tax rate depending
if you are individual or corporate. We also have G- Gains
Income from Casual (Isolated) Sales, this is
relation to Capital Gain. And we have the G- Gross Income
Passive Income, this refers to income realized I- Interest
without your active participation like your
interest income in your bank deposit, income R- Royalties
from your investment being managed by a
D- Dividends
manager, etc.
A- Annuities

P- Prizes and Winnings

When we talk of Ordinary or Regular Income
this is composed of CGIRDAP which stands for P- Pensions
Compensation income employee, Gains from
P- Partner’s distributive share in a general
sale of ordinary asset, Interest of you deposit
professional partnership
and that is your main line of business like

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

11
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

separately the passive income earned by

individual taxpayer and the passive income
earned by a corporate taxpayer. But it’s not
really more of a discussion, it’s more of
familiarization of the applicable rates on these
Royalties enumerated passive income. Mao na gahuwat
It covers intellectual property rights. It is ko sa create kay I tell you there’s quite a lot of
passive (if one time invention); active changes or amendments, not a lot, but siguro
(franchising). naay one or two or three amendments on
passive income. So after overview, ang unahon
natog discuss basically would be indiviual
income taxation - ordinary regular income,
Dividends
and then we move on to passive income of
Usually treated as passive but pwede siya individual and then we move on to income
ordinary active income if you are a holding from casual or isolated sales.
or investing company.

Kani income from casual or isolated sales

It is important to differentiate between passive class, the rules here applies both to individual or
income or ordinary income because there is a corporate taxpayer. When we say income from
different manner of collecting tax and applicable casual or isolated sale, that’s basically from
tax rates. capital gains noh. From sale of capital asset.
And when we talk about sale of capital asset,
there are three major types of capital assets
There are some specific types of incomes that or classification of capital assets in the NIRC:
may be considered as ordinary income or
1. Real Property
regular income or passive income depending on
the situation. 2. Shares of stocks

3. Other personal properties

And for each type of these types of capital

assets, the capital gains tax - we call it the CGT.
Then it’s very easy for you class to determine
The Capital Gains Tax applicable also differs
how much is the applicable rate. Okay? So
and the rule also differs. It’s just that kani
again, for ordinary or regular income, the tax
personal properties, other personal properties,
rate varies on the type of taxpayer and the type
this is more applicable to individual taxpayer.
of income earned. And we will have more
Dili kaayo applicable to corporate taxpayer
specific discussion on that. The passive income
because wala may you know, juridical
also, the tax rate depends on income earners.
personality ra man si corporate taxpayer. So
So we will have a separate discussion also for
presumption, if you’re a coporation, you use that
passive income. So both individual and
asset for business purpose. Which is the very
corporate taxpayer, mejo pare pareha ug
purpose why you were created in the very first
passive income class but I’ll be discussing

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

12
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

place. So anyhow, we will have a deeper have deeper understanding of this withholding
discussion on that right after individual taxation, or pay as you earn system right after we’ve
before we start corporate income taxation. discussed individual and corporate income
taxation. When we will talk na about withholding
taxes or withholding tax 101.
Now the next thing that you need to familiarize
with is the mode of collection of these
income taxes. Okay? When we say mode of Or I think before corporate _____ (sorry dili ko
collection, we are not talking about tax type maklaro unsa iya gisulti), let me check on the
class, but we are talking about the manner by videos that I’ve prepared.
which the tax is being collected by the
government. Okay? The very first and common
manner mode of collection is self assessment Well then of course, final withholding, from the
and payment. The pay as you file system. word final, it means that the amount collected by
Meaning to say, the one who computes and the withholding agent is considered full in final
ascertains the tax liability is the taxpayer and payment of the…
the taxpayer remits it to the BIR voluntarily.
Then we also have withholding. Withholding,
ang tax nga gicollect ana niya is withholding
tax. Take note, withholding tax is NOT an
income tax type or a tax type, rather its a mere
description or a descriptive title of taxes that
Usually the final withholding, this is applied to
may be collected through withholding. Alright?
passive income or income earnest by non-
And that system is what we call pay as you
resident persons that’s usually being subjected
earn system. There are 2 type of withholding:
to final withholding.
1. Creditable Withholding

2. Final Withholding
Q: What will oblige the agent to withhold?
When we say creditable withholding, from the
A: This is because if the agent fails to withhold,
word credit, it means to say that the tax withheld
the consequence is he cannot claim that out
by the withholding agent, kay ang gisugo nga
flow as expense or as deduction to the
muwithhold ni government kay si withholding
withholding agent’s own income and
agent man which is usually the payor or the
automatically that leads to deficiency tax liability
client or the customer. From the word credit,
if gi disallow to iyang gi claim na expense
meaning to say the withholding tax that was
because there was no withholding.
collected by the withholding agent is deemed
lang as advanced payment of the total tax that
will have to be paid by the income earner. Once
Another one is the Deficiency of Assessment
the total tax liability has been computed nga
and Payment or Pay upon Demand, this is
bayrunon ni income earner, then ang kato nga
where the BIR comes in because this is self
income tac nga gicollect in advance will just be
assessment so in short si taxpayers ang mag
a deduction to the total tax liability. So we will

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

13
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

buot ug compute. So if si taxpayer is not

knowledgeable in Taxation, most likely masayop
MODULE 3.2
gyud na.

General Principles of Income Taxation

Q: Can the BIR check that?
● Resident Citizen (RC) - Taxable on all
A: The answer is YES. Mao na, na naa tay
income derived from sources within and
classification nga large taxpayer because
without (outside the Philippines.
following admin feasibility, ang unahon ug
review or monitor ni BIR kung sakto ba ang ● Non-Resident Citizen (NRC) - Taxable
computation and tax compliance sa kaning mga only on incomes derived from sources
large taxpayers because they are paying large within the Philippines.
amounts of taxes.
● Alien Individual - Whether a resident
or not of the Philippines, is taxable only
on income derived from sources within
If ever there are noted deficiencies or omissions
the Philippines.
in the computation or compliance, that’s when
the Deficiency Assessment of the BIR and the ● Domestic Corporation - Taxable on all
Demand of Payment comes in. Through a income derived from sources within and
formal assessment or audit being conducted by without (outside) the Philippines.
the Bureau.
● Foreign Corporation - Whether
engaged or not in trade or business of
the Philippines, is taxable only on
BIR in short ascertains the amount of tax liability
income derived from sources within the
vs. actual tax paid. Demand to pay shall then be
Philippines.
made for any tax deficiencies. Usually kanang
mahitabo is 1) self assessment and payment. ● Overseas Contract Worker (OCW) -
Not all transactions are subject to withholding, Taxable only on income from sources
naa lang specific transactions and specific type within the Philippines. A seafarer who is
of taxpayers na required to withhold, na a citizen of the Philippines and who
required to be subjected to withholding. That is receives compensation for services
why we will have a separate discussion on rendered abroad as a member of the
withholding tax 101, so I can discuss with you complement of a vessel engaged
what these transactions are and who these exclusively in international trade shall
taxpayers are required not withhold under be treated as an overseas contract
specified circumstances. Ultimately, BIR will worker.
review that and when makita ni BIR ang sayop,
that is when deficiency assessment and
payment comes in. We will move on to the continuation of our
discussion which is the income tax overview.
We will discuss the general principles of income
tax and hopefully we can move on and discuss

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

14
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

the inclusions, just a quick overview of the rates applicable for each of these classes of
inclusions of the gross income, as well as the taxpayers.
exclusions thereof, and the overview of the
meaning of “deduction.”
In relation to individual taxpayers, we have the
Overseas Contract Workers or “OCW”. When
First, the general principles of income taxation. it comes to “OCW” or seafarers, they are
This is expressly provided under the NIRC, if I’m considered citizens of the Philippines and they
not mistaken, this is provided under Section 23 receive compensation for services rendered
of the NICR which specifically provides the abroad as a member of the complement of a
general classifications of income taxpayers and vessel engaged exclusively in international trade
taxabilities of these income taxpayers. and shall be treated as an overseas contract
worker. Meaning to say, “cruise ship” or
“seafarer”, that’s exclusively an international
For individual taxpayers, basically, they are route, the compensation earned on that
classified into resident-citizens, non-resident particular assignment of the seafarer is
citizens, and alien individuals. When we focus deemed earned outside of the country. It
on individual taxation, it’s then where we will shall not be taxed here in the Philippines
distinguish and define who a resident citizen because, as a rule for overseas contract
and non-resident citizen is. But for now, please workers, they are only taxable on income from
remember that if your classification is a sources within the Philippines. It’s a different
resident citizen or “RC”, you are taxable on story if you’re a seaman in an international
all your income derived from sources within vessel, not a local vessel. Of course, if local
and outside the Philippines. You are taxable vessel or inter-island, taxable gyud ka for
for all your world-wide income. Whereas, if you income earned within the Philippines. If it is an
are a non-resident citizen or an alien individual, international vessel, whatever income you
you are only taxable for the income you’ve earned on that activity is considered earned
generated or derived from sources within the outside and not taxable in the Philippines.
Philippines. Take note, however, when we talk
about “alien individual”, we further classify
that into two categories: a (1) resident alien But if ipadala nana nimo dire sa Pilipinas, mao
and (2) non-resident alien. For taxation nana ang rason ngano i-exempt mo. because i
purposes, a non-resident alien is further think sa labor laws na especially sauna mga
subclassified into two: (1) non-resident alien 1990s or early 2000, naay specific dako nga
engaged in trade or business, and (2) non- percentage out of that income nga kinahanglan
resident alien not engaged in trade or ipadala sa pilipinas. So now, when that income
business. We need to distinguish or determine is sent here in the Philippines, that’s beneficial
the classification of these taxpayers because we to the country. And if that income is invested
need to determine the situs of the income or here in the Philippines, that time, that income is
their taxability. More importantly, we need to deemed earned na within the Philippines so
distinguish or determine their classification taxable na or subject na to income tax.
because individuals are categorized into
different categories and there are different tax

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

15
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Now for corporate tax payers, generally, it’s common features between individual income tax
classified into two: and corporate income tax.

- Domestic corporation (similar to a

resident citizen is a juridical entity born
For individual income taxation, it is more of
or registered or incorporated here in the
schedular system of taxation. This is more of
Phils. Which is why it is taxable for
different characterization and different rates are
income earned or derived from sources
made applicable in each of this category of
within or without. Because domestic
income. Unlike in a global of concept of taxation,
corp let’s just say is naghatag ug
so long as musulod na sha sa definition of
kinabuhi ana niya is the Philippines).
income and you placed it in category only, one
tax rate for that which is quite common for
corporate income taxation. Basta musulod na
- Foreign corporation ( classified either
sha sa ordinary or regular income, one tax rate
resident foreign or non resident foreign
will be applied.
corp. Similar to non resident citizens
and alien individual, they are only
taxable for the income derived from
For individual income taxation, tax rates are
sources within the Phils or inside the
progressive in character. Because progressivity
Phil jurisdiction.
is more applicable to the tax for compensation
income earner as well as business or
professional income earner and there is a
Same from individual tax payers, you need to
specific schedule ranging from 0-35%
distinguished if it is domestic or foreign corp.
diffewrential lang sila sa taxbase or in the
Because other than determining the situs of the
computation of taxbase. But nonetheless its
income earned, the tax rates are also different.
progressive in character because as the tax
Well for corporate entities the tax rates are mor
base will increase, the tax rates will also
or less the same but the allowable deductions
increase and naturally, the tax liability will also
could be different. Especially under the
increase. Unlike in corporate income taxation,
CREATE BILL, there is more distinction for the
the tax rate is fixed 30%, it could be lower to 25
domestic and foreign corp because now in the
or 20 depending on the condition.
CREATE, they now take into consideration the
small and medium enterprises which are
generally domestic entities or domestic
It's more proportional because there is a fix but
corporations.
as long as the tax based which is either gross
income or net income will increase the tax
liability will naturally follow and will increase.
So these are the general principles of income
taxation that you need to know at this stage.

So at this point, let’s move on to: FEATURES Method of Taxation

OF INCOME TAXATION. Unsa man ang

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

16
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Net income taxation is used for individual

taxpayers earning business, trade or
What's the difference between the EFPS and
professional income because they can make
Manual?
deductions. There is a specific set of allowable
deduction and similar to corporate income tax
payers, because for corporation income tax
payers specifically domestic corporations and Everything is done electronically through the
resident foreign corporations, they are taxed computer. But under the EFPS system, the pay
also on their net income. as you file system is not strictly followed.
Because if you are registered under EFPS,
traceable ka na. To encourage taxpayers to
register under EFPS, they were given
Tax based is the net income x the applicable tax
extensions, they can file early but they don't
rate.
need to pay on that day of filing. Provided, they
pay on the due date.

However, for individual taxpayers different ang

individuals earning, compensation income under
Example: Kung ang deadline as tax return is
employers-employee relationship. Wala situation
April 15. Kung manual filer ka and you filed,
na same for corporate.
March 30. It is expected to pay on the same
date. But for EFPS it's not, pwede ka file early
but you don't need to pay on the same date, you
For an individual, if you are an employee, you
can pay later provided not beyond the due date.
cannot just make any deduction, only the
So if the due date is April 15, you filed March 30,
specified allowable deductions for employees
you can pay April 10 or April 13 or April 15.
which are the mandatory contributions to the
Basta di mulapas, but if mulapas ka subject ka
SSS, Philhealth and Pag-ibig.
sa penalty.

For both individual and corporate income

In short under EFPS, pay as you file system is
taxation
not strictly implemented.

pay as you file system - meaning its the

EFPS was also one of the main contributor why
taxpayer who initially compute or assess her tax
the BIR was able to collect more.
liability and based on that computation the
taxpayer pays to the government. Dungan ang
pag file and pag bayad, this is the usual rule
This applies to Corporate Income Tax also.
when it comes to manual filing and payment.
Under certain cases, “Pay-as-you-Earn”.
But now, BIR is prioritizing the digitalization.
Under the digitization project, they have this so- This is applicable to income subject to
called EFPS (Electronic Filing and Payment withholding tax.
System).

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

17
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

This is the formula used by the BIR Tax Returns

esp for those business/ professional income
Again, in withholding tax, ang mu withhold kay
earners.*gi dissect ni atty ang formula*
si withholding agent, si client, si buyer/customer.
In such a case, the amount withheld must be ★ Gross Sales/ Receipts/Revenues -
remitted to the BIR. It depends if it's creditable these are sales/receipts/revenues w/c
withholding OR final withholding. are not exempted under the law or not
subjected to any special rate.

KINDS OF INCOME TAX METHODS In the tax return, if you think your sales is
subject to a preferential rate, there’s a separate
1. Gross Income
disclosure thereof.
2. Net income
Sales OR Receipts OR Revenue, gi OR na kay
Definition wise, it’s hard to remember. But if you depende na sa industry ni taxpayer.
look at the formula it’s easier to remember. If into trade = GROSS SALES
If into sale of service = RECEIPTS
If manufacturing, mining, etc = REVENUES

That inflow of wealth should take into

consideration the outflow para ang subject lang
nato to tax would be the profit/gain.

★ That’s why we have to deduct the sale

returns, allowances and discounts.

These are the allowances for defective units.

Discounts given to customers.

★ Deduct Cost of sales (more on

manufacturing/trading. Technically, it’s
called COST OF GOODS
MANUFACTURED AND SOLD)
★ Cost of Sales/Services - direct
cost/expenses related in the generation
of the revenues/receipts/sales.
★ Once you deduct this cost of sales, you
get the Gross Income from Operation

Gross Income from Operation is your gross

income. This is usually applicable if there is
NO OTHER INCOME NOT SUBJECTED TO
FINAL TAX. If there is, then kato ang himoon
nimo nga tax base. Anhi kutob ang
computation nato when we say gross income

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

18
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

taxation. Once you have this figure, that will now April 5th. Mas mahal kaysa current cost niya.
be your Tax Base. mao na ang imultiply nimo The gain there, is it considered as “other
whatever is the Tax Rate. That will now be your income”? YES. Is it subject to final tax? Not
GIT (Gross Income Tax).
necessarily because it’s not real property,
so, it is not shares of tax.
EXAMPLE: Kana mga income nimo na not
part of your ordinary course of transaction, Kani man real property or shares of stock
pero nag in flow ka nga walay final tax. ang usual subject ng capital shares tax
Let’s say, for example, ako negosyante, I which considered as final tax. But the rest,
have a manufacturing business. If I have usually dili. Does that fall on other income?
money, I deposited it in the bank savings, The answer is yes. You have to add that to
earned interest income – kay automatic you other income from operation. Under
man na sa bangko to subject into final tax – gross income taxation, whatever is the total
so, kinahanglan pa ba to nako diri as final there, that serves as your tax base.
tax? Dili, kay nasubject naman to to final
To get the net taxable income or the net
tax.
income, you are going to deduct the
But, it’s a different story if I, the allowable deductions under the existing
businessman, having a factory and several laws.
employees, I allow my employees to get a
Two methods of deduction:
loan from me – nagpa 5/6 ko in short sa
employees nako. The employees get a loan 1. itemized Deduction
from me and I earn income out of it – you
know it’s not subjected to final tax kay kinsa 2. Optional Standard Deduction (OSD)
may mu withhold ana, ang employee? Na
wala man nay alamag. Di man na parehas
sa bangko na required muregister sa BIR. When it comes to itemized deduction, it
So, the point is, you earned interest income could be the ordinary itemized deduction,
there out of the loan granted to your or it could be the special itemized
employee. Does that amount to other deduction.
income? The answer is YES. Do you need When we talk about ordinary itemized
to report it for tax purposes? The Answer is deduction, these are the deductions
again yes. provided for under the NIRC. You can use
Or, let’s say for example, factory, I have a the mnemonic:
delivery van or truck, used in the factory. ExInTaLoBaChaRePenDepDep
That is usually considered man as ordinary Ex – expenses, In – interest, Ta – taxes,
asset as it is being subjected to Lo – losses, Ba – bad debt, Cha –
depreciation. Let’s say for example charitable expenses, Re – research cost,
gibaligya nako ang truck or sakyanan on

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

19
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Pen – pensions, Dep – depletion, Dep – only either of the two. So, total taxable income
Depreciation or total gross income less the deductions, you
get the net taxable income or loss. Of course,
We also have special allowable deduction, that’s a loss so, that’s a negative, automatic
especially if the taxpayer is registered even if you multiply that with the income tax rate,
under investment promotion agencies that your income tax due would be zero. Otherwise,
have provisions or accelerated deduction. if it is positive, you will have here income tax
There will be additional inclusions under due. This statement other than MCIT which we
special allowable deductions once the will tackle later on, MCIT stands for Minimum
Corporate Income Tax. MCIT only applies to
CREATE bill becomes a law. Because
corporate tax payer. But, generally, that’s how
there are many provisions there wherein
you compute your net taxable income and your
the taxpayer may avail of the so-called income tax due--this is your tax liability to the
provisions for accelerated deductions. Cost government.
of labor, so, there are provisions that 150% of
the cost—you can deduct. The thing is, if you Sir, is the total of my computation here the
are going to claim for special allowable itemized amount that I will remit in the BIR? Not
deduction, you need to specify in the tax return necessarily. Why? Remember, creditable
the provision allowing you or giving you that withholding tax is considered as advance
allowable itemized deduction. payment of your tax liability. So, if you have a
transaction that is withhold by your client, there
And then of course we have the NOLCO. is still less there. I did not include it for now
NOLCO stands for Net Operating Loss Carry because the purpose for now is how to illustrate
Over and when we say NOLCO, these are the the gross income and how the net income is
losses you incurred in the previous years which computed and not how income tax due and
you can carry over the following year provided payable is computed.
that in the following year, you are subject to the
regular or the ordinary income taxes. Gross sales receipt, less sales return
allowances discounts, less cost of sales or
Now, if you don’t like the deduction of itemized service, you get your gross income. Add other
option, the other option is the so-called (OSD) income, you get your gross taxable income or
or the Optional Standard Deduction. We will total taxable income. Less allowable deductions
discuss the rate of the OSD because the rate as or less deductions which could either be
of now is quite different. But under the create (?) itemized or OSD, you get your net income or net
bill, they are trying to amen that, that is why I taxable income. So, some authors,
am always confused when I am in the process jurisprudences, and even the tax code refers to
of revising. I have to really be careful because it directly as taxable income. That actually refers
there are really some items that are changed to the net taxable income. Of course, if it is a
totally under the create (?) bill. loss, then there is no tax to speak of.

Sir, maybe the OSD is already stricken out? No, SOURCES OF INCOME
it is still there but the condition for the availment
of the OSD is the one that’s changed. So, it’s

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

20
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Where did the income come from? Of course, 1. There should be gain or profit. Kibaw na
as mentioned, in the very few slides, the source man siguro ta tanan unsa'y gain or profit - on
of the income is the capital or the tree itself. The top of the capital (derived from a close and
income is just a mere fruit of the tree or on top completed transaction). When we say close and
of the tree. But other than capital, class, income completed transaction, it means that the
may also come from labor. This labor mao ni transaction has already been made effective.
basically ang source ni compensation income or
ni professional income. Ang gibayran basically Before I move on to this, I forgot, balik ta gamay
is the labor or the service man. Or it could be sa Source of Capital which is Labor. This is also
both the labor and the capital. If I'm an the reason why compensation nato (under
employee and at the same I have a retail employer-employee relationship) dili gyud maka
business or I have a manufacturing business, deduct sa cost of our service to the employer
then the source of my income is both labor and because technically, you cannot quantify the
capital. Or sale of property - I own a property, I extent of your service rendered to the employer.
sell it for a gain then that's the source of my The least, if ever naa kay quantification, that
income. It's just that if it's property, you have would be self-serving. Mao na nga usually ang
ascertain if it's ordinary asset or capital asset gi-allow lang nga deduction kato lang mga
(as what we've discussed in our previous video). contributions. And lisod i-escapo because
automatic when you have an employer, the
So the next important thing that you need to employer will withhold from your income.
understand is: are all in flows of wealth
taxable? Or are all income taxable? Take So what are the elements again?
note of these three elements because I cannot
over emphasize the importance of these. Mao ni 2. The gain or profit is realized or received.
ang usually gina balik2x gyud ni Supreme Court Take note ha – realized or received.
if faced with the issue whether a particular
Unsa'y kalahi-an sa duha?
transaction or item is taxable or not. And dapat
magkuyug ni tanan as much as possible.
When we say "realized", it means to say you
have already tendered or rendered your
obligation even if wala pa kay nadawat na
bayad. Realize na ni accrue na sa imoha ang
right to receive that income then you can
recognize na the gain or the profit.

Or “receive” meaning to say wala pa ka naka

render sa service, wala pa nimo na deliver
ang deliverable nimo, wala pa nimo na
deliver ang goods pero gibayaran na ka, gi
depositohan na ka.

Pwede na ba ka ma subject to income tax

nganha? The answer is YES. And this is where

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

21
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

complication or differences in accounting and eventually that liability of the taxpayer will be
taxation comes in. Nganu man? adjusted to be declared as income.

Taxation is medyo sigurista. Both, if you look at

it, "realize" that's on accrual basis while The problem comes in if it will lapse to another
"receive" is on cash basis. For taxation it's a taxable year.
hybrid of both. Kung asa ang ma una, pwede
na to nimo i-declare and ma-subject na ka sa
tax. But for accounting, it's not. Because for
Example: In December, nag advance payment
accounting, strictly accrual lang. You will only
si customer, pero January pa nimo gi deliver, so
recognize income, gain or profit, if you already
in your books, January to December ang
realized the income, if you already delivered
taxable year nimo. In your books, accounting
your obligation. That’s for accounting purposes.
wise, for that year following accrual, liability pa
But for taxation purposes, it’s not, especially if
to nimo, wala pa kay i-report nga income
that transaction is subjected to withholding tax.
because next year pa man ka mu deliver, naa
pa man kay deliverable. But for BIR purposes,
that is already taxable income of that year
This is the reason why sometimes , it would because you already received it actually or
result in deficiency assessment. Why? If the constructively.
accountant is more on the accounting
perspective and he receives advance payment
and he was not able to deliver, for accounting What is meant by constructive receipt?
purposes, that is liability because I still have
deliverables to you. - It means it already went to your bank
deposit. You already have control how
to disburse that money.
But for taxation purposes, can it already be
subjected to withholding? Yes, because there is
already payment. Third element of taxable income: Such gain or
profit is not exempt under any law or treaty ergo,
if there is a provision of law recognizing of
taxing the income.
The customer already gave money, so can he
withhold the portion of that money and remit it to - If it is exempted under law or treaty,
the BIR? Yes. then you do not declare it as part of
your gross or net taxable income. This
is what we call as exclusion or
Wala ni problema nga situation if it happened in exemption.
the same taxable year. It will eventually be
- There are some instances where you
cured. Meaning to say, if the advance payment
need to disclose it separately in the
and the delivery of the goods or service
income tax return for disclosure
happened within the same taxable year,
purposes, especially if you are availing

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

22
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

your tax incentives from the IPAs or satisfied or delivered what needs
Investment Promotions Agency. to be delivered.

l An exchange has taken place - naa

There are only 3 elements of taxable income. koy gi hatag sa imoha, naa sad
However, in several SC cases, it becomes koy nadawat sa imoha.
difficult to determine whether these elements
are present because of the given situation or
scenarios. To reinforce the analysis on whether
*kaning realization test, gi discuss ni ni SC in
that income is taxable or not, in several SC
one case involving the taxability of stock
rulings or decisions, the SC laid out these tests.
dividends distributed to share holders of a
Ang pinakafamous ani nga test kay kaning
corporation.
realization test or macomber test and all
events test recently.

Stock dividends - a distribution made by a

corporation or a corporate entity kay ang
1. Flow of wealth test
corporation gina compose mana siya ug
shareholders, each of these shareholders owns
- It means that the determining factor for the
shares of stocks. Mag issue na si corporation, it
imposition of income tax is whether any gain
could be cash, it could be property dividend.
was derived from the transaction.

- This is more akin to analyzing the first

element whether there is gain or profit.
Dividend - supposedly a return on top of the
investment of the shareholders especially if it’s
- And if there is gain or profit, then that’s the
cash or property. But it could be in stock
time together with the other elements that the
dividend. Common ang issuance sa stock
income is deemed taxable.
dividends if the company of the corporation per
2. Realization test or macomber test financial statement is earning income pero dili
liquid, kay pwede mana ang income niya
- Tells us that unless the income is deemed pursuant to accruals lang pero at the moment
realize then there is no taxable income. This is wala siyay cash or property nga pwede
more on the second element. idistribute to the shareholders because after all,
mas dako ang receivable niya from clients or
- How to determine if it is already deemed customers. So, the corporation will opt to issue
realize? Two conditions must be met: stock dividend.

l The earning process is complete or

virtually complete - there is no
more pending obligation on the What will happen when the corporation issues
part of the income earner or the stock dividends?
income earner has already

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

23
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

The shares of the existing shareholders will Is there a flow of wealth realized in this
increase. transaction?

EXAMPLE: you have a corporation, tulo lang ka - No. Because, again, their shareholdings
shareholder ang i-llustrate nato becaus eunder remain to be the same (40%, 40%, and
the Revised Corporation Code, it need not be a 20%) even if their shares increased.
minimum of five.

NOTE: As a rule, following the Realization Test

(Macomber Test), the stock dividend income is
Corporation A has 3 shareholders (B, C, & D)
not subject to income tax.
B - owns 40 shares = 40% ownership

C - owns 40 shares = 40% ownership

NOTE: Although, there are two instances when
D - owns 20 shares = 20% ownership the stock dividends may be subjected to tax.
This will be discussed under Corporate Income
TOTAL = 100 shares = 100% Taxation. (Tip: Master the ins and outs of
Corporation)

In 2021, Corporation A declared 10% stock

dividends - this means that the existing shares TAKEAWAY: If a stock dividend is issued to all
or stocks owned by the existing shareholders shareholders and the percentage or the
will increase by 10%. increase in the shares remains to be the same,
then the stock dividend income is not subject to
income tax following the Realization Test.
B - current 40 shares + 4 (10% of their current
shares) = 44 shares

C - current 40 shares + 4 (10% of their current REMINDER:

shares) = 44 shares ● FLOW OF WEALTH TEST - gain or
D - current 20 shares + 2 (10% of their current profit
shares) = 22 shares ● REALIZATION TEST of MACOMBER
TOTAL = 110 shares TEST - realization of gain or profit

Is there taxable gain in this case? Did B, C,

and D earn any profit? Economic benefit principle
- No. Because their shareholdings remain Economic benefit principle this is still
to be the same (40%, 40%, and 20%). more on the first element because under the
So, they gained no advantage. Economic Benefit Principle what we are
looking at is on whether there is flow of

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

24
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

wealth realized to the extent that the exempted, provided that the proceeds
taxpayer is economically benefited. Which is thereof is used actually, directly and
why the economic benefit principle is also in exclusively used for educational purpose.
support to the rule of stock dividend that if But you know for other entities nga gibuhat
issued to all shareholders at the same rate or na, dili non-stock, non-profit, educational
percentage is not subject to income tax, instead of lease agreement and gi-execute
because there is really no economic benefit to kay deed of donation, pero gi-fix ang amount
the recipient thereof. unya gi-fix ang period, definitely following
the net effect test, even the economic benefit
principle and flow of wealth test, that so
Nganung wala may economic benefit? – called donation is deemed taxable income.
same raman ang ownership or control niya sa
kompanya, generally, there are exceptions
again.

Net Effect Test

Tells us, the substance of the whole

transaction formed usually controls the tax
consequences. Kaning net effect test class,
mao ni ang gigamit ni Supreme Court especially
in subjecting to income tax mga simulated sales
transactions. Kana bitawng di jud ganahan
mubayad ug income tax, so you know instead of
executing a deed of sale and gi-execute kay
deed of donation. I think I mentioned this with Claim of Right Doctrine
you that there are some institutions na magpa-
When we say claim of right, it means to
lease, so they don’t want to pay tax on the lease
say that the person or the taxpayer claims
income, so instead of executing a lease
ownership, command or control over the
agreement where they are supposed to report
property which he do not originally own.
rent income and gi-execute deed of donation.
Claim of right doctrine class was used by the
Pero ang deed of donation gi-fix pila ang
Supreme Court in a ruling that embezzled funds
donation, gi-fix ang period of donation which is
(corruption funds) is a taxable income on the
on monthly basis, so that alone, that is
part of the embezzler or corrupt official, nganu
simulated lease, net effect thereof is, there is
man? Kung nangawat ka or nag-embezzle ka or
income. The income there can be subjected to
nangurakot ka anha your intent there is
tax.
fraudulent so you do not have the intention,
there is no consensual agreement in the first
place between the parties to return what has
But then again if the one doing that is non-stock, been embezzled or taken. Lahi mana kong
non-profit educational institution, beyond the there was a loan agreement and walay interest
point, nganun man? Because it could still be kay kung nagloan agreement ka nangutang ko

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

25
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Php.100 sa imoha unya ni agree ko na mubayad tests, this is the most recent test that you will
ko sa Php.100. Pagbayad nako sa Php.100 sa notice in Supreme Court Cases determining the
imoha gi-uli lang nako ang capital nimo, there is tax ability of a particular transaction.
no income there. Pero kung nangawat ko ug 100
sa imoha, ug di ko masakpan nimo, ako-a natu.
So mao ni ang claim right doctrine, mao ni Under the all events test, there are two things
usually gi-gamit in tax evasion cases filed that you need to ascertain (1) there should
against public officials who are found to have be a right to collect the income or an
embezzled funds. obligation on the other party to pay the same
(2) the amount is liquidated or certain. The
first test is quite broad because when you say
“the right to collect the income” even if you don’t
have formal agreement but you have already
Kana bitawng sweldo nila in one year is only
delivered your deliverables, performed your
Php1M, mao rato na subject for withholding,
service, then you have the right to collect your
pero if tan-awn nimo ang net assets nila walay
income. The other party has already an
lain negosyo, ang net assets nila naana sa
obligation to pay the same. Pwedi ba if you
Php50M ang pag increase in one year. So asa
don’t have the right to collect income and then
man to gikan ang 49M so that’s already a red
there is already an obligation of the other party
flag. Can the BIR say we will subject you to tax
to pay the same? Yes. If there is a contract. And
if you cannot explain? Claim of right doctrine
in the contract you specify there for example
because there is a presumption that you’ve
you are already a lawyer, service contract, you
embezzled that funds from wherever. And again
ask for a downpayment and based on that
the taxpayer will say, that is from illegal source
contract you agreed by January 1 to pay down
can it be subject to tax? Yes. We go back to the
payment 50% of the professional fee. Is that
generic phrase which is “Income tax is source
already taxable income? Yes. Because you
blind”. That is why we apply the claim of right
already have the obligation of the other party to
doctrine.
pay the same. That is why we said earlier that
the gain or profit is either realized or received.
That is why even deposits and I have to mention
Flow of Wealth Test is there should be gain or this because this applies in practice, even
profit, realization test the transaction must deposits which are due for liquidation later on by
be closed and completed and the amount is the service provider that is already considered
determined economic benefit principle, more as taxable income or revenue on the part of the
or less similar net effect test where the service provider as ruled by the BIR. Because
substance of the whole transaction is being you have the control over the money. There was
taken into consideration. And of course, the a debate a quite some time, because the reason
claim of right of doctrine takes into of the service provider is that this is just placed
consideration your claim of ownership control or in trust to us and this is being subjected to
command over a certain item or property which liquidation, however the BIR is very familiar to
you do not owned in the first place. In short you the practice that even if you ask for deposit for
don’t have a capital, labor or dili jud na originally out of pocket expense some of which is not
imuha kay kinawat na nimo. Lastly the all even anymore return to the client and not anymore

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

26
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

liquidated. So the BIR said to be safe para di mi 2. Gross income derived from the conduct of
alkansi, that’s practice, well if you are a big firm, trade or business or the exercise of a
reputable and di pinaagi sa inamigo but on profession;
professional service you can expect that there
3. Gains derived from dealings in property;
would really be a liquidation. But it’s different if
inamigo na approach, so that’s why BIR said, 4. Interests;
since you have received that already you have
control over that fund. -Can either be passive or active
(ordinary income)

-Must not be passive income,

Then upon receipt following the All Events Test otherwise subject to FWT
-- liquidated, determined and recognized that
part of the revenue. Later on kung moingon ka -If normal business is pawnshops,
nga i-uli na nimo then you will just make an lending or banking — interest
adjustment. income is subject to ordinary tax rate

5. Rents;

Tests:

1. Flow of Wealth test Lessor ka, royalties kato ako gi mention.

Business nimo ang pag grant ug franchise.
2. Realization Test or Macomber Test
Diba 7 eleven tigpa franchise ka. Kani si
3. Economic Benefit Principle Jollibee or Mcdo noh, ikaw ni ang holdings
company to grant these franchises. The
4. Net Effect Test
royalties there is your ordinary income.
5. Claim of Right Doctrine Okay? Naa sad ta . Kung panagsaan lang
6. All Events Test
to nimo. Dili gyud to mao ang main line of
business nimo. But if naka specify na gyud
nas articles nimo to grant patents. You
Gross Income Inclusion (SECTION 32A) know, copyright, franchise, etc. to your
based on your business model, then that
This is not exclusive because of lifeblood
becomes ordinary. Alright? I hope you get
theory.
that point.

(CG2IR2DAP3)
Dividends same also if you’re a holding
1. Compensation for services in whatever company. Wala kay lain activity, wala kay
form paid, including, but not limited to fees, lain source of income but dividends coming
salaries, wages, commissions, and similar
in from your subsidiaries. Alright?
items;
Consolidated in the withholding companies.

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

27
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

C - Compensation

Annuities same coming from your G - Gross income from business or

investments. That’s your usual bread and profession
butter.
G - Gains or income derived from dealing
with property

Prices and winnings same. You make it I - Interest

your profession na to join singing contest or
R - Rent
to join beauty contest. Pwede na ba na
maconsider as ordinary income? The R - Royalties
answer is YES. Especially if you’re not
D - Dividends
doing anything else but that. And you use
the prices there as your source of living. A - Annuities

P - Prices and winning

Of course pensions and you have P - Pension
partner’s distributive share in a general
P - Partner’s distributive share from the
professional partnership. GPP basically is
income generated in the GPP
involved in the exercise of profession. It
could be accounting or it could be legal
profession. So, do you need to memorize
this? The answer is at least you have to And then you will ask, Sir, unsay kalainan
memorize that because mao ni ang aning Gain or Income from profession dire
expressly provided in the tax code. Is this ug kani General Professional Partnership?
an exclusive list? DEFINITELY NOT. This is Kani class there is partnership. So meaning
NOT EXCLUSIVE because when it comes to say dili lang ikaw usa ang nag exercise
to income taxation, income tax is source sa profession. Naa kay partner or partners.
blind. Pwede pa na muabot 100 class if you Here, usually, sole ka nga nag exercise sa
want income from you know, ____ (sorry d profession nimo. Okay? Accounting,
jud maklaro) in drugs, income from Lawyering, Real Estate, Brokerage, etc. So
prostitution, etc. It could be added there. I hope we are clear on that. Alright?
That could be gross income from the
conduct of trade or business or the exercise
of profession. Do you get it? But anyhow, So I will stop there it’s already one hour. So
the mnemonic that could help you here is on our next discussion, we will discuss
CG2IR2DAP3. Situs of Income. Although we know the
generic basis in determining the Situs,
depending on the classification kung RC,
DC, Alien, or foreign. This one, this is the

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

28
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

specific rule on Situs of Income telling us

when an income is taxable based on the
CG2IR2DAP3
place where the income is earned. Because
again, when we say SITUS OF INCOME, it Sec. 32(A) – Except when otherwise provided in
refers to the place where the income was this Title, gross income means all income
derived from whatever source, including (but not
earned or generated. But for now, I will stop
limited to) the following items:
here and we will continue in the next video
lecture discussion. Thank you very much 1) Compensation for services in whatever form
for your time. paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;

2) Gross income derived from the conduct of

trade or business or the exercise of a profession;
MODULE 3.3 3) Gains derived from dealings in property;

4) Interests;
Situs of Income to Non-deductible Items • Can either be passive or active (ordinary
income)

This is a continuation of the overview of income • Must not be passive income, otherwise subject
taxation. In the previous video, we discussed to FWT
the underlying principles of income taxation, • If normal business is pawnshops, lending or
especially the taxability of resident citizens, non- banking — interest income is subject to ordinary
resident citizens, aliens, as well as corporate tax rate
entities as an overview. As we move along, we
will be discussing in detail the taxabilities of 5) Rents;
these entities. We ended the last lecture video
6) Royalties;
on the inclusions of gross income. As I’ve
mentioned, you need to memorize that and you • covers intellectual property rights
can well use the mnemonic “CG2IR2DAP3” which
• passive (if one time invention); active
stands for compensation for services, gross
income from the conduct of trade or business, (franchising)
or the exercise of profession, gains or income
derived from dealings in property, interest, rents, 7) Dividends;
royalties, dividends, annuities, prizes and • usually treated as passive
winnings, pensions and partner’s distributive
share from the net income of the general • but pwede ordinary active income if you are a
professional partnership. Again, you will be holding or investing company
meeting more of these inclusions when we
8) Annuities;
discuss taxabilities on individual taxpayers and
corporate taxpayers. 9) Prizes and winnings; see below rules

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

29
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

10) Pensions; and

11) Partner's distributive share from the net SITUS OF INCOME

income of the general professional partnership

1. Compensation Income - Place where

This time around, before moving on to the the service/s is/are rendered.
details, let’s discuss first the overview of
2. Business Income -
common principles or concepts that apply to
income earned whether by an individual Merchandising, Farming, Mining
taxpayer or corporate taxpayer. One of these is
the situs of income, or the place where the - Place where the business is
income is deemed generated. As discussed undertaken.
under principles of taxation, it is important to
know where the income is generated because
the place where it was generated has primary Manufacturing
jurisdiction when it comes to imposing the tax.
a. Goods manufactured and sold within
It’s a different story when it comes to resident
the Philippines— income derived purely
citizens or domestic corporations.
within.

b. Goods manufactured and sold

For compensation income, let’s say for example, outside the Philippines—income derived
under employer-employee relationship, the purely outside.
place where the service is rendered is
c. Goods manufactured within the
considered as the situs of the compensation
Philippines and sold outside the
income. It follows that if the place where it is
Philippines —income partly within and
earned is here in the Philippines, then the
partly without.
Philippines has primary jurisdiction to collect the
income tax. Take note, situs of income is d. Goods manufactured outside the
different from the situs of the business, which is Philippines and sold within the
basically subjected to business tax. Lahi sad Philippines —income partly within and
ang business tax, lahi sad ang situs ni VAT as partly without.
compared to the situs of income, which is
subject to income tax. For now, our focus is on
income tax. 3. Income from Sale or Exchange of
Property -

1. If it Involves Personal Property—the

In Tax 2, we will discuss business tax. If you
place of sale
don’t study now, the downside there, is ma
sagol ang discussion in review time and bar 2. In Case Of Sale Of Transport
time. Better to master everything for income Documents—the place where the
taxation now so you won’t be confused later on. transport document is sold

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

30
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

3. If it Involves Real Property—the place factories here in the Philippines and are most
or location of real likely selling their goods to a related party
abroad at a lower price. So far as Philippine
property
taxation is concerned, there should be a profit
that taxpayers report equivalent to the usual
profit in the industry where the manufacturer
Business income is for merchandising, belongs to.
farming and mining. Say for example, the
place where the business has undertaken has
the primary situs for collecting the income tax.
You can just imagine, say for example, there
For manufacturing, we have to look at the place
are two possible scenarios: first, the factory is in
where the goods are manufactured and where
the Philippines but it is a subsidiary, which
the goods are sold. “Sir, why don’t we focus on
means that 99% or 100% of the ownership of
the place where the goods are manufactured?”
this company is being owned by a foreign
Because, class, there is no income to speak of
corporation abroad. For example, this local
yet. The place of manufacture is different from
manufacturing corporation will manufacture
the place of sale. If we consider the place where
furniture here in the Philippines, and then they
it is manufactured, there is no income to report
sell it at cost abroad. This is a nice arrangement
from the taxpayer and the government has
between parent and subsidiary because the cost
nothing to collect.
of labor is lower and there is an advantage
when it comes to the labor aspect. They sell it
abroad at cost and they earn more, rather than
For our discussion, we look at both, where it paying employees from that foreign country that
was made and where it was sold. If it is are being paid very high. As compared to here
manufactured and sold within the Philippines, in the Philippines, it is cheaper.
the income is purely within. Complication comes
when it is manufactured here and sold outside
the Philippines, which is a common situation
The problem comes in now, because a portion
specifically pertaining to ecozone locators. It’s
of that is deemed earned in the Philippines,
covered with a special law. “What if, customs
even when the goods are sold outside, for
territory ko or outside the ecozone and business
income taxation purposes. This is the very
nako? What if naa diri ang factory and e ship
foundation why “transfer pricing” comes in,
out nako and sell it outside?” It’s very common.
wherein BIR can just say that the price at cost is
If the goods are manufactured and sold outside
not the same as the price in the market. What
the Philippines, income taxation is derived
will BIR compare that with? BIR will compare
purely outside. If the goods are manufactured
subsidiary companies….
within the Philippines and sold outside the
Philippines, that is considered to be income BIR will compare subsidiary companies to a
tax partly within and income partly without. company with the same industry who are selling
That is when the Philippine’s right to collect their furniture abroad to third parties or
income tax over the goods manufacture unrelated parties. So kung ang presyo nimo is
comes in. That is when transfer pricing 100, and i-export nimo abroad, is at 200,
comes in. Usually, these taxpayers have automatic the diff of 100 is the profit and BIR

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

31
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

may subject deficiency tax assessment. documentation nga dapat bottomline kung pila
Definitely class in tax 2, when the commissioner ang baligya ana to an unrelated party, that
of internal revenue is empowered by the should also be the selling price that you said to
legislature or congress to set the correct price of your parent company. Otherwise, the CIR will
an item esp when it is not proper;y supported or set the price and it will result in deficiency
not properly sold in the existing market price. assessment and deficiency tax liability except
Mao na naay requirement for transfer pricing that if you can properly support it with a study.
documentation and the BIR is currently looking
at this now. Because nahimo naning pre valid
practice in the phils. So magtukod ug factory So kung naa kay study nga dili lang isa ka
here and sell it at cost abroad. So company ang gi consider nimo ang mao na ang
reimbursement basis nalang. The parent average costing nya ma prove nimo nga naa
company abroad will just reimbursed the local koy gamayng profit and nisulod man na sha sa
company here for whatever expenses it incurred. kani nga percentage ofc naa nay technical term.
So natural, if that company will file its income Nisulod ni sha range of usual prices in the
tax return to the BIR, the income will be zero. market. In that case, you can say to the BIR that
Potentially lost ka because of the conversion of this is an acceptable price. So the BIR can back
the foreign currencies. down unless the BIR would question the
veracity of your documentation. So that’s for
So these are some things that need to be
business income.
addressed. If you say naa bay basis si BIR, the
answer is yes. ofc the authority of the
commissioner and the situs of income if it's
manufactured here. Same thing if the goods are When it comes to sale exchange or exchange
manufactured outside, and sold in the Phil.then of property., this is straightforward bec all we
income partly within and partly without. need to do is ascertain the type of property. If its
a personal property, the place of sale. In the
case of transport documents, then the place
where the transport document is sold katong
In this case the fourth one ( Goods
mga bill of lading (i think na discuss ni ninyo sa
manufactured outside the Philippines and sold
transport law or nego).
within the Philippines - income partly within and
partly without) , this is not a problem because If it involves real property then the place or
sales happened here. Most likely, reporting location of the real property still following the lex
thereof will be done here by the seller. May it be rae sitae.
a corporate entity or may it be an individual
distributor. Medyo ma monitor na ni BIR.
For interest income, the situs there is the
residence of the debtor/borrower not the
Ang issue is on letter C ( goods manufactured residence of the creditor. Take note ha
within the Phils and sold outside the Phils - residence, not citizenship. Not also the place
income partly within and partly without) . But where the loan contract was executed. Nya
then again to address that loophole, the Bir is muingon mo nga “:sir ang credifor naa man sa
strict now when it comes to transfer pricing

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

32
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

America? Unsaon man na pagreport sa tax?” property is register in Bermuda pero gigamit
through withholding. man na dire sa Phils,so the Phil govt has the
right to collect income tax over that earnings of
that foreign corp located in the tax haven.
You will learn later on that this interest income
could either be ordinary income or passive
income . but in any case, it could be subjected Kinahanglan na mag withhold kayn ang
to withholding tax and the withholding agent ofc Philippine company whatever payments made
is the debtor or borrower. So if ang withholding to that fopreiohn company will be claimed as
debtor is a resident of the Phils, siya ang mu expense man in the Phils. And unsa gane to
remit sa BIR. ang consequence if di sha maka withhold gane?
Dili ma claim as expense ang royalty payment
to the company abroad. The ethical approach
Rent income is ofc the place where the there if you want to avoid paying tax on the
property of the contract is located. So if you are royalties is to avail of TAx Treaty Relief because
registered as a lessor, then there are reports there are various treaties that grants exemption
that you need to submit to the BIR, sworn from income tax, royalty income earned by non
statements of the properties or the lease resident corp. Meaning if the foreign corp grants
amounts of the properties. the right to use an intangible property to as
company located in the Phils and that foreign
company is located in the US and we have an
Royalties is the place where the intangible existing treaty with the US wherein we promise
property is used. If you’ve seen the concept of nga dili na nato kolektahan ig income tax and si
tax haven, if you notice there is a discussion US ra ang mangolekta kay kung foreign corp na
wherein one mechanism for these foreign sa Pilipinas, non resident foreign corp, then
entities to avail of tax avoidance through this tax domestic corp na sa US. ang usual agreement
havens is to register or transfer the registration sa treaty class is both countries will promise
of the intangible properties in these tax havens. each other that they will only taxpayers residing
And they will just enter into agreement with in their countries.
companies in the phils (for example) and these The ethical approach there, if you want to avoid
companies will use the intangible property and paying tax on the royalties is to avail of the tax
pay out to the company located in the tax haven treaty relief. There are various tax treaties which
which does not collect any income. The issue is grant exemptions from income tax, royalty
on the Phil side. The payment for the intangible income earned by non resident foreign
properties will be declared as expense to the corporations. Meaning if the foreign corporation
Phil company. Required ba si Phil company mu grants the right to use a particular intangible
withhold on that? The answer is Yes especially property to a company located in the Philippines
if the Phil company is a large taxpayer or a tax and that foreign company is located in the US
withholding agent. So there the payment of this and we have existing treaty with the US wherein
companies in the payment of royalties. Why? we promise na dili na nato kolektahan income
Because the place where it is used is in the tax and si US lang ang makakolekta kay kung
Phils. Even if the place where the intangible

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

33
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

nonresident foregn corporation na sa Pilipinas,

then domestic corporation na sa US.
a. The income is purely within if the income
derived from the Philippines is more than 85%;

Usual agreement in treaties: Both countries, PH b. It is purely without if the proportion of its
and US, will promise each other that they will Philippine income to the total income is 50% or
only tax, taxpayers residing in their countries. If less;
not resident in their countries, they promise to
c. There should be an allocation if it is more
either exempt them tax upon proper application
than 50% but not exceeding 85%.
or subject them to a lower tax rate depending on
the country.

This involves a situation where a foreign

corporation has operations here in the
The remedy is to check if there is an existing
Philippines. We have to see either 85%, 50 to 85
treaty and usual requirement in the treaty is the
or more than 85%.
income earner of the royal income or fee must
be a nonresident foreign corporation or
nonresident entity.
What if walay operation ang foreign corporation?

Situs - place where intangible property is used.

The dividend will be exempted from income
taxation. Kung wala operation, what's your
basis man in determining the income of the
Dividends
foreign corporation. In that case, it is classified
as a Non Resident Foreign Corporation. You
can avail of the exempting provisions under
1. Received from domestic corporation-
treaties:
income purely within. It will be subjected to tax
here.

That if the income earner is a non resident

foreign corporation, then that would be
The manner of collecting tax on the dividends
exempted.
especially when the dividends is gained from
passive income is through final withholding.

2. Received from foreign corporation outside What if the income earner is a domestic
the income of the foreign corporation in the corporation or resident citizen, that the
Philippines during the last preceding 3 stockholder ang recipient sang dividend and ang
taxable years, following rules shall apply, to nag issue sang dividend is a foreign corporation?
wit -

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

34
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Then in such a case we check the income for A: NO, because the issuing corpo is a non-
the last 3 taxable years, if it is 50% or less, 50- resident foreign corpo. Meaning, being non-
85%, or more than 85%. resident, it has no income generated here in
the PH. dili ka ka-determine if <50, 50-85 or >85.

Dividends - issued by a corporation who issues

stocks to its stockholder. This presupposes that the foreign corporation
has operation here in PH.
It could either be cash dividends, property
dividends or stock dividends among others.
There are other types of dividends but it's not
EXAMPLE: Kung ako Pilipino has an investment
that famous na.
in a corpo w/c has no operation in the PH,
Corporate entities in Philippine Scenario - insofar as the PH taxing gov is concerned, non-
corporation can be a shareholder in another resident foreign corpo siya. If this foreign corpo
corporation. issues dividend to me, the situs is outside.

Kung domestic corporation and naa sad siyay Q: Taxable or not?

incorporator and that domestic corporation will
A: Depends who is the recipient.
issue dividend to the shareholders, regardless
of whoever/wherever the shareholder is located, If the recipient is a non-resident/alien/another
the dividend income is deemed purly income foreign corpo who is only taxable with the
within. That’s why ang subject to tax is subject income they earn in the PH, NOT TAXABLE.
to withholding ni domestic.
If the recipient is a resident citizen/domestic
corpo, TAXABLE FOR THEIR WORLDWIDE
INCOME, EVEN IF THE SITUS OF THE
If the issuing corporation of the dividend is a
DIVIDEND IS OUTSIDE THE PH; IT SHOULD
foreign corporation, and it was issued to
BE DECLARED AS PART OF THEIR OTHER
whomsoever, whether corporate/ individual
INCOME IN THE TAX RETURN.
entity, we check the income received by that
foreign corporation in the PH during the last
preceding 3 taxable yrs. Diri mosolod ang ratio,
ang allocation kung naa siyay income derived in ANNUITIES - place where the contract was
the PH. made. This usually pertains to investments.

PRIZES & WINNINGS - if on account of

services rendered: place where the services
Q: WHAT IF THE ISSUING CORPO OF THE were rendered; If not: place where the same is
DIVIDEND WALAY INCOME NA GENERATE given.
SA PH BUT ITS STOCKHOLDERS ARE IN
THE PH. IS THE SITUS WITHIN THE PH?
Q: how about the winnings of Manny P. in Las
Vegas?

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

35
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

A: that is considered as income earned outside

1.Exemption under
the PH insofar as situs is concerned. fundamental law;
2.Exemption by the
statute; and
Q: WHy is the PH gvt subjecting it to tax? 3.Does NOT come
under the definition of
A: Bec. Manny is classified as a resident citizen, an income.
who virtually taxed on their worldwide income.
All that is needed is to determine if that is an NOTE: Elements of
income - a) there
income gain/profit. I hope you now get the point
must be gain/profit; b)
of the interrelation of situs and the genprin. realized/ received
either actual or
constructive; & c)
PENSION - place where this may be given on NOT exempt under
any existing
account of services rendered.
law/treaty/whatsoever
Usually, pensions are deemed tax exempt due
Pertains to Pertains to
to SPL provisions.
computation of gross computation of net
income income

INCOME FROM GPP - place where the

Earned /received by Something spent/paid
exercise of profession is undertaken. If the the taxpayer but does in earning gross
exercise of profession is here, then taxable. If NOT form part of the income
abroad for income outside, still taxable if your gross income
classification is that of a resident citizen.
EXAMPLE: 13th EXAMPLE: business
EXAMPLE: common among lawyers nga naa Month Pay NOT rent expense,
license here and in some US State. So their exceeding 90k, the salaries to
income earned is deemed income outside that exclusionary employees, etc.
threshold
is taxable if they‘re a resident citizen; otherwise,
then NOT TAXABLE.
Why compare? Bec this was asked in one bar q.
PARETO DOCTRINE [80-20]: focus your
EXCLUSIONS v. DEDUCTIONS effort to the 20% that has 80% impact. In short,
FROM GROSS INCOME you don’t have to read the NIRC cover to cover.

EXCLUSIONS DEDUCTIONS
EXCLUSIONS
Flow of wealth to the Amounts allowed by
taxpayer w/c are NOT the law (or outflows
treated as part of G.I. actually) to be
for purposes of deducted from the Items deemed excluded from income taxation:
computing taxable gross income to
❏ Proceeds of Life Insurance Policy
income due to: arrive at net income.

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

36
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

insurance proceeds. I find it very wise

cause no more estate tax, income tax,
WHY EXCLUDED? Bec this is compensation
for loss of life. The money received is not even because the proceeds of the life insurance
deemed compensation to the life that was lost. is virtually -wala na ka huna-hunaon – kay it
Life is very valuable, matic na! is exempted from taxation.

However, there are circumstances na this

exclusion is subjected to tax, if:
One of the selling points of insurance agents -
one way of managing your assets/estate well to 1. Insurer and insured agreed that
avoid conflict among your heirs is to get a life the amount of the proceeds shall
insurance and make each of them as
be withheld by the insurer (Ex:
beneficiaries.
AXA, Manulife, Sun Life, etc) with
the obligation to pay interest in
the same, the interest will be
I have a client before, she’s a well-known old
doctor. She asked me to prepare a last will & subject to tax;
testament. I tell you, it was the easiest LWT to
 Interest will be subject to tax
make... all that I need to include is a few
because it’s not anymore the
parcels of land and a bank deposit – di
proceeds of the life insurance
kayo material na amount- then the rest is
policy, you are now using it as a
just a mere reiteration of her life insurance
capital for your investment. So,
policy. Ang gihimo niya from her money as
that’s another story na. That is
a doctor – and I’ve learned something from
not anymore a compensation for
her – nga she earned a lot of money, she
the loss of life.
has so many life insurance policies. You
 So, since capital na na sya
can get as many life insurances as you
investment nimo, then ang
want – no limit. Because again, life is
interest na maearn nimo would
priceless. So, nagkuha sya mga 10 or 8.
now be taxable.
Kay married to siya but no child, and I think
namatay na iya bana. So, ang naa nalang 2. There is transfer of the insurance
is ang sisters niya, which are all very old, policy
and the children of her sisters. What she
did is she made the children of her sisters  Transfer is at a price and the
the beneficiaries. In short, wala nay daghan price is higher than what has
lalis because of the policy upon her death – been paid so far then the income
God forbid, unta buhi pa sya ron cause that there is deemed taxable.
was 3 years ago. This is her way of giving 2. Amount received as Insured as Return
back to them for all their help. So, of Premium
automatic, upon her death, they become Is this limited to life policy? Not necessarily.
irrevocable beneficiaries of her life So long as it is a return of premiums paid

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

37
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

by him under life insurance, endowment, or maturity value. Mr. X outlives the policy
annuity contracts, either during the term or and collects the maturity value of
at the maturity of the term mentioned in the P500,000.
contract or upon surrender of the contract.
So, meaning to say no death happened. So,
So, the first is limited lang to life walay proceeds sa life insurance policy kay
insurance policy, but the second, covers madawat raman nimo na kung mamatay.
not only life insurance, but also Ang mahitabo is amount received as return
endowments and annuity contracts. of premium.
Basta ang nahitabo sa number 2 is wala ka
namatay. Instead, you outlived the policy. So, in this case, the Maturity Value agreed
upon in the agreement is P500,000, but the
It is a common provision in insurance policy total premium is P20,000 x 10 years, so the
that there is a maturity period. Di man ka total premium in effect is P200,000.
the entire lifetime magbayad sa insurance Obviously, there is an excess which is
policy, usually up to 10 years. Then, after 10 P300,000.
years, there is a maturity value that you will
receive if you will surrender the insurance So, what happens now? The exclusion lang
policy. Focus lang ko sa life insurance - from gross income is the amount received
mao ni ang cash surrender value. Same as the amount of premium. Meaning to say,
with endowment and annuities after a this amount of P200,000 is not taxable, but
period of time. the excess of P300,000, this is now subject
to income tax.
So, kung ang total premium nimo is lower
than the maturity value, then the excess of Take note:
the maturity value over the premium will be
considered as taxable income. In Insurance policies, even in endowment
and annuities, naa nay gitawag na cash
Illustration: surrender value. But this cash surrender
Mr. X is insured in a P1,000,000 life value, if wala pay maturity, is usually lower
insurance policy (meaning to say, kung than the total premium. Because maalkansi
mamatay si Mr. X, ang beneficiary ni Mr. X ang insurance company or insurer if after a
will receive 1M. So, kung mamatay si Mr X, year, pwede naka makakuha sa maturity
ang mahitabo is proceeds ng life insurance value after a year you can already get the
maturity value. That’s part of the income that
policy, but in this case, wala siya namatay.)
they generate. So, usually in the first year there
with annual premium payments of
is no cash surrender value. Usually, it will start
P20,000 for 10 years. There is a provision after 5 years, there is only a certain percentage
that if Mr. X outlives the policy after the of the premium and then it goes up until the
10th year, he will be paid a P500,000 maturity date of the policy. So, that’s when

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

38
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

return of premium could happen if the risk So, it is an expected profit. Let’s say for
insures again did not happen during the example, you are an egg seller. The expected
duration. sale of the eggs that you sell that are
transferred recklessly through a motor vehicle
Another exclusion from income taxation are for delivery is 50,000. You got hit, it’s not your
gifts, bequests, and devises. Because when fault but all the eggs are shattered. Of course,
we talk of these things, these are considered the expected income of 50, 000 is deemed lost.
isolated in flows or casual in flows. I short, not If it’s being paid, compensated, the actual
on a day to day basis you can receive gifts, 50,000 by the party at fault, that is deemed
bequests, and devises. In any case, the amount income. Since it is a deemed income, just
that you receive as gifts, bequests, or devises is deduct the cost of sales there to determine the
being subjected already either to donor’s tax or taxable income. The point is, that may already
estate tax. No more income tax because it is not be subject to tax.
considered ordinary income. And again, when
we talk of gifts, bequests, and devises, we will 2. Compensation for unrealized income.
discuss its difference in tax 2. So, one pertains
to personal properties and the other one 3. Interest for non-taxable damages.
pertains to real properties.
Moral and exemplary damages as a result of
Then, fourth exclusion, you have compensation breach of contract. Take note, however, that
for injuries or sickness. Why is this excluded? mora, exemplary, and atty’s fees in out of court
Because the same with number one, this is just settled is not taxable especially if it pertains to
a mere indemnification or compensation. Of cases involving one’s reputation which is
course, for injuries or damages suffered. It is unquantifiable.
compensatory in nature. This could be paid by
virtue of a suit, health insurance, accident And then the 5th exclusion is the income
insurance, or through the workmen’s exempt under treaty. The point is, the primary
compensation act. Why is the income not purpose why states enter intotreaty is to
subjected to tax? Because it’s very difficult for minimize the effect of international double
you to quantify the value of one’s health, taxation. In practice, if you think your income is
reputation, in case it involves issue on exempt under treaty because you are a non-
reputation. Simply put these as unquantifiable or resident corporation in the Philippines, your
cannot be measured financially. That is why as corporation is domiciled in the US and there is
a rule, these compensations are considered treaty and you are earning only royalty income
exclusions. here, that is exempt from taxation. But there is a
need to as for a certification or a favorable ruling
However, there are instances where these from the BIR. Matter of fact, that’s what we call
compensations for injuries or sickness may be in practice as TTRA—Tax Treaty Relief
subject to tax. And what are these? Application especially if it relates to business
income generally related here in the Philippines
1. If what was received amounts to actual casually by a non-resident corporation.
damages for loss of anticipated profits or for
loss of business profits. For interests, royalties, and dividends—these
are the usual earnings of NRFC’s here,

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

39
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

pursuant to the ease of doing business, the benefit exemption received during this time of
interests, royalties, and dividends so long as the pandemic.
these are passive income, there is no need to
pass a ruling, the only thing that’s need to be Diri na lang ta sa two laws exempting retirement
applied in the BIR is the CORTT—Certificate of benefits received under RA 7641 or under RA
Residence Tax Treaty. Meaning to say, the one 4917 (reasonable private benefit plan). Kaning
who will apply here is the non-resident 4917 this is contained or I think adopted or
corporation earning the interest, royalty, and included na in the Code, if I am not mistaken
dividend, and it will apply the preferable lower wherein these requisites for exclusion of
rate as provided in the treaty. retirement benefits are already laid down.

The application for the tax treaty relief as well as

the submission of the certificate of registration in
the foreign country is being made to the
INTERNATIONAL TAX AFFAIRS DIVISION of
the bureau. Why the need to discuss this?
Because this could be one of the service lines
that you might offer later on. In here, you have
to convince the BIR that there is a provision in
the treaty granting the lower rate and your client,
the non-resident foreign corporation represented
by its subsidiary here in the Philippines,
qualifies on that particular provision. Of course,
it is easier if it is interest, royalties or dividends No. 2: Ang hinumduman ninyo ani is 50:1:10.
is the one that’s earned by the non-resident At least 50 years old, at least 10 years of
foreign corporation because there is no need to service, and ma-avail lang ni nga exclusion
prepare for a position paper, transmittal na lang, one time.
of the so-called certificate of residence. So there
is this specific BIR form that you just need to fill- No. 5: In short, there has to have a BIR
up and attach the corresponding agreements or certification on the approval. Applyan ni siya.
contracts between the domestic corporation and
the earning non-resident foreign corporation. So No. 6: The retirement age is 50. So pwede pa
that's on income exempt under treaty. gyud ka mangita ug another employer (private)
because we're talking here about private
Sixth exclusion we have retirement Benefits, employee. Then you retire again after 10 years.
Separation Pay and Gratuities. 60 years old na ka. So that's your second
retirement from a private entity. The second
Let's go first to Retirement Benefits. So the retirement nimo that is not anymore excluded
exemption or exclusion of retirement benefits even if that is still a private benefit plan. But, if
take note, I will not discuss na lang the provision your previous employer or your second
in the Bayanihan to Recover As One because employer is a government, then that's a different
there is a special provision there on retirement story. The retirement would be exempted. So
again, as provided here, the subsequent

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

40
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

retirement benefits received from another So, Congress, recognizing that fact or that
private employer is no longer exempt but situation, subsequently passed RA 7641.
subject to tax. But if the second employer is a
government entity or institution, then that would RA 7641 seeks to remedy the situation wherein
be exempted. Or, ang first employer nimo kung wala'y private... Kay kung tan-awon nimo
government entity, ni resign ka at the age of 30, ang 4917, if your employer don't have a BIR
and then private employer ka 30 to 55 (more approved reasonable private benefit plan, your
than 10 years na nah and then more than 50 retirement pay becomes taxable. Do you follow?
years old na ka). Pwede pa ba ka mo qualify Nya kahibalo biya ta sa labor - ½ month pay for
under 4917? The answer is YES provided your every 1 year of service (22.5 days). I-multiply na
private employer has a BIR approved sa number of years, pwede biya ka makadawa
reasonable private benefit plan under RA 4917. ug minilyon. Do you follow? If i-subject na nimo
to income tax, dako kaayo ang tax. It doesn't
Now, what is happening in reality is: medium- make sense.
small enterprises – very few ang nag apply ug
private benefit plan. There are even issue ang So mao na subsequently, Congress passed RA
uban corporation katong 555 before. Unsa man 7641 to remedy that in practical situation and
na ang purpose nganha? Para lang gyud dili sila under RA 7641, it is specified that even if you do
makabayad ug retirement, dili nila ma regularize not have reasonable private benefit plan but you
ang employee. have a CBA (collective bargaining agreement)
and other agreements establishing your
So anyhow, what I'm trying to say is, pila ra ka retirement plan, then that would be exempted.
percent siguro gyud ang naa'y private benefit Usually though these CBAs ang age ug ang
plan. Very common sa Philippines nga wala, or years of service, usually mag dula2x lang sad
dili gyud ka afford si employer ug private benefit na between 50 to 60, or between 5 to 10 years.
plan. Naa pa man gud ni appraisal nga Naa ra sad na nganha kay due for approval
mahitabo inig establish nimo because in man sad na ang CBA.
establishing the private benefit plan, before you
know how much will be contributed as premium However, if there is no retirement plan gyud,
to the plan, you have many factors to consider. or CBA, or any agreement providing for
Like ang age demographics sa employee nimo, retirement benefits, then the benefits are
turnover sa employee nimo, ang risk sa trabaho excluded from income tax if these two
sa employees nimo, etc. And there are conditions will happen (and this is very
professional appraisers for this. So it's quite common):
costly. Wa pa gani ka kasugod, mogasto na ka.
Of course, sa mga negosyante diri, kibaw biya 1.) The retiring employee must served for at
mo nga dili gyud ni first priority. Not even, I don't least 5 years and
think, second priority ni. This usually becomes a
2.) Not less than 60 years of age but not
prioroty once you professionalize your family
more than 65.
business. But if it is a family business, iyahay ug
secure ang family members.
Diba mao man ang giingon nato nga 60 years
old is the voluntary age of retirement while
65 is the mandatory age of retirement. So

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

41
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

long as you retire within that age range, and required from
you render at least 5 years of service, then the taxpayer.
pursuant to RA 7641, your retirement benefit
b. Prizes and awards in sports
would still be exempted or excluded from
competitions.
income taxation.
- Sports was separated
This was asked also once in the bar that's why I from the first item
need to emphasize the different scenario. For because the conditions
taxation of course class, kung pangutan-on mo: for its exemption or
under the tax code, what are the requirements exclusion is different
for exclusion of retirement benefits? You use from letter a
the provision under RA 4917. At least 50 years
old, at least 10 years of service, there is a c. Income derived by the Government or
reasonable retirement plan duly approved by the its political subdivisions from the
BIR and used only once. But there was one exercise of any essential governmental
question nga gipa distinguish ang exclusion of function or from any public utility.
retirement benefit provision under the Tax Code
d. Income derived from investments in the
and under RA 7641. That is when the tabular
Philippines by Foreign Government or
presentation comes in.
Financing Institutions

e. Gains derived from redemption of

Exclusions shares of stock issued by a Mutual
Fund Company
7. Miscellaneous
f. Contributions to GSIS, SSS, PAG-IBIG,
a. Prizes and awards given in recognition and Union Dues
of Religious, Charitable, Scientific,
Educational, Artistic, Literary, or Civic g. Benefits in the form of 13th month pay
achievements. and other benefits not exceeding
P90,000
- There is no sports here
because it is in letter b h. Gains derived from the sale, exchange
bonds debentures or other certificate of
- Conditions/Requisites: indebtedness with a maturity of more
- There is no than 5 years.
effort on the
part of the
taxpayer to join
Gibaligya nimo ang yuta to private entities or
the said
corporations for a profit, this is already
competition
proprietary. So pwede na ba mo sulod si BIR
- No future and isubject ka to tax? YES.
service is

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

42
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

d. Income derived from investments in the the income earner is a foreign state or
Philippines by Foreign Government or country. Following the inherent limitation
Financing Institutions of international comity, and the express
provision under this 7(d) enumeration
- If you read the entire provision, exclusions that should not be subjected
in the NIRC, the essential requisite here to income tax.
is that the recipient of the income must
be a foreign government of course kung e. Gains derived from redemption of shares
foreign government dili gyud na isubject of stock issued by a Mutual Fund Company
to tax, excluded gyud na, inherent
limitation, international comity or even if - Mutual Fund Company: a
not directly the foreign government, a situation where the owners of the fund
financing institution owned, financed, are those who are investors thereof.
controlled or in one case refinanced by There is actually pulling of funds and
a foreign government is also exempted the funds pulled by these investors will
from income taxation because if this be used for diversified investments and
financing institution which is basically usually, these investments are very
or usually a bank, if it is owned, risky to the point that the mutual fund
financed, controlled or in one case could suffer a very high loss or it could
refinanced by a foreign government, suffer a very high gain. Mao na nga
technically that is instrumentality of that whatever gains derived from redemption
foreign government, extension kung of shares of stocks in a mutual fund
baga, so we follow still international company, hands off ang government.
comity. So we exclude that from income Exempt from income taxation, ngano
taxation. man? To save it also from mura man
gud na nag gamble bitaw ka sa dagan
- A regional financing institution, sa stock market which could go up or
international financing institution could go down.
established by foreign government and
it has investments here in the
Philippines and it earned income here in
the Philippines and that would be So imagine if the gain is
exempted from income taxation. subjected to income tax, it follows that
the loss should be allowed as a
- Loan agreements also entered deduction. Kay in ana mana if ang
into by the Philippines government and income nako isubject ko nimo to tax,
if the creditor there earns income, maka claim ko dapat as expense
usually there is a provision there especially if I’m doing business, same
exempting the World bank for example thing here, if the gain is subjected to tax,
or if ang magpa loan kay China, US or the loss should be made an allowable
Japan there is interest there, automatic deduction and that could become
understandably that would be excluded unfavourable to the government. Why?
from income tax because the creditor or Mga negosyante they have different

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

43
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

portfolio of investments, all that they *there is no need for you to include it in the
need to do kung tan aw nila nga dako computation of your taxable income but there
silag income this year, pullout nato ang are some items that needs to be disclosed in
mutual fund, let’s recognize the loss, the payroll of the employee.
ideduct nato ang loss sa income kay ma
foresee baya na nimo based sa dagan RA No. 9505 - Personal Equity & Retirement
or trend. So hands off nalang, way tax Account (PERA)
sa gain, wala say deduction for the loss.
● Exclusion under Special Law

● PERA is a product of RA 9505 or the

PERA Act of 2008 which was signed into
f. Contributions to GSIS, SSS, PAG-IBIG, and law by President Arroyo on August 22,
Union Dues 2008.

● Tax incentives became effective starting

January 1, 2009.
- This is excluded because this is expressly
provided under the law. ● PERA is a product offered by universal
banks. (Ex.: BPI and BDO) - unlike in
SSS or GSIS, the contributor directly
contracts with the bank.
th
g. Benefits in the form of 13 month pay
and other benefits not exceeding P90,000 PURPOSE: To encourage Filipinos, especially
OFWs, to put up a voluntary retirement savings
plan.
h. Gains derived from the sale, exchange,
retirement bonds debentures or other
certificate of indebtedness with a maturity of A voluntary retirement savings program
more that five (5) years. The contributor is entitled to receive back the
total amount contributed, plus all income
associated with his or her PERA account, upon
retirement. In addition, the contributor receives
-Kung gi retire nimo more than
the following benefits through PERA:
5 years, wala kay tax but if you pre-
terminate it prior to the maturity of five 1. The maximum annual contribution, until
year period, there could be a tax there. the age of 55, is entitled to a 5% income
(There was a propose change to this tax credit;
under the CREATE bill, I’ll get back to
you) 2. All income earned from the PERA
investment upon reaching retirement or
death are tax exempt; and

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

44
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

3. Unlike in SSS or GSIS, the contributor I. The taxpayer seeking deduction must
makes all the investment decisions, with point to some specific provisions of the
the help of the investment Managers, in statute authorizing the deduction.
choosing which investment assets to
II. The taxpayer must be able to prove that
put his/her money.
he is entitled to the deduction
authorized or allowed.

HOW PERA WORKS:

A. You contribute a certain amount of

In claiming for a tax exemption, the Double
money voluntarily. Nexus Doctrine must be followed.

In claiming for a tax deduction, the Double

Nexus Doctrine must also be followed
Threshold to be able to avail of the 5% because in essence, the nature of deduction
income tax credit: is exemption.

100,000 - Philippine residents Double Nexus Doctrine

1. Cite a specific provision granting the
200,000 - living and working overseas
exemption.
2. Prove entitlement of exemption
granted by law.
NOTE: This is the maximum annual
contribution. Any excess thereof is no longer
subject to the 5% in come tax credit. III. There should have been proper
withholding if required under the law.

Exception: So long as the taxpayer

B. Upon reaching retirement (or death), pays the amount of the withholding tax,
you no longer have to rely solely on then the deduction may already be
your pension which you will be receiving allowed as a deduction. (RMC issued in
from the SSS or GSIS because PERA 2018 by now-Commissioner Dulay)
can be likened to as a retirement fund.
(MAIN GOAL of this Special Law)
NOTE: We will discuss in detail the non-
C. With PERA, you can track your own
deductible items. Same with the exclusions, the
investment through your bank account.
non-deductible items apply to both individual
and corporate taxpayers.

DEDUCTIONS FROM GROSS INCOME

NOTE: In essence, the nature of deduction is
exemption because such deduction will result in
BASIC PRINCIPLES GOVERNING the lowering of the tax liability.
DEDUCTIONS:

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

45
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Atty. KMA: Not all outflows may be deducted General Rule: there should be proper
hence, in the formula I have mentioned, I withholding and if there is no proper withholding
purposely labeled it as “allowable deduction.” It the corresponding claims or expense in relation
has to be an outflow and it has to be allowed to the withholding tax that was not withhold will
under the law. be disallowed. Except if there is subsequent
payment of the amount of the withholding tax.

Example: Sauna sa time ni Henares stricto,

kung ikaw withholding agent, gisugo ka ug Note:
pawithhold, unya wala ka nakawithhold ang
Itemized [ExInTaLoBaChaRePenDepDep] or
mahitabo sa imoha kato deduction nimo e-
Optional Standard Deduction [OSD]
disallow to as a reduction to your taxable
income. So if it is being disallowed, natural the Expense, Interest, Taxes, Losses, Balance,
bottom figure that taxable income will increase, Charitable contributions, Research and
so it will result to deficiency income assessment. development cost, Pensions, Depletion, and
Plus, you will be asked to pay the amount of the Depreciation
withholding tax that you failed to withholding as
a withholding agent. Can you imagine? ang
gukuron dili ang income earner, ang pabayron
ikaw as a withholding agent because you failed
your responsibility. So given that situation, Non- deductible Items – these are the items
double whammy si taxpayer, nganu man? that you cannot claim as a deduction from your
Taxpayer/withholding agent gi-disallow pa ang income tax;
expense, niya nisaka ang tax liability niya,
● Personal Living or Family expenses –
pabayron pa siya sa withholding tax, so many
because
stakeholders raised that concern to the
commission and finally Commissioner Dulay ○ The first 250,000 of your income
heard it. Kung wala ka naka-withhold then upon during the year is subject to 0%
audit gi-disallow ang expense that you are trying tax.
to claim or deduction you are trying to claim.
● Amount paid for new buildings or
Pero if bayaran nimo ang nakit-an nga
permanent improvement, or betterment
withholding tax nga wala nimo na withhold, e-
to increase the value of any property or
allow nato namo balik ug padeduct ang
estate;
expenses na wala nimo na withhold-an, basta
bayaran nimo ang amount sa withholding tax na ○ This is considered as capital
wala nimo na withhold as withhold agent. Kay expense. Ang deductible nimo
ikaw ang gisugo nimo kay ikaw mn ang nga expense is technically is
nagabantay anha. ( if gibayaran na ang the expense that you expended
withholding tax, so dapat e-allow na as during the taxable year. But
deduction ang kato nga expense). even it is a capital expense that
is considered as major expense,
involving huge sum of money
which increases the value of the

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

46
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

property, not to mention expense refers to “major repairs”. Of course we

extends the life of the property have to distinguish major repairs from minor
to more than a year. In short, repairs. Minor repairs these are minimal amount
ang benefit nimo ana nga gasto and are expected to benefit you over a short
extends beyond the taxable period of time. But if it is restoring the property,
year. Non-deductible item siya it means that you are extending the life of a
at once pero ma stagger nimo property and you are increasing the value of the
siya through the recognition of property. So the same as in #2 the cost of the
depreciation. major repair will have to be capitalized first, will
have to be included in the costing of the
● Any amount expended in restoring
property and eventually in a staggered basis be
property or in making good the
subjected to depreciation.
exhaustion thereof for which an
allowance is or has been made; or

● Premium paid on any life insurance The fourth non-deductible item pertains to
policy covering the life of any officer or life insurance policy. What are the conditions
employee or of any person financially why this is considered deductible? One,
interested in any trade or business premium paid. Kinsa ang nibayad? Taxpayer of
carried on by the taxpayer, individual or course. Premium paid on any life insurance
corporate, when the taxpayer is directly policy (not any type of insurance policy, not car
or indirectly a beneficiary under such insurance, property insurance) covering the life
policy. of any officer or employee or of any person
financially interested in any trade or
business carried on by the taxpayer,
individual or corporate, when the taxpayer is
directly or indirectly a beneficiary under
Third non-deductible item is such policy. Siya ang beneficiary sa policy.
Nganong non-deductible man? Is there an
out flow nga nahitabo in this case? None.
It’s just like temporarily putting your money
to the insurance company through the
premiums paid on the life insurance policy
but eventually because you are beneficiary
when the officer will die the money goes
back to you. It’s a temporary transfer of
your money. So it’s non-deductible there’s
no really real out flow. However, if the
beneficiary is not the employer or the
taxpayer the heirs for example of the officer
or employee in such case the money will not go
Any amount expended in restoring property or in to the company since such case the premium
making good the exhaustion thereof for which paid may now be considered as a deduction.
an allowance is or has been made. This third

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

47
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Although there could be a question on a deductible. What is the reason behind its non
necessity thereof, but that’s another sorry. deductibility? Because they belong to the same
family. In short they have a common interest
and they can very well agree to just sell it at a
Let’s illustrate this: loss. So they can deduct the loss and reduce
their income. In short abuse the tax laws.
ABC Company, insures the life of its President
X. ABC Company gets a life insurance policy
from AXA. For that life insurance policy over
the life for its President. ABC Co. pays
premium to AXA Php20,000 per year up to 10
years. For example, wala pa naabot ang 10
years namatay na si President X and of course
the promise of AXA is upon death of the
insured, which is Pres. X, the beneficiary will
receive 1M. ABC Co. is the beneficiary upon
the death of Pres. X it follows that AXA will
give 1M to ABC Co. In short, naa bay kwarta
napagawas si ABC Co.? None. Because
ultimately if mamatay si X mabalik man ang (ii) Except in case of distribution in
kwarta sa iyaha with ginansya pa and exempt liquidation, between an individual and a
pa from income tax because it is a proceeds corporation more than 50% in value of the
from life insurance policy. outstanding stock of each of which is owned,
directly or indirectly, by or for same
But it’s a different story if ABC Co. is not
individual Again individual and corporation but
beneficiary. For example, when Pres. X died the
more than 50% is owned by individual so
1M was given to Mrs. X because in the policy it
meaning naay influence si individual to set the
was testified that Mrs. X is the beneficiary. In
pricing of the property transferred of the
this case, napagawas ba jud og kwarta si ABC
corporation more than 50%
Co.? Yes. Because the proceeds upon the
death of Pres. X is given to somebody else.

Or the third is between two corporations more

than 50% of the outstanding stock of which is
Fifth non-deductible item which is: Losses from
owned directly, by or for some individual, if
sales or exchanges of property directly or
either one of such corporations is a personal
indirectly- (meaning wala na gi term nila sale
holding company or a foreign personal holding
but, using net effect test it’s really a sale
company.
transaction)

In such cases, still there is influence over the

(i) Between members of a family (brother,
decision making function in setting the price.
sister of half or full blood, spouse,
ascendants, lineal descendants) it’s not

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

48
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Kinsa ang mo claim sa loss; buyer or seller?

Seller. Kay si buyer siya man ang nibayad sa
Company B is owned by A, D and E. A and D
kwarta. So ginansiya si buyer kung alkansi si
owns 40% and E owns 20%.
seller. But the point is, if they fall in any of the 6
situations then loss is deductible.

Is the loss deductible?

IV. Between the grantor and a fiduciary of
any trust
Yes, it is deductible because there is no
A fiduciary is merely an administrator of the trust significant influence of A in both buying and
so there is no really transfer of ownership. selling companies.

V. Between fiduciary of a trust and the Situation 2:

fiduciary of another trust, if the same person
is a grantor with respect to each trust The share of Mr. A in Company Seller is 70%,
Mr. B is 10% and Mr. C is 20%.
The fiduciary is deemed an administrator or
temporary owners.
Company B is owned by A, D and E. A and D
owns 40% and E owns 20%.
VI. Between a fiduciary of a trust and a
beneficiary of such trust
Is the loss deductible?

Illustration:

Company Seller sells house and lot to Company The answer is YES. It is deductible. Why?
Buyer. The gross selling price is 10 million and Because A does not have any significant
also the building. The cost of the lot is 20 million. influence over the buying company. Ang
So there is a loss of 10 million. Is the loss influence manggud niya sa selling is on the
deductible? Yes, the loss is deductible to setting of the price. But influence of the
Company Seller provided they do not fall under
buying, puydi man siya maka, kung naa
any of the scenarios enumerated.
siyay influence, puydi man siya maka
enforce. Maka influence. To pursue the
transaction. But in this case, dili man, diba
Illustration: (same facts above but with addition)
ang requisite is more than 50% of the
Situation 1: outstanding stock of each so meaning
Shareholders of Company S is Mr. A, Mr. B nd the buying and selling company. In this
Mr.C. Mr. A and B owns 40% and Mr. C owns case, 40% raman siya sa buying company,
20%.

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

49
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

so wala ni nameet nga requisite in number kani directly or indirectly by or for some
3. Therefore, answer is, it is deductible. individual. What is meant by that? Meaning
siya ang beneficial owner pero legal owner
or ang niappear sa GIS dili ang name niya.
Now, let’s change again, what if let’s say for Sir, how do we know that he is the
example, ang ownership ni A in company B beneficial owner? Usually class it is
is not 40%. Ang ownership ni A sa company supported by the so called ______ (Sorry d
B, let’s say for example is 90%. So the rest ko maklaro. All I can hear is Trustee Shit
of the share holders owns nalang tag 5% Agreement which I think di mao. Huhu).
shares. In this case, the same transaction Mao na karon because of money
noh, Will the loss of 10 million be deductible? laundering issues, the SEC becomes quite
The answer is NOT DEDUCTIBLE. Why strict to the point of revising the disclosures
not deductible? Because A, the common or in the GIS and ang SEC karon ginarequire
inter lacking share holder, between na niya nga idisclose kinsa ang beneficial
company S and company B, now has owner. Meaning to say, puydi manggud ko
significant influence in both companies. mag appoint as nominee ba, ako di ko
Because he owned more than 50% in ganahan muappear ang name nako sa
value of the outstanding stock. When we daghang kompanya. So I’ll just appoint
say outstanding stock, this is the stock somebody who will sit there but basically I
issued and deemed entitled to vote which is am the one directing him and if ever he’s
in making decisions whether to buy or to receiving dividends, we have an agreement
sell a particular realty or property. Okay? nga ang katong dividend nga madawat niya
Do you follow? Hopefully you’ve followed. will be given to me. Dili to iappropiate niya.
So the illustration so far shows direct Do you follow? Of course naa lang siya
ownership of an inter lacking share holder. minimal fee for that. That’s what we call
(Trustee Shit Agreement) Trustor ko,
trustee siya. I’m the benificial owner. So
Take note, the condition, again class ha that’s when indirect ownership comes in. Or
pareha ra na sa number 2. Ang kalahian the shareholder is another corporate entity
lang sa number 2, instead of two and I am one of the shareholders on that
companies, individual ang usa. So kung corporate entity shareholder. That’s another
number 2 situation, instead of company S, situation of indirect ownership. So in such
ang ibutang nato si shareholder A. Si Mr. A. case, you still have to ascertain how much
But same situation. Dapat naa siya’y is my share holding in that corporate entity
shareholding of more than 50% in the other who owns shares in either the buying or
company. Ang nakabutang sa number 2 is selling company. Okay? So let’s try to
50% of which is on directly by for such an illustrate that one.
individual whether buying or selling. Kani
lang, term, directly, by or for an individual or

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

50
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Example:

So you still have company S, the seller, but If you look at it, A is an owner of company
the shareholders of company S is another S also class. Pero, indirect ownership.
corporation. Let’s say for example, F Why indirect ownership? Because the direct
corporation. Dili individual ha? Kani si B, C, ownership is in the name of F Corp. But if
A, D, & E individuals na class. Si F you look at it, 99% of this 99%, effectively, A
corporation, another corporate entity, owns 99% of Company S. So in that cae,
owning shares in company S. Puydi diay na more than 50% ang ownership niya, more
sir? The answer is YES. Because a than 50% sad sa company B, so, when you
corporation may invest in another will be asked, Is the loss of 10 million
corporation. Because it has what we call deductible? The answer is NO. Why?
juridical personality class. Okay? Let’s say Because A owns company S indirectly and
for example ang ownership ni F corporation the percentage of ownership is in effect
ni company S is, let’s say for example, 99%. 99% for more than 50%. Do you follow?
So ang shares nalang ni other individuals, Let’s change a bit.
ni B & C, is .5. Tag .5 nalang siya. So .5%
and another .5. If you look at that, well
muingon ka, Uy wala ni inter lacking share Let’s change the situation:
holder kay corporate man. Pero unsa man If ang ownership ni A is not 99%, this is still
ang buhaton ana ni BIR? The BIR will look indirect ownership because ang ni appear as
at the share holders of F Corporation. shareholder ni Company S is si F Corp. man but
Ngano man? Tanawn na niya because ang if you look at F Corp., if ang ownership ni A is
gibutang sa requisite is individual. By or for only 1%, X owns let’s say 98% and then Y owns
the same individual. Dili corporation. another 1%. Although indirect owner si A ni
Meaning, we look at to the very last Company S but pila ang ownership ni A?
individual composing that company or
corporate entity. So the BIR will now
A: Ang indirect ownership niya would be 1% of
examing the share holdings of F
99% shares in Company S.
Corporation. If F Corporation is owned by A,
X, & Y.
Q: Pila ang 1% of 99%?

F Corporation A: It is 0.1 x 0.99 x 100 = 0.99% which is way

below 50%. This is even lower than 1%
A - 99% owned ownership in Company S. So below siya 50, dili
more than 50.
X - .5

Y - .5

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

51
TAXATION 1 Transcripts | Atty. KMA | A.Y. 2020 - 2021

Q: So naa ba si A significant influence ni

Company S?

A: NO. Although A has an influence in Company

B because he directly owner 90%.

Q: But in this situation kung 0.99% lang ang

indirect ownership niya in Company S, you
will be asked. Is the loss of P 10M deductible?

A: This time around your answer will be YES

because the requirement is more than 50% of
the outstanding stock of each of the selling and
buying company must be owned by the same
individual, either direct or indirect.

UNIVERSITY OF SAN CARLOS SCHOOL OF LAW AND GOVERNANCE

52