Income Tax on Individuals

Individual Source of Income Tax Base

RC Within and without Taxable Income
NRC Within Taxable Income
RA Within Taxable Income
NRA-ETB Within Taxable Income
NRA-NETB Within Gross Income

a) Resident Citizens, Non-Resident Citizens, and Resident

Aliens
(1) Inclusions and Exclusions for Taxation on Compensation
Income
Inclusions:
All remuneration for services rendered by an employee for his employer
unless specifically excluded. It includes
1. salaries, wages, emoluments,
2. honoraria,
3. bonuses,
4. allowances,
5. fringe benefits including director’s fee,
6. taxable pensions and retirement pay and
7. other income of similar nature including those paid in kind.
1. COLA, PERA, housing allowance, OT pay, Emergency pay,
Hazard pay, Rice and clothing allowance, Medical allowance,
grocery allowance.
Exclusions:
1. Compensation for services rendered by an independent
contractor;
2. Amounts paid either as advances or reimbursement for
transportation, representation, and other bona fide ordinary and
necessary expenses incurred in the performance of duties unless
there is an excess over actual expenses;
3. Income derived by partner from professional partnership.
4. Convenience of the Employer Rule. — benefits which are
given for the exclusive benefit or convenience of the employer.
5. De minimis benefits.

(2) Taxation of Business Income/Income from Practice of

Profession
Schedular:
 1. RC – 0-35% of net income within & without;
2. NRC – 0-35% on net income within;
3. RA – 0-35% of net income within;
4. NRA-ETB – 0-35% of net income within;
5. NRA-NETB – 25% of gross income within;
6. Estates & Trusts – 0-35% of net income;
7. Special Employees – 15% of gross compensation income.
8% option
Self-employed individuals and/or professionals shall have the option to
avail of an eight percent (8%) tax on gross sales or gross
receipts  and other non-operating income in excess of Php250K in lieu
of the graduated income tax rates and the percentage tax.

Rules on availing the 8% tax rate

1. The first Php250K is not subject to tax;
2. This is in lieu of the 3% percentage tax;
3. Taxpayer must signify intention to use this option in the 1st
quarter percentage or income tax return. Otherwise, graduated
rates apply.
4. Mixed income earners are not entitled to the Php250K
reduction.
5. This option is NOT available to:
1. Purely compensation income earners;
2. VAT-registered taxpayers, regardless of gross sales or
receipts;
3. Non-VAT taxpayers whose gross sale or receipts and
other non-operating income > Php3M;
4. Taxpayers subject to OPT except those under Sec 116.
5. Partners of a GPP since their distributive share is already
net of costs and expenses; and
6. Individuals enjoying income tax exemption, i.e. BMBEs.

(3) Taxation of Passive Income

Passive Income Rate

For RC, NRC, RA
Royalties in general 20%
- Books, literary and musical composition 10%
Prize and Winnings – P10K or less 0-35%
- >P10K 20%
PCSO and Lotto winnings – P10K or less EXEMPT
- >P10K 20%
Interest income from FCDU 15%
Cash and Property Dividends- Individual to DC 10%
-DC to DC 0%
 Interest on long-term deposit or investment in bank EXEMPT
(With maturity of at least 5 years)

PLUS NRA-ETB
Interest from currency deposits, trust funds and deposit substitutes 20%
Interest Income from long-term deposit or investment EXEMPT
- Upon pre-termination with Holding period 4-5 years 5%
- 3-4 years 12%
- <3 years 20%

ALL, including NRA-NETB

Capital gains 6%
Capital gains for shares of stock not traded 15%
ONLY NRA-NETB
Gross amount of income within PH 25%

BDO v. Republic 2015 En Banc

WON the PEACe Bonds are “deposit substitutes” and thus subject to 20% final
withholding tax under the 1997 NIRC.

Related to this question is the interpretation of the phrase “borrowing from

twenty (20) or more individual or corporate lenders at any one time” under
Section 22(Y) of the 1997 NIRC, particularly on whether the reckoning of the 20 lenders
includes trading of the bonds in the secondary market.

20-lender rule

Whether referring to money market securities or capital market securities,

transactions occur either in the primary market or in the secondary market. Primary
markets facilitate the issuance of new securities. Secondary markets facilitate the
trading of existing securities, which allows for a change in the ownership of the
securities. The transactions in primary markets exist between issuers and investors,
while secondary market transactions exist among investors.

The financial market, therefore, is an agglomeration of financial transactions

in securities performed by market participants that works to transfer the funds from the
surplus units (or investors/lenders) to those who need them (deficit units or borrowers).
Thus, from the point of view of the financial market, the phrase “at any one time” for
purposes of determining the “20 or more lenders” would mean every transaction
executed in the primary or secondary market in connection with the purchase or
sale of securities.

Where the financial assets involved are government securities like bonds, the
reckoning of “20 or more lenders/investors” is made at any transaction in connection
with the purchase or sale of the Government Bonds. Consequently, the seller is
required to withhold the 20% final withholding tax on the imputed interest
income from the bonds.

For debt instruments that are NOT deposit substitutes, regular income tax
applies

It must be emphasized, however, that debt instruments that do not qualify as

deposit substitutes under the 1997 NIRC are subject to the regular income tax.
The “gains” contemplated in Section 32(B)(7)(g) refers to:
1) gain realized from the trading of the bonds before their maturity date, which is
the difference between the selling price of the bonds in the secondary market and the
price at which the bonds were purchased by the seller; and
2) gain realized by the last holder of the bonds when the bonds are redeemed at
maturity, which is the difference between the proceeds from the retirement of the
bonds and the price at which such last holder acquired the bonds.

For discounted instruments, like the zero-coupon bonds, the trading gain shall

be the excess of the selling price over the book value or accreted value (original issue
price plus accumulated discount from the time of purchase up to the time of sale) of
the instruments.

The BIR’s interpretation of “at any one time” to mean at the point of
origination alone is unduly restrictive.

Tax treatment of income derived from the PEACe Bonds

Should there have been a simultaneous sale to 20 or more lenders/investors, the

PEACe Bonds are deemed deposit substitutes. Further, the obligation to withhold
the 20% final tax on the corresponding interest from the PEACe Bonds would likewise
be required of any lender/investor had the latter turned around and sold said PEACe
Bonds, whether in whole or part, simultaneously to 20 or more lenders or investors.
Under Section 24 of the 1997 NIRC, interest income received by individuals from long-
term deposits or investments with a holding period of not less than five (5) years
is  exempt from the final tax.

Thus, should the PEACe Bonds be found to be within the coverage of deposit
substitutes, the proper procedure was for the Bureau of Treasury to pay the face value
of the PEACe Bonds to the bondholders and for the BIR to collect the unpaid final
withholding tax directly from RCBC Capital/CODE-NGO, or any lender or
investor if such be the case, as the withholding agents.

(4) Taxation of Capital Gains

1. Income from sale of shares of stock of a Philippine corporation

In the case of shares of stock not listed and traded in the local stock
exchanges, the following rules shall apply:

1. For common shares of stock, the book value based on the

latest available financial statements duly certified by an independent
public accountant prior to the date of sale, but not earlier than the
immediately preceding taxable year, shall be considered as the prima
facie fair market value.
2. For preferred shares of stock, the liquidation value, which
is equal to the redemption price of the preferred shares as of balance
sheet date nearest to the transaction date, including any premium
and cumulative preferred dividends in arrears, shall be considered as
fair market value.

3. In case there are both common and preferred shares, the

book value per common share is computed by deducting the
liquidation value of the preferred shares from the total equity of the
corporation and dividing the result by the number of outstanding
common shares as of balance sheet date nearest to the transaction
date.

4. For this purpose, the book value of the common shares of

stock or the liquidation value of the preferred shares of stock need
not be adjusted to include any appraisal surplus from any property of
the corporation not reflected or included in the latest audited
financial statements, in order to determine the fair market value of
the shares of stock. The latest audited financial statements shall be
sufficient in determining the fair market value of the shares of stock
subject of the sale, barter, exchange, or other disposition. (RR 20-
2020)

2. Income from sale of real property situated in the Philippines

3. Income from sale, exchange, and other disposition of other capital
assets.

Types Rate Basis

Sale of shares of stocks not traded 15% Net Capital Gains
- Listed and Traded 0.6% Gross Selling Price
Sale of real property located in PH 6% GSP, FMV, higher
Sale of other capital assests
 - > 12 Months 0-35% 50% of CG
- 12 Months or less 0-35% 100% of CG

RULES

1. Real properties formerly forming part of the stock in trade of a taxpayer

engaged in real estate or formerly used in trade or business which were later

on abandoned continue to be treated as ORDINARY assets.

Provided, that such is automatically converted to CAPITAL assets upon showing

proof that they have not been used in business for more than 2 years prior to the

consummation of the taxable transaction.

2. Change of hands to recipient not engaged in real estate or to use in

business:

1. Succession or donation - CAPITAL;

2. As dividend - CAPITAL;

3. Exchange - ORDINARY;

4. Involuntary Transfers - NO EFFECT.

CONDITIONALLY EXEMPT FROM CGT

1. Proceeds of sale of the principal residence have been fully utilized in

acquiring a new one within 18 months from date of sale;

2. The historical cost or adjusted basis of RP sold will be carried over to the

new PR;

3. CIR has been duly notified, through a prescribed return, within 30 days,

from date of sale of intention to avail of tax exemption.

4. Net of proceeds not utilized will be subject to CGT.

 5. Buyer of principal residence shall deduct 6%, deposit in cash or manager’s

check in an interest-bearing account with an Authorized Agent Bank under an

Escrow Agreement.

EXEMPT ENTITIES FROM CGT

1. Dealer in securities;

2. Exempt under special laws;

3. Exchange of real property solely for shares of stock resulting in corporate

control;

4. GOCC selling real property;

5. Disposition is gratuitous;

6. Pursuant to CARP Law;

7. Requirements above have been met, reg. principal residence.

Republic v. Sps Salvador 2017

Whether the capital gains tax on the transfer of the expropriated property can

be considered as consequential damages that may be awarded to respondents.

NO. It is settled that the transfer of property through expropriation

proceedings is a sale or exchange within the meaning of Sections 24(D) and

56(A)(3) of the NIRC, and profit from the transaction constitutes capital gain. Since

capital gains tax is a tax on passive income, it is the seller, or respondents in this case,

who are liable to shoulder the tax.

As far as the government is concerned, the capital gains tax in expropriation

proceedings remains a liability of the seller, as it is a tax on the seller's gain from

the sale of real property.

(5) Capital Asset vs. Ordinary Asset

 The term 'capital assets' means property held by the taxpayer (whether or not connected

with his trade or business), but does not include (ordinary assets)

1. stock in trade of the taxpayer;

2. other property of a kind which would properly be included in the

inventory of the taxpayer if on hand at the close of the taxable year;

3. property held by the taxpayer primarily for sale to customers in the

ordinary course of his trade or business;

4. property used in the trade or business, of a character which is

subject to the allowance for depreciation provided in Subsection (F) of

Section 34; or

5. real property used in trade or business of the taxpayer.

For specific guidelines in determining WON real property is a capital or ordinary asset,

please see RR 7-2003.

Main takeaway — a taxpayer habitually engaged in the real estate business  is

someone:

1. Registered with the HLURB or HUDCC as as a real estate dealer or

developer; or

2. If not registered with the above, having consummated during the

preceding year of at least six (6) taxable real estate sale transactions, regardless

of amount; or

3. Registered as habitually engaged in real estate business with the LGU or

BIR.

b) Income Tax on Non-Resident Aliens Engaged in Trade or Business

Passive Income Rate

Royalties, in general 20%
- Books, literary and musical composition 10%
Prizes and Winnings – P10K or less 0-35%
- >P10K 20%
PCSO and Lotto winnings – P10K or less EXEMPT
- >P10K 20%
Interest income from FCDU 15%
 Cash and Property Dividends- Individual to DC 10%
- DC to DC 0%
Interest on long-term deposit or investment in banks
EXEMPT
(With maturity of at least 5 years)
Interest from currency deposits, trust funds and deposit substitutes 20%
Interest Income from long-term deposit or investment EXEMPT
- Upon pre-termination with Holding period of 4-5 years 5%
- 3-4 years 12%
- < 3 years 20%

c) Income Tax on Non-Resident Aliens Not Engaged in Trade or

Business

Passive Income Rate

Royalties, in general 20%
- Books, literary and musical composition 10%
Prizes and Winnings – P10K or less 0-35%
- >P10K 20%
PCSO and Lotto winnings – P10K or less EXEMPT
- >P10K 20%
Interest income from FCDU 15%
Cash and Property Dividends- Individual to DC 10%
- DC to DC 0%
Interest on long-term deposit or investment in banks
EXEMPT
(With maturity of at least 5 years)
Capital gains 6%
Capital gains for shares of stock not traded 15%
Gross amount of income within PH 25%

INDIVIDUAL TAXPAYERS EXEMPT FROM INCOME TAX

1. SENIOR CITIZENS

Senior Citizens who are considered to be minimum wage earners shall be entitled to
exemption from the payment of individual income taxes (Sec4[b] RA 9527, as amended).

2. MINIMUM WAGE EARNERS (MWEs)

Statutory Minimum Wage shall refer to the rate fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB) as defined by the Bureau of Labor and Employment Statistics
of DOLE.

Minimum Wage Earner shall refer to a worker in the private sector paid the minimum
wage or to an employee in the public sector with compensation income of not more than the
statutory minimum wage in the non-agricultural sector where he or she is assigned.
 Republic Act No. 9504 imposes taxes only on the taxable income received in excess of
the minimum wage, but the MWEs will not lose their exemption as such. Workers who receive
the statutory minimum wage and their basic pay remain MWEs. The receipt of other income
during the year does not disqualify them as MWEs for they remain so, entitled to exemption,
but the taxable income they receive other than as MWEs may be subjected to appropriate taxes
(Soriano v. Secretary of Finance, 2017).

3. EXEMPTIONS GRANTED UNDER INTERNATIONAL AGREEMENTS

1) Officers and staff of the Asian Development Bank who are NOT PH nationals shall be
exempt from PH income tax
2) Alien individual employees of foreign embassies or international organizations in PH are
exempt from our income tax based on the international agreements entered into by PH
with said internaitonal organizations

6. INCOME TAX ON CORPORATIONS

a. Income Tax on Domestic Corporations and Resident Foreign Corporations

Taxation in General Corporation

Includes: partnerships, no matter how created or organized, joint-stock companies, joint
accounts, association, or insurance companies,
Does not include: general professional partnerships and a joint venture or consortium
formed for the purpose of undertaking construction projects or engaging in petroleum,
coal, geothermal and other energy operations pursuant to an operating consortium
agreement under a service contract with the Government.

Kinds of Corporation under the NIRC

1. Domestic corporation - a corporation created or organized in the Philippines
under its law and is liable for its income from sources within and without.
2. Resident Foreign Corporation – a corporation which is not domestic and is engaged in
trade or business in the Philippines and is liable for income form sources within the
Philippines.
3. Non-resident Foreign Corporation – a corporation which is not domestic and not
engaged in trade or business in the Philippines and is liable for income from sources
within.
4. Special Types of Corporations – those corporations with different tax rates

Corporate income tax reduction and other pandemic-related tax relief under CREATE
*Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act to take effect on
April 11, 2021

Domestic Corporations – taxed for income derived from sources within and outside the
Philippines

PRE-
TYPE OF BUSINESS CREATE
CREATE
In general, on net income from all sources.
(Domestic corporations which earn a taxable income 30% 25%
above P5M)

On net income from all sources of domestic corporations 30% 20%

 PRE-
TYPE OF BUSINESS CREATE
CREATE
with total assets not exceeding 100 million Philippine
pesos (PHP) and total net taxable income not exceeding
PHP 5 million.
Minimum corporate income tax (applicable from July 1,
2% 1%
2020 to June 30, 2023)
Non-profit and proprietary educational institutions and
10% 1%
hospitals (applicable from July 1, 2020 to June 30, 2023)
Exempt, subject to
Foreign-sourced dividends received by domestic
15% reinvestment of earnings
corporations
in the Philippines

Improperly accumulated earnings tax (IAET) 10% Repealed

Non-stock, non-profit educational institutions (all assets and revenues used

actually, directly, and exclusively for educational purposes) and other non- Exempt
profit organizations.

Resident foreign corporations

Resident foreign corporations (foreign corporations engaged in trade or business in the
Philippines through a branch office) are taxed in the same manner as domestic corporations
(except on capital gains on the sale of buildings not used in business, which are taxable as
ordinary income), but only on Philippine-source income.

CIT rate
Income
(%)

Income of international carriers on their gross Philippine billings 2.5

Interest income from foreign currency loans granted to residents other than
10% final
offshore business units (OBUs) or other foreign currency deposit units (FCDUs) of
tax
depository banks

Regional operating headquarters (ROHQs) earning income from the Philippines 25

Regional or area headquarters of multinational corporations that do not earn or

derive income from the Philippines, and that act as supervisory, communications,
Exempt
and coordinating centers for their affiliates, subsidiaries, or branches in the Asia-
Pacific region and other foreign markets

Corporate tax scheme on regular corporations

Domestic Corporation Resident Corporation
- Gross income tax; OR - RCIT subject to Minimum
- Regular Corporate Income Tax Corporate Income Tax (MCIT)
(RCIT)

DOMESTIC CORPORATION- is a corporation created and organized in the Philippines or

under its laws and I liable for its income from sources within and without (Sec. 22(C), NIRC)
Optional Tax Scheme for Domestic Corporations
Domestic corporations may opt to be taxed at either:
 • Corporate gross income tax– The President, upon recommendation of the Sec. of
Finance, may allow domestic corporations the option to be taxed at 15% of gross income
after conditions have been satisfied.
• Regular corporate income tax (RCIT) subject to minimum corporate income tax
(a) Regular Corporate Income Tax (RCIT) or Normal Corporate Income Tax
RCIT applies to all corporations in general. It covers all taxable income of corporations that are
not subject to final tax or capital gains tax. Tax Rate: 25% (CREATE)

ALLOWABLE DEDUCTIONS
As for the allowable deductions, the corporation has the option to choose as between Itemized
deductions or Optional Standard Deduction (OSD).
A. Itemized deductions

Pertains to the items in Sec. 34 of the NIRC as discussed under Deductions from Gross
Income. These expenses are deducted to gross income to arrive at the taxable income.

Deductions from Gross income

1. Expenses
a. Ordinary and Necessary Trade, Business or Professional Expenses
i. Salaries, wages and other forms of compensation expenses
ii. Travel expense
iii. Rentals expenses
iv. Entertainment, amusement and recreation expenses

Note: No deduction from gross income shall be allowed unless the taxpayer shall
substantiate with sufficient evidence, such as official receipts or other adequate records:
(i) the amount of the expense being deducted, and (ii) the direct connection or relation of
the expense being deducted to the development, management, operation and/or conduct
of the trade, business or profession of the taxpayer.
b. Interest
c. Taxes
d. Losses
e. Bad Debts
f. Depreciation
g. Depletion of Oil and Gas Wells and Mines
h. Charitable and other Contrbutions
i. Research and Development
When itemized deductions is mandatory
The following are corporations, partnerships and other non-individuals that are mandated
to use the itemized deductions:
a. Those exempt under the NIRC (i.e., exempt corporations under Sec. 30 and GOCCs
under Sec. 27(C)] and other special laws, with no other taxable income;
b. Those with income subject to special/preferential tax rates; and
c. Those with income partially subject to income tax rate under Secs. 27(A) and 28(A)
(1) of the NIRC and partially subject to special/preferential tax rates. Illustration:
 Gross Sales 50 million
Less: Sales Returns/ Sales 15 million
Discounts/ Allowances/ Cost of
Goods Sold
Gross Income 35 million
Less: Allowable Deductions
Salaries Expenses 5 million
Depreciation Expense 2 million
Rent Expenses 3 million
Repair and Maintenance 2 million 12 million
Taxable Income 23 million
Tax Rate 25%
RCIT 5.75 million

B. Optional Standard Deduction (OSD)

In lieu of the itemized deductions, a corporation may elect to a standard deduction (OSD) in an
amount not exceeding forty percent (40%) of gross income of corporations.
A taxpayer who elected to avail of the OSD shall signify in his/its first quarter return such
intention. Otherwise, he/it shall be considered as having availed himself of the itemized
deductions.
Once the election to avail the OSD is signified in the return, it shall be irrevocable for the taxable
year for which the return is made.

Who can claim OSD?

All corporations who are subject to tax on taxable net income can claim except the following:
1. NRFC
2. Taxpayers mandated to use itemized deductions
Illustration:
Gross Sales 50 million
Less: Cost of Goods Sold 15 million
Gross Income 35 million
Less: Allowable Deductions
40% OSD (35 million X 40%) 14 million
Taxable Income 21 million
Tax Rate 25%
RCIT 5.25 million

(B) Minimum Corporate Income Tax (MCIT)

The MCIT is applicable to every corporation taxable to the 30% regular corporate income tax
including non-profit, exempt, and special corporations with respect to their taxable income
subject to the regular corporate income tax, but not to the income subject to special tax rates.
(Banggawan)

Imposition of MCIT
Computed as 2% of gross income subject to regular income tax (GI)72
The MCIT is not a tax on capital. It is imposed on gross income which is arrived at by deducting
the capital spent by a corporation in the sale of its goods, i.e., the cost of goods and other direct
expenses from gross sales. Clearly, the capital is not being taxed. Thus, MCIT is constitutional.
(Chamber of Real Estate and Builders’ Associations, Inc. v. Romulo, G.R. No. 160756, 2010)
When applicable: Beginning on the 4th taxable year from the year in which such corporation
commenced its business operation, i.e., the year when corporation registers with the BIR,
regardless of whether the corporation is using calendar or fiscal year. Thus, a corporation which
started operations on any day in 2012 will be covered by the MCIT in 2016.

When imposed: When the corporation has either:

 1. Zero or negative taxable income or
2. when 2% of the corporation’s gross income is greater than 30% of its taxable income
(MCIT > RCIT)
Concept of Gross income for MCIT purposes
For corporations involved in
a. sale of goods- Gross sales less sales returns, discounts, allowances, and cost of goods
sold
b. sale of service- Gross receipts less sales returns, allowances, discounts, and cost of
services.
Cost of goods sold shall mean all business expenses directly incurred to produce the merchandise
to bring them to their present location and use.
Cost of services shall mean all direct costs and expenses necessarily incurred to provide the
services required by the customers and clients.

Excess MCIT Carry-over

Excess of MCIT over the RCIT shall be carried forward and credited against RCIT tax due in the
immediately succeeding three (3) years.

Rules for MCIT carry-over

1. Excess MCIT can be used as tax credit against RCIT if RCIT is greater than MCIT.
Excess MCIT cannot be deducted against MCIT tax due.
2. Unused MCIT at the end of the 3-year period shall expire and will no longer be used.
Relief from MCIT
Upon recommendation of the CIR, MCIT may be suspended by the Sec. of Finance upon
submission of proof that the corporation sustained losses on account of:
a. Prolonged labor dispute
b. Force majeure
c. Legitimate business reverses
Illustrations
A. Regular Corporate Income Tax vs Minimum Corporate Income Tax
Computation of RCIT
2014 2015 2016
Gross Sales 3,000,000 4,000,000 5,000,000
Less: COGS 1,500,000 2,000,000 2,500,000
Gross Income 1,500,000 2,000,000 2,500,000
Less: Operating
Expense 1,450,000 1,900,000 2,100,000
Net Taxable 50,000 100,000 400,000
Income
RCIT Rate 30% 30% 30%
RCIT 15,000 30,000 120,000

Computation of MCIT
2015 2016
2,000,00
Gross Income 0 2,500,000
MCIT Rate 2% 2%
MCIT 40,000 50,000

B. The following dates are available for X Corp:

o SEC Registration - December 17, 2010

o BIR Registration - January 4, 2010
 o Start of operations - January 1, 2012

The MCIT will be imposed on X Corporation starting taxable year 2013

  2014 2015 2016   2014 2015 2016
Higher of MCIT
15,000 30,000 120,000 15,000 30,000 120,000
RCIT and RCIT

MCIT 40,000 50,000 MCIT Excess - 10,000

MCIT-excess Tax Due
(MCIT-RCIT) 15,000 30,000 110,000
10,000
Note: The 15,000 excess will be carried over the following year

RESIDENT FOREIGN CORPORATION – is a corporation organized, authorized or existing

under the law of any foreign country, engaged in trade or business with the Philippines. RFC
shall be liable for a 25% income tax on their income derived within the Philippines as provided
under CREATE.

Q: What constitutes doing business in order to classify a corporation as a resident foreign

corporation?
Suggested Answer: Doing business constitutes any act that implies continuity of commercial
dealings or arrangements or the exercise of functions normally incidental to and in the
progressive prosecution of commercial gain or for the purpose of the business. (Sec. 3 (d),
Foreign Investment Act; Air Canada v. CIR, GR No. 169507, 2016)
1. Regular Corporate Income Tax
2. Minimum Corporate Income tax

3. BRANCH PROFIT REMITTANCE TAX (BPRT) – 15%

Any profit remitted by a branch to its head office shall be subject to a tax of 15% which shall be
based on the total profits applied or earmarked for remittance without any deductions for the tax
component (except those activities which are registered with PEZA) (Sec. 28(A)(5)).
The 15% branch profit remittance tax is a final tax which is required to be withheld at source by
the branch of a foreign corporation.

Interest, dividends, rents, royalties, remuneration for technical services, salaries, wages,
premiums, annuities, emoluments or other fixed or determinable annual, periodic or casual gains,
profits, income, and capital gains received by a foreign corporation during each taxable year
from all sources within the Philippines shall not be treated as branch profit unless the same are
effectively connected with the conduct of the taxpayer’s trade or business in the Philippines.
(Sec. 28(A)(5))
The term “effectively connected with the conduct of taxpayer’s trade, or business: does not
necessarily mean that the income must be derived from the actual operation of the taxpayer-
corporation’s trade or business, it is sufficient that the income arises from the business activity in
which the corporation is engaged. (RMC No. 55-80)

Scope
BPRT covers the remittance of all resident foreign corporations including ROHQs of
multinational companies, FCDUs or OBUs of foreign banks, and international carriers, except
PEZA-registered entities.
Remittance form prior year earnings is still taxable The NIRC used the phrase “any profit
remitted” without limiting the same to current year profit remittance. The BPRT therefore is
understood to apply to remittance of prior year earnings. (Banggawan)

Illustration
A resident foreign corporation earning purely active income reported the following since it
started operation in 2019:
2019 2020
Profit after
tax 200,000 150,000
 Remittance 80,000 270,000

BPRT due for 2019

Remittance 80,000
BPRT rate 15%
BPRT due 12,000

BPRT due for 2020

2020 profit 150,000
2019 unremitted profit balance (200,000-
80,000) 120,000
Total remittance 270,000
BPRT rate 15%
BPRT due 40,500

Non-resident foreign corporations (NRFC)

i. Taxation of Non-resident foreign corporations (NRFC)

 NRFCs - subject to 30% income tax on gross income derived during each taxable year
from all sources within the Philippines.
 30% income tax – based on total gross income without any deductions allowed.

Passive Income Rate

Interest on foreign loans, i.e. lending to Domestic 20%
Corporations (DC)
Intercorporate dividends from DC 15%
- Subject to a condition that the country of domicile of
the NRFC allows a credit against the tax due from the NRFC
taxes deemed to have been paid in PH equivalent to 15%.
(Tax Sparing Rule)
- Otherwise 30%

ii. NRFCs subject to preferential tax rates

1) Cinematographic Film Owner, Lessor or Distributor. — 25%;
2) Owner or Lessor of Vessels Chartered by Philippine Nationals. — 4% of gross rentals,
lease or charter fees from leases or charters to Filipino citizens or corporations, as approved
by MARINA;
3) Owner or Lessor of Aircraft, Machineries and Other Equipment. — 7.5% of gross
rental or fees.

CIR v. Interpublic Group of Companies (G.R. No. 207039)

Facts:
Interpublic Group of Companies, Inc. (IGC) is a non-resident foreign corporation that owns
roughly about 3 million shares or 30% of the total outstanding and voting capital stock of
McCann Worldgroup Philippines, Inc. (McCann), a domestic corporation duly organized and
existing under the Philippines laws engaged in general advertising business.
 The IGC filed and administrative claim for refund or issuance of tax credit certificates
representing the alleged overpaid final withholding tax (FWT) on dividends paid by McCann
to IGC. In the said claim, the IGC averred that as a non-resident foreign corporation, it may
avail the preferential FWT rate of 15% on dividends received from a domestic corporation
under the Tax Code.
The CIR denied the claim for refund or for the issuance of tax credit certificate (TCC). Hence
the petition.

Issue:
WON an NRFC which collects dividends from the Philippines sue here to claim tax refund?

Ruling:
YES. The threshold question is whether the IGC was doing business in the Philippines when
it collected dividend earnings from sources within the Philippines.

Doing business - implies a continuity of commercial dealings and arrangements, and

contemplates, to that extent, the performance of acts or works or the exercise of some of the
functions normally incident to, and in progressive prosecution of, the purpose and object of
its organization.

Mere investment as a shareholder by a foreign corporation in a duly registered domestic

corporation shall NOT be deemed "doing business" in the Philippines. It is clear then that the
IGC's act of subscribing shares of stocks from McCann, a duly registered domestic
corporation, maintaining investments therein, and deriving dividend income therefrom, does
not qualify as "doing business" contemplated under R.A. No. 7042. Hence, the IGC is not
required to secure a license before it can ile a claim for tax refund.

The general rule that a foreign corporation is the same juridical entity as its branch office in
the Philippines cannot apply here. When the foreign corporation transacts business in the
Philippines independently of its branch, the principal-agent relationship is set aside. The
transaction becomes one of the foreign corporation, not of the branch. Consequently, the
taxpayer is the foreign corporation, not the branch or the resident foreign corporation.
Corollarily, if the business transaction is conducted through the branch ofice, the latter
becomes the taxpayer, and not the foreign corporation.

The RP-US Tax Treaty created a treaty obligation on the part of the US that it "shall allow"
to a US parent corporation receiving dividends from its Philippine subsidiary "a tax credit for
the appropriate amount of taxes paid or accrued to the Philippines by the said Philippine
subsidiary. The US allowed a "deemed paid" tax credit to US corporations on dividends
received from foreign corporation.

This goes to show that the IGC, being a non-resident US corporation is qualiied to avail of
the aforesaid 15% preferential tax rate on the dividends it earned from the Philippines. It was
proven that the country which it was domiciled shall grant similar tax relief/credit against the
tax due upon the dividends earned from sources within the Philippines. Clearly, the IGC has
made an overpayment of its tax due of FWT by using the 35% tax rate.

Since the RP-US Tax Treaty does not provide for any other prerequisite for the availment of
the beneits under the said treaty, to impose additional requirements would negate the
availment of the reliefs provided for under international agreements.
The following are special corporations and are taxed differently:
2.1 Proprietary educational institution 10% of taxable net income
2.2 Non-profit hospital 10% of taxable net income
2.3 Resident international carrier 2.5% of gross Philippine billings
2.4 Non-resident owner or lessor of vessel 4.5% of gross rentals, lease and charter
fees from the Philippines
2.5 Non-resident cinematographic film
owner, lessor or distributor. 25% of gross income from the Phil.
2.6 Non-resident owner or lessor of
aircraft, machinery and other 7.5 % of gross rental from the Phil.
equipment.
2.7 Regional operating headquarters of
multinational corporation 10% of net taxable income.
TAKE NOTE:
1. There is no MCIT on special corporations and non-resident corporations

Special types of corporation

- Those corporations subject to different tax rates.
1. Special RFC
a. Domestic depositary banks (foreign currency deposit units)
b. International carriers - 2.5% of gross Philippine billings
c. Offshore banking units - 10% of net taxable income.
d. Regional or Area Headquarters and Regional operating Headquarters of multinational
companies - 10% of net taxable income.

2. Special NRFC
a. Non-resident cinematographic film owners, lessors or distributors - 25% of gross
income from the Phil.
b. Non-resident owners or lessors of vessels chartered by Philippine nationals - 4.5% of
gross rentals, lease and charter fees from the Philippines
c. Non-resident lessors of aircraft, machinery and other equipment - 7.5 % of gross rental
from the Phil.
Note: There is no MCIT on special corporations and non-resident corporations.

d.) Exemptions from Tax on Corporations

I. Background
Section 30 of the National Internal Revenue Code (NIRC) of 1997, as amended,
enumerated eleven (11) kinds of organization and expressly provides that such
organizations shall not be taxed under Title II (Tax on Income) in respect to income
received by them as such.

Sections 25, 26, 27, 29, 30, 31, 32, 34, 35 of the Revenue Regulations (RR) No.
02-40 dated February 10, 1940 (the Income Tax Regulations) describing these
corporations and their respective operations referencing whether or not a corporation
falls within these eleven (11) categories.

This Order is issue to clarify the nature, character and tax treatment of
corporations under Section 30 of the NIRC. This Order does not include processing of
Certificate of Tax Exemptions (CTE’s) of non-stock, non-profit educational institutions
under Section 30(H) of the NIRC, which is covered by Revenue Memorandum Order
(RMO) No. 44-2016.
II. Characteristics and Nature of Organizations and Corporations under Sections
30 of the NIRC, as amended

The concerned BIR personnel shall be guided by the following discussions, in

order to determine the true nature, of the taxability of a corporation claiming as a non-
stock, non-profit entity:
A. Labor, agricultural and horticultural organization not organized principally for
profit.
1.) Characteristics

a.) It is organized as a non-stock, non-profit corporation;

b.) Operated either as a labor, agricultural or horticultural organization;

2.) Corporate Purposes

a.) Labor Organization – refers to an association of workers who have

combined to protect and promote the interests of its members by bargaining
collectively with their employers to secure better working conditions, wages and
similar benefits.

A legitimate labor organization is one duly registered with the Department of

Labor.

b.) Agricultural and horticultural organization – refers to an association of

persons engaged in raising livestock or aquatic resources, cultivating useful or
ornamental plants. It includes also engaged in cultivating the ground including
the preparation of soil, planting the seed and raising of crops.

Horticulture concerns the cultivation of gardens or orchards and the growing of

fruits, vegetables, flowers, and ornamental plants.

Actual Operation:

To be entitled from income tax, the corporation must carry out activities primarily
to improve the working conditions of its members, and/or develop a higher
efficiency in their respective occupations or the improvement of production
techniques.

B. Mutual savings bank nit having a capital stock represented by shares, and
cooperative bank without capital stock organized and operated for mutual
purposes and without profit

Republic Act No. 8367, otherwise known as “Revised Non-Stock Savings and
Loan Association Act of 1997”. And, Republic Act No. 9520, otherwise known as
“Philippine Cooperative Code of 2008”., are the ones that govern which grants
tax incentives to cooperative banks, recognition of tax exemptions of non-stock
savings and loan associations and cooperative banks.

C. A beneficiary society, order or association, operating for the exclusive benefit

of the members such as a fraternal organization operating under the lodge
system, or mutual aid association or a non-stock corporation organized by
employees providing for the payment of life, sickness, accident, or other benefits
exclusively to the members of such society, order or association, or non-stock
corporation or their dependents.

1.) Characteristics

a.) It is organized as –

I. A beneficiary society, order or association, operating for the exclusive

benefit of the members such as a fraternal organization operating
under the lodge system; or

II. A mutual aid association or a non-stock corporation organized by

employees providing for the payment of life, sickness, accident, or
other benefits exclusively to the members of such society, order or
association, or non-stock corporation or their dependents.

2.) Corporate Purposes

The organization should be operated to assist their members through the

provision of benefits through an established system of benefit payments to its members
and their dependents.

D. Cemetery company owned and operated exclusively for the benefit of its
members

1.) Characteristics

a.) It is organized as a non-stock corporation and not operated for profit;

b.) Owned by and operated exclusively for the benefit of its lot owners;
c.) It is chartered solely for burial purposes and not permitted by its charter to
engage in any business not necessarily incident to that purpose; and
d.) No part of its net earnings inures to the benefit of any private shareholder or
individual.

2.) Corporate purposes

The corporation is organized as a cemetery company for the exclusive benefit of

its members, solely for the purpose of the disposal of bodies by burial and that its
Articles of Incorporation does not permit it to engage in any business not
necessarily incident to that purpose; and that no part of its net earnings inures to
the benefit of any private shareholder or individual.

3.) Actual operation

It is operated solely for burial purposes and not permitted by its charter to engage
in any business not necessarily incident to that purpose. Earnings of the
company may be used for the operation, maintenance and improvement of the
cemetery.

E. Non-stock corporation or association organized and operated exclusively for

religious, charitable, scientific, athletic or cultural purposes, or for the
rehabilitation or veterans, no part of its net income or asset belongs to or inures
to the benefit of any member, organizer, officer or any specific person
1.) Characteristics

a.) A non-stock organization or association

b.) Organized and operated exclusively for:

I. Religious;
II. Charitable;
III. Scientific;
IV. Athletic, or
V. Cultural purposes, or
VI. For the rehabilitation of veterans.

2.) Corporate purposes

a.) Religious purposes – refers to the promotion, propagation and

accomplishment of any form of religion, creed or religious belief organized by the
Government of the Republic of the Philippines.

b.) Charitable purposes – refers to activities extending belief to the poor,

distressed and underprivileged and shall include fighting against juvenile
delinquency and community deterioration and provision for free goods and
services to the public.

c.) Scientific purposes – refers to undertaking or assisting in pure or basic,

applied and scientific research in the field of agriculture, forestry, fisheries,
industry, engineering, energy development, food and nutrition, medicine
environment and biological, physical and natural sciences for the public interest.

d.) Athletic purposes – refers to and include a conducting program on physical

fitness and amateur sports development for the country; developing and
maintaining recreational facilities, playgrounds and sports center and
conducting training programs for the development of youth and athletes for
national and international competitions.

e.) Cultural purposes – refers to and include undertaking and/or assisting in

research activities on all aspects of history, social system, customs and
traditions; developing, enriching and preserving Filipino arts and culture; developing
and promoting the visual and performing arts; and participating in vigorous
implementation of bilingual policy through translation and wider use of technical,
scientific and creative publications, development of an adaptive technical
dictionary and use of Filipino as the medium of instruction.

f) Rehabilitation of veterans – refers to services extended to Philippine veterans

and members of their families because of financial difficulties and attendant
problems; and services extended to disabled veterans towards productive life.

3) Actual operation:

A corporation is exempt from tax on its income if it meets two tests:

(a) It is organized and operated for one or more of the above-specified

purposes; and

(b) no part of its net income or assets inures to the benefit of private
stockholders or individuals.
F. Business league, chamber of commerce, or board of trade, not organized for
profit and no part of the net income of which inures to the benefit of any private
stock-holder, or individual;

1) Characteristics:

a) Organized as a business league, chamber of commerce, or board of trade;

b) Operated as an association of persons having some common business
interest,
which limits its activities to work for such common interest;
c) It does not engage in a regular business of a kind ordinarily carried on for
profit;
d) It is non-profit;
e) No part of its net income or asset shall belong to or inures to the benefit of any
member, organizer, officer or any specific person

2) Corporate purposes:

To promote such common interest and not to engage in a regular business of a

kind ordinarily carried on for profit. It is an organization of the same general class
as a chamber of commerce or board of trade.

3) Actual operations:

Its activities should be directed to the improvement of business conditions of one

or more lines of business and should not engage in a regular business of a kind
ordinarily carried on for profit. No part of its net income or asset shall belong to or
inures to the benefit of any member, organizer, officer or any specific person.

G. Civic league or organization not organized for profit but operated exclusively
for the promotion of social welfare.

1) Characteristics:

a) It is organized as a non-stock corporation and not for profit;

b) It is exclusively operated for the promotion of social welfare; and
c) It has no net earnings or assets which inure to the benefit of any member,
organizer, officer or any specific person.

2) Corporate purposes:

The organization must be primarily engaged in promoting the common good and
general welfare of the people of the community, i.e. for the purpose of bringing
about civic betterment and social improvement.

3) Actual operations:

To be entitled to the exemption, the regular activities of the corporation must be

exclusively for promotion of social welfare. No part of its net income or asset
shall belong to or inures to the benefit of any member, organizer, officer or any specific
person.

H. A non-stock and nonprofit educational institution

I. Government educational institution

1) Characteristics:

a) It is established by law or a local government unit;

b) It is administered and financially subsidized by the government or the local
government concerned;
c) It is governed by the Board of Trustees or Board of Regents; and
d) It is supervised by DepEd or CHED.

2) Corporate purposes:

It is established as an educational institution financed and operated by an agency

of the government which does not charge tuition fees; instead, financing is
obtained through taxes or other government-collected revenues.

3) Actual operations:

The institution operates as a primary or secondary school, a college, or a

professional or trade school that has a regularly scheduled curriculum, a regular
faculty, and a regularly enrolled student body in attendance at a place where the
educational activities are regularly carried on.

J. Farmers' or other mutual typhoon or fire insurance company, mutual ditch or

irrigation company, mutual or cooperative telephone company, or like
organization of a purely local character, the income of which consists solely of
assessments, dues, and fees collected from members for the sole purpose of
meeting its expenses;

1) Characteristics:

a) It is organized as a non-stock, non-profit organization;

b) It is organized as a farmers' or other mutual typhoon or fire insurance
company, mutual ditch or irrigation company, mutual or cooperative telephone
company, or like organization of a purely local character;
c) Income consists solely of assessments, dues, and fees collected from
members; and;
d) Its income is for sole purpose of meeting its expenses.

2) Corporate purposes:

It is established for the operation of a mutual typhoon or fire insurance company,

mutual ditch or irrigation company, mutual or cooperative telephone company.
Organizations, other than mutual life insurance associations, must be organized
and operated on a mutual basis i.e. it is owned by its members and policy
holders who are banded together to provide themselves a mutually desirable
service approximately at cost and on a mutual basis.

3) Actual operations:

a) A mutual insurance company owned entirely by its policy holders; or

association of farmers, direct beneficiaries of the operation of an irrigation
project/system; or a telephone company owned and operated by the members to
provide telephone services for the benefit of the members.
 b) These organizations are operated on a mutual basis and must use their
income solely to cover losses and expenses, with any excess being returned to
members or retained to cover future losses and expenses.

c) A mutual life insurance organization cannot have policyholders other than its
members.

However, associations organized as cooperatives and registered with the

Cooperative Development Authority are governed by R.A. 9520 or “Philippine
Cooperative Code of 2008”.

K. Farmers', fruit growers', or like association organized and operated as a sales

agent for the purpose of marketing the products of its members and turning back
to them the proceeds of sales, less the necessary selling expenses on the basis
of the quantity of produce finished by them

1) Characteristics:

a) It is organized as a non-stock, non-profit organization;

b) It is organized as an association or organization whose members are engaged
in; farming, fruit growing, or similar occupations;
c) Its income is for sole purpose of meeting its expenses.

2) Corporate purposes:

To act as a sales agent for the purpose of marketing the products of its members
and turning back to them the proceeds of sales, less the necessary selling
expenses on the basis of the quantity of produce finished by them.

3) Actual operations:

a) Associations, acting as sales agents for farmers-members, must establish that

they have no net income for their own account.
b) It should return to the members the proceeds of sales after deducting the
necessary selling expenses on the basis of the quantity of produce finished by
them.
c) The proceeds of the business should be distributed on such proportionate
basis.

Organizational Test:

This requires that the corporation or association's constitutive documents (SEC

Registration, Articles of Incorporation and By-Laws) must show that its primary
purpose/s
of incorporation fall under Section 30 of the NIRC.

Operational Test:

This requires that the regular activities of the corporation or association be

exclusively devoted to the accomplishment of the purposes specified in Section 30 of
the NIRC. A corporation or association fails to meet this test if the corporation has no
activities conducted in furtherance of the purpose for which it was organized, or if a
substantial part of its operations constitutes "activities conducted for profit".

New guidelines for tax exemption of non-stock non-profits

Furthermore, the exemption shall only be limited to income tax. It therefore

excludes withholding tax, value-added tax, or percentage tax. Thus, Section 30
corporations have the responsibility to withhold taxes on the compensation income of
their employees, and on the payments to individuals or corporations subject to tax.
Likewise, their purchases of goods, properties, or services, and importations shall be
subject to the 12% VAT. As an indirect tax, it can be passed on to the purchaser.

Section 30 corporations who availing of the tax exemption are required to secure
a Certificate of Tax Exemption (CTE) or a tax exemption ruling. A CTE shall be valid for
three years from the date of its effectivity, unless sooner revoked or canceled. However,
it may be renewed or revalidated for another three years.

e.) Period within which to file Income Tax Return of Individuals and Corporations

1. For INDIVIDUALS

Description

This return shall be filed by every resident citizen deriving compensation income
from all sources, or resident alien and non-resident citizen with respect to compensation
income from within the Philippines, except the following:

1. An individual whose taxable income does not exceed P 250,000.00;

2. An individual with respect to pure compensation income, as defined in Section

32(A)(1) derived from sources within the Philippines, the income tax on which
has been correctly withheld (tax due equals tax withheld) under the provisions of
Section 79 of the Code: Provided, that an individual deriving
compensation concurrently from two or more employers at any time during the
taxable year shall file an income tax return;

3. An individual whose sole income has been subjected to final withholding tax
pursuant to Section 57(A) of the Tax Code; and

4. A minimum wage earner as defined in Section 22(HH) of the Tax Code or an

individual who is exempt from income tax pursuant to the provisions of the Tax
Code and other laws, general or special.

Filing Date

This return is filed on or before April 15 of each year covering income for the
preceding taxable year.

2. For CORPORATIONS
 Description

This return shall be filed by a Corporation, Partnership and Other Non-Individual

Taxpayer EXEMPT under the Tax Code, as amended [Sec. 30 and those exempted in
Sec. 27(C)] and other Special Laws WITH NO OTHER TAXABLE INCOME such as but
not limited to foundations, cooperatives, charitable institutions, non-stock and non-profit
educational institutions, General Professional Partnership (GPP) etc.

Filing Date

This return is filed on or before the 15th day of the 4th month following the close
of the taxpayer's taxable year.

F) Substituted Filing

Applicable to individual taxpayers:

a. receiving purely compensation income, regardless of amount
b. from only one employer in the Philippines for the calendar year, and
c. the income tax of which has been withheld correctly by the employer

Who shall not be required to file an annual income tax return?

1. Individual taxpayers
2. receiving purely compensation income, regardless of amount,
3. from only one employer in the Philippines for the calendar year,
4. the income tax of which has been withheld correctly by the said employer (tax due equals tax
withheld).
The certificate of withholding filed by the respective employers, duly stamped, received by the
BIR, shall be tantamount to the substituted filing of income tax returns by said employees.

G) Failure to File Returns

Failure to File Return, Supply Correct and Accurate Information, Pay Tax Withhold and Remit
Tax and Refund Excess Taxes Withheld on Compensation. — Any person:
1. required xxx to pay any tax make a return, keep any record, or supply correct the accurate
information,
2. who willfully fails to
a. pay such tax, make such return, keep such record, or
b. supply correct and accurate information, or
c. withhold or remit taxes withheld, or
d. refund excess taxes withheld on compensation,
3. at the time or times required by law or rules and regulations shall xxx be punished by a fine
and suffer imprisonment.
Any person who attempts to make it appear for any reason that he or another
1. has in fact filed a return or statement, or
2. actually files a return or statement and subsequently withdraws the same or statement
after securing the official receiving seal or stamp of receipt of internal revenue office
wherein the same was actually filed
shall be punished by a fine and suffer imprisonment.

Importance of Withholding Tax System

It is considered as an effective tool in the collection of taxes for the following reasons:
1. It encourages voluntary compliance;
2. It reduces cost of collection effort;
3. It prevents delinquencies and revenue loss; and
4. It prevents dry spells in the fiscal condition of the government by providing revenues
throughout the taxable year.

Types of Withholding Taxes

1. Withholding Tax on Compensation
2. Expanded Withholding Tax
3. Final Withholding Tax; and
4. Withholding Tax on Government Money Payment

Withholding Tax on Compensation

Compensation or Wages
- means all remuneration for services performed by an employee for his employer under an
employee- employer relationship unless exempted by the NIRC and pertinent laws.

Kinds of Compensation
• Regular Compensation
- includes basic salary, fixed allowances for representation, transportation and others paid to an
employee.

• Supplementary Compensation - includes payments to an employee in addition to the regular

compensation as follows:
- Commissions
- Overtime pay
- Fees, including director’s fees
- Profit sharing
- Monetization of leave credits
- Sick Leave
- Fringe benefit received by rank & file employee
- Hazard pay
- Taxable 13th month pay
- Other remuneration received from an employee-employer relationship
Exemptions from Withholding Tax on Compensation
1. Remuneration received as an incident of employment (RA 7641; those with approved
reasonable private retirement plan; Social Security Act 1954, as amended; GSIS Act of 1937, as
amended; and etc.);
2. Remuneration paid for agricultural labor;
3. Remuneration for domestic services;
4. Remuneration for casual labor not in the course of an employer's trade or business;
5. Compensation for services by a citizen or resident of the Philippines for a foreign government
or International Organization;
6. Damages (Actual, moral, exemplary and nominal);
7. Life insurance;
8. Amounts received by the insured as a return of premium;
9. Compensation for injuries or sickness;
10. Income exempt under treaty
11. Thirteenth (13th) month pay & other benefits
12. GSIS, SSS Medicare & other contributions (employee’s share only);
13. Compensation income of minimum wage earners (MWEs) who work in the private sector
and being paid the Statutory Minimum Wage (SMW), as fixed by the Regional Tripartite Wage
and Productivity Board (RTWPB) / National Wages Productivity Commission (NWPC),
applicable to the place where he/she is assigned;
14. Compensation income of employees in the public sector with compensation income of not
more than Statutory Minimum Wage in the non-agricultural sector as fixed by the
RTWPB/NWPC applicable to the place where he/she is assigned
15. “De Minimis Benefits” enumerated under Revenue Regulations (RR) No. 5-2011, as
amended by RR 8-2012;
16. Fringe benefits given to employees other than rank and file and subjected to Fringe Benefits
Tax (FBT);
17.Personnel Economic Relief Allowance (PERA) given to government employees;
18.Representation and Transportation Allowance (RATA) granted to public officers and
employees under the General Appropriations Act; and
19.Compensation during the year not exceeding Two Hundred Fifty Thousand Pesos
(P250,000.00)

Exemptions from Withholding Tax on Compensation

Minimum Wage Earners

No withholding tax shall be required on the Statutory Minimum Wage (SMW) of the Minimum
Wage earner in the private/public sectors as defined in RR 2-1998, as amended by RR 10-2008,
including:

• Holiday pay
• Overtime pay
• Night shift differential
• Hazard pay of Minimum Wage Earners (MWE) in the private/public sectors as defined by these
Regulations
Provided further, that additional compensation such as:
• commissions
• honoraria
• fringe benefits
• benefits in excess of the allowable statutory amount of P90,000.00
• taxable allowances and other taxable income other than the SMW given to a MWE by the same
employer other than those which are expressly exempt from income tax shall be subject to
withholding tax using the withholding tax table.

Minimum Wage Earners

De Minimis Benefits Not Subject to Withholding Tax

a. Monetized unused vacation leave credits of private employees not exceeding ten (10) days
during the year;
b. Monetized value of vacation and sick leave credits paid to government officials and
employees;
c. Medical cash allowance to dependents of employees not exceeding One Thousand Five
Hundred Pesos (P1,500.00) per employee per semester or Two Hundred Fifty Pesos (P250.00)
per month;
d. Rice subsidy of Two Thousand Pesos (P2,000.00) or one (1) sack of fifty (50) kg. rice per
month amounting to not more than Two Thousand Pesos (P2,000.00);
e. Uniform and clothing allowance not exceeding Six Thousand Pesos (P6,000.00) per annum;
f. Actual medical assistance, e.g., medical allowance to cover medical and healthcare needs,
annual medical/executive check-up, maternity assistance, and routine consultations, not
exceeding Ten Thousand Pesos (P10,000.00) per annum;
g. Laundry allowance not exceeding Three Hundred Pesos (P300.00) per month;
h. Employees achievement awards e.g., for length of service or safety achievement, which must
be in the form of a tangible personal property other than cash or gift certificate, with annual
monetary value not exceeding Ten Thousand Pesos (P10,000.00) received by the employee
under an established
written plan which does not discriminate in favor of highly paid employees;
i. Gifts given during Christmas and major anniversary celebrations not exceeding Five Thousand
Pesos (P5,000.00) per employee per annum; and
j. Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five
percent (25%) of the basic minimum wage on a per region basis.
k. Benefits received by an employee by virtue of a collective bargaining agreement (CBA) and
productivity incentive schemes provided that the total annual monetary value received from both
CBA and productivity incentive schemes combined do not exceed ten thousand pesos
(P10,000.00) per employee per taxable year.

All other benefits given by employers which are not included in the above enumeration shall not
be considered as “de minimis” benefits, and hence, shall be subject to income tax as well as
withholding tax on compensation income.
Expanded Withholding Tax (EWT)
 The Withholding of Creditable Tax at Source or simply called ExpandedWithholding
Tax is a tax imposed and prescribed on the items of income payable to natural or juridical
persons, residing in the Philippines, by a payor corporation/person which shall be credited
against the income tax liability of the taxpayer for the taxable year.

Income Payments Covered & Its Applicable Expanded Withholding Tax Rates
Income Subject to EWT Rate

A. Professional fees, talent fees, etc. for services

rendered by individuals
10% if the gross income for the
current year exceeds P3,000,000
1. Individuals engaged in the practice of profession or or VAT registered
callings like Lawyers, CPAs, Engineers, Real Estate regardless of the amount ;
service practitioners and all other professionals who have
passed licensure examinations regulated by the PRC, 5% if P3,000,000 or less ;
Supreme Court, etc.
2. Professional entertainers, such as, but not limited to,
actors and actresses, singers lyricist, composers
and emcees.
3. Professional athletes, including basketball player,
pelotaris and jockeys.
4. All directors and producers involved in movies, stage,
radio, television and musical productions.
5. Insurance agents and Insurance adjusters
6. Management and technical consultants.
7. Bookkeeping agents and agencies.
8. Other recipients of talent fees
9. Fees of directors who are not employees
of the company paying such fees, whose
duties are confined to attendance at and
participation in the meetings of the board
of directors.

B. Professional fees, talent fees, etc. for 15% if the gross income for the
services of taxable juridical persons current year exceeds P720,000.00

10% if P720,000 or less

C. Rentals 5%
• Real properties
• Personal properties used in business in excess of
P10,000 annually except RA 8556 (Financial Company
Act of 1998)
• Poles, satellites and transmission facilities
Income Subject to EWT Rate

• Billboards

D. Cinematographic film rentals & other payments 5%

E. Income payments to certain contractors: 2%
• General engineering contractors
• General building contractors
• Specialty contractors
• Other contractors

F. Income distribution to the beneficiaries of estate and 15%

trusts

G. Gross commission of customs, insurance, stock, - 5% if 3M or less

immigration and commercial brokers and fees of agents - 10% if the gross income for
of professional entertainers and real estate service current year exceeds 3M or
practitioner who failed or did not take up licensure VAT registered regardless
examination given by and not registered with the Real of the amount
Estate Service under PRC

H. Payment by the general professional partnership (GPP) For Individual Payee

to its partners - 5% if 3M or less
- 10% if above 3M or VAT
registered
For Non-individual Payee
- 15% if the gross income for
the current year exceeds
P720,000.00
- 10% if P720,000 or less

I. Payments to medical/dental/veterinary For Individual Payee

services thru hospitals/clinics/health - 5% if 3M or less
maintenance organizations, including - 10% if above 3M or VAT
direct payments to service providers registered
For Non-individual Payee
- 15% if the gross income for
the current year exceeds
P720,000.00
- 10% if P720,000 or less
J. Gross selling price or total amount of consideration or
its equivalent paid to the seller/owner for the sale,
exchange or transfer of real property classified as
ordinary asset:
Income Subject to EWT Rate

1. Seller/transferor is exempt from CWT in

accordance with Sec. 2.57.5 of RR 2-98 Exempt

• With a selling price of P500,000 or less 1.5%

• With a selling price of more than P500,000 but 3.0%
not more than P2,000,000
• With a selling price of more than P2,000,000 5%

2. Seller/transferor is not habitually engaged in the 6%

real estate business

K. Additional income payments to government personnel 15%

from importers, shipping and airline companies or their
agents for overtime services (suspended)

L. Certain income payments made 1% on one-half of the

by credit card companies gross amount paid

M. Income payments made by TWA’s to their

local/resident suppliers of goods and
services other than those covered by other
rates of withholding tax
• Supplier of goods 1%
• Supplier of services 2%

Note: Provided, however, that for purchases involving

agricultural products in their original state, the tax
required to be withheld under this sub-section shall only
apply to purchases in excess of the cumulative amount of
Three Hundred Thousand Pesos (P300,000) within the
same taxable year.

For this purpose, agricultural products in their original

state as used in these regulations, shall only include corn,
coconut, copra, palay, rice, cassava, sugar cane, coffee,
fruits, vegetables, marine food products, poultry and
livestock.

N. Income payments made by the government to its

local/resident suppliers of goods & local/resident supplier
of services other than those covered by other rates of
withholding tax
 Income Subject to EWT Rate

• Supplier of goods 1%
• Supplier of services 2%

C. VALUE-ADDED TAX (VAT)

1. Concept and Elements of VATable Transactions

 Tax on value added

VAT is a tax on the value added of a taxpayer arising from taxable sales of goods, properties,

or services during the quarter at the rate of 0 or 12%.

Value added is the difference between total sales of the taxpayer for the taxable quarter

subject to VAT and his total purchases for the same period subject also to VAT.

Output tax means the VAT due on the sale or lease of taxable goods, properties or services

by any person registered or required to register.

Input tax means the VAT due from or paid by a VAT-registered person in the course of his

trade or business on importation of goods or local purchase of goods, properties, or services,

including lease or use of property, from a VAT-registered person.

 Sales tax

VAT is a tax on the taxable sale, barter or exchange of goods, properties or services. A sale

may be an actual or deemed sale, or an export or a local sale.

GR:  There must be an actual sale in PH in order that VAT may be imposed.

EXC:

1.
1.
1.
1. Importation of goods;
 2. Erroneous issuance of VAT invoice or receipt for VAT-exempt

sales;

3. Deemed sales of goods or properties.

CIR v. CA and COMASERCO

WON COMASERCO was engaged in the sale of services, and thus liable to pay VAT thereon.

YES. Sec 105 of the NIRC clarifies that even a non-stock, non-profit, organization or

government entity, is liable to pay VAT on the sale of goods or services.

Section 108 of the NIRC defines the phrase "sale of services" as the "performance of all kinds of

services for others for a fee, remuneration or consideration."

Hence, it is immaterial whether the primary purpose of a corporation indicates that it receives

payments for services rendered to its affiliates on a reimbursement-on-cost basis only, without

realizing profit, for purposes of determining liability for VAT on services rendered. As long as

the entity provides service for a fee, remuneration or consideration, then the service

rendered is subject to VAT.

 Tax on consumption

VAT is broad-based because every sale at the levels of manufacturers or producers and

distributors is subject to VAT. The tax burden rests with the final consumer who consumes

the goods, properties or services.

 Tax credit method

Cost deduction method — refers to the manner of computing the taxpayer’s VAT liability

by deducting his costs and expenses subject to VAT from his taxable sales and multiplying

the resulting value added by 12%.

Tax credit method or invoice method — the input taxes shifted by the sellers to the buyer

are credited against the buyer’s output taxes when he in turn sells the taxable goods,

properties, or services.

There is generally forward shifting of tax when there is a seller’s market — more buyers

than sellers, or demand > supply.

There is backward shifting when there is a buyer’s market like in real estate and the coconut

oil industries.

2. Impact and Incidence of Tax

An indirect tax is a tax demanded in the first instance from one person in the expectation and

intention that he can shift the burden to someone else.

The impact of taxation is on the seller upon whom the tax has been imposed, while

the incidence of tax is on the final consumer, the place at which the tax comes to rest.

3. Destination Principle and Cross-Border Doctrine

The destination of the goods determines taxation or exemption from tax. Export sales of

goods are zero-rated, while imports of goods are subject to 12% VAT. Thus, the situs of

taxation is where the goods are consumed. As for services, consumption takes place where

the service is performed.

 Cross border doctrine mandates that no VAT shall be imposed to form part of the cost of

the goods destined for consumption outside the territorial border of the taxing authority.

CIR v. American Express

As a general rule, the VAT system uses the destination principle. However, our VAT law itself

provides for a clear exception, under which the supply of service shall be zero-rated when the

following requirements are met:

1) the service is performed in the Philippines;

2) the service falls under any of the categories provided in Section 102(b) of the Tax Code;

and

3) it is paid for in acceptable foreign currency that is accounted for in accordance with

the regulations of the BSP.

Since respondent’s services meet these requirements, they are zero-rated. Petitioner’s Revenue

Regulations that alter or revoke the above requirements are ultra vires and invalid.

Tax situs of a zero-rated service

The place where the service is rendered determines the jurisdiction to impose the VAT.

Performed in the Philippines, such service is necessarily subject to its jurisdiction, for the State

necessarily has to have “a substantial connection” to it, in order to enforce a zero rate. The

place of payment is immaterial; much less is the place where the output of the service will be

further or ultimately used.

CIR v. Filminera Resources Corporation 2020

The tax treatment of export sales is based on the Cross Border Doctrine and Destination

Principle of the Philippine VAT system. Under the Destination Principle, goods and services
are taxed only in the country where these are consumed. In this regard, the Cross Border

Doctrine mandates that no VAT shall be imposed to form part of the cost of goods destined for

consumption outside the territorial border of the taxing authority. Hence, actual export of goods

and services from the Philippines to a foreign country must be free of VAT; while, those

destined for use or consumption within the Philippines shall be imposed with VAT. Plainly, sales

of export products to another producer or to an export trader are subject to zero percent

rate provided the export products are actually exported and consumed in a foreign country.

IMPOSITION OF VAT ON TRANSFER OF GOODS BY TAX EXEMPT PERSONS

In the case of tax-free importation of goods into the Philippines by persons, entities or agencies
exempt from tax and when such goods are subsequently sold, transferred or exchanged in the
Philippines to non-exempt persons or entities, the purchasers, transferees or recipients shall be
considered the importers thereof, who shall be liable for any internal revenue tax on such
importation. The tax due on such importation shall constitute a lien on the goods superior to all
charges or liens on the goods, irrespective of the possessor thereof.

In short, if A, exempt from tax, imports goods and transferred it to B, non-exempt a.k.a pays
taxes, B will be liable for the VAT on such goods as if he bought it himself.

TRANSACTIONS DEEMED SALE SUBJECT TO VAT

The following transactions shall be deemed sale:

(1) Transfer, use or consumption not in the course of business of goods or properties originally
intended for sale or for use in the course of business;

(2) Distribution or transfer to:

(a) Shareholders or investors as share in the profits of the VAT-registered persons; or

(b) Creditors in payment of debt;

(3) Consignment of goods if actual sale is not made within sixty (60) days following the date
such goods were consigned; and

(4) Retirement from or cessation of business, with respect to inventories of taxable goods
existing as of such retirement or cessation.
ZERO-RELATED AND EFFECTIVELY ZERO-RATED SALES OF GOODS OR
PROPERTIES

The following services performed in the Philippines by VAT- registered persons shall be subject
to zero percent (0%) rate.

(1) Processing, manufacturing or repacking goods for other persons doing business outside the
Philippines which goods are subsequently exported, where the services are paid for in acceptable
foreign currency and accounted for in accordance with the rules and regulations of the Bangko
Sentral ng Pilipinas (BSP);

(2) Services other than those mentioned in the preceding paragraph, rendered to a person
engaged in business conducted outside the Philippines or to a nonresident person not engaged in
business who is outside the Philippines when the services are performed, the consideration for
which is paid for in acceptable foreign currency and accounted for in accordance with the rules
and regulations of the Bangko Sentral ng Pilipinas (BSP);

(3) Services rendered to persons or entities whose exemption under special laws or international
agreements to which the Philippines is a signatory effectively subjects the supply of such
services to zero percent (0%) rate;

(4) Services rendered to persons engaged in international shipping or international air transport
operations, including leases of property for use thereof: Provided, That these services shall be
exclusive for international shipping or air transport operations; 

(5) Services performed by subcontractors and/or contractors in processing, converting, or

manufacturing goods for an enterprise whose export sales exceed seventy percent (70%) of total
annual production;

(6) Transport of passengers and cargo by domestic  air or sea vessels from the Philippines to a
foreign country; and

(7) Sale of power or fuel generated through renewable sources of energy such as, but not limited
to, biomass, solar, wind, hydropower, geothermal, ocean energy, and other emerging energy
sources using technologies such as fuel cells and hydrogen fuels.

(8) Services rendered to offshore gaming licensees subject to gaming tax under Section 125-A of
this Code by service providers, including accredited service providers as defined in Section 27
(G) of this Code.
 VAT-Exempt Transactions
1. Sale or importation of

1.
1. agricultural and marine food products in their original state,

2. livestock and poultry of a kind generally used as, or yielding or producing foods

for human consumption; and

3. breeding stock and genetic materials therefor.

2. Sale or importation of

1.
1. fertilizers;

2. seeds, seedlings and fingerlings;

3. fish, prawn, livestock and poultry feeds, including ingredients, whether locally

produced or imported, used in the manufacture of finished feeds

except specialty feeds for race horses, fighting cocks, aquarium fish, zoo animals and

other animals generally considered as pets;

3. Importation of personal and household effects belonging to the residents of the

Philippines returning from abroad and nonresident citizens coming to resettle in the

Philippines: Provided, That such goods are exempt from customs duties;

4. Importation of professional instruments and implements, tools of trade, occupation or

employment, wearing apparel, domestic animals, and personal and household effects

belonging to persons coming to settle in the Philippines or Filipinos or their families and

descendants who are now residents or citizens of other countries.

 Vehicles, vessels, aircrafts, machineries and other similar goods for use in manufacture,

shall NOT fall within this classification and shall therefore be subject to duties, taxes and

other charges;

5. Services subject to percentage tax under Title V;

1.
1. Sale or lease of goods or properties or the performance of services of non-VAT-

registered persons, other than the transactions mentioned in paragraphs (A) to (AA) of Sec.

109(1) of the Tax Code, the gross annual sales and/or receipts of which does not exceed

the amount of Php3M.

2. Services rendered by domestic common carriers by land, for the transport of

passengers and keepers of garages (Sec. 117);

3. Services rendered by international air/shipping carriers (Sec. 118);

4. Services rendered by franchise grantees of radio and/or television broadcasting

whose annual gross receipts of the preceding year do not exceed Php10M, and by

franchise grantees of gas and water utilities (Sec. 119);

5. Service rendered for overseas dispatch, message or conversation originating

from the Philippines (Sec. 120);

6. Services rendered by any person, company or corporation (except purely

cooperative companies or associations) doing life insurance business of any sort in the

Philippines (Sec. 123);

7. Services rendered by fire, marine or miscellaneous insurance agents of foreign

insurance companies (Sec. 124);

 8. Services of proprietors, lessees or operators of cockpits, cabarets, night or day

clubs, boxing exhibitions, professional basketball games, Jai-Alai and race tracks (Sec.

125); and

9. Receipts on sale, barter or exchange of shares of stock listed and traded through

the local stock exchange or through initial public offering (Sec. 127).

6. Services by agricultural contract growers and milling for others of palay into rice, corn

into grits and sugar cane into raw sugar;

7. Medical, dental, hospital and veterinary services except those rendered by professionals;

8. Educational services rendered by private educational institutions, duly accredited by the

DepEd, CHED, TESDA and those rendered by government educational institutions;

“Educational services” shall refer to academic, technical or vocational education.

9. Services rendered by individuals pursuant to an employer-employee relationship;

10. Services rendered by RAHQ that do not earn or derive income from the Philippines;

11. Transactions which are exempt under international agreements to which the

Philippines is a signatory or under special laws, except those under PD No. 529;

12.

1.
1. Sales by agricultural cooperatives duly registered with the CDA to their

members

2. as well as sale of their produce, whether in its original state or processed form, to

non-members;

3. their importation of direct farm inputs, machineries and equipment, including

spare parts thereof, to be used directly and exclusively in the production and/or processing

of their produce;
CIR v. United Cadiz Sugar Farmers Association 2016

Although the sale of refined sugar is generally subject to VAT, such transaction may

nevertheless qualify as a VAT-exempt transaction if the sale is made by a cooperative.

Under Section 109(L) of the NIRC, sales by agricultural cooperatives are exempt from

VAT provided the following conditions concur, viz:

First, the seller must be an agricultural cooperative duly registered with the CDA. An

agricultural cooperative is "duly registered" when it has been issued a certificate of

registration by the CDA. This certificate is conclusive evidence of its registration.

Second, the cooperative must sell either:

1) exclusively to its members; or

2) to both members and non-members, its produce, whether in its original state or

processed form.

The second requisite differentiates cooperatives according to its customers. If the

cooperative transacts only with members, all its sales are VAT-exempt, regardless of

what it sells. On the other hand, if it transacts with both members and non-members, the

product sold must be the cooperative's own produce in order to be VAT-exempt. Stated

differently, if the cooperative only sells its produce or goods that it manufactures on its

own, its entire sales is VAT-exempt.

A cooperative is the producer of the sugar if it owns or leases the land tilled, incurs the

cost of agricultural production of the sugar, and produces the sugar cane to be refined. It

should not have merely purchased the sugar cane from its planters-members.

CIR v. Negros Consolidated Farmers MPC 2018

 For an agricultural cooperative to be exempted from the payment of advance VAT on

refined sugar, it must be

1) a cooperative in good standing duly accredited and registered with the CDA; and

2) the producer of the sugar.

13. Gross receipts from lending activities by credit or multi-purpose cooperatives duly

registered with the CDA;

14. Sales by non-agricultural, non-electric and non-credit cooperatives duly registered

with the CDA.

The share capital contribution of each member does not exceed Php15K and regardless of

the aggregate capital and net surplus ratably distributed among the members;

Importation by non-agricultural, non-electric and non-credit cooperatives of machineries and

equipment, including spare parts thereof, to be used by them are subject to VAT.

15. Export sales by persons who are not VAT-registered;

If VAT-registered, zero-rated.

16. The following sales of real properties are exempt from VAT, namely:

1.
1. Sale of real properties not primarily held for sale to customers or held for

lease in the ordinary course of trade or business. However, even if the real property is

not primarily held for sale to customers or held for lease in the ordinary course of trade or

business but the same is used in the trade or business of the seller, the sale thereof shall be

subject to VAT being a transaction incidental to the taxpayer's main business.

2. Sale of real properties utilized for low-cost housing.

 3. Sale of real properties utilized for socialized housing wherein the price ceiling

per unit is P450K or as may from time to time be determined by the HUDCC and the

NEDA and other related laws.

4. Sale of residential lots valued at Php1,919,500 and below, or house & lot and

other residential dwellings valued at Php3,199,200 and below.

If two or more adjacent residential lots are sold or disposed of in favor of one buyer, for

the purpose of utilizing the lots as one residential lot, the sale shall be exempt from VAT

only if the aggregate value of the lots do not exceed Php1,919,500M.

Adjacent residential lots, although covered by separate titles and/or separate tax

declarations, when sold or disposed to one and the same buyer, whether covered by one

or separate Deed of Conveyance, shall be presumed as a sale of one residential lot.

Provided, That beginning January 1, 2021, the VAT exemption shall only apply to

1.
1.
1. sale of real properties not primarily held for sale to customers or held for

lease in the ordinary course of trade or business,

2. sale of real property utilized for socialized housing,

3. sale of house and lot, and other residential dwellings with selling price of

not more than Php3,199,200.

17. Lease of a residential unit with a monthly rental not exceeding P15K;

The foregoing notwithstanding, lease of residential units where the monthly rental per unit

exceeds P15K, but the aggregate of such rentals of the lessor during the year do not exceed

P3M shall likewise be exempt from VAT; however, the same shall be subject to three

percent (3%) percentage tax under Section 116 of the Tax Code.
 In cases where a lessor has several residential units for lease, some are leased out for a

monthly rental per unit of not exceeding P15K while others are leased out for more than

P15K per unit, his tax liability will be as follows:

17.
1. The gross receipts from rentals not exceeding P15K per month per unit shall be

exempt from VAT regardless of the aggregate annual gross receipts. It is also exempt from

the 3% percentage tax.

2. The gross receipts from rentals exceeding P15K per month per unit shall be

subject to VAT if the aggregate annual gross receipts from said units only exceeds P3M.

Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of

the Tax Code.

In case of mixed transactions, the abovementioned rule should be observed.

The term 'residential units' shall refer to apartments and houses & lots used for residential

purposes, and buildings or parts or units thereof used solely as dwelling places (e.g.,

dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms,

lodging houses, inns and pension houses.

The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of

residential houses; per person in the case of dormitories, boarding houses and bed spaces; and

per room in case of rooms for rent.

18. Sale, importation, printing or publication of books, and any newspaper, magazine,

journal, review bulletin, or any such educational reading material covered by the UNESCO

Agreement on the Importation of Educational, Scientific and Cultural Materials, including the

digital or electronic format thereof: Provided, That the materials enumerated herein are not

devoted principally to the publication of paid advertisements;

19. Transport of passengers by international carriers;

If cargo, 3% OPT.

20. Sale, importation or lease of passenger or cargo vessels and aircraft, including engine,

equipment and spare parts thereof for domestic or international transport operations;

21. Importation of fuel, goods and supplies by persons engaged in international shipping or

air transport operations:

Provided, That the fuel, goods, and supplies shall be used for international shipping or air

transport operations;

Thus, said fuel, goods and supplies shall be used exclusively or shall pertain to the transport

of goods and/or passenger from a port in the Philippines directly to a foreign port, or vice

versa, without docking or stopping at any other port in the Philippines unless the docking or

stopping at any other Philippine port is for the purpose of unloading passengers and/or

cargoes that originated from abroad, or to load passengers and/or cargoes bound for abroad.

22. Services of bank, non-bank financial intermediaries performing quasi-banking

functions, and other non-bank financial intermediaries;

Such as money changers and pawnshops, subject to percentage tax under Secs. 121 and

122, respectively, of the Tax Code;

23. Sale or lease of goods and services to senior citizens and persons with disability, as

provided under RA Nos. 9994 and 10754, respectively;

24. Transfer of property pursuant to Section 40(C)(2) of the NIRC, as amended;

Tax-free exchange of property in pursuance of a plan of merger or consolidation.

25. Association dues, membership fees, and other assessments and charges collected by

homeowners associations and condominium corporations;

 26. Sale of gold to the BSP;

27. Sale of or importation of prescription drugs and medicine for:

1. Diabetes, high cholesterol, and hypertension beginning January 1, 2020; and

2. Cancer, mental illness, tuberculosis, and kidney diseases beginning January 1,

2021; and

28. Sale or importation of the following beginning January 1, 2021 to December 31, 2023:

1. Capital equipment, its spare parts and raw materials, necessary for the production

of personal protective equipment components such as coveralls, gown, surgical cap,

surgical mask, N-96 mask, scrub suits, goggles and face shield, double or surgical gloves,

dedicated shoes, and shoe covers, for COVID-19 prevention;

2. All drugs, vaccines and medical devices specifically prescribed and directly used

for the treatment of COVID-19; and

3. Drugs for the treatment of COVID-19 approved by the Food and Drug

Administration (FDA) for use in clinical trials, including raw materials directly necessary

for the production of such drugs.

29. Sale or lease of goods or properties or the performance of services other than the

transactions mentioned in the preceding paragraphs, the gross annual sales and/or receipts do

not exceed the amount of P3M.

Contex Corp. v. CIR

The petitioner’s claim to VAT exemption in the instant case for its purchases of supplies and

raw materials is founded mainly on Section 12 (b) and (c) of RA 7227, which basically exempts

them from all national and local internal revenue taxes, including VAT. Petitioner is registered as
a NON-VAT taxpayer per Certificate of Registration issued by the BIR. As such, it is exempt

from VAT on all its sales and importations of goods and services.

Petitioner’s claim, however, for exemption from VAT for its purchases of supplies and raw

materials is incongruous with its claim that it is VAT-Exempt, for only VAT-Registered

entities can claim Input VAT Credit/Refund.

WON the petitioner may claim a refund on the Input VAT erroneously passed on to it by its

suppliers.

NO. While it is true that the petitioner should not have been liable for the VAT inadvertently

passed on to it by its supplier since such is a zero-rated sale on the part of the supplier,

the petitioner is not the proper party to claim such VAT refund. Since the transaction is

deemed a zero-rated sale, petitioner’s supplier may claim an Input VAT credit with no

corresponding Output VAT liability. Congruently, no Output VAT may be passed on to the

petitioner.

Rather, it is the petitioner’s suppliers who are the proper parties to claim the tax credit and

accordingly refund the petitioner of the VAT erroneously passed on to the latter.

PSALM v. CIR 2019

WON PSALM’s privatization activities are subject to VAT.

NO. The sale of the power plants in this case is not subject to VAT since the sale was made

pursuant to PSALM's mandate to privatize NPC's assets, and was not undertaken in the course of

trade or business. In selling the power plants, PSALM was merely exercising a governmental

function for which it was created under the EPIRA law.

During its corporate life, PSALM has powers relating to the management of its personnel and

leasing of its properties as may be necessary to discharge its mandate.

Input and Output Tax

Categories of Input taxes

1. Input tax credit on importation of goods and current local purchases of goods,

properties, and services (Sec 110);

2. Transitional input tax credit — 2%;

3. Presumptive input tax credit — 4%;

4. Final withholding tax credit; and

5. Excess input tax credit.

Sources of input tax credits

1. Purchase or importation of goods:

1. For sale; or

2. For conversion into or intended to form part of a finished product for sale

including packaging materials; or

3. For use as supplies in the course of business; or

4. For use as materials supplied in the sale of service; or

 5. For use in trade or business for which deduction for depreciation or amortization

is allowed under this Code.

2. Purchase of services on which a VAT has been actually paid.

3. Transactions deemed sale;

4. Transitional input tax.

When creditable

1. On purchase of goods or properties — upon consummation of sale, or issue of the sales

invoice, although no payment thereof was made by the buyer.

2. On importation — upon payment of the VAT prior to the release of the goods from

customs custody.

3. On purchase of services — when paid by the buyer and evidenced by the seller’s

official receipt.

Substantiation of Input Tax Credits

1. Input taxes for the importation of goods or the domestic purchase of goods, properties or

services is made in the course of trade or business, whether such input taxes shall be credited

against zero-rated sale, non-zero-rated sales, or subjected to the 5% Final Withholding

VAT, must be substantiated and supported by the following documents, and must be reported

in the information returns required to be submitted to the Bureau:

1. For the importation of goods - import entry or other equivalent document

showing actual payment of VAT on the imported goods.

2. For the domestic purchase of goods and properties – invoice showing the

information required under Secs. 113 and 237 of the Tax Code.
 3. For the purchase of real property – public instrument i.e., deed of absolute sale,

deed of conditional sale, contract/agreement to sell, etc., together with VAT invoice

issued by the seller.

4. For the purchase of services – official receipt showing the information required

under Secs. 113 and 237 of the Tax Code.

A cash register machine tape issued to a registered buyer shall constitute valid proof of

substantiation of tax credit only if it shows the information required under Secs. 113 and

237 of the Tax Code.

2. Transitional input tax shall be supported by an inventory of goods as shown in a detailed

list to be submitted to the BIR.

3. Input tax on “deemed sale” transactions shall be substantiated with the invoice required

under Sec. 4.113-2.

4. Input tax from payments made to non-residents (such as for services, rentals and

royalties) shall be supported by a copy of the Monthly Remittance Return of Value Added

Tax Withheld (BIR Form 1600) filed by the resident payor in behalf of the non-resident

evidencing remittance of VAT due which was withheld by the payor.

5. Advance VAT on sugar shall be supported by the Payment Order showing payment of the

advance VAT.

Transitional Input Tax Credits

A person who becomes liable to VAT or any person who elects to be a VAT-registered person

shall, subject to the filing of an inventory be allowed input tax

1. on his beginning inventory of goods, materials and supplies equivalent to two percent

(2%) of the value of such inventory or

 2. the actual VAT paid on such goods, materials and supplies,

whichever is higher, which shall be creditable against the output tax.

When may one claim transitional input tax

1. He becomes liable to VAT for the first-time either through a new law or when his taxable

transactions exceed the P3M threshold;

2. He elects to register as a VAT-registered person; and

3. He is already VAT-registered and also deals in goods or properties, the sale of which is

exempt, but later becomes a taxable transaction through legislation.

Presumptive Input Tax Credits

Persons or firms engaged

1. in the processing of sardines, mackerel and milk, and

2. in manufacturing refined sugar and cooking oil,

shall be allowed a presumptive input tax, creditable against the output tax, equivalent to four

percent (4%) of the gross value in money of their purchases of primary agricultural products

which are used as inputs to their production.

The term 'processing' shall mean pasteurization, canning and activities which through physical

or chemical process alter the exterior texture or form or inner substance of a product in such

manner as to prepare it for special use to which it could not have been put in its original form or

condition.

9. TAX REFUND or TAX CREDIT

I. WHO CAN APPLY?

1. Any VAT-registered person,
 2. whose sales are zero-rated or effectively zero-rated may,

3. within two (2) years after the close of the taxable quarter when the sales were

made,

4. apply for the issuance of a tax credit certificate or refund of creditable input

tax due or paid attributable to such sales, EXCEPT TRANSITIONAL INPUT TAX,

to the extent that such input tax has not been applied against output tax.

II. CANCELLATION OF VAT REGISTRATION. 

A person whose registration has been cancelled due to retirement from or

cessation of business, or due to changes in or cessation of status under Section 106(C)

of this Code may, within two (2) years from the date of cancellation, apply for the

issuance of a tax credit certificate for any unused input tax which may be used in

payment of his other internal revenue taxes.

III. PERIOD WITHIN WHICH REFUND OR TAX CREDIT OF INPUT TAXES

SHALL BE MADE.

  In proper cases, the Commissioner shall grant a refund for creditable input

taxes within ninety (90) days from the date of submission of the official receipts

or invoices and other documents in support of the application filed:

Provided, That should the CIR find that the grant of refund is not proper, the CIR

must state in writing the legal and factual basis for the denial.

In case of full or partial denial of the claim for tax refund, the taxpayer affected

may, within thirty (30) days from the receipt of the decision denying the claim, appeal

the decision with the CTA:

 Provided, however, That failure on the part of any official, agent, or employee of

the BIR to act on the application within the ninety (90)-day period shall be punishable

under Section 269 of this Code.

When based on statute, a claim for tax refund partakes of the nature of an

exemption.

IV. CATEGORIES OF REFUNDS OR CREDITS

A. Zero-rated or effectively zero-rated sales of goods. Petitioner must prove or

comply the following:

1. He is a VAT-registered person;

2. Filed with the BIR or DOF Center within 2 years after the close

of taxable quarter when the sales were made

With the CTA within 30 days from date of receipt of denial from CIR;

1.
3. The claimed input tax payments were not applied against any

output tax during the period covered by the claim and in the succeeding

periods, unless there be a separate claim;

4. Deduct from its quarterly return the input tax being claimed as

refund or credit;

5. Directly attributable to the sale;

6. The acceptable foreign currency exchange proceeds had been duly

accounted for, if applicable;

7. Duly supported by VAT invoices or official receipts;

Imprinting of the word “zero-rated” on the invoices or receipts is required.

1.
 8. The VAT return for the succeeding quarters covered by the claim

must be submitted with the CTA.

B. Cancellation of VAT registration due to cessation of business or dissolution of the

corporation.

1. Within two (2) years from the date of cancellation, apply for the

issuance of a tax credit certificate for any unused input tax which may be

used in payment of his other internal revenue taxes.

2. The date of cancellation being referred herein is the date of

issuance of tax clearance by the BIR, after full settlement of all tax

liabilities relative to cessation of business or change of status.

3. The filing of the claim shall be made only after completion of the

mandatory audit of all internal revenue tax liabilities covering the

immediately preceding year and the short period return and the issuance of

the applicable tax clearance/s by the appropriate BIR Office which has

jurisdiction over the taxpayer.

RELATED JURISPRUDENCE

CIR V. CENTRAL LUZON DRUG CORPORATION

Tax liability required for Tax credit

Since a tax credit is used to directly reduce the tax that is due, there ought to be a tax

liability before the tax credit can be applied . While the grant is mandatory, the
 availment or use is not. By its nature, the tax credit may still be deducted from a future,

not a present, tax liability, without which it does not have any use.

Prior tax payments NOT required for Tax credit

While a tax liability is essential to the availment or use of any tax credit, prior tax

payments are not. On the contrary, for the existence or grant solely of such credit,

neither a tax liability nor a prior tax payment is needed. Regarding this matter, a

private establishment reporting a net loss in its financial statements is no different from

another that presents a net income. Both are entitled to the tax credit provided for under

RA 7432, since the law itself accords that unconditional benefit.

CIR V. AICHI FORGING OCTOBER 6, 2010

In claims for tax refund or credit of unutilized input VAT, only the administrative claim

must be within the 2-year prescriptive period reckoned from the close of the taxable

quarter when the sale was made.

The claimant may then file his judicial claim

a. Within 30 days from receipt of the denial of the CIR; OR

b. Within 30 days after the lapse of the 90-day period given to the CIR to decide

that is reckoned from the date when documents are deemed submitted.

This is considered a denial on the part of the CIR.

a. If the claimant files his judicial claim without respecting the 90-day period, such

will be dismissed as being premature.

 b. The rule that both administrative and judicial claims fall within the 2-year period

applies to erroneously or excessively paid taxes, and is reckoned from the date of

payment. Input VAT is NOT erroneously or excessively paid.

PHILIPPINE PHOSPHATE FERTILIZER V. CIR

Nowhere in the Circular is it stated that invoices are required to be presented in claiming

refunds.

CIR V. SAN ROQUE POWER 2013 EN BANC

In application of the 120+30 Day Periods (please note that the 120 days is now 90

days  under the TRAIN law):

 GR: Taxpayer must wait for the lapse of 120 days before it could seek relief with

the CTA.

 EXC: Those who filed their judicial claim between 10 Dec 2003 — 6 Oct 2010.

“Excess” Input VAT and “Excessively” Collected Tax

The input VAT is NOT “excessively” collected as understood under Section 229 because

at the time the input VAT is collected the amount paid is correct and proper.

CIR V. DASH ENGINEERING 2013 CF. SAN ROQUE

In accordance with San Roque, respondent’s judicial claim for refund must be denied for

having been filed late. Although respondent filed its administrative claim with the BIR on

August 9, 2004 before the expiration of the two-year period in Section 112(A), it undoubtedly
failed to comply with the 120+30-day period in Section 112(D) (now subparagraph C) which

requires that upon the inaction of the CIR for 120 days after the submission of the documents in

support of the claim, the taxpayer has to file its judicial claim within 30 days after the lapse of

the said period.

ROHM APOLLO V. CIR 2015

The taxpayer can file an appeal in one of two ways:

1) file the judicial claim within 30 days after the Commissioner denies the claim within the

90-day waiting period, or

2) file the judicial claim within 30 days from the expiration of the 90-day period if the CIR

does not act within that period.

PANAY POWER CORP. V. CIR 2015

In this case, records disclose that petitioner filed its administrative and judicial claims for

refund/credit of its input VAT on December 29, 2005 and January 20, 2006, respectively,

or during the period when BIR Ruling No. DA-489-03 was in place.

As such, it need not wait for the expiration of the 120-day period before filing its judicial

claim before the CTA, and hence, is deemed timely filed. In view of the foregoing, the CTA En

Banc erred in dismissing outright petitioner’s claim on the ground of prematurity.

CARGILL PHILS., INC. V. CIR 2015

Anent Cargill’s first refund claim, it filed its administrative claim with the BIR on June

27, 2003, and its judicial claim before the CTA on June 30, 2003, or before the period when BIR
Ruling No. DA-489-03 was in effect. As such, it was incumbent upon Cargill to wait for the

lapse of the 120-day period before seeking relief with the CTA. It was thus prematurely filed.

In contrast, Cargill’s second refund claims were both filed on May 31, 2005, falling

within the exemption window period contemplated in San Roque. Verily, the CTA En Banc

erred when it outrightly dismissed CTA Case No. 7262 on the ground of prematurity.

PILIPINAS TOTAL GAS V. CIR 2015

EN BANC RE SUBMISSION OF DOCUMENTS

Under the current rule, the reckoning of the 120-day period has been withdrawn from

the taxpayer by RMC 54-2014, since it requires him at the time he files his claim to complete his

supporting documents and attest that he will no longer submit any other document to prove his

claim. Further, the taxpayer is barred from submitting additional documents after he has filed

his administrative claim.

HEDCOR, INC. V. CIR 2015 ALSO ON SUBMISSION OF DOCUMENTS

The Transmittal Letter submitted by petitioner is not a substantial submission  that

would warrant a change in the reckoning date for the 120-day period for the BIR to act on the

claim for refund.

SILICON PHILIPPINES V. CIR 2016

The general interpretative rule allowed the premature filing of judicial claims by

providing that the "taxpayer-claimant need not wait for the lapse of the 120-day period before it
could seek judicial relief with the CTA by way of Petition for Review." The rule certainly did

not allow  the filing of a judicial claim long after the expiration of the 120+30 day period.

V. PROCEDURE FOR CLAIMING REFUNDS OR TAX CREDITS OF INPUT VAT

UNDER SECTION 112
1. The claim for refund must be filed with the CIR within two (2) years counted

from the last day of the quarter when the zero-rated sale was made;

2. The claim for refund must be accompanied by a statement under oath that all

documents to support the claim has been submitted at the time of filing of claim for

refund;

3. The CIR must decide on the claim within 90 days from the date of filing. The

adverse decision is appealable to the CTA within 30 days from receipt;

4. If no decision is made within the 90-day period, there is a deemed denial or

adverse decision which is appealable to the CTA within 30 days from the lapse of the

90-day period.

RELATED JURISPRUDENCE

CIR V. DEUTSCHE KNOWLEDGE SERVICES PTE. LTD. 2020

A claimant's entitlement to a tax refund or credit of excess input VAT attributable to

zero-rated sales hinges upon the following requisites:

1. the taxpayer must be VAT-registered;

2. the taxpayer must be engaged in sales which are zero-rated or effectively

zero-rated;
 3. the claim must be filed within two years after the close of the taxable quarter

when such sales were made; and

4. the creditable input tax due or paid must be attributable to such sales, except the

transitional input tax, to the extent that such input tax has not been applied against the

output tax.

VI. CONDITIONS FOR ZERO-RATING OF SALES OF SERVICES

1. the seller is VAT-registered.

2. the services are rendered "to a person engaged in business conducted

outside the Philippines or to a nonresident person not engaged in

business who is outside the Philippines when the services are performed."

3. the services are "paid for in acceptable foreign currency and accounted for

in accordance with [BSP] rules and regulations."

VII. PROOF OF NRFC STATUS.

The claimant must establish the two components of a client's NRFC status, viz.:

1. that their client was established under the laws of a country not the Philippines or,

simply, is not a domestic corporation; and

2. that it is not engaged in trade or business in the Philippines.

The CTA found that the SEC Certification of Non-Registration of Company and

Authenticated Articles of Association and/or Certificates of Registration/Good

Standing/Incorporation sufficiently established the NRFC status of 11 of DKS's affiliates

clients.
 10. FILING OF RETURNS AND PAYMENT

 Every person liable to pay VAT shall file a quarterly return of the amount of his gross
sales or receipts within twenty-five (25) days following the close of each taxable quarter
prescribed for each taxpayer.

 VAT-registered persons shall pay the VAT on a monthly basis.

 Any person, whose registration has been cancelled in accordance with Section 236, shall
file a return and pay the tax due thereon within twenty-five (25) days from the date of
cancellation of registration.

 Only one consolidated return shall be filed by the taxpayer for his principal place of
business or head office and all branches.

 The return shall be filed with and the tax paid to an authorized agent bank, Revenue
Collection Officer or duly authorized city or municipal Treasurer in the Philippines
located within the revenue district where the taxpayer is registered or required to register.