a. R.A. No.

o. 9400 gives tax privileges to Clark & be paid by all registered business enterprises within the CFZ and
John Hay, R.A. No. 9399 Grants tax amnesty shall be directly remitted as follows: three percent (3%) to the
to locators of Clark & John Hay National Government, and two percent (2%) to the treasurer's office
of the municipality or city where they are located.

"The governing body of the Clark Special Economic Zone shall

RA 9400 SEC. 2. Section 15 of the Republic Act No. 7227, as amended, is likewise be established by executive proclamation with such
hereby amended to read as follows: powers and functions exercised by the Export Processing Zone
Authority pursuant to Presidential Decree No. 66, as
"SEC. 15. Clark Special Economic Zone (CSEZ) and Clark Freeport amended: Provided, That it shall have no regulatory authority over
Zone (CFZ). – Subject to the concurrence by resolution of the local public utilities, which authority pertains to the regulatory agencies
government units directly affected, the President is hereby created by law for the purpose, such as the Energy Regulatory
authorized to create by executive proclamation a Special Economic Commission created under Republic Act No. 9136 and the National
Zone covering the lands occupied by the Clark military reservations Telecommunications Commission created under Republic Act No.
and its contiguous extensions as embraced, covered and defined 7925.
by the 1947 Military Bases Agreement between the Philippines and
the United States of America, as amended, located within the "Subject to the concurrence by resolution of the local government
territorial jurisdiction of Angeles City, municipalities of Mabalacat units directly affected and upon recommendation of the Philippine
and Porac, Province of Pampanga, and the municipalities of Capas Economic Zone Authority (PEZA), the President is hereby
and Bamban, Province of Tarlac, in accordance with the provision authorized to create by executive proclamation Special Economic
as herein provided insofar as applied to the Clark military Zones covering the City of Balanga and the municipalities of Limay,
reservations. The Clark Air Base proper with an area of not more Mariveles, Morong, Hermosa, and Dinalupihan, Province of Bataan.
than four thousand four hundred hectares (4,400 has.), with the
exception of the twenty-twohectare commercial area situated near "Subject to the concurrence by resolution of the local government
the main gate and the Bayanihan Park consisting of seven and a units directly affected and upon recommendation of the PEZA, the
half hectares (7.5 has.) located outside the main gate of the Clark President is hereby authorized to create by executive proclamation
Special Economic Zone, is hereby declared a Freeport zone. Special Economic Zones covering the municipalities of Castillejos,
San Marcelino, and San Antonio, Province of Zambales.
"The CFZ shall be operated and managed as a separate customs
territory ensuring free flow or movement of goods and capital "Duly registered business enterprises that will operate in the
equipment within, into and exported out of the CFZ, as well as Special Economic Zones to be created shall be entitled to the same
provide incentives such as tax and duty-free importation of raw tax and duty incentives as provided for under Republic Act No.
materials and capital equipment. However, exportation or removal 7916, as amended: Provided, That for the purpose of administering
of goods from the territory of the CFZ to the other parts of the these incentives, the PEZA shall register, regulate, and supervise
Philippine territory shall be subject to customs duties and taxes all registered enterprises within the Special Economic Zones."
under the Tariff and Customs Code of the Philippines, as amended,
the National Internal Revenue Code of 1997, as amended, and
other relevant tax laws of the Philippines. SEC. 5. A new Section 15-C is hereby inserted, amending Republic Act No.
7227, as amended, to read as follows:
"The provisions of existing laws, rules and regulations to the
contrary notwithstanding, no national and local taxes shall be "Sec. 15-C. John Hay Special Economic Zone (JHSEZ). –
imposed on registered business enterprises within the CFZ. In lieu Registered business enterprises which will operate after the
of said taxes, a five percent (5%) tax on gross income earned shall effectivity of this Act, within the JHSEZ created under Proclamation
No. 420, series of 1994, shall be entitled to the same tax and duty
 incentives as provided for under Republic Act No. 7916, as prescribed in the National Internal Revenue Code (NIRC) of 1997,as
amended: Provided, That for the purpose of administering these amended, and the Tariff and Customs Code of the Philippines, as amended.
incentives, the PEZA shall register, regulate, and supervise all
registered enterprises within the JHSEZ: Provided, further, That the SEC. 2. Immunities and Privileges. - Those who have availed themselves
Conversion Authority and the John Hay Management Corporation of the tax amnesty and have fully complied with all its conditions shall be
(JHMC) shall only engage in acquiring, owning, holding, relieved of any civil, criminal and/or administrative liabilities arising from or
administering or leasing real properties, and in other activities incident to the nonpayment of taxes, duties and other charges covered by
incidental thereto." the tax amnesty granted under Section 1 herein.

B. Kinds of Taxes
RA 9399 1. Income subject to corporate income tax

SECTION 1. Grant of Tax Amnesty. - Registered business enterprises

operating prior to the effectivity of this Act within the special economic zones (A) In General. - Except as otherwise provided in this Code, an income tax
and freeports created pursuant to Section 15 of Republic Act No. 7227, as of thirty-five percent (35%) is hereby imposed upon the taxable income
amended, such as the Clark Special Economic Zone created under derived during each taxable year from all sources within and without the
Proclamation No. 163. series of 1993; Poro Point Special Economic and Philippines by every corporation, as defined in Section 22(B) of this Code
Freeport Zone created under Proclamation No. 216, series of 1993; John and taxable under this Title as a corporation, organized in, or existing under
Hay Special Economic Zone created under Proclamation No. 420, series of the laws of the Philippines: Provided, That effective January 1, 2009, the
1994; and Morong Special Economic Zone created under Proclamation No. rate of income tax shall be thirty percent (30%). [15]
984, series of 1997, may avail themselves of the benefits of remedial tax
amnesty herein granted on all applicable tax and duty liabilities, inclusive of In the case of corporations adopting the fiscal-year accounting period, the
fines, penalties, interests and other additions thereto, incurred by them or taxable income shall be computed without regard to the specific date when
that might have accrued to them due to the rulings of the Supreme Court in specific sales, purchases and other transactions occur. Their income and
the cases of John Hay People's Coalition v. Lim, et al., G.R. No. 119775 expenses for the fiscal year shall be deemed to have been earned and spent
dated 23 October 2003 and Coconut Oil Refiners Association, Inc. v. Torres, equally for each month of the period.
et al, G.R. No. 132527 dated 29 July 2005, by filing a notice and return in
such form as shall be prescribed by the Commission of Internal Revenue
and the Commissioner of Customs and thereafter, by paying an amnesty tax The corporate income tax rate shall be applied on the amount computed by
of Twenty-five thousand pesos (P25,000.00) within six months from the multiplying the number of months covered by the new rate within the fiscal
effectivity of this Act: Provided, That the applicable tax and duty liabilities to year by the taxable income of the corporation for the period, divided by
be covered by the tax amnesty shall refer only to the difference between: (i) twelve. [16]
all national and local impositions under relevant tax laws, rules and
regulations; and (ii) the five percent (5%) tax on gross income earned by Provided, further, That the President, upon the recommendation of the
said registered business enterprises as determined under relevant revenue Secretary of Finance, may effective January 1, 2000, allow corporations the
regulations of the Bureau of Internal Revenue and memorandum circulars of option to be taxed at fifteen percent (15%) of gross income as defined
the Bureau of Customs during the period covered: Provided, however, That herein, after the following conditions have been satisfied:
the coverage of the tax amnesty herein granted shall not include the
applicable taxes and duties on articles, raw materials, capital goods, (1) A tax effort ratio of twenty percent (20%) of Gross National Product
equipment and consumer items removed from the special economic zone (GNP);
and freeport and entered in the customs territory of the Philippines for local (2) A ratio of forty percent (40%) of income tax collection to total tax
or domestic sale, which shall be subject to the usual taxes and duties revenues;
(3) A VAT tax effort of four percent (4%) of GNP; and Switzerland, a non-resident foreign corporation.
(4) A 0.9 percent (0.9%) ratio of the Consolidated Public Sector Financial
Position (CPSFP) to GNP. Herein private respondent, Wander Philippines, Inc. (Wander, for short), is a
domestic corporation organized under Philippine laws. It is wholly-owned
The option to be taxed based on gross income shall be available only to subsidiary of the Glaro S.A. Ltd. (Glaro, for short), a Swiss corporation not
firms whose ratio of cost of sales to gross sales or receipts from all sources engaged in trade or business in the Philippines.
does not exceed fifty-five percent (55%).
On July 18, 1975, Wander filed its withholding tax return for the second
quarter ending June 30, 1975 and remitted to its parent company, Glaro
The election of the gross income tax option by the corporation shall be dividends in the amount of P222,000.00, on which 35% withholding tax
irrevocable for three (3) consecutive taxable years during which the thereof in the amount of P77,700.00 was withheld and paid to the Bureau of
corporation is qualified under the scheme. Internal Revenue.

For purposes of this Section, the term 'gross income' derived from business Again, on July 14, 1976, Wander filed a withholding tax return for the second
shall be equivalent to gross sales less sales returns, discounts and quarter ending June 30, 1976 on the dividends it remitted to Glaro
allowances and cost of goods sold. 'Cost of goods sold' shall include all amounting to P355,200.00, on which 35% tax in the amount of P124,320.00
business expenses directly incurred to produce the merchandise to bring was withheld and paid to the Bureau of Internal Revenue.
them to their present location and use.
On July 5, 1977, Wander filed with the Appellate Division of the Internal
For a trading or merchandising concern, 'cost of goods sold' shall include Revenue a claim for refund and/or tax credit in the amount of P115,400.00,
the invoice cost of the goods sold, plus import duties, freight in transporting contending that it is liable only to 15% withholding tax in accordance with
the goods to the place where the goods are actually sold, including Section 24 (b) (1) of the Tax Code, as amended by Presidential Decree Nos.
insurance while the goods are in transit. 369 and 778, and not on the basis of 35% which was withheld and paid to
and collected by the government.

For a manufacturing concern, 'cost of goods manufactured and sold' shall Petitioner herein, having failed to act on the above-said claim for refund, on
include all costs of production of finished goods, such as raw materials used, July 15, 1977, Wander filed a petition with respondent Court of Tax Appeals.
direct labor and manufacturing overhead, freight cost, insurance premiums
and other costs incurred to bring the raw materials to the factory or On October 6, 1977, petitioner filed his Answer.
warehouse.
On January 19, 1984, respondent Court of Tax Appeals rendered a
In the case of taxpayers engaged in the sale of service, 'gross income' Decision, the decretal portion of which reads:
means gross receipts less sales returns, allowances and discounts.
"WHEREFORE, respondent is hereby ordered to grant a refund and/or tax
credit to petitioner in the amount of P115,440.00 representing overpaid
withholding tax on dividends remitted by it to the Glaro S.A. Ltd. of
Switzerland during the second quarter of the years 1975 and 1976."
Commissioner of Internal Revenue v. Wander Phils. G.R. No. 68375.
On March 7, 1984, petitioner filed a Motion for Reconsideration but the same
April 15, 1988
was denied in a Resolution dated August 13, 1984. Hence, the instant
petition.
This is a petition for review on certiorari of the January 19, 1984 Decision* of
the Court of Tax Appeals in C.T.A. Case No. 2884, entitled Wander
Petitioner raised two (2) assignment of errors, to wit:
Philippines, Inc. vs. Commissioner of Internal Revenue, holding that Wander
Philippines, Inc. is entitled to the preferential rate of 15% withholding tax on
the dividends remitted to its foreign parent company, the Glaro S.A. Ltd. of
I
ASSUMING THAT THE TAX REFUND IN THE CASE AT BAR IS 597; Matialonzo vs. Servidad, 107 SCRA 726).
ALLOWABLE AT ALL, THE COURT OF TAX APPEALS ERRED IN
HOLDING THAT THE HEREIN RESPONDENT WANDER PHILIPPINES, In any event, the submission of petitioner that Wander is but a withholding
INC. IS ENTITLED TO THE SAID REFUND. agent of the government and therefore cannot claim reimbursement of the
alleged overpaid taxes, is untenable. It will be recalled, that said corporation
is first and foremost a wholly owned subsidiary of Glaro. The fact that it
II became a withholding agent of the government which was not by choice but
by compulsion under Section 53 (b) of the Tax Code, cannot by any stretch
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT of the imagination be considered as an abdication of its responsibility to its
SWITZERLAND, THE HOME COUNTRY OF GLARO S.A. LTD. (THE mother company. Thus, this Court construing Section 53 (b) of the Internal
PARENT COMPANY OF THE HEREIN RESPONDENT WANDER Revenue Code held that "the obligation imposed thereunder upon the
PHILIPPINES, INC.), GRANTS TO SAID GLARO S.A. LTD. AGAINST ITS withholding agent is compulsory". It is a device to insure the collection by the
SWISS INCOME TAX LIABILITY A TAX CREDIT EQUIVALENT TO THE 20 Philippine Government of taxes on incomes, derived from sources in the
PERCENTAGE-POINT PORTION (OF THEM 35 PERCENT PHILIPPINE Philippines, by aliens who are outside the taxing jurisdiction of this Court
DIVIDEND TAX) SPARED OR WAIVED OR OTHERWISE DEEMED AS IF (Commissioner of Internal Revenue vs. Malayan Insurance Co., Inc., 21
PAID IN THE PHILIPPINES UNDER SECTION 24 (b) (1) OF THE SCRA 944). In fact, Wander may be assessed for deficiency withholding tax
PHILIPPINE TAX CODE. at source, plus penalties consisting of surcharge and interest (Section 54,
NLRC). Therefore, as the Philippine counterpart, Wander is the proper entity
The sole issue in this case is whether or not private respondent Wander is who should claim for the refund or credit of overpaid withholding tax on
entitled to the preferential rate of 15% withholding tax on dividends declared dividends paid or remitted by Glaro.
and remitted to its parent corporation, Glaro.
Closely intertwined with the first assignment of error is the issue of whether
From this issue, two questions were posed by petitioner: (1) Whether or not or not Switzerland, the foreign country where Glaro in domiciled, grants to
Wander is the proper party to claim the refund; and (2) Whether or not Glaro a tax credit against the tax due it, equivalent to 20% of the difference
Switzerland allows as tax credit the "deemed paid" 20% Philippine Tax on between the regular 35% rate and the preferential 15% rate. The dispute in
such dividends. this issue lies on the fact that Switzerland does not impose any income tax
on dividends received by Swiss corporation from corporations domiciled in
Petitioner maintains and argues that it is Glaro, the tax payer, and not foreign countries.
Wander, the remitter or payor of the dividend income and a mere withholding
agent for and in behalf of the Philippine Government, which should be legally Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778, the
entitled to receive the refund if any. law involve in this case, reads:

It will be noted, however, that Petitioner's above-entitled argument is being "Sec. 1. The first paragraph of subsection (b) of Section 24 of the National
raised for the first time in this Court. It was never raised at the administrative Internal Revenue Code, as amended, is hereby further amended to read as
level, or at the Court of Tax Appeals. To allow a litigant to assume a different follows:
posture when he comes before the court and challenge the position he had
accepted at the administrative level, would be to sanction a procedure '(b) Tax on foreign corporations. - (1) Non-resident corporation. - A foreign
whereby the Court - which is supposed to review administrative corporation not engaged in trade or business in the Philippines, including a
determinations - would not review, but determine and decide for the first foreign life insurance company not engaged in the life insurance business in
time, a question not raised at the administrative forum. Thus, it is well settled the Philippines, shall pay a tax equal to 35% of the gross income received
that under the same underlying principle of prior exhaustion of administrative during its taxable year from all sources within the Philippines, as interest
remedies, on the judicial level, issues not raised in the lower court cannot be (except interest on foreign loans which shall be subject to 15% tax),
raised for the first time on appeal (Aguinaldo Industries Corporation vs. dividends, premiums, annuities, compensations, remuneration for technical
Commissioner of Internal Revenue, 112 SCRA 136; Pampanga Sugar Dev. services or otherwise, emoluments or other fixed or determinable, annual,
Co., Inc. vs. CIR, 114 SCRA 725; Garcia vs. Court of Appeals, 102 SCRA periodical or casual gains, profits, and income, and capital gains: x x x
Provided, still further That on dividends received from a domestic 24 (b) (1) of the Tax Code, would run counter to the very
corporation liable to tax under this Chapter, the tax shall be 15% of the spirit and intent of said law and definitely will adversely
dividends received, which shall be collected and paid as provided in Section affect foreign corporations' interest here and discourage
53 (d) of this Code, subject to the condition that the country in which the them from investing capital in our country.
non-resident foreign corporation is domiciled shall allow a credit against the
tax due from the non-resident foreign corporation taxes deemed to have Besides, it is significant to note that the conclusion
been paid in the Philippines equivalent to 20% which represents the reached by respondent Court is but a confirmation of the
difference between the regular tax (35%) on corporations and the tax (15%) May 19, 1977 ruling of petitioner that "since the Swiss
dividends as provided in this section: x x x .'" Government does not impose any tax on the dividends to
From the above-quoted provision, the dividends received be received by the said parent corporation in the
from a domestic corporation liable to tax, the tax shall be Philippines, the condition imposed under the above-
15% of the dividends received, subject to the condition mentioned section is satisfied. Accordingly, the
that the country in which the non-resident foreign withholding tax rate of 15% is hereby affirmed."
corporation is domiciled shall allow a credit against the tax
due from the non-resident foreign corporation taxes Moreover, as a matter of principle, this Court will not set
deemed to have been paid in the Philippines equivalent to aside the conclusion reached by an agency such as the
20% which represents the difference between the regular Court of Tax Appeals which is, by the very nature of its
tax (35%) on corporations and the tax (15%) dividends. function, dedicated exclusively to the study and
consideration of tax problem and has necessarily
In the instant case, Switzerland did not impose any tax on developed an expertise on the subject unless there has
the dividends received by Glaro. Accordingly, Wander been an abuse or improvident exercise of authority (Reyes
claims that full credit is granted and not merely credit vs. Commissioner of Internal Revenue, 24 SCRA 198,
equivalent to 20%. Petitioner, on the other hand, avers the which is not present in the instant case.
tax sparing credit is applicable only if the country of the
parent corporation allows a foreign tax credit not only for WHEREFORE, the petition filed is Dismissed for lack of
the 15 percentage-point portion actually paid but also for merit.
the equivalent twenty percentage-point portion spared,
waived or otherwise deemed as if paid in the Philippines; SO ORDERED.
that private respondent does not cite anywhere a Swiss
law to the effect that in case where a foreign tax, such as 2. Income subject to final income tax
the Philippine 35% dividend tax, is spared, waived or
otherwise considered as if paid in whole or in part by the
foreign country, a Swiss foreign-tax credit would be
allowed for the whole or for the part, as the case may be, (D) Rates of Tax on Certain Passive Incomes. -
of the foreign tax so spared or waived or considered as if
paid by the foreign country.
(1) Interest from Deposits and Yield or any other Monetary Benefit from
While it may be true that claims for refund are construed Deposit Substitutes and from Trust Funds and Similar Arrangements,
strictly against the claimant, nevertheless, the fact that and Royalties. - A final tax at the rate of twenty percent (20%) is hereby
Switzerland did not impose any tax or the dividends imposed upon the amount of interest on currency bank deposit and yield or
received by Glaro from the Philippines should be any other monetary benefit from deposit substitutes and from trust funds and
considered as a full satisfaction of the given condition. For, similar arrangements received by domestic corporations, and royalties,
as aptly stated by respondent Court, to deny private derived from sources within the Philippines: Provided, however, That interest
respondent the privilege to withhold only 15% tax provided income derived by a domestic corporation from a depository bank under the
for under Presidential Decree No. 369, amending Section expanded foreign currency deposit system shall be subject to a final income
tax at the rate of seven and one-half percent (7 1/2%) of such interest
income. C. Branch Profit Remittance Tax

(2) Capital Gains from the Sale of Shares of Stock Not Traded in the Sec. 28 (A)(5) (5) Tax on Branch Profits Remittances. - Any profit
Stock Exchange. - A final tax at the rates prescribed below shall be remitted by a branch to its head office shall be subject to a tax of fifteen
imposed on net capital gains realized during the taxable year from the sale, (15%) which shall be based on the total profits applied or earmarked for
exchange or other disposition of shares of stock in a domestic corporation remittance without any deduction for the tax component thereof (except
except shares sold or disposed of through the stock exchange: those activities which are registered with the Philippine Economic Zone
Authority). The tax shall be collected and paid in the same manner as
provided in Sections 57 and 58 of this Code: Provided, that interests,
Not over P 100,000 5% dividends, rents, royalties, including remuneration for technical services,
Amount in excess of P 100,000 10% salaries, wages premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits, income and capital
(3) Tax on Income Derived under the Expanded Foreign Currency gains received by a foreign corporation during each taxable year from all
Deposit System. - Income derived by a depository bank under the sources within the Philippines shall not be treated as branch profits unless
expanded foreign currency deposit system from foreign currency the same are effectively connected with the conduct of its trade or business
transactions with nonresidents, offshore banking units in the Philippines, in the Philippines.
local commercial banks including branches of foreign banks that may be
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
with foreign currency deposit system shall be exempt from all taxes, except D. Minimum Corporate Income Tax
net income from such transactions as may be specified by the Secretary of Sec. 27(e) and Sec. 28(A)(2)
Finance, upon recommendation by the Monetary Board to be subject to the
regular income tax payable by banks: Provided, however, That interest
income from foreign currency loans granted by such depository banks under
(E) Minimum Corporate Income Tax on Domestic Corporations. -
said expanded system to residents other than offshore banking units in the
Philippines or other depository banks under the expanded system, shall be
subject to a final tax at the rate of ten percent (10%). [20] (1) Imposition of Tax. - A minimum corporate income tax of two percent
(2%) of the gross income as of the end of the taxable year, as defined
herein, is hereby imposed on a corporation taxable under this Title,
Any income of nonresidents, whether individuals or corporations, from
beginning on the fourth taxable year immediately following the year in which
transactions with depository banks under the expanded system shall be
exempt from income tax. such corporation commenced its business operations, when the minimum
income tax is greater than the tax computed under Subsection (A) of this
Section for the taxable year.
(4) Intercorporate Dividends. - Dividends received by a domestic
corporation from another domestic corporation shall not be subject to tax.
(2) Carry Froward of Excess Minimum Tax. - Any excess of the minimum
corporate income tax over the normal income tax as computed under
(5) Capital Gains Realized from the Sale, Exchange or Disposition of Subsection (A) of this Section shall be carried forward and credited against
Lands and/or Buildings. - Afinal tax of six percent (6%) is hereby imposed the normal income tax for the three (3) immediately succeeding taxable
on the gain presumed to have been realized on the sale, exchange or years.
disposition of lands and/or buildings which are not actually used in the
business of a corporation and are treated as capital assets, based on the
(3) Relief from the Minimum Corporate Income Tax Under Certain
gross selling price of fair market value as determined in accordance with
Conditions. - The Secretary of Finance is hereby authorized to suspend the
Section 6(E) of this Code, whichever is higher, of such lands and/or
buildings. imposition of the minimum corporate income tax on any corporation which
suffers losses on account of prolonged labor dispute, or because of force
majeure, or because of legitimate business reverses.

The Secretary of Finance is hereby authorized to promulgate, upon E. Improperly Accumulated Earnings Tax
recommendation of the Commissioner, the necessary rules and regulation Sec. 29
that shall define the terms and conditions under which he may suspend the
imposition of the minimum corporate income tax in a meritorious case.
SEC. 29. Imposition of Improperly Accumulated Earnings Tax. -
(4) Gross Income Defined. - For purposes of applying the minimum
corporate income tax provided under Subsection (E) hereof, the term 'gross (A) In General. - In addition to other taxes imposed by this Title, there is
income' shall mean gross sales less sales returns, discounts and hereby imposed for each taxable year on the improperly accumulated
allowances and cost of goods sold. 'Cost of goods sold' shall include all taxable income of each corporation described in Subsection B hereof, an
business expenses directly incurred to produce the merchandise to bring improperly accumulated earnings tax equal to ten percent (10%) of the
them to their present location and use. improperly accumulated taxable income.

For a trading or merchandising concern, 'cost of goods sold' shall include (B) Tax on Corporations Subject to Improperly Accumulated Earnings
the invoice cost of the goods sold, plus import duties, freight in transporting Tax. -
the goods to the place where the goods are actually sold including insurance
while the goods are in transit. (1) In General. - The improperly accumulated earnings tax imposed in the
preceding Section shall apply to every corporation formed or availed for the
For a manufacturing concern, 'cost of goods manufactured and sold' shall purpose of avoiding the income tax with respect to its shareholders or the
include all costs of production of finished goods, such as raw materials used, shareholders of any other corporation, by permitting earnings and profits to
direct labor and manufacturing overhead, freight cost, insurance premiums accumulate instead of being divided or distributed.
and other costs incurred to bring the raw materials to the factory or
warehouse. (2) Exceptions. - The improperly accumulated earnings tax as provided for
under this Section shall not apply to:
In the case of taxpayers engaged in the sale of service, 'gross income'
means gross receipts less sales returns, allowances, discounts and cost of (a) Publicly-held corporations;
services. 'Cost of services' shall mean all direct costs and expenses (b) Banks and other nonbank financial intermediaries; and
necessarily incurred to provide the services required by the customers and (c) Insurance companies.
clients including (A) salaries and employee benefits of personnel,
consultants and specialists directly rendering the service and (B) cost of
facilities directly utilized in providing the service such as depreciation or (C) Evidence of Purpose to Avoid Income Tax. -
rental of equipment used and cost of supplies: Provided, however, That in
the case of banks, 'cost of services' shall include interest expense. (1) Prima Facie Evidence. - the fact that any corporation is a mere holding
company or investment company shall be prima facie evidence of a purpose
Sec. 28 A (2) Minimum Corporate Income Tax on Resident Foreign to avoid the tax upon its shareholders or members.
Corporations. - A minimum corporate income tax of two percent (2%) of
gross income, as prescribed under Section 27 (E) of this Code, shall be (2) Evidence Determinative of Purpose. - The fact that the earnings or
imposed, under the same conditions, on a resident foreign corporation profits of a corporation are permitted to accumulate beyond the reasonable
taxable under paragraph (1) of this Subsection. needs of the business shall be determinative of the purpose to avoid the tax
upon its shareholders or members unless the corporation, by the clear
preponderance of evidence, shall prove to the contrary.
(D) Improperly Accumulated Taxable Income. - For purposes of this accumulated its earnings and profits for reasonable business requirements
Section, the term 'improperly accumulated taxable income' means to meet working capital needs; (b) being a subsidiary of American Cyanamid
taxable income adjusted by: Company whose share of stocks are listed and traded in New York Stocks
Exchange.No individual shareholder of petitioner could have evaded or
(a) Income exempt from tax; prevented the imposition of individual income taxes by petitioners
(b) Income excluded from gross income; accumulation of earnings and profits.
(c) Income subject to final tax; and Court of Tax Appeals denied the petition. It said the law permits a stock
(d) The amount of net operating loss carry-over deducted; corporation to set aside a portion of its retained earnings for specified
purposes. In the case at bar, petitioner's purpose for accumulating its
And reduced by the sum of: earnings does not fall within the ambit of these specified purposes.

The Court ordered that Cyanamid pay the CIR representing 25% surtax on
(a) Dividends actually or constructively paid; and
improper accumulation of profits for 1981, plus 10% surcharge and 20%
(b) Income tax paid for the taxable year.
annual interest from January 30, 1985 to January 30, 1987.

Provided, however, That for corporations using the calendar year basis, the
accumulated earnings tax shall not apply on improperly accumulated income
as of December 31, 1997. In the case of corporations adopting the fiscal Issue: Whether or not petitioner is liable for the accumulated earning tax for
year accounting period, the improperly accumulated income not subject to the year 1981?
this tax, shall be reckoned, as of the end of the month comprising the twelve
Held:
(12)-month period of fiscal year 1997-1998.
Sec. 25 of the old National Internal Revenue Code of 1977 discouraged tax
(E) Reasonable Needs of the Business. - For purposes of this Section, the avoidance through corporate surplus accumulation, when corporations do
term 'reasonable needs of the business' includes the reasonably not declare dividends, income taxes are not paid on the undeclared
anticipated needs of the business. dividends received by the shareholders. The tax on improper accumulation
of surplus is essentially a penalty tax designed to compel corporation to
distribute earnings so that the said earnings by shareholders could, in turn,
be taxed.
Cyanamid Philippines, Inc. v. CA G.R. No. 108067. January 20,
2000

Cyanamid Philippines, Inc. is a corporation organized under the Philippine *Fringe Benefits Tax
laws, a wholly-owned subsidiary of American Cyanamid Co. based in Maine, Sec. 33
USA. It is engaged in the manufacture of pharmaceutical products and
chemicals, wholesaler of imported finished goods and an importer/ indentor.

On Feb. 7, 1985, the Commissioner of Internal revenue demanded to the SEC. 33. Special Treatment of Fringe Benefit. -
petitioner the payment of deficiency income tax of P119,817 for 1981.
“(A) Imposition of Tax. – Effective January 1, 2018 and onwards, a final tax
Petitioner protested the assessment.
of thirty-five percent (35%) is hereby imposed on the grossed-up monetary
On Oct. 20, 1987, CIR refused to allow the cancellation of assessment value of fringe benefit furnished or granted to the employee (except rank and
notices. file employees as defined herein) by the employer, whether an individual or
a corporation (unless the fringe benefit is required by the nature of, or
Petitioner claimed that CIR assessment representing 25% surtax on its necessary to the trade, business or profession of the employer, or when the
accumulated earnings for 1981 had no legal basis because (a) petitioner fringe benefit is for the convenience or advantage of the employer). The tax
herein imposed is payable by the employer which tax shall be paid in the (C) Fringe Benefits Not Taxable. - The following fringe benefits are not
same manner as provided for under Section 57(A) of this Code. The taxable under this Section:
grossed-up monetary value of the fringe benefit shall be determined by
dividing the actual monetary value of the fringe benefit by sixty- five percent (1) Fringe benefits which are authorized and exempted from tax under
(65%) effective January 1, 2018 and onwards: Provided, however, That special laws;
fringe benefit furnished to employees and taxable under Subsections (B), (2) Contributions of the employer for the benefit of the employee to
(C), (D), and (E) of Section 25 shall be taxed at the applicable rates imposed retirement, insurance and hospitalization benefit plans;
thereat: Provided, further, That the grossed-up value of the fringe benefit (3) Benefits given to the rank and file employees, whether granted under a
shall be determined by dividing the actual monetary value of the fringe collective bargaining agreement or not; and
benefit by the difference between one hundred percent (100%) and the (4) De minimis benefits as defined in the rules and regulations to be
applicable rates of income tax under Subsections (B), (C), (D), and (E) of promulgated by the Secretary of Finance, upon recommendation of the
Section 25. Commissioner.
(B) Fringe Benefit Defined. - For purposes of this Section, the term 'fringe
benefit' means any good, service or other benefit furnished or granted in The Secretary of Finance is hereby authorized to promulgate, upon
cash or in kind by an employer to an individual employee (except rank and recommendation of the Commissioner, such rules and regulations as are
file employees as defined herein) such as, but not limited to, the following: necessary to carry out efficiently and fairly the provisions of this Section,
taking into account the peculiar nature and special need of the trade,
business or profession of the employer.
(1) Housing;

(2) Expense account; I. INCOME TAX EXEMPT ENTITIES

(3) Vehicle of any kind; A. Partnership/joint ventures formed for the purpose of
undertaking construction projects or engaging in energy
(4) Household personnel, such as maid, driver and others; operations
Sec. 26
(5) Interest on loan at less than market rate to the extent of the difference Sec. 26. Tax Liability of Members of General Professional Partnerships.
between the market rate and actual rate granted; - A general professional partnership as such shall not be subject to the
income tax imposed under this Chapter. Persons engaging in business as
(6) Membership fees, dues and other expenses borne by the employer for partners in a general professional partnership shall be liable for income tax
the employee in social and athletic clubs or other similar organizations; only in their separate and individual capacities.
For purposes of computing the distributive share of the partners, the net
(7) Expenses for foreign travel; income of the partnership shall be computed in the same manner as a
corporation. Each partner shall report as gross income his distributive share,
actually or constructively received, in the net income of the partnership.
(8) Holiday and vacation expenses;
B. Professional partnership of real estate brokers exempt from
(9) Educational assistance to the employee or his dependents; and income tax

(10) Life or health insurance and other non-life insurance premiums or

C. Co-ownership
similar amounts in excess of what the law allows.
D. Section 30, NIRC
 SEC. 30. Exemptions from Tax on Corporations. - The following company, or like organization of a purely local character, the
organizations shall not be taxed under this Title in respect to income of which consists solely of assessments, dues, and fees
income received by them as such: collected from members for the sole purpose of meeting its
expenses; and
(A) Labor, agricultural or horticultural organization not organized
principally for profit; (K) Farmers', fruit growers', or like association organized and
operated as a sales agent for the purpose of marketing the
(B) Mutual savings bank not having a capital stock represented by products of its members and turning back to them the proceeds of
shares, and cooperative bank without capital stock organized and sales, less the necessary selling expenses on the basis of the
operated for mutual purposes and without profit; quantity of produce finished by them;

(C) A beneficiary society, order or association, operating for the Notwithstanding the provisions in the preceding paragraphs, the
exclusive benefit of the members such as a fraternal organization income of whatever kind and character of the foregoing
operating under the lodge system, or mutual aid association or a organizations from any of their properties, real or personal, or from
nonstock corporation organized by employees providing for the any of their activities conducted for profit regardless of the
payment of life, sickness, accident, or other benefits exclusively to disposition made of such income, shall be subject to tax imposed
the members of such society, order, or association, or nonstock under this Code.
corporation or their dependents;

(D) Cemetery company owned and operated exclusively for the

benefit of its members; Sec. 23-35, NIRC

(E) Nonstock corporation or association organized and operated

exclusively for religious, charitable, scientific, athletic, or cultural
purposes, or for the rehabilitation of veterans, no part of its net F. Under special laws
income or asset shall belong to or inure to the benefit of any
member, organizer, officer or any specific person; 1. Omnibus Investment Code – income tax holiday incentive,
as amended by EO 226
(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 ART. 39. Incentives to Registered Enterprises. - All registered enterprises
the benefit of any private stock-holder, or individual; shall be granted the following incentives to the extent engaged in a preferred
area of investment:
(G) Civic league or organization not organized for profit but
operated exclusively for the promotion of social welfare; (a) Income Tax Holiday. -

(1) For six (6) years from commercial operation for pioneer firms and four (4)
(H) A nonstock and nonprofit educational institution; years for non-pioneer firms, new registered firms shall be fully exempt from
income taxes levied by the National Government. Subject to such guidelines
(I) Government educational institution; as may be prescribed by the Board, the income tax exemption will be
extended for another year in each of the following cases:
E. (J) Farmers' or other mutual typhoon or fire insurance company,
mutual ditch or irrigation company, mutual or cooperative telephone
i. the project meets the prescribed ratio of capital equipment to number of approval of the Board is secured for the part-time utilization of said
workers set by the Board; equipment in a non-registered activity to maximize usage thereof or the
proportionate taxes and duties are paid on the specific equipment and
ii. utilization of indigenous raw materials at rates set by the Board; machinery being permanently used for non-registered activities; and
iii. the net foreign exchange savings or earnings amount to at least (3) The approval of the Board was obtained by the registered enterprise for
US$500,000.00 annually during the first three(3) years of the importation of such machinery, equipment and spare parts.chanrobles
operation.chanrobles virtual law library virtual law library
The preceding paragraph notwithstanding, no registered pioneer firm may In granting the approval of the importations under this paragraph, the Board
avail of this incentive for a period exceeding eight (8) years.chanrobles may require international canvassing but if the total cost of the capital
virtual law library equipment or industrial plant exceeds US$5,000,000, the Board shall apply
or adopt the provisions of Presidential Decree Numbered 1764 on
(2) For a period of three (3) years from commercial operation, registered
International Competitive Bidding.chanrobles virtual law library
expanding firms shall be entitled to an exemption from income taxes levied
by the National Government proportionate to their expansion under such If the registered enterprise sells, transfers or disposes of these machinery,
terms and conditions as the Board may determine; Provided, however, That equipment and spare parts without prior approval of the Board within five (5)
during the period within which this incentive is availed of by the expanding years from date of acquisition, the registered enterprise and the vendee,
firm it shall not be entitled to additional deduction for incremental labor transferee, or assignee shall be solidarily liable to pay twice the amount of
expense.chanrobles virtual law library the tax exemption given it.chanrobles virtual law library
(3) The Provision of Article 7 (14) notwithstanding, registered firms shall not The Board shall allow and approve the sale, transfer or disposition of the
be entitled to any extension of this incentive. (b) Additional Deduction for said items within the said period of five (5) years if made:
Labor Expense. - For the first five (5) years from registration a registered
enterprise shall be allowed an additional deduction from the taxable income (aa) to another registered enterprise or registered domestic producer
of fifty percent (50%) of the wages corresponding to the increment in the enjoying similar incentives;
number of direct labor for skilled and unskilled workers if the project meets
the prescribed ration of capital equipment to number of workers set by the (bb) for reasons of proven technical obsolescence; or
Board: Provided, That this additional deduction shall be doubled if the
(cc) for purposes of replacement to improve and/or expand the operations of
activity is located in less developed areas as defined in Art. 40.
the registered enterprise.chanrobles virtual law library
(c) Tax and Duty Exemption on Imported Capital Equipment. - Within five (5)
(d) Tax Credit on Domestic Capital Equipment. - A tax credit equivalent to
years from the effectivity of this Code, importations of machinery and
one hundred percent (100%) of the value of the national internal revenue
equipment and accompanying spare parts of new and expanding registered
taxes and customs duties that would have been waived on the machinery,
enterprises shall be exempt to the extent of one hundred per cent (100%) of
equipment and spare parts, had these items been imported shall be given to
the customs duties and national internal revenue tax payable
the new and expanding registered enterprise which purchases machinery,
thereon; Provided, That the importation of machinery and equipment and
equipment and spare parts from a domestic manufacturer: Provided, That
accompanying spare parts shall comply with the following conditions:
(1) That the said equipment, machinery and spare parts are reasonably
(1) They are not manufactured domestically in sufficient quantity, of needed and will be used exclusively by the registered enterprise in the
comparable quality and at reasonable prices; manufacture of its products, unless prior approval of the Board is secured for
the part-time utilization of said equipment in a non-registered activity to
(2) They are reasonably needed and will be used exclusively by the maximize usage thereof; (2) that the equipment would have qualified for tax
registered enterprise in the manufacture of its products, unless prior and duty-free importation under paragraph (c) hereof; (c) that the approval of
the Board was obtained by the registered enterprise; and (4) that the Numbered 613, as amended, shall be permitted to enter and reside in the
purchase is made within five (5) years from the date of effectivity of the Philippines during the period of employment of such foreign nationals. A
Code. If the registered enterprise sells, transfers or disposes of these registered enterprise shall train Filipinos as understudies of foreign nationals
machinery, equipment and spare parts, the provisions in the preceding in administrative, supervisory and technical skills and shall submit annual
paragraph for such disposition shall apply.chanrobles virtual law library reports on such training to the Board.chanrobles virtual law library

(e) Exemption from Contractor's Tax. - The registered enterprise shall be (i) Exemption on Breeding Stocks and Genetic Materials. - The importation
exempt from the payment of contractor's tax, whether national or of breeding stocks and genetic materials within ten (10) years from the date
local.chanrobles virtual law library of registration or commercial operation of the enterprise shall be exempt
from all taxes and duties: Provided, That such breeding stocks and genetic
(f) Simplification of Customs Procedures. - Customs procedures for the materials are (1) not locally available and/or obtainable locally in comparable
importation of equipment, spare parts, raw materials and supplies, and quality and at reasonable prices; (2) reasonably needed in the registered
exports of processed products by registered enterprises shall be simplified activity; and (3) approved by the Board.chanrobles virtual law library
by the Bureau of Customs.chanrobles virtual law library
(j) Tax Credit on Domestic Breeding Stocks and Genetic Materials. - A tax
(g) Unrestricted Use of Consigned Equipment. - Provisions of existing laws credit equivalent to one hundred percent (100%) of the value of national
notwithstanding, machinery, equipment and spare parts consigned to any internal revenue taxes and customs duties that would have been waived on
registered enterprise shall not be subject to restrictions as to period of use of the breeding stocks and genetic materials had these items been imported
such machinery, equipment and spare parts: Provided, That the appropriate shall be given to the registered enterprise which purchases breeding stock
re-export bond is posted unless importation is otherwise covered under and genetic materials from a domestic producer: Provided, (1) That said
subsections (c) and (m) of this Article: Provided, further, That such breeding stocks and genetic materials would have qualified for tax and duty
consigned equipment shall be for the exclusive use of the registered free importation under the preceding paragraph; (2) that the breeding stocks
enterprise.chanrobles virtual law library and genetic materials are reasonably needed in the registered activity; (3)
that approval of the Board has been obtained by the registered enterprise;
If such equipment is sold, transferred or otherwise disposed of by the
and (4) that the purchase is made within ten (10) years from date of
registered enterprise the related provision of Article 39 (c) (3) shall apply.
registration or commercial operation of the registered enterprise.chanrobles
Outward remittance of foreign exchange covering the proceeds of such sale,
virtual law library
transfer or disposition shall be allowed only upon prior Central Bank
approval.chanrobles virtual law library (k) Tax Credit for Taxes and Duties on Raw Materials. - Every registered
enterprise shall enjoy a tax credit equivalent to the National Internal
(h) Employment of Foreign Nationals. - Subject to the provisions of Section
Revenue taxes and Customs duties paid on the supplies, raw materials and
29 of Commonwealth Act Number 613, as amended a registered enterprise
semi-manufactured products used in the manufacture, processing or
may employ foreign nationals in supervisory, technical or advisory positions
production of its export products and forming part thereof, exported directly
for a period not exceeding five (5) years from its registration, extendible for
or indirectly by the registered enterprise: Provided, however, That the taxes
limited periods at the discretion of the Board: Provided, however, That when
on the supplies, raw materials and semi-manufactured products domestically
the majority of the capital stock of a registered enterprise is owned by
purchased are indicated as a separate item in the sales invoice.chanrobles
foreign investors, the positions of president, treasurer and general manager
virtual law library
or their equivalents may be retained by foreign nationals beyond the period
set forth herein.chanrobles virtual law library Nothing herein shall be construed as to preclude the Board from setting a
fixed percentage of export sales as the approximate tax credit for taxes and
Foreign nationals under employment contract within the purview of this
duties of raw materials based on an average or standard usage for such
incentive, their spouses and unmarried children under twenty-one (21) years
materials in the industry.chanrobles virtual law library
of age, who are not excluded by Section 29 of Commonwealth Act
(l) Access to Bonded Manufacturing/Trading Warehouse System. -
property taxes on land owned by developers, no taxes, local and national,
Registered export oriented enterprises shall have access to the utilization of
the bonded warehousing system in all areas required by the project subject shall be imposed on business establishments operating within the
to such guidelines as may be issued by the Board upon prior consultation ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by
with the Bureau of Customs.chanrobles virtual law library
all business enterprises within the ECOZONE shall be paid and remitted as
(m) Exemption from Taxes and Duties on Imported Spare Parts. - follows:
Importation of required supplies and spare parts for consigned equipment or
those imported tax and duty free by a registered enterprise with a bonded a. Three percent (3%) to the National Government;
manufacturing warehouse shall be exempt from customs duties and national
internal revenue taxes payable thereon: Provided, however, That at least b. Two percent (2%) which shall be directly remitted by the business
seventy percent (70%) of production is exported; Provided, further, That establishments to the treasurer’s office of the municipality or city where the
such spare parts and supplies are not locally available at reasonable prices, enterprise is located.
sufficient quantity and comparable quality; Provided, finally, That all such
spare parts and supplies shall be used only in the bonded manufacturing
warehouse of the registered enterprise under such requirements as the
SEC. 25. Applicable National and Local Taxes. – All persons and services
Bureau of Customs may impose.chanrobles virtual law library
establishments in the ECOZONE shall be subject to national and local taxes
(n) Exemption from Wharfage Dues and any Export Tax, Duty, Impost and
under the National Internal Revenue Code and the Local Government Code.
Fee. - The provisions of law to the contrary notwithstanding, exports by a
registered enterprise of its non-traditional export products shall be exempted
from any wharfage dues, and any export tax, duty, impost and SEC. 26. Domestic Sales. – Goods manufactured by an ECOZONE
fee.chanrobles virtual law library
enterprise shall be made available for Immediate retail sales in the domestic
market, subject to payment of corresponding taxes on the raw materials and
2. Special Economic Zone Act of 1995 (RA 7916) other regulations that may be adopted by the Board of the PEZA.

However, in order to protect the domestic industry, there shall be a negative

SEC. 23. Fiscal Incentives. – Business establishments operating within the list of Industries that will be drawn up by the PEZA. Enterprises engaged in
the industries included in the negative list shall not be allowed to sell their
ECOZONES shall be entitled to the fiscal incentives as provided for under products locally. Said negative list shall be regularly updated by the PEZA.
Presidential Decree No. 66, the law creating the Export Processing Zone
The PEZA, in coordination with the Department of Trade and Industry and
Authority, or those provided under Book VI of Executive Order No. 226, the Bureau of Customs, shall jointly issue the necessary implementing rules
otherwise known as the Omnibus Investment Code of 1987. and guidelines for the effective Implementation of this section.

Furthermore, tax credits for exporters using local materials as Inputs shall
enjoy the same benefits provided for in the Export Development Act of 1994. SEC. 27. Applicability of Banking Laws and Regulations. – Existing banking
laws and Bangko Sentral ng Pilipinas (BSP) rules and regulations shall apply

SEC. 24. Exemption from National and Local Taxes.- Except for real to banks and financial institutions to be established in the ECOZONE and to
 The abovementioned zone shall be subject to the following policies:
other ECOZONE-registered enterprises. Among other pertinent regulations,
these include those governing foreign exchange and other current account (a) Within the framework and subject to the mandate and limitations of the
transactions (trade and non-trade) local and foreign borrowings, foreign Constitution and the pertinent provisions of the Local Government Code, the
Subic Special Economic Zone shall be developed into a self-sustaining,
currency deposit units, offshore banking units and other financial institutions industrial, commercial, financial and investment center to generate
under the supervision of the BSP. employment opportunities in and around the zone and to attract and promote
productive foreign investments;

SEC. 28. After Tax Profits. – Without prior Bangkok Sentral approval, after (b) The Subic Special Economic Zone shall be operated and managed as
tax profits and other earnings of foreign investments in enterprises in the a separate customs territory ensuring free flow or movement of goods and
capital within, into and exported out of the Subic Special Economic Zone, as
ECOZONE may be remitted outward in the equivalent foreign exchange well as provide incentives such as tax and duty-free importations of raw
through any of the banks licensed by the Bangko Sentral ng Pilipinas in the materials, capital and equipment. However, exportation or removal of goods
from the territory of the Subic Special Economic Zone to the other parts of
ECOZONE: Provided, however, That such foreign investments in said
the Philippine territory shall be subject to customs duties and taxes under
enterprises have been previously registered with the Bangko Sentral. the Customs and Tariff Code and other relevant tax laws of the Philippines;

(c) The provisions of existing laws, rules and regulations to the contrary
notwithstanding, no taxes, local and national, shall be imposed within the
Subic Special Economic Zone. In lieu of paying taxes, three percent (3%) of
3. Bases Conversion and Development Act (RA 7227, as the gross income earned by all businesses and enterprises within the Subic
amended) Special Economic Zone shall be remitted to the National Government, one
percent (1%) each to the local government units affected by the declaration
SECTION 12. Subic Special Economic Zone. — Subject to the of the zone in proportion to their population area, and other factors. In
concurrence by resolution of the sangguniang panlungsod of the City of addition, there is hereby established a development fund of one percent
Olongapo and the sangguniang bayan of the Municipalities of Subic, Morong (1%) of the gross income earned by all businesses and enterprises within
and Hermosa, there is hereby created a Special Economic and Free-port the Subic Special Economic Zone to be utilized for the development of
Zone consisting of the City of Olongapo and the Municipality of Subic, municipalities outside the City of Olongapo and the Municipality of Subic,
Province of Zambales, the lands occupied by the Subic Naval Base and its and other municipalities contiguous to be base areas.
contiguous extensions as embraced, covered, and defined by the 1947
Military Bases Agreement between the Philippines and the United States of In case of conflict between national and local laws with respect to tax
America as amended, and within the territorial jurisdiction of the exemption privileges in the Subic Special Economic Zone, the same shall be
Municipalities of Morong and Hermosa, Province of Bataan, hereinafter resolved in favor of the latter;
referred to as the Subic Special Economic Zone whose metes and bounds
shall be delineated in a proclamation to be issued by the President of the (d) No exchange control policy shall be applied and free markets for
Philippines. Within thirty (30) days after the approval of this Act, each local foreign exchange, gold, securities and future shall be allowed and
government unit shall submit its resolution of concurrence to join the Subic maintained in the Subic Special Economic Zone;
Special Economic Zone to the office of the President. Thereafter, the
President of the Philippines shall issue a proclamation defining the metes (e) The Central Bank, through the Monetary Board, shall supervise and
and bounds of the Zone as provided herein. regulate the operations of banks and other financial institutions within the
 Subic Special Economic Zone; (A) General Definition. - Except when otherwise provided in this Title, gross
income means all income derived from whatever source, including (but not
(f) Banking and finance shall be liberalized with the establishment of limited to) the following items:
foreign currency depository units of local commercial banks and offshore
banking units of foreign banks with minimum Central Bank regulation; (1) Compensation for services in whatever form paid, including, but not
limited to fees, salaries, wages, commissions, and similar items;
(g) Any investor within the Subic Special Economic Zone whose continuing (2) Gross income derived from the conduct of trade or business or the
investment shall not be less than Two hundred fifty thousand dollars exercise of a profession;
($250,000), his/her spouse and dependent children under twenty-one (21) (3) Gains derived from dealings in property;
years of age, shall be granted permanent resident status within the Subic (4) Interests;
(5) Rents;
Special Economic Zone. They shall have freedom of ingress and egress to
(6) Royalties;
and from the Subic Special Economic Zone without any need of special
(7) Dividends;
authorization from the Bureau of Immigration and Deportation. The Subic (8) Annuities;
Bay Metropolitan Authority referred to in Section 13 of this Act may also (9) Prizes and winnings;
issue working visas renewal every two (2) years to foreign executives and (10) Pensions; and
other aliens possessing highly-technical skills which no Filipino within the (11) Partner's distributive share from the net income of the general
Subic Special Economic Zone possesses, as certified by the Department of professional partnership.
Labor and Employment. The names of aliens granted permanent residence
status and working visas by the Subic Bay Metropolitan Authority shall be (B) Exclusions from Gross Income. - The following items shall not be
reported to the Bureau of Immigration and Deportation within thirty (30) days included in gross income and shall be exempt from taxation under this Title:
after issuance thereof;
(1) Life Insurance. - The proceeds of life insurance policies paid to the heirs
(h) The defense of the zone and the security of its perimeters shall be the or beneficiaries upon the death of the insured, whether in a single sum or
responsibility of the National Government in coordination with the Subic Bay otherwise, but if such amounts are held by the insurer under an agreement
Metropolitan Authority. The Subic Bay Metropolitan Authority shall provide to pay interest thereon, the interest payments shall be included in gross
and establish its own internal security and firefighting forces; and income.

(i) Except as herein provided, the local government units comprising the (2) Amount Received by Insured as Return of Premium. - The amount
Subic Special Economic Zone shall retain their basic autonomy and identity. received by the insured, as a return of premiums paid by him under life
The cities shall be governed by their respective charters and the insurance, endowment, or annuity contracts, either during the term or at the
municipalities shall operate and function in accordance with Republic Act maturity of the term mentioned in the contract or upon surrender of the
No. 7160, otherwise known as the Local Government contract.
Code of 1991.
(3) Gifts, Bequests, and Devises. - The value of property acquired by gift,
bequest, devise, or descent: Provided, however, That income from such
II. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME property, as well as gift, bequest, devise or descent of income from any
Sec. 32, NIRC property, in cases of transfers of divided interest, shall be included in gross
income.

SEC. 32. Gross Income. - (4) Compensation for Injuries or Sickness. - amounts received, through
Accident or Health Insurance or under Workmen's Compensation Acts, as
compensation for personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on account of such (e) Benefits received from or enjoyed under the Social Security System in
injuries or sickness. accordance with the provisions of Republic Act No. 8282.

(5) Income Exempt under Treaty. - Income of any kind, to the extent (f) Benefits received from the GSIS under Republic Act No. 8291, including
required by any treaty obligation binding upon the Government of the retirement gratuity received by government officials and employees.
Philippines.
(7) Miscellaneous Items. -
(6) Retirement Benefits, Pensions, Gratuities, etc.-
(a) Income Derived by Foreign Government. - Income derived from
(a) Retirement benefits received under Republic Act No. 7641 and those investments in the Philippines in loans, stocks, bonds or other domestic
received by officials and employees of private firms, whether individual or securities, or from interest on deposits in banks in the Philippines by (i)
corporate, in accordance with a reasonable private benefit plan maintained foreign governments, (ii) financing institutions owned, controlled, or enjoying
by the employer: Provided, That the retiring official or employee has been in refinancing from foreign governments, and (iii) international or regional
the service of the same employer for at least ten (10) years and is not less financial institutions established by foreign governments.
than fifty (50) years of age at the time of his retirement: Provided, further,
That the benefits granted under this subparagraph shall be availed of by an (b) Income Derived by the Government or its Political Subdivisions. -
official or employee only once. For purposes of this Subsection, the term Income derived from any public utility or from the exercise of any essential
'reasonable private benefit plan' means a pension, gratuity, stock bonus or governmental function accruing to the Government of the Philippines or to
profit-sharing plan maintained by an employer for the benefit of some or all any political subdivision thereof.
of his officials or employees, wherein contributions are made by such
employer for the officials or employees, or both, for the purpose of
distributing to such officials and employees the earnings and principal of the (c) Prizes and Awards. - Prizes and awards made primarily in recognition of
fund thus accumulated, and wherein its is provided in said plan that at no religious, charitable, scientific, educational, artistic, literary, or civic
time shall any part of the corpus or income of the fund be used for, or be achievement but only if:
diverted to, any purpose other than for the exclusive benefit of the said
officials and employees. (i) The recipient was selected without any action on his part to enter the
contest or proceeding; and
(b) Any amount received by an official or employee or by his heirs from the (ii) The recipient is not required to render substantial future services as a
employer as a consequence of separation of such official or employee from condition to receiving the prize or award.
the service of the employer because of death sickness or other physical
disability or for any cause beyond the control of the said official or employee. (d) Prizes and Awards in sports Competition. - All prizes and awards
granted to athletes in local and international sports competitions and
(c) The provisions of any existing law to the contrary notwithstanding, social tournaments whether held in the Philippines or abroad and sanctioned by
security benefits, retirement gratuities, pensions and other similar benefits their national sports associations.
received by resident or nonresident citizens of the Philippines or aliens who
come to reside permanently in the Philippines from foreign government “(e) 13th Month Pay and Other Benefits. – Gross benefits received by
agencies and other institutions, private or public. officials and employees of public and private entities: Provided, however,
That the total exclusion under this subparagraph shall not exceed Ninety
(d) Payments of benefits due or to become due to any person residing in the thousand pesos (P90,000) which shall cover:
Philippines under the laws of the United States administered by the United (i) Benefits received by officials and employees of the national and local
States Veterans Administration. government pursuant to Republic Act No. 6686;
(ii) Benefits received by employees pursuant to Presidential Decree No.
851, as amended by Memorandum Order No. 28, dated August 13, 1986;
(iii) Benefits received by officials and employees not covered by Presidential taxable year which is to be distributed currently by the fiduciary to the
Decree No. 851, as amended by Memorandum Order No. 28, dated August beneficiaries, and the amount of the income collected by a guardian of an
13, 1986; and infant which is to be held or distributed as the court may direct, but the
(iv) Other benefits such as productivity incentives and Christmas bonus.” amount so allowed as a deduction shall be included in computing the taxable
income of the beneficiaries, whether distributed to them or not. Any amount
allowed as a deduction under this Subsection shall not be allowed as a
(f) GSIS, SSS, Medicare and Other Contributions. - GSIS, SSS, Medicare deduction under Subsection (B) of this Section in the same or any
and Pag-Ibig contributions, and union dues of individuals. succeeding taxable year.

(g) Gains from the Sale of Bonds, Debentures or other Certificate of (B) In the case of income received by estates of deceased persons during
Indebtedness. - Gains realized from the same or exchange or retirement of the period of administration or settlement of the estate, and in the case of
bonds, debentures or other certificate of indebtedness with a maturity of income which, in the discretion of the fiduciary, may be either distributed to
more than five (5) years. the beneficiary or accumulated, there shall be allowed as an additional
deduction in computing the taxable income of the estate or trust the amount
of the income of the estate or trust for its taxable year, which is properly paid
(h) Gains from Redemption of Shares in Mutual Fund. - Gains realized or credited during such year to any legatee, heir or beneficiary but the
by the investor upon redemption of shares of stock in a mutual fund amount so allowed as a deduction shall be included in computing the taxable
company as defined in Section 22 (BB) of this Code. income of the legatee, heir or beneficiary.

(C) In the case of a trust administered in a foreign country, the deductions

A. Definition of Gross Income mentioned in Subsections (A) and (B) of this Section shall not be allowed:
Provided, That the amount of any income included in the return of said trust
B. Exclusions from Gross Income shall not be included in computing the income of the beneficiaries.

Items of income which are not included in the taxable income. REPEALED SEC. 62. Exemption Allowed to Estates and Trusts. - For
These are the items of income which are excluded by the the purpose of the tax provided for in this Title, there shall be allowed an
Constitution, by tax treaties, by the Tax Code itself, and by exemption of Twenty thousand pesos (P20,000) [39] from the income of the
special tax laws from the gross income and considered as estate or trust.
exempt from income tax. Said income should be excluded in
the determination of the taxable income in the income tax SEC. 63. Revocable trusts. - Where at any time the power to revest in the
returns of taxpayers, whether individual or corporation, unless grantor title to any part of the corpus of the trust is vested (1) in the grantor
required to be reported in the same return or in certain either alone or in conjunction with any person not having a substantial
information returns as required by regulations. adverse interest in the disposition of such part of the corpus or the income
therefrom, or (2) in any person not having a substantial adverse interest in
Sec. 61-64 the disposition of such part of the corpus or the income therefrom, the
income of such part of the trust shall be included in computing the taxable
income of the grantor.
SEC. 61. Taxable Income. - The taxable income of the estate or trust shall
be computed in the same manner and on the same basis as in the case of SEC. 64. Income for Benefit of Grantor. -
an individual, except that:
(A) Where any part of the income of a trust (1) is, or in the discretion of the
(A) There shall be allowed as a deduction in computing the taxable income grantor or of any person not having a substantial adverse interest in the
of the estate or trust the amount of the income of the estate or trust for the disposition of such part of the income may be held or accumulated for future
distribution to the grantor, or (2) may, or in the discretion of the grantor or of employees the earnings and principal of the fund thus accumulated, and
any person not having a substantial adverse interest in the disposition of wherein it is provided in said plan that at no time shall any part of the corpus
such part of the income, be distributed to the grantor, or (3) is, or in the or income of the fund be used for, or be diverted to, any purpose other than
discretion of the grantor or of any person not having a substantial adverse for the exclusive benefit of the said officials and employees.
interest in the disposition of such part of the income may be applied to the
payment of premiums upon policies of insurance on the life of the grantor,
such part of the income of the trust shall be included in computing the
taxable income of the grantor. ` RA 7641 – An Act granting retirement benefits to private sector
employees in absence of qualified plan
(B) As used in this Section, the term 'in the discretion of the grantor'
means in the discretion of the grantor, either alone or in conjunction with any
person not having a substantial adverse interest in the disposition of the part Section 1. Article 287 of Presidential Decree No. 442, as amended,
of the income in question. otherwise known as the Labor Code of the Philippines, is hereby amended
to read as follows:

"Art. 287. Retirement. – Any employee may be retired upon

RA 4917 - An Act Providing That Retirement Benefits Of reaching the retirement age established in the collective bargaining
Employees Of Private Firms Shall Not Be Subject To agreement or other applicable employment contract.
Attachment, Levy, Execution, Or Any Tax Whatsoever.
"In case of retirement, the employee shall be entitled to receive
Section 1. Any provision of law to the contrary notwithstanding, the such retirement benefits as he may have earned under existing
retirement benefits received by officials and employees of private firms, laws and any collective bargaining agreement and other
whether individual or corporate, in accordance with a reasonable private agreements: Provided, however, That an employee's retirement
benefit plan maintained by the employer shall be exempt from all taxes and benefits under any collective bargaining and other agreements shall
shall not be liable to attachment, garnishment, levy or seizure by or under not be less than those provided herein.
any legal or equitable process whatsoever except to pay a debt of the official
or employee concerned to the private benefit plan or that arising from liability
"In the absence of a retirement plan or agreement providing for
imposed in a criminal action: Provided, That the retiring official or employee
retirement benefits of employees in the establishment, an employee
has been in the service of the same employer for at least ten (10) years and
upon reaching the age of sixty (60) years or more, but not beyond
is not less than fifty years of age at the time of his retirement: Provided,
sixty-five (65) years which is hereby declared the compulsory
further, That the benefits granted under this Act shall be availed of by an
retirement age, who has served at least five (5) years in the said
official or employee only once: Provided, finally, That in case of separation of
establishment, may retire and shall be entitled to retirement pay
an official or employee from the service of the employer due to death,
equivalent to at least one-half (1/2) month salary for every year of
sickness or other physical disability or for any cause beyond the control of
service, a fraction of at least six (6) months being considered as
the said official or employee, any amount received by him or by his heirs
one whole year.
from the employer as a consequence of such separation shall likewise be
exempt as hereinabove provided.
"Unless the parties provide for broader inclusions, the term one-half
(1/2) month salary shall mean fifteen (15) days plus one-twelfth
As used in this Act, the term "reasonable private benefit plan" means a
(1/12) of the 13th month pay and the cash equivalent of not more
pension, gratuity, stock bonus or profit sharing plan maintained by an
than five (5) days of service incentive leaves.
employer for the benefit of some or all of his officials and employees,
wherein contributions are made by such employer or officials and
employees, or both, for the purpose of distributing to such officials and
 "Retail, service and agricultural establishments or operations E. Tax Treaties
employing not more than (10) employees or workers are exempted
from the coverage of this provision. Deutsche Bank v. Collector of Internal Revenue, G.R. No.
188550, August 19, 2013
"Violation of this provision is hereby declared unlawful and subject
to the penal provisions provided under Article 288 of this Code."
Facts:

C. Exclusion of 13th Month Pay and Bonuses Up to A Certain Pursuant to the National Internal Revenue Code of 1997, on October 21,
Threshhold 2003, the petitioner remitted to the respondent the amount of Php
67,688,553.51, representing fifteen (15) percent of the branch profit
remittance tax (BPRT) on its regular banking unit (RBU) net income remitted
to the Deutsche Bank of Germany (DB Germany) for 2002 and prior taxable
years.
D. Article III, Section 5 and 6 - RA 7459 Inventors and Invention
Incentives Act of the Philippines Believing that they made an overpayment of the BPRT, on October 4, 2005,
the petitioner filed with the BIR Large Taxpayers Assessment and
Sec. 5. Tax Incentives. — Inventors, as certified by the Filipino Inventors Investigation Division an administrative claim for refund or a tax credit
Society and duly confirmed by the Screening Committee, shall be exempt certificate representing the alleged excess BPRT paid (amount of Php
from payment of license fees, permit fees and other business taxes in the 22,562,851.17). The petitioners also requested from the International Tax
development of their particular inventions. This is an exception to the taxing Affairs Division (ITAD) for a confirmation of its entitlement to a preferential
power of the local government units. The certification shall state that the tax rate of 10% under the RP-Germany Tax Treaty.
manufacture of the invention is made on a commercial scale.cralaw

Inventors shall exempt from paying any fees involved in their application for Because of the alleged inaction of the BIR on the administrative claim, on
registration of their inventions. October 18, 2005, the petitioner filed a petition for review with the Court of
Sec. 6. Tax Exemption. — To promote, encourage, develop and accelerate Tax Appeals (CTA), reiterating its claim for refund or tax credit certificate
commercialization of technologies developed by local researchers or representing the alleged excess BPRT paid. The claim was denied on the
adapted locally from foreign sources including inventions, any income ground that application for tax treaty relief was not filed with ITAD prior to the
derived from these technologies shall be exempted from all kinds of taxes payment of BPRT, thereby violating the fifteen-day period mandated under
during the first ten (10) years from the date of the first sale, subject to the Section III, paragraph 2 of the Revenue Memorandum Order No. 1-2000.
rules and regulations of the Department of Finance: Provided, that this tax Also, the CTA Second Division relied on an en banc decision of the CTA that
exemption privilege pertaining to invention shall be extended to the legal heir before the benefits of a tax treaty may be extended to a foreign corporation,
or assignee upon the death of the inventor.chan robles virtual law library the latter should first invoke the provisions of the tax treaty and prove that
they indeed apply to the corporation (Mirant Operations Corporation v
The technologies, their manufacture or sale, shall also be exempt from Commissioner of Internal Revenue).
payment of license, permit fees, customs duties and charges on
imports.cralaw Hence this petition.

Issue:
Whether or not the failure to strictly comply with the provisions of RMO No.
1-2000 will deprive persons or corporations the benefit of a tax treaty.

Ruling:

No. The constitution provides for the adherence to the general principles of
international law as part of the law of the land (Article II, Section 2).Every
treaty is binding upon the parties, and obligations must be performed (Article
26, Vienna Convention on the Law on Treaties). There is nothing in RMO 1-
2000 indicating a deprivation of entitlement to a tax treaty for failure to
comply with the fifteen-day period. The denial of availment of tax relief for
the failure to apply within the prescribed period (under the administrative
issuance) would impair the value of the tax treaty. Also, the obligation to
comply with the tax treaty must take precedence over the objective of RMO
1-2000 because the non-compliance with tax treaties would have negative
implications on international affairs and would discourage foreign
investments.

Dispositive:

The petition was granted, the CTA en banc decision was set aside and
reversed.The respondent was ordered to refund or issue a tax credit
certificate (the amount of Php 22,562,851.17) in favor of the petitioner.