A2015 - Salvador - Tax 1 Reviewer

A 2015
TAX 1 REVIEWER
Chan, Gono, de Chavez, Manalo

TAX REVIEWER
A2015 | Prof. Serafin Salvador
JAMIE CHAN | KAYE DE CHAVEZ | CIELO GOÑO | KIM MANALO
Individual Corporation
Includes: natural persons, (estates, trusts in proper cases) Includes: partnership (no matter how created or
organized), joint stock companies, joint accounts,
associations, insurance companies
NOT included: general professional partnerships, JV or
consortiums, JV in petroleum/ energy operations under a
service contract with the Government
Resident Citizen Non-resident Resident Alien Non-Resident Alien (NRA) Domestic Foreign Corporation
(RC) Citizen (NRC) (RA) Corporation
Resident Foreign Non-resident
ETB Non-ETB Corporation Foreign
(RFC) Corporation
(NRFC)
Description 1. Those who are 1. PHL citizens who 1. His residence 1. Engages in 1. Does NOT Corporations Engaged in NOT engaged in
citizens at the time establishes to the is WITHIN PHL business in the perform any organized and Trade and trade and
of adoption of the satisfaction of the PHL for 181 regular service created in the PHL Business in the business in the
1987 Constitution CIR the fact of 2. He is NOT a days or more in PHL and stays or under its laws PHL – means a PHL
(Feb. 2, 1987) physical presence citizen of PHL within the for 180 days or continuity of
abroad with the calendar year less in the PHL commercial
2. Those whose definite intention to Note: dealings and
fathers and reside therein - Actually 2.Includes arrangements
mothers are present in the performance of
citizens of PHL 2. A PHL citizen who PHL and not a personal Special Aliens: Special Domestic Special NRFC:
leaves during the mere transient services within Corps: Special RFC:
3. Those born taxable year to or sojourner the PHL 1. Regional or 1. Private 1. Lessor of
before the 1973 reside abroad, -w/n a transient: area HQ (RAHQ) Educational 1. International cinematographi
the 1973 Consti either as an depends on his and Regional Institutions – any Carriers – may c film
was effective and immigrant or for intention re his Sir: Only #1 is Operating HQ private school be online or
who elected PHL employment on a length and the test now (ROHQ) of MNCs maintained and offline 2. Owner or
citizenship upon permanent basis nature of stay administered by lessor of vessels
reacing the age of - when the 2. Offshore private individuals 2. Offshore chartered by
majority (Jan. 17, 3. A PHL citizen nature of visit Banking Units or groups issued a Banking Units PHL Nationals
1973) whose employment requires for an permit to operate by
abroad requires him extended stay 3. Petroleum DEPED sec 3. Foreign 3. Owner or
4. Naturalized to be physically and it is Service - related activities Currency lessor of
according to law present abroad necessary for Contractors or include income from Deposit Unit aircraft,
most of the time him to make a sub-contractors auxiliary activities machinery and
Note: during the taxable temporary home - may engage to equipment
Stay must be two year in the PHL (but if unrelated trade or
years or more RR1-79: Most of the it can be business not
(1985 BIR time = not less than promptly substantially related
1 | Chan, Gono, de Chavez, Manalo

decision) 183 days abroad; accomplished, he to exercise of
the basis of the is a transient) educational purpose
computation is the -includes aliens
date of the arrival as with floating 2. Non-Profit
shown in the intention as to hospitals
passport (w/n when to return - same rules as educ
working already) his country or insti
his stay here
4. If previously - only loses (3) GOCCs
considered as NRC residence status GR: EXEMPT
but returned to PHL once he XPN: GSIS, SSS, Phil
to reside here, will abandons Insurance Corp and
be considered NRC residence and PCSO which will be
during the taxable actually departs taxed with the same
year when he rate as similar corp
returned
Sources Within AND Within PHL Within PHL Within PHL Within and Without Within Within PHL
Without the PHL PHL
INCOME TAX
RC/ NRC/ RA NRA ETB NRA NETB DC RFC NRFC

NORMAL TAX RATES If income is not over 10k  5% Same with RC/ 25% 30% 30% 35%
If 10k < x < 30k  500 + 10% of the excess over 10k NRC
Tax Base: All With option to be Base: All income Base: All
If 30k < x < 70k  2,500 + 15% of the excess over income taxed at 15%:* within PHL income within
30k received other 1. Tax effort ratio of the PHL
If 70k < x < 140k  8,500 + 20% of the excess over than capital 20% of GNP With the same
70k gains 2. Ratio of 40% of option to be
If 140k < x < 250k  22,500 + 25% of the excess over income tax taxed at 15%
140k For Special collection to total (supra)
If 250k < x < 500k  50,000 + 30% of the Aliens: 15% tax revenues
excess over 250k PVD: Same tax 3. VAT tax effort of
If over 500k  125,000 + 32% of the excess over treatment to 4% of GNP
500k Filipinos 4. .9% ratio of the
employed Consolidated Public
Tax Base: Gross Income (less deductions) Sector Financial
NOTE: Minimum wage earners are EXEMPT Position to GNP
*Not enforced
PASSIVE INCOME RC/ NRC/ RA NRA ETB NRA NETB DC RFC NRFC
Interest from any 20% -- -- 20% 20%
bank deposit and (Normal tax (25%)
other monetary rates)
benefit from deposit

substitutes
Royalties 20% 20% -- 20% 20%
*From sources
XPN: XPN: within the PHL
For books, literary works, musical compositions: 1. Books,
10% literary, musical
compositions –
10%
2.Cinematograph
ic films
Prizes and Winnings 20% 20% -- --
For Prizes: Except those 10k or less  subject to (Same XPNs)

graduated rates
For winnings: Except PCSO and Lotto winnings
Interest from a 7.5% -- 7.5% 7.5%
depositary bank (Normal Tax
under Expanded rates apply)
foreign currency
deposit system
Interest income from EXEMPT EXEMPT -- --
long term deposit or
investment income Unless pre-terminated before the 5th year. If the (Same XPN)
from long term remaining maturity:
deposit or a. 4 yrs to less than 5 yrs – 5% final tax
investment in the b. 3 yrs to less than 4 yrs – 12%
form of savings, c. Less than 3 yrs – 20%
common or
individual trust
funds, deposit
substitutes,
investment mgt
accounts and other
investments
Cash/ Received 10% 20% -- -- --
Property by an
Dividend individua
l from a
DC

Intercorp -- -- -- EXEMPT EXEMPT 30%
orate
Dividend Unless with
s (From a 15% tax credit
DC) deemed to have
been paid then
the rate: 15%
Income derived by a -- -- EXEMPT EXEMPT EXEMPT EXEMPT
depositary bank (Sec 27 D.4)
from foreign
currency
transactions with:
1. Non-residents
2. OBU in PHL
3. Local
commercial
banks
transacting
FCDS
Interest Income from -- -- -- 10% 10% 20%
foreign currency
loans * granted by a * granted by a
depositary bank depositary bank
under expanded under expanded
FCDS to residents FCDS to
(other than OBUs) residents (other
than OBUs)
CAPITAL GAINS RC/ NRC/ RA NRA ETB NRA NETB DC RFC NRFC
CG from sale of Not over 100k  5% Same with Individuals
shares of stock NOT On any amount in excess of 100k  10%
traded in the stock
exchange
CG from sale of real 6% 6% -- --
property Base: GSP or FMV, whichever is higher *For property not
actually used in the
PVD: If sold to gov’t, normal rates may be used at the option of the taxpayer business and are
XPN: Will buy new residence = EXEMPT treated as capital
1. Property sold was principal residence and the proceeds will be fully utilized for the assets
construction of new principal residence Base: GSP or FMV,
2. Acquire new within 18 calendar months from date of sale whichever is higher
3. Can be availed of only once in 10 years
4. CIR is informed within 30 days from sale of the intention to avail exemption
5. Portion of proceeds not used will be subject to CG tax
*If there are errors, please feel free to advise me -- Cielo
PART I
Constitutional limitations of taxation:
A. INTRODUCTION1
1. Observance of due process of law and equal protection of the laws. (sec, 1, Art.
1. GENERAL PRINCIPLES 3) Any deprivation of life , liberty or property is with due process if it is done
under the authority of a valid law and after compliance with fair and reasonable
methods or procedure prescribed. The power to tax, can be exercised only for a
Sec. 21 Sources of Revenue NIRC
constitutionally valid public purpose and the subject of taxation must be within
The following taxes, fees and charges are deemed to be national internal revenue
taxes: the taxing jurisdiction of the state. The government may not utilize any form of
1. Income tax; assessment or review which is arbitrary, unjust and which denies the taxpayer
2. Estate and Donor’s taxes; a fair opportunity to assert his rights before a competent tribunal. All persons
3. Value-added tax; subject to legislation shall be treated alike under like circumstances and
4. Other percentage taxes; conditions, both in the privileges conferred in liabilities imposed. Persons and
5. Excise taxes;
properties to be taxed shall be group, and all the same class shall be subject to
6. Documentary stamp taxes; and
7. Such other Taxes as are or hereafter may be imposed and collected by the Bureau the same rate and the tax shall be administered impartially upon them.
of Internal Revenue 2. Rule of uniformity and equity in taxation (sec 28(1)Art VI) All taxable articles or
properties of the same class shall be taxed at the same rate. Uniformity implies
Other Sources in general: equality in burden not in amount. Equity requires that the apportionment of the
1. Constitution tax burden be more or less just in the light of the taxpayers ability to bear the
2. NIRC tax burden.
3. Other Tax Statutes
3. No imprisonment for non-payment of poll tax (sec. 20, Art III) A person cannot
4. Revenue Regulations implementing NIRC
be imprisoned for non-payment of community tax, but may be imprisoned for
other violations of the community tax law, such as falsification of the
2. CONSTITUTIONAL/INHERENT LIMITATIONS community tax certificate, or for failure to pay other taxes.
4. Non-impairment of obligations and contracts, sec 10, Art III . the obligation of a
contract is impaired when its terms and conditions are changed by law or by a
The following are the inherent limitations of taxation: party without the consent of the other, thereby weakening the position or the
rights of the latter. IF a tax exemption granted by law and of the nature of a
1. Purpose. Taxes may be levied only for public purpose;
contract between the taxpayer and the government is revoked by a later taxing
2. Territoriality. The State may tax persons and properties under its jurisdiction;
law, the said law shall not be valid, because it will impair the obligation of
3. International Comity. the property of a foreign State may not be taxed by
contract.
another.
5. Prohibition against infringement of religious freedom Sec 5, Art III, it has been
4. Exemption. Government agencies performing governmental functions are
said that the constitutional guarantee of the free exercise and enjoyment of
exempt from taxation
religious profession and worship, which carries the right to disseminate
5. Non-delegation. The power to tax being legislative in nature may not be
religious belief and information, is violated by the imposition of a license fee on
delegated. (subject to exceptions)
the distribution and sale of bibles and other religious literatures not for profit
1
(Jamie’s Part)
by a non-stock, non-profit religious corporation.

6. Prohibition against appropriations for religious purposes, sec 29, (2) Art. VI, taxation, ... . tax "applies equally to all persons, firms and corporations
Congress cannot appropriate funds for a private purpose, or for the benefit of placed in similar situation
any priest, preacher or minister or for the support of any sect, church except
when such priest, preacher, is assigned to the armed forces or to any penal AS APPLIED IN THE CASE
institutions, orphanage or leprosarium.
 Taxpayers may be classified into different categories. To repeat, it. is
7. exemption of all revenues and assets of non-stock, non-profit educational
enough that the classification must rest upon substantial distinctions that
institutions used actually, directly, and exclusively for educational purposes
make real differences.
from income, property and donor’s taxes and custom duties (sec. 4 (3 and 4)
 In the case of the gross income taxation embodied in Batas Pambansa Blg.
art. XIV.
135, the, discernible basis of classification is the susceptibility of the
8. Concurrence by a majority of all members of Congress in the passage of a law
income to the application of generalized rules removing all deductible
granting tax exemptions. Sec. 28 (4) Art. VI.
items for all taxpayers within the class and fixing a set of reduced tax rates
9. Congress may not deprive the Supreme Court of its jurisdiction to review,
to be applied to all of them.
revise, reverse, modify or affirm on appeal or certiorari, final judgments and
 Taxpayers who are recipients of compensation income are set apart as a
orders of lower courts in all cases involving the legality of any tax, impost,
class. As there is practically no overhead expense, these taxpayers are not
assessment or any penalty imposed in the relation thereto.
entitled to make deductions for income tax purposes because they are in
SISON V. COMMISSIONER the same situation more or less.
 In the case of professionals in the practice of their calling and
FACTS: Sison was assailing the validity of BP 135 businessmen, there is no uniformity in the costs or expenses necessary to
HELD: BP 135 is constitutional. produce their income. It would not be just then to disregard the
disparities by giving all of them zero deduction and indiscriminately
 Due process clause - a taxing statute is so arbitrary that it finds no support
impose on all alike the same tax rates on the basis of gross income.
in the Constitution
 There is ample justification then for the Batasang Pambansa to adopt the
 Equal protection clause - It suffices then that the laws operate equally and
gross system of income taxation to compensation income, while
uniformly on all persons under similar circumstances or that all persons
continuing the system of net income taxation as regards professional and
must be treated in the same manner, the conditions not being different,
business income.
both in the privileges conferred and the liabilities imposed. Favoritism
and undue preference cannot be allowed. It is inherent in the power to tax
that a state be free to select the subjects of taxation, and it has been
repeatedly held that 'inequalities which result from a singling out of one
particular class for taxation, or exemption infringe no constitutional
3. HISTORY OF PHILIPPINE INCOME TAX LAW – DEFINITION AND
limitation.'" DISTINCTIONS
 Uniformity - According to the Constitution: "The rule of taxation shag be
uniform and equitable." when the tax "operates with the same force and
effect in every place where the subject may be found. " Equality and  Income tax is a tax on all yearly profits arising from property,
uniformity in taxation means that all taxable articles or kinds of property professions, trades or offices, or as a tax on a person’s income,
emoluments, profits and the like
of the same class shall be taxed at the same rate. The taxing power has the
 Income Tax System
authority to make reasonable and natural classifications for purposes of o Global tax system

 For individuals – the total allowable deductions, 1. Income, gain or profit
personal and additional exemptions are deducted a. Income – all wealth that flows into the taxpayer other than as a
from the gross income to arrive at the net taxable mere return of capital
income subject to the graduated income tax rates 2. Income, gain or profit is received or realized during the taxable year
 For corporations - the total allowable deductions are 3. Income gain or profit isn’t exempted from income tax
deducted from the gross income to arrive at the net
taxable income subject to the two-tiered tax rates
 This is regardless of the type of income received by
the taxpayer 4. CLASSIFICATION OF INCOME TAXPAYERS
 All items of gross income, deductions, and personal
and additional exemptions if any, are reported in one
ITR and one set of tax rates are applied on the tax Sec. 22 (A)
base 'Person' - an individual, a trust, estate or corporation.
 Uniform rules, uniform rates, and does not classify  Citizenship principle
income o Citizen who resides in the Philippines – worldwide income and
o Schedular tax system income from sources within the Philippines
 Different types of incomes are subject to different  He is taxed for sources outside of the Philippines because
sets of graduated or flat income tax rates of the protection he gets from the Philippine Government
 File a separate regular ITR or capital gains tax return even when he is outside of the Philippines
by the recipient of the income for whichever
appropriate type of income is received Section 22 (E) Non-resident citizen - income from sources within the
 Recipient of passive income does not have to file ITR Philippines
because this is the job of the withholding agent A citizen of  who establishes to the satisfaction of the Commissioner
 Different rules, different rates, and classifies income the the fact of his physical presence abroad
o Semi-schedular or semi-global tax system Philippines  with a definite intention to reside therein.
 Individual Income Taxation – Schedular tax
treatment A citizen of  who leaves the Philippines during the taxable year to
 Corporate Income Taxation – Global tax treatment the reside abroad
Philippines o Either as an immigrant or for employment on a
Features of Philippine Income Tax Law permanent basis.
A citizen of  who works and derives income from abroad
 Direct tax – burden is borne by income recipient upon whom the tax is the  whose employment thereat requires him to be physically
imposed Philippines present abroad most of the time during the taxable year.
o Indirect tax – tax demanded in the first instance from a
person in the expectation and intention that he can shift the
A citizen  who has been previously considered as nonresident
burden to someone else
citizen and
 Progressive tax – the tax base increases as the tax rate increases
 who arrives in the Philippines at any time during the
o Ability to pay principle
taxable year to reside permanently in the Philippines
o Progressive system of taxation
 shall be treated as a nonresident citizen for the taxable
 Most comprehensive system of imposing income tax
year in which he arrives in the Philippines with respect to
 Semi-schedular or semi-global system
his income derived from sources abroad until the date of
 Of American origin
his arrival in the Philippines.
Requisites for income to be taxable

 Examples of non-residents
 Immigrants
 Employees of a foreign entity on a permanent B. TAX ON INDIVIDUALS23
basis
 OCW 1. Kinds of Tax Payers
 Residence principle
A. Rates of Income on Individual Citizen and Individual Resident Alien of the
o Resident alien - income from sources within the Philippines
PHL
 Residence is within the Philippines but is not a citizen. He
isn’t a mere transient or sojourner is a resident of the
Philippines for income tax purposes Section 24. Income Tax Rates
1. Income Tax is imposed on:
 Source principle a. Resident Citizens – on all taxable income derived for each taxable year
o Alien - income from sources within the Philippines from all sources within AND without the PHL
 Transient - This excludes (XPN): Passive income (subsection B), capital gains from
o Non-resident alien - income from sources within the Philippines sales of shares of stock not traded in Stock Exchange (C), and capital
 Not a resident of the Philippines and not a citizen thereof gains from sale of real property (D)
 Engaged in trade or business in the Philippines –
aggregate period of stay in the Philippines is
more than 180 days during any calendar year Who are citizens (RR2 Sec3):
o Taxed on his income from sources 1. Citizens of PHL at the time of adoption of the 1987 Consti
within the Philippines at the graduated 2. Those whose fathers and mothers are citizens of the PHL
income tax rates of 5%-32% 3. Those born before the adoption of the 1973 Consti became effective AND who
o Passive investment incomes shall be elected PHL citizenship upon reaching majority
subject to 20% final tax 4. Naturalized according to law
 Not engaged in trade or business in the
Philippines depending on the length of his stay 1985 BIR decision
in the Philippines Who is a resident: Stay must be two years or more
o His compensation, income, business or
professional income, capital gain, Section 24. Income Tax Rates
passive investment income and other 1. Income Tax is imposed on:
income from sources within the b. Non-resident citizens (including OFWs) – all income derived for each
Philippines is taxed at the flat rate of taxable year from all sources WITHIN the PHL only (XPN: B, C, D)
25%
o Capital gains from sale or exchange of
shares of stocks in a domestic Who are non-residents (Sec22)
corporation and from real property
1. A citizen who establishes to the satisfaction of the Commissioner the fact of his
shall be subject to capital gains tax or
physical presence abroad with a definite intention to reside therein
stick transaction tax
2. A citizen of the PHL who leaves the PHL during the taxable year to reside
 Corporations
o Domestic - worldwide income and income from sources within the 2
Those underlined are the kind of taxpayers
Philippines 3
(Cielo’s Part)
o Foreign - income from sources within the Philippines

abroad, either as an immigrant or for employment on a permanent basis Section 24. Income Tax Rates
3. A citizen of PHL who works and derives income abroad and whose employment d. Rate of Tax for Passive Income: GR: 20%
requires him to be physically present abroad MOST OF THE TIME (RR1-79: not 1. Interests, Royalties, Interest income for PHL currency bank 20%
less than 183 days; basis of computation is the date of arrival as shown by the Prizes, Other deposits and yield, or any other monetary final tax
passport regardless if actually working or not) during the taxable year Winnings benefit from deposit substitutes, trust
funds, and similar arrangements
Royalties 20%
Section 24. Income Tax Rates XPN: royalties on books, musical 10%
1. Income Tax is imposed on: compositions, literary work
c. Resident alien (RA) – on all income derived for each taxable year Prizes and other winnings from sources 20%
from all sources WITHIN the PHL (XPN: B, C, D) within PHL
- RR2, Sec5: A RA is actually present in PHL, not a mere XPN: prizes amounting to 10k or less
transient or sojourner determined by his intentions with which shall be subject to graduated tax in
regard to the length of his stay A; also winnings from PCSO/Lotto
Interest income from a depository bank 7.5%

under the expanded Foreign Currency
Section 24. Income Tax Rates Deposit system
Rate of Tax (x) a. Interest income from LONG-TERM deposit or investment in the
If income is not over 10k 5% form of savings, common or individual trust funds, deposit
If 10k < x < 30k 500 + 10% of the excess over 10k substitutes, investment management accounts and other
If 30k < x < 70k 2,500 + 15% of the excess over 30k investments evidenced by certificates by the BSP  EXEMPT
- HOWEVER, if the deposit/investment is pre-terminated, the
If 70k < x < 140k 8,500 + 20% of the excess over 70k entire income shall be subject to tax based on the remaining
maturity:
If 140k < x < 250k 22,500 + 25% of the excess over 140k  If 4 years to less than 5 years – 5%
 If 3 years to less than 4 years – 12%
If 250k < x < 500k 50,000 + 30% of the excess over 250k  If less than 3 years – 20%
NB: Based on how the law is worded, it appears that the longer
time before maturity, the less the interest, but tax rates should
If over 500k 125,000 + 32% of the excess over 500k
instead be lower if the period that had lapsed is longer. So if the
remaining maturity period is only 3 years, the less interest should
be paid.
2. Cash and/ or property dividends  final tax of 10% from January 1, 2000
Other provisos:
From Jan. 1, 1998 – 6%; From Jan. 1, 1999 – 8%
If earning forms part of income as of Dec. 31, 1997, this is EXEMPT.
 Married individuals shall compute their individual income tax
SEPARATELY. If the source of income cannot be identified
between them, it shall be divided equally between the spouses. NB: Dividend is a corporate profit set aside, declared, and ordered by the directors
to be paid to stockholders on demand or at fixed time. Until they are declared, they
 Minimum wage earners shall be EXEMPT from paying income tax.
belong to the corp and liable for the payment of its debts. (Cf stock dividend –
This exemption includes the holiday pay, OT, night shift
dividend payable in reserve or increase of additional stock of a corp as evidenced by
differential.
a certificate of stock, not cash)

The year when the income was taken is the basis, regardless of what year it was Section 25: Tax on Nonresident Alien Individual
declared (e.g. if dividend was earned in 1998, it is subject to 6% tax even if declared A. Nonresident Alien (NRA) ENGAGED in trade or business within PHL 
in 2001). same rate as in Sec. 24.A.2 (see rates above)
1. In General
e. Capital Gains from sale of Shares of Stock not traded in the stock - Who is a NRA? A NRA shall come to PHL and stay for an aggregate
exchange – this applies to NET capital gains from the sale, barter, period of more than 180 days during any calendar year
exchange or other disposition of shares of stock in a domestic corp - RR2 Sec6: An alien who acquired residence in PHL continues to be a
which are NOT disposed thru the stock exchange resident until he abandons his home and actually depart from PHL
- RR2 Sec8: Engaged in trade or business means performance of
If not over 100k 5% personal services within PHL and implies a regular place for
On any amount in excess of 100k 10% transactions and does not include casual places where transactions are
NB: NET capital gains is used here, hence, the capital losses may be deducted. made
Different rules govern if stocks are traded in the stock exchange.
2. Cash and or Property dividends / Interests / Royalties / Prizes  20%
This applies to:
a. Dividends from a domestic corp, joint stock company, insurance or
f. Capital gains from sale of Real Property  final tax of 6% based mutual fund company, regional operating headquarters of a
on gross selling price (GSP) or fair market value (FMV) whichever multinational corp (MNC)
is higher b. Share in the distributable net income of a partnership (except
- this applies to properties located in PHL, for disposition/ sale general professional partnership)
(including pacto de retro or other conditional sales) made by c. Joint account, joint venture taxable as a corp or association
individuals (including estates and trusts) d. Interests
- If sale is to the gov’t or other political subdivisions, agencies, GOCCs  e. Royalties of any form (except for books and other literary works,
the taxpayer may choose to use the graduated tax schedule (in A.2) musical composition which will be taxed for 10%)
f. Prizes (except those 10k or less)
XPN: Capital gains from sale of principal residence is EXEMPT from tax IF: g. Other winnings (except PCSO and Lotto)
1. Made by natural persons and the proceeds is fully utilized in acquiring XPN:
or constructing a new principal residence a. Cinematographic films and similar works – Sec. 28
2. Acquisition/construction made within 18 calendar months from the b. Long term deposit and investments – EXEMPT (unless pre-
date of sale or disposition terminated, see rules on Sec. 24)
3. Provided (PVD): the historical cost or adjusted basis of the real
property sold is carried over to the new principal residence 3. Capital gains for stocks not traded in the stock exchange and sale of
4. PVD: the CIR is notified within 30 days from sale thru a prescribed real property– same rules with Sec. 24
return of his intention to avail of the exemption
5. PVD: this exemption can be availed only once every 10 years B. Nonresident Alien NOT engaged in trade or business within PHL  25%
6. PVD: IF there is no full utilization of the proceeds, the remaining (uniform) tax rate for the entire income received from all sources within
portion will be subject to tax (again based on GSP/ FMV) PHL
- But for capital gains from sale of stocks and real property  same with
NB: How to compute #6: Sec 24
Unutilized portion of GSP of old residence x GSP/FMV x 6%
GSP of old residence
C. (D/E) Special Aliens  15% for the gross income received as salaries, etc.
1. Aliens employed by regional or area headquarters and regional

operating headquarters in PHL by multinational companies (MNC – a authorized to engage in foreign currency denominated
foreign firm or entity engaged in international trade with affiliates or transactions  7.5% for income derived from foreign currency
subsidiaries or branch offices in the Asia Pacific Region) deposits (FCD)
2. Aliens employed by offshore banking units established in PHL EXEMPT from tax if NON RESIDENT  who are non residents:
3. Aliens who are permanent resident of a foreign country but is a. Not a resident citizen
employed by a foreign service contractor/ subcontractor engaged in b. Not a resident Alien
petroleum operations in PHL c. Not a domestic corporation
PVD (for item 2 and 3): the same tax treatment shall apply to Filipinos d. Not a resident foreign corporation (with branch or rep here)
employed and occupying the same position  Offshore banking unit - branch, subsidiary, affiliate or foreign
NB: Ratio for this preferential tax rate  incentive for the establishment of banking corp authorized to engage in offshore banking business
such MNCs, banking units, and for engaging in petroleum operations in
PHL.
RR 8-98: Creditable withholding tax imposed on the withholding agent/buyer
a. If the seller/transferor is habitually engaged in real estate (registered in
HLURB):
2. Kinds of income and income tax of Individuals If GSP is 500k or less 1.5%
If GSP is more than 500k but less than 3%
a. Tax Formula (for resident citizens) 2M
If GSP is more than 2M 5%
Professional: b. If seller is NOT habitually engaged in 7.5%
Step 1: Gross income from all sources (within/without PHL) real estate
Less Itemized deductions (or 40% optional standardized deductions)
= NET INCOME
Step 2: Net Income 3. Personal, Additional and Special Exemptions
Less Personal and Additional exemptions = TAX BASE
Step 3: Tax base
Multiply to tax rate (see Sec. 24.A.2 for rate) = TAX DUE Section 35. Allowance of Personal Exemption for Individual Taxpayer
A. In General  P50k basic personal exemption for each individual taxpayer
Salaried:
In case of married individuals, if only one is deriving gross income, only such spouse
Step1: Gross income
Less Personal, additional exemptions, health insurance = TAX BASE will be entitled to the exemption
Step2: Tax base B. Additional Exemption for Dependents – P25K for each dependents not
Multiply to tax rate = TAX DUE exceeding four
NB: If the taxpayer derives the income from compensation only, no - For married individuals, only one can claim
itemized deductions (in step 1) are allowed but only personal, additional - If legally separated, he/she who has custody of the child can claim
exemptions and health insurance will be allowed. There is also no 10%
optional deduction.
Dependent –a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is either:
1. Not more than 21 y/o, unmarried AND not gainfully employed
b. Final Income Tax (see Sec. 24) 2. Regardless of age, if incapable of self-support due to mental or
physical defect
RR 10 – 98: Income Tax on FCD C. Change of Status (Close of year rule)
 FCDU – a unit of a local bank or branch of a foreign bank

1. If he marries or should have additional dependent during the taxable  The amount does not exceed 2,400 per family OR 200 a month paid during the
year – he may claim the additional exemption in full for such year taxable year
2. If he dies during the taxable year – his estate may still claim the  Tax taken by the taxpayer for himself, including his family, shall be allowed as
personal and additional exemption for himself and his dependents as deduction from his gross income
is he died at the close of such year  Said family has a gross income of not more than 250k for the taxable year
3. If the spouse or any of the dependent dies/becomes 21/becomes PVD: For married taxpayers, the spouse claiming the additional exemptions shall be
gainfully employed during the taxable year – the taxpayer may still entitled to this deduction
claim the exemptions as if the change of status occurred at the close of
such year
D. Personal Exemption Allowable to Nonresident Alien Individual engaged in 5. Senior Citizens Law
trade, business or exercise of his profession in PHL – entitled to personal
RA 9904, Section4: Privileges of a Senior Citizen
exemption in the amount equal to the exemptions allowed in the income
(a) the grant of twenty percent (20%) discount and exemption from the value -
tax law in the country of which he is a citizen to citizens of PHL not residing added tax (VAT), if applicable, on the sale of the following goods and services from
in such country BUT NOT to exceed the amount fixed here for citizens or all establishments, for the exclusive use and enjoyment or availment of the senior
residents (i.e.50k) citizen
PVD: The NRA should file a tru and accurate return of the total income (1) on the purchase of medicines, including the purchase of influenza and
received by him from all sources in PHL pnuemococcal vaccines, and such other essential medical supplies,
accessories and equipment to be determined by the Department of Health
(DOH).
(b) exemption from the payment of individual income taxes of senior citizens who
RR 2-98: Head of Family  P25k personal exemption (BUT NOW: 50k) are considered to be minimum wage earners in accordance with Republic Act No.
9504;
a. It means one who is unmarried or legally separated with one or both parents, or
The establishment may claim the discounts granted under subsections (a) and (c)
one or more siblings (full/half) , or with one or more legit/illegit children living of this section as tax deduction based on the cost of the goods sold or services
with and dependent upon him for chief support. The sibling or child must be: rendered: Provided, That the cost of the discount shall be allowed as deduction
from gross income for the same taxable year that the discount is granted:
1. Not more than 21 y/o; unmarried; not gainfully employed Provided, further, That the total amount of the claimed tax deduction net of VAT, if
2. Or regardless of age, incapable of self-support applicable, shall be included in their gross sales receipts for tax purposes and shall
be subject to proper documentation and to the provisions of the National Internal
Revenue Code (NICR), as amended. xxx
b. Or one who is the benefactor of a qualified senior citizen (A senior citizen is one
at least 60y/o including those who have retired from both govt/private
enterprise with an income of not more than 60k per annum Carlos Superdrug v. DSWD
F: Petitioners are domestic pharmaceutical corporations assailing the

constitutionality of the Senior Citizens law, in particular they assail the discount to
4. Premium Payments and Personal Exemptions medicine-purchases granted to the senior citizens and the tax deduction scheme
granted to petitioners. According to them, the tax deduction scheme is insufficient
for them to recoup their losses and this amounts to an unlawful deprivation of their
Section 34 (m) – Deduction from gross income property. Petitioners claim that the tax credit scheme should have been used.
 Payment for health and/or hospitalization insurance

 Tax credit scheme: a peso-for-peso deduction from a taxpayer’s tax liability
due to the government of the amount of discounts such establishment has
granted to a senior citizen. (100% recovery)
 Tax deduction scheme: the establishment concerned is allowed to deduct
from gross income, in computing for its tax liability, the amount of
discounts granted to senior citizens (32% of the 20% is to be foregone by
the government).
H: The SC upheld the constitutionality of the law. The tax deduction scheme is not
meant to give the petitioners a full reimbursement of the discount, but it is a
sufficient form of just compensation. In any case, the State has a power to impose a
burden upon private establishments to partly subsidize the promotion of health and
welfare of a special group of citizens, in this case, the senior citizens.
6. Attrition Act of 2005
- A Revenue Fund is created from the excess of target collection as incentive

to collectors in BIR and BOC
- If collection falls short of the target by 7.5%  employee may be subject to
removal and other disciplinary action
Abakada Guro v. Purisima (2008)
F: Petitioner is assailing the constitutionality of the Attrition act.
H: It is constitutional. It is pursuant to the constitutional provision as regards to

accountability of public officers. Similarly, it is a valid delegation of power. Sec. 7
specifies the limits of the Board’s authority and identifies the conditions under
which officials and employees whose revenue collection falls short of the target
by at least 7.5% may be removed from the service. It lays down a reasonable
yardstick for removal (when the revenue collection falls short of the target by at
least 7.5%) with due consideration of all relevant factors affecting the
level of collection. This standard is analogous to inefficiency and
incompetence in the performance of official duties, a ground for disciplinary
action under civil service laws.

PART II F: Ayala Land Inc. and Appleyard Properties Inc. were to construct a building on a
C. TAX ON CORPORATIONS4 land owned by Ayala Land. They contributed equal amounts for the construction
and agreed to distribute profits at 60:40 ratio. They also agreed to form a joint
1. Definition of Corporations
venture for the leasing of the building the profits of which they will share in the
same proportion.
Sec 22 (B) NIRC H: JV for building construction is NOT taxable as a corporation; JV for leasing is
The term "corporation" shall include taxable as a corporation.
 partnerships, no matter how created or organized
 joint-stock companies Obillos vs. CIR (1985)
 joint accounts (cuentas en participacion) F: The father completed payment for two lots which he gave to his 4 children. The
 association father intended the lots for the building of his children’s residences. The children,
 insurance companies however, sold the lots. They derived profit from the sale for which they paid capital
NOT Corporations: gains tax and thereafter, divided the remaining amount to themselves. CIR assessed
them for deficiency income taxes treating them as a corporation.
 general professional partnerships (formed by persons for the sole purpose
of exercising their common profession) H: NOT taxable as a corporation. The siblings were mere co-owners of the lots given
 joint venture or consortium formed for the purpose of undertaking to them by their father. They were not engaged in any JV. The sale was an isolated
construction projects transaction and the division of profit was a mere incident of their co-ownership of
 joint venture or consortium formed for the purpose of engaging in the lots.
petroleum, coal, geothermal and other energy operations pursuant to an
operating consortium agreement under a service contract with the RR 10-2012 (June 2, 2012) – Requisites for exemption of a JV engaged in
Government construction:
(1) for the undertaking of a construction project; and
Ona vs. Commissioner (2) should involve joining or pooling of resources by licensed local contracts; that
F: Upon the death of the wife, she was survived by the husband and 5 children. is, licensed as general contractor by the Philippine Contractors Accreditation
Husband was appointed as the administrator of the estate. The heirs entered into a
Board (PCAB) of the Department of Trade and Industry (DTI);
project of partition which was approved by the probate court. Despite the agreed
partition, the properties were not actually divided among the heirs and instead, the (3) these local contractors are engaged in construction business; and
father was allowed to take over the management of the properties allowing the (4) the Joint Venture itself must likewise be duly licensed as such by the Philippine
latter to lease them and derive income therefrom. CIR assessed them for deficiency Contractors Accreditation Board (PCAB) of the Department of Trade and
corporate income tax treating them as an unregistered partnership.
Industry (DTI)
H: Taxable as a corporation (unregistered partnership). From the time on the
Sir Says: The reason for this issuance of the BIR is the conduct of contractors
mother’s death until the time the project of partition was approved by the probate
(specifically in BGC) pre-selling the condominium units, that is while construction is
court, there only is a co-ownership which is not subject to corporate income tax.
ongoing, so that they can avoid being subject to VAT and other taxes for sales during
However, when after knowing their respective share they entrusted them to the
that period.
father for investing purposes, they effectively created an unregistered partnership.
2. Classification of Corporations and Taxes

BIR RULING: No. 317-92 (October 28, 1992)
a. In general
4
(Kaye’s Part)
Sec. 27 NIRC - Rates of Income tax on Domestic Corporations Resident A foreign corporation engaged Income from within the
Foreign in trade or business within the Philippines
(A) In General. - Except as otherwise provided in this Code, an income tax of thirty-
Philippines.
five percent (35%) is hereby imposed upon the taxable income derived during each
Example: Tiger Airways
taxable year from all sources within and without the Philippines by every
Non-resident A foreign corporation not Income from within the
corporation, as defined in Section 22(B) of this Code and taxable under this Title as a
Foreign engaged in trade or business Philippines
corporation, organized in, or existing under the laws of the Philippines:
within the Philippines.
Provided, That effective January 1, 1998, the rate of income tax shall be thirty- Example: Cathay Pacific
four percent (34%); effective January 1, 1999, the rate shall be thirty-three
percent (33%); and effective January 1, 2000 and thereafter, the rate shall be
Tax Regimes for Domestic and Resident Foreign Corporations:
thirty-two percent (32%).
1. Regular Corporate Income Tax (RCIT)
a. This is the general tax regime (sometimes called Normal Tax)
Sec 28 NIRC - Rates of Income Tax on Foreign Corporations. Tax Base Tax Rate
(A) Tax on Resident Foreign Corporations. Domestic Worldwide Income 35% - Nov 1, 2005
(1) In General. - Except as otherwise provided in this Code, a corporation to Dec 31, 2008
organized, authorized, or existing under the laws of any foreign country, Resident Foreign Income within PH 30% - January 1,
engaged in trade or business within the Philippines, shall be subject to an 2009 to present
income tax equivalent to thirty-five percent (35%) of the taxable income
derived in the preceding taxable year from all sources within the
Philippines:Provided, That effective January 1, 1998, the rate of income tax 2. Optional Gross Income Tax (GIT)
shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be a. Requisites:
thirty-three percent (33%), and effective January 1, 2000 and thereafter, the i. Authorized by the President of the PH upon
rate shall be thirty-two percent (32%). xxx recommendation of the Sec of Finance
1. Conditions for grant of authority:
(B) Tax on Nonresident Foreign Corporation. a. Tax effort ratio of 20% of GNP
(1) In General. - Except as otherwise provided in this Code, a foreign b. Income tax collection/Total revenues =
corporation not engaged in trade or business in the Philippines shall pay a 40%
tax equal to thirty-five percent (35%) of the gross income received during c. VAT tax effort of 4% of GNP
each taxable year from all sources within the Philippines, such as interests, d. Consolidated Public Sector Financial
dividends, rents, royalties, salaries, premiums (except reinsurance Position/GNP=0.9%
premiums), annuities, emoluments or other fixed or determinable annual, ii. Corporation has the following ratio:
periodic or casual gains, profits and income, and capital gains, except capital 1. Cost of Sales/Gross Receipts = 55% (or more)
gains subject to tax under subparagraphs (C) and (d): Provided, That effective b. Once elected, irrevocable for 3 consecutive years
1, 1998, the rate of income tax shall be thirty-four percent (34%); effective
January 1, 1999, the rate shall be thirty-three percent (33%); and, effective 3. Minimum Corporate Income Tax (MCIT)
January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%).
Xxx 4. Tax on Passive Income of Domestic and RFCs:
Classification Definition Taxable Income Income Tax Base Proportion Rate
Domestic Created or organized in the Income from within and Interest (on any Capital employed in the 20% Final Tax
Philippines or under its laws without the Philippines currency or bank Philippines
Example: Philippine Airlines (worldwide) deposit and yield or

monetary benefit its primary purpose or function.
from deposit o Proprietary educational institution – is any private school maintained
substitutes and and administered by private individuals or groups with an issued
from trust funds or permit to operate from the Department of Education, Culture and
similar Sports (DECS), or the Commission on Higher Education (CHED), or
arrangements) the Technical Education and Skills Development Authority (TESDA),
Interest (Expanded Capital employed in the 7.5% Final Tax as the case may be, in accordance with existing laws and regulations.
FCDU) Philippines (primarily for Constitution, Article XIV, Sec. 4 (3)
lending)
All revenues and assets of non-stock, non-profit educational institutions used
Dividends Those received from domestic Exempt actually, directly, and exclusively for educational purposes shall be exempt from
corporations taxes and duties. Upon the dissolution or cessation of the corporate existence of
Royalties Those used in the PH 20% Final Tax such institutions, their assets shall be disposed of in the manner provided by law.
CG from sale of  Held as Capital Asset First 100,000 – 5% Proprietary educational institutions, including those cooperatively owned, may
Shares of Stock NOT  Not traded in the SE likewise be entitled to such exemptions, subject to the limitations provided by law,
In Excess of 100,000 –
traded in the Stock including restrictions on dividends and provisions for reinvestment.
10%
Exchange
CG from sale of land Fair Market Value or Gross 6% Final Tax Finance Department Order 137-87
and/or buildings Selling Price, whichever is a. All revenues and assets of non-stock, non-profit educational institutions used
which are treated as Higher actually, directly and exclusively for educational purposes are EXEMPT from
capital assets internal revenue taxes and customs duties.
Must be a capital asset. b. Cafeterias, dorms and bookstores are also exempt if:
a. Owned and operated by the school
 TEST: 2-year threshold (must
b. Within the school premises
be idle or not used in the
business for more than 2
years) Department Order 149-95 (Nov 24, 1995) [also BIR Ruling 417-98]
Interest income from deposits of non-stock, non-profit educational institutions shall
b. Special Corporations be exempt from 20% FTax if used in furtherance of its educational purpose
i. Private Educational Institutions and Non-Profit Hospitals

CIR vs St. Luke’s Medical Center (Sep 26, 2012)
Sec. 27 (B) - Proprietary Educational Institutions and Hospitals F: St. Lukes is a non-stock and non-profit corporation which, prior to the
controversy, enjoyed income tax exemption (as per a BIR Ruling based on Sec 30
Proprietary educational institutions and hospitals which are nonprofit shall pay a
NIRC). In the year in question, the BIR assessed for deficiency taxes. BIR argues that
tax of ten percent (10%) on their taxable income
since the gross income of the corporation consists of income from both paying and
LIMIT: Gross income from unrelated trade, business or other activity exceeds non-paying patients, it cannot be said to be under Sec 30 of the NIRC (organized and
fifty percent (50%) of the total gross income derived from all sources subject operated exclusively for charitable purpose).
to RCIT
H: St. Lukes is a proprietary, non-profit hospital. Under Sec 27 (B) of the NIRC, it is
o ‘Unrelated trade, business or other activity’ – any trade, business or entitled to the 10% preferential rate.
other activity, the conduct of which is not substantially related to the
 Proprietary – Private
exercise or performance by such educational institution or hospital of

 Non-Profit – no net income or asset accrues to or benefits any member of international airline
specific person, with all net income or asset devoted to the institution’s o The passenger boards a plane
purposes an all its activities conducted not for profit. It does not in a port or point in the
necessarily mean “charitable” or operating totally for free. Philippines
 Only aliquot portion of the cost of the
ii. Non-Resident Cinematographic Film Owner, Lessor or Distributor ticket corresponding to the leg flown
from the Philippines to the point of
transshipment shall form part of GPB,
Sec 28. (B) (2) - Nonresident Cinematographic Film Owner, Lessor or under the ff. circumstances:
Distributor o For flight which originates from
A cinematographic film owner, lessor, or distributor shall pay a tax of twenty-five the Philippines
percent (25%) of its gross income from all sources within the Philippines. o But transshipment of passenger
takes place at any port outside
the Philippines on another
airline
iii. International Carriers: Section 28(A)(3)5
o International Carrier: An international carrier doing business in the

Philippines shall pay a tax of two and one-half percent (2 ½%) on its “Gross
Philippine Billings” (Sec. 28 (A)(3)(b))
International Shipping– Gross revenue whether for:
o Gross Philippine Billings:
What?  Passenger
(Sec. 28 (A)(3)(a))  Cargo Originating from the Philippines to the final
International Air Carrier – Amount of gross revenue derived from carriage of: destination
o Regardless of:
What?  Persons  The place of sale OR
 Excess Baggage  Payments of the passage or
 Cargo freight documents
 Mail  Mail
Where? Originating from the Philippines Where?  Originating from the Philippines to the final destination
o Regardless of:
How? In a continuous and uninterrupted flight  The place of sale OR
 Payments of the passage or freight
documents
Conditions:  Irrespective of:
 o Place of payment of the ticket
or
o Passage document
 Part of GPB when the ff. concurs: BOAC v. Commissioner
o Tickets revalidated, exchanged,
and/or indorsed to another Facts: British Overseas Airways Corporation (BOAC) is an offline international air
carrier. Since it was not granted a CPCN to operate in the Philippines, it did not carry
5
passengers and/or cargo to and from the Philippines. During the period covered by
(Kimmie’s Part)
the assessment, BOAC maintained a general sales agent in the Philippines not of a contract/charter for rent or hire relating to a particular airplane.
temporary character – this was responsible for selling BOAC tickets covering Originating from the Philippines
passengers and cargoes.  Passengers, excess baggage, cargo, and/or mail ORIGINALLY COMMENCE their
flight from any Philippine port to any other port or point outside the Philippines
Held: BOAC is a foreign corporation doing business in the Philippines. The source of (IN  OUT)
income is the property, activity, or service that produced the income. For the source  Chartered flights originally commencing their flights from any Philippine port
of income to be considered as coming from the Philippines, it is sufficient that the to any foreign port (IN  OUT)
income is derived from activity within the Philippines. In BOAC’s case, the sale of  Chartered flights originally commencing their flight from any foreign port (OUT
tickets in the Philippines is the activity that produces the income. The tickets  STAY > 48hrs prior to embarkation)
exchanged hands here and payments for fares were also made here in Philippines  Whose stay is for MORE THAN 48 hours (x > 48 hrs.) prior to embarkation
currency. The Court ruled that the situs of the source of payments is the Philippines.  EXCEPT where flight of airplane from same airline company failed to
The flow of wealth proceeded from and occurred within the Philippine territory, depart within 48 hrs. due to force majeure
enjoying the protection accorded by the Philippine government. A transportation  Passenger, excess baggage, cargo, mail originally commencing flight from
ticket is not a mere piece of paper. When issued by a common carrier, it constitutes foreign port (OUT IN)
the contract between the ticket-holder and the carrier. The test of taxability is the  Alights or discharged in any Philippine port
source, and the source of income is that activity which produced the income. The  Boards or is loaded on another aircraft of same airline company
word “source” conveys one essential idea, that origin of the income is the  General Rule: Flight from Philippines to any foreign port = considered NOT
Philippines. ORIGINATING from the Philippines
 Exception: When intervening period between arrival and departure
RR 15-2002 (20 May 2002) Implementing Gross Philippine Billings Tax on EXCEEDS 48 hrs.
International Carriers  Exception to exception: Failure to depart within 48 hours is due to reasons
Definition of Terms beyond his control (e.g. force majeure or when only next available flight
International air carrier leaves beyond 48 hours.
 Foreign airline corporation doing business in the Philippines  Condition: If the 2nd aircraft belongs to a different airline, flight from
 Has landing rights in any Philippine port Philippines to any foreign port = considered ORIGINATING from the
 To perform international air transportation services/activities or flight Philippines, regardless of intervening period between arrival and
operations departure from Philippines
 Anywhere in the world Continuous and Uninterrupted Flight: Flight in carrier of SAME airline
Off-line carrier: An international air carrier having NO flight operations to and  From moment a passenger, excess baggage, cargo, or mail is lifted from the
from the Philippines Philippines up to point of final destination
On-line carrier: An international air carrier having or maintaining flight operations  When NOT continuous and uninterrupted: if transshipment takes place at any
to and from the Philippines port outside the Philippines or another aircraft belonging to a different airline
Off-line flights: Flight operations carried out or maintained by an international air Place of Final Destination: Place of final disembarkation designated or agreed
carrier between ports or points upon by the parties in a contract of air transportation
 OUTSIDE the territorial jurisdiction of the Philippines Transient Passengers: Passenger who originated from outside the Philippines
 Without touching a port or point in the Philippines towards a destination also outside the Philippines but stops in the Philippines for
 EXCEPTION: when in distress or due to force majeure a period either:
On-line flights: Flight operations carried out or maintained by an international air  For a period of either:
carrier between ports or points  Less than 48 hours OR
 IN the territorial jurisdiction of the Philippines and  More than 48 hours, if delay is due to force majeure or reasons beyond his
 Any port or point outside the Philippines control
Chartered flight: Flight operation which includes operations between ports or  In BOTH cases, passenger boarded an airplane of same airline bound to
points in the Philippines (includes block charter) and ports and points outside the place of final destination
Philippines, placed under the custody and control of a charterer by a Foreign Airline Companies WITHOUT flights starting from or passing through the

Philippines destination
 When NOT subject to GPB tax6 (2½%) or Common Carrier’s Tax7 (3%)  Gross revenue on excess baggage = computed based on the actual
 Off-line airline with branch office or sales agent in the Philippines revenue derived as appearing on the official receipt or any similar
 Sells passage documents for compensation or commission to document
cover off-line flights of its and of other airlines  Gross revenue for freight or cargo and mail = based on revenue
 Covering flights originating from Philippine ports or off-line realized from its carriage.
flights  Revenue realized for freight or cargo = [Amount on airway bill-
 RATIO: They are not considered engaged in business as international discounts]
air carrier in the Philippines  Revenue realized for mails = amount in cargo manifest of carrier
 NOTE: These foreign airlines may be subjected to other taxes under the  For tickets with Departure and Return flights, the return trip revenue
Code pertaining to flight back to the Philippines is not included in GPB
International Air Carrier with flights originating from Philippine Ports  Where flight is interrupted by force majeure resulting in transshipment
 GR: An international air carrier with flights originating from the to another aircraft of another airline and transshipment is in another
Philippines, irrespective of the place where passage documents are country = GPB determined by portion of flight from the Philippines up
sold or issued, is SUBJECT TO GBP (2 ½%) to point of transshipment.
 EXCEPTION: When a different tax rate under the applicable tax treaty o Non-revenue passengers and refunded tickets not included
to which the Philippines is a signatory o GPB = leg flown from any point in the Philippines to the point of
Gross Philippine Billings: total amount of gross revenue transshipment
 Gross Revenue o Exchange rate = average monthly Airline Rate as provided in Bank
 Tickets sold IN the Philippines – Actual amount derived from Settlement Plan (BSP) Monthly sales report or Bankers Association of
transportation services on a continuous and uninterrupted flight the Philippines (BAP) rate, whichever is higher. BAP rate computed by
from any port or point in the Philippines to its final destination in adding all the different BAP rates during the month and dividing the
any port or point of a foreign country same by the no. of days in a month.
 GPB = monthly average net fare of all the tax coupons of o All items of income other than income from international air transport
plane tickets issued for the month per point of final services in Sec. 5 is subject to tax
destination, per class of passage [first, business, o In determining Common Carrier’s tax, the tax base is the same as GPB
economy class] and per classification of passenger tax base.
[adult, child, infant] as reflected in the remittance area of
the tax coupon of plane tickets MULTIPLIED BY total
number of passengers flown for the month as declared in Air Canada v CIR
the flight manifest
 Tickets sold OUTSIDE the Philippines – Locally available net fares Facts: Air Canada is a Canadian corporation, which was granted an authority to
applicable to the flight, taking into consideration the seasonal operate as an off-line carrier by the Civil Aeronautics Board. In 2000, petitioner and
fare rate established at the time of the flight, class of passage, Aerotel Ltd., Corporation entered into a Passenger General Sales Agency Agreement
classification of passenger, date of embarkation, and place of final whereby Aerotel was appointed as General Sales Agent in the Philippines.
destination.
 GPB = same as above Held: An international airline which has appointed a ticket sales agent in the
 Passage documents revalidated, exchanged and/or endorsed to Philippines and which allocates fares received to various airlines on the basis of
another on-line international airline = included in taxable base of their participation in the services rendered, although it does not operate any
carrying airline, subject to GPB tax if passenger is lifted/boarded on an airplane in the Philippines, is a resident foreign corporation subject to tax on income
aircraft from any port or point in the Philippines towards a foreign received from Philippine sources.
6
Sec. 28(A)(3)(a) United Airline Inc. v. CIR
7
Sec. 118 (A)
the government owes him an amount equal to or greater than the tax being
Facts: United Airlines is a foreign corporation organized and existing under the "' collected. The collection of a tax cannot await the results of a lawsuit against the
laws of the State of Delaware, United States of America. It is licensed to establish and government.
operate a branch in the Philippines and to "open an office as an off-line carrier. The
SEC License of petitioner was amended, allowing it to act as an "on-line carrier of
persons, property and mail between the United States and the Philippines" so it RA 10378, (23 July 2012): Reciprocal Exemption for GPB Tax
discontinued its passenger flights. Petitioner allegedly continued to pay tax at the Who? International carriers doing business in the Philippines
reduced rate of 1 Yz%, pursuant to Article 9 (1) of the Convention Between the
Government of the Republic of the Philippines and the Government of the United Benefit? May avail of a preferential rate or exemption from the tax imposed
States of America with Respect to Income Taxes (hereafter "RPUS Tax Treaty") on on their gross revenue
revenues from tickets/passage documents sold in the Philippines covering
passenger/cargo flights originating outside of the Philippines. Basis?  Applicable tax treaty; or
 International agreement to which the Philippines is a
Held: Petitioner cannot be made liable to pay the income tax on Gross Philippine signatory
Billings since its carriage of persons, excess baggage, cargo and mail does not  On the basis of reciprocity – home country of international
originate from the Philippines in a continuous and uninterrupted flight. carrier grants income tax exemption to Philippine carriers
Nevertheless, considering the nature of its business being duly licensed to engage in
trade or business in the Philippines as an off-line carrier and appointing a General iv. Non-resident Owner of Vessels:
Sales Agent to manage its passenger and cargo services in the country, petitioner is
still liable for payment of its income taxes as a resident foreign corporation doing Sec. 28 (B)(3)
business in the Philippines. Considering that petitioner is a resident foreign A non-resident owner or lessor of vessel shall be subject to a 4½% tax of gross
corporation doing business in the Philippines, it shall be subject to an income tax rentals, lease or charter fees from leases or charters to Filipino citizens or
equivalent to 32% of the taxable income derived from its sale of tickets here in the corporations, as approved by the Maritime Industry Authority.
Philippines. However, in view of the existence of the RP-US Tax Treaty, the
applicable tax rate is reduced.
v. Non-resident Lessor of Aircraft, Machineries, and other Equipment:
South African Airways v. CIR
Sec. 28 (B)(4)
Facts: Petitioner South African Airways is a foreign corporation organized and Rentals, charters and other fees derived by a nonresident lessor of aircraft,
existing under and by virtue of the laws of the Republic of South Africa. In the machineries and other equipment shall be subject to a 7½% tax of gross rentals or
Philippines, it is an internal air carrier having no landing rights in the country. fees.
Petitioner has a general sales agent in the Philippines, Aerotel Limited Corporation
(Aerotel). Aerotel sells passage documents for compensation or commission for
petitioner’s off-line flights for the carriage of passengers and cargo between ports or vi. Foreign Currency Deposit System/ Offshore Banking Units
points outside the territorial jurisdiction of the Philippines. Petitioner is not
registered with the SEC and not licensed to do business in the Philippines. RR 10-76: Taxation of Offshore Banks and Foreign Currency Deposit Units
Offshore Conduct of banking transactions in currencies involving the
Held: (a) An international air carrier maintains flights to and from the Philippines, it
Banking receipt of funds principally from external sources and
shall be taxed at the rate of 2 1/2% of its Gross Philippine Billings, while
utilization of such funds
international air carriers that do not have flights to and from the Philippines but
nonetheless earn income from other activities in the country will be taxed at the
Offshore A branch, subsidiary or affiliate of a foreign banking
rate of 32% of such income.
Banking Unit corporation which is duly authorized as a separate accounting
(b) There can be no off-setting of taxes against the claims that the taxpayer may
(OBU) unit, to transact offshore banking business in the Philippines.
have against the government. A person cannot refuse to pay a tax on the ground that

Deposits Funds in foreign currencies, which are accepted and held by  Tax rate = 10% = considered as final tax
an offshore banking unit in the regular course of business  EXEMPTION: Fees, commissions and other charges which form an
with the obligation to return as equivalent amount with or integral part of the charges imposed on foreign currency loan
without interest. transactions are exempt from the tax herein imposed.
Foreign An accounting unit of a local bank or in an existing local
Currency branch of foreign banks that is authorized to operate under
Deposit Unit the expanded currency deposit system.
(FCDU) RR 10-98 August 25, 1998 [Taxation of Income from Foreign Currency
Gross offshore All income arising from transactions allowed by the Central Deposits and Transactions of Foreign Currency Deposit Units and Offshore
income – Bank between: Banking Units]
  Two OBUs Tax on Interest income received on Foreign Currency Deposit:
 Two FCDU By Resident 7 ½% withholding tax
 OBU and FCDU By Non-resident No income tax
 OBU and Non-resident If held JOINTLY by resident and non- 50% exempt, 50% subject to final
 FCDU and Non-resident resident (i.e., Seaman, OFW, etc) withholding tax of 7 ½%
Tax rate = 5% based on net offshore income
Tax on Income derived by FCDU or OBU from foreign currency transactions:
Gross onshore – Gross interest income from foreign currency loans and With Resident 10% withholding tax on gross interest
income investments with residents made by OBUs or FCDUs income
Tax rate: 10% of gross interest income without deductions With Non-resident No income tax
Income derived by FCDU or OBU from subject to regular corporate income
Net offshore other foreign currency transactions, tax rate (30% of gross income)
income Gross offshore income unrelated banking services
(Less: Proportion of total
interest expense)*
(Less: Proportion of general RA 9294 – Restores Tax Exemption of OBU’s and FCDU’s (approved April 28,
administrative expense)** 2004, effective May 21, 2004)
(Less: Head office expenses) Tax on Income derived under expanded foreign currency deposit system. –
*NOTE: This is based on the ratio of: Offshore interest  By depository bank
income/Total gross interest income  only for the same  With transactions with nonresidents, OBU in the Philippines, local commercial
period banks, branch of foreign banks authorized to transact business in the
**NOTE: This is based on the ratio of: Net offshore income/ Philippines
(Total income – interest expense)  Tax rate = EXEMPT from tax
o Income not covered by offshore/onshore income  EXCEPTION: Net income from transactions aforementioned, which is
is subject to the usual corporate taxes subject to regular income tax payable by banks
 Interest Income from foreign currency loans
 By depository banks
 To residents, other than OBU or other depository banks
RR 14-77 (Amending RR 10-76)  Subject to final tax rate = 10 %
Gross onshore income – Gross interest income arising from foreign currency loans  Income of nonresidents – Tax exempt
and/or investments with residents made by OBUs or FCDUs.
 For foreign currency loan transactions, gross interest income shall refer
only to stipulated interest and NOT include any fees, commissions and
other charges that are integral parts of the income vii. Petroleum Service Contractor and Sub Contractor (PD 1354, PD 87)
PD 1354: Imposing Final Income tax on subcontractors and alien employees of 1. Crude oil exported = gross proceeds from sale of crude oil at posted
service contractors and subcontractors engaged in petroleum operations price
under PD 87 2. Crude oil sold for consumption in the Philippines = gross proceeds
Tax on Subcontractors 8% of its gross income derived from the sale thereof at market price per barrel
o from aforementioned contract 3. Natural gas and/or casinghead petroleum exported or sold for
Income from OTHER SOURCES in or out of the Philippines in case of foreign consumption in the Philippines = total quantity sold at the prevailing
subcontractors  subject to regular income tax market price thereof
4. Other incidental income arising from any petroleum operations.
Gross income = all income earned or received as a result of the contract entered  Deductions from Gross Income
into by the subcontractor with a service contractor engaged in petroleum 1. Filipino participation incentive
operations in the Philippines 2. Operating expenses reimbursed8 including amortization and
depreciation
Tax on Aliens employed by petroleum Final tax of 15% of the salaries, a. Amortization and Depreciation
service contracts and subcontractors wages, annuities, compensations, i. Intangible exploration costs = deductible in FULL
remunerations and emoluments ii. Tangible exploration costs (capital expenditures/ other
received from contractors and recoverable capital assets) = depreciated for a period of 10
subcontractors. years.
Aliens = permanent residents of foreign country, employed and assigned in the  Not allowable deductions: In respect of financing of petroleum operations, the
Philippines by service contractors or by subcontractors engaged in petroleum ff. cannot be deducted:
operations in the Philippines 1. Interest
2. Other consideration paid or suffered
Income earned from other sources  subject to income tax imposed by NIRC
viii. Enterprises Registered under Bases Convention and Development Act of 1992 and
Presidential Decree 87 Philippine Economic Zone Act of 1995
Petroleum Operations – Searching for and obtaining petroleum within the
Philippines through drilling and pressure or suction or the like, and all other Clarification of coverage of 5% Preferential Rate by RR 20-2002 October 14,
operations incidental thereto. 2002, as amended by RR 2-2005, February 8, 2005 amending RR 1-95 and RR
 Includes transportation, storage, handling and sale of 16-99
petroleum so obtained
 EXCLUSIONS:
1. Transportation of petroleum outside the
Philippines
2. Processing or refining at a refinery
3. Any transactions in the products so refined
Contractor - the contractor in a service contract
TAX TREATMENT: The contractor shall be liable for Philippine income tax on
income derived from its petroleum operations under its contract of service.
8
Petroleum Board reimburses the contractor for all operating expenses not exceeding 70%
Taxable net income = (Gross income – Deductions) of the gross proceeds from production in any year. Provided, if operating expenses exceeds
COMPUTATION 70% of gross proceeds from production from any year, the unrecorded expenses shall be
 Gross income includes: recovered from the operations of succeeding years.
Coverage: Income earned from registered activities by enterprises registered with vein, the other kinds of privileges extended to the John Hay SEZ are by tradition and
Subic Bay Metropolitan Authority (SBMA), Clark Development Authority (CDA), or usage for Congress to legislate upon
Philippine Economic Zone Authority (PEZA)
Tax Treatment: x. Clark Development Tax Exemption:
1. Income by registered enterprise in SBMA, CDA, or PEZA:
a. Registered activities – taxed according to specified terms of Coconut Refiner’s Association et. al. v. Ruben Torres
registration
i. 5% preferential tax rate Facts: RA 7227 was enacted converting Clark, among others, into a special economic
ii. Income tax holiday zone. Ramos issued EO No. 80 declared that Clark shall have all the applicable
iii. Regular income tax rate incentives granted to SBMA. Thus, Board Resolution No. 93-05-034 was passed
b. Not related to registered activities – subject to regular internal allowing the tax and duty-free sale at retail of consumer goods imported via Clark
revenue taxes for consumption outside the Clark Special Economic Zone (CSEZ).
i. Interest on Philippine currency bank deposits – 20% final
Held: EO 80 and BR ARE INVALID for constituting executive legislation. CSEZ is
income tax
excluded from the tax and duty-free incentives provided under RA 7227.
ii. Foreign currency deposits – 7.5%
iii. Capital gains tax on sale of shares of stock
In this case, while Section 12 of Republic Act No. 7227 expressly provides for the
1. Shares listed – ½% of stock transaction tax
grant of incentives to the SSEZ, it fails to make any similar grant in favor of other
2. Shares not listed
economic zones, including the CSEZ.
a. If net gains is LESS THAN P100,000 = 5% capital
gains tax Tax and duty-free incentives being in the nature of tax exemptions, the basis thereof
b. If net gains is MORE THAN P100,000 = 10% capital should be categorically and unmistakably expressed from the language of the
gains tax statute. Consequently, in the absence of any express grant of tax and duty-free
privileges to the CSEZ in Republic Act No. 7227, there would be no legal basis to
uphold the questioned portions of EO No. 80 and BCDA Board Resolution No. 93-05-
John Hay People’s Alternative Coalition v. Victor Lim 034, which both pertain to the CSEZ.
Facts: RA 7227 sets out the policy of the government to accelerate the sound and
balanced conversion into alternative productive uses of the former military bases
under the 1947 Phil-US MBA, namely, the Clark and Subic military reservations as
well as their extensions including Camp John Hay. Subic economic Zone was granted
with incentives ranging from tax and duty-free importations, exemptions of
businesses from local and national taxes, etc. By virtue of RA 7227, Ramos issued
Proclamation No. 420, which established a special economic zone on a portion of xi. RA 9400, Restores Privileges to Clark and John Hay; RA 9399 Grants Tax Amnesty to
Camp John Hay – vesting national and local tax exemption and other incentives to locators of Clark and John Hay
the John Hay special economic zone.
RA 9400
Held: Proclamation No. 420 is UNCONSTITUTIONAL. Tax exemptions, investment
incentives and other benefits were only granted to Subic Special Economic Zone by
Sec. 12, RA 7227. There is no express extension of the aforesaid benefits to other
SEZs still to be created at the time via presidential proclamation. The deliberations
of Senate confirm the exclusivity to Subic SEZ of the tax and investment privileges
accorded it under the law. • The challenged grant of tax exemption would
circumvent the Constitution’s imposition that a law granting any tax exemption
must have the concurrence of a majority of all the members of Congress. In the same

Clark Freeport Zone (CFZ) 2. Pay a tax amnesty of P25,000 within 6 months of effectivity of this Act
 Tax treatment – no national and local taxes shall be imposed on registered Effect of Amnesty: Relieved of civil, criminal, and/or criminal liabilities arising
business enterprises within the CFZ. from non-payment of taxes, duties, and other charges covered by the amnesty.
 However, they will be subject to 5% tax on gross income earned - 3% to
National government, 2% to municipal treasurer
John Hay Special Economic Zone (JHSEZ) 3. KINDS OF TAXES (DOMESTIC, RESIDENT, NON-RESIDENT)9
 Tax treatment – no national and local taxes shall be imposed on registered
business enterprises within the CFZ. a. FINAL INCOME TAX
 However, they will be subject to 5% tax on gross income earned - 3% to
National government, 1% LGU, 1% municipality  Interest
 Royalties
 Capital gains on shares of stock dividends
RA 9399 (20 March 2007) [Tax amnesty]
COVERAGE b. INCOME TAX AT THE END OF THE YEAR, QUARTERLY INCOME TAX
 Registered business enterprises within the special economic zones and
freeports such as:
CIR V PROCTER & GAMBLE
1. Clark Special Economic Zone
2. Poro Point Special Economic and Freeport Zone (Lifted from http://www.batasnatin.com/law-library/taxation-law/income-
3. John Hay Special Economic Zone
taxation/2001-cir-vs-procter-and-gamble-philippine-manufacturing-corporation-
4. Morong Special Economic Zone
204-scra-377.html)
 Tax amnesty shall refer to the difference between the following taxes and duties
only: F: Procter and Gamble Philippines declared dividends payable to its parent company
1. All national and local impositions and sole stockholder, P&G USA. Such dividends amounted to Php 24.1M. P&G Phil
2. 5% tax on gross income paid a 35% dividend withholding tax to the BIR which amounted to Php 8.3M It
 Tax amnesty shall not cover subsequently filed a claim with the Commissioner of Internal Revenue for a refund
 Applicable taxes and duties on: or tax credit, claiming that pursuant to Section 24(b)(1) of the National Internal
1. Articles Revenue Code, as amended by Presidential Decree No. 369, the applicable rate of
2. Raw materials withholding tax on the dividends remitted was only 15%.
3. Capital goods
4. Equipment ISSUE: WON P&G Philippines is entitled to the refund or tax credit. YES. P&G
5. Consumer items Philippines is entitled.
 When they are removed from the special economic zone and Freeport
 Entered in the customs territory of the Philippines HELD: Sec 24 (b) (1) of the NIRC states that an ordinary 35% tax rate will be applied
 For local or domestic sale to dividend remittances to non-resident corporate stockholders of a Philippine
These are subject to usual taxes and duties prescribed by the NIRC corporation. This rate goes down to 15% ONLY IF he country of domicile of the
BENEFIT: May avail themselves of the benefits of remedial tax amnesty on all foreign stockholder corporation “shall allow” such foreign corporation a tax credit
applicable tax and duty liabilities inclusive of: for “taxes deemed paid in the Philippines,” applicable against the tax payable to the
1. Fines domiciliary country by the foreign stockholder corporation. However, such tax
2. Penalties credit for “taxes deemed paid in the Philippines” MUST, as a minimum, reach an
3. Interests amount equivalent to 20 percentage points which represents the difference
4. Other additions incurred or might accrue to them
PROCEDURE:
9
1. File a notice and return prescribed by the Commission of Internal Revenue and (Jamie’s Part)
Commissioner of Customs
between the regular 35% dividend tax rate and the reduced 15% tax rate. Thus, the Reason behind the law: since the US Congress desires to avoid or
test is if USA “shall allow” P&G USA a tax credit for ”taxes deemed paid in the reduce double taxation of the same income stream, it allows a tax
Philippines” applicable against the US taxes of P&G USA, and such tax credit must credit of both (i) the Philippine dividend tax actually withheld, and
reach at least 20 percentage points. Requirements were met. (ii) the tax credit for the Philippine corporate income tax actually
paid by P&G Philippines but “deemed paid” by P&G USA.
 Deemed paid requirement: US Internal Revenue Code, Sec 902: a domestic Moreover, under the Philippines-United States Convention “With
corporation (owning 10% of remitting foreign corporation) shall be Respect to Taxes on Income,” the Philippines, by treaty
deemed to have paid a proportionate extent of taxes paid by such foreign commitment, reduced the regular rate of dividend tax to a
corporation upon its remittance of dividends to domestic corporation. maximum of 20% of the gross amount of dividends paid to US
 20 percentage points requirement: (computation is as follows) parent corporations, and established a treaty obligation on the
P 100.00 -- corporate income earned by P&G Phils part of the United States that it “shall allow” to a US parent
x 35% -- Philippine income tax rate corporation receiving dividends from its Philippine subsidiary “a
P 35.00 -- paid by P&G Phil as corporate income tax [tax] credit for the appropriate amount of taxes paid or accrued to
the Philippines by the Philippine [subsidiary].
P 100.00
- 35.00
65. 00 -- available for remittance CIR V WANDER PHILS. (160 SCRA 573)
P 65. 00 F: Wander Philippines, Inc. is a domestic corporation organized under Philippine

x 35% -- Regular Philippine dividend tax rate laws and is a wholly-owned subsidiary of the Glaro S.A. Ltd. (Glaro for short), a
P 22.75 -- regular dividend tax Swiss corporation not engaged in trade or business in the Philippines.
Wander remitted to its parent company, Glaro, dividends on which 35%
P 65.00 withholding tax thereof was withheld and paid to the BIR.
x 15% -- Reduced dividend tax rate Wander filed for refund and/or tax credit on the ground that it is liable only to 15%
P 9.75 -- reduced dividend tax withholding tax in accordance with Section 24 (b) (1) of the Tax Code and not 35%.
P 65.00 -- dividends remittable ISSUE: WON Wander Philippines is entitled to the preferential rate of 15%
- 9.75 -- dividend tax withheld at reduced rate withholding tax on dividends declared and remitted to its parent corporation, Glaro.
P 55.25 -- dividends actually remitted to P&G USA
HELD:YES
Dividends actually remitted by P&G Phil = P 55.25 Wander is a withholding agent of Glaro according to Section 53 of the NIRC and
---------------------------------- ------------- x P35 = P29.75 therefore entitled to claim the reimbursement. The ration for this is that the
Amount of accumulated P 65.00 profits earned Philippine counterpart of Glaro which is a Swiss Company.
Switzerland does not impose any income tax on dividends received by Swiss
P35 is the income tax paid. corporation from corporations domiciled in foreign countries which in this case is
Glaro.
P29.75 is the tax credit allowed by Sec 902 of US Tax Code for Phil Section 24 (b) (1) of the Tax Code, as amended by P.D. 369 and 778 tells us that the
corporate income tax ‘deemed paid’ by the parent company. Since dividends received from a domestic corporation liable to tax shall be 15% of the
P29.75 is much higher than P13, Sec 902 US Tax Code complies dividends received. This is subject to the condition that the country in which the
with the requirements of sec 24 NIRC. (I did not understand why non-resident foreign corporation is domiciled shall allow a credit against the tax due
these were divided and multiplied. Point is, requirements were from the non-resident foreign corporation taxes deemed to have been paid in the
met) Philippines equivalent to 20% which represents the difference between the regular
tax (35%) on corporations and the tax (15%) dividends.

The fact that Switzerland did not impose any tax or the dividends received by Glaro  Ratio: An attempt to equalize the income tax burden on foreign
from the Philippines should be considered as a full satisfaction of this condition corporations maintaining a local branch office and organizing, and
from Section 24 (b) (1). subsidiary domestic corporations where at least a majority of all
the latter’s shares are owned by such foreign corporations
4. BRANCH PROFIT REMITTANCE TAX  History:
o Before, the local branch office was taxed only for income
RMC 55-80 - Tax on branch profits remittances derived from sources within the Philippines, while local
Tax Tax Base subsidiaries were taxed for their income realized and
Rate when the income is declared as dividends by the local
Any profit remitted abroad by a branch office to its mother company subsidiary to its parent company abroad
15% (NOTE: Except those registered with the Export Processing Zone o They were taxed differently so the government decided
Authority) to neutralize this unequal tax treatment
o Note: The local subsidiary is subject to a withholding tax
7 1/2% Any profit remitted by a branch office to its mother company authorized of 15% only as per the dividends remittance to its foreign
to engage in petroleum operations in the Philippines parent corporation
 How applied?
o The profit remittance tax is in addition to the regular tax
SEC 28 (A) Tax on Branch Profits Remittances imposed
Tax Rate 15% o Any form of remittance (direct or indirect) made to the
head office abroad shall be presumed to have been made
Tax Base Any profit remitted by a branch to its head office based on from the accumulated profits of the branch will fall under
the total profits applied or earmarked for remittance the branch profits remittance tax
without any deduction for the tax component thereof (except o Interests, dividends, rents, royalties, including
those activities which are registered with the Philippine remuneration for technical services, salaries, wages
Economic Zone Authority). premiums, annuities, emoluments or other fixed or
determinable annual, periodic or casual gains, profits,
Notes: income and capital gains received by a foreign
corporation during each taxable year from all sources
o The tax shall be collected and paid in the same manner as within the Philippines shall not be treated as branch
provided in Sections 57 and 58 of this Code profits unless the same are effectively connected with the
o Not treated as branch profits unless the following are effectively conduct of its trade or business in the Philippines.
connected with the conduct of its trade or business in the o If the branch profits are converted into capital and are
Philippines: retained in the country, it will not be subject to the
 Interests, dividends, rents, royalties, including remittance tax
remuneration for technical services, salaries, wages  The tax base is the total profits applied or earmarked for
premiums, annuities, emoluments or other fixed or remittance without any deduction for the tax component thereof
determinable annual, periodic or casual gains, profits, o Includes branch profits not remitted abroad, but credited
income and capital gains to the Assigned Capital account of its head office as this is
 All of the above should be received by a foreign an indirect remittance
corporation during each taxable year from all sources  Entities exempt
within the Philippines o Head offices authorized to engage in petroleum
operations in the Philippines – 7 ½%
De Leon Annotations: o Philippine branches registered as Subic Bay Freeport
enterprise – 5%

o Non-resident foreign corporations - exempt taxable income OR
o Whenever the amount of minimum corporate income tax is greater
than the normal income tax due from such corporation
5. MINIMUM CORPORATE INCOME TAX o What does normal tax mean?
o The income tax rates prescribed under Sec. 27(A) and Sec.
Tax Base Gross Income 28(A)(1) of the Code at 32% effective January 1, 2000 and
Rate 2% thereafter (RR 9-98)
What is the rule if the operations is partly covered under a special income tax
 (Lifted from Mamalateo) system?
o The MCIT primarily aims to forestall tax evasion by corporations that
declare losses despite their business operations. Thus, even if a o For domestic corporations whose operations or activities are
corporation incurs net loss in its business operations, it is still subject partly covered by the regular income tax system and partly covered
to an MCIT of 2%% of its gross income. However, if the company has under a special income tax system the MCIT shall apply on operations
ordinary income greater than the MCIT 2% of the company's gross covered by the regular income tax system. (RR 9-98)
income then the company will pay the former, the corollary would Carry Forward of Excess Minimum Tax
hold true as well. o Requisites
o Any excess of the minimum corporate income tax over the
 Concept and rationale of the MCIT (Dimaampao) normal income tax as computed under Subsection (A) of this
o It was devised as a relatively simple and effective revenue-raising Section
instrument compared to the normal income tax which is more difficult o Shall be carried forward and credited against the normal
to control and enforce. It is a means to ensure that everyone will make income tax for the three (3) immediately succeeding taxable
some minimum contribution to the support of the public sector years.
o Congress intended to put a stop to the practice of corporations which, o Example (from de Leon; given edited)
while having large turn-overs, report minimal or negative net income
resulting in minimal or zero income taxes year in and year out, through
under-declaration of income or over-deduction of expenses otherwise
called tax shelters EXAMPLE:
o As a tax on gross income, it prevents tax evasion and minimizes tax
avoidance schemes achieved through sophisticated and artful Year Normal Income Tax MCIT EXCESS
manipulations of deductions and other stratagems.
 Purpose of the MCIT 2007 100,000 200,000 100,000
o The imposition of the MCIT is designed to forestall the prevailing 2007 amount of tax payable 200,000
practice of corporations of over claiming deductions in order to reduce 2008 150,000 250,000 100,000
their income tax payments
2008 amount of tax payable 250,000
2009 1,000,000 300,000
SEC 27 (E) Minimum Corporate Income Tax on Domestic Corporations
A minimum corporate income tax (MCIT) of 2% of the gross income as of the end of
the taxable year is imposed upon any domestic corporation Computation of net amount tax payable in 2009:
 When is this imposed?
 Beginning the 4th taxable year immediately following the year Amount of tax payable 1,000,000
the corporation commenced its business operations
When is the MCIT imposed? Less:
o The MCIT is imposed whenever such corporation has zero or negative 2007 excess MCIT -100,000

2008 excess MCIT -100,000 200,000
Net of amount of tax payable 800,000
Notes for this example:
 The taxpayer shall pay the MCIT whenever it is greater than

the regular or normal corporate income tax which is imposed
under Sec. 27(A) of the Code. The comparison between the
normal income tax payable by the corporation and the MCIT shall
be made at the end of the taxable year. (RR 9-98)
o In 2008 and 2009, the MCIT is greater than the normal
income tax so the Company has to pay the MCIT and not SEC 27 (E) Minimum Corporate Income Tax on Domestic Corporations
the normal income tax.
o In 2009, since the normal income tax is greater than the
MCIT, the Company shall pay the former.
 The Company can credit the excess of its MCIT over the normal
income tax for 2007 and 2008 from the amount of normal income
tax payable in 2009.
o This excess shall be carried forward and may be credited
against the normal income tax due for a period not
exceeding three (3) taxable years immediately
succeeding the taxable year/s in which the same has been
paid. (RR 9-98)
 The excess MCIT cannot be claimed as a credit
against the MCIT itself or against any other
losses (RR 9-98)
SEC 27 (E) Minimum Corporate Income Tax on Domestic Corporations

Relief from the Minimum Corporate Income Tax Under Certain Conditions
 The Secretary of Finance is hereby authorized to suspend the
imposition of the minimum corporate income tax on any
corporation which suffers losses on account of
o prolonged labor dispute;
o because of force majeure; or
o because of legitimate business reverses.
 The Secretary of Finance is hereby authorized to promulgate,
upon recommendation of the Commissioner, the necessary rules
and regulation that shall define the terms and conditions under
which he may suspend the imposition of the minimum corporate
income tax in a meritorious case.
Definition of terms dispute (RR 9-98) taxable period and which has caused the temporary
Gross Income shutdown of business operations.
 The term 'gross income' shall mean gross sales less sales returns, discounts and
allowances and cost of goods sold
 Cost of goods sold Force majeure (RR 9- A cause due to an irresistible force as by "Act of
 Shall include all business expenses directly incurred to produce the 98) God" like lightning, earthquake, storm, flood and the
merchandise to bring them to their present location and use. like. This term shall also include armed conflicts like
 For a trading or merchandising concern war or insurgency.
o Cost of goods sold shall include
 the invoice cost of the goods sold Legitimate business Shall include substantial losses sustained due to fire,
 import duties reverses (RR 9-98) robbery, theft or embezzlement, or for other economic
 freight in transporting the goods to the place where the goods are reason as determined by the Secretary of Finance
actually sold
 insurance while the goods are in transit.
 For a manufacturing concern
o Cost of "goods manufactured and sold" shall include
RR 9-98
 all costs of production of finished goods
When is the MCIT shall be imposed:
 raw materials used
 whenever such corporation has zero or negative taxable income or
 direct labor
 whenever the amount of minimum-corporate income tax is greater
 manufacturing overhead than the normal income tax due from such corporation.
 freight cost Accounting treatment of the excess of minimum corporate income tax
 insurance premiums  Any amount paid as excess minimum corporate income tax shall be
 other costs incurred to bring the raw materials to the factory or recorded in the corporation's books as an asset under account title
warehouse. "deferred charges-minimum corporate income tax".
o Taxpayers engaged in the sale of service, 'gross income' means gross  Any amount of the excess minimum corporate income tax which has not or
receipts less sales returns, allowances, discounts and cost of services cannot be so credited against the normal income taxes due for the 3-year
Cost of services reglementary period shall lose its creditability.
 All direct costs and expenses necessarily incurred to provide the services  Such amount shall be removed and deducted from "deferred charges-
required by the customers and clients minimum corporate income tax" account by a debit entry to "retained
o salaries and employee benefits of personnel, consultants and specialists earnings" account and a credit entry to "deferred charges-minimum
directly rendering the service corporate income tax" account since this tax is not allowable as deduction
o cost of facilities directly utilized in providing the service such as from gross income it being an income tax.
depreciation or rental of equipment used and cost of supplies: Exceptions to the application of the MCIT to domestic corporations
 In the case of banks  The minimum corporate income tax (MCIT) shall apply only to
o cost of services shall include interest expense. domestic corporations subject to the normal corporate income tax
prescribed under these Regulations.
 The minimum corporate income tax shall not be imposed upon any of the
following domestic corporation:
RR 9-98  Domestic corporations operating as proprietary educational
Definition of terms institutions subject to tax at ten percent (10%) on their taxable
income; or
Substantial losses from Losses arising from a strike staged by the employees  Domestic corporations engaged in hospital operations which are
a prolonged labor which lasted for more than six (6) months within a non-profit subject to tax at ten percent (10%) on their taxable

income; and foreign corporations:
 Domestic corporations engaged in business as depository banks
under the expanded foreign currency deposit system, otherwise  Resident foreign corporations engaged in business as "international
known as Foreign Currency Deposit Units (FCDUs), on their carrier" subject to tax at two and one-half percent (2 ½%) of their "Gross
income from foreign currency transactions with local Philippine Billings"
commercial banks, including branches of foreign banks,  Resident foreign corporations engaged in business as Offshore Banking
authorized by the Bangko Sentral ng Pilipinas (BSP) to transact Units (OBUs) on their income from foreign currency transactions with
business with foreign currency deposit system units and other local commercial banks, including branches of foreign banks,
depository banks under the foreign currency deposit system, authorized by the Bangko Sentral ng Pilipinas (BSP) to transact business
including their interest income from foreign currency loans with Offshore Banking Units (OBUs), including interest income from
granted to residents of the Philippines under the expanded foreign foreign currency loans granted to residents of the Philippines, subject
currency deposit system, subject to final income tax at ten percent to a final income tax at ten percent (10%) of such income; and
(10%) of such income  Resident foreign corporations engaged in business as regional operating
Firms that are taxed under a special income tax regime such as those in accordance headquarters subject to tax at ten percent (10%) of their taxable income.
with RA 7916 and 7227 (the PEZA law and the Bases Conversion Development Act,  Firms that are taxed under a special income tax regime such as those in
respectively). accordance with RA 7916 and 7227 (the PEZA law and the Bases
Conversion Development Act, respectively)
 Passive incomes which have been subject to a final tax at source shall not
form part of gross income for purposes of the minimum corporate income
SEC 28 (A) Tax on Resident Foreign Corporations - Minimum Corporate tax
Income Tax on Resident Foreign Corporations
An MCIT of 2% of the gross income from sources within the Philippines is imposed
upon any resident foreign corporation 6. IMPROPERLY ACCUMULATED EARNINGS TAX
When is the MCIT imposed?
RR 2-2001
 The MCIT is imposed whenever such corporation has zero or negative A tax is being imposed in the nature of a penalty to the corporation for the
taxable income OR improper accumulation of its earnings, and as a form of deterrent to the avoidance
 Whenever the amount of minimum corporate income tax is greater than of tax upon shareholders who are supposed to pay dividends tax on the earnings
the normal income tax due from such corporation distributed to them by the corporation. (RR 2-2001)
o What does normal tax mean?
 The income tax rates prescribed under Sec. 27(A) and  What is the ratio behind this tax? (lifted from Dimaampao)
Sec. 28(A)(1) of the Code at 32% effective January 1, o If the earnings and profits were distributed, the shareholders
2000 and thereafter (RR 9-98) would be liable to income tax thereon, whereas if the distribution
 Note: use the same rules applied to domestic corporations were not made to then, they would incur no tax in respect to the
undistributed earnings and profits of the corporation.
o A tax here is being imposed in the nature of a penalty to the
corporation for the improper accumulation of its earnings, and as
a form of deterrent to the avoidance of tax on shareholders who
Exceptions to the application of the MCIT (RR 9-98) are supposed to pay dividends tax on the earnings distributed to
The minimum corporate income tax shall only apply to resident foreign them by the corporation.
corporations which are subject to normal income tax. o If there is a determination that a corporation has accumulated
income beyond the reasonable needs of the business, 10%
 The minimum corporate income tax shall not apply to the following resident improperly accumulated earnings tax shall be imposed

o With the imposition of the IAET, corporations will be compelled to (b) Banks and other nonbank financial intermediaries; and
distribute corporate gains or earnings not necessary in the (c) Insurance companies.
business, to stockholders in the form of dividends which are now
taxable
 The rationale is that if the earnings and profits were Evidence of Purpose to Avoid Income Tax
distributed, the shareholders would then be liable to
income tax thereon, whereas if the distribution were not
made to them, they would incur no tax in respect to the  Prima Facie Evidence
undistributed earnings and profits of the corporation. o The fact that any corporation is a mere holding company or
Thus, a tax is being imposed in the nature of a penalty to investment company shall be prima facie evidence of a purpose to
the corporation for the improper accumulation of its avoid the tax upon its shareholders or members.
earnings, and as a form of deterrent to the avoidance of  Evidence Determinative of Purpose
tax upon shareholders who are supposed to pay o The fact that the earnings or profits of a corporation are permitted
dividends tax on the earnings distributed to them by the to accumulate beyond the reasonable needs of the business shall
corporation (RR 2-2001) 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.
SEC. 29. Imposition of Improperly Accumulated Earnings Tax
Definition of Improperly Accumulated Taxable Income
Tax Rate - 10%
 Improperly accumulated taxable income' means taxable income'
Tax Base - The undistributed portion of the profits or surplus of a corporation adjusted by:
o Income exempt from tax;
o Income excluded from gross income;
Rate of additional tax o Income subject to final tax; and
o The amount of net operating loss carry-over deducted;
 Requisites  And reduced by the sum of
o For each taxable year o Dividends actually or constructively paid; and
o The improperly accumulated earnings tax will be equal to ten o Income tax paid for the taxable year
percent (10%) of the
o improperly accumulated taxable income on the improperly  For corporations using the calendar year basis
accumulated taxable income of each corporation o The accumulated earnings under tax shall not apply on
o What is the Tax on Corporations Subject to Improperly Accumulated improperly accumulated income as of December 31, 1997.
Earnings Tax  For corporations adopting the fiscal year accounting period
 There is a tax of 10% on the undistributed portion of the o The improperly accumulated income not subject to this tax
profits or surplus of a corporation, whether domestic or shall be reckoned as of the end of the month comprising the
foreign, which is formed or availed of for the purpose of twelve (12)-month period of fiscal year 1997-1998.
preventing the imposition of the tax upon its
shareholders or members, or the shareholders or
Reasonable Needs of the Business - includes the reasonably anticipated needs of the
members of any other corporation by permitting
business - This includes the immediate needs of the business, including reasonably
earnings and profits to accumulate instead of being
anticipated needs
divided or distributed.
o Exceptions
(a) Publicly-held corporations;

RR 2-2001 date, inclusive of accumulations taken from other years;
 Earnings reserved for definite corporate expansion
Determination of Reasonable Needs of the Business projects or programs requiring considerable capital
expenditure as approved by the Board of Directors or
o When is an accumulation of earnings or profits (including equivalent body;
undistributed earnings or profits of prior years) unreasonable?  Earnings reserved for building, plants or equipment
acquisition as approved by the Board of Directors or
 If it is not necessary for the purpose of the business, equivalent body;
considering all the circumstances of the case.  Earnings reserved for compliance with any loan covenant
or pre-existing obligation established under a legitimate
 To determine the "reasonable needs" of the business in order business agreement;
to justify an accumulation of earnings, one must use the  Earnings required by law or applicable regulations to be
"Immediacy Test" under American jurisprudence retained by the corporation or in respect of which there
 The term "reasonable needs of the business" are is legal prohibition against its distribution;
hereby construed to mean - the immediate needs of  In the case of subsidiaries of foreign corporations in the
the business, including reasonably anticipated needs. Philippines, all undistributed earnings intended or
 The corporation should be able to prove an reserved for investments within the Philippines as can be
immediate need for the accumulation of the earnings proven by corporate records and/or relevant
and profits, or the direct correlation of anticipated documentary evidence.
needs to such accumulation of profits. Otherwise,
such accumulation would be deemed to be not for
the reasonable needs of the business, and the penalty Exempted domestic corporations classified as closely held corporations exempted
tax would apply. from IAE
 In order to determine whether profits are accumulated for the  Banks and other non-bank financial intermediaries;
reasonable needs of the business as to avoid the imposition of  Insurance companies;
the improperly accumulated earnings tax, the controlling  Publicly-held corporations;
intention of the taxpayer is that which is manifested at the  Taxable partnerships;
time of accumulation, not subsequently declared intentions  General professional partnerships;
which are merely the product of afterthought.  Non- taxable joint ventures; and
 A speculative and indefinite purpose will not suffice.  Enterprises duly registered with the Philippine Economic Zone
 The mere recognition of a future problem or the Authority (PEZA) under R.A. 7916, and enterprises registered
discussion of possible and alternative solutions is not pursuant to the Bases Conversion and Development Act of 1992 under
sufficient. R.A. 7227, as well as other enterprises duly registered under special
 Definiteness of plan/s coupled with action/s taken economic zones declared by law which enjoy payment of special tax
towards its consummation are essential. rate on their registered operations or activities in lieu of other taxes,
national or local.
The following constitute accumulation of earnings for the reasonable needs of the
business: What are closely held corporations under IAE?
o Allowance for the increase in the accumulation of earnings up to  At least fifty percent (50%) in value of the outstanding capital stock or at
100% of the paid-up capital of the corporation as of Balance Sheet least fifty percent (50%) of the total combined voting power of all classes of
stock entitled to vote is owned directly or indirectly by or for not more
than twenty (20) individuals. income subject to final tax
 Domestic corporations not falling under the aforesaid definition are,
therefore, publicly-held corporations. the amount of net operating loss carry-over (NOLCO) deducted
TAXABLE INCOME
LESS: income tax paid/payable for the taxable year
HOW TO DETERMINE IF CLOSELY HELD CORPORATION BASED ON STOCK dividends actually or constructively paid/issued from the
OWNERSHIP: applicable year’s taxable income
amount reserved for the reasonable needs of the business as
 Stock Not Owned by Individuals defined in these Regulations emanating from the covered year’s
o Stock owned directly or indirectly by or for a corporation, taxable income.
partnership, estate or trust shall be considered as being owned
proportionately by its shareholders, partners or beneficiaries. Improperly Accumulated Taxable Income
o Family and Partnership Ownership. – An individual shall be MULTIPLY
considered as owning the stock owned, directly or indirectly, by or BY: 10%
for his family, or by or for his partner. Improperly Accumulated Earnings Tax
 ‘family of an individual’ includes his brothers or sisters
(whether by whole or half-blood), spouse, ancestors and For purposes of determining the source of earnings or profits declared or
lineal descendants. distributed from accumulated income for each taxable year, the dividends shall be
o Option to Acquire Stocks. - If any person has an option to acquire deemed to have been paid out of the most recently accumulated profits or surplus
stock, such stock shall be considered as owned by such person. and shall constitute a part of the annual income of the distributee for the year in
 an option to acquire such an option and each one of a which received
series of option shall be considered as an option to
acquire such stock. Period for Payment of Dividend/Payment of IAET
o Constructive Ownership as Actual Ownership.-Stock o The dividends must be declared and paid or issued not later than
constructively owned by reason of the application of paragraph one year following the close of the taxable year, otherwise, the
(1) or (3) hereof shall, for purposes of applying paragraph (1) or IAET, if any, should be paid within fifteen (15) days thereafter.
(2), be treated as actually owned by such person; but stock
constructively owned by the individual by reason of the Holding or investment company - a corporation having practically no activities
application of paragraph (2) hereof shall not be treated as owned except holding property, and collecting the income therefrom or investing the
by him for purposes of again applying such paragraph in order to same.
make another the constructive owner of such stock.
 Once the profit has been subjected to IAET, the same shall no longer be The following are prima facie instances of accumulation of profits beyond the
subjected to IAET in later years even if not declared as dividend. reasonable needs of a business and indicative of purpose to avoid income tax upon
 Notwithstanding the imposition of the IAET, profits which have been shareholders:
subjected to IAET, when finally declared as dividends, shall nevertheless be o Investment of substantial earnings and profits of the corporation
subject to tax on dividends imposed under the Tax Code of 1997 except in in unrelated business or in stock or securities of unrelated
those instances where the recipient is not subject thereto. business;
o Investment in bonds and other long-term securities;
o Accumulation of earnings in excess of 100% of paid-up capital, not
Tax Base of Improperly Accumulated Earnings Tax
otherwise intended for the reasonable needs of the business as
defined in these Regulations.
ADD: income exempt from tax
income excluded from gross income
CYANAMID PHILIPPINES, INC.

F: Cyanamid Philippines is a wholly owned subsidiary of American Cyanamid Co., o Fringe benefit means any good, service or other benefit
based in Maine, USA. It is engaged in the manufacture of pharmaceutical products o Furnished or granted in cash or in kind
and chemicals, a wholesaler of imported finished goods, and an importer / indentor. o by an employer to an individual employee (except rank and file
On February 7, 1985, the CIR sent an assessment letter to petitioner and demanded employees as defined herein)
the payment of deficiency income tax. Petitioner protested the assessments o Such as, but not limited to, the following:.
particularly the 25% Surtax Assessment. Petitioner claimed that the surtax for the  (1) Housing;
undue accumulation of earnings was not proper because the said profits were  (2) Expense account;
retained to increase petitioner’s working capital and it would be used for reasonable  (3) Vehicle of any kind;
business needs of the company. Petitioner contended that it availed of the tax  (4) Household personnel, such as maid, driver and
amnesty under Executive Order no. 41, hence enjoyed amnesty from civil and others;
criminal prosecution granted by law.  (5) Interest on loan at less than market rate to the
extent of the difference between the market rate and
Held: On the claim that the accumulation of earnings was for reasonable business actual rate granted;
purposes (increase of working capital)  (6) Membership fees, dues and other expenses borne
by the employer for the employee in social and athletic
o The Bardahl formula relied upon by Cyanamid allows retention as clubs or other similar organizations;
working capital reserve sufficient amounts of liquid assets to carry  (7) Expenses for foreign travel;
the company through one operating cycle., however, the Bardahl  (8) Holiday and vacation expenses;
formula is normally applied to companies with operating cycles  (9) Educational assistance to the employee or his
much shorter than that of Cyanamid's therefore the formula's dependents; and
application in this case is questionable  (10) Life or health insurance and other non-life
o The court used other formulas to determine WON capital insurance premiums or similar amounts in excess of what
retention was necessary. the law allows.
o (EMPHASIZED IN CLASS) Using the current ratio, it was found out
that the current assets of Cyanamid was more than twice its Imposition of Fringe Benefit Tax
current liabilities. This ratio projects adequacy in working capital  A final tax of thirty-two percent (32%) (effective January 1, 2000 and
o Cyanamid failed to justify its claim that the accumulation of thereafter) is imposed on the grossed-up monetary value of fringe benefit
earnings was done for reasonable business purposes. The burden o This fringe benefit is furnished or granted to the employee (except
of proving that there is no improper accumulation lies on the rank and file employees as defined herein) by the employer,
taxpayer whether an individual or a corporation (unless the fringe benefit is
o In order to determine WON profits are accumulated for the required by the nature of, or necessary to the trade, business or
reasonable needs of the business to avoid the surtax, it must be profession of the employer, or when the fringe benefit is for the
shown that the controlling intention of the tax payer is manifested convenience or advantage of the employer).
at the time of the accumulation not intentions declared
subsequently, which are mere afterthoughts
The tax herein imposed is payable by the employer which tax shall be paid in the
same manner as provided for under Section 57 (A) of this Code.
 Section 57 A – the fringe benefit tax imposed by Section 33 shall be treated
7. FRINGE BENEFITS TAX
as a final income tax on the employee which shall be withheld and paid by
the employer on a calendar quarterly basis
Section 33 Special Treatment of Fringe Benefits
Tax Rate - 32%
How to determine the grossed-up monetary value
Tax Base - Grossed-up monetary value of fringe benefit
Definition of Fringe Benefit defined
 Requisites Actual Monetary Value of the Fringe benefit

68% amended, defines "managerial employee" as one who is vested
with powers or prerogatives to lay down and execute
 The grossed-up monetary value of the fringe benefit shall be determined by management policies and/or to hire, transfer, suspend, lay-off,
dividing the actual monetary value of the fringe benefit by sixty-eight recall, discharge, assign or discipline employees. "Supervisory
percent (68%) effective January 1, 2000 and thereafter: employees" are those who, in the interest of the employer,
o Provided, however, That fringe benefit furnished to employees effectively recommend such managerial actions if the exercise
and taxable under Subsections (B), (C), (D) and (E) of Section 25 of such authority is not merely routinary or clerical in nature but
shall be taxed at the applicable rates imposed thereat: requires the use of independent judgment.
o Provided, further, That the grossed -Up value of the fringe benefit  These regulations do not cover those benefits properly forming part
shall be determined by dividing the actual monetary value of the of compensation income subject to withholding tax on compensation in
fringe benefit by the difference between one hundred percent accordance with Revenue Regulations No. 2-98.
(100%) and the applicable rates of income tax under Subsections  Fringe benefits which have been paid prior to January 1, 1998 shall not
(B), (C), (D), and (E) of Section 25. be covered by these Regulations.
Fringe Benefits Not Taxable

 The following fringe benefits are not taxable under this Section:
o fringe benefits which are authorized and exempted from tax under
special laws; [SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS (A)]
o Contributions of the employer for the benefit of the employee to Determination of the Amount Subject to the Fringe Benefit Tax In general, the
retirement, insurance and hospitalization benefit plans; computation of the fringe benefits tax would entail
o Benefits given to the rank and file employees, whether granted o (a) valuation of the benefit granted and
under a collective bargaining agreement or not; and o (b) determination of the proportion or percentage of the
o De minimis benefits as defined in the rules and regulations to be benefit which is subject to the fringe benefit tax.
promulgated by the Secretary of Finance, upon recommendation
of the Commissioner.  That the Tax Code allows for the cases where only a portion (i.e. less than
100 per cent) of the fringe benefit is subject to the fringe benefit tax is
The Secretary of Finance is hereby authorized to promulgate, upon clearly stated in Section 33 (a) of R.A. 8424 which stipulates that fringe
recommendation of the Commissioner, such rules and regulations as are necessary benefits which are "required by the nature of, or necessary to the trade,
to carry out efficiently and fairly the provisions of this Section, taking into account business or profession of the employer, or when the fringe benefit is for the
the peculiar nature and special need of the trade, business or profession of the convenience or advantage of the employer" are not subject to the fringe
employer. benefit tax.
 Thus, in cases where the fringe benefits entail joint benefits to the
employer and employee, the portion which shall be subject to the fringe
benefits tax and the guidelines for the valuation of fringe benefits are
RR 3-98 / [SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS (A)] defined under these rules and regulations.
 Coverage
Guidelines for the valuation of fringe benefits [SEC. 2.33. SPECIAL TREATMENT
 These Regulations shall cover only those fringe benefits given or OF FRINGE BENEFITS (A)]
furnished to managerial or supervisory employees and not to the rank and  Unless otherwise provided in these regulations, the valuation of fringe
file benefits shall be as follows:
o The term, "RANK AND FILE EMPLOYEES" means all o (1) If the fringe benefit is granted in money, or is directly paid for
employees who are holding neither managerial nor by the employer - the value is the amount granted or paid for.
supervisory position. The Labor Code of the Philippines, as o (2) If the fringe benefit is granted or furnished by the

employer in property other than money and ownership is instalment basis assigned interest of interest)
transferred to the employee - the value of the fringe benefit shall for use of EE
be equal to the fair market value of the property as determined in ER-owned residential ER’s acquisition cost or ER’s acquisition cost or
accordance with Sec. 6 (E) of the Code (Authority of the property and ownership zonal value whichever zonal value whichever is
Commissioner to Prescribe Real Property Values). transferred to EE is higher higher
o (3) If the fringe benefit is granted or furnished by the ER-owned residential Choose between Choose between market
employer in property other than money but ownership is not property and ownership market value and zonal value and zonal value
transferred to the employee - the value of the fringe benefit is transferred to EE at less value whichever is whichever is higher
equal to the depreciation value of the property. than acquisition cost higher Market value – cost to
o In tabular form Market value – cost to employee OR Zonal value –
Fringe benefit given The value is equal to… employee OR Zonal cost to employee
Money, or is directly paid for value – cost to
The amount granted or paid for
by the employer employee
Equal to the fair market value of the property as Housing privilege of Not treated as a fringe
In property other than
determined in accordance with Sec. 6 (E) of the military officials of the benefit
money and ownership is
Code (Authority of the Commissioner to Armed Forces of the
transferred to the employee
Prescribe Real Property Values) Philippines (AFP)
In property other than consisting of officials of
money but ownership is the Philippine Army,
Equal to the depreciation value of the property
not transferred to the Philippine Navy and
employee Philippine Air Force
A housing unit which is Not treated as a fringe
situated inside or benefit
 Note: the guidelines for valuation of specific types of fringe benefits adjacent to the premises
and the determination of the monetary value of the fringe benefits are of a business or factory
given below. The taxable value shall be the grossed-up monetary value of Temporary housing for Not treated as a fringe
the fringe benefit. [SEC. 2.33. SPECIAL TREATMENT OF FRINGE BENEFITS employee for 3 months or benefit
(B)] less
 Housing privilege  Valuation of Expense Account

o What is treated as a fringe benefit?
Fringe Benefit Value of the Benefit Monetary Value of the  Expenses incurred by the employee but which are paid
Fringe Benefit by his employer
Lease of residential The amount of rent 50% of rent taxable  When is this not treated as a fringe benefit?
property by the ER for use paid by the ER as o When the expenditures are duly
of EE evidenced by the lease receipted for and in the name of the
contract employer and the expenditures do
ER-owned residential 5% of the market value 50% x (5% of market or not partake the nature of a personal
property assigned for use of the land and zonal value taxable) expense attributable to the employee.
by EE improvement  Expenses paid for by the employee but reimbursed by his
ER-owned residential 5% of the acquisition 50% x (5% of the employer
property purchased on cost exclusive of acquisition cost exclusive  When is this not treated as a fringe benefit?

o When the expenditures are duly basis; ownership divided by 5 years. the motor vehicle is used
receipted for and in the name of the placed in the by the employee partly
employer and the expenditures do name of EE for his personal purpose
not partake the nature of a personal and partly for the benefit
expense attributable to the said of his employee
employee. Portion of Amount shouldered The entire value of the benefit
 Personal expenses of the employee (like purchases of purchase price by the ER  Regardless of whether
groceries for the personal consumption of the employee shouldered by ER; the motor vehicle is
and his family members) paid for or reimbursed by the ownership placed used by the employee
employer to the employee whether or not the same are in the name of EE partly for his personal
duly receipted for in the name of the employer purpose and partly for
 Note: Representation and transportation allowances the benefit of his
which are fixed in amounts and are regular received employer.
by the employees as part of their monthly compensation Fleet of motor Cost of all the 50% of the value of the benefit
income shall not be treated as taxable fringe benefits vehicles owned motor vehicles not
but the same shall be considered as taxable and maintained by normally used for The monetary value of the motor
compensation income subject to the tax imposed under ER for use of the sales, freight, vehicle fringe benefit is
Sec. 24 of the Code. business and the delivery service and equivalent to the following:
employees other non-personal
 Valuation of Motor vehicle of any kind used divided by 5 MV = [(A)/5] X 50%
years
Fringe Benefit Value of the Benefit Monetary Value of the Fringe Where:
Benefit MV = Monetary value
Motor vehicle Acquisition cost The entire value of the benefit A = acquisition cost
purchased by ER  Regardless of whether Fleet of motor amount of rental 50% of the value of the benefit
in the name of EE the motor vehicle is used vehicles leased by payments for motor
by the employee partly ER for the use of vehicles not normally
for his personal purpose the business and used for sales, freight,
and partly for the benefit the employees, delivery, service and
of his employer other non-personal
ER provides the Amount of cash The entire value of the benefit use
EE with cash for received by EE regardless of whether the motor The use of aircraft Not Subject to fringe benefit tax
the purchase of a vehicle is used by the employee (including
motor vehicle; partly for his personal purpose helicopters)
ownership placed and partly for the benefit of his owned and
in the name of EE employer maintained by the
 Unless the same was employer.
subjected to a
withholding tax as The use of yacht The value of the
compensation income whether owned benefit shall be
under Revenue and maintained measured based on
Regulations No. 2-98. or leased by the the depreciation of a
ER purchases the Acquisition cost The entire value of the benefit ER yacht at an estimated
car on installment exclusive of interest  Regardless of whether useful life of 20 years
 Valuation of educational assistance to the employee or his dependents
 Valuation of Household Expenses treated as taxable fringe benefits
o Expenses of the employee borne by the employer for household
personnel Treated as a Not treated as a taxable fringe benefit
 salaries of household help, personal driver of the taxable fringe
employee, or other similar personal expenses (like benefit
payment for homeowners association dues, garbage dues, The cost of the A scholarship grant to the employee by the employer shall
etc.) educational not if the education or study involved is directly connected
assistance to with the employer's trade, business or profession, and there
 Valuation of interest on loan at less than market rate the employee is a written contract between them that the employee is under
o Requisites: which are obligation to remain in the employ of the employer for period
 If the employer lends money to his employee borne by the of time that they have mutually agreed upon. In this case, the
 This lending is free of interest or at a rate lower than employer expenditure shall be treated as incurred for the convenience and
12% furtherance of the employer's trade or business.
 Such interest foregone by the employer or the difference The cost of Unless the assistance was provided through a competitive
of the interest assumed by the employee and the rate of educational scheme under the scholarship program of the company.
12% shall be treated as a taxable fringe benefit. assistance
extended by an
 Membership fees, dues, and other expenses borne by the employer for his employer to
employee, in social and athletic clubs or other similar organizations the dependents
o Treated as taxable fringe benefits of the employee in full of an employee
 Valuation of expenses for foreign travel

 Life or health insurance and other non-life insurance premiums or
Not treated as a taxable fringe benefit Treated as a taxable fringe benefit similar amounts in excess of what the law allows
Attendance at business meetings or 30% of the cost of first class
conventions (Reasonable business airplane ticket Treated as a taxable fringe benefit Not treated as a taxable fringe benefit
expenses paid for by the employer for The cost of life or health insurance Contributions of the employer for the
the foreign travel of his employee for and other non-life insurance benefit of the employee, pursuant to
the purpose of attending business premiums borne by the employer for the provisions of existing law, such as
meetings or conventions) his employee under the Social Security System (SSS),
Inland travel expenses related to In the absence of documentary (R.A. No. 8282, as amended) or
above (such as expenses for food, evidence showing that the employee's under the Government Service
beverages and local transportation) travel abroad was in connection with Insurance System (GSIS) (R.A. No.
except lodging cost in a hotel (or business meetings or conventions, 8291), or similar contributions arising
simil ar establishments) amounting to the entire cost of the ticket, from the provisions of any other
an average of US$300.00 or less per including cost of hotel existing law
day accommodations and other expenses The cost of premiums borne by the
incident thereto shouldered by the employer for the group insurance of
employer his employees.
The cost of economy and business Travelling expenses which are paid by
class airplane ticket the employer for the travel of the
family members of the employee  Fringe Benefits Not Subject to Fringe Benefits Tax

o (1) Fringe benefits which are authorized and exempted from  Gifts given during Christmas and major anniversary
income tax under the Code or under any special law; celebrations not exceeding P5,000 per employee per
o (2) Contributions of the employer for the benefit of the employee annum;
to retirement, insurance and hospitalization benefit plans;  Flowers, fruits, books or similar items given to employees
o (3) Benefits given to the rank and file, whether granted under special circumstances; and
under a collective bargaining agreement or not;  Daily meal allowance for overtime work not exceeding
o (4) De minimis benefits as defined in these Regulations; 25% of the basic minimum wage.
o (5) If the grant of fringe benefits to the employee is required by
the nature of, or necessary to the trade, business or profession of
the employer; or
o (6) If the grant of the fringe benefit is for the convenience of the
employer. RR 10-2000
 The excess of advances made over actual expenses shall constitute taxable
RR 8-2000 vis-à-vis RR 5-2008 and RR 5-2011 income if such amount is not returned to the employer
Scope of de minimis benefits  Vacation and sick leave allowances – constitute compensation unless
 Requisites: considered as #1 of above
o The term DE MINIMIS benefits which are exempt from the fringe
benefit tax
o These are limited to facilities or privileges furnished or offered by
an employer to his employees that are of relatively small value
and are offered or furnished by the employer merely as a means of
promoting the health, goodwill, contentment, or efficiency of
his employees such as the following:
 Monetized unused vacation leave credits not exceeding
10 days during the year;
 Monetized value of vacation and sick leave credits paid to
government officials and employees (RR 5-2011)
 Medical cash allowance to dependents of employees not
exceeding P750.00 per employee per semester or
P125.00 a month;
 Rice subsidy of P1,500.00 or one (1)sack of 50 kg. rice
per month amounting to not more than P1, 500.00 (RR 5-
2008)
 Uniform and Clothing allowance not exceeding P4,000.00
per annum (RR 5-2008)
 Actual yearly medical benefits not exceeding P10,000 per
annum;
 Laundry allowance not exceeding P300 per month;
 Employees achievement awards which must be in the
form of a tangible personal property other than cash or
gift certificate, with an annual monetary value not
exceeding P10,000 received by the employee under an
established written plan which does not discriminate in
favor of highly paid employees;

Part III benefit of their shareholders, are NOT EXEMPT
- Similarly, corporations engaged in growing agricultural or horticultural
D. TAX ON CORPORATIONS10 products or raising live stock or similar products for profits are NOT
EXEMPT from tax under this paragraph.
1. The Taxpayer 2. Mutual Savings Banks and Cooperative Banks
2. Exemption from Tax (Section 30) Requisites for exemption:
a. no capital stock represented by shares, and
b. whose earnings less only the expenses of operation, are distributable
Common Requisites: wholly among the depositors
a. Not organized and operated principally for profit
- If it appears that the organization has shareholders who participate in the
b. No part of the net income inures to the benefit of any member or individual
profits, the organization is NOT EXEMPT
c. No capital represented by shares of stock
- This applies to domestic and foreign banks
d. Educational or instructive in character
- Not applicable as mutual savings banks if deposits are made compulsory
under contracts between bank and depositors and is operated for
Objectives: For the betterment of the conditions engaged in such pursuits, the speculation rather than for savings (Dimaampao)
improvement of the grade of their product and the development of a higher degree 3. Fraternal Beneficiary Society, Order or Association
of efficiency in their respective occupations.
Requisites for Exemption:
SECTION 30: (Incorporated RR2 provisions) a. operated under the "lodge system", or for the exclusive benefit of the
members
1. Labor, Agricultural, or Horticultural Organization not organized principally for
"Operating under the lodge system" means carrying on its activities
Profit
under a form of organization that comprises local branches, chartered
by a parent organization and largely self-governing, called lodges,
Requisites:
chapters, or the like
a. have no net income inuring to the benefit of any member;
b. should have an established system for payment to its members or their
b. are educational or instructive in character; and
dependents of life, sick, accident, or other benefits
c. have as their objects the betterment of the conditions of those engaged
- Mutual protective societies not operating under a lodge system and
in such pursuits, the improvement of the grade of their products, and
traveler’s assoc providing for fixed death benefits are NOT EXEMPT (US
the development of a higher degree of efficiency in their respective
case law)
occupations
4. Cemetery companies
- Organizations such as provincial fairs and like associations of a quasi-
Requisites:
public character, which are designed to encourage the development of
a. if it is owned by and operated exclusively for the benefit of its lot
better agricultural and horticultural products through a system of awards,
owners, or
prizes, or premiums, and whose income derived from gate receipts, entry
b. if it is not operated for profit
fees, donations, etc., is used exclusively to meet the necessary expenses of
- also EXEMPT if cemetery corporation is chartered solely for burial
upkeep and operation, are thus EXEMPT
purposes and not permitted by its charter to engage in any business not
- HOWEVER: associations which have for their purpose, for example, the
necessarily incident to that purpose PROVIDED that no part of its net
holding of periodical race meets, the profits from which may inure to the
earnings inures to the benefit of any private shareholder or individual
- Even though a cemetery issues preferred stock entitling the holders to
10
(Cielo’s Part) dividend at a fixed rate, it may still be EXEMPT provided that its articles of
incorporation require:

a. that the preferred stock shall be retired at par as soon as sufficient - Educational corporations may include associations whose sole purpose is
funds are realized from sales, and the instruction of the public. But associations formed to disseminate
b. that all funds not required for the payment of dividends upon or for controversial or partisan propaganda are not considered educational
the retirement of preferred stock shall be used by the company for the - Scientific corporations include an association for the scientific study of law
care and improvement of the cemetery property with a view to improving its administration.
A cemetery company having a capital stock represented by shares, or which is
operated for profit or for the benefit of persons other than its members  NOT 6. Business league chamber of commerce, or board of trade
EXEMPT
Requisites:
5. Religious, charitable, scientific, athletic, or cultural corporation a. A business league is an association of persons having some common
business interest
Requisites: b. limits its activities to work for such common interest
a. It must be organized and operated for one or more of the specified c. does not engage in a regular business of a kind ordinarily carried on
purposes; and for profit
b. no part of its net income must inure to the benefit of private
stockholders or individuals - An association engaged in furnishing information to prospective investors,
- Income not derived from their properties, real or personal, are EXEMPT to enable them to make sound investments, is NOT EXEMPT because its
- In the case of a religious corporation, income from the conduct of strictly members have no common business interest, even though all of its income
religious activities is EXEMPT (example: fees received for administering is devoted to the purpose stated
baptismals, solemnizing marriages, attending burials, holding masses, and - A clearing house association, not organized for profit, no part of the net
other like income) income of which inures to any private shareholder or individual, is
- In the case of an educational corporation, income from the holding of an EXEMPT provided its activities are limited to the exchange of checks, and
educational fair or exhibit is EXEMPT similar work for the common benefit of its members
- However, if such exempt income is invested by the corporation, the income An association of persons who are engaged in the transportation business, whether
from such investment, as interests from the capital where the capital has by land or water, which is designed to promote the legitimate objects of such
been loaned or dividends on stock where the capital has been invested in business, and all of the income of which is derived from membership dues and is
shares of stock, IS NOT EXEMPT expended for office expenses is EXEMPT from tax (Sec 31)
- Donations and other similar contributions from other persons are EXEMPT.
7. Civic league
Definitions:
- Charitable corporations include an association for the relief of the families Requisites:
of clergymen, even though the latter make a contribution to the fund a. not organized for profit but operated exclusively for purposes
established for this purpose; or for furnishing the services of trained nurses beneficial to the community as a whole. In general, organizations
to persons unable to pay for them; or for aiding the general body of engaged in promoting the welfare of mankind are exempt from tax
litigants by improving the efficient administration of justice b. Sworn affidavit is submitted to BIR (see proof of exemption infra)
- It does not prevent exemption that private individuals, for whose benefit a c. This includes associations organized for maintaining sanitation, afford
charity is organized, receive the income of the corporation or association. community police protection, fire prevention, beautification and
The law refers to individuals having a personal and private interest in the uniformity of the surrounding premises of the occupants of a
activities of the corporation, such as stockholders. If, however, a subdivision from income tax (BIR Ruling 520 series of 1959)
corporation issues "voting shares", which entitle the holders upon the d.
dissolution of the corporation to receive the proceeds of its property, Social clubs - The exemption applies to practically all social and recreation clubs
including accumulated income, NOT EXEMPT, even though the by-laws which are supported by membership fees, dues, and assessments. If a club, by
provide that the shareholders shall not receive any dividend or other reason of the comprehensive powers granted in the charter, engages in business for
return upon their shares.
profit, such club is not organized and operated exclusively for pleasure, recreation, political subdivisions
or social purposes, and any profit realized from such activities is subject to tax
11. Farmers', fruit growers', or like association
8. A nonstock and nonprofit educational institution Requisites

(Revenue Memorandum Circular 76-2003) a. Formed or organized as sales agent for the purpose of marketing the
- The exemption refers to internal revenue taxes imposed national product to its members
government on all revenues and assets used actually, directly, and b. No net income for members
exclusively for educational purposes (CONSTI) c. Proceeds of the sale shall be turned over to them less necessary selling
- Ancilliary activities are also EXEMPT (like dormitories, canteens, etc) expenses on the basis of the quantity of produce finished by them
- The exemption does not cover withholding taxes. As an educ
institution, they are constituted as withholding agents for the - Cooperative dairy companies, which are engaged in collecting milk and
government required to withhold the tax on compensation disposing of it or the products thereof and distributing the proceeds, less
income of their employees, or the withholding tax on income necessary operating expenses, among their members upon the basis of the
payments to persons subject to tax quantity of milk or of butter fat in the milk furnished by such members are
9. Government educational institution; exempt from the tax. If the proceeds of the business are distributed in any
- Based on Act 1870, UP is subject to 20% final tax. REASON: other way than on such a proportionate basis, the company will be subject
Income from properties, real or personal or from any of their to tax
activities conducted for profit, regardless of the disposition - A farmers' association is not exempt from taxation where in accounting to
made of such income shall be subject to tax farmers furnishing produce for the proceeds of sales it deducts more than
10. Mutual Fire Insurance Companies and Like Organizations purely local character the necessary selling expenses incurred
- Cooperative associations acting as purchasing agents are not expressly
Requisites: exempt from tax, but rebates made to purchasers, whether or not members
a. Income be derived solely from assessments, dues, and fees collected of the association, in proportion to their purchases may be excluded from
from members gross income in computing the net income subject to tax. Any profits made
b. Receipt of income which is a mere incident of the business of the from non-members and distributed to members in the guise of rebates are,
company will not prevent exemption. Thus the receipt of interest upon of course, subject to tax
a working bank balance, or of the proceeds of the sale of badges, office - “Like associations” are those engaged in similar activities as farming and
supplies, or equipment, will not defeat the exemption. The same is true growing fruits (US case)
of the receipt of interest upon Government bonds - Cooperative marketing associations duly incorporated under Act No. 3425,
c. If bonds are for permanent investment, exemption is destroyed known as the Cooperative Marketing Law are exempt from income tax. (See
d. receipt of an entrance fee (premium) charged by a mutual fire also R.A. 702 exempting cooperative marketing associations.)
insurance company as a condition of membership, does not render the *** Notwithstanding the provisions in the preceding paragraphs, the income of
company taxable whatever kind and character of the foregoing organizations from any of their
XPN: If an organization issues policies for stipulated cash premiums, or properties, real or personal, or from any of their activities conducted for profit
if it requires advance deposits to cover the cost of the insurance and regardless of the disposition made of such income, shall be subject to tax imposed
maintains investments from which income is derived under this Code.
XPN to XPN: Although it makes advance assessment, it is for the sole
purpose of meeting future losses and expenses, provided that the
balance of such assessments remaining on hand at the end of the year
is retained to meet losses and expenses or is returned to members E. EXEMPT ENTITIES – GENERAL PRACTICE – EXEMPTION STRICTLY CONSTRUED
An organization of a purely local character is one whose business activities are 1. Partnership
confined to a particular community, place, or district, irrespective, however, of
Section 26 may inure to the benefit of any private shareholder or individual,
General Professional Partnership (Sec 26) – NOT SUBJECT to income tax as a  and in general, all facts relating to its operations which affect its right
corporation to exemption
- Persons engaging in business as partners shall be liable for - To such affidavit should be attached a copy of the charter or articles of
income tax in their separate and individual capacities incorporation, the by-laws of the organization, and the latest financial
- For their distributive share, the income of the partnership is statement showing the assets, liabilities, receipts, and disbursement of the
computed in the same manner as a corporation. Each partner organization.
shall report as gross income his share, actually or - Upon receipt of the affidavit and other papers by the CIR, the organization will
constructively received, in the net income of the partnership. be informed whether or not it is exempt. When an organization has established
its right to exemption, it need not thereafter make and file a return of income.
However, the organization should file on or before April 15 of each year, an
a. Professional partnership of Real Estate Brokers – EXEMPT from annual information return under oath, stating its gross income and expenses
income tax (Ruling 294-88) incurred during the preceding year, and a certificate showing that there has not
been any substantial change in its By-Laws, Articles of Incorporation, manner of
2. Co-ownership operation and activities as well as sources and disposition of income. (As
- In Obillos v. CIR (supra), the sale by the co-owner siblings of amended by Revenue Regulations No. 7-64, approved November 25, 1964.)
their property is not considered as a taxable partnership. The
transaction is a result of their decision to dissolve the co-
ownership, the profits derived therein merely an incident of
such sale transaction. Sinco v. CIR (1956)
Facts: PR V. Sinco, with his immediate family as incorporators, founded the V. G.

3. Section 30 Corporations Sinco Educational Institution, a non-stock educational institution. The CIR assessed
a corporate income tax liability for 1950 to 1951. The corporation filed an action for
a. Sections 23 – 35, RR2 (Sec 25 to 35 infra) refund before the CFI (case remanded to CTA) arguing that it is tax exempted under
the NIRC. CTA ruled in favor of corporation.
RR2, Sec 23
The distributive share of the net profit of a general co-partnership must be Held. CTA is affirmed  corporation is exempt
included in the individual returns of the partners
BUT where the result of partnership operation is a loss, the loss will be divisible by Sinco’s corporation is a non-profit institution; it has never distributed any
the partners in the same proportion as the net income would have been divisible dividend or profit to stockholders. Only part of its income went to payment of
(or, if the partnership agreement provides for the division of a loss in a manner its teachers or professors and for the other expenses incident to it being an
different from the division of a gain, in the manner so provided) and may be taken educational institution. These are mere remuneration of services but must not
by the individual partners in their respective returns of income be considered as distribution of profit. Even the salary purportedly received by
Sinco for his services in the school should not be considered as distribution of
his dividend.
RR2, Sec 24: Proof of exemption Charging of tuition fees does not make the school a profit-making
- Every organization claiming exemption must file an affidavit with the CIR and institution, such mechanism is the school’s only source of income. Similarly,
must show: acquisition by the school of additional equipment and facilities which will
 the character of the organization redound to the benefit of the school will not remove the exemption of the
 the purpose for which it was organized school. Lastly, CIR’s argument that the assets will be ultimately distributed to
 its actual activities the stockholders (Sinco et al) upon dissolution is too speculative and will not
 the sources of its income and its disposition prevent the school from availing of its right to tax exemption.
 whether or not any of its income is credited to surplus or inures or
4. RP-US Income Tax Treaty (1983)  If the project meets the prescribed ratio of capital equipment to
number of works set by the Board
Status Independent Dividends Interest Royalties  If the utilization of indigenous raw materials are at rates set by the
Personal Board
Services  If the net foreign exchange savings or earnings amount to at least
Effective Income 25% of the 15% of the 25% of the $5m annually during the first 3 years of operation
January 1, derived by an gross amount gross amount gross amount o But no registered firm may avail of this incentive for a period
1983 invidvidual of dividend of interest of royalties exceeding 8 years
who is a Exemption for registered expanding firms:
resident of 20% where 0% when paid  For a period of 3 years from commercial operation, registered
such one the payee is a to the 15% when expanding firms are entitled to tax-exemption proportionate to
Contracting company government or paid by a their expansion, but if it availed of this incentive during this
state is taxable holding at the central company period, it is NOT entitled to additional deduction for incremental
by that state least 10% of bank, or on a registered labor expense
ans is EXEMPT the paying loan or credit with the  This incentive cannot be extended beyond 3 years
by the other company's guaranteed or Philippine
Contracting voting stock insured by the Board of Additional deduction for labor expense
state during the government or Investments  For the first 5 years from registration, a registered enterprise is
part of the the central and engaged in allowed an additional deduction of 50% of the wages
paying bank preferred corresponding to the increment in the number of DIRECT labor for
company's areas of skilled and unskilled labors if the project meets the prescribed
10% when ratio of capital equipment to number of workers set by the Board
taxable year activity
paid on public  This exemption shall be doubled if the activity is located in less
preceding the
issues of developed areas
payment date,
bonds
and during
the whole of Tax & Duty exemption on imported capital equipment
its prior  Within 5 years from the effectivity of this code (until 1992),
taxable year importations of machinery and equipment and spare parts of
(if any) registered enterprises shall be 100% exempt of customs duties
and revenue tax, but the importation must comply with the
following conditions:
 They are not manufactured domestically in sufficient quantity of
5. Omnibus Investment Code – Income Tax Holiday Incentive (as amended by EO comparable quality and at reasonable prices
266)  They are reasonably needed and will be used exclusively by the
registered enterprise in the manufacture of its products
 The approval of the Board was obtained for such importation
Income Tax Holiday Incentive (as amended by EO 266) Tax credit for domestic capital equipment: A tax credit of 100% of the value of the
Some important portion of OIC: Activity-driven incentives: revenue tax and customs duties that would have been waived on the machinery
Income Tax Holiday and equipment had these been imported is given to registered enterprises which
For pioneer firms – 6 years from commercial operation purchase them from a domestic manufacturer
 For non-pioneer firms – 4 years from commercial operation Exemption from contractor’s tax The registered enterprise is exempt from
 For newly registered firms – fully exempt from income taxes contractor’s tax
 Extension of tax exemption for more than 1 year:
Requisites:

6. Special Economic Zone of 1995 levels. The court found nothing on YMCA’s Articles of Incorporation
– these are activity- and location-driven incentives. hinting that it is an educ institution.
Dissent (Bellosillo): YMCA is an educ institution devoted to educ and charitable
Special Economic Zone of 1995 purposes and not operated for profit, hence, it should be exempt from tax for
o Fiscal Incentives operation incidental to its purpose.
 Businesses operating within the ECOZONES shall be entitled to fiscal
incentives as per PD 66 (EPZA) or with EO 226.
 Exporters using local materials as inputs shall get tax credits same as those
provided in the Export Development Act of 1994 Jewellery Industry Development Act of 1998 (RA8502)
o Exemption from Taxes under the NIRC The following are incentives provided under RA8502:
 No taxes (local & national) shall be imposed on businesses operating within a. Entitlement to zero (0) duty on imported raw materials which include
the ECOZONEs precious metals, loose gems, precious stones, jewelry parts, accessories and
 In lieu of taxes, 5% of the gross income shall be remitted to the national supplies for use by jewelry enterprise
government b. Exemption from the imposition of excise tax on all goods commonly or
o Applicable national taxes All income derived by persons and all services commercially known as jewelry, whether real or imitation pearls, precious
establishments in the ECOZONE are subject to taxes under the Tax Code and semi-precious stones and imitations thereof; all goods made of, or
ornamented, mounted or fitted with precious metals or imitations thereof,
c. Entitlement to zero (0) duty on imported capital equipment, including
CIR v. CA and YMCA (1998) spare parts and toolings
d. Additional deduction from taxable income of fifty percent (50%) of
expenses incurred in training schemes approved by the appropriate agency
F: CIR assessed YMCA of income tax deficiency for rent income it received from shop and which shall be deductible during the financial year the expenses were
owners and parking spaces in its premises. CTA and CA ruled in favor of YMCA  incurred;
the rent income should not be taxed because they are reasonably incidental to and
necessary to the accomplishment of its objectives. Hence, this petition.
7. Cooperative Code of the Philippines
H: SC reversed CTA and CA.
Cooperative Code of the Philippines
a. Under Section 27 (now Sec30) of NIRC, the last paragraph states that The following are the tax incentives for cooperatives:
despite the exemption of a corporation under the enumeration, the a. For cooperatives with accumulated reserves and undivided net
income it receives from its properties, regardless of its disposition, savings of not more than P10,000,000  shall be exempt from all
shall be subject to tax. IN THIS CASE, this proviso is clearly applicable national, city, provincial, municipal or barangay taxes of whatever
because the source of the rent income is the properties owned by name and nature.
YMCA regardless of how YMCA use the income (for maintenance only b. For cooperatives with accumulated reserves and undivided net
and not for profit, according to YMCA)  SC adhered to strict savings of more than P10,000,000 shall pay the following taxes
construction of tax exemptions. at the full rate:
b. The exemption under the Constitution pertains only to property taxes 1) Income Tax: On the amount allocated for interest on
for property owned by charitable institutions and not from income (in capitals: Provided, That the same tax is not consequently
this case rent) from those property. imposed on interest individually receive by members; xxx
c. YMCA is not an educational institution for the purposes of the
Constitution. A school system refers to a hierarchically structured and
chronologically graded learnings organized and provided by the
formal school system and for which certification is required in order 8. Barangay Micro Business Enterprises
for the learner to progress through the grades or more to the higher

Barangay Micro Business Enterprises (3) Gains derived from dealings in property;
Section 7. Exemption from Taxes and Fees – All BMBEs shall be exempt from tax for (4) Interests;
income arising from the operations of the enterprise (5) Rents;
What is a BMBE? (6) Royalties;
 A BMBE or "Barangay Micro Business Enterprise" refers to any business (7) Dividends;
entity or enterprise engaged in the production, processing or (8) Annuities;
manufacturing of products or commodities, including agro-processing, (9) Prizes and winnings;
trading and services, whose total assets including those arising from (10) Pensions; and
loans but exclusive of the land on which the particular business entity's (11) Partner's distributive share from the net income of the general
office, plant and equipment are situated, shall not be more than Three professional partnership.
Million Pesos
 The LGUs are encouraged either to reduce the amount of local taxes, fees
and charges imposed or to exempt BMBEs from local taxes, fees and
charges. 2. Exclusions from Gross Income
Sec 32 NIRC (B):

9. Tourism Act of 2009 (1) Life Insurance
 Proceeds of life insurance policies paid to the heirs or
beneficiaries upon the death of the insured
Tourism Act of 2009  Interests thereon  Included in gross income
Section 57. Exemption From Payment of Corporate Income Tax. - Notwithstanding
any provision of existing laws, decrees, executive orders to the contrary, the TPB
or Tourism Promotions Board shall be exempt from the payment of corporate (2) Amount Received by Insured as Return of Premium
income tax, as provided under the National Internal Revenue Code (NIRC) of 1997,  Amount received by the insured, as a return of premiums paid by
as amended. him under life insurance, endowment, or annuity contracts, either
during the term or at the maturity of the term mentioned in the
contract or upon surrender of the contract.
F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME 11

(3) Gifts, Bequests, and Devises
1. Definition of Gross Income
 Income from such property, as well as gift, bequest, devise or
descent of income from any property, in cases of transfers of
Sec. 32 NIRC - Gross Income divided interest, shall be included in gross income.
(A) General Definition. - Except when otherwise provided in this Title, gross income
means all income derived from whatever source, including (but not limited to) the (4) Compensation for Injuries or Sickness
following items:
 Amounts received, through Accident or Health Insurance or under
(1) Compensation for services in whatever form paid, including, but not limited Workmen's Compensation Acts, as compensation for personal
to fees, salaries, wages, commissions, and similar items; injuries or sickness, plus the amounts of any damages received,
(2) Gross income derived from the conduct of trade or business or the exercise whether by suit or agreement, on account of such injuries or
of a profession; sickness.
11
(Kaye’s Part)
(5) Income Exempt under Treaty interest on deposits in banks in the Philippines by foreign governments,
 Income of any kind, to the extent required by any treaty obligation financing institutions owned, controlled, or enjoying refinancing from
binding upon the Government of the Philippines. foreign governments, and international or regional financial institutions
established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions
(6) Retirement Benefits, Pensions, Gratuities, etc. (Requisites)
(c) Prizes and awards made primarily in recognition of religious,
A. Retirement benefits received under Republic Act No. 7641 charitable, scientific, educational, artistic, literary, or civic achievement
 In accordance with a reasonable private benefit plan maintained (d) Prizes and Awards in Sports Competition
by the employer
o A pension, gratuity, stock bonus or profit-sharing plan (e) 13th Month Pay and Other Benefits
maintained by an employer for the benefit of some or all (f) GSIS, SSS, Medicare and Other Contributions
of his officials or employees, wherein contributions are (g) Gains from the Sale of Bonds, Debentures or other Certificate of
made by such employer for the officials or employees, or Indebtedness
both, for the purpose of distributing to such officials and
(h) Gains from Redemption of Shares in Mutual Fund
employees the earnings and principal of the fund thus
accumulated
o Said plan that at no time shall any part of the corpus or RR 2-1940 (Provisions relating to Gross Income)
income of the fund be used for, or be diverted to, any
SECTION 39. What gross income includes  In general, income is the gain derived
purpose other than for the exclusive benefit of the said
from capital, from labor, or from both combined, provided it be understood to
officials and employees.
include profit gained through a sale or conversion of capital assets.
 The retiring official or employee has been in the service of the
same employer for at least ten (10) years and is not less than fifty  Profit of citizens, resident aliens, or domestic corporations derived from
(50) years of age at the time of his retirement sales in foreign commerce must be included in their gross income.
 The benefits granted under this subparagraph shall be availed of May be in the form of cash or of property.
by an official or employee only once. SECTION 40. Compensation for personal services
B. Separation Pay  because of death sickness or other physical  When taxable?
disability or for any cause beyond the control of the said official or o Amount received is ordinarily income for the taxable year of its
employee. determination, if the return is rendered on the accrual basis; or
C. Social security benefits, retirement gratuities, pensions and other o The taxable year in which received, if the return is rendered on a
similar benefits received by resident or nonresident citizens or aliens receipts and disbursements basis
who come to reside permanently in the Philippines o Commissions paid salesman, compensation for services on the
D. Payments of benefits due or to become due to any person residing in basis of a percentage of profits, commissions on insurance
the Philippines under the laws of the United States administered by the premiums, tips, and pensions or retiring allowances are income to
United States Veterans Administration. the recipients; as are also marriage fees, baptismal offerings, sums
paid for saying masses for the dead, and other contributions
E. Benefits received from or enjoyed under the Social Security System
received by a clergyman, evangelists, or religious worker for
F. Benefits received from the GSIS, including retirement gratuity services rendered.
received by government officials and employees.
SECTION 41. Compensation paid other than in cash
 Fair market value of the thing is the amount to be included as income
(7) Miscellaneous Items  If rendered at a stipulated price such price will be presumed to be the fair
(a) Income Derived by Foreign Government - Derived from investments in value of the compensation received
the Philippines in loans, stocks, bonds or other domestic securities, or from  In stock is  to be treated as if the corporation sold the stock for its market

value and paid the employee in cash. inventory, provided such practice is followed consistently by
 When living quarters are furnished in addition to cash salary rental value the taxpayer. In case of the sale of any live stock included in
of such quarters should be reported as income. an inventory their cost must not be taken as an additional
SECTION 42. Compensation paid in promissory notes (not merely as security for deduction in the return of income, as such deduction will be
such payment)  constitute income to the amount of their fair market value. reflected in the inventory.
o In every case of the sale of machinery, farm equipment, or
 A note not bearing interest  income as of the time of receipt the fair other capital assets, any excess over the cost thereof less the
discounted value of the note at that time amount of depreciation theretofore sustained and allowed as
 If the payment due on a note so accounted for are met as they become due, a deduction in computing net income, shall be included as
there should be included as income in respect of each such payment so gross income.
much thereof as represents recovery for the discount originally deducted.
(Amortization) SECTION 46. Sale of patents and copyrights
SECTION 43. Gross income from business (Definitions)  Disposing of patents or copyrights by sale should determine the profit or
loss arising therefrom by computing the difference between the selling
 Manufacturing, merchandising, or mining business = the total sales, less the price and the cost.
cost of goods sold, plus any income from investments and from incidental
or outside operations or sources. (Subtractions should not be made for SECTION 47. Sale of goodwill. — Gain or loss from a sale of goodwill results only
depreciation, depletion, selling expenses or losses, or for items not when the business, or a part of it, to which the goodwill attaches is sold, in which
ordinarily used in computing the cost of goods sold.) case the gain or loss will be determined by comparing the sale price with the cost
or other basis of the assets, including goodwill.
SECTION 44. Long term contracts  taxable for the period in which the income is
determined (depending upon the nature and terms of the particular contract) SECTION 48. Annuities and insurance policies
 "Long-term" contracts means building, installation, or construction  Annuities paid by religious, charitable, and educational corporations under
contracts covering a period in excess of one year. Persons whose income is an annuity contract are subject to tax to the extent that the aggregate
derived in whole or in part from such contracts may, as to such income, amount of the payments to the annuitant exceeds the amounts paid by him
prepare their returns upon the following bases: as consideration for the contract.
o An annuity charged upon devised land is taxable to a donee-
(a) Percentage of completion annuitant, whether paid by the devisee out of the rents of the land
(b) May be reported in the taxable year in which the contract is finally or from other sources.
completed o The devisee is not required to return as gross income the amount
SECTION 45. Gross income of farmers of rent paid to the annuitant, and he is not entitled to deduct from
his gross income any sums paid to the annuitant
 If cash basis is employed in accounting and no inventory is kept,
 Amounts received by an insured as a return of premiums paid by him
report:
under life insurance, endowment, or annuity contracts, such as the so-
(1) the amount of cash or the value of merchandise or other property called "dividends" of a mutual insurance company, which may be credited
received from the sale of live stock and produce against the current premium, are not subject to tax.
(2) the profit from the sale of any live stock or other items which were  Distributions on paid-up policies which are made out of earnings of the
purchased insurance company subject to tax are in the nature of corporate dividends
(3) gross income from all other sources. and should be included in the taxable income of the individual, without any
credit for the amount of tax paid by the corporation at source.
 Reporting on the accrual basis
o All live stock raised or purchased for sale shall be included in SECTION 49. Improvements by lessees. — When buildings are erected or
the inventory at their proper valuation determined in improvements made by a lessee in pursuance of an agreement with the lessor, and
accordance with the method authorized and adopted for the such buildings or improvements are not subject to removal by the lessee, the
purpose. Also, live stock acquired for drafts, breeding, or lessor may at his option report the income therefrom upon either of the following
dairy purposes and not for sale may be included in the bases;

 The lessor may report as income at the time when such buildings or another. (Treasury Shares)
improvements are completed the fair market value of such buildings or  So also if the corporation receives its own stock as consideration upon the
improvements subject to the lease. sale of property by it, or in satisfaction of indebtedness to it, the gain or loss
 The lessor may spread over the life of the lease the estimated resulting is to be computed in the same manner as though the payment had
depreciated value of such buildings or improvements at the been made in any other property. Any gain derived from such transaction is
termination of the lease and report as income for each year of the lease subject to tax, and any loss sustained is allowable as deduction where
an aliquot part thereof. permitted by the provisions of Title II.
a. The amount spread is the book value based on the books of SECTION 56. Contributions by shareholders. — Where a corporation requires
the lessee which is equal to the salvage value additional funds for conducting its business and obtains such needed money
SECTION 50. Forgiveness of indebtedness May amount to a payment of income, through voluntary pro rata payments by its shareholders, the amounts so received
to a gift, or to a capital transaction, dependent upon the circumstances. being credited to its surplus account or to a special capital account, will not be
 If an individual performs services for a creditor, who, in consideration considered income, although there is no increase in the outstanding shares of
thereof cancels the debt, income to that amount is realized by the debtor as stock of the corporation. The payments in such circumstances are in the nature of
compensation for his services. voluntary assessments upon, and represent an additional price paid for, in shares
 If, however, a creditor merely desires to benefit a debtor and without any of stock held by the individual shareholders, and will be treated as an addition to
consideration therefor cancels the debt, the amount of the debt is a gift and as a part of the operating capital of the company.
from the creditor to the debtor and need not be included in the latter's SECTION 59. Gross income of a corporation in liquidation. — When a corporation
gross income. is dissolved, its affairs are usually wound up by a receiver or trustee in dissolution.
 If a corporation to which a stockholder is indebted forgives the debt, the The corporate existence is continued for the purpose of liquidating the assets and
transaction has the effect of the payment of a dividend. paying the debts, and such receiver or trustee stands in the stead of the
o If it is the coporation which is indebted and the stockholder corporation for such purposes. Any sales of property by them are to be treated as
condones the debt, it is deemed an additional investment in the if made by the corporation for the purpose of ascertaining the gain or loss.
company. SECTION 60. Gross income of foreign corporations. — The gross income of a
SECTION 54. Creation of corporate sinking fund. — If a corporation in order solely foreign corporation subject to tax consists of its gross income from sources within
to secure payment of its bonds or other indebtedness, places property in trust, or the Philippines. Gross income from sources within the Philippines, as applied to
sets aside certain amounts in a sinking fund under the control of a trustee who foreign corporations, shall include interest received on bonds, notes, or other
may be authorized to invest and reinvest such sums from time to time, the interest-bearing obligations issued by residents, corporate or otherwise, as well as
property or fund thus set aside by the corporation and held by the trustee is an income derived from dividends on the capital stock or from the net earnings of
asset of the corporation, and any gain arising therefrom is income of the domestic or resident foreign corporations, joint stock companies, associations, or
corporation and shall be included as such in its annual return. insurance companies, dividends from other foreign corporations to the extent
provided in Section 37 of the Code, and likewise income from rentals and royalties
SECTION 55. Acquisition or disposition by a corporation of its own capital stock.
from all sources within the Philippines.
— Whether the acquisition or disposition by a corporation of share of its own
capital stock gives rise to taxable gain or deductible loss depends upon the real
nature of the transaction, which is to be ascertained from all its facts and When income is to be reported
circumstances.
A. (SECTION 51, RR 2) In taxable year in which they are received by the
 The receipt by a corporation of the subscription price of shares of its taxpayer, unless they are included when they accrue to him in accordance
capital stock upon their original issuance gives rise to neither taxable gain
with the approved method of accounting followed by him.
nor deductible loss, whether the subscription or issue price be in excess of,
or less than, the par or stated value of such stock.  If a person sues in one year on a pecuniary claim or for property, and
 But if a corporation deals in its own shares as it might in the shares of money or property is recovered on a judgment therefore in a later
another corporation, the resulting gain or loss is to be computed in the year, income is realized in that year, assuming that the money or
same manner as though the corporation were dealing in the shares of property would have been income in the earlier year if then received.

o Same rule applies for bad debts (but only up to the amount of the Act does not include those items of income exempted by statute or by
tax banefit – Tax Benefit Rule) fundamental law. Such tax-free income should not be included in the income tax
B. SECTION 52. Income constructively received return unless information regarding it is specifically called for. SECTION 62.
Proceeds of insurance. — The proceeds of life-insurance policies directly or in
 To constitute receipt in such a case the income:
trust, are excluded from the gross income of the beneficiary.
o must be credited to the taxpayer without any substantial
 Immaterial whether the proceeds are received in a single sum or in
limitation or restriction as to the time or manner of payment
installments.
or condition upon which payment is to be made o If, however, such proceeds are held by the insurer under an
o book entry, if made, should indicate an absolute transfer from agreement to pay interest thereon, the interest payments must be
one account to another included in gross income.
 If the income is not credited, but is set apart, such income must be SECTION 63. Amounts received as compensation for injuries or sickness. — The
unqualifiedly subject to the demand of the taxpayer. Where a amounts received by an insured or his estate or beneficiaries through accident or
corporation contingently credits its employees with bonus stock, but health insurance or under workmen's compensation acts as compensation for
the stock is not available to such employees until some future date, the personal injuries or sickness are excluded from the gross income of the insured,
mere crediting on the books of the corporation does not constitute his estate, and other beneficiaries. Any damages recovered by suit or agreement
on account of such injuries or sickness are similarly excluded from the gross
receipt.
income of the individual injured or sick, if living, or of his estate or other
 Examples of constructive receipt beneficiaries entitled to receive such damages, if dead.
o When interest coupons have matured and are payable, but SECTION 64. Gifts and bequests. — Property received as a gift or received under a
have not been cashed, such interest payment though not will or testament or through legal succession, is exempt from the income tax,
collected when due and payable, is nevertheless available to although the income therefrom or income derived from its investment, sale, or
the taxpayer and should therefore be included in his gross otherwise is not. An amount of principal paid under a marriage settlement is a gift.
income for the year during which the coupons matured. Neither alimony nor an allowance based on a separation agreement is taxable
o Defaulted coupons are income for the year in which paid. income.
o The distributive share of the profits of a partner in a general
co-partnership duly registered is regarded as received by him, RA 4917 (AN ACT PROVIDING THAT RETIREMENT BENEFITS OF EMPLOYEES
although not distributed. OF PRIVATE FIRMS SHALL NOT BE SUBJECT TO ATTACHMENT, LEVY,
o Interest credited on savings bank deposits, even though the EXECUTION, OR ANY TAX WHATSOEVER)
bank nominally has a rule, seldom or never enforced, that it Section 1. As used in this Act, the term "reasonable private benefit plan" means a
may require so many days' notice in advance of cashing pension, gratuity, stock bonus or profit sharing plan maintained by an employer
for the benefit of some or all of his officials and employees, wherein contributions
depositors' checks, is income to the depositor when credited.
are made by such employer or officials and employees, or both, for the purpose of
An amount credited to shareholders of a building and loan association, when such distributing to such officials and employees the earnings and principal of the fund
credit passes without restriction to the shareholder, has taxable status as income for thus accumulated, and wherein it is provided in said plan that at no time shall any
the year of the credit. When the amount of such accumulations has not become part of the corpus or income of the fund be used for, or be diverted to, any purpose
available to the shareholder until the maturity of a share, the amount of any share in other than for the exclusive benefit of the said officials and employees.
excess of the aggregate amount paid in by the shareholder is income for the year of
maturity of the share.
RA 7641 (AN ACT GRANTING RETIREMENT BENEFITS TO PRIVATE SECTOR
EMPLOYEES IN ABSENCE OF QUALIFIED PLAN)
RR 2 (provisions relating to Exclusions)
In the absence of a retirement plan or agreement providing for retirement benefits
SECTION 61. Exclusions from gross income. — The term "gross income" as used in of employees in the establishment, an employee upon reaching the age of sixty

(60) years or more, but not beyond sixty-five (65) years which is hereby declared including government-owned and -controlled corporations, and of private
the compulsory retirement age, who has served at least five (5) years in the said offices received after the12th month pay beginning CY 1994; and
establishment, may retire and shall be entitled to retirement pay equivalent to at b) Other benefits, such as, Christmas bonus given by, private offices to their
least one-half (1/2) month salary for every year of service, a fraction of at least six officials and employees, productivity incentives bonus, loyalty award, gifts
(6) months being considered as one whole year. in cash or in kind and other benefits of similar nature actually received by
Unless the parties provide for broader inclusions, the term one-half (1/2) month officials and employees of both Government and private offices in an
salary shall mean fifteen (15) days plus one-twelfth (1/12) of the 13th month pay amount not exceeding Twelve Thousand Pesos (12,000.00) for one
and the cash equivalent of not more than five (5) days of service incentive leaves. (1)calendar year.
Retail, service and agricultural establishments or operations employing not more The above-stated exclusions [(a) and (b)] shall cover benefits paid or accrued
than (10) employees or workers are exempted from the coverage of this provision. beginning January 1, 1994 but shall be limited only paragraph (b) above, provided,
however, that when added to the 13th month pay, the total amount of tax exempt
Xxx
benefits shall not exceed Thirty Thousand Pesos (P30,000.00).
3. Exclusion of 13th Month Pay
c. RMC 36-94 [Dec 14, 1994]

RA 7833 [January 1994] (An act including 13th month pay and other benefits
among the exclusions from gross income)  Adopting the amendments under RA 7833, supra
Section 1. A new sub-paragraph to be known as sub-paragraph (F) is hereby
inserted at the end of Section 28(b)(8) of the National Internal Revenue Code, as RA 7459 – Investors and Inventions Incentives Act of the Philippines
amended, which shall read as follows: Sec 3. C. The inventor shall be exempt from the following taxes for which
“(F) 13th month pay and other benefits. otherwise he shall have been directly liable:
“(i) Benefits received by officials and employees of the national and local (a) Income tax on the net income derived from the sale of invention
governments pursuant to Republic Act No. 6686; products resulting from newly discovered/developed technologies by
“(ii) Benefits received by employees pursuant to Presidential Decree No. local researches or new technology adopted from foreign sources
851, as amended by Memorandum Order No. 28, dated August 13, 1986; whether it be patented machine, product, process including
implements or tools and other related gadgets of invention, utility
“(iii) Benefits received by officials and employees not covered by
model and industrial design patents;
Presidential Decree No. 851, as amended; and
“(iv) Other benefits such as productivity incentives and Christmas bonus in
an amount not exceeding Twelve thousand pesos (P12,000) which shall be 4. Exemption of Minimum Wage Earners
integrated in the 13th month pay solely for purposes of this Act.”
“Provided, however, that the exclusion shall only apply to the first Thirty RA 9504 (July 6, 2008)
thousand pesos (P30,000).”
 A minimum wage earner as defined as an individual who is exempt from
income tax pursuant to the provisions of this Code and other laws, general
or special.
RR 2-1995  Minimum wage earners as defined shall be exempt from the payment of
income tax on their taxable income: Provided, further, That the holiday pay,
SECTION 3. Benefits Exempted from Income Tax. — For purposes of determining overtime pay, night shift differential pay and hazard pay received by such
the taxable compensation income, the following benefits shall be excluded from minimum wage earners shall likewise be exempt from income tax.
the gross compensation income, viz:
a) 13th month pay equivalent to the mandatory one (1) month basic salary of
officials and employees of the Government(whether national or local),

b. RR 10-2008 o This discloses a legislative policy to include all income not
 MWEs are xempted from Withholding Tax on Compensation expressly exempted from the class of taxable income under our
laws
o FORMULA: Gross income = All income – exclusions
G. ITEMS OF GROSS INCOME (Sec. 32)12
1. Compensation for Personal Service
Sec. 32. Gross Income
o Compensation income - All remuneration for services performed by
(A) General Definition. – Except when otherwise provided in this Title, gross an employee for his employer under an employer-employee
income means all income derived from whatever source, including (but not relationship, unless specifically excluded by law. This includes the
limited to) the following items: cash value of all remuneration paid in any medium other than cash.
(1) Compensation for services in whatever form paid, including, but not limited [Sec. 78 (A)]
to fees, salaries, wages, commissions, and similar items;  It includes salaries, wages, commissions, tips, allowances,
(2) Gross income derived from the conduct of trade or business or the exercise bonuses, fringe benefits, honorarium, personal
of a profession; emergency allowance, longevity pay, subsistence
(3) Gains derived from dealings in property; allowance, hazard pay, and other forms of compensation.
(4) Interest;  Remuneration may be paid on the basis of piece-work, or
(5) Rents; percentage of profits – paid hourly, daily, weekly,
(6) Royalties; monthly, or annually. [RR 2-98]
(7) Dividends;  Remuneration for services constitutes compensation
(8) Annuities; even if the relationship of ER-ER does not exist anymore
(9) Prizes and winnings; at the time payment is made. [RR 2-98]
(10)Pensions; and o General Rule: Every form of compensation income is taxable
(11)Partner’s distributive share from the net income of the general professional regardless of how it is earned, by whom it is paid or the form in
partnership which it is received
o Exceptions: The term wages does NOT include remuneration paid:
 For agricultural labor paid entirely in products of the
o GROSS INCOME = all income derived from whatever source farm where the labor paid entirely in products of the
 The enumeration in Sec. 32 is NOT EXCLUSIVE farm where the labor is performed, or
 Income, gain, or profit, subject to income tax.  For domestic service in a private home, or
 It includes the compensation for personal services, business income,  For casual labor not in the course of the employer’s trade
profits, and income derived from any source whatever unless it is or business, or
exempt from income tax by law or it is subject to final withholding  For services by a citizen or resident of the Philippines for
income tax in accordance with the semi-global or semi-schedular tax a foreign government or an international organization.
system adopted by the Philippines. It is the difference between gross [Sec. 78(A)]
sales/revenue and the cost of goods sold/services. The definition of  Compensation income including overtime pay, holiday
gross income is broad and comprehensive. (Mamalateo) pay and hazard pay, earned by Minimum Wage Earners
o “Income from whatever source” – Inclusion of all income not expressly who has no other returnable income are NOT subject to
exempted or excluded from the class of taxable income under the laws withholding tax on wages [RA 9504]
irrespective of the voluntary or involuntary action of the taxpayer in producing o Compensation for services is included in the computation of gross
the gains, and whether derived from legal or illegal sources. income only if the taxpayer is subject to the net income tax.
o Compensation income; Requisites:
 Must arise from personal services under an employer-
employee relationship and
12  It is in the nature of income to the recipient employee
(Kimmie’s Part)
o EE-ER relationship is not essential in case the law deems such 1. Salary + living quarters/meals as remuneration for services rendered
income as compensation income (i.e. Director’s fees) = the value of the quarters and meals shall be added to the
a. In Money – if compensation is paid in cash, the full amount remuneration paid
received is the measure of the income subject to tax. 2. Living quarters or meals are furnished to an employee for the
i. Salary – earnings received periodically for a regular work convenience of the employer = Value is not included as part of
other than manual labor, such as monthly salary of an compensation income.
employee
ii. Wages – all remuneration for services performed by an (C) Facilities and privileges of a relatively small value (i.e. entertainment,
EE for his ER [Sec. 78A] medical services, “courtesy” discounts on purchases)
b. In Kind - if services are paid for in a medium other than money. 1. General Rule: Not considered as compensation subject to withholding
The fair market value of the thing taken in payment is the measure if such facilities or privileges are of relatively small value and are
of the income subject to tax. offered or furnished by the employer merely as a means of promoting
o Examples are stocks, bonds or other forms of property the health, goodwill, contentment, or efficiency of his employees.
i. “Convenience of the Employer” Rule – Henderson v. Collector 2. Exception: Where compensation is paid in property other than money,
the employer shall make necessary arrangements to ensure that the
Henderson v. Collector amount of the tax required to be withheld is available for payment to
the Commissioner.
Facts: BIR assessed Spouses Henderson for deficiencies
pertaining to rentals of apartment and travel allowance paid (D) Tips and gratuities – Those paid directly to an employee by a customer, not
for in their behalf by the company of Mr. Henderson accounted for by the employee to the employer are considered as taxable
income but not subject to withholding.
Held: Rental and travel allowances that are paid for by the
company and did not redound to the personal benefit of the (E) Pensions, retirement and separation pay - constitute compensation subject
taxpayer do not constitute taxable income. The bills were to withholding, except those provided under Subsection B [Exemptions] of
directly paid by the company to the creditors. Nevertheless, this section
the taxpayers are entitled only to a ratable value of the
allowances – only the reasonable amount they would have
spent for house rental and utilities should be the amount (F) Fixed or variable transportation, representation and other allowances
subject to tax. 1. General Rule: Fixed or variable transportation, representation and
other allowances that are received by a public officer or employee of a
ii. RR 2-98 [Compensation paid in kind] private entity, in addition to the regular compensation fixed for his
(A) Compensation paid in kind position or office is COMPENSATION subject to withholding tax.
1. Compensation = The Fair Market Value (FMV) of 2. Exception: Any amount paid specifically, either as advances or
the thing taken in payment reimbursements for travelling, representation and other bona fide
2. If services are rendered at a stipulated price, in the absence of ordinary and necessary expenses incurred or reasonably expected to
proof to the contrary, such price will be presumed to be FMV of the be incurred by the employee in the performance of his duties are NOT
remuneration (FMV = stipulated price) COMPENSATION provided the following conditions are satisfied:
3. If a corporation transfers its own stock as remuneration for a. It is for ordinary and necessary travelling and representation
services rendered by its employee, the amount such remuneration or entertainment expenses paid or incurred by the employee
is the FMV of the stock at the time the services were rendered. in the pursuit of the employer’s trade, business or profession;
(FMV of stock at time of service) and
b. The employee is required to account or liquidate for the
(B) Living quarters or meals – Compensation income is computed as follows if expenses. [Must be in accordance with specific requirements
the person receives:

of substantiation for each category of expenses pursuant to iii. RR 3-98 [Special treatment of Fringe Benefit]
Sec. 34 of Tax Code] (A) General Rule: These regulation concerning fringe
i. Excess of actual expenses over advances made shall benefits do not cover benefits forming part of
constitute taxable income if such amount is not compensation income subject to withholding tax on
returned to the employer compensation
ii. If reasonable amount of said expenses are pre- (B) Exceptions:
computed on a daily basis, paid to the employee a. Representation and transportation allowances
while he is on assignment or duty = NOT subject to fixed in amounts, regularly received by
substantiation and withholding. employees as part of their monthly
compensation income  taxed as compensation
(G) Vacation and sick leave allowances or sick leave credits = constitute income NOT fringe benefit
COMPENSATION b. When the employer provides the employee with
1. General Rule: Salary of employee on vacation or on sick leave, which cash for the purchase of motor vehicle and
are paid notwithstanding his absence from work, constitute ownership is in the name of the employee AND
COMPENSATION this cash is subjected to a withholding tax as
2. Exception: Monetized value of unutilized vacation leave credits of 10 compensation income
days or less (x≤10) paid to the employee during the year are NOT c. If the fringe benefit is exempted from the fringe
subject to income tax or withholding tax benefit tax  it may still form part of employee’s
gross compensation income subject to income
(H) Deductions made by employer from compensation of employee - tax. Thus, it is subject to withholding tax on
o What? Any amount required by law to be deducted by the employer compensation income
from the compensation of an employee including the withheld tax
o Treatment? Considered as part of the employee's compensation and
deemed to be paid to the employee as compensation H. INTEREST INCOME: An earning derived from depositing or lending of money,
o When? At the time the deduction is made. goods or credits
(I) Remuneration for services as employee of a nonresident alien individual or 1. Taxable

foreign entity
o RULE: Treated as compensation whether or not such alien a. General Rule: Interests are included in the gross income of the creditor
individual or foreign entity is engaged in trade or business within or depositor
the Philippines.
o Any person paying compensation on behalf of a non-resident alien b. Tax Rates on Interest Income from the following:
individual, foreign partnership, or foreign corporation which is not
engaged in trade or business within the Philippines is subject to all
provision's of law and regulations applicable to an employer. General Rule Exception Tax Rate
(A) Philippine Currency
(J) Compensation for services performed outside the Philippines Deposits and Yield, any
o Who? By a resident citizen other Monetary Benefit
o For? A domestic or a resident foreign corporation or partnership, or from Deposit Substitutes 20% final withholding tax
for a non-resident corporation or partnership, or for a non-resident and from Trust Funds
individual not engaged in trade or business in the Philippines and Similar
o Treatment? Compensation subject to tax. Arrangements
o Non-resident citizen = taxable only on income derived from sources (A.1) Depositor is non-
25% income tax
within the Philippines. resident alien not

engaged in trade or enjoying refinancing
business in the from foreign government
Philippines or an
(A.2) Depositor is an international/regional
employee trust fund or TAX EXEMPT financing institution
retirement plan established by
If depositor is a: (D) Long-term deposit or
(a) Resident = 7.5% final deposit substitutes,
withholding tax investment management TAX EXEMPT
(b) Non-resident = TAX accounts and other
(B) Foreign currency
EXEMPT investments
deposits with an OBU or
(c) If held jointly by (a) Period < 3 years = 20%
FCDU in the Philippines
resident & non-resident = final tax on entire income
(D.1) Investment is pre-
50% exempt, 50% subject (b) 3 years ≤ Period < 4
terminated before the 5th
to 7.5% final withholding years
year
tax (c) 4 years ≤ Period < 5
If depositor is a: years
(a) Resident citizen = (E) Domestic corporation GR: 15% final withholding
subject to graduated to a non-resident foreign tax
income tax rate corporation organized EXC: Instances when it is
(B.1) Foreign currency (b) Domestic corporation = under foreign laws with reduced to 10% or tax
deposit made with a bank regular corporate income an effective tax treaty exempt
outside the Philippines tax rate [30%] with the Philippines
(c) Non-resident, alien
individual, foreign 2. Not Taxable
corporation = TAX a. Exception: When they are exempt from tax or subject to final tax as
EXEMPT preferential rate under the Tax Code (see table above)
If creditor is:
(C) Loans and other (a) Individual = Subject to 3. Imputed Interest in Inter Company Loans/ Advances (Sec. 50, Tax Code,
transactions not graduated income tax rates ROM 63-99, July 1999)
enumerated above (b) Corporation = Normal
corporate tax rate a. Sec. 59, Tax Code
(C.1) Non-resident alien
25% final tax, unless a tax
not engaged in trade or Sec. 50. Allocation of Income and Deductions
treaty provides for a lower
business in the In the case of two or more organizations, trades or businesses (whether or not
rate
Philippines incorporated and whether or not organized in the Philippines) owned or controlled
(C.2) Non-resident 20% final tax, unless a tax directly or indirectly by the same interests, the Commissioner is authorized to
foreign corporation (also treaty provides for a lower distribute, apportion or allocate gross income or deductions between or among such
applies to foreign loans) rate organization, trade or business, if he determined that such distribution,
(C.3) If loan is granted by apportionment or allocation is necessary in order to prevent evasion of taxes or
a clearly to reflect the income of any such organization, trade or business.
Not subject to final
1. Foreign government
withholding tax
2. Financial institution  Who? Two or more organizations, trades, or businesses
owned, controlled, or owned or controlled by the same interests
 Action? Commissioner is authorized to distribute, apportion, transactions - i.e., "the standard to be applied in every case is
or allocate gross income or deductions between or among that of an uncontrolled taxpayer dealing at arm's length with
organization, trade or business another uncontrolled taxpayer".
 Purpose: To prevent evasion of taxes or to reflect income of
organization/trade/business clearly. ii. Determination of Taxable Income on Inter-company Loans or
Advances
Revenue Memorandum Order 63-99 [July 1999]  IN GENERAL:

Objective o One member of a group of controlled entities
 To adopt the arm's length bargaining standard as the ultimate test for o Makes a loan or advances directly or indirectly, or otherwise
determining the correct gross income and deductions between two or becomes a creditor of another member of such group
more enterprises under common control. o Charges no interest, or at a rate which is not equal to an arm's-
 To provide a means of redistributing or reapportioning income and length rate as defined in subparagraph (2) of this paragraph
expenses of taxpayers under common control after applying Section 50 of o THEN, the Commissioner may make appropriate allocations to
the NIRC, as amended reflect an arm's length interest rate for the use of such loan or
Coverage advance.
 Loans or advances of money or other consideration (whether or not  If payments are made to parties under common control
evidence by a written instrument); according to a legally enforceable contract, the contract
 Indebtedness arising in the ordinary course of business out of sales, may still be recognized as valid. However, for purposes
leases, or the rendition of services by or between members of the group, of determining the true taxable income of the parties
or any other similar extension; involved, the interest rate charged may be subjected to
 Does not apply to alleged indebtedness which was in fact a contribution reallocation.
of capital or a distribution by a corporation with respect to its share  Section 50 does not apply only to taxable entities.
 Reallocation may also apply to tax-exempt organizations.
iii. Arm’s Length Interest Rate

i. Application of Arm’s length on Sec. 50
 IN GENERAL:
Section 50. Allocation of income and deductions. o Arm's length interest rate = rate of interest which was charged or
would have been charged at the time the indebtedness arose in
In any case of two or more organizations trades or businesses (whether or not
independent transaction with or between unrelated parties under
incorporated and whether or not organized in the Philippines) owned or controlled
similar circumstances.
directly or indirectly by the same interests the Commissioner of Internal Revenue is
 All relevant factors will be considered = amount and
authorized to distribute apportion or allocate gross income or deductions between
duration of the loan, the security involved, the credit
or among such organizations trades or businesses if he determines that such
standing of the borrower, and the interest rate prevailing
distribution apportionment or allocation is necessary in order to prevent evasion of
at the situs of the lender or creditor for comparable
taxes or clearly to reflect the income of any such organizations trades or businesses.
loans.
 Arm's length rate in domestic transactions = interest rate
is the Bank Reference Rate (BRR) prescribed by the
 Section 50 empowers the Commissioner to rectify abnormalities
Bangko Sentral ng Pilipinas (BSP).
and distortions in income brought about by common control
 The fact that the interest rate actually charged on a loan
through the adoption of standards considered fair, reasonable or
or advance is expressly indicated on a written
at arm's length.
instrument does not preclude the application of Section
 This Order adopts the arm's length bargaining standard as the
50 to such loan or advance.
ultimate test for determining the fairness of related party
paid by the lessee to the third party in behalf of the lessor (i.e. interest,
iv. Interest Period taxes, loans, insurance premiums, etc.) [RR 19-86]
 General Rule: The interest period shall commence at the date the b. Sec. 74, RR-2
indebtedness arises
 Exception: SECTION 74. Rentals
o With respect to indebtedness arising in the ordinary course of Where a leasehold is acquired for business purposes for a specified sum, the
business out of sales, leases, or supply of goods and services purchaser may take as a deduction in his return an aliquot part of such sum each
[generally considered as trade accounts receivables or payables] year, based on the number of years the lease has to run. Taxes paid by a tenant to or
 Interest period shall not commence if the taxpayer is able to for a landlord for business property are additional rent and constitute a deductible
establish that the normal trade practice in a given industry is to item to the tenant and taxable income to the landlord, the amount of the tax being
allow balances in the case of similar transactions with unrelated deductible by the latter. The cost borne by a lessee in erecting buildings or making
parties, to remain outstanding for a longer period without permanent improvements on ground of which he is lessee is held to be a capital
charging interest. investment and not deductible as a business expense. In order to return to such
o Determining period for outstanding balance  payments or taxpayer his investment of capital, an annual deduction may be made from gross
credits shall be applied against the earliest balance outstanding. income of an amount equal to the cost of such improvements divided by the number
 The taxpayer may, in accordance with an agreement, apply such payments of years remaining of the term of lease, and such deduction shall be in lieu of a
or credits in some other order in its books only after establishing that the deduction for depreciation. If the remainder of the term of lease is greater than the
arrangement is customary for parties in that particular business. probable life of the buildings erected, or of the improvements made, this deduction
shall take the form of an allowance for depreciation.
CIR v. Filinvest
 RENTALS
“No imputation of interest increase on intercompany advances” o Leasehold is acquired for business purposes for a specified sum
o Deductions:
Facts: Filinvest Development Corporation (FDC) extended advances in favor of its  Aliquot part of lease amount each year based on number
affiliates and supported the same with instructional letters and cash and journal of years of lease
vouchers. BIR assessed FDC for deficiency income tax by imputing an “arm’s length”  Taxes paid by tenant to or for a landlord for business
interest rate on its advances to affiliates. property  constitutes additional rent
 As to tenant – deductible item
Held: Despite the seemingly broad power of the CIR to distribute, apportion and
 As to landlord – taxable income
allocate gross income under Section 50 of the Tax Code, the same does not include
 Cost of improvements divided by number of years
the power to impute theoretical interests even with regard to controlled taxpayers’
remaining of term of lease
transactions. This is true even if the CIR is able to prove that interest expense (on its
 In lieu of deduction for depreciation or allowance for
own loans) was in fact claimed by the lending entity.
depreciation
c. Notes:
The term in the definition of gross income that income “from whatever source
derived” is covered, it still requires that there must be actual or at least probable
receipt or realization of the item of gross income sought to be apportioned,  Lease of personal property: Rental income on the lease of personal
property located in the Philippines and paid to a non-resident taxpayer
distributed, or allocated.
shall be taxed as follows:
I. INCOME UNDER LEASE AGREEMENT (Sec. 49, RR 2)
Non-Resident Corporation Non-Resident Alien
1. Rent – Refers to earnings derived from leasing real estate as well as Vessel 4.5% 25%
personal property. It also in includes all other obligations assumed to be Aircraft, machineries and 7.5% 25%
other Equipment NOTE: Income recognition for income tax purposes should follow income
Other Assets 30% 25% recognition for accounting purposes.
 Accrual method  Income is reported as taxable income when earned

 Lease of real property  Cash basis method  Income is reported as taxable income when received
LESSOR TAX RATE
Citizen Resident Alien Non-resident Net taxable income shall be subject to
alien engaged in trade or business in the the graduated income tax rates 4. Leasehold Improvements – Options to Report Income for Right of Reversion
Philippines of Improvements to Lessor:
Non-resident alien not engaged in trade Rental income from real property
or business in the Philippines located in the Philippines shall be SECTION 49. Improvements by lessees.
subject to 25% final withholding tax When buildings are erected or improvements made by a lessee in pursuance of an
unless a lower rate is imposed pursuant agreement with the lessor, and such buildings or improvements are not subject to
to an effective tax treaty removal by the lessee, the lessor may at his option report the income therefrom
Domestic Corporation Resident Foreign Net taxable income shall be subject to upon either of the following bases;
Corporation 30% corporate income tax or its gross (a) The lessor may report as income at the time when such buildings or
income will be subject to 2% MCIT improvements are completed the fair market value of such buildings or
Non-resident Foreign Corporation Gross rental income from real property improvements subject to the lease.
located in the Philippines shall be (b) The lessor may spread over the life of the lease the estimated depreciated value
subject to 30% corporate income tax, of such buildings or improvements at the termination of the lease and report as
such tax to be withheld and remitted by income for each year of the lease an aliquot part thereof.
the lessee in the Philippines If for any other reason than a bona fide purchase from the lessee by the lessor
the lease is terminated, so that the lessor comes into possession or control of
2. Obligation of Lessor to Third Parties Assumed and Paid by Lessee: The the property prior to the time originally fixed for the termination of the lease,
lessee may agree to pay certain obligations of the lessor to third parties. the lessor receives additional income for the year in which the lease is so
The payment made by the lessee under such terms of the lease contract terminated to the extent that the value of such buildings or improvements when
should be considered as additional rent income of the lessor. he became entitled to such possession exceeds the amount already reported as
income on account of the erection of such buildings or improvements. No
3. Advance Rental: Receipt of advance rentals by the lessor may or may not appreciation in value due to causes other than the premature termination of the
constitute taxable income to him depending on the true nature of the lease shall be included. Conversely, if the building or improvements are
advance rentals destroyed prior to the expiration of the lease, the lessor is entitled to deduct as
a. If the advance rental is in the nature of prepaid rent (for the a loss for the year when such destruction takes place the amount previously
lessee), received by the lessor under a claim of right and without reported as income because of the erection of such buildings or improvements,
restriction as to use  entire amount is taxable income of the less any salvage value subject to the lease to the extent that such loss was not
lessor in the year received compensated for by insurance. If the buildings or improvements destroyed
b. If the amount received is in the nature of a security deposit for the were acquired prior to March 1, 1913, the deduction shall be based on the cost
faithful compliance by the lessee of the terms of the contract  or the value subject to the lease to the extent that such loss was not
there is no income to the lessor compensated for by insurance
i. EXCEPTION: When the conditions imposed by the lessor
occur, making the security deposit property of the lessor.
[Forfeiture of deposit]
c. If the amount is received as a loan  no income upon its receipt by  The cost borne by a lessee in erecting buildings or making permanent
the lessor improvements on ground of which he is lessee is held to be a capital investment
and not deductible as a business expense. In order to return to such taxpayer

his investment of capital, an annual deduction may be made from gross income PART IV
of an amount equal to the cost of such improvements divided by the number of
years remaining of the term of lease, and such deduction shall be in lieu of a J. DIVIDEND INCOME13
deduction for depreciation. If the remainder of the term of lease is greater than
the probable life of the buildings erected, or of the improvements made, this Some general principles from de Leon
deduction shall take the form of an allowance for depreciation.
 The basic principle for the tax of distributions in liquidation, complete or
 Income from leasehold improvements: partial is that they’re treated as a sale or exchange rather than as ordinary
a. Option 1 – Report Fair Market Value Upon Completion dividends even though the liquidating distributions include earnings and
i. Outright method – Income form the leasehold improvement profits.
shall be recognized when the improvement is completed at  The stocks owned by the stockholders are the property disposed of and the
its market value liquidating distributions whether out of earnings or profits or other
sources are regarded as the proceeds of the sale
b. Option 2 – Report Over Remaining Life of Lease Depreciated Value
after Expiration of Lease Period SEC 73 Distribution of dividends or Assets by Corporations
ii. Spread-out method – The estimated book value of the Definition of dividends
leasehold improvement at the end of the lease is spread  Any distribution made by a corporation to its shareholders out of its
over the term of the lease and is reported as income for earnings or profits
each year of the lease an aliquot part thereof.  estimated  Payable to its shareholders
book value at the end of the lease contract or lease term  Comes is either money or in other property.
 Scenarios
a. Situation 1: Lease is terminated, lessor comes into possession or
control of the property before the original termination date SEC 250 RR2
i. Lessor receives additional income for the year Dividends
ii. Lease is terminated to the extent of the value of such  Comprise any distribution whether in cash or other property
buildings or improvements when he became entitled to  In the ordinary course of business, even though extraordinary in amount
possession exceeds the amount already reported as  Made by a domestic or resident foreign corporation, joint-stock company,
income on account of the erection of such building or partnership, joint account (cuentas en participacion), association, or
improvement insurance company to the shareholders or members out of its earnings or
iii. EFFECT: No appreciation of value due to causes other profits accumulated since March 1, 1913.
than the premature termination of the lease shall be Although interest on certain Government bonds and other similar obligations is not
included taxable when received by a corporation, upon amalgamation with the other funds of
b. Situation 2: The building or improvement is destroyed before the the corporation, such income loses its identity and when distributed to
expiration of the lease shareholders, is taxable to the same extent as other dividend.
i. Lessor is entitled to deduction when destruction takes Depending on the kinds of taxpayers
place  A taxable distribution made by a corporation to individual stockholders or
ii. Amount reported – salvage value** members
**NOTE: To the extent not compensated by insurance o Included in the gross income of the distributees when the cash of
other property is unqualifiedly made subject to their demand.
 Dividends, in cash or other property received by an individual
13
(Jamie’s Part)

o Subject to tax in his hands in the same manner another income.  The taxable income declared by a partnership for a taxable year which is
 Dividends, whether in cash or other property, received by a domestic or subject to tax under Section 27 (A) of this Code
resident foreign corporation from a domestic corporation  You should deduct first the corporate income tax imposed therein
o Taxable only to the extent of 25 per cent thereof in accordance This shall be deemed to have been actually or constructively received by the
with Section 24 of the Code. partners in the same taxable year and shall be taxed to them in their individual
 Dividends received by a domestic corporation from a foreign corporation, capacity, whether actually distributed or not.
whether resident or non-resident
o Taxable to the extent that they constitute income from sources
within the Philippines, as provided in Section 37 (a) (2) (b) of the 1. KINDS OF DIVIDENDS RECOGNIZED IN LAW
Code.
 Dividends paid by the domestic corporation to a nonresident foreign a. CASH – taxed - when taxable, the measure of income is the amount
corporation of money received
o Taxable in full. (For definition of the different classes of
corporations, see Section 84 of the Code). b. PROPERTY – taxed - when taxable, the measure of income is the
FMV of the property received. A dividend paid in shares of stocks
of another corporation, or in treasury stocks, is a property
dividend.
SECTION 73 NIRC
When is it a taxable income or loss? SEC 251 RR2
o Distribution of all assets in complete liquidation or dissolution Dividends paid in property
 Where a corporation distributes all of its assets in complete liquidation
or dissolution the gain realized or loss sustained by the stockholder,  Dividends paid in securities or other property (other than its own stock) in
whether individual or corporate, is a taxable income or a deductible which the earnings of a corporation have been invested
loss, as the case may be.  Are income to the recipients to the amount of the full market value of such
property when receivable by individual stockholders.
o Cancellation or redemption When receivable by corporations
 If a corporation cancels or redeems stock issued as a dividend at such
time and in such manner as to make the distribution and cancellation  The amount of such dividends includible for purposes of the tax on
or redemption, in whole or in part, essentially equivalent to the corporations are specified in Section 24 of the Code. (See also Section 250
distribution of a taxable dividend of these regulations).
 The amount so distributed in redemption or cancellation of the stock A dividend paid in stock of another corporation is not a stock dividend
shall be considered as taxable income to the extent that it represents a
 Even though the stock distributed was acquired through the transfer by the
distribution of earnings or profits.
corporation declaring the dividends of property to the corporation the
stock of which is distributed as a dividend.
Note: Stock dividend representing the transfer of surplus to capital account shall not
be subject to tax.
Where a corporation declares a dividend payable in a stock of another
corporation, setting aside the stock to be so distributed and notifying the
Dividends Distributed are Deemed Made from Most Recently Accumulated Profits
stockholders of its action, the income arising to the recipients of such stock is its
 Any distribution made to the shareholders or members of a corporation
market value at the time the dividend becomes payable.
 Shall be deemed to have been made from the most recently accumulated
profits or surplus
Scrip dividends are subject to tax in the year in which the warrants are issued.
 And shall constitute a part of the annual income of the distributee for the
year in which received.
Net Income of a Partnership Deemed Constructively Received by Partners
ISSUE/HELD: WON the stock dividends were taxable. YES.
BIR RULING 108-93 MAY 7, 1993
 The property dividend shall be recorded at the book value in the books of R: Where a company parts with a portion of its earnings to buy the majority shares
both the issuing corporation and the recipient stockholder of a stockholder and distributed such shares to the remaining stockholders, the
 The earnings of a corporation have been invested are income to the distribution is not a stock dividend. It is in effect a distribution of earnings to the
recipient to the amount or the full market value of such property when stockholders.
receivable by individual stockholders has already been modified having o Applied in the case at bar when the three respondents parted with
been rendered obsolete a portion of their earnings "to buy" the corporate holdings of
 Dividends received from a domestic corporation and the share of an Reese, they were in ultimate effect and result making a
individual partner in a partnership subject to tax under Section 24(a) of the distribution of such earnings to the respondents. All these
Tax Code amounts are consequently subject to income tax as being, in truth
and in fact, a flow of cash benefits to the respondents
 As a flow of cash benefits to them, it is subject to income tax.
 The fact that the stockholder’s resolution authorizing the distribution of
c. STOCK said earnings is null and void is of no moment. Under the Tax Code, income
tax is assessed on income received from any property, activity or service
SEC. 73. Distribution of dividends or Assets by Corporations that produces the income.
(B) Stock Dividend
o A stock dividend representing the transfer of surplus to capital
account shall not be subject to tax. FISHER V. TRINIDAD
o However, if a corporation cancels or redeems stock issued as a
dividend at such time and in such manner as to make the
distribution and cancellation or redemption, in whole or in part, F: Trinidad was a stockholder in Philippine American Drug Company, The latter as a
essentially equivalent to the distribution of a taxable dividend result of the business for that year, declared a "stock dividend" and Trinidad’s share
 The amount so distributed in redemption or cancellation of the stock dividend was issued to him. Trinidad was ordered by the CIR to pay
of the stock shall be considered as taxable income to the income tax on said stock dividend. Trinidad wants to recover the income tax he paid
extent that it represents a distribution of earnings or on the stock dividend.
profits.
ISSUE/HELD: WON the "stock dividends" in the present case "income" and taxable
as such under the provisions of section 25 of Act No. 2833? NO. A stock dividend is
not an income. It merely evidences the interest of the stockholder in the increased
COMM V MANNING capital of the corporation. Hence it is not taxable.
F: MANTRASCO had capital stock divided between Reese and the three respondents. R: Stock dividends" are not "income," and the same cannot be taxed under that
Reese died. MANTRASCO had no sufficient money to buy his shares so the three provision of Act No. 2833 which provides for a tax upon income.
respondents became its trustees. These shares were considered as stock dividend of
MATRASCO and was fully paid by MANTRASCO thus the trust agreement was  When a corporation or company issues "stock dividends" it shows that the
terminated. Upon examination of the books of MANTRASCO by the BIR, it was company's accumulated profits have been capitalized, instead of
disclosed that the three respondents failed to declare the said stock dividends as distributed to the stockholders or retained as surplus available for
part of their taxable income. BIR examiners concluded that the distribution of distribution, in money or in kind, should opportunity offer.
Reese's shares as stock dividends was in effect a distribution of the "asset or  The stockholder has received nothing but a representation of an interest in
property of the corporation as may be gleaned from the payment of cash for the the property of the corporation and, as a matter of fact, he may never
redemption of said stock and distributing the same as stock dividend." receive anything, depending upon the final outcome of the business of the
corporation.
 A stock dividend, when declared, is merely a certificate of stock which  the same interest in the same corporation being represented after the
evidences the interest of the stockholder in the increased capital of the distribution by more shares of precisely the same character, and
corporation.  a stock dividend where there either has been a change of corporate
 There is a clear distinction between a cash dividend and a stock dividend. identity or a change in the nature of the shares issued as dividends
The one is a disbursement to the stockholder of accumulated earnings, and whereby the proportional interest of the shareholders after the
the corporation parts irrevocably with all interest therein; the other distribution is essentially different from his former interests.
involves no disbursement by the corporation; the corporation parts with  When is it taxable?
nothing to its stockholder. o A stock dividend constitutes income if it gives the shareholder
an interest different from that which his former stock
holdings represented. (SEC 252 RR2)
MEASURE OF INCOME IN CASH AND PROPERTY DIVIDEND  It gives the shareholder a greater proportional
interest in the corporation after its distribution (de
 Cash: The measure of the income is the amount of the cash received Leon)
 Property: The measure of income is the fair market value of the
property received at the time of receipt or distribution
i. MEASURE OF INCOME
iii. STOCK DIVIDEND
SEC 253 RR2
 Proportionate test  Sale of stock received as dividends
o A stock dividend representing the transfer of surplus to o Stock issued by a corporation, as a dividend, does not constitute taxable
capital account is not subject to income tax. (SEC 252 RR2) income to a stockholder in such corporation
o Some notes from de Leon  But gain may be derived or loss sustained by the stockholder, whether
 Stock dividends represent capital and do not individual or corporate, from the sale of such stock, which gain or loss
constitute income to its recipient. The mere issuance will be treated as arising from the sale or exchange of a capital asset.
thereof is not yet subject to income tax as they are  The amount of gain derived or loss sustained from the sale of such
nothing but an enrichment through increase in value stock, or from the sale of the stack with respect to which it is issued,
of capital investment. shall be determined in accordance with the following rules
 As capital, the stock dividends postpone the  (a) Where the stock issued as dividend is all or substantially the
realization of profits because the fund represented same character or preference as the stock upon which the stock
by the new stock has been transferred from surplus dividend is paid
to capital and no longer available for actual o The cost of each share (or when acquired prior to March 1,
distribution. 1913, the fair market value as of such date) will be the
 Stock dividends issued by a corporation are quotient of the cost (or such fair market value) of the old
considered unrealized gain, and cannot be subjected shares of stock divided by the total number of the old and
to income tax until that gain has been realized not new shares.
subject to income tax  (b) Where the stock issued as a dividend is in whole or in part
of a character or preference materially different from the
a. WHEN TAXABLE stock upon which the stock dividend is paid
o The cost (and when acquired prior to March 1, 1913, the
SEC 252 RR2
fair market value as of such date) of the old shares of
 The distinction between a stock dividend which does not, and one which stock shall be divided between such old stock and the
does, constitute income taxable to the shareholder is the distinction new stock, in proportion, as nearly as may be, to the
between a stock dividend which respective value of each class of stock, old and new, at the
 works no change in the corporate entity time the new shares of stock are issued, and the cost (or

when acquired prior to March 1, 1913, the fair market (Lifted from Dimaampao)
value as of such date) of each share of stock will be the
quotient of the cost (or such fair market value as of GIVER RECIPIENT TAXABLE (TAX RATE) /
March 1, 1913) of the class to which such share belongs EXEMPT
divided by the number of shares in that class. Domestic Domestic/Resident Tax exempt
 (c) Where the stock with respect to which a stock dividend is Foreign Corporation
issued was purchased at different times and at different
prices and the identity of the lots cannot be determined Domestic Resident Corporation, 10% effective taxable
o Any sale of the original stock, will be charged to the Non-resident year 2000
earliest purchases of such stock, and any sale of dividend Corporation, Resident
stock issued with respect to such stock will be presumed Alien
to have been made from the stock issued with respect to Domestic Non-resident Alien 20%
the earliest purchased stock, to the amount of the Engaged in Trade or
dividend chargeable to such stock. Business in the
 (d) Where the stock with respect to which a stock dividend is Philippines
declared was purchased at different times and at different Domestic Non-resident Alien not 25%
prices, and the dividend stock issued with respect to such Engaged in Trade or
stock cannot be identified as having been issued with respect Business in the
to any particular lot of such stock Philippines
o Then any sale of such dividend stock will be presumed to Domestic Non-resident Foreign 15% subject to
have been made from the stock issued with respect to the Corporation allowance for tax credit
earliest purchased stock, to the amount of the stock
dividend chargeable to such stock.
SEC 256 RR2
Distribution in liquidation
b. WHEN NOT TAXABLE  In all cases where a corporation (as defined in Section 84) distributes
all of its property or assets in complete liquidation or dissolution
SEC 252 RR2  The gain realized from the transaction by the stockholder, whether
When is it not taxable? individual or corporate, is taxable to the extent recognized in Section
 If the new shares confer no different rights or interests than did the old 34(b) of the Code.
— the new certificates plus the old representing the same Definition of "complete liquidation"
proportionate interest in the net assets of the corporation as did the  Includes any one of a series of distributions made by a corporation in
old. complete cancellation or redemption of all of its stock in accordance
with a bona fide plan of liquidation under which the transfer of all the
assets under liquidation is to be complete within a reasonable time
from the date of the first distribution, usually not to exceed one year
iv. LIQUIDATING DIVIDEND from the time of such first distribution. If the amount received by the
stockholder in liquidation is less than the cost or other basis of the
 This is the distribution of all the property assets of a corporation in stock, the loss in the transaction is deductible to the extent allowed in
complete liquidation or dissolution Section 34(c) of the Code.
 The difference between the amount received from the corporation in
complete liquidation or dissolution and the cost of the shares
surrendered is taxable income or deductible loss as the case may be
BIR RULING 322-87 OCTOBER 19, 1987

 Since the individual stockholders of the company will receive upon its determining element therefore is whether the distribution was in the
liquidation all its assets as liquidating dividends, they will thereby realize ordinary course of business and with intent to maintain the corporation as
capital gain or loss. a going concern, or after deciding to quit with intent to liquidate the
 The gain, if any, derived by the individual stockholders consisting of the business. Proceedings actually begun to dissolve the corporation or formal
difference between the fair market value of the liquidating dividends and the action taken to liquidate it are but evidentiary and not indispensable.
adjusted cost to the stockholders of their respective shareholdings in the said "The distinction between a distribution in liquidation and an ordinary
corporation (Sec. 66(a); Sec. 256, Income Tax Regulations) shall he subject to dividend is factual; the result in each case depending on the particular
income tax at the rates prescribed under Section 2 1(a) of the Tax Code, as circumstances of the case and the intent of the parties. If the distribution is
amended by Executive Order No. 37. in the nature of a recurring return on stock it is an ordinary dividend.
 Moreover, pursuant to Section 33(b) of the Tax Code, as amended, only 50% of However, if the corporation is really winding up its business or
the aforementioned capital gain is reportable for income tax purposes if the recapitalizing and narrowing its activities, the distribution may properly be
shares were held by the individual stockholders for more than twelve months treated as in complete or partial liquidation and as payment by the
and 100% of the capital gains if the shares were held for less than twelve corporation to the stockholder for his stock. The corporation is, in the latter
months; and The company is not subject to the capital gains tax on the transfer instances, wiping out all or Part of the stockholders' interest in the
of shares of stock which are among the assets of the corporation under company . . ."
liquidation in favor of its stockholders  Income tax law states that “Where a corporation, partnership, association,
joint-account, or insurance company distributes all of its assets in
complete liquidation or dissolution, the gain realized or loss sustained by
the stockholder, whether individual or corporation, is a taxable income or a
WISE & CO. INCORPORATED V MEER deductible loss as the case may be.”
F: Manila Wine Merchants, Ltd., (HK Co.) sold its company to Manila Wine v. ESSENTIALLY EQUIVALENT TO DISTRIBUTION
Merchants, Inc., a Philippine corporation, (PH Co.). As a result of the sale of its OF TAXABLE DIVIDENDS
business and assets to PH Co., a surplus was realized and the HK Co. distributed this
surplus to the shareholders. Manila Wine Merchants, Ltd. Paid Philippine income tax  The basic principle for the taxation of distributions in liquidation,
had been paid by HK Co. on the said surplus from which said distributions were complete or partial, is that they are treated as a sale or exchange rather
made. At a special general meeting of the shareholders of Manila Wine Merchants, than as ordinary dividends even though the liquidating distributions
Ltd, the stockholders by resolution directed that the company be voluntarily include earnings and profits
liquidated and its capital distributed among the stockholders. Wise & Co., Inc. is  Liquidating distributions are the proceeds
one of the shareholders of Manila Wine Merchants, Ltd and the former was taxed
for the shares it received.
CIR V CA & CTA & ANSCOR
ISSUES/HELD:
1. WON the amounts received by plaintiffs and on which the taxes in question were FACTS:
assessed and collected are ordinary or liquidating dividends. (LIQUIDATING  Don Andres Soriano formed the corporation ANSCOR
DIVIDENDS)  ANSCOR's authorized capital stock was increased to P2,500,000.00 divided
2. WON liquidating dividends are taxable income. YES. The amounts distributed in into 25,000 common shares with the same par value of the additional
the liquidation of a corporation shall be treated as payments in exchange for stock 15,000 shares, only 10,000 was issued which were all subscribed by Don
or shares, and any gain or profit realized thereby shall be taxed to the distributed as Andres, after the other stockholders waived in favor of the former their
other gains or profits, which was then subject to "normal tax." pre-emptive rights to subscribe to the new issues. This increased his
subscription to 14,963 common shares.
RATIO:  Don Andres died. A day after, ANSCOR increased its capital stock to
 The ordinary connotation of liquidating dividend involves the distribution P20M and in 1966 further increased it to P30M. In the same year
of assets by a corporation to its stockholders upon dissolution. The (December 1966), stock dividends worth 46,290 and 46,287 shares were

respectively received by the Don Andres estate and Doña Carmen from nothing but a representation of an interest in the corporate
ANSCOR. Hence, increasing their accumulated shareholdings to 138,867 properties. As capital, it is not yet subject to income tax.
and 138,864 19 common shares each. o Capital is wealth or fund; whereas income is profit or gain or the
 Doña Carmen requested a ruling from the United States Internal Revenue flow of wealth. The determining factor for the imposition of
Service (IRS), inquiring if an exchange of common with preferred shares income tax is whether any gain or profit was derived from a
may be considered as a tax avoidance scheme under Section 367 of the transaction.
1954 U.S. Revenue Act. By January 2, 1968, ANSCOR reclassified its existing  If a corporation cancels or redeems stock issued as a dividend at such time
300,000 common shares into 150,000 common and 150,000 preferred and in such manner as to make the distribution and cancellation or
shares. redemption, in whole or in part, essentially equivalent to the distribution of
 The IRS opined that the exchange is only a recapitalization scheme and not a taxable dividend, the amount so distributed in redemption or cancellation
tax avoidance. Consequently, on March 31, 1968 Doña Carmen exchanged of the stock shall be considered as taxable income to the extent it
her whole 138,864 common shares for 138,860 of the newly reclassified represents a distribution of earnings or profits accumulated after March
preferred shares. The estate of Don Andres in turn, exchanged 11,140 of its first, nineteen hundred and thirteen.
common shares, for the remaining 11,140 preferred shares, thus reducing  This provides that the redemption or cancellation of stock dividends,
its (the estate) common shares to 127,727. depending on the "time" and "manner" it was made, is essentially
 Pursuant to a Board Resolution, ANSCOR redeemed 28,000 common shares equivalent to a distribution of taxable dividends," making the proceeds
from the Don Andres' estate. By November 1968, the Board further thereof "taxable income" "to the extent it represents profits".
increased ANSCOR's capital stock to P75M divided into 150,000 preferred  Thus, the provision had the obvious purpose of preventing a
shares and 600,000 common shares. About a year later, ANSCOR again corporation from avoiding dividend tax treatment by distributing
redeemed 80,000 common shares from the Don Andres' estate, further earnings to its shareholders in two transactions — a pro rata stock
reducing the latter's common shareholdings to 19,727. As stated in the dividend followed by a pro rataredemption — that would have the
Board Resolutions, ANSCOR's business purpose for both redemptions of same economic consequences as a simple dividend.
stocks is to partially retire said stocks as treasury shares in order to reduce  Depending on the circumstances, the proceeds of redemption of stock
the company's foreign exchange remittances in case cash dividends are dividends are essentially distribution of cash dividends, which when
declared. paid becomes the absolute property of the stockholder. Thereafter, the
 After examining ANSCOR's books of account and records, Revenue latter becomes the exclusive owner thereof and can exercise the
examiners issued a report proposing that ANSCOR be assessed for freedom of choice. Having realized gain from that redemption, the
deficiency withholding tax-at-source, pursuant to Sections 53 and 54 of the income earner cannot escape income tax.
1939 Revenue Code, for the year 1968 and the second quarter of 1969  As qualified by the phrase "such time and in such manner," the
based on the transactions of exchange and redemption of stocks. exception was not intended to characterize as taxable dividend every
distribution of earnings arising from the redemption of stock
ISSUE/HELD dividend. Whether the amount distributed in the redemption should
WON ANSCOR's redemption of stocks from its stockholder as well as the exchange be treated as the equivalent of a "taxable dividend" is a question of
of common with preferred shares can be considered as "essentially equivalent to the fact, which is determinable on "the basis of the particular facts of the
distribution of taxable dividend" making the proceeds thereof taxable under the transaction in question.
provisions of Sec. 83(b) of the 1939 Internal Revenue Act.  Redemption of stock dividends is essentially turning it into a cash
dividend
Held/Ratio:  A stock dividend represents capital and do not constitute income to its
recipient
 The general rule is the proportionate test wherein stock dividends once o The mere issuance is not yet subject to income tax as they are
issued form part of the capital and, thus, subject to income tax. nothing but enrichment through increase in value of capital
o Stock dividends issued by the corporation, are considered investment
unrealized gain, and cannot be subjected to income tax until that o As capital, the stock dividends postpone the realization of
gain has been realized. Before the realization, stock dividends are profits because the fund represented by the new stock has

been transferred from surplus to capital and no longer earnings.[101] Otherwise, the apparent intention to avoid tax
available for actual distribution becomes doubtful as the intention to evade becomes manifest.
o Stock dividends issued by a corporation are unrealized gain o Again, it is the “net effect rather than the motives and plans of
and cannot be subject to income tax until realized the taxpayer or his corporation”[104] that is the fundamental
 Exception guide in administering Sec. 83(b). This tax provision is aimed
o Sec 73 B gives the exception. at the result.[105] It also applies even if at the time of the
 However, if a corporation cancels or redeems stock issuance of the stock dividend, there was no intention to
issued as a dividend at such time and in such manner redeem it as a means of distributing profit or avoiding tax on
as to make the distribution and cancellation or dividends.[106] The existence of legitimate business
redemption, in whole or in part, essentially purposes in support of the redemption of stock dividends is
equivalent to the distribution of a taxable dividend, immaterial in income taxation. It has no relevance in
the amount so distributed in redemption or determining “dividend equivalence”.[107] Such purposes may
cancellation of the stock shall be considered as be material only upon the issuance of the stock dividends.
taxable income to the extent that it represents a  Test of taxability under the exempting clause
distribution of earnings or profits. o The test of taxability under the exempting clause, when it
o This was designed to prevent the issuance and cancellation or provides “such time and manner” as would make the
redemption of stock dividends which is fundamentally not redemption “essentially equivalent to the distribution of a
taxable, from being made use as a device for the actual taxable dividend”, is whether the redemption resulted into a
distribution of cash dividends which is taxable flow of wealth. If no wealth is realized from the redemption,
 Redemption and cancellation there may not be a dividend equivalence treatment. In the
o Depending on the circumstances, the proceeds of redemption metaphor of Eisner v. Macomber, income is not deemed
of stock dividends are essentially distribution of cash “realize” until the fruit has fallen or been plucked from the
dividends which when paid becomes the exclusive the tree.
absolute property of the stockholder. The latter becomes the o to rule that the said proceeds are exempt from income tax
exclusive owner thereof and can exercise the freedom of when the redemption is supported by legitimate business
choice. Having realized gain from the redemption, the income reasons would defeat the very purpose of imposing tax on
earner cannot escape income tax income. Such argument would open the door for income
 Criteria earners not to pay tax so long as the person from whom the
o Presence or absence of real business purpose income was derived has legitimate business reasons.
o Amount of earnings and profits available for the declaration  Exchange of common with preferred shares
of a regular dividend and the corporation’s records with o The exchange of common stocks with preferred stocks, or
respect to the declaration of dividends preferred for common or a combination of either for both,
o The effect of the distribution as compared with the may not produce a recognized gain or loss, so long as the
declaration of regular dividend provisions of Section 83(b) is not applicable. This is true in a
o The lapse of time between issuance and redemption trade between two (2) persons as well as a trade between a
o The presence of a substantial surplus and a generous supply stockholder and a corporation. In general, this trade must be
of cash which invites suspicion as does a meagre policy in parts of merger, transfer to controlled corporation, corporate
relation to both to current earnings and accumulated surplus acquisitions or corporate reorganizations. No taxable gain or
 Corporate creditors loss may be recognized on exchange of property, stock or
o The issuance of stock dividends and its subsequent securities related to reorganizations
redemption must be separate, distinct, and not related, for the o Both the Tax Court and the Court of Appeals found that
redemption to be considered a legitimate tax scheme.[100] ANSCOR reclassified its shares into common and preferred,
Redemption cannot be used as a cloak to distribute corporate and that parts of the common shares of the Don Andres estate
and all of Doña Carmen’s shares were exchanged for the

whole 150, 000 preferred shares. Thereafter, both the Don K. INCOME FROM ANY SOURCE WHATEVER 14
Andres estate and Doña Carmen remained as corporate
subscribers except that their subscriptions now include 1. Bad Debt Recovery
preferred shares. There was no change in their proportional (Note: The syllabus cites Rule 50, RR2 but the same is not applicable here, so I
interest after the exchange. There was no cash flow. Both referred to the old reviewer for this provision, but this will be discussed infra under
stocks had the same par value. Under the facts herein, any bad debts)
difference in their market value would be immaterial at the
time of exchange because no income is yet realized – it was a
mere corporate paper transaction. It would have been
different, if the exchange transaction resulted into a flow of Rules on Bad debt recovery:
wealth, in which case income tax may be imposed.
o In this case, the exchange of shares, without more, produces a. If the deduction of the bad debt in prior year resulted in income tax
no realized income to the subscriber. There is only a benefit  the recovered bad debt is TAXABLE (in the year of recovery)
modification of the subscriber’s rights and privileges - which b. If it did not result in income for the tax benefit of the employer  NOT
is not a flow of wealth for tax purposes. The issue of taxable TAXABLE
dividend may arise only once a subscriber disposes of his c. Income from bad debt recover = the extend of the income tax benefit of
entire interest and not when there is still maintenance of said deduction
proprietary interest
 If its source is the original capital subscriptions upon establishment of
2. Forgiveness of Indebtedness
the corporation or from initial capital investment in an existing
enterprise, its redemption to the concurrent value of acquisition may
not invite the application of Sec. 83(b) under the 1939 Tax Code, as it is (RR2, Sec. 50)
not income but a mere return of capital. On the contrary, if the
redeemed shares are from stock dividend declarations other than as Effect of the cancellation or forgiveness:
initial capital investment, the proceeds of the redemption is additional
wealth, for it is not merely a return of capital but a gain thereon. Example:
 It is not the stock dividends but the proceeds of its redemption that
may be deemed as taxable dividends. Here, it is undisputed that at the a. A debtor performs services for the creditor and the latter cancels the debt
time of the last redemption, the original common shares owned by the in consideration of the services  the cancellation amounts to payment
estate were only 25,247.5.[91] This means that from the total of of income
108,000 shares redeemed from the estate, the balance of 82,752.5 b. A creditor merely desires to benefit the debtor and cancels without
(108,000 less 25,247.5) must have come from stock dividends. consideration  the amount of debt is a gift which NEED NOT be
Besides, in the absence of evidence to the contrary, the Tax Code included in the debtor’s gross income
presumes that every distribution of corporate property, in whole or in c. A corporation to which the stockholder is indebted forgives the debt 
part, is made out of corporate profits,[92] such as stock dividends. The the effect is payment of a dividend
capital cannot be distributed in the form of redemption of stock
dividends without violating the trust fund doctrine – wherein the 3. Tax Refunds
capital stock, property and other assets of the corporation are
regarded as equity in trust for the payment of the corporate creditors.
RMC 13-80:
Taxes previously claimed and allowed as deductions, but subsequently refunded
14
(Cielo’s Part)

or granted as tax credit should be declared as part of the gross income of the
taxpayer in the year of the receipt and refund as tax credit
6. Income from any source whatever
Rules on the refund of taxes previously deducted: Gutierrez v. CIR
a. TAXABLE: If the tax paid is a deductible tax refund, or credit F: An expropriation proceeding was commenced against Sps. Gutierrez. After the
Example: percentage taxes (except VAT and percetange tax on sale), court ruled in favor of the Republic, they were paid. CIR assessed a tax deficiency for
excise tax and professional tax the amount they received from the government.
b. NOT TAXABLE: If the tax paid is not deductible as tax refund or credit
thereof not taxable H: Amount is taxable. The acquisition by the government of a private property thru
i. Income tax eminent domain after just compensation is embraced within the meaning of the
ii. Estate tax term “sale or disposition of property” which is included in the computation of gross
iii. Income tax in Title III income.
iv. VAT
c. Income from tax refund = to the extent of the income tax benefit of said
deduction
d. The tax refund shall be reported as income shall be reported as income in
the year it was received  if cash method (accounting method) L. TRANSFER PRICE REGULATIONS
It must be reported in the year it was ordered  if accrual basis (BIR
Ruling 84) (RR2-2013)
Background: Recall the case of CIR v. Filinvest on the issue of transactions
4. Damage Recovery between related enterprises i.e. a mother company and its affiliates, or among
a. Taxable affiliates within the same group of companies. The purpose of this regulation is to
i. Compensation for loss of profits or income ensure that the a transaction among these related enterprises (i.e. the controlled
ii. In infringement suits, recoveries of lost profits transaction) is consistent with the arm’s length pricing principle
iii. Damages recovered from a breach of contract It means that the controlled transaction must be the same or at par with an
iv. Exemplary damages, not being a return of lost capital uncontrolled transaction (i.e. transaction between independent enterprises). A
b. NOT taxable comparable analysis between these two transactions will be conducted. If the CIR
i. Compensation for damage to property, injury to person or loss finds that the controlled transaction between the related enterprises is anomalous
of life or may have been used to evade payment of taxes (e.g. loan with a lower interest
ii. Compensation for lost capital than commercial rate), the CIR can allocate or distribute gross income or
iii. Moral damages which is purely compensatory in nature deductions to reflect the income and taxes due from the controlled transactions.
To ensure that the controlled transaction adopts the arm’s length pricing
principle, various transfer pricing methodologies are employed.
5. Prizes and Winnings
1. Resale Price Method (RPM) – the focus is on the gross profit margin
a. In excess of 10k and winnings (except Lotto and PCSO) derived within the
realized by the reseller (a related enterprise) which resold the product to
PHL  20%
an independent party.
b. For NRA  25%
- This is a good method for distribution companies since there is
c. Cash prizes for tournaments when such is the profession (Pacquiao?) 
seldom any need to infuse new investment for further development
normal tax rate in Sec 24a
of the product and the gross profit margin will be determined easily
d. Cash prizes by foreign players with tax treaties if the activities are within
(cf manufacturing industries)
PHL  as NRA ETB so 30% (?)

Example: DEDUCTIONS15
With the same parties used above. Let’s say SMIC sold a building to SMDC
for 100M, which would not require extensive renovations. Then SMDC
A. CLASSES OF DEDUCTIONS
sold it to company X for 150M (the renovation cost is 20M so the gross
profit margin is 30M). If with a comparable transaction, Filinvest sold a
building worth 120M which needed a renovation cost up to 20M. If Ayala 1. Optional Standard Deduction (OSD)
land would sell it also for 150M, the gross proft margin is only 10M. It NIRC Sec 34. (L) Optional Standard Deduction.
would appear that the transaction between the SM companies is not at
arm’s length which resulted to SMIC paying a smaller capital gains tax for  In lieu of itemized deductions
the sale of a real property.  Election of OSD when made in the return shall be irrevocable for the
2. Cost Plus Method – the focus is on the gross mark up obtained by a taxable year for which the return is made
supplier from a transaction with a related enterprise.  One who is entitled to and claimed for the optional standard shall not be
- This is helpful in service-oriented industries or manufacturing required to submit with his tax return such financial statements (advantage
industries. of electing OSD over itemized deductions)
3. Profit Split Method – the division of profits that independent enterprises
would have realized as compared with the division of related parties in A. For Individuals - 40% of gross receipts or gross sales
the same comparable transaction.  Individual subject to tax under the schedular system (except for
4. Transactional Net Margin Method – similar to cost plus and resale price taxpayers earning compensation income arising from personal
method, instead of the costs or gross profit margin respectively, the net services rendered under an employer-employee relationship)
proft margin attained by a related enterprise in the controlled transaction  Other than a nonresident alien
is compared with a net profit of independent enterprises
5. Comparable Uncontrolled Pricing (CUP) Method – the amount charged in B. For Corporations - 40% of gross income
a controlled transaction is compared with an uncontrolled transaction. A  Domestic Corporation
difference in the amounts charged may indicate that the controlled  Resident Foreign Corporation
transaction is not arm’s length and the price in the uncontrolled
transaction may be substituted for the controlled transaction. The two
transactions must be comparable or must have the same circumstances. RR 16-2008
Example: Gross Income = gross sales less sales returns, allowances, discounts and Cost of
Related enterprises: SMIC and SMDC Goods Sold
Independent Enterprises in a comparable transaction: Ayala Land and
Filinvest
Gross Sales = Those included as taxable income
Let’s say SMIC loaned to SMDC an amount of 500million with a 2% annual
interest for the latter’s expansion. This is a controlled transaction. If in a
similar loan transaction between independent companies, Ayala Land Cost of Goods Sold
and Metrobank, a 500Million loan for the former’s expansion would incur  Trade or merchandising concern - invoice cost of goods plus freight, import
a 6% annual interest, there is a difference in price and it appears that the duties and all other costs in transporting the goods to the place where they
controlled transaction is not at arm’s length. The CIR may use the 6% as are actually sold
the annual interest for loan and this is the interest income that will be  Manufacturing concern - all costs incurred in the production of finished
taxed on SMIC (the creditor). goods (raw materials, direct labor, manufacturing overhead costs)
2. Itemized Deductions
15
(Kaye’s Part)
representation expenses which the CIR disallowed because they are not considered
B. EXPENSES IN GENERAL ordinary and necessary.
1. Requisites for Deductibility H: This case adds to the statutory requirements that an expense must be ordinary
and necessary. In this case the court said that the expense must also meet the test of
 Ordinary and necessary reasonableness of amount. It also defined the following terms:
 Substantiated by adequate proof
o No deduction from gross income shall be allowed unless the  Ordinary – expenses which are normal in relation to the business of the
taxpayer shall substantiate with sufficient evidence, such as taxpayer and surrounding the circumstances
official receipts or other adequate records:  Necessary – where the expenditure is appropriate and helpful in the
 the amount of the expense being deducted development of the taxpayer’s business or that the same is proper for the
 the direct connection or relation of the expense being purpose of realizing a profit or minimizing loss
deducted to the development, management, operation
and/or conduct of the trade, business or profession of the 2. Compensation for Personal Services
taxpayer.
Sec 34 NIRC
 Not contrary to law, morals, public order or public policy
o Bribes, Kickbacks and Other Similar Payments. - No deduction A reasonable allowance for salaries, wages, and other forms of compensation for
from gross income shall be allowed under Subsection (A) hereof personal services actually rendered, including the grossed-up monetary value of
for any payment made, directly or indirectly, to an official or fringe benefit furnished or granted by the employer to the employee: Provided, That
employee of the national government, or to an official or employee the final tax imposed under Section 33 hereof has been paid.
of any local government unit, or to an official or employee of a
government-owned or -controlled corporation, or to an official or
KUENZLE & STREIF, INC VS CIR
employee or representative of a foreign government, or to a
private corporation, general professional partnership, or a similar F: CIR disallowed as expenses payments to certain officials of the petitioner
entity, if the payment constitutes a bribe or kickback. company in the form of bonuses. According to the CIR, the expenses are
unreasonable for because they are in excess of the respective salaries of the
a. Ordinary and Necessary
recipients and thus, unreasonable.
RR-2, Sec 65
H: The test of reasonableness applied is wrong. That it exceeds the salary of the
Business expenses deductible from gross income include the ordinary and recipient does not necessarily make it unreasonable. TEST:
necessary expenditures directly connected with or pertaining to the taxpayer's  The bonus is for compensation
trade or business.  For personal service actually rendered
 Bonus + salary if measured as against the service rendered is
commensurate (reasonable)
o To be reasonable, ALL CIRCUMSTANCES must be taken into
Sec 34 NIRC
account
There shall be allowed as deduction from gross income all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on or which
are directly attributable to, the development, management, operation and/or 3. Travelling/Transportation Expenses
conduct of the trade, business or exercise of a profession. Sec 34 NIRC
A reasonable allowance for travel expenses, here and abroad, while away from
VISAYAN CEBU TERMINAL CO. VS COLLECTOR home in the pursuit of trade, business or profession.
F: Petitioner is organized for the purpose of handling arrastre operations in Cebu for
which it was awarded contract by the BOC. Petitioner claimed as deductions RR-2, Sec 66
Travel Expenses as ordinarily understood, include transportation expenses and
meals and lodging. If the trip is undertaken for other than business purposes, the RR-2, Sec 68
transportation expenses are personal expenses and not deductible. If the trip is  Incidental repairs which neither materially add to the value of the property
solely on business, the reasonable and necessary traveling expenses become nor appreciably prolong its life, but keep it in an ordinarily efficient
business expenses and thus deductible. operating condition, may be deducted as expense, provided the plant or
(a) If, then, an individual, whose business requires him to travel receives a property account is not increased by the amount of such expenditure.
salary as full compensation for his services, without reimbursement for  Repairs in the nature of replacement, to the extent that they arrest
traveling expenses, or is employed on a commission basis with no expense deterioration and appreciably prolong the life of the property should be
allowance, his traveling expenses, including the entire amount expended charged against the depreciation reserves if such account is kept.
far meals and lodging, are deductible from gross income.
(b) If an individual receives a salary and is also repaid his actual traveling
expenses, he shall include in gross income, the amount so repaid and may
deduct such expenses. 6. Expenses under Lease Agreements
(c) If an individual receives a salary and also an allowance for meals and Sec 34 NIRC
lodging, as for example, a per diem allowance in lieu of subsistence, the A reasonable allowance for rentals and/or other payments which are required as a
amount of the allowance should be included in gross income and the cost of condition for the continued use or possession, for purposes of the trade, business or
such meals and lodging may be deducted therefrom. profession, of property to which the taxpayer has not taken or is not taking title or
 Only such expenses as are reasonable and necessary in the conduct of the in which he has no equity other than that of a lessee, user or possessor.
business and directly attributable to it may be deducted.
 Substantiation requirement (must show):
RR-2, Sec 74 Rentals.
(1) the nature of the business in which he is engaged
 Leasehold is acquired for business purposes for a specified sum, the
(2) the number of days away from home during the taxable year on purchaser may take as a deduction in his return an aliquot part of such sum
account of business each year, based on the number of years the lease has to run.
(3) the total amount of expenses incident to meals and lodging while  Taxes paid by a tenant to or for a landlord for business property
absent from home and business during the taxable year o deductible item to the tenant
(4) the total amount of other expenses incident to travel and claimed as o taxable income to the landlord
a deduction.  Cost borne by a lessee in erecting buildings or making permanent
improvements -capital investment of lessee and not deductible as a
business expense.
4. Cost of Materials o An annual deduction may be made from gross income of an
RR-2, Sec 67 amount equal to the cost of such improvements divided by the
 Materials and supplies - only to the amount that they are number of years remaining of the term of lease (just like
actually consumed and used in operation during the year for which the depreciation)
return is made.
 Incidental materials or supplies on hand for which no record of
consumption is kept or of which physical inventories at the beginning and 7. Expenses for Professionals
end of the year are not taken - the total cost of such supplies and materials
as were purchased during the year for which the return is made, provided RR-2, Sec 69
the net income is clearly reflected by this method.  Cost of supplies used by him in the practice of his profession
 Expenses paid in the operation and repair of transportation equipment
used in making professional calls
 Dues to professional societies and subscriptions to professional journals
5. Repairs
 Rent paid for office rooms  Transportation equipment even when wholly used in carrying on farm
 Utilities (fuel, light, water, telephone, etc.) operations
 Salaries of office assistants  If a farm is operated for recreation or pleasure and not on a commercial
Amounts currently expended for books, furnitures, and professional instruments basis, and if the expenses incurred in connection with the farm are in
and equipment, the useful life of which is short, may be deducted. But amounts excess of the receipt therefrom, the entire receipts from the sale of
expended for books, furniture, and professional instruments and equipment of a products may be ignored in rendering a return of income, and the expenses
permanent character are not allowable as deductions. incurred, being regarded as personal expenses, will not constitute
allowable deduction.
8. Expenses for Farmers

9. Entertainment Expenses (Entertainment, Amusement and Recreation)
RR-2, Sec 7
Sec 34 NIRC
A farmer who operates a farm for profit is entitled to deduct from gross income as
necessary expenses all amounts actually expended in the carrying on of A reasonable allowance for entertainment, amusement and recreation expenses
the business of farming. during the taxable year, that are directly connected to the development,
management and operation of the trade, business or profession of the taxpayer, or
that are directly related to or in furtherance of the conduct of his or its trade,
Deductible: business or exercise of a profession not to exceed such ceilings as the Secretary of
 The cost of ordinary tools of short life or small cost, such as hand tools, Finance may, by rules and regulations prescribe, upon recommendation of the
including shovels, rakes, etc. Commissioner, taking into account the needs as well as the special circumstances,
 The cost of feeding and raising livestock may be treated as an expense nature and character of the industry, trade, business, or profession of the taxpayer:
deduction, in so far as such cost represents actual outlay, but not including Provided, That any expense incurred for entertainment, amusement or recreation
the value of farm produce grown upon the farm or the labor of the that is contrary to law, morals public policy or public order shall in no case be
taxpayer. allowed as a deduction.
 Where a farmer is engaged in producing crops which take more than a  EAR includes representation expenses and/or depreciation or rental
year, expenses deducted may be determined upon the crop basis expense relating to entertainment facilities.
(deductions in the year in which the gross income is realized).
 "Representation expenses" - expenses incurred by taxpayer in connection
 Cost of gasoline or fuel, repairs, and upkeep of the transportation with the conduct of his trade, business or profession, in entertaining,
equipment if used wholly in the business of farming is deductible as an providing amusement and recreation to, or meeting with, a guest or guests
expense; if used partly for business purposes and partly for the pleasure or at a dining place, place of amusement, country club, theater, concert, play,
convenience of the taxpayer or his family, such cost may be apportioned sporting event, and similar events or places.
according to the extent of the use for purposes of business and pleasure or
convenience, and only the proportion of such cost justly attributable to o Does not refer to fixed representation allowances that are subject
business purposes is deductible as a necessary expense. to withholding tax on wages.
Non deductible:
 The cost of farm machinery, equipment, and farm buildings representing RR 10-2002 Ceiling on EAR expenses covers:
capital investment.  Individuals engaged in business, including taxable estates and trusts
 Development of farms, orchards, and ranches, prior to the time when the  Individuals engaged in the practice of profession
productive state is reached  Domestic Corporations
 Amounts expended in purchasing work, breeding or dairy animals may be  Resident Foreign corporations
depreciated unless such animals are included in an inventory

GPPs, including its members 2) directly related to or in furtherance of the conduct of his or its
TBoP
*Presumption: Fringe benefit! c. Not contrary to law, morals, good customs, public policy or public order
 In the case of a country, golf, sports club, or any other similar club where
the employee or officer of the taxpayer is the registered member (and not *CEILING on EAR expenses:
the employer), there shall be a presumption that such expenses are fringe A. Taxpayers engaged in sale of goods: 0.50% of net sales
benefits unless proven that these are actually representation expenses. B. Taxpayers engaged in sale of services: 1% of net revenues
C. Taxpayers engaged in both:
*Substantiation Requirements - Receipts and records indicating: 1st:
1) Amount of expense
2) Date and place of expense GI from Service
3) Purpose X Amount of EAR Exp = N
4) Professional or business relationship of expense Total Gross Income
5) Name of person and company entertained with contact details
Compare N with 1% limit; whichever is lower = Y
*"Entertainment Facilities" - must be owned or form part of the taxpayer's trade

2nd:
or business or rented by such taxpayer for which he claims a deduction for
depreciation or rent expense
GI from Sales
 A yacht, vacation home or condominium X Amount of EAR Exp = M
o Yacht must not be restricted for the use of specific officers as to Total Gross Income
make it subject to FBT.
 Any similar item of real or personal property used by the taxpayer
Compare M with 0.50% limit; whichever is lower = Z
primarily for EAR of guests or employees
3rd:
Add the values of Y and of Z, the result is the EAR expense deductible
*Exclusions from EAR expenses:
for the year.
 Expenses treated as fringe benefits
 Expenses for charitable or fund raising events
 Expenses for bona fide meetings 10. Expenses for Private Educational Institutions
 Expenses for attending or sponsoring an employee to a business league or  A private educational institution, referred to under Section 27 (B) may at
professional org meeting its option elect either:
 Expenses for events organized for promotion, marketing and advertising
(a) to deduct expenditures otherwise considered as capital outlays
including concerts, conferences, seminars, etc.
of depreciable assets incurred during the taxable year for the
 Expenses of similar nature expansion of school facilities or
(b) to deduct allowance for depreciation thereof under Subsection
*Requisites for Deductibility of EAR expenses: (F) of the tax code
a. Paid or incurred during the taxable year
b. Must be: ALHAMBRA CIGAR AND CIGARETTE VS COLLECTOR
1) directly connected to the development, management and
operation of the trade, business or profession or

F: Petitioner filed its income tax return and claimed as deduction the expenses for CIR vs General Foods
repairs on building which represented the cost of construction of a new fence. CIR F: Respondent’s advertising expense for the promotion of “Tang” was disallowed by
disallowed the expense on the ground that they are capital outlays. the CIR. According to the CIR, the expense was unreasonable for taking up more
H: The expenses for the fence are not deductible. Based on the purpose, the court than half of the total marketing expense of the company. Respondent avers that the
must determine if the expense is for restoration to a sound state or for replacement. reason for the huge amount of expense was because it intended to enhance the
If the former, deductible as an expense outright; if latter, charged as a capital reputation of the product.
expenditure to be depreciated over the expected useful life. In this case, prior to the
construction of the new fence, there was a hollow block fence. Thus, the purpose of
H: The expense spent for promotion cannot be charged in full during the year. There
the new fence was to replace the old fence (capital expenditure).
are 2 kinds of advertising expense:
1. Advertising expense to stimulate the current sale of the merchandise
CALANOC VS COLLECTOR (deductible expense)
F: Calanoc financed and promoted a boxing and wrestling exhibition to raise money 2. Advertising designed to stimulate the future sale of merchandise (capital
for the orphans. After the event, he claimed some representation expenses which expenditure)
included payment for police protection. In this case, since the expense was intended not only for current sales but also
H: The payments to the police in consideration of “protection” are not allowable to secure the good reputation of the product for the succeeding years, then it is
under the law. The law expressly prohibits expenses which are illegal for being a capital expenditure which must be amortized over it expected use to the
contrary to law, morals, public order or public policy. company.
11. Constructive Dividends

C. INTEREST16
RR-2, Sec 70
The test of deductibility in the case of compensation payments is whether they o Interest - amount which one has contracted to pay for use of borrowed
are reasonable and are, in fact, payments purely for service. money or amount of compensation paid for use of money or forbearance
 Any amount paid in the form of compensation, but not in fact as the from such use.
purchase price of services, is not deductible.
 An ostensible salary paid by a corporation may be a distribution of 1. Interest Deductible from Gross Income [Sec. 34 (B)]
dividend on stock. This is likely to occur in the case of a corporation o General Rule: The amount of interest paid or incurred within the
having few shareholders, practically all of whom draw salaries. If in such a taxable year on indebtedness in connection with the taxpayer’s
case the salaries are in excess of those ordinarily paid for similar services, profession, trade or business shall be allowed as deduction from
and the excessive payment correspond or bear a close relationship to the gross income
stockholdings of the officers or employees, it would seem likely that the o Limitation: Taxpayer’s allowable deduction for interest expense
salaries are not paid wholly for services rendered, but that the shall be reduced by an amount equal to 42% of the interest income
excessive payments are a distribution of earnings upon the stock. subjected to final tax.
 Effective Jan. 2009, PERCENTAGE = 33%
2. Interest not Deductible from Gross Income

12. Advertising expenses o Exceptions: No deduction shall be allowed in respect of interest
under the following scenarios:
2 Types:
1. Expenses for current sale (deductible)
2. Expenses for future sale (to be amortized)
16
(Kimmie’s Part)
 Interest paid in advance by the taxpayer who reports  Optional treatment of interest expense
income on cash basis shall only be allowed as deduction on capital expenditure incurred to
in the year the indebtedness is paid. acquire property used in trade,
 If indebtedness is payable in periodic amortizations, only business or exercise of profession –
the amount of interest which corresponds to the amount Taxpayer may choose either:
of principal amortized or paid during the year shall be  Deduction in full in the year
allowed as deduction in such taxable year when incurred; or
 Interest payments made between related taxpayers as  A capital expenditure for
follows which the taxpayer may claim
o Members of family. – Between members of a only as a deduction the
family. For purposes of this paragraph, the periodic amortization of such
family of an individual shall include only his expenditure
brothers and sisters (whether by the whole or  Interest on indebtedness incurred to finance petroleum
half-blood), spouse, ancestors, and lineal exploration
descendants; or
o Individual and Corporation. – Except in the case 3. Prepaid Interest of Individual on Cash Method of Accounting
of distributions in liquidation, between an
individual and a corporation more than 50% in Commissioner v. Vda. De Prieto
value of the outstanding stock of which is
owned, directly or indirectly, by or for such
individual; or Facts: Respondent conveyed real property to her 4 children by way of gifts – for
o Between corporations. – Except in the case of which she was assessed donor’s gift tax, interest and compromises. Respondent paid
distributions in liquidation, between two P117,706.50 – P55,978.65 represents total interest on account of delinquency.
corporations more than 50% in value of the Respondent claimed this as deduction on her gross income. CIR disallowed this
outstanding stock of each of which is owned, claim.
directly or indirectly, by or for the same
individual, if either one of such corporations, Held: Interest on indebtedness deductible. Section 30 (b) (1), Tax Code:
with respect to the taxable year of the
corporation preceding the date of the sale or SEC. 30 Deductions from gross income. — In computing net income there shall be
exchange was, under the law applicable to such allowed as deductions —
taxable year, a personal holding company or a
foreign personal holding company; or (b) Interest:
o Grantor and fiduciary. – Between the grantor
(1) In general. — The amount of interest paid within the taxable year on
and a fiduciary of any trust; or
indebtedness, except on indebtedness incurred or continued to purchase
o Two fiduciaries – One grantor. – Between the
or carry obligations the interest upon which is exempt from taxation as
fiduciary of a trust and the fiduciary of another
income under this Title.
trust if the same person is a grantor with respect
to each trust; or
"Indebtedness" as used in the Tax Code of the United States containing
o Fiduciary and beneficiary. – Between a fiduciary
similar provisions as in the above-quoted section has been defined as an
of a trust and a beneficiary of such trust.
unconditional and legally enforceable obligation for the payment of
 Theoretical interest = not deductible money. Under this definition, tax may be considered as indebtedness.
since it is merely computed or Although taxes already due have not the same concept as debts, they are
calculated. It does not arise from obligations that may be considered as such. The interest paid by
interest bearing obligations

respondent for late payment is deductible from her gross income under
Sec. 30 (b). RR 13-2000 [Requirement for deductibility of interest expense]
There is indebtedness
4. Reduction of Interest Expense on Interest Income subjected to Final Tax i. No indebtedness = no deduction
under TRA of 1997 ii. Indebtedness = unconditional and legally enforceable
obligation for payment of a sum certain in money
Reduction of Interest Expense on Interest Income subjected to Final Tax under b. The indebtedness is that of the taxpayer
TRA of 1997 c. The indebtedness is connected with the
Tax arbitrage – arises when corporate and individual taxpayers borrow and invest taxpayer’s trade, profession, or business
simultaneously to take advantage of interest differentials d. The interest must be legally due
e. The interest must be stipulated in writing
Rule on Interest Expense limitation: Under Section 34 (B) of the 1997 Tax Code, f. The taxpayer is liable to pay interest on the
the amount of interest paid or incurred within a taxable year on indebtedness in indebtedness
connection with the taxpayer’s profession, trade or business is allowed as g. The indebtedness must have been paid or
deduction from gross income. However, the taxpayer’s otherwise allowable accrued during the taxable year
deduction for interest expense should be reduced by 33% of the interest income h. The interest payment arrangement must not be
subjected to final tax. between related taxpayers
i. The interest must not be incurred to finance
Formula: Allowable deductions – [Interest income x rate] petroleum operations
j. In case of interest incurred to acquire property
Illustration of Tax Arbitrage used in trade, business or exercise of profession,
a) On January 1, 2009, Corporation X borrowed from a local bank an amount the same was not treated as a capital
of P500, 000 at a 10% annual interest (resulting to interest expense). expenditure
b) Immediately thereafter, the proceeds of the loan were placed in a local
bank deposit account, which earns a 10% annual interest rate (resulting to
interest income).
c) Assuming that the rule on interest expense limitation is not yet in place, the D. TAXES (Sec. 80-82, RR2)
interest expense of P50, 000 (10% of P500, 000) will result to a tax benefit
of 30% or P15, 000 in 2009; while the interest income of P50, 000 (10% of o Refers to national and local taxes.
P500, 000), being a passive income will only be subjected to final tax of o Does not include amounts representing interest, surcharge or penalties
20% or P10, 000. incident to delinquency.
d) The taxpayer would derive a net benefit of P5, 000 from the combined
effect of a lower rate of final tax liability and a higher rate of tax 1. Deductible from Gross Income
deductibility. Realizing the negative impact of tax arbitrage on revenue
generation, the interest expense limitation was legislated. Sec. 34 (C)
o General Rule: All taxes paid or incurred within the taxable year in
Rationale of the reduction: This limitation on the deductibility of interest expense connection with the taxpayer’s profession, trade or business, are deductible
was legislated specifically to address the tax arbitrage arising from the difference from gross income
between the 20% final tax on interest income and the regular corporate income o Taxes allowed in this Subsection, when refunded or credited, shall be
tax rate (RCIT) under which interest expense can be claimed as a deduction. included as part of gross income in the year of receipt to the extent of the
Thus, this system neutralizes the interest income advantage. Consequently, the income tax benefit of said deduction
taxpayers are discouraged from borrowing money to be used mainly for o LIMITATION – Deductions for taxes aforementioned shall be allowed only if
investment in a money market instrument in order to generate an interest income and to the extent that they are connected with income from sources within
advantage. the Philippines in case of the following:

a) Nonresident alien individual engaged in trade or business in the i. Exception to exception – When the taxpayer does not
Philippines; and signify his desire to avail of the tax credit for taxes of
b) Resident foreign corporation foreign countries, the amount may be allowed as a
deduction subject to the limitations set forth by law
c. Estate and donor’s taxes; and
d. Taxes assessed against local benefits of a kind tending to increase
o Examples of deductible taxes the value of the property assessed
o Examples of non-deductible taxes
RR 2, Sec. 80, 82, 83 a. Postage
a) Import duties paid to the proper customs officers b. Merchants' sales tax imposed by law upon sales is not deductible
b) Business, occupation, license, privilege, excise and stamp taxes and any other by the individual purchaser even though the tax may be billed to
taxes of every name or nature paid directly to the Government of the him as a separate item.17
Philippines or to any political subdivision c. Taxes imposed upon taxpayer’s interest as shareholder of a bank
c) Automobile registration fees or other corporation, which are paid by the corporation without
d) Merchants' sales tax imposed by law upon sales reimbursement from the taxpayer. The amount so paid should not
e) Income, war-profits, and excess-profits taxes imposed by the authority of a be included in the income of the shareholder.
foreign country  allowed as deductions only if the taxpayer does not signify in d. Corporate bonds or other obligations containing a tax-free
his return his desire to have to any extent the benefits of the provisions of law covenant clause the corporation paying a tax or any part of it, for
allowing credits against the tax for taxes of foreign countries. someone else pursuant to its agreement is not entitled to deduct
f) In the case of a citizen of a foreign country residing in the Philippines whose such payment from gross income on any ground.
income from sources within such foreign country is not subject to income tax, e. Income tax paid to or accrued in favor of the Government of the
only that portion of the taxes paid to such foreign country which corresponds to Philippines
his net income subject to the Philippine income tax shall be allowed as f. Estate, inheritance, and gift taxes
deduction. g. Assessments, paid for local benefits, such as street, sidewalk, and
g) Taxes levied for the general public welfare, by the proper taking authorities at a other like improvements, imposed because of and measured by
like rate against all property in the territory over which such authorities have some benefit inuring directly to the property against which the
jurisdiction assessment is levied, do not constitute an allowable deduction
h) Assessments made for the purpose of maintenance or repair of local benefits, from gross income. A tax is considered assessed against local
the taxpayer may deduct assessments paid as an expense incurred in business, benefits when the property subject to the tax is limited to the
if the payment of such assessments is necessary to the conduct of his business. property benefited.
h. Special assessments are not deductible, even though an incidental
benefit may inure to the public welfare.
o Requisites for deductibility – Such tax must be: i. Assessments made for the purpose of constructing local benefits,
a) Paid or incurred within the taxable year the payments by the taxpayer are in the nature of capital
b) Paid or incurred in connection with the taxpayer’s trade, profession expenditures and are not deductible.18
or business; j. Value Added Tax
c) Imposed directly on the taxpayer k. Fines and penalties
d) Not specifically excluded by law from being deducted from the
taxpayer’s gross income 17
RATIO: Taxes are deductible as such only by the person upon whom they are imposed. In
merchant’s sales tax, the tax is imposed on the merchant and not the purchaser
2. Not Deductible from Gross Income
o Exceptions: The following taxes cannot be deducted from gross income 18
Assessments made for the purpose of both construction and maintenance or repairs, the
a. Philippine income tax, except Fringe benefit taxes burden is on the taxpayer to show the allocation of the amounts assessed to different
b. Income tax imposed by the authority of any foreign country purpose. If the allocation cannot be made, none of the amounts paid is deductible
l. Final taxes (b) Partnerships and Estates. - In the case of any such individual who is a member of
m. Capital Gains Tax a general professional partnership or a beneficiary of an estate or trust, his
n. Import duties proportionate share of such taxes of the general professional partnership or the
o. Business taxes estate or trust paid or incurred during the taxable year to a foreign country, if his
p. Occupation taxes distributive share of the income of such partnership or trust is reported for taxation
q. Privilege and license taxes under this Title.
r. Excise taxes An alien individual and a foreign corporation shall not be allowed the credits
s. Documentary stamp taxes against the tax for the taxes of foreign countries allowed under this paragraph.
t. Automobile registration fees
u. Real property taxes
v. Electric energy consumption tax under BP 36
o Who may claim tax credits:
3. Meaning of the term “Taxes” [Sec. 80, RR 2] a) Resident citizens
o The word "taxes" means taxes proper and no deductions should be allowed b) Domestic corporations
for amounts representing interest, surcharge, or penalties incident to c) Members of general professional partnerships
delinquency. d) Beneficiaries of estates or trusts
o Who may NOT claim tax credits:
4. Tax Credits vs. Tax Deduction a) Non-resident citizens
o Tax Credits – Foreign income taxes paid or incurred which reduces the b) Resident aliens
Philippine income tax to be paid. Only domestic corporations are entitled to c) Non-resident aliens
avail of the tax credit d) Foreign corporations
o Purpose of Credit: To lessen the harshness of taxation in cases where an o Limitations: The amount of tax credit allowed is equivalent to the tax paid
income is subject to both foreign tax and Philippine income tax. or incurred to a foreign country during the taxable year but not to exceed
 The taxpayer has the option either to claim foreign income taxes the following limits:
paid as deduction from gross income or tax credit against the a) [Per Country Limit] The amount of tax credit shall not exceed the
Philippine income tax. If claimed as tax credit, it is no longer same proportion of the tax against which such credit is taken,
deductible from gross income. which the taxpayer’s taxable income from sources within such
o Tax Credit vs. Tax Deduction country bears to his entire taxable income for the same taxable
Tax Credit Tax Deduction year; AND
Deductible Deductible from Philippine Deductible from gross i. FORMULA
From Income Tax income a. Per Country Limit
Sources Foreign income war-profits and Deductible taxes such as
excess profit tax business tax, excise tax,
percentage tax and other ( )( )
business-connected taxes
Effect Reduces taxpayer’s liability Reduces taxable income
b. Tax Credit
Sec. 34 (C)(3). Credit Against Tax for Taxes of Foreign Countries.

( )( )
If the taxpayer signifies in his return his desire to have the benefits of this
paragraph, the tax imposed by this Title shall be credited with:
(a) Citizen and Domestic Corporation. - In the case of a citizen of the Philippines and
of a domestic corporation, the amount of income taxes paid or incurred during the
taxable year to any foreign country; and
( )( )
ii. ILLUSTRATION
Assume:
2011 Taxable Net Income from all Sources P 400,000 2. ILLUSTRATION
Country G Net Income 100,000 Assume:
Country H Net Income 80,000 2011 Taxable Net Income from all Sources P 400,000
Tax paid/incurred: Philippines 132,000 Country G Net Income 100,000
Country G 35,000 Country H Net Income 80,000
Country H 25,000 Tax paid/incurred: Philippines 132,000
Country G 35,000
Country H 25,000
Solution – Per Country Limit:
Tax Credit
Country G (100/400 x 132,000) P 33,000
Actually Paid to Country G 35,000 P 32,000
Country H (80/400 x 132,000) 26,400 Solution – Worldwide Limit:
Actually Paid to Country H 25,000 25,000 Income from outside PH [180/400 x 132,000] P 59,400
Tax credit allowed under Per Country Limit 57,000 Total Foreign Income Taxes Paid 60,000
The result after applying the formula above is compared to the tax actually paid Tax Credit Allowed under Worldwide Limit P 59,400
for each foreign country. The lower of the two amounts for each foreign country The result after applying the formula is compared to the tax actually paid in total to
will be added to get the total tax credit allowed under Per country limit foreign countries. The lower of the two amounts will be added to get the total tax credit
allowed under Worldwide Limit.
b) [Worldwide Limit] The total amount of the credit shall not exceed o Compare the tax credit allowed under
the same proportion of the tax against which such credit is taken, The lower of the two amounts is
which the taxpayer’s taxable income from sources without the the final allowable tax credit. In
Philippines taxable bears to his entire taxable income for the same  Per country limit this case, the amount computed
taxable year  Worldwide limit under Per Country Limit is
 This applied where the taxpayer derives income from lower. Thus, it becomes the final
more than one foreign country allowable tax credit.
1. FORMULA NOTE: If there is only one country, both limits will yield the same
a. Worldwide Limit answer.
o PROCEDURE to get TAX CREDIT ALLOWABLE:
( )( ) 1. Use formula for Per Country Limit
2. Resulting amount compared to actual tax paid to
foreign country
3. Lower amount = final allowable tax credit
b. Tax Credit o Year in Which Credit is Taken:

 The credits provided for in this Section may, at the option of the  Purpose of law: Prevent the taxpayer from claiming the benefits of his
taxpayer and irrespective of the method of accounting employed in payment of foreign taxes twice – as deduction and as tax credit.
keeping his books, be taken in the year in which the taxes of the  No double taxation in this case – Philippines only receives the benefits of
foreign country were incurred. one tax while US receives the other tax
a. If the taxpayer elects to take such credits in the year in Any relief should come from the US as income was derived in the
which the taxes of the foreign country accrued, the Philippines; therefore, Philippines is entitled to the benefits of income
credits for all subsequent years shall be taken upon the tax.
same bases, and no portion of any such taxes shall be NOTES:
allowed as a deduction in the same or any succeeding 1. Between the Philippines and US, income tax should accrue
year. to the Philippines since income was earned and taxpayer
o Proof of Credits: The credits shall be allowed only if the taxpayer resides therein.
establishes to the satisfaction of the Commissioner the following: 2. To allow alien to deduct from his gross income whatever
 The total amount of income derived from sources without the taxes he pays to his own government amounts to conferring
Philippines on the latter the power to reduce the tax income of the
 The amount of income derived from each country, the tax paid or Philippine government by simply increasing the tax rates
incurred to which is claimed as a credit under said paragraph, such on the alien resident.
amount to be determined under rules and regulations prescribed by 3. Every time the tax rate imposed upon the alien resident is
the Secretary of Finance; and increased by its own government, his deduction from
 All other information necessary for the verification and computation Philippine taxes increases thereby diminishing the
of such credits. proceeds for the Philippines. Clearly, this subordinates
Philippine taxes to those levied by a foreign government.
CIR v. Lednicky
a. Discounts or Tax Credits –
Facts: Spouses Lednicky are US citizens who derived all their income from CASE: CIR v. Bicolandia Drug Corp.
Philippine sources. In their ITR, they claimed as deduction the income tax they paid
to the US government. Facts: Bicolandia Drug filed a claim for tax credit arising from the
20% discount granted to senior citizens. CIR denied claim assailing
Held: Income tax paid to US government is NOT deductible. The right to deduct that it is merely a deduction from gross income.
foreign taxes from gross income is only a substitute or alternative to the right to
claim tax credits for foreign income tax. Held: 20% discount is subject to tax credit – any interpretation
substituting “tax credit” with “deduction from gross income” is
 Unless the alien resident has the right to claim the tax credit, he is unwarranted. A tax credit is an amount subtracted from an
precluded from deducting foreign income tax. The law only allows individual or entity’s tax liability to arrive at the total tax liability. A
deduction for those who do not signify their desire to avail of tax credits. tax credit reduces the taxpayer’s liability, compared to a deduction,
The law assumes that said taxpayer may show his intent to avail of tax which reduces taxable income upon which the tax liability is
credits calculated. A credit differs from deduction to the extent that the
 In sum, where a resident alien is subjected to an income tax by his former is subtracted from the tax while the latter is subtracted from
country where he derives no income, he will not be entitled to tax credit. income before the tax is computed.
Tax credits for foreign taxes are allowed only for income derived from
sources within the Philippines. An alien is allowed an alternative under Tax deduction Tax credit
the law so that if he is not entitled to tax credit, he cannot be allowed to Taxes are deducted from the gross
Taxes are deducted from the income
use as deduction the foreign income tax paid from his Philippine gross income in computing the taxable
tax itself
income. income
Merely entitles the establishment or Entitles corporation or establishment

corporation to deduct the cost of the to deduct directly from the income tax o Losses from sales or exchanges of capital assets
discount after arriving at “{gross sales due the cost of the 20% sales discount o Losses resulting from securities becoming worthless, and
– (returns + discounts + allowances + which are capital assets
cost of goods sold)]” o Losses from short sales of property
o Losses due to failure to exercise privileges or options to buy
or sell property
5. Fines and Penalties  Special kinds of losses
o Losses from wash sales of stick or securities
Gutierrez v. Collector o Losses due to voluntary removal or buildings, machinery, etc,
incident to renewal or replacement
o Losses of the useful value of capital assets due to some change
Facts: CIR assessed deficiency income taxes against Gutierrez arising from in business conditions
deductions made by plaintiff, which were disallowed by CIR. o Abandonment losses in petroleum operations
Held: While Section 30 allows business expenses to be deducted, it does not allow
fines and penalties to be deducted. Deductions from gross income are matters of
legislative grace- those not expressly granted by Congress are withheld. Moreover, SEC 24 D (1) NIRC
when acts are condemned by law and their commission is made punishable by fines Losses actually sustained during the taxable year and not compensated for by
of forfeitures, to allow them to deduced from the wrongdoer’s gross income, reduces insurance or other forms of indemnity shall be allowed as deductions:
and defeats the prescribes punishment.  (a) If incurred in trade, profession or business;
 (b) Of property connected with the trade, business or profession, if the loss
NOTE: To be deductible, an expense must be:
arises from fires, storms, shipwreck, or other casualties, or from robbery,
(a) Ordinary and necessary; theft or embezzlement.
(b) Paid or incurred within the taxable year; and In the case of a non-resident alien individual or foreign corporation
(c) Paid or incurred in carrying on a business The losses deductible shall be those actually sustained during the year incurred in
business, trade or exercise of a profession conducted within the Philippines, when
E. LOSSES19 such losses are not compensated for by insurance or other forms of indemnity.
 Losses – an unintentional parting with something of value.

o All losses which are not general or natural to the ordinary RR 12-77
course of business and are not covered under some other Requisites for deductibility of loss (Sir’s notes)
heading such as bad debts, inventory losses, depreciation, etc.  Loss must be that of a taxpayer
 Must be actually sustained and charged off within the taxable year
RR 12-77  Must have been incurred in trade, business or profession
Classification of losses  Must be evidenced by a closed and completed transaction
 Ordinary losses  Must not be compensated for by insurance or other form of indemnity
o Losses incurred in trade, business or profession o The excess of the amo8unt of the insurance procveeds over the net
o Losses incurred of property connected with the trade, book value of te insured assets is not taxable income to the
business or profession, if due to casualty or from robbery, insured if it is used in restoring the lost property (de Leon)
theft or embezzlement  In case of casualty loss, a sworn declaration of the loss must be filed within
 Capital losses 45v days after the date of the occurrence of casualty or robbery, theft, or
embezzlement
 The taxpayer must prove the elements of the loss claimed, such as the
19
(Jamie’s Part) actual nature and concurrence of the event and amount of the loss.

2. COMPLETED TRANSACTIONS
Closed and completed transaction (Sir’s notes from the Alhambra case)
SECTION 96 RR 2
o A loss is actually sustained when it is evidenced by a closed and Losses must usually be evidenced by closed and completed transactions.
completed transaction. There should be an identifiable event  Proper adjustment must be made in each case for expenditures or items of
which justifies the loss. loss properly chargeable to capital account, and for depreciation,
obsolescence, amortization, or depletion.
1. KINDS OF TAXPAYERS AND THEIR LOSSES  The amount of the loss must be reduced by the amount of any insurance or
other compensation received, and by the salvage value, if any, of the
SECTION 93 RR2 property.
Losses by individuals  A loss on the sale of residential property is not deductible unless the
 Losses sustained by individuals during the year not compensated for by property was purchased or constructed by the taxpayer with a view to its
insurance or otherwise are fully deductible (except by non-resident aliens) subsequent sale for pecuniary profit.
o (a) If incurred in a taxpayer's trade; or  No loss is sustained by the transfer of property by gift or death. Losses
o (b) If incurred in any transaction entered into for profits; or sustained in illegal transactions are not deductible.
o (c) Of property not connected with the trade or business if arising
from fires, storm, shipwreck, or other casualty, or from robbery, FERNANDEZ V HERMANOS
theft or embezzlement.
 No loss shall be allowed as a deduction if at the time of filing of the return, F: Fernandez Hermanos Inc. is a domestic corporation organized for the principal
such loss has been claimed as deduction for estate or inheritance tax purpose of engaging in business as an “investment company.” The CIR assessed
purposes in the estate or inheritance tax return. against the taxpayer certain sums as alleged deficiency income taxes and disallowed
the following deductions:
o losses in Mati Lumber Co in 1950
o losses or bad debts in Palawan Manganese Mines Inc in 1951
SECTION 94 RR 2 o losses in Balamban Coal Mines in 1950 and 1951
Losses by domestic corporations o losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954
 May deduct losses actually sustained and charged off within the year
 Not compensated for by insurance or otherwise. ISSUE/HELD :WON the Tax Court's rulings with respect to the disputed items of
disallowances are correct
RATIO:
SECTION 95 RR2
Losses by non-resident alien and foreign corporations  Losses in Mati Lumber - Deductible. These losses represent the shares of
 Allowed only losses sustained in business or trade conducted within the stock petitioner acquired from Mati. These are deductible on the ground
Philippines that the lumber company had ceased operations and became insolvent in
 Losses of property within the Philippines arising from fires, storms, that year. The CIR was incorrect in arguing that since the company still
shipwreck, or other casualty and from robbery, theft, or embezzlement owned a sawmill and some equipment, the shares of stock still had value.
 Losses actually sustained in transactions entered into for profit in the The proper assessment would be to treat as income for the year in which
Philippines, although not connected with their trade or business, not petitioner gets the proceeds from the liquidation of those assets.
compensated by insurance or otherwise.  Losses or bad debts in Palawan Manganese Mines Inc - Not Deductible.
 Not compensated for by insurance or otherwise. These losses represent part of the loans extended by the petitioner to its
100% owned subsidiary. Petitioner cannot properly claim as a loss the

advances given to Palawan in 1951 for that year. There can be no partial o In determinating the amount of the loss, adjustment must be
writing off as a loss or bad debt under the Tax Code. Those losses or bad made, however, for improvements, depreciation and the salvage
debts ascertained within the taxable year are deductible in full or not at all. value of the property.
 Losses in Balamban Coal Mines in 1950 and 1951 – Not Deductible. These o This exception to the rule requiring a sale or other disposition of
losses represent sums spent by the petitioner for the operation of its property in order to establish a loss requires proof of some
Balamban coal mines. The petitioner should have treated them as losses in unforeseen cause by reason of which the property has been
1952 when the mines were abandoned and not in 1950 and 1951 on the prematurely discarded
ground that the mines made no sales of coal during those years.  Proof required to establish loss of useful value
 Losses in Hacienda Dalupiri and Hacienda Samal from 1950-1954 -  An increase in the cost or change in the
Deductible. These losses represent sums spent by petitioner for the manufacture of any product makes it necessary
operation of the 2 haciendas. The farms are not operated solely for to abandon such manufacture, to which special
pleasure or as a hobby and not for profit. It is operated for business, the machinery is exclusively devoted
petitioner may properly deduct the same.  New legislation directly or indirectly makes the
continued profitable use of the property
impossible.
3. SPECIAL RULES ON LOSSES  When not deductible
o Where the useful life of property terminates solely as a result of
a. VOLUNTARY REMOVAL OF BUILDINGS those gradual processes for which depreciation allowance are
authorized.
o Inventories or to other than capital assets.
SECTION 97 RR2  It is deductible to buildings only when they are permanently abandoned or
Voluntary removal of buildings permanently devoted to a radically different use, and to machinery only
 Loss due to the voluntary removal or demolition of old buildings, the when its use as such is permanently abandoned.
scrapping of old machinery, equipment, etc., incident to renewals and o Any loss to be deductible under this exception must be charged off
replacements - deductible from gross income. in the books and fully explained in returns of income
 When a taxpayer buys real estate upon which is located a building, which
he proceeds to raze with a view to erecting thereon another building
o It will be considered that the taxpayer has sustained no deductible c. SHRINKAGE IN VALUE OF STOCKS
expense on account of the cost of such removal, the value of the
real estate, exclusive of old improvements, being presumably SECTION 99 RR2
equal to the purchase price of the land and building plus the cost Shrinkage in value of stocks
of removing the useless building  A person possessing stock of a corporation cannot deduct from gross
income any amount claimed as a loss merely on account of shrinkage in
value of such stock through fluctuation of the market or otherwise.
b. LOSS OF USEFUL VALUE OF ASSETS  The loss allowable in such case is that actually suffered when the stock is
disposed of.
SECTION 98 RR2 o If stock of a corporation becomes worthless, its cost or other basis
Loss of useful value determined in accordance with these regulations may be deducted
 Change in business conditions by the owner in the taxable year in which the stock became
o Through some change in business conditions the usefulness in the worthless, provided a satisfactory showing of its worthlessness be
business of some or all of the capital assets is suddenly terminated made, as in the case of bad debts.
so that the taxpayer discontinues the business or discards such
assets permanently from use of such business he may claim as
deduction the actual loss sustained.

4. WAGERING LOSSES dollar, but which remittance of scheduled amortization consisting of
principal and interests payments on a foreign loan has not actually been
SEC 34 D (6), NIRC made are not deductible from gross income for income tax purposes
Wagering Losses
 Losses from wagering transactions shall be allowed only to the extent of
the gains from such transactions.
RMC 26-86 Interbank Guiding Rate
 Beginning Jan. 1, 1985, the conversion rate to be applied shall be the
5. SUBSTANTIATION OF LOSSES prevailing interbank reference rate for the day of the transaction.
 In the event that the foreign exchange rate as stated in the above paragraph
RR 12-77 (a) is impractical or not feasible, the average interbank reference during
Period for filing loss the year shall apply.
 Within 45 days after the date of the occurrence of casualty or robbery, theft  For the purpose of converting the tax liability in US dollar to Philippine
or embezzlement, a corporation that sustained loss therefrom and intends peso, the prevailing interbank rate at the time of payment shall be applied
to claim the loss as a deduction for the taxable year in which the loss was when paid before the due date of the tax or the prevailing interbank
sustained shall file a sworn declaration of loss with the nearest revenue reference rate at the due date of tax when paid on or after the due date of
district officer. the tax.
 When currency involved is other than US dollar, the foreign currency shall
first be converted to US dollar at the prevailing exchange rates between the
two currencies.
6. FOREIGN EXCHANGE LOSSES  This circular does not apply to transaction covered by RMC 30-84
regarding the imposition of additional 1% gross receipt tax on buying and
BIR RULING 144-85 selling of foreign exchange of peso by bank, non-bank financial
 Annual increase in value of an asset is not taxable income because such intermediaries and other authorized foreign exchange dealers or agents
increase has not yet been realized. and RMC 32-84 in determining the cost basis of certain commodities
o The increase in value, i.e., the gain, could only be taxed when a imported beginning Jan. 1, 1984, the value and prices thereof are quoted in
disposition of the property occurred which was of such a nature as foreign currency.
to constitute a realization of such gain, that is, a severance of the
gain from the original capital invested in the property.
o The same conclusion obtains as to losses.
 The annual decrease in the value of property is not 7. ABANDONMENT LOSSES
normally allowable as a loss. Hence, to be allowable the
loss must be realized. SEC 34 D (7), NIRC
 When foreign currency acquired in connection with a transaction in the Abandonment Losses
regular course of business is disposed of ordinary gain or loss results from  In the event a contract area where petroleum operations are undertaken is
the fluctuations. partially or wholly abandoned
 The loss is deductible only for the year it is actually sustained. It is o All accumulated exploration and development expenditures
sustained during the year in which the loss occurs as evidenced by closed pertaining thereto shall be allowed as a deduction
and completed transaction and as fixed by identifiable events occurring in o Accumulated expenditures incurred in that area prior to January
that year. 1, 1979 shall be allowed as a deduction only from any income
 A closed transaction is a taxable event which has been consummated. derived from the same contract area.
 No taxable event has as yet been consummated prior to the remittance of o In all cases, notices of abandonment shall be filed with the
the scheduled amortization. Accordingly, foreign exchange losses sustained Commissioner.
as a result of devaluation of the peso vis-a-vis the foreign currency e.g., US  In case a producing well is subsequently abandoned, the unamortized costs

thereof, as well as the undepreciated costs of equipment directly used  The cost of any feed, pasturage, or care which has been deducted as an
therein expense of operation shall not be included as part of the cost of the stock
o Allowed as a deduction in the year such well, equipment or facility for the purpose of ascertaining the amount of a deductible loss.
is abandoned by the contractor Where inventories are used
o If such abandoned well is reentered and production is resumed, or  If gross income is ascertained by inventories, no deduction can be made for
if such equipment or facility is restored into service, the said costs livestock or products lost during the year, whether purchased for resale,
shall be included as part of gross income in the year of resumption produced on the farm, as such losses will be reflected in the inventory by
or restoration and shall be amortized or depreciated, as the case reducing the amount of livestock or products on hand at the close of the
may be. year.
If an individual owns and operates a farm, in addition to being engaged in another
trade, business or calling, and sustains a loss from such operation of the farm, then
the amount of loss sustained may be deducted from gross income received from
LOSSES IN FARMING OPERATIONS all sources, provided the farm is not operated for recreation or pleasure.
SEC 100 RR2 8. NOLCO

General rule: Losses incurred in the operation of farms as business enterprises are
deductible from gross income. SEC 34 D 3, NIRC (VIS-À-VIS RR 14-2001)
Shrinkage Net Operating Loss Carry-Over
 If farm products are held for favorable markets, no deduction on account of
shrinkage in weight or physical value or by deterioration in storage shall be  The net operating loss of the business or enterprise for any taxable
allowed, except as such shrinkage may be reflected in an inventory if used year immediately preceding the current taxable year, which had not
to determine profits. been previously offset as deduction from gross income shall be carried
Loss by storm, etc. over as a deduction from gross income for the next three (3)
 The total loss by storm, flood, or fire of a prospective crop is not a consecutive taxable years immediately following the year of such loss
deductible loss in computing net income.  Any net loss incurred in a taxable year during which the taxpayer was
Value of animals that perish exempt from income tax shall not be allowed as a deduction under this
 A farmer engaged in raising and selling stock, cattle, sheep, horses, etc., is Subsection
not entitled to claim as a loss the value of animals that perish from among  A net operating loss carry-over shall be allowed only if there has been
those animals that were raised on the farm, except as such loss is reflected no substantial change in the ownership of the business or enterprise in
in an inventory if used. that
Livestock purchased
 If livestock has been purchased after March 1, 1913, for any purpose, and
afterwards dies from disease, exposure, or injury, or is killed by order of (i) Not less than seventy-five percent (75%) in nominal value of
the authorities, the actual purchase price of such stock, less any outstanding issued shares., if the business is in the name of a
depreciation allowable as a deduction in computing net income, with corporation, is held by or on behalf of the same persons; or
respect to such perished, livestock, and also any insurance or indemnity (ii) Not less than seventy-five percent (75%) of the paid up capital of
recovered, may be deducted as a loss. the corporation, if the business is in the name of a corporation, is held
Cost of other property by or on behalf of the same persons.
 The actual cost of other property (with proper adjustment for
depreciation), which is destroyed by order of the authorities, may in like Definition of 'net operating loss' - the excess of allowable deduction over gross
manner be claimed as a loss; but if reimbursement is made in whole or in income of the business in a taxable year.
part on account of stock killed or property destroyed, the amount received
shall be reported as income for the year in which reimbursement is made. For mines other than oil and gas wells, a net operating loss without the benefit of
Cost of feed, etc. incentives provided for under Executive Order No. 226, as amended, otherwise

known as the Omnibus Investments Code of 1987, incurred in any of the first ten 1. Requirement for Deductibility
(10) years of operation may be carried over as a deduction from taxable income for
the next five (5) years immediately following the year of such loss. The entire CIR v. Goodrich (1967)
amount of the loss shall be carried over to the first of the five (5) taxable years
following the loss, and any portion of such loss which exceeds, the taxable income of F: CIR made an assessment for deficiency income taxes of Goodrich International
such first year shall be deducted in like manner form the taxable income of the next Rubber Company for 1951 and 1952. The assessments consist of 14k for bad debts
remaining four (4) years. allegedly incurred in 1951 and 8k for representation expenses allegedly expended
in 1952. The CTA set aside the assessments, hence, this appeal.
a. THREE YEAR PERIOD
H: Out of the 18 accounts considered by Goodrich as bad debts, 10 were disallowed
b. NO SUBSTANTIAL CHANGE IN OWNERSHIP 75% RULE and 8 were allowed.
For a bad debt to be deducted, it must be actually ascertained to be

worthless within the taxable year. To determine whether a debt has become
SEC 34 D (3), NIRC
worthless, two facts must be proved:
A net operating loss carry-over shall be allowed only if there has been no substantial
change in the ownership of the business or enterprise in that (1) The taxpayer did in fact ascertain the debt to be worthless in the year
for which the deduction is sought and
 (i) Not less than seventy-five percent (75%) in nominal value of (2) That in so doing, he acted in good faith (i.e. he reasonable investigated
outstanding issued shares., if the business is in the name of a corporation, is the relevant facts and had drawn a reasonable inference from the
held by or on behalf of the same persons; or information obtained by him.
 (ii) Not less than seventy-five percent (75%) of the paid up capital of the IN THIS CASE, some debts are not worthless, in some accounts, only a letter
corporation, if the business is in the name of a corporation, is held by or on of demand was sent or it was not ascertained if there are other properties that can
behalf of the same persons. be levied upon in case of a collection suit.
But some accounts are allowed to be deducted. In one account, the counsel of
G found that there is no property of the debtor that can be attached. In 4 accounts,
F. BAD DEBTS20 the debts involved are of smaller amounts and continuous failure to pay despite
numerous demands show inability to pay. In another 3 accounts, despite
What is a Bad Debt: bombardment of letter of demands (17 letters etc), the debtors failed to pay.
Sec. 34 (E)(1) of the NIRC: Sir: there must be a judicial demand for the debt up to execution which must be
Bad debts are debts due to the taxpayer which are: returned unsatisfied. However, in Goodrich, the court was liberal in allowing the
debts because of the immateriality of amounts, a bankrupt debtor or various
demands. This is the most abused deduction.
As provided by RR5-99, Sec. 2:
Bad debts are those resulting from the worthlessness or uncollectivity, in whole or RR 5-99
in part, of amounts due the taxpayer by others, arising from money lent or from Requisites for Deductibility (RR5-99):
uncollectible amounts of income from goods sold or services rendered. (a) There must be an existing indebtedness due to the taxpayer that is valid
and demandable
(b) The same must be connected with the taxpayer’s trade, business and
practice of profession
(c) It must not be entered into by related parties in Sec 36B
20
(Cielo’s Part) (d) It must be actually charged off the books of accounts of the taxpayer as of
the end of the taxable year
(e) It must be actually ascertained to be worthless 3. Bad debts between related parties (Sec36B)
(a) Between members of a family
(b) Between and individual and corporation, wherein more than 50% in
value of the outstanding stock is owned by the individual
2. Tax Benefit Rule (c) Between two corporations, wherein more than 50% in value of the
Basis: Recovery of bad debts previously allowed as deduction in the preceding years outstanding stock is owned by the individual
shall be considered part of the gross income in the year of recovery to the extent of (d) Between grantor and fiduciary of any trust
the income tax benefit of said deduction. (Sec 34E1) (e) Between fiduciaries of two different trust if the same person is the
grantor of both
Situations (Sec4, RR5-99): (f) Between fiduciary and beneficiary of the same trust
A. TAX BENEFIT: If in the year the taxpayer claimed deduction of bad

debts written of, he realized a reduction in his income tax due to the 4. Requirements for Deductibility including Banks (RR 5-99, Sec3)
deduction, subsequent recovery thereof from his debtor shall be - In case of banks, the BSP, thru its Monetary Board, shall ascertain the
treated as a receipt of realized taxable income. wortlessness and uncollectibility of bad debts AND it shall approve the
writing off of the said indebtedness from the banks’ books of accounts at
the end of the taxabe year
Example: - A receivable from an insurance or surety company cannot be written off
2009: Taxable income before bad debt  100k from the taxpayer’s books and claimed as bad debts unless the company
Bad debts written off  170k has been declared closed due to insolvency or any similar reason by the
Tax benefit for 2009  100k Insurance Commissioner.
2010: Bad debt recovered  130k

Bad debt to be included in income 130k
Tax benefit written off in 2009 100k
Non-taxable bad debt recovery  30k
Taxable bad debt recovered  100k (the tax benefit in 2009)
Sir changed the facts: what if you recovered the 170k, then payment of
130k was made later  what you should report is the entire 130k! 5. Debt or Equity?
Philex Mining v. CIR (2008)
B. NO TAX BENEFIT: If the taxpayer did not benefit from the deduction of NB: Partnership case!
the benefit because it did not result in any deduction (i.e. operating at a
loss), subsequent recovery shall be treated as mere return of capital F: Philex Mining entered into an agreement with Baguio Gold Mining Company
which is not a realized income. denominated as “Power of Attorney”. Among the terms of the agreement is that
Example: The 10k bad debt was written off together with other expenses, Philex will be the Manager of the mining project, that Philex may infuse capital and
all deductions amount to 50k but the income is only 40k so that the net loss property to the project, and that Philex as manager will be entitled to 50% of the net
is 10k. When the 10k is recovered, it is a mere return of capital and not profit. The project incurred losses. For its annual income tax return, Philex deducted
taxable. an amount of 112M as loss on settlement of receivables from Baguio Gold or bad
debts. BIR disallowed the deduction.
C. If the bad debt was disallowed, subsequent collection will NOT BE
TAXABLE. H: Deductions are disallowed  those are not debts but equity.

The Court interpreted the “Power of Attorney” to be a partnership between 2. In respect to properties NOT used directly in production of
the parties. The cash and property advanced by Philex to the operation are actually petroleum shall be depreciated under the straight line method on
part of its share in the common fund of the partnership and not in the nature of a the basis of an estimated useful life of 5 years.
loan for which Philex was expecting an unconditional return. Those funds are
actually investment of Philex to the project. (c) Depreciation of properties used in mining operations: In respect of all
properties used in mining, other than petroleum operations shall be
computed as follows:
1. At the normal rate of depreciation if the expected life is 10 years
G. DEPRECIATION OR
2. Depreciated over any number of years between 5 years and the
What is Depreciation? expected life if the latter is more than 10 years and the
depreciation thereon is allowed as deduction from taxable income.
It is the gradual diminution in the useful value of tangible property used in trade or
The contractor shall notify the CIR at the beginning of the
business resulting from the exhaustion, wear and tear and normal obsolescence. The
depreciation period which allowable depreciation rate will be
term is also applied to the amortization of the value of intangible assets the use of
used.
which in the trade or business is definitely limited in duration.
Ratio for this deduction: REPLACEMENT (2) Non-resident aliens engaged in trade or business and resident-foreign
corporations
Summary of Sec. 34 (F)(1,4,5,6): Depreciation: - A reasonable allowance for the deterioration of property arising out of its
use or employment or its non-use in the business, trade, or profession
conducted by them in the Philippines shall be permitted only when such
Persons entitled to depreciation allowance:
property is located within the Philippines.
(1) Resident citizens and resident aliens – there shall be allowed as a
deduction, a reasonable allowance for the exhaustion and wear and tear
(including for obsolescence) of property used in trade and business.
(a) In general
1. Depreciation Base
1. If the taxpayer OWNS the property and has a capital investment
therein, he may claim depreciation.
Zamora v. CIR (1963)
2. If the property is held by one person FOR LIFE with remainder to
another person, the deduction shall be computed as if the life F: CIR disallowed the 3.5% rate of depreciation claimed by Mariano Zamora of the
tenant is the absolute owner of the property. Bay View Hotel Building. The CIR and the CTA granted only 2.5% as rate using the
3. If the property is HELD IN TRUST, the deduction shall be so-called Bulletin F, a publication on depreciation of the US Federal Internal
apportioned between the income beneficiaries and the trustee in Revenue Service. Zamora claims that the rate he used was based on three factors:
accordance with the trust, or, in the absence of the trust
agreement, on the basis of the trust income allowable to each. (a) The property is in the Ermita District that is now becoming a
commercial district
(b) Depreciation of properties used in petroleum services: (b) There is no room for improvement
1. In respect to all properties directly related to production of (c) The changing modes of architecture, styles of furniture and decorative
petroleum initially placed in service in taxable year under the designs
straight line or double declining balance method of depreciation H: 2.5% rate affirmed
(at the option of the contractor). If the double declining is chosen,
it may be changed to straight line at a subsequent date. NOTE: the Those factors are already considered in the 2.5% rate. As regards the
usual life of these properties shall be ten years or such shorter life Bulletin F, the Court admitted that it has no binding force but it has a strong
as may be permitted by the CIR.

persuasive effect considering that it was based on scientific studies and observation 10,000 (less scrap value)/5years = 2,000 per year is the annual depreciation
for a long period in the US after whose Income Tax law ours is patterned.
2. Methods of Depreciation
It must be based on a REASONABLE ALLOWANCE: B. Declining balance method – this method uses a rate (usually 1.5 or 2 times
the straight linerate) to the declining book value of the asset
- It shall include, but not limited to, an allowance computed in accordance - The rate that may be used is 20% which is double declining; 10% may also
with rules and regulations prescribed by the SoFinance, upon the be used as ordinary declining
recommendation of the CIR based on the methods to be discussed infra
- The taxpayer and the CIR may enter into an agreement in writing
specifically dealing with the useful life and rate of depreciation of any Formula: Depreciation Rate is
property (based on the rules prescribed by the SoFinance) this will be
binding upon the taxpayer and the national government UNLESS there are 1 x 2 (or1.5)
facts and circumstances not taken into consideration when the agreement
was forged. The burden of proving such facts and circumstances shall rest Estimated Useful Life
upon the property who wants to modify the useful life or rate.
- PVD: the taxpayer can adopt its own useful life and depreciation rate on Formula for the Depreciation expense:
any depreciable asset  if there is no written objection on the part of the
CIR, such will be binding! Book value x Rate = Depreciation expense
Methods:
A. Straight-line method – the total depreciation is spread over the useful life
of the asset Illustration: A machine costing 10k is to be depreciated for 5 years, compute the
- Salvage value is the value of the property at the end of its useful life  depreciation expense:
usually 10% of the value is used
- How do you determine the useful life  the number of years when you can Rate: 1 = 10%
use the property. BIR used the Bulletin F as reference for useful life (see
Annex A of RR19-86 for the listings). Other list which you can use is ADR or 10
Asset Depreciation Rates.
Formula: Annual Depreciation is Year Computation Accumulated Book Value

Depreciation Depreciation
Cost (or other basis) - Scrap value (if any) 1
2
Estimated Useful Life 3
4
5
*This table serves as an exercise 
C. Sum of the Year Digits Method

Illustration:
A machine amounting to 10k has an estimated useful life of 5 years with no Formula: Annual Depreciation Rate is
salvage value at the end of 5 years.
E. Unit of Production method
Remaining useful life
X Depreciable Cost
Sum of the years [n(n+1)]/2 Sir: What methods do you advise?
(1) In case of higher return business  SYD will give the highest amount during
the first year
Illustration: (2) If the corp is at a loss  use straight line because the amount at first years
would be smaller
A machine costing 10k is to be depreciated for 5 years, salvage value is 1000 (or
10% of the cost) compute the depreciation expense:
3. Depreciation rates
RUL / [5(6)/2] RUL / 15 A. Bulletin F – but this was made in the 40s (discussed in the case of
Zamora)
Year Rate Remaining Book Depreciation Remaining B. Annex A of RR 19-86
Value Expense Book value C. Asset Depreciation Rate
for ff year
1 5/15 9000 (10k less 3000 (5/15 6,000
salvage value of multiplied to 4. Limitations on depreciation deduction on motor vehicles not exceeding
1000) 9k) 2.4Million
2 4/15 6000 1,600 4,400 Rules on depreciation:
3 3/15 4,400 880 3520
4 2/15 3520 469.3 3050 (a) Only one vehicle for land is allowed for the use of an official or
employee, the value of which should not exceed 2,400,000
5 1/15
(b) No depreciation shall be allowed for yachts, helicopters, airplanes and
other land or aircrafts which exceed 2.4M
Other method that you can use: Effect: some companies just lease and claim rental expenses
D. Working Hours Method – the total working hours of the machine until its
retirement is estimanted and a charge per hour is determined under the
following formulas:
H. DEPLETION21
Formula: Depreciation Charge per hour is
(Sec 34 NIRC (G)) Depletion of Oil and Gas Wells and Mines
Cost (or other basis)
(1) In General. - a reasonable allowance for depletion or amortization computed in
Less scrap value (if any)
accordance with the cost-depletion method
Estimated Useful Life in hours  When the allowance for depletion shall equal the capital invested no
further allowance shall be granted
Formula for the Annual Depreciation:  After production in commercial quantities has commenced, intangible
exploration and development drilling costs:
No of hours asset was used X Depreciation charge per hour
21
Kaye’s Part
(a) For non-producing wells and/or mines: deductible in the year o 'Exploration expenditures' – expenditures paid or incurred for the
incurred purpose of ascertaining the existence, location, extent or quality of
(b) For producing wells and/or mines (at the election of the any deposit of ore or other mineral, and paid or incurred before
taxpayer): the beginning of the development stage of the mine or deposit.
o 'Development expenditures' – expenditures paid or incurred
i. shall be deductible in full in the year paid or incurred;
during the development stage of the mine or other natural
OR
deposits. The development stage of a mine or other natural
ii. may be capitalized and amortized deposit shall begin at the time when deposits of ore or other
 'Intangible costs in petroleum operations' – any cost incurred in petroleum minerals are shown to exist in sufficient commercial quantity and
operations which in itself has: quality and shall end upon commencement of actual commercial
o No salvage value AND extraction.
o Incidental to and necessary for the drilling of wells and (3) Depletion of Oil and Gas Wells and Mines Deductible by a Nonresident Alien
preparation of wells for the production of petroleum individual or Foreign Corporation
o Note: Costs that pertain to the acquisition or improvement of
 Allowance for depletion of oil and gas wells or mines under paragraph 1
property of a character subject to the allowance for depreciation
shall be authorized only in respect to oil and gas wells or mines located
are not included.
Any intangible exploration, drilling and development expenses allowed as a
deduction in computing taxable income during the year shall not be taken into
consideration in computing the adjusted cost basis for the purpose of computing
allowable cost depletion. I. PENSION TRUST
(2) Election to Deduct Exploration and Development Expenditures (RR-2, Sec 118) Payments to employees' pension trusts.
 The taxpayer may at his option deduct exploration and development An employer who adopts or has adopted a reasonable pension plan, actuarially
expenditures accumulated as cost or adjusted basis for cost depletion as of sound, and who establishes, or has established, and maintains a pension trust for
date of prospecting, as well as exploration and development expenditures the payment of reasonable pensions to his employees shall be allowed to deduct
paid or incurred during the taxable year amount deductible shall not from gross income reasonable amounts paid to such trust:
exceed twenty-five percent (25%) of the net income from mining (a) If the plan contemplates the payment to the trust, in advance of the time
operations computed without the benefit of any tax incentives under when pensions are granted, of amounts to provide for future pensions payments,
existing laws. then (1) reasonable amounts paid to the trust during the taxable year
o The election by the taxpayer to deduct the exploration and representing the pension liability applicable to such year, determined in
development expenditures is irrevocable and shall be binding in accordance with the plan, shall be allowed as a deduction for such year as an
succeeding taxable years. ordinary and necessary business expense, and in addition (2) one-tenth of a
o The actual exploration and development expenditures minus reasonable amount transferred or paid to the trust during the taxable year to
twenty-five percent (25%) of the net income from mining shall be cover in whole or in part the pension liability applicable to the years prior to the
carried forward to the succeeding years until fully deducted. taxable year, or so transferred or paid to place the trust on a sound financial basis,
 'Net income from mining operations' – gross income from operations less shall be allowed as a deduction for the taxable year and for each of the nine
'allowable deductions' which are necessary or related to mining operations. succeeding taxable years.
 'Allowable deductions' – shall include:
o mining, milling and marketing expenses (b) If the plan does not contemplate the payment to the trust, in advance of the
o depreciation of properties directly used in the mining operations time when pensions are granted, of amounts to provide for future pension
payments, then (1) reasonable amounts paid to the trust during the taxable year
(but not to expenditures for the acquisition or improvement of
property which is subject to an allowance for depreciation) representing the present value of the expected future payments in respect of
pensions granted to employees retired during the taxable year shall be allowed as
 In no case shall this deduction apply with respect to amounts paid or
deduction for such year as an ordinary and necessary business expense, and in
incurred for the exploration and development of oil and gas.

addition (2) one tenth of a reasonable amount transferred or paid to the trust
during the taxable year to cover in whole or in part the present value of the The Contributor shall retain the ownership, whether legal or beneficial, of funds
expected future payments in respect of pensions granted to employees retired placed therein, including all earnings of such funds.
prior to the taxable year, or so transferred or paid to place the trust on a sound
financial basis, shall be allowed as a deduction for the taxable year and for each of
the nine succeeding taxable years. The maximum allowed contribution to the pension plan is Php 100,000 per year
(except for OFWs – Php 200,000)
Section 8 – The contributor shall be given an income tax credit equivalent to 5% of
 The law allows for a deduction as an incentive to the employer for setting
the total contribution (only an tax credit on income tax never a tax refund)
up the pension plan.
 If the contributor is an OFW, he shall be entitled to claim a tax credit from
Requisites for deductibility:
any tax payable to the government.
1. Employer must have established a pension plan.
All income from investments and reinvestments of the fund is tax exempt.
2. Pension plan must be reasonable and actuarially sound.
3. It must be funded by the employer.
4. Amount contributed by employer must no longer be subject to his control. J. CHARITABLE AND OTHER CONTRIBUTIONS
5. Payment has not been allowable as a deduction in previous years.
(NIRC Sec 34 (H))
Only contributions actually paid during the year shall be deductible. A promise to
contribute cannot be considered for tax purposes.
(RR 5-76, April 12, 1976) Two kinds of deductions for the Employer Contributions Deductible in Full
An employer establishing or maintaining a pension trust for the payment of (a) Donations to the Government. - Donations to the Government of the Philippines
reasonable pensions to his employees, may deduct from his gross income: or to any of its agencies or political subdivisions, including fully-owned government
 Normal Cost: Contributions to such trust during the taxable year corporations, exclusively to finance, to provide for, or to be used in undertaking
representing the liability accruing during the year; and priority activities in:
 Past service cost: One tenth (1/10) of a reasonable amount paid to the trust  education
during the taxable year covering the pension liability applicable to the  health
years prior to the taxable year (if not theretofore allowed as deduction) in  youth and sports development
excess of such contributions.  human settlements
Sir says: It is better to elect the normal cost deduction because the deduction is  science and culture
made in the same year as the actual outlay as against the past service cost  economic development according to a National Priority Plan determined
deduction which allocates the deduction to future periods when in fact the outlay NEDA
was made in the current year. (I’m not sure kung tama si Sir because what I know (b) Donations to Certain Foreign Institutions or International Organizations. -
is that the Normal cost and Past Service cost are both deductible and the taxpayer donations to foreign institutions or international organizations which are fully
does not actually make a choice, the deduction is computed for by an actuary. In deductible in pursuance of or in compliance with agreements, treaties, or
short, nakaschedulenayungbabayaran every year which includes both normal and commitments entered into by the Government of the Philippines and the foreign
past service cost.) institutions or international organizations or in pursuance of special laws;
(c) Donations to Accredited Nongovernment Organizations
(RA 9605) Personal Equity and Retirement Fund Act of 2008 (as implemented o 'Nongovernment organization' means a non profit domestic corporation:  
by RR 17-2011)
(1) Organized and operated exclusively for (no part of the net income of
"Personal Equity and Retirement Account (PERA)" – voluntary retirement account which inures to the benefit of any private individual):
established by and for the exclusive use and benefit of the Contributor for the
purpose of being invested solely in PERA investment products in the Philippines. o scientific

o research Those made to:
o educational  the Government of the Philippines or any of its agencies or any political
o character-building and youth and sports development subdivision thereof exclusively for public purposes
o health  to accredited domestic corporation or associations organized and operated
o social welfare exclusively for:
o cultural or charitable purposes, or a combination thereof o religious
(2) Which, not later than the 15th day of the third month after the close of o charitable
the accredited nongovernment organizations taxable year in which o scientific, youth and sports development
contributions are received, makes utilization directly for the active conduct o cultural or educational purposes
of the activities constituting the purpose or function for which it is organized o the rehabilitation of veterans
and operated.  to social welfare institutions, or to non-government organizations no part
‘Utilitzation’ means: of the net income of which inures to the benefit of any private stockholder
(i) Any amount in cash or in kind (including or individual
administrative expenses) paid or utilized to accomplish LIMITS:
one or more purposes for which the accredited a. INDIVIDUAL: Not in excess of ten percent (10%) of the taxpayer's taxable
nongovernment organization was created or organized. income derived from trade, business or profession before deduction for
(ii) Any amount paid to acquire an asset used (or held for contributions
use) directly in carrying out one or more purposes for b. CORPORATION: Not in excess of five percent (5%) of the taxpayer's taxable
which the accredited nongovernment organization was income derived from trade, business or profession as computed before
created or organized. deduction for contributions
An amount set aside for a specific project which comes Valuation – The amount of any charitable contribution of property other than
within one or more purposes of the accredited money shall be based on the acquisition cost of said property.
nongovernment organization may be treated as a Proof of Deductions – Contributions or gifts shall be allowable as deductions only if
utilization, but only if at the time such amount is set verified under the rules and regulations prescribed by the Secretary of Finance,
aside, the accredited nongovernment organization has upon recommendation of the Commissioner.
established to the satisfaction of the Commissioner that
the amount will be paid for the specific project within a
period to be prescribed in rules and regulations to be
promulgated by the Secretary of Finance, upon K. RESEARCH AND DEVELOPMENT EXPENSES
recommendation of the Commissioner, but not to exceed (Sec 34, (I) NIRC)
five (5) years, and the project is one which can be better
accomplished by setting aside such amount than by Two treatments of R&D expenses:
immediate payment of funds. 1. A taxpayer may treat R&D expenditures which are paid or incurred by him
(3) The level of administrative expense of which shall, on an annual basis, during the taxable year in connection with his trade, business or profession
in no case to exceed thirty percent (30%) of the total expenses; and as an ordinary and necessary expense which are not chargeable to a capital
account. Expenditures so treated shall be allowed as deduction during the
(4) The assets of which, in the event of dissolution, would be distributed to
taxable year when paid or incurred.
another nonprofit domestic corporation organized for similar purpose or
2. Deferred expenses:
purposes, or to the state for public purpose, or would be distributed by a
a) Paid or incurred in connection with the trade, business or
court to another organization to be used in such manner as in the judgment
profession
of said court shall best accomplish the general purpose for which the
b) Not treated as an outright expense; and
dissolved organization was organized.
c) Chargeable to capital account but not chargeable to property of a
Contributions deductible but subject to limitations character which is subject to depreciation or depletion.
 Such deferred expenses shall be allowed a deduction ratably distributed the failure to withhold
over a period of not less than 60 months (beginning from the year the  No withholding of creditable or final tax was made and the recipient-payee
taxpayer realizes the benefits from the expenditure). failed to report the income on due date thereof, but the withholding agent
NOT R&D EXPENSES pays during the original audit and investigation the amount supposed to
have been withheld, inclusive of surcharges, interest and penalties incident
a) Expenditure for the acquisition or improvement of land or of property to his failure to withhold
subject to depreciation or depletion; and  The withholding agent erroneously underwithheld the tax but pays during
Any expenditure paid or incurred for the purpose of ascertaining the existence, the original audit and investigation the difference in the amount supposed
location, extent, or quality of any deposit of ore or other mineral, including oil or to have been withheld, inclusive of surcharges, interest and penalties to
gas. such error
L. IMPOSITION OF CEILINGS ON DEDUCTIONS BY THE SECRETARY OF FINANCE

The Secretary of Finance, upon recommendation of the Commissioner, after a public N. ITEMS NOT DEDUCTIBLE
hearing shall have been held for this purpose, may prescribe by rules and
regulations, limitations or ceilings for any of the itemized deductions. (Sec 36 NIRC)
 For purposes of determining the ceilings or limitations, the Secretary of No deduction for any of the following:
Finance shall consider the following factors: a) Personal, living or family expenses
a) Adequacy of the prescribed limits on actual expenditure b) Any amount paid out for new buildings or for permanent improvements, or
requirements of each particular industry betterments made to increase the value of any property or estate (except
b) Effects of inflation on expenditure levels for intangible drilling and development costs incurred in petroleum
 No ceilings shall further be imposed on items of expense already subject to operations which deductible)
ceilings under the present law. c) Any amount expended in restoring property or in making good the
exhaustion thereof for which an allowance is or has been made
M. ADDITIONAL REQUIREMENT FOR DEDUCTIBILITY d) Premiums paid on any life insurance policy covering the life of any officer
or employee, or of any person financially interested in any trade or
(Sec 34 (K) NIRC) business carried on the taxpayer, individual or corporate, when the
Any amount paid or payable which is otherwise deductible from, or taken into taxpayer directly or indirectly a beneficiary under such policy.
account in computing for gross income or for which depreciation or amortization e) Losses from Sales or Exchanges of Property
may be allowed, shall be allowed as deduction only if it is shown that the tax 1. Between members of a family (family – siblings whether whole or
required to be deducted and withheld therefrom has been paid to the BIR. half blood, spouse, ancestors and lineal descendants)
2. Except in liquidation, between an individual and corporation more
than 50% of the outstanding stock of which is owned, directly or
indirectly, by or for such individual
RMO 38-83: GUIDELINES TO BE OBSERVED BY REVENUE OFFICERS FOR 3. Except in liquidation, between 2 corporations more than 50% in
ALLOWING OR DISALLOWING ITEMS OF DEDUCTIONS value of the outstanding stock of which is owned, directly or
An account claimed as deduction on which a tax is supposed to have been indirectly, by or for the same individual if either one of such
withheld under Sections 54 and 93 shall be allowed if in the course of his audit corporations, with respect to the taxable year of the corporation
and/or investigation, the examiner discovers that: preceding the date of such taxable year, a personal holding
company or a foreign personal holding company
 No withholding of creditable or final tax was made but the payee reported 4. Between the grantor and fiduciary of any trust
the income and the withholding agent/taxpayer pays during the original 5. Between the grantor and a fiduciary of a trust and fiduciary of
audit and investigation the surcharges, interest and penalties incident to
another trust if the same person is a grantor with respect to each
trust
Between a fiduciary of a trust and beneficiary of such trust
ATLAS CONSOLIDATED vs CIR (January 27, 1981)

F: Atlas paid for the services rendered by a public relations firm P.K. MacKer & Co. In
its tax return, it claimed as deduction as a business expense said payment labeled as
stockholders relation service fee. CIR disallowed the deduction and assessed the
company for deficiency taxes.
H: They were capital expenditures and thus not deductible as expense outright.
There is no hard and fast rule whether the case meets the requirement for
deductibility. The right to deduction depends in each case on particular facts and the
relation of the payment to the type of business in which the taxpayer is engaged.
TEST FOR DEDUCTIBILITY:
1. The expense must be ordinary and necessary
2. It must be paid or incurred within the taxable years
3. It must be paid or incurred in carrying the trade or business
In this case, the expense cannot be considered as an ordinary expense. The expense
was intended to promote and protect the reputation of the company since it was
doing a public offer. Efforts to establish reputation are akin to acquisition of capital
assets and, therefore, expenses related thereto are not business expense deductible
outright.
Sir Says: The expense in this case is akin to expenditure for goodwill which is not
amortizable. (Querendum) How then can the company recover the expense? (I tried
to research on this and I found that the company can annually test the goodwill for
impairment. If the reputation has been tarnished, goodwill will probably be
impaired and the impairment is deductible as an expense for both financial
accounting and taxation purposes.)

PART VI  Property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business
SALE OR EXCHANGE OF PROPERTY22  Property used in trade or business of a character which is subject to the
 Sale or exchange must be consummated not just perfected to have tax allowance for deprciation provided in Sec. 34 (F)
consequences  Real property used in trade or business of taxpayer
 Sale/exchange = when there is and effective and actual transfer of ownerhsip
of the property to another as would divest the transferor of the benefits Guidelines in Determining whether a real property is capital or ordinary asset
accruing from the ownership of the peroperty, for a valuable consideration (RR 7-2003, December 27, 2002)
 Importance = if there is a gain, you will be taxed. If there is loss, it may be Taxpayer engaged in real estate business - refer collectively to real estate dealers,
real estate developers, and/or real estate lessors. A taxpayer whose primary
deductible
purpose of engaging in business, or whose Articles of Incorporation states that its
 Gain of property is small or when sale results to a loss = best character is primary purpose is to engage in the real estate business.
ordinary asset because the cost or adjusted basis of the asset is deducted Definition Guidelines
from the gross selling price and only gain is taxed (graduated rate if Real Any person engaged in: All real properties acquired by
individual, 30% if corporate). Loss may be deducted from gross income for Estate  the business of buying and the real estate dealer shall be
next 3 suceeding taxable years Dealer selling or exchanging real considered as ordinary assets.
 Gain from sale or transfer is big, best to transfer as capital asset because properties
 on his own account as a
preferential tax rates are applied on gross selling price or fair market value,
principal
whichever is higher
 holding himself out as a full
or part-time dealer in real
A. CAPITAL ASSETS (Sections 39, 132-155, RR-2) estate
1. Definition of Capital Assets Real Any person engaged in: The ff. are considered
Sec. 39. Capital assets Estate  the business of developing ordinary assets:
The term 'capital assets' means property held by the taxpayer (whether or not Developer real properties into either: 1. All real properties acquired
connected with his trade or business), but does not include stock in trade of the  Subdivisions by the real estate developer
taxpayer or other property of a kind which would properly be included in the  Building houses on  whether developed or
inventory of the taxpayer if on hand at the close of the taxable year, or property held subdivided lots undeveloped as of the time of
by the taxpayer primarily for sale to customers in the ordinary course of his trade or  Constructing residential, acquisition
business, or property used in the trade or business, of a character which is subject to commercial units, 2. All real properties which are
the allowance for depreciation provided in Subsection (F) of Section 34; or real townhouses and other held by the real estate
property used in trade or business of the taxpayer. similar units developer primarily for sale or
 Capital assets  for his own account and for lease to customers in the
offering them for sale or ordinary course of his trade or
o GENERAL RULE: Property held by taxpayer, whether or not connected with
lease. business
his trade or business 3. All properties which would
o EXCEPTIONS: ORDINARY ASSETS properly be included in the
 Stock in trade of the taxpayer inventory of the taxpayer if on
 Other property which would be included in the inventory of the hand at the close of the taxable
taxpayer if on hand at the close of the taxable year year
4. All real properties used in the
trade or business
22
Kimmie’s Part  in the form of land,
building, or other 2. Depreciable asset even if fully
improvements depreciated or depreciation was not
Real Any person engaged in: The ff. are considered accounted for during the period of
Estate  the business of leasing or ordinary assets: ownership
Lessor renting real properties 1. All real properties of the 3. Monetary consideration or the
 on his own account as a real estate lessor whether presence or absence of profit in the
principal land and/or improvements, operation of the property is not
 holding himself out as lessor which are significant in the characterization of
of real properties being  for lease/rent the property. So long as the property
rented out or offered for rent  being offered for lease/rent is or has been used for business
 otherwise for use or being purposes, whether for the benefit of
used in the trade or the owner or any of its members or
business stockholders
Taxpayer  Registered with the HLURB  All real properties acquired The ff. are capital assets:
habitually or HUDCC as a real estate in the course of trade or 1. Real property used by an exempt
engaged in dealer or developer business = ordinary assets. corporation in its exempt operations
real estate  If the taxpayer is not  Property purchased for [e.g. See Sec. 30, NIRC]  not
business registered with the HLURB or future use in the business considered used for business
HUDCC  may be considered even though this purpose is purposes
through the establishment of later thwarted by 2. Real property whether:
substantial relevant evidence circumstances beyond the  single detached
(e.g. consummation during taxpayer’s control, does not  townhouse
the preceding year of at least lose its character as an  condominium unit
six (6) taxable real estate sale ordinary asset. Nor does a Not used in trade or business owned by
transactions, registration as mere discontinuance of the an individual engaged in business.
habitually engaged in real active use of the property Evidenced by:
estate business with LGU or change its character a. Certification from the Barangay
BIR previously established as a Chairman
business property. b. Certificaition from head of
administration [in case of
Other Kinds condominium unit, townhouse or
apartment]
Definition Guidelines
Validated from existing records of the
Taxpayer not Refer to persons The ff. are ordinary assets:
BIR
engaged in the other than real 1. Real properties
Taxpayers Includes those Retains classification as ordinary asset
real estate estate dealers,  Land, building, or other
changing who amended its
business real estate improvements
business from Articles of The change of business or amendment
developers  Used or being used or have been
real estate Incorporation of the primary purpose of the business
and/or real estate previously used in the trade or
business to from a real estate shall not result in the re-classification
lessors. business of taxpayer
non-real estate business to a non- of real property held by it from
 Includes buildings and/or business. real estate ordinary asset to capital asset
improvements subject to business, such as
depreciation and lands used in the a holding
trade or business of the taxpayer. company,

manufacturing declaration of succession or donation to the heir or
company, trading property donee who is not engaged in the real
company, etc dividends estate business with respect to the
Taxpayers All real properties originally acquired real property inherited or donated,
originally by it shall continue to be treated as and who does not subsequently use
registered to ordinary assets such property in trade or business.
be engaged in  In the hands of the receipients, real
the real estate property received as dividend by the
business but stockholders who are not engaged in
failed to the real estate business and who do
subsequently not subsequently use such real
operate property in trade or business even if
Treatment of Real properties GR: Continue to be treated as ordinary the corporation which declared the
abandoned and formerly forming assets. real property dividend is engaged in
idle real part of the stock  Real property initially acquired by a real estate business.
properties in trade of a taxpayer engaged in the real estate Treatment of Involuntary Involuntariness of such sale shall have
taxpayer engaged business shall not result in its real property transfers of real no effect on the classification of such
in the real estate conversion into a capital asset even if subject of properties, real property in the hands of the
business, or the same is subsequently abandoned involuntary including involuntary seller, either as capital
formerly being or becomes idle transfer expropriation or asset or ordinary asset
used in the trade EXCEPTION: Properties classified as foreclosure sale
or business of a ordinary assets for being used in
taxpayer engaged business by a taxpayer engaged in 2. Definition of Ordinary Income Sec. 22 (Z): Any gain from the sale or
or not engaged in business other than real estate business exchange of propertty which is not a capital asset or property
the real estate as defined in Sec. (2)(g) are
described in Sec. 39(A)(1). Any gain from the sale or exchange of
business, which automatically converted into capital
were later on assets upon showing of proof that the property which is treated or considered as ordinary income shall be
abandoned and same have not been used in business for treated as gain from the sale or exchange of property which is not a
became idle more than two (2) years prior to the capital asset.
consummation of the taxable a. RULE: If the asset involved is ordinary, the entire amount of
transactions involving said properties. the gain from the transaction shall be included in the
Treatment of Real properties The ff. are considered ordinary assets: computation of gross income [Sec. 32(A)] and the entire
real properties classified as  Real property received in an amount of the loss shall be deductible from gross income.
that have been capital or exchange in the hands of the
transferred to ordinary asset in [Sec. 34(D)].
transferee in the case of a tax-free
a buyer/ the hands of the exchange by taxpayer not engaged in
transferee, seller/transferor real estate business to a taxpayer Calasanz v. Commisioner GR L-26284, October 10, 1986
whether the may change their who is engaged in real estate
transfer is character in the business, or to a taxpayer who will Facts: Petitioner Calasanz inherited an agricultural land from her father. After the
through sale, hands of the use in business the property received land was surveyed, subdivided and improvements were introduced, she sold the lots
barter or buyer/ transferee. in the exchange.
to the public for a profit. In her ITR, a profit from the sale worth P31,060 appeared.
exchange, The ff. are considered capital assets:
inheritance, Further, she reported 50% or P15,530 as taxable capital gains, relying on the
 In the hands of the heir or donee, real
donation or property transferred through provision of what is now “Sec. 39 (B)”. CIR emphasized that the expense on

improvements were more than double the price of the land thereby petitioner shall be treated as loss from the sale or exchange of property which is
should be taxed on the basis of ordinary income rates (as opposed to capital gains not a capital asset
tax, which subjects to tax 50% of the amount only) 5. Percentage Taken into account (Long Term-Short Term) by Taxpayers
Held: Taxed in FULL as ORDINARY INCOME. The circumstances in this case indicate other than a Corporation [Sec. 39 (B)]
that the activities of petitioner were one engaged in real estate business. Some a. Only the following percentages of the gain or loss recognized
factors to consider are: (1) the conversion of agricultural land to residential upon the sale or exchange of a capital asset shall be taken into
subdivision; (2) extensive improvements; (3) cost of improvements which is account in computing net capital gain, net capital loss, and net
substantially more than the cost of the land. There is authority that a property income:
ceases to be a capital asset if the amount expended to improve it is double its i. 100% if the capital asset has been held for not more
original cost.; (4) advertisements to sell the lots to the public. than 12 months (x≤12 months)
A property initially classified as capital asset may be treated ii. 50% if capital asset has been held for more than 12
as an ordinary asset if a combinationof factors tend to show months (x>12months)
that the activity was in furtherance of or in the course of the Current provision: See sec. 24 (d), the amount of gain is fully taxable but at a
taxpayer’s trade or business. preferential rate of 6% of gross selling price (not the ordinary graduated rate of
NOTE: See Sec. 39 (Capital Assets) and Sec. 24 (D) [Tax 32% max). Stocks also not subject to exclusion
treatment for ordinary assets]  Example: Personal property [Car, Jewelry]
 If it is a Ordinary Asset  TAX BASE = Full amount;  Your wedding ring is only to be taxed at 50% per Sec. 26[B]
TAX RATE = preferential rate of 6%  Example: Jess bought a BMW for 5 million. She exchanged it for a diamond
 If it is a Capital Asset  TAX BASE = 50% only; TAX ring worth 3.2 million. How is this taxed?
RATE = regular rate o As to BMW - Property was acquired by purchase. To determine
gain/loss:
3. Net Capital Gain [Sec. 39 (2)] , Net Capital loss [Sec. 39 (3)] Amount
Net The excess of the gains from sales or exchanges of capital assets Selling Price 3.2M
Capital over the losses from such sales or exchanges Cost (5M)
Gain Loss (1.8M)
Net The excess of the losses from sales or exchanges of capital assets
Capital over the gains from such sales or exchanges o As to JEWELRY – Property acuired by gift/donation. To determine
Loss gain/ loss:
Amount
NOTE: Selling Price 5M
 Capital losses may be deducted only to the extent of the gains from the sale Cost (1M)*
or exchange Loss (4M)**
 Ordinary losses can be offset against net capital gains if they are subject to *1M is theoretical – value at the time ring was bought
the same tax rate **Jewelry is personal property, it is only taxed at 50% (Thus, only 2M is taxable)
4. Ordinary Loss [Sec. 22 (Z): Any loss from the sale or exchange of
property which is not a capital asset. Any loss from the sale or B. DETERMINATION OF GAIN OR LOSS FROM TRANSFER OF PROPERTY (Section
exchange of property which is treated or considered as ordinary loss 40, Section 136-143, RR2)

1. Computation of Gain or Loss [Sec. 40 (A)] gain
Property which should be included in Latest inventory value [RR2 – Sec.
Formula: Gain the inventory 136]
3. Exchange of Property – Tax-Free Exchange
SEC 141, RR-2

Formula: Loss Determination of gain or loss from th exchange of proeprty. - The amount if
income derived or loss sustained from an exchange of property is the difference
between the FMV of the property received and the cost of the property given in
the exchange
*NOTE: Amount realized is amount realized from sale or other disposition of Formula: Gain from exchange
property
Formula: Amount Realized
Formula: Loss from exchange

Amount realized from sale or other disposition of property
2. Cost or basis for income tax purposes [Sec. 40(B)]
Basis for determining gain or loss from sale or disposition of property

Property acquired by purchase [on or Its Cost [purchase price + expenses of General Rule: Gain or loss shall be recognized in every sale or excahange of
after 1 March 1913] acquisition] property
Property acquired by inheritance Fair Market Price OR value as of date
Exceptions:
of acquisition
A. Sales or Exchanges Resulting in Non Recognition of Gains or Losses:
Property acquired by gift or donation Same as if it would be in the ahnds of
the donor or last preceidng owner by 1. Exchange solely in kind in legitimate mergers or consolidations includes:
whom it was not acquired by gift (a) Between the corporations which are parties to the mergers or
EXCEPTIONS: If basis > FMV of consolidation (property for stocks)
property at time of the gift then [To
determine loss, basis is FMV] Illustration: Stockholders of A gives B the same amount of stock as the properties
Property acquired for less than Amount paid by the transferee for the given by B to A.
adequate consideration in property
money/money’s worth
Property acquired in a transaction See 40 (C)(5)
where gain or loss not recognized (a) If stocks
(b) Property transferred = same as
if in the hands of transferor +

B. Transactions where gains is recognized but not loss:
1. Transactions between realted taxpayers
2. Illegal transactions
3. Exchanges of property, not solely in kind, in pursuance of corporate
mergers and consolidations [40(C)(3)(a-b)]
a. A shareholder or security holder or corporation receives not only
stock or securities permitted to be received without the
recognition of gain or loss, but also money and/or property, the
gain shall be recognized but in an amount not in excess of the
sum of the money and the FMV of such other property received.
i. PROVIDED, as to shareholder  if money/property has
NOTE: In this case, B is dissolced. A’s stocks are exchanged to B, which are further the effect of a distribution of a taxable dividend –
distributed to B’s stockholders (3 & 4). After the dissolution, 3 and w4 become shareholder taxed as dividend an amount of gain
stockholders of A. recognized not exceeding his proportionate share of the
 SIR: Are these really tax free? NO. Substituted basis must be applied. undistributeed earnings and profits of the corporation.
(b) Between a stockholder of a corporation party to a merger or consolidation ii. The remainder of the gain is recognized shall be treated
and the other party corporation (Stock for Stock) as a capital gain.
(c) A security holder of a corporation, which is a party to the merger or b. A corporation which is a party to the merger or consolidation
consolidation, exchanges his securities in such corporation, solely for stock receives not only stock permitted to be received without the
or securities in such corporation, a party to the merger or consolidation. recognition of gain or loss, but also money/ property and does
(Securities for securities) not distribute it in pursuance of the plan of merger or
2. Transfer or exchanges by a person of his property for stock in a corporation consolidation.
as a result of which, said person, along or together with others not i. If corporation distributes in pursuance of plan  NO
exceeding 4 persons gains corporate control. [5 people] GAIN recognized from the exchange
 Control = ownership of stocks in a corporation possessing at least ii. If not distrbute in pursuance of plan  GAIN (but not
51% of the total voting power of all classes of stocks entiteled to loss) shall be recognized but in an amount not in excess
vote. of the sum of money and the FMV of other property so
received, which is not distributed.
Tax-Free Exchange of Property
[Sec. 40 (C)(5)], NIRC] C. Other considerations
The basis of the stock or securities received by the transferor upon the exchange a. Merger or Consolidation
specified in the above exception shall be the same as the basis of the property, stock
or securities exchanged, decreased by: [Sec 40 (C)(6)b)], NIRC
1. Money received and  “Merger or consideration” means the ordinary merger or consolidation or the
2. FMV of the other property received and increased by: acquisition by one corporation of all or substantially all the properties of
a. The amount treated as dividend of the shareholder and another corporation solely for stock:
b. Amount of any gain recognized on the exchanged  Ordinary merger or consolidation takes placce when one or more
corporations are absorbed by one corporation which survives and

continues the business stockholders upon the exchange of their stocks solely for DFI stocks under
 Ordinary consolidation is that which takes place when 2 or more Section 35(c) (2) of the Tax Code.
corporations unite into a new corporation. In consideration, the  The basis of the assets received by DFI shall be the same as it would be in
constitutent corporations cease to exist. the hands of EFI. The basis of DFI stocks received by the stockholders of
 Must be undertaken for a bona fide business purpose and not solely for the EFI shall be the same as the basis of the EFI stocks surrendered in exchange
purpose of escaping the burden of taxation therefor.
 Bona fide business purpose = each and every step of transaction considered  If the total liabilities to be assumed by DFI upon effective merger date
and the whole transaction or series of transactions considered as single uni exceed the historical or original acquisition cost (cost basis) of the assets
transferred by EFI, the excess shall be recognized as gain of EFI.
 However, upon the subsequent sale or exchange of the assets or shares of
stocks acquired by the parties, the gain derived from such sale or exchange
i. BIR Ruling 383-387 November 25, 1987
shall be subject to income tax.
BIR Ruling 383-387 November 25, 1987 However, in order that the above-described reorganization can be considered a
FACTS: merger under Section 35(c)(2) of the Tax Code, the parties to the merger should
 DFI and EFI are both domestic corporations registered to engage in comply with the following requirements:
agricultural development projects in the Philippines A. The plan of reorganization should be adopted by each of the corporations,
 70% of the equity of both corporations are owned by Mr. Juanito R. Ignacio the adoption being shown by the acts of its duly constituted responsible
(Ignacio) while 30% belongs to Philippine Packing Corporation (PPC) officers and appearing upon the official records of the corporation. Each
[another domestic corporation] and its four (4) individual nominees who corporation, which is a party to the reorganization, shall file, as part of its
are merely holders of one qualifying share each return for the taxable year within which the reorganization occurred, a
 A merger has been proposed wherein EFI shareholders will exchange all complete statement of all facts pertinent to the non-recognition of gain or loss
their EFI shares solely for shares in DFI in connection with the reorganization, including:
 As a result of the merger, DFI will be the surviving corporation which will (1) A copy of the plan of reorganization, together with a statement executed
continue to be owned 70% by Ignacio and 30% by PPC, with EFI then under the penalties of perjury showing in full the purposes thereof and in
ceasing to exist detail all transactions incident to or pursuant to the Plan.
 All EFI stockholders will become DFI stockholders, and that simultaneous (2) A complete statement of the cost or other basis of all property,
with the merger the Articles of Incorporation of the surviving corporation, including all stocks or securities, transferred incident to the plan.
DFI shall be amended and its name shall be Evergreen Farms, Inc. (3) A statement of the amount of stock or securities and other property or
immediately after the effectivity of the merger. money received from the exchange, including a statement of all
distributions or other disposition made thereof. The amount of each kind of
ISSUE: Whether the merger of Delta Farms, Inc. (DFI) and Evergreen Farms, Inc. stock or securities and other property received shall be stated on the basis
(EFI) qualifies as a tax-exempt re-organization under Section 35(c)(2) of the Code of the fair market value thereof at the date of the exchange.
(4) A statement of the amount and nature of any liabilities assumed upon
RULING: The above reorganization is a merger within the contemplation of the exchange, and the amount and nature of any liabilities to which any of
Section 35(c)(2) and (5(b) of the Tax Code because a corporation (DFI) acquired the property acquired in the exchange is subject.
all of the properties of another corporation (EFI) solely for stocks, the transaction B. Every taxpayer, other than a corporation a party to the reorganization, who
undertaken being for a bona fide business purpose and not solely for the purpose received stock or securities and other property or money upon a tax-free
of escaping the burden of taxation. exchange in connection with a corporate reorganization shall incorporate in
 The transfer by EFI of all its assets and liabilities to DFI solely, in exchange his income tax return for the taxable year in which the exchange takes place a
for the latter's shares of stock shall not give rise to the recognition of gain complete statement of all facts pertinent to the non-recognition of gain or loss
or loss pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall upon such exchange including:
be recognized to EFI upon the distribution of DFI shares to EFI (1) A statement of the cost or other basis of the stock or securities
stockholders in complete redemption of their stocks under Section transferred in the exchange; and
35(c)(2) of the Tax Code. No gain or loss shall be recognized to EFI (2) A statement in full of the amount of stock or securities and other

property or money received from the exchange, including any liabilities R: THERE WAS A VALID MERGER. No taxable gain was derived by the private
assumed upon the exchange, and any liabilities to which property received respondents from the transaction. Sec. 35 of the Tax Code provides: “No gain or loss
is subject. The amount of each kind of stock or securities and other shall be recognized if in pursuance of a plan of merger or consolidation (a) a
property (other liabilities assumed upon the exchange) received shall be corporation which is a party to a merger or consolidation, exchanges property solely
set forth upon the basis of the fair market value thereto at the date of the
for stock in a corporation which is a party to the merger or consolidation”. Contrary
exchange.
C. Permanent records in substantial form shall be kept by every taxpayer who to the claim of the petitioner, there was a valid merger although the actual transfer
participates in a tax-free exchange in connection with a corporate of the properties subject of the deed of assignment was not made on the date of the
reorganization showing the cost or other basis of the transferred property or merger. In the nature of things, this was not possible. Obviously, it was necessary for
money received (including any liabilities assumed on the exchange, or any the old corporation to surrender its net assets first to the new corporation before
liabilities to which any of the properties received were subject), in order to the latter could issue its own stock to the shareholders of the old corporation
facilitate the determination of gain or loss from a subsequent disposition of
because the new corporation had to increase its capitalization for this purpose. This
such stock or securities and other property received from the exchange.
In addition to the foregoing requirements, permanent records in substantial form required the adoption of the resolution to this effect at the special stockholders
must be kept by the corporations participating in the merger showing the meeting of the new corporation, the registration of such issuance with the SEC, and
information listed above in order to facilitate the determination of gain or loss its approval by that body. All these took place after the date of the merger but they
from a subsequent disposition of the stock received as a consequence of the were deemed part and parcel of, and indispensable to the validity and enforceability
merger. of, the deed of assignment.
Commissioner v. Vicente Rufino GR L-33665-68 a. Transfer of “Substantially All” the assets

[Sec. 40 (C)(6)(d)]
F: Private respondents were the majority stock holders of two corporations both i. The Secretary of Finance, upon recommendation of the Commissioner, is
named Eastern Theatrical Co., Inc. – one organized in 1934 for a period of 25 years authorized to issue rules and regulations for the purpose of determining the
[OLD Corp] and another organized in 1958 for a 50-year term [NEW Corp]. The proper amount of transferred assets which meet the standard of the phrase
board of directors of the Old Corp passed a resolution during a special meeting, “susbtantially all” and for the proper implementation of this Section
authorizing the old corporation to merge with the new corporation by transferring
its assets, business, goodwill, and liabilities to the new corporation. Pursuant ii. Substantially all means the acqusition by the corporation of at least 80% of the
assets, including case, of another corporation which has the element of
thereto, a deed of assignment was executed and signed by Ernesto Rufino as
permanence and not merely momentary holding
president of the old corporation, and Vicente Rufino as representative of the new
corporation. The consideration is that the new corporation’s shares of stock were to
be distributed among the shareholders on the basis of one stock for each stock held b. Transfer of Property for Shares of Stocks
in the old corporation. This agreement (signed Jan. 9, 1959) was made retroactive to
Jan. 1, 1959. The New Corp increased capitalization to P2M, which was divided into i. RMR 1-2001 dated November 29, 2001
200k shares at 10 pesos per value each share, and the said increase was registered RMR 1-2001 November 29, 2001
on March 5, 1959, with the SEC. CIR issued deficiency capital gains tax saying that The following facts must concur to apply this rule
the merger was NOT for a legitimate business purpose but only to avoid tax liability 1. A domestic corporation (the Transferor) owns certain property, consisting of
– exchange of stocks was only on paper and increase in capitalization of the NEW the ff.:
corp. occurred only 27 days after the end of the life of the OLD corp. Therefore there [EXAMPLE]
was actually NO merger as the OLD corp. expired already. a. Land encumbered by a real estate mortgage
b. Buildings
c. 100 shares of stock in G corporation with a par value of P10 per share

d. 50 shares of stock in D corporation without par value RMO 32-201 November 29, 2001
e. Unsecured receivables Prescribing the new conditions & requirements of tax-free exchange: Guidelines
f. Loans to Q (Borrower/Mortgagor) secured by a real estate mortgage Implementing Revenue Regulations No. 18-2001 on the Monitoring of the Basis of
g. Cash the Property Transferred and Shares of Stock Received. - Requirements hereunder
2. X Corporation (the Transferee) is a domestic corporation stated must be complied with by both transferor(s)/absorbed corporation and
a. The Transferor transfers the property to the Transferee. transferee/surviving/consolidated corporation.
b. In exchange, the Transferee issues shares to the Transferor out of the
unissued portion of its existing authorized capital stock, or, if such existing DOCUMENTATION REQUIREMENTS
authorized capital stock is insufficient, out of shares from an increase in the A. BIR Certification/Ruling —
Transferee's authorized capital stock. Any application to be filed with the Law Division for a BIR Certification/Ruling on
c. The Transferor does not receive any money or property other than the the tax consequence of the exchange of properties shall be made in a form which
aforementioned shares of the transferee. the BIR will provide for the purpose under the cover of a transmittal letter
d. The property transferred by the Transferor-corporation constitutes less providing a brief overview of the transaction that contains all the material facts of
than 80% of the Transferor's assets, including cash.  the exchange transaction, and shall be accompanied by three (3) copies of each of
e. In addition to the transfer of the property, the Transferee assumes the following documents:
liabilities of the Transferor. However, the sum total of the amount of (1) In the case of transfer of property to a controlled corporation/partnership —
liabilities assumed, plus the amount of the encumbrance or REM on the do (a) Deed of Transfer/Assignment/Exchange;
not exceed the basis of the property transferred. (b) Duly registered Articles of Incorporation or Partnership with SEC of the
f. The shares are neither issued in payment for services, nor for settlement of transferor corporation and transferee corporation/partnership, and By-Laws;
an outstanding liability that arises from the performance of services (c) Copies of the Transfer Certificates of Title/Condominium Certificates of
rendered by the Transferor to the Transferee. Title/Certificates of Stock to the properties to be transferred pursuant to the tax-
g. As a result of the above-mentioned transfer, the Transferor acquires at free exchange, as certified by the appropriate Registrar of Deeds or Corporate
least 51% of the total outstanding capital stock of the Transferee entitled to Secretary, as the case may be;
vote. (d) Copies of the latest Tax Declaration of the properties to be transferred
TAX CONSEQUENCES pursuant to the tax-free exchange, as certified by the appropriate local
 The Transferor shall not recognize any gain or loss on the transfer of the government unit's Assessor. It is understood that any improvement is separately
property to the Transferee. declared and therefore, covered by a Tax Declaration distinct from the Tax
 The Transferor will not be subject to capital gains tax, income tax, or to Declaration on the land. Further, if the tax declaration was issued three (3) or
creditable withholding tax on the transfer of such property to the more years prior to the exchange transaction, the Transferor shall include in the
Transferee. certification by the local government unit's Assessor that such declaration is the
 Neither may the transferor recognize a loss, if any, incurred on the transfer. latest tax declaration covering the real property;
 The assumption of liabilities or the transfer of property that is subject to a (e) Certification of the fair market value or zonal value of the real property
liability does not affect the non-recognition of gain or loss under Section involved in the exchange. The zonal value shall be certified, as a general rule, by
40(C)(2) of the Tax Code since in this case, the total amount of such the Chief, Asset Valuation Division at the 10th Floor, BIR National Office. However,
liabilities does not exceed the basis of the property transferred. the Revenue District Officer or the Revenue Regional Director can also issue the
The Transferee is not subject to income tax on its receipt of the property as certification whenever access to the latest schedule of zonal values is
contribution to its capital, even if the value of such property exceeds the par value electronically available to them.
or stated value of the shares issued to the Transferor. However, stocks shall not be (f) Sworn certification by the individual transferor or in the case of a juridical
issued for a consideration less than par or issued price. person, by the Chief Financial Officer or his equivalent as to the basis of the
property to be transferred. The original or adjusted basis, as the case may be, of
c. Administrative requirements in case of tax-free exchanges, RMO 32-201, each real property/share of stock/or other property transferred must be itemized
in the certification, instead of a single lump sum in order to enable the Registrar of
November 29, 2001, prescribing the new conditions and requirements of tax
Deeds or the corporate secretary, as the case may be, to annotate the substituted
free exchange basis on the reverse side of the Transfer/Condominium Certificate of Title to the

real property involved or of the Certificate of FORM OF REQUEST FOR RULING AND CERTIFICATION
Stock, and in order to facilitate the determination of gain or loss from a To the extent applicable, the request for certification-ruling shall be prepared and
subsequent disposition of real properties/shares of stock and other properties submitted in the form provided in Annex "A" hereof under the heading
received in the exchange. "Application and Joint Certification".
(g) Sworn statement of the amount and nature of any liabilities assumed upon the
exchange, and the amount and nature of any liabilities to which any of the PROCESSING AND CERTIFICATION FEE
properties acquired in the exchange is subject. The proper officer to issue the The taxpayer/applicant shall pay the applicable processing and certification fee
statement shall be the Chief Financial Officer or his equivalent and confirmed by before filing of the request for certification-ruling. The applicant must submit
the President or the Chief Executive Officer or Country Chairman or their proof of payment of the processing and certification fee, with the original
equivalent; presented, upon filing of the application for certification-ruling with the Law
(h) Audited Financial Statements of Transferor-corporation, as of the transaction Division. Otherwise, the application shall not be accepted for processing.
date. The processing and certification fee shall accordingly be adjusted if additional
(2) In the case of Merger or Consolidation — transfer certificates of title/condominium certificates of title/certificates of stock
(a) The documents stated in (1) above; are submitted for processing.
(b) Plan of Corporate Merger or Consolidation;
(c) Statement of the amount and nature of the assets to be transferred by the DECLARATION UNDER OATH
absorbed corporation to the surviving/consolidated corporation. Declarations in the application and joint certification form, the documents to be
(d) Articles of Incorporation duly registered with SEC of the merged or submitted, and the facts represented in support of the requested certification-
consolidated corporation; and (e) Audited Financial Statements duly submitted or ruling, including the covering letter, shall be sworn under oath, under penalties of
to be submitted to the SEC in connection with the application for merger or perjury, by the taxpayer himself, or, in the case of a juridical person, by the Chief
consolidation. Financial Officer or his equivalent who has personal knowledge of the facts to be
The material facts in the submitted documents, including an analysis of their true, correct and complete.
bearing on the issues and a specification of the applicable provisions thereof, must
be stated also in the covering letter. ISSUANCE OF CERTIFICATE AUTHORIZING REGISTRATION (CAR)/TAX CLEARANCE
(TCL)
B. No Application/Request for Certification-Ruling will be processed unless the The CAR/TCL for the real property or share of stock/unit of participation/interest
foregoing requirements are complied with in all respects. involved in the exchange shall be issued by the Revenue District Officer (RDO) or
by the Authorized Internal Revenue Officer (AIRO), on the basis of the
C. In the case of executed and/or completed transactions, either original executed certification-ruling issued by the Commissioner or his duly authorized
and notarized copies or certified true copies of the above-mentioned documents representative to the effect that the transaction qualifies as a tax-free exchange or
must be submitted, together with proof of payment of the applicable documentary corporate reorganization under Section 40(C)(2) of the Tax Code of 1997. The
stamp taxes on the transactions. In the case of issuance of shares/unit of necessary proof of payment of appropriate documentary stamp taxes must also be
participation by the transferee, the due dates for the payment of the presented.
corresponding documentary stamp tax The CAR/TCL to be issued shall specify, among others, that the transaction
involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of 1997;
D. Records to be kept and information to be filed. — the date of exchange; the original or adjusted basis as represented by the taxpayer,
The parties to the transaction shall comply with the pertinent provisions of and substituted basis of the properties as stated in the certification or ruling
Revenue Regulations No. 18- 2001 dated November 13, 2001, regarding the issued by the Bureau of Internal Revenue.
records to be kept and information to be filed in connection with the tax-free
exchange, provided that, any violation thereof, including the failure of the parties
to present proof of annotation of the substituted basis within the period provided
d. De facto merger, RMR 1-2002, April 25, 2002 on tax consequences thereof
in Section 7 of such Regulations shall be referred to the Prosecution Division for
appropriate action. under Sec. 40 (c)(2) and (6)(b)

RMR 1-2002, April 25, 2003 element of permanence and not merely momentary holding.
TAX CONSEQUENCES OF DE FACTO MERGER 6. A de facto merger and a transfer to a controlled corporation are different in
FACTS: that
1. A domestic corporation (the Transferor) owns certain properties consisting of a) the Transferor in a de facto merger is a corporation, while in a transfer to a
the following, for example: controlled operation, the Transferors may either be a corporation or an
a. Land encumbered by a REM individual
b. Buildings b) In a de facto merger, there is no requirement that the transferor gains
c. 100 shares of stock in G Corporation with a par value of P10 per share control (that is, 51% of the total voting powers of all classes of stocks of the
d. 50 shares of stock in D Corporation without par value Transferee entitled to vote) of the Transferee as a prerequisite to enjoying
e. Unsecured receivables the benefit of non-recognition of gain or loss.
f. Loans to Q (Borrower/Mortgagor), secured by a REM 7. What is essential in a de facto merger is that the Transferee acquires all or
g. Cash substantially all of the properties of the Transferor.
2. The property transferred by the Transferor constitutes at least 80% of the
Transferor’s assests, including cash. TAX CONSEQUENCES
3. The Transferor transfers the property to the Transferee. In exchange, the 1. The Transferor shall not recognize any gain or loss on the transfer of the
Transferee issues shares to the Transferor out of the unissued portion of its property to the Transferee.
existing authorized capital stock, or, if such existing authorized capital stock is 2. The Transferor will not be subject to capital gains tax, income tax, and to
insufficient, out of shares from an increase in the Transferee’s authorized creditable withholding tax on the transfer of such property to the Transferee.
capital stock. The Transferor does not receive any money or property other 3. Neither may the Transferor recognize a loss, if any, incurred on the transfer.
than the aforementioend shares of the transferee. 4. The assumption of liabilities or the transfer of property that is subject to a
4. In addition to the transfer of the property, the Transferee assumes liabilities of liability does not affect the non-recognition of gain or loss under Section
the Transferor. However, the sum total of the amount of liabilities assumed, 40(C)(2) of the Tax Code, since in this case, the total amount of such liabilities
plus the amount of the excumbrance or REM on the land do not exceed the does not exceed the basis of the property transferred.
basis of the property transferred. 5. The Transferee is not subject to income tax on its receipt of the property as
GENERAL PRINCIPLES contribution to its capital, even if the value of such property exceeds the par
1. A de facto merger involves the acquisition by one corporation of all or value or stated value of the shares issued to the Transferor.
substantially all the properties of another solely for stock. 6. Stocks shall not be issued for a consideration less than par or issued price
2. The phrase “substantially all the properties of another corporation” is defined thereof. (Section 62, Corporation Code of the Philippines)
in BIR General Circular No. V-523 dated July 16, 1957 to mean the “acquisition
by one corporation of at least 80% of the assets, including cash, of another
corporation,” which ‘has the element of permanence and not merely 1. Cost basis in tax-free exchanges
momentary holding’.
3. To constitute a de facto merger, the following elements must concur:
RMR 18-2001 dated November 29, 2001 - Guidelines on monitoring basis of
a) There must be a transfer of all or substantially all of the properties of
Property in Tax-free exchange
the transferor corporation solely for stock, and
A. Substituted Basis of Stock or Securities Received by the Transferor (General Rule)
b) It must be undertaken for a bona fide business purpose and not
solely for the purpose of escaping the burden of taxation.
4. One basic difference between a de facto merger and a statutory merger is that
* +
the Transferor is not automatically dissolved in the case of the former.
Likewise, there is no automatic transfer to the Transferee of all the rights, , -
privileges, and liabilities of the Transferor.
5. In procedure, it is similar to a transfer to a controlled corporation under the
same Section 40(C)(2) of the Tax Code, except that at least 80% of the
Transferor’s assets, including cash, are transferred to the Transferee, with the Exception: Boot - Money received and other property received in excess of the

stock or securities received by the transferor on a tax-free exchange Submission of Information on the Basis of Properties
Basis: FMV The parties to a tax-free exchange of property for shares who are applying for
confirmation that the transaction is indeed a tax-free exchange shall, together with
Other Considerations: such information as the Commissioner of Internal Revenue may require, submit
1. If the transferee of property assumes, as part of the consideration to the the following:
transferor, a liability of the transferor or acquires from the latter property (a) A sworn certification on the basis of the property to be transferred pursuant to
subject to a liability, such assumption or acquisition (in the amount of the such exchange. The basis of each real property/share of stock or other property
liability) shall, for purposes of computing the substituted basis, be treated transferred must be itemized in the certification to enable the BIR to determine
as money received by the transferor on the exchange. the basis for subsequent disposition and to make it possible for the Register of
2. If the transferor receives several kinds of stock or securities, the Deeds or the corporate secretary, as the case may be, to annotate the information
Commissioner is authorized to allocate the basis among the several classes on such basis for each property/share of stock on the reverse side of the Transfer
of stocks or securities. Certificate of Title/Condominium Certificate of Title of the real property involved,
or of Certificate of Stock. The sworn declaration must be executed by the
B. Substituted Basis of the Transferred Property in the Hands of the Transferee. transferor himself, or in case the transferor is a juridical entity, by an official with
The substituted basis of the property transferred in the hands of the transferee rank of no less than the Chief Financial Officer or his equivalent. The
shall be as follows: Commissioner of Internal Revenue is authorized to prescribe the form in which
(a) the original basis in the hands of the transferor; such sworn declaration shall appear.
(b) Plus: the amount of the gain recognized to the transferor on the transfer. (b) Certified true copies of the Transfer Certificates of Title and/or Condominium
Certificates of Title of the real properties to be transferred;
C. The Original Basis of Property to be Transferred (c) Certified true copies of the corresponding latest Tax Declaration of the real
The original basis of the property to be transferred shall be the following, as may properties to be transferred. It is understood that any improvement is separately
be appropriate: declared and therefore, covered by a Tax Declaration distinct from the Tax
(a) The cost of the property, if acquired by purchase on or after March 1, 1913; Declaration on the land. Further, if the tax declaration was issued three (3) or
(b) The fair market price or value as of the moment of death of the decedent, if more years prior to the exchange transaction, the Transferor shall include in the
acquired by inheritance; certification by the local government unit's Assessor that such tax declaration is
(c) The basis in the hands of the donor or the last preceding owner by whom the the latest tax declaration covering the real property;
property was not acquired by gift, if the property was acquired by donation. (d) Certified true copies of the certificates of stocks evidencing shares of stock to
If the basis, however, is greater than the fair market value of the property at the be transferred; and
time of donation, then, for purposes of determining loss, the basis shall be such (e) Certified true copy of the inventory of other property/ies to be transferred.
fair market value; or, No certification/ruling will be issued by BIR unless the requirements are
(d) The amount paid by the transferee for the property, if the property was submitted.
acquired for less than an adequate consideration in money or money's worth.
(e) The adjusted basis of (a) to (d) above, if the acquisition cost of the property is Information to be Contained in Certification/Ruling by the Bureau of Internal
increased by the amount of improvements that materially add to the value of the Revenue
property or appreciably prolong its life less accumulated depreciation. All certifications or rulings issued by BIR confirming that an exchange of property
(f) The substituted basis, if the property was acquired in a previous tax-free for shares complies with the provisions of Section 40(C)(2) shall include a
exchange under Section 40(C)(2) of the Tax Code of 1997. statement on the substituted basis of the property transferred.
D. Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of Conditions for the Issuance of Certificate Authorizing Registration (CAR) or Tax
Property Subject of the Tax- free Exchange. Clearance (TCL)
The substituted basis as defined in Section 40(C)(5) of the Tax Code shall be the  The CAR/TCL for the real property or share of stock/unit of
basis for determining gain or loss on a subsequent sale or disposition of property participation/interest involved in the exchange shall be issued by the
subject of the tax-free exchange. Revenue District Officer/Authorized Internal Revenue Officer on the basis
of the certification or ruling to be issued in triplicate
 The CAR/TCL to be issued shall specify that the transaction involved is a The amount of income derived or loss sustained from a tax-free exchange of
tax-free exchange under Section 40(C)(2), the date of exchange; and the property is the difference between the market value at the time of the exchange of
substituted basis of the properties as stated in the certification or ruling the property received in exchange and the original cost, or the adjusted cost basis,
issued by the BIR of the property exchanged to the transferor. The cost basis to the transferee of the
property exchanged for stocks shall be the same as it would be in the hands of the
transferor.
4. Cost Or Basis In Tax-Free Exchanges23
 General – gain or loss shall be recognized in every sale or exchange of  Tax Basis (lifted from Mamalateo)
property o Tax basis in a qualified tax-free exchange of property for computing
the gain on the sale of the assets received by the corporation - the
SECTION 40 C (2), NIRC original/historical cost of the property given in exchange of the shares
 The entire amount of the gain or loss, as the case may be, shall be recognized of stock
except in the following cases o Tax basis in a qualified tax-free exchange of for computing the gain on
o Sales or exchanges resulting in non-recognition of gains or losses the sale of the assets received by the corporation on the sale of the
 Exchange solely in kind in legitimate mergers or consolidation shares of stock received by the stockholders in exchange of the assets –
includes: the original/historical cost of the property given in exchange of the
 Exchange solely in kind in legitimate mergers or shares of stock
consolidations includes: o In a qualified merger the tax basis for computing capital gains on the
o Between the corporation which are parties sale of the assets received by the surviving corporation from the
to the mergers or consolidation (property absorbed corporation – the original/historical cost of the assets when
for stocks) still in the hands of the absorbed corporation
o Between a stockholder of a corporation o In a qualified merger the tax basis for computing capital gains on the
party to a merger or consolidation and the sale of the shares of stock received by the stockholders from the
other party corporation (stock for stock) surviving corporation - the acquisition/historical cost of assets
o A security holder of a corporation, which is referred to the surviving corporation
a party to the merger or consolidation,
exchanges his securities in such
corporation, solely for stock or securities in
such corporation, a party to the merger or
consolidation.
o No gain or loss shall also be recognized if property is transferred to a RR 18-2001 GUIDELINES ON MONITORING, BASIS OF PROPERTY IN TAX-FREE
corporation by a person in exchange for stock or unit of participation EXCHANGES
in such a corporation of which as a result of such exchange said person, No gain or loss shall also be recognized if property is transferred to a corporation
alone or together with others, not exceeding four (4) persons, gains by a person in exchange for stock or unit of participation in such corporation of
control of said corporation which as a result of such exchange, said person, alone or together with together,
 Stocks issued for services shall not be considered as issued in not exceeding 4 persons, gains control of said corporation
return for property.  Note that there are five people here
 Rationale: They want to encourage proprietorships to incorporate so that
they can be open to the public if the public wants to invest, and so they can
be easily monitored.
SEC 141 RR2
Substituted Basis of Stock or Securities Received by the Transferor.
23  The substituted basis of the stock or securities received by the transferor
Jamie’s Part
on a tax-free exchange shall be as follows:  The adjusted basis of (a) to (d) above, if the acquisition cost of the property
is increased by the amount of improvements that materially add to the
The original basis of the property, stock or securities to be transferred value of the property or appreciably prolong its life less accumulated
(money received, if any + the fair market value of the other property depreciation.
- received, if any)  The substituted basis, if the property was acquired in a previous taxfree
+ (the amount treated as dividend of the shareholder, if any + the amount of exchange under Section 40(C)(2) of the Tax Code of 1997
any gain that was recognized on the exchange, if any
Basis for Determining Gain or Loss on a Subsequent Sale or Disposition of
Property Subject of the Tax-free Exchange.
 The substituted basis as defined in Section 40(C)(5) of the Tax Code of
1997, and implemented in Section 2.A and 2.B above, shall be the basis for
However, the property received as 'boot' shall have as basis its fair market value. determining gain or loss on a subsequent sale or disposition of property
 Boot - refers to the money received and other property subject of the tax-free exchange
received in excess of the stock or securities received by the
transferor on a tax-free exchange. Requirements for Parties to a Tax-free Exchange of Property for Shares under
o If the transferee of property assumes as part of the consideration to Section 40(C)(2) of the Tax Code of 1997 who are Applying for Confirmation That
the transferor a liability of the transferor or acquires from the latter The Transaction is Indeed a Tax-free Exchange
property subject to a liability  A sworn certification on the basis of the property to be transferred
o such assumption or acquisition (in the amount of the liability) shall, for pursuant to such exchange. The basis of each real property/share of stock
purposes of computing the substituted basis, be treated as money or other property transferred must be itemized in the certification in order
received by the transferor on the exchange. to enable the BIR to determine the basis for subsequent disposition and to
o If the transferor receives several kinds of stock or securities, the make it possible for the Register of Deeds or the corporate secretary, as the
Commissioner is authorized to allocate the basis among the several case may be, to annotate the information on such basis for each
classes of stocks or securities. property/share of stock on the reverse side of the Transfer Certificate of
Title/Condominium Certificate of Title of the real property involved, or of
Substituted Basis of the Transferred Property in the Hands of the Transferee. Certificate of Stock. The sworn declaration must be executed by the
the original basis in the hands of the transferor transferor himself, or in case the transferor is a juridical entity, by an
official with rank of no less than the Chief Financial Officer or his
+ the amount of the gain recognized to the transferor on the transfer
equivalent. The Commissioner of Internal Revenue is authorized to
prescribe the form in which such sworn declaration shall appear.
 Certified true copies of the Transfer Certificates of Title and/or
The Original Basis of Property to be Transferred
Condominium Certificates of Title of the real properties to be transferred;
 The cost of the property, if acquired by purchase on or after March 1, 1913;
 Certified true copies of the corresponding latest Tax Declaration of the real
 The fair market price or value as of the moment of death of the decedent, if
properties to be transferred. It is understood that any improvement is
acquired by inheritance;
separately declared and therefore, covered by a Tax Declaration distinct
 The basis in the hands of the donor or the last preceding owner by whom
from the Tax Declaration on the land. Further, if the tax declaration was
the property was not acquired by gift, if the property was acquired by
issued three (3) or more years prior to the exchange transaction, the
donation.
Transferor shall include in the certification by the local government unit's
 If the basis, however, is greater than the fair market value of the property
Assessor that such tax declaration is the latest tax declaration covering the
at the time of donation, then, for purposes of determining loss, the basis
real property;
shall be such fair market value; or,
 (d) Certified true copies of the certificates of stocks evidencing shares of
 The amount paid by the transferee for the property, if the property was
stock to be transferred; and
acquired for less than an adequate consideration in money or money's
 Certified true copy of the inventory of other property/ies to be transferred.
worth.
 No certification/ruling will be issued by the Bureau of Internal Revenue

unless the foregoing requirements, in addition to such other documents  If the tax declaration was issued
that the Commissioner of Internal Revenue may require, are submitted. three (3) or more years prior to the
exchange transaction, the
Transferor shall include in the
RMO 32-2001 Guidelines Implementing Revenue Regulations No. 18-2001 on certification by the local
the Monitoring of the Basis of the Property Transferred and Shares of Stock government unit's Assessor that
Received Pursuant to Section 40(C)(2) of the Tax Code of 1997, Revising and such declaration is the latest tax
Updating the Requirements and Conditions Precedent to the Non-Recognition declaration covering the real
of Gain or Loss in Transactions Falling Thereunder, and Prescribing the Forms property;
Therefor. o Certification of the fair market value or
 Documentation requirements zonal value of the real property involved in
o BIR Certification/Ruling the exchange.
 Any application to be filed with the Law Division for a BIR  The zonal value shall be certified,
Certification/Ruling on the tax consequence of the exchange as a general rule, by the Chief,
of properties described hereunder Asset Valuation Division at the
 Made in a form which the BIR will provide for the purpose 10th Floor, BIR National Office.
under the cover of a transmittal letter providing a brief  The Revenue District
overview of the transaction that contains all the material facts Officer or the Revenue
of the exchange transaction Regional Director can also
 Accompanied by three (3) copies of each of the following issue the certification
documents: whenever access to the
 In the case of transfer of property to a controlled latest schedule of zonal
corporation/partnership - values is electronically
o Deed of Transfer/Assignment/Exchange; available to them.
o Duly registered Articles of Incorporation or o Sworn certification by the individual
Partnership with SEC of the transferor transferor or in the case of a juridical
corporation and transferee corporation/ person, by the Chief Financial Officer or his
partnership, and By-Laws; equivalent as to the basis of the property to
o Copies of the Transfer Certificates of be transferred.
Title/Condominium Certificates of  The original or adjusted basis, as
Title/Certificates of Stock to the properties the case may be, of each real
to be transferred pursuant to the tax-free property/share of stock/or other
exchange, as certified by the appropriate property transferred must be
Registrar of Deeds or Corporate Secretary, itemized in the certification instead
as the case may be; of a single lump sum in order to
o Copies of the latest Tax Declaration of the enable the Registrar of Deeds or
properties to be transferred pursuant to the the corporate secretary, as the case
tax-free exchange, as certified by the may be
appropriate local government unit's  To annotate the
Assessor. substituted basis on the
 Any improvement is separately reverse side of the
declared and therefore, covered by Transfer/Condominium
a Tax Declaration distinct from the Certificate of Title to the
Tax Declaration on the land. real property involved or

of the Certificate of Stock, In the case of executed and/or completed transactions
and
 To facilitate the  Either original executed and notarized copies or certified true copies of the
determination of gain or above-mentioned documents must be submitted
loss from a subsequent  Together with proof of payment of the applicable documentary stamp taxes
disposition of real on the transactions.
properties/shares of stock  In the case of issuance of shares/unit of participation by the transferee
and other properties o The due dates for the payment of the corresponding documentary
received in the exchange. stamp tax prescribed under Revenue Memorandum Order No. 8-
o Sworn statement of the amount and nature 98 dated February 10, 1998, as amended by Revenue Regulations
of any liabilities assumed upon the No. 6-2001 and 12-2001 dated July 31, 2001 and September 7,
exchange, and the amount and nature of any 2001, respectively, shall apply.
liabilities to which any of the properties
acquired in the exchange is subject.
 The proper officer to issue the
Form of request for ruling and certification
statement shall be the Chief
Financial Officer or his equivalent
and confirmed by the President or  The request for certification-ruling shall be prepared and submitted in the
the Chief Executive Officer or form under the heading "Application and Joint Certification".
Country Chairman or their o If the application is to be signed and submitted not by the
equivalent; taxpayer himself, but only by his authorized representative
o Audited Financial Statements of Transferor-  The appropriate special power of attorney shall be
corporation, as of the transaction date. submitted with the application for a certification-ruling.
 In the case of Merger or Consolidation - Otherwise, the request shall not be accepted by the BIR.
o The documents stated in (1) above;  In the case of a juridical person, the corporate secretary
o Plan of Corporate Merger or Consolidation; shall issue a sworn statement that the signing officer (i.e.,
o Statement of the amount and nature of the at the very least, the Chief Financial Officer) has been
assets to be transferred by the absorbed authorized by the Board of Directors to represent the
corporation to the surviving/consolidated company and has personal knowledge of the facts of the
corporation. exchange transaction.
o Articles of Incorporation duly registered
with SEC of the merged or consolidated
corporation; and  Processing and certification fee
o Audited Financial Statements duly o The taxpayer/applicant shall pay the applicable processing and
submitted or to be submitted to the SEC in certification fee before filing of the request for certification-ruling.
connection with the application for merger o The applicant must submit proof of payment of the processing and
or consolidation. certification fee, with the original presented, upon filing of the
o The material facts in the submitted application for certification-ruling with the Law Division.
documents, including an analysis of their o Otherwise, the application shall not be accepted for processing.
bearing on the issues and a specification of o The processing and certification fee shall accordingly be adjusted
the applicable provisions thereof, must be if additional transfer certificates of title/condominium certificates
stated also in the covering letter. of title/certificates of stock are submitted for processing.

DECLARATION UNDER OATH exceptions, receives stock or securities which would be permitted to be
received without the recognition of the gain if it were the sole
 Declarations in the application and joint certification form, the documents consideration, and as part of the consideration, another party to the
to be submitted, and the facts represented in support of the requested exchange assumes a liability of the taxpayer, or acquires from the taxpayer
certification-ruling, including the covering letter, shall be sworn under property, subject to a liability
oath, under penalties of perjury, by the taxpayer himself, or, in the case of a o Such assumption or acquisition shall not be treated as money
juridical person, by the Chief Financial Officer or his equivalent who has and/or other property, and shall not prevent the exchange from
personal knowledge of the facts to be true, correct and complete. Actual being within the exceptions.
submission of the application/request and follow-up thereof may be done  If the amount of the liabilities assumed plus the amount of the liabilities to
by an authorized representative, clothed with a special power of attorney, which the property is subject exceed the total of the adjusted basis of the
and subject to the provisions of Revenue Regulations No. 15-99 dated July property transferred pursuant to such exchange
16, 1999 on accreditation of tax agents. o Such excess shall be considered as a gain from the sale or
exchange of a capital asset or of property which is not a capital
asset, as the case may be.
Issuance of certificate authorizing registration (car)/tax clearance (tcl)
 The CAR/TCL for the real property or share of stock/unit of 6. Business Purpose
participation/interest involved in the exchange shall be issued by the
Revenue District Officer (RDO) or by the Authorized Internal Revenue Gregory v. Helvering, 293 U.S. 465
Officer (AIRO), on the basis of the certification-ruling issued by the
Commissioner or his duly authorized representative to the effect that the  Gregory owned two companies – United Mortgage Company and Averill
transaction qualifies as a tax-free exchange or corporate reorganization Corporation. Gregory asked United Mortgage to turn over all its Monitor
under Section 40(C)(2) of the Tax Code of 1997. Stick to Averille. Gregory owned 100% of United, which no longer owned
 The necessary proof of payment of appropriate documentary stamp taxes Monitor shares, and 100% of Averill, which only owned 1,000 shares of
must also be presented. Monitor. Gregory dissolved Averill and had all its assets — the 1,000
 The CAR/TCL to be issued shall specify, among others, that the transaction Monitor shares — distributed to herself. She sold the 1,000 shares to a
involved is a tax-free exchange under Section 40(C)(2) of the Tax Code of third party for $133,333.33, but claiming cost of $57,325.45, she claimed
1997; the date of exchange; the original or adjusted basis as represented by that she should be taxed on a capital net gain on $76,007.88 (instead of 86k
the taxpayer, and substituted basis of the properties as stated in the = 133k – 57k).
certification or ruling issued by the Bureau of Internal Revenue.  On her 1928 Federal income tax return, Gregory treated the transaction
(from United to Averill to herself) as a tax-free corporate reorganization
under section 112 of the Revenue Act of 1928, the tax statute applicable at
that time. Indeed, the legal form of this set of transactions arguably
appeared to qualify under the literal language of the statute.
 Commissioner of Internal Revenue argued that in terms of economic
substance there really was no “business reorganization” — that Mrs.
Gregory, who controlled all three corporations, was simply following a
legal form to make it appear to be a reorganization — so that she could
5. Assumption of Liability in Tax free Exchanges dispose of the Monitor shares without having to pay a substantial income
tax on the gain that otherwise would have been deemed to have been
SECTION 40 C (4), NIRC realized.
Assumption of Liability
 If the taxpayer, in connection with the exchanges described in the foregoing ISSUE/HELD

WON there was a valid reorganization which will reduce the payment of tax by  If the property is not redeemed
petitioner. NO  The final deed of sale executed by the sheriff in favor
of the purchaser at a foreclosure sale shall be
RATIO registered with the Register of Deeds
 The reorganization mentioned by the statute aims that a transfer of assets  The title of the mortgagor shall be cancelled, and a
by one corporation to another must be made in actual pursuance of new certificate issued in the name of the purchaser.
reorganization plan of corporate business; and not a transfer of assets o If the mortgage was foreclosed extrajudicially
having no relation to the business of either companies.  A certificate of sale executed by the officer who conducted the
 In the case at bar, it is apparent that there is no business or corporate sale shall be filed with the Register of Deeds who shall make a
purpose here and the reorganization was used as a mere device for brief memorandum thereof on the certificate of title.
concealing its real character, and the sole object and accomplishment of  In the event of redemption by the mortgagor
which was the consummation of a preconceived plan, not to reorganize a  The same rule provided for in the second paragraph
business or any part of a business, but to transfer a parcel of corporate of this section shall apply.
shares to the petitioner to reduce the taxes to be paid (Business purpose  In case of non-redemption
doctrine)  The purchaser at foreclosure sale shall file with the
Register of Deeds, either a final deed of sale executed
by the person authorized by virtue of the power of
7. Payment of Capital Gains Tax and DST on an extra-judicial foreclosure of banks attorney embodied in the deed of mortgage, or his
sworn statement attesting to the fact of non-
RR No. 4-99, 9 March 1999 Further Amending Revenue Memorandum Order redemption
No. 29-86 dated September 3, 1986, as Amended by Revenue Memorandum
 The Register of Deeds shall issue a new certificate in
Order No. 16-88 dated April 18, 1988, Relative to the Payment of Capital Gains
favor of the purchaser after the owner's duplicate of
Tax and Documentary Stamp Tax on Extra-Judicial Foreclosure Sale of Capital
the certificate has been previously delivered and
Assets Initiated by Banks, Finance and Insurance Companies
cancelled.
o Note: Where the right of redemption of the mortgagor exists, the
Foreclosure of Mortgage certificate of title of the mortgagor shall not be cancelled yet even if the
o If the mortgage was foreclosed judicially, a certified copy of the final property had already been subjected to foreclosure sale
order of the court confirming the sale shall be registered with the  BUT INSTEAD only a brief memorandum shall be annotated at
Register of Deeds. the back of the certificate of title, and the cancellation of the
o If no right of redemption exists title and the subsequent issuance of a new title in favor of the
 The certificate of title of the mortgagor shall be cancelled purchaser/highest bidder depends on whether the mortgagor
 A new certificate issued in the name of the purchaser. shall redeem or not the mortgaged property within one year
o Where the right of redemption exists from the issuance of the certificate of sale.
 The certificate of title of the mortgagor SHALL NOT BE Thus, no transfer of title to the highest bidder can be effected yet until and after
CANCELLED the lapse of the one-year period from the issuance of the said certificate of sale.
 The certificate of sale and the order confirming the sale shall
be registered by a BRIEF MEMORANDUM thereof made by the
Capital Gains Tax
Register of Deeds upon the certificate of title.
 In case the mortgagor exercises his right of redemption within one year
 In the event the property is redeemed
from the issuance of the certificate of sale
 The certificate or deed of redemption shall be filed o No capital gains tax shall be imposed because no capital gains has
with the Register of Deeds been derived by the mortgagor and no sale or transfer of real
 A brief memorandum thereof shall be made by the property was realized.
Register of Deeds on the certificate of title of the  A certification to that effect or the deed of redemption
mortgagor. shall be filed with the Revenue District Office having
jurisdiction over the place where the property is located over the place where the property is located.
which certification or deed shall likewise be filed with the
Register of Deeds and a brief memorandum thereof shall
be made by the Register of Deeds on the Certificate of
Title of the mortgagor. C. Losses from Wash Sales of Stock and Securities
 In case of non-redemption
o The capital gains tax on the foreclosure sale imposed under Secs. SECTION 38, NIRC
24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due Definition of wash sale
based on the bid price of the highest bidder but only upon the  It is a sale of securities where substantially identical securities are acquired
expiration of the one-year period of redemption provided for within a period beginning thirty (30) days before the date of such sale or
under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and disposition and ending thirty (30) days after the sale.
shall be paid within thirty (30) days from the expiration of the Non-deductibility of Losses from Wash Sales of Stock or Securities (Also found in
said one-year redemption period. Sec 131 RR2)
 Losses sustained from any sale or other disposition of shares of stock or
Documentary Stamp Tax securities where it appears that within a period beginning thirty (30) days
 In case the mortgagor exercises his right of redemption before the date of such sale or disposition and ending thirty (30) days after
o The transaction shall only be subject to the P15.00 documentary such date, the taxpayer has acquired (by purchase or by exchange upon
stamp tax imposed under Sec. 188 of the Tax Code of 1997 which the entire amount of gain or loss was recognized by law), or has
because no land or realty was sold or transferred for a entered into a contact or option so to acquire, substantially identical stock
consideration. or securities – Is not deductible
 In case of non-redemption  Exception: Unless the claim is made by a dealer in stock
o The corresponding documentary stamp tax shall be levied, or securities and with respect to a transaction made in
collected and paid by the person making, signing, issuing, the ordinary course of the business of such dealer.
accepting, or transferring the real property wherever the Requisites
document is made, signed, issued, accepted or transferred where  The sale or disposition of stocks or securities resulted in a loss
the property is situated in the Philippines  There was an acquisition or contract or option for acquisition of stock
o Whenever one party to the taxable document enjoys exemption securities within 30 days before the date of such sale or 30 days after the
from the tax, the other party thereto who is not exempt shall be sale
the one directly liable for the tax.  The stock or securities sold were substantially the same as those acquired
o The tax return prescribed under the Code shall be filed within ten within the 61-day period
(10) days after the close of the month following the lapse of the o Prohibition does not apply to a dealer in stock or securities and
one-year redemption period, and the tax due under Sec. 196 of the with respect to a transaction made in the ordinary course of the
Tax Code of 1997 shall be paid based on the bid price at the same business of such dealer.
time the aforesaid return is filed. Definition of ‘acquired’ (SEC 131 RR2)
 Acquired by purchase or by an exchange upon which the entire amount of
Tax Clearance Certificate/Certificate Authorizing Registration gain or loss was recognized by law
 In case of non-redemption, a tax clearance certificate (TCC) or Certificate  Comprehends cases where the taxpayer has entered into a contract or
Authorizing Registration (CAR) in favor of the purchaser/highest bidder option within the sixty-one-day period to acquire by purchase or by such
shall only be issued upon presentation of the capital gains and an exchange.
documentary stamp taxes returns duly validated by an authorized agent Definition of substantially identical (lifted from de Leon)
bank (AAB) evidencing full payment of the capital gains and documentary  The stock must be of the same class, or in the case of bonds, the terms
stamp taxes due imposed under Secs. 3 and 4 of these Regulations on the thereof must be the same
sale of the property classified as capital asset. o The following are not substantially identical:
 The AAB must be located at the Revenue District Office having jurisdiction  The common stock and the preferred stock of the same

corporation disposed of
 A non-voting stock and a stock with voting power o The particular shares of stocks or securities the acquisition of which
 The stock of the corporation and the stock of another resulted in the non-deductibility of the loss shall be those with which
corporation the stock or securities disposed of are matched in accordance with the
 Two series of bonds where one is secured by a mortgage following rule:
and the other is not; or which differ as to interest rates  The stock or securities sold or otherwise disposed of will be
If the amount of stock or securities acquired (or covered by the contract or option to matched with an equal number of the shares of stock or
acquire) is less than the amount of stock or securities sold or otherwise disposed of securities acquired in accordance with the order of
 The particular shares of stock or securities, the loss form the sale or other acquisition (beginning with the earliest acquisition) on the
disposition of which is not deductible, shall be determined under rules and stock securities acquired.
regulations prescribed by the Secretary of Finance, upon recommendation  The acquisition of any share of stock or any security which results in the non-
of the Commissioner. deductibility of a loss under the provisions of this section
 If the amount of stock or securities acquired (or covered by the contract or Shall be disregarded in determining the deductibility of any other loss
option to acquire which) resulted in the non-deductibility of the loss, shall
be determined under rules and regulations prescribed by the Secretary of
Finance, upon recommendation of the Commissioner. D. Exemption from Capital Gains Tax of Certain Individuals from the Sale or Exchange
of Principal Residence
SEC 131 RR-2 (Treatment of loss on wash sales) SECTION 24, NIRC
 Capital Gains from Sale of Real Property
 Where more than one loss is claimed to have been sustained within the taxable
o A final tax of six percent (6%)
year from the sale or other disposition of stock or securities
o Based on the gross selling price or current fair market value as
o The provisions of wash sales shall be applied to the losses in the order
determined in accordance with Section 6(E) of this Code, whichever is
in which the stock or securities the disposition of which resulted in the
higher
respective losses were disposed of (beginning with the earliest
o Imposed upon capital gains presumed to have been realized from the
disposition).
sale, exchange, or other disposition of real property located in the
o If the order of disposition of stock or securities disposed of at a loss on
Philippines, classified as capital assets, including pacto de retro sales
the same day cannot be determined
and other forms of conditional sales, by individuals, including estates
 The stock or securities will be considered to have been
and trusts
disposed of in the order in which they were originally
o The tax liability, if any, on gains from sales or other dispositions of real
acquired (beginning with earliest acquisition).
property to the government or any of its political subdivisions or
 Where the amount of stock or securities are acquired within the sixty-one-day
agencies or to government-owned or -controlled corporations shall be
period is less than the amount of stock or securities sold or otherwise disposed
determined either under Section 24(A) or under this Subsection, at the
of
option of the taxpayer;
o The particular shares of stock or securities the loss from the sale or
 Exception
other disposition of which is not deductible shall be those with which
o Capital gains presumed to have been realized from the sale or
the stock or securities acquired are matched according to the following
disposition of their principal residence by natural persons the
rule:
proceeds of which is fully utilized in acquiring or constructing a new
 The stock or securities acquired will be matched in
principal residence within eighteen (18) calendar months from the
accordance with the order of their acquisition (beginning with
date of sale or disposition shall be exempt from the capital gains tax
the earliest acquisition) with an equal number of shares of
imposed under this Subsection
stock, or securities sold or otherwise disposed of.
o Requisites:
 Where the amount of stock or securities acquired within the sixty-one-day
 the proceeds of which is fully utilized in acquiring or
period is not less than the amount of stock or securities sold or otherwise
constructing a new principal residence within eighteen (18)

calendar months from the date of sale or disposition
 that the historical cost or adjusted basis of the real property
sold or disposed shall be carried over to the new principal
residence built or acquired
 that the Commissioner shall have been duly notified by the
taxpayer within thirty (30) days from the date of sale or E. TAX AMNESTY
disposition through a prescribed return of his intention to
avail of the tax exemption herein mentioned RA 9480 AN ACT ENHANCING REVENUE ADMINISTRATION AND COLLECTION
 the said tax exemption can only be availed of once every ten BY GRANTING AN AMNESTY ON ALL UNPAID INTERNAL REVENUE TAXES
(10) years IMPOSED BY THE NATIONAL GOVERNMENT FOR TAXABLE YEAR 2005 AND
o If there is no full utilization of the proceeds of sale or disposition, the PRIOR YEARS VIS-À-VIS DO 29-07 IMPLEMENTING RA 9480
portion of the gain presumed to have been realized from the sale or Coverage
disposition shall be subject to capital gains tax.  The tax amnesty shall cover all national revenue taxes imposed by the National
 For this purpose, the gross selling price or fair market value at the time of sale, Government for the taxable year 2005 and prior years, with or without
whichever is higher, shall be multiplied by a fraction which the unutilized assessments duly issued therefore, that have remained unpaid as of December
amount bears to the gross selling price in order to determine the taxable 31, 2005.
portion and the tax prescribed under paragraph (1) of this Subsection shall be
imposed thereon.
Who May Avail of Tax Amnesty
o Individuals, whether resident or nonresident citizens, or resident or
nonresident aliens;
RR No. 13-99 as amended by RR No. 14-2000 dated November 20, 2000.
o Estates and trusts;
 In order to ensure payment of the 6% capital gains tax on sale or exchange of o Corporations;
real property classified as capital asset, and to prevent tax leakages arising from o Cooperatives and tax exempt entities that have become taxable of
non-compliance with the conditions for tax exemption discovered by the tax December 31, 2005; and
authority at a later time, payment of capital gains tax under escrow is then o Other judicial entities including partnerships.
required.
 The 6% capital gains tax other wise due on the presumed capital gains derived
from the sale, exchange or disposition of his principal residence shall be Who may not avail
deposited in cash or manager’s check in interest-bearing account with an o Withholding agents with respect to their withholding tax liabilities;
Authorized Agent Bank under an Escrow Agreement between the concerned o Those with pending cases falling under the jurisdiction of the
Revenue District Officer, the seller/transferor and the AAB to the effect that the Presidential Commission on Good Government;
amount so deposited including its interest yield, shall only be released to such o Those with pending cases involving unexplained or unlawfully
seller/transferor and the AAB to the effect that the amount so deposited, acquired wealth, revenue or income under the Anti-Graft and Corrupt
including its interest yield, shall only be released to such seller/transferor upon Practices Act;
certification by the said RDO that the proceeds of sale or disposition thereof o Those with pending cases filed in court involving violation of the Anti-
has, in fact, been utilized in the acquisition or construction of the Money Laundering Law;
seller/transferor’s new principal residence within 18 calendar months from the o Those with pending criminal cases filed in court or in the Department
date of said sale or disposition. The date of sale or disposition of a property of Justice for tax evasion and other criminal offenses under Chapter II
refers to the date or notarization of the document evidencing the transfer of of Title X of the National Internal Revenue Code of 1997, as amended.
said property. in general, the term “escrow” means “a scroll, writing, or deed, o Tax cases subject of final and executory judgment by the courts.
delivered by the grantor, promisor, or obligor into the hands of a third person,
to be held by the latter until the happening of a contingency or performance of a Method of Availment of Tax Amnesty
condition and then by him delivered to the guarantee, the promise of the
obligee. o Forms/Documents to be filed
 Notice of Availment in such forms as may be prescribed 1.Individual (whether resident or nonresident, 5% or P50,000
by the BIR. including resident or nonresident aliens) Estates and whichever is higher
 Statement of Assets, Liabilities and Networth (SALN) as Trusts
of December 31, 2005 in such forms, as may be
prescribed by the BIR. 2. Corporations
 Tax Amnesty Return in such form as may be prescribed (a) With subscribed capital above P50 Million 5% or P500,000 whichever
by the BIR. is higher
o Place of Filing of Amnesty Tax Return
 Residents shall file with the Revenue District Officer (b) With subscribed capital above P20 Million up to 5% or P250,000 whichever
(RDO)/Large Taxpayer District Office of the BIR which P50 Million is higher
has jurisdiction over the legal residence or principal (c) With subscribed capital of P5 Million to P20 5% or P100,000 whichever
place of business of the taxpayer, as the case may be. Million is higher
 Non-residents shall file with the office of the
Commissioner of the BIR, or with the RDO. (d) With subscribed capital of P5 Million 5% or P25,000 whichever
 At the option of the taxpayer, the RDO may assist the is higher
taxpayer in accomplishing the forms and computing the 3. Other judicial entities, including partnerships, but 5% or P50,000
taxable base and the amnesty tax payable, but may not not limited to, cooperatives and foundations, that Whichever is higher
look into, question or examine the veracity of the entries have
contained in the Tax Amnesty Return, Statement of become taxable as of December 31, 2005
Assets, Liabilities and Networth, or such other documents
submitted by the taxpayer. 4. Taxpayers who filed their balance sheets/SALN, 5% base on the
together with their income tax returns for 2005, and resultingincrease in
who desire to avail of the tax amnesty under this Act networth or the minimum
Payment of Amnesty Tax and Full Compliance by absolute amounts of
amending such previously file statements thereby amnesty tax prescribed
 Upon filing of the Tax Amnesty Return including still undeclared assets and/or liabilities above, whichever is higher.
 The taxpayer shall pay the amnesty tax to the authorized agent bank or in
the absence thereof, the Collection Agents or duly authorized Treasurer of  Contents of the SALN
the city or municipality in which such person has his legal residence or 1. Assets within or without the Philippines, whether real or personal,
principal place of business. tangible or intangible, whether or not used in trade or business:
 The Acceptance of Payment Form, the Notice of Availment, the SALN, and a. Real properties shall be accompanied by a description of
the Tax Amnesty Return shall be submitted to the RDO, which shall be their classification, exact location, and valued at
received only after complete payment. acquisition cost, if acquired by purchase or the zonal
valuation or fair market value, whichever is higher, if
Tax Amnesty Rates acquired through inheritance or donation;
b. Personal properties other than money, shall be
 The qualified taxpayers are required to pay an amnesty tax equivalent to accompanied by a specific description of the kind and
five percent (5%) of their total declared networth as of December 31, 2005, number of assets (i.e. automobiles, shares of stock, etc.)
as declared in the SALN as of the said period, or resulting increase in or other investments, indicating the acquisition cost less
networth by amending such previously filed statements for purposes of depreciation or amortization, in proper cases, if acquired
this tax amnesty, thereby including still undeclared assets and/or by purchase, or the fair market price or value at the time
liabilities, as the case may be, as of December 31, 2005, or the absolute of receipt, if acquired through inheritance or donations;
minimum amnesty payment, whichever is higher, in accordance with the c. Assets denominated in foreign currency shall be
following schedule: converted into the corresponding Philippine currency

equivalent, at the rate of exchange prevailing as of  If the property is acquired by purchase
December 31, 2005; and o The basis is the cost of such property.
d. Cash on hand and in bank in peso as of December 31,  The cost basis for determining the capital gains or losses for
2005, as well as Cash on Hand and in Bank in foreign shares of stock acquired through purchase shall be governed
currency, converted to peso as of December 31, 2005.
by the following rules:
2. All existing liabilities which are legitimate and enforceable,
secured and unsecured, whether or not incurred in trade or  a. If the shares of stock can be identified, then the
business, disclosing or indicating clearly the name and address of cost shall be the actual purchase price plus all costs
the creditor and the amount of the corresponding liability. of acquisition, such as commissions, Documentary
3. The total networth of the taxpayer, which shall be difference Stamp Taxes, transfer fees, etc.
between the total assets and total liabilities.  b. If the shares of stock cannot be properly
identified, then the cost to be assigned shall be
computed on the basis of the first - in first- out
(FIFO) method.
F. TAXATION OS SHARES OF UNLISTED STOCKS  c. If books of accounts are maintained by the seller
where every transaction of a particular stock is
 The following sellers or transferors of stock are liable to the tax provided in recorded, then the moving average method shall be
these Regulations: applied rather than the FIFO method.
o a. Individual taxpayer, whether citizen or alien;  d. In general, stock dividend received shall be
o b. Corporate taxpayer, whether domestic or foreign; and assigned with a cost basis which shall be determined
o c. Other taxpayers not falling under (a) and (b) above, such as estate, by allocating the cost of the original shares of stock
trust, trust funds and pension funds, among others. to the total number shares held after receipt of stock
 The following are exempted to the taxes imposed in the Regulations: dividends (i.e. the original shares plus the shares of
o a. Dealers in securities; stock received as stock dividends).
o b. Investors in shares of stock in a mutual fund company, as defined in
Section 22 (BB) of the Tax Code, as amended and Section 2(s) of these  If the property was acquired by devise, bequest or inheritance
Regulations, in connection with the gains realized by said investor o The basis shall be the FMV of such property at the time of death
upon redemption of said shares of stock in a mutual fund company; of the decedent.
and  The term “property acquired by bequest, devise or
o c. All other persons, whether natural or juridical, who are specifically inheritance” means acquisition through testamentary or
exempt from national internal revenue taxes under existing intestate succession and includes, among others:
investment incentives and other special laws.  a. Property interests that the taxpayer received
as a result of a transfe r, or creation of a trust, in
 How do you determine gain or loss from the sale, barter or exchange of contemplation of or intended to take effect in
property, for a valuable consideration possession or enjoyment at or after death; and
o By deducting from the amount of consideration contracted to be paid,  b. Such property interests as the taxpayer has
the vendor/transferor’s basis for the property sold or disposed plus received as the result of the exercise by a person
expenses of sale/disposition, if any. of a general power of appointment by will or by
deed executed in contemplation of or intended

to take effect in possession or enjoyment at or
after death, otherwise known as a donation
mortis causaor a donation in contemplation of
death.
 If the property was acquired by gift
o The basis shall be the same as it would be in the hands of the
donor or the last preceding owner by whom it was not acquired by
gift
 Except that if such basis is greater than the FMV of the
property at the time of the gift, then for the purpose of
determining the loss, the basis shall be such FMV .
 If the property was acquired for less than an adequate consideration in

money or money’s worth
o The basis of such property is the amount paid by the transferee for
the property.
RR 6-2008 AMENDED BY RR 6-2013

Definition of Fair Market Value
 In the case of shares of stock not listed and traded in the local stock
exchanges
o The value of the shares of stock at the time of sale shall be the fair
market value.
 In determining the value of the shares, the Adjusted
Net Asset Method shall be used
 Here, all assets and liabilities are adjusted to fair
market values.
 The net of adjusted asset minus the liability
values is the indicated value of the equity.
 The appraised value of real property at the time
of sale shall be the higher of
o The fair market value as determined by
the Commissioner, or
o The fair market value as shown in
the schedule of valued fixed by the
Provincial and City Assessors, or
o The fair market value as determined by
Independent Appraiser

PART VII preceding 3 year period was
Philippine sourced and only to the
PART VII extent of the following amount:
(PHILIPPINE GI / WORLD GI) x
SITUS OF TAXATION DIVIDEND INCOME
SALE OF For property 1. Sale of shares in a DC
A. SITUS OF TAXATION (Sec 42 of NIRC, RR1 Sec 152 to 165)24 PERSONAL purchased 2. Personal prop purchased in or outside
PROPERTY and sold – the Phils but sold within
place of sale
Relevance: not all type of taxpayer will pay income taxes on all their income. For prop 1. For personal prop produced in whole
produced and or in part within and sold outside or
a. Resident citizens of PHL and domestic corps  taxable income from ALL sold - produced in whole or in part outside
sources apportioned and sold within, gain is considered
b. Non-resident citizens, aliens (w/n resident or engaged in trade or derived from partly within and
business) and foreign corps  taxable only for income derived from without the Phils
sources WITHIN the PHL a. Ratio: Because you do not
know where the Situs of the
sale. Therefore just prorate it
Classification of income as to source (Sec 42): depending on the
participation of the Philippine
1. Income which is derived in full from sources within the PHL and foreign enterprise
2. Income which is derived in full from sources outside the PHL
3. income which is derived partly from sources within and partly from
sources outside the PHL Summary of Sec 42: Gross Income WITHIN PHL (with related RR2-40 rules)
1. Gross income from sources WITHIN PHL

From Sir’s class: a. Interest Income
1. Interest income derived from sources within PHL
INCOME PRINCIPLE FROM SOURCES WITHIN AND
INTEREST Where the 1. If derived from within the Philippines 2. Interest on bonds, notes, or other interest-bearing
capital is 2. Includes interests on bonds, notes or obligations of residents, corporate or otherwise
employed other interest bearing obligations of
residents
DIVIDENDS Where the 1. Received from a domestic corp. (Eg. b. Dividend Income
capital is Dividends received of a shareholder 1. dividends received FROM a domestic corporation
employees from Ayala Corporation even if this is AND
from the transaction of Ayala in 2. dividends from a foreign corporation 50% or more
Cambodia) of the gross income or GI of which for the 3-year
2. Received from a foreign corp. if 50% period ending with the close of the taxable year
or more of the gross income of the preceding the declaration of such dividends (or for
foreign corp. for the immediately such part of such period as the corporation has
been in existence) was derived from sources
within PHL but only in an amount which bears the
24
Cielo’s Part same ratio to such dividends as the GI of the
corporation for such period derived from sources any industrial, commercial or scientific equipment
within PHL bears to its GI from all source 3. The supply of scientific, technical, industrial or
commercial knowledge or information;
4. The supply of any assistance that is ancillary and
Formula: subsidiary to, and is furnished as a means of
enabling the application or enjoyment of, any such
Phil GI (3yr period) (x) Dividend Income = Dividend Income property or right as is mentioned in paragraph (i),
from PHL sources any such equipment as is mentioned in paragraph
(ii) or any such knowledge or information as is
World GI (3yr period) mentioned in paragraph (iii)
5. The supply of services by a nonresident person or
his employee in connection with the use of
property or rights belonging to, or the installation
or operation of any brand, machinery or other
c. Compensation for personal services
apparatus purchased from such nonresident
1. compensation for labor or personal services
person
performed within the PHL regardless of (1) the
6. Technical advice, assistance or services rendered
residence of the payor; (2) the place in which the
in connection with technical management or
contract was made; or (3) the place of payment
administration of any scientific, industrial or
2. When the personal service or labor is performed
commercial undertaking, venture, project or
partly within and partly outside the PHL and no
scheme; and
accurate allocation of such compensation
7. The use of or the right to use:
performed in PHL can be made, the amount to be
(i) Motion picture films;
included in the amount shall be derived by an
apportionment on the time basis (ii) Films or video tapes for use in connection
with television; and
(iii)Tapes for use in connection with radio
Formula: broadcasting
No. of days labor is performed in PHL (x) Total Compensation e. Gain on Sale of Real Property - gains, profits and income from the
received = Income from PHL sources sale of real property located in the Philippines; and
f. Gain on Sale of Personal Property
Total no. of days labor was performed GR: profits and income from the sale of personal property is
treated as derived entirely from the country where it is sold
XPN: gain from the sale of shares of stock in a domestic

d. Rentals and Royalties – from property located in the PHL or from corporation which shall be treated as derived entirely from
any interest in such property, including rentals or royalties for:
sources WITHIN the PHL regardless of the place where it was sold
1. The use of or the right or privilege to use in the
Philippines any copyright, patent, design or model, or exchange
plan, secret formula or process, goodwill,
trademark, trade brand or other like property or Qualification: Although sold ordinarily means where the property
right is marketed, this rule will not apply if the personal property:
2. The use of, or the right to use in the Philippines

(a) Produced in whole or in part by the taxpayer within and sold The rule is that for expenses incurred by the head office which cannot be
outside the PHL or definitely allocated or identified with the operations of any of its branches but
(b) Produced (in whole or in part) by the taxpayer outside and which directly benefit its branches around the world (e.g. admin expenses, R&D),
sold within the PHL the deductible share should be based upon the ration of the local branch’s GI to the
total GI of the company worldwide. IN THIS CASE, the ratio of the GI of SFK
g. Income derived from the ownership of farms and natural deposits:
Philippines to the SFK’s worldwide income is 15.9%, hence its deductible share
1. Income derived from the ownership or operation
of any farms, mine, oil or gas well, other natural should be 15.9% of the total overhead expenses which is P1.4M.
deposit or timber located within the PHL and
2. Income from the sale by the producer of the Other RRs:
products within or outside the PHL
NOTE: If due to peculiar condition of production and sales or for Revenue Audit Memo Order (RAMO) 1-86 – Income from constructive trading
other reasons, all of such gross income should not be allocated to of multinationals
sources within the PHL, an apportionment thereof to sources Two types of branch operations of MNCs being addressed by this RAMO:
within PHL and to sources outside PHL should be made.
1. Liason offices or branches
- Under this scheme, this kind of branch solicit orders from local
importers then report this to their head office who will make the sale
to the importer.
BOAC v. CIR (supra) - How they were taxed: The head office will only allocate a share of the
sale to the liason office, hence, the amount of tax will be left at the
BOAC’s sale of tickets was taxed here in the PHL. The source of income is the PHL discretion of the MNC.
because the activity, the payment for the tickets, is done within PHL. - How they should be taxed: The sale are “constructively consummated”
in PHL so they should report the gross selling price of the commodities
Note J. Feliciano’s dissent: The basis for taxing BOAC should be the actual services sold thru its home office.
which is transportation. This service is done outside the PHL, hence, BOAC should
not be taxed. 2. Commercial broker or indentor
- Under this scheme, this branch solicits orders from local importers
then report to the head office. Then the head office will solicit
2. Taxable Income from Sources within the PHL prospective exporters (who will sell the commodity to the Filipino
importer).
CIR v. CTA and Smith Kline (1984) - How they were taxed: The branch will not pay a commercial broker’s
tax and will only receive compensation from the head office for the
F: Smith Kline and French Overseas Co. (SKF) is a multinational company licensed to solicitation. Purportedly, it cannot be considered a commercial broker
do business in PHL but is based in the US. For 1971, it declared as deduction P501k in relation to its head office because they are one entity.
($77k) as its share in the overhead expenses of the parent company. However, in - How they should be taxed: The branch should pay a commercial
1972, it received a certification that its share is actually $219k or more than P1.4M. broker gross receipts tax
it claimed for a refund. CIR disallowed allegedly because of a contract between SFK
PHL and SFK main company that the former’s share is limited only to $77K.
RR 16-86 – RE Apportionment of Deductions
H: Refund is allowed. A PHL branch is allowed to deduct expenses, losses and other deductions. As to
expenses which cannot be definitely allocated, the ratable part shall be based on
any of the ff ratios:

i. Gross income within PHL to the total gross income For Construction and other activities
ii. Net sales in the PHL to total net sales  Net income from construction and other activities (x) tax rate
iii. If any other method of allocation will be adopted, secure
a written permission from CIR
o The income tax return that will be filed should be 3. Gross Income from Sources without the PHL (Sec 42)
accompanied by a certification from an independent CPA Summary of Sec 42: Gross Income WITHOUT PHL (with related RR2-40 rules)
containing these info:
 The home office deductions have been examined 1. Interests other than those derived from income sources within PHL
using generally accepted auditing standards 2. Dividends other than those derived within PHL (see rules above for
 The deductions prorated to the PHL do not include corporations)
the net losses of the local branch, income tax 3. Compensation for labor or personal services performed without the PHL
payment, capital expenditures and other expenses 4. Rentals or royalties from property located without PHL or from any
directly chargeable o the branch. interest in such property
o If an allocable amount of another branch in another country is 5. Gains and profits from sale of real and personal property located outside
disallowed because of governmental requirement, it will not PHL
be added to the amount to be allocated by the head office. 6. Income derived from purchase of personal property within and its sale
outside the PHL
RAMO 4-86 – Audit guidelines in the Allocation of Home Office 4. Income from sources partly within or without the PHL
Overhead Expenses
- NOTE that it will be difficult to determine the amount which the head
office is allocating to its branches, so the ff guidelines should be Special rules are provided by RR2-40:
followed. a. Income derived from foreign steamship companies whose vessels touch PHL
- Audit Procedures: ports and other services rendered partly within and without PHL  2.5% of
o Provide a detailed examination of functions performed by the GPB
Head office and the branch b. Income from sale of personal property produced in whole or in part by the
o The functions must be determined and listed. They should taxpayer within and sold outside PHL; or produced in whole or in part by the
also be analyzed taxpayer outside and sold within PHL
- In general, the deduction should meet these tests:
o RELEVANCE  are the expenses necessary to the local
branch? 5. Definition of Royalties
o REASONABLE  are the charges ordinary? Keep in mind the
arm’s length principle in transactions Philamlife v. CTA, CIR
- As to deductions that cannot be definitely allocated:
o Provide a breakdown of the expenses that the head office is F: Philamlife entered into a contract with foreign corporation AIRCO (later to
pro-rating
become AIGI), a Bermuda-based reinsurance company. Under the contract, AIRCO
o Basis of pro-ration
will perform services for Philamwlife including Investment, Underwriting and
Marketing, Education and Training, Personnel, and Accounting/Auditing. In 1979,
RAMO 1-95 – Audit guidelines for PHL branches soliciting orders, service CIR gave P a tax credit for allegedly erroneous payment of withholding tax at source
contracts and other activities on remittances to AIGI. This was later cancelled by CIR so P was assessed with a
For solicitation and trading activities:
 Worldwide operating sales to the PHL (x) Worldwide sales (x) rate
deficiency withholding tax. The issue now is whether the compensation for the From a local By a resident Income Graduated income tax
management services performed abroad by AIGI should be taxed in PHL. owner individual owner rates
of copyright
H: YES. Based on Sec37 of the old code, the definition of royalties include the supply By a domestic corp Income 32% final tax
of scientific, technical or commercial knowledge or info, the supply of any assistance owner
as a means of enabling the application or enjoyment of any property or right, and From a Non-resident alien Income If engaged in trade or
foreign individual business, the same as a
technical advice, assistance or services. It is clear from this definition that the
licensor resident individual
management services should be considered as income from services within the PHL owner
under royalties. AIRCO, being a non-resident foreign corp not engaged in trade or Foreign Income 32%
business here shall pay a 35% tax of its income within PHL. corporation Subject to existing tax
(resident or non- treaties
6. Effect of turnkey projects resident)
CIR v. Marubeni Acquisition of copyright rights

By a local From a local Royalties 20%
F: Marubeni is a Japanese corporation engaged in export/import trading and subsidiary/ licensor
construction registered to engage in business here in the country. CIR examined its reseller/ From a non- Royalties 32% on the gross
books and found uncleared income from two big contracts made of TURN KEY basis distributor resident foreign amount of royalties
(one with the NDC for the construction of a wharf and another with PHILPHOS for licensor
By the end From local Business Withhold 2% income
the construction of an ammonia storage complex). The projects are turn-key which
user subsidiaries, Income tax from gross amount
is defined as a job or contract in which the contractor agrees to complete the work resellers or of the payments
of building and installation to the point of readiness and occupancy, hence, M call for distributors
supply for both the materials and services. M was assessed for a contractor’s tax. M From the foreign Royalties Royalties
claimed that it should be taxed only on the PHL Onshore Portion and not on the PHL owner and or 32% on the gross
Offshore Portion wherein equipments and materials were ordered from Japan and licensor of the amount of royalties
completed there before delivery to the PHL. software Subject to tax treaties
H: M is liable only for the Onshore portion. (M is an independent contractor. M is not

liable for the contractor’s tax.) The construction supplies listed in the Offshore B. ACCOUNTING PERIODS AND METHODS25
Portion were fabricated and manufactured in Japan before they were shipped to
General Rule:
PHL. These services are rendered outside the taxing jurisdiction of PHL and thus,
not subject to contractor’s tax. Sec 43 NIRC
The taxable income shall be computed upon the basis of the taxpayer's annual
accounting period (fiscal year or calendar year, as the case may be) in accordance
with the method of accounting regularly employed in keeping the books of such
7. Guidelines for computer software payment, royalty, services or business taxpayer, but if no such method of accounting has been so employed, or if the
income (2005) method employed does not clearly reflect the income, the computation shall be
made in accordance with such method as in the opinion of the Commissioner clearly
Payment is in Tax Rates
the form of
25
Acquisition of ownership over a copyright Kaye’s Part
reflects the income. If the taxpayer's annual accounting period is other than a fiscal o Interest coupons that have matured and are payable even prior to
year, as defined in Section 22(Q), or if the taxpayer has no annual accounting period, encashment (deemed received upon maturity)
or does not keep books, or if the taxpayer is an individual, the taxable income shall o Distributive share of partner in a GPP even before distribution
be computed on the basis of the calendar year. o Interest credited on savings bank deposits (upon credit)
o Amount credited to shareholders of a building or loan association
 Calendar year – beginning January 1 up to December 31 if made without restrictions to the shareholder even prior to
 Fiscal year – beginning any date between January 1 to December 31; maturity
comprising one full year
When income is to be reported When deductions and credits are taken
Sec 44, NIRC (Sec 45 NIRC)

The amount of all items of gross income shall be included in the gross income for the The deductions shall be taken for the taxable year in which 'paid or accrued' or 'paid
taxable year in which received by the taxpayer, unless, under methods of accounting or incurred', dependent upon the method of accounting the basis of which the net
permitted under Section 43, any such amounts are to be properly accounted for as income is computed, unless in order to clearly reflect the income, the deductions
of a different period. In the case of the death of a taxpayer, there shall be included in should be taken as of a different period. In the case of the death of a taxpayer, there
computing taxable income for the taxable period in which falls the date of his death, shall be allowed as deductions for the taxable period in which falls the date of his
amounts accrued up to the date of his death if not otherwise properly includible in death, amounts accrued up to the date of his death if not otherwise properly
respect of such period or a prior period. allowable in respect of such period or a prior period.
(RR-2, Sec 51) Accounting Methods
If a person sues in one year on a pecuniary claim or for property, and money or (RR-2 Sec 167)
property is recovered on judgment in a later year, in come is realized in that year,
assuming that it would have been income in the earlier year if the received It is recognized that no uniform method of accounting can be prescribed for all
(example: patent infringement) taxpayers, and the law contemplates that each taxpayer shall adopt such forms
and systems of accounting as are in his judgment best suited to his purpose. Each
taxpayer is required by law to make a return of his true income. He must,
therefore, maintain such accounting records as will enable him to do so. An
(RR-2, Sec 52) approved standard method of accounting which reflects the taxpayer’s income
may be adopted.
Income constructively received – Income which is credited to the account of or set
apart for a taxpayer and which may be draw upon by him at any time is subject to Essential considerations:
tax for the year during which so credited or set apart, although not then actually
reduced to possession.  In all cases in which production, purchase or sale of merchandise of any
 Must have been credited without any substantial limitation or restriction as kind is an income producing factor inventories of merchandise on hand
to the time or manner of payment or payment is not subject to condition (finished, work in process, raw materials and supplies) should be taken at
 A book of entry, if made, should indicate an absolute transfer the beginning and end of the year and used in computing the net income of
 If income is not credited but only set apart, it must be unqualifiedly subject the year
to the demand of the taxpayer  Expenditures should be properly classifed as between capital (amortized)
 Examples of constructive receipt (RR-2, Sec 53): and income (expensed outright)

 Repairs made to restore a depreciable/depletable asset or to prolong its  Percentage of completion method
life should be added to the property account or charged against the reserve o Accounting for Long Term Contracts
account and not to current expenses  Income from a long term contracts hall be reported based
on percentage of completion method. However
In case of difference between the provisions of the Tax Code and the implementing
completed contract method may be applied subject to the
RRs, on one hand, and the generally accepted accounting principles (GAAP) and the
following:
generally accepted auditing principles (GAAS) on the other hand, Tax code and its
 Contracts entered into and started prior to JAN
implementing RRs should prevail. (RMC 22-2004)
1, 1998
GENERAL ACCOUNTING METHODS USED FOR TAX PURPOSES:  Project previously reported under completed
contract method
 Cash method – income is realized when cash is received and expense is  Project not completed in 1998
recognized when cash is actually paid  Example
o Example: If the contractor receives payment from the project  The project is from 2012-2015. The project
developer
developed pays the contractor every year from
o Used by big professional firms
 Accrual basis – income is realized when earned (upon constructive receipt) 2012 to 2015. However, the contractor only
and expense is recognized when incurred regardless of time of actual reports its income (those paid by the project
payment developer from the 2012-2015) upon the
o Examples: Receiving the check from the client even if not yet completion of the project which is on 2015.
cleared; receiving payment from a customer o This means the contractor enjoys tax
 Hybrid method or modified cash method free status from 2012 to 2014.
 Note that this is no longer used
CASE: CONSOLIDATED MINES INC vs CTA (August 29, 1974)
F: The company used the accrual basis of accounting method for its income.
However, in its expenses, it failed to declare the share of Benguet Corporation in the (Sec 48 NIRC)
“accounts receivable.” Such share is the amount due to Benguet Corporation for its Income from long-term contracts.
o 'Long-term contracts’ – building, installation or construction contracts
service to the company as mine operator. Their agreement is that the compensation
covering a period in excess of one (1) year.
of Benguet will be 50% of gross profit that is the actual receipts less actual o Persons whose gross income is derived in whole or in part from such
disbursements. What the company does is to deduct such share in the A/R upon contracts shall report such income upon the basis of percentage of
actual receipt of the A/R and upon actual payment to Benguet (on a cash & carry completion. The return should be accompanied by a return certificate of
basis). CIR questioned this method of accounting. architects or engineers showing the percentage of completion during the
taxable year of the entire work performed under contract. There should be
H:The company was not in fact using a hybrid method but was consistent with the deducted from such gross income all expenditures made during the taxable
use of accrual basis of accounting method. Since Benguet’s share is only on based on year on account of the contract, account being taken of the material and
supplies on hand at the beginning and end of the taxable period for use in
payments actually received, it cannot share on the company’s Accounts Receivable.
connection with the work under the contract but not yet so applied. If upon
The amount due to Benguet is determined upon actual receipt of such accounts and completion of a contract, it is found that the taxable net income arising
only then will the company incur a liability to pay Benguet. Therefore, the company thereunder has not been clearly reflected for any year or years, the
properly deducts the compensation to Benguet when there is obligation to pay, that Commissioner may permit or require an amended return.
is, upon actual receipt of the payment.

year for which return was made and the date designated as the close of the
(RR-2, Sec 44) fiscal year.
Persons whose income is derived in whole or in par from such contracts may, as to Example: from year ending Dec 31 to year ending June 30 
such income, prepare their returns upon the following bases: separate return for January 1 to June 30
(a) Gross income derived from such contracts may be reported upon the basis of  Changes from one fiscal year to another fiscal year separate final or
percentage of completion. In such case there should accompany the return adjustment return shall be made for the period between the close of the
certificate of architects, or engineers showing the percentage of completion former fiscal year and the date designated as the close of the new fiscal
during the taxable year of the entire work performed under contract. There year.
should be deducted from such gross income all expenditures made during the Example: from year ending June 30 to year ending September 30 
taxable year on account of the contract, account being taken of the material and separate return for July 1 to September 30
supplies on hand at the beginning and end of the taxable period for use in  Changes from fiscal year to calendar year  separate final or adjustment
connection with the work under the contract but not yet so applied. If upon return shall be made for the period between the close of the last fiscal year
completion of a contract, it is found that the taxable net income arising for which return was made and the following December 31.
thereunder has not been clearly reflected for any year or years, the Example: Change from year ending June 30 to year ending December
Commissioner of Internal Revenue may permit or require an amended return. 31  make a separate return for the period of July 1 to December 31
(b)Gross income may be reported in the taxable year in which the contract is finally  The income shall be computed on the basis of the period for which separate
completed and accepted if the taxpayer elects as a consistent practice to so treat final or adjustment return is made.
such income, provided such method clearly reflects the net income. If this method is
adopted there should be deducted from gross income all expenditures during the
life of the contract which are properly allocated thereto, taking into consideration Installment Basis
any material and supplies charged to the work under the contract but remaining on
hand at the time of the completion. (Sec 49 NIRC)
Change of Accounting Period Instalment Basis - Applicable in the following cases:
(Sec 46 NIRC)  Sales of Dealers in Personal Property – a person who regularly sells or
If a taxpayer, other than an individual, changes his accounting period from fiscal otherwise disposes of personal property on the instalment plan may return
year to calendar year, from calendar year to fiscal year, or from one fiscal year to as income therefrom in any taxable year that proportion of the instalment
another, the net income shall, with the approval of the Commissioner, be computed payments actually received in that year, which the gross profit realized or
on the basis of such new accounting period, subject to the provisions of Section 47. to be realized when payment is completed, bears to the total contract price.
Formula:
Gross Profit
(Sec 47 NIRC) X Instalment paid = Amount reportable as Income
Contract Price
Final or Adjustment Returns for a Period of Less than Twelve (12) Months. –
Returns for Short Period Resulting from Change of Accounting Period
 Sales of Realty and Casual Sales of Personality (same formula)
3 SCENARIOS: a) Casual sale or other casual disposition of personal property (other
than property of a kind which would properly be included in the
 Changes from calendar year to fiscal year separate final or adjustment inventory of the taxpayer if on hand at the close of the taxable
return shall be made for the period between the close of the last calendar year) for a selling price exceeding One thousand pesos (P1,000)

b) Sale or other disposition of real property, if in either case the In the case of two or more organizations, trades or businesses (whether or not
initial payments do not exceed twenty-five percent (25%) of the incorporated and whether or not organized in the Philippines) owned or controlled
selling price directly or indirectly by the same interests, the Commissioner is authorized to
'Initial payments' – the payments received in cash or distribute, apportion or allocate gross income or deductions between or among such
property other than evidences of indebtedness of the organization, trade or business, if he determined that such distribution,
purchaser during the taxable period in which the sale or apportionment or allocation is necessary in order to prevent evasion of taxes or
other disposition is made. clearly to reflect the income of any such organization, trade or business.
 Sales of Real Property Considered as Capital Asset by Individuals –
individual who sells or disposes of real
property, considered as capital asset, and is otherwise qualified to report
the gain therefrom may pay the capital gains tax in installments under rules YUTIVO SONS HARDWARE vs CIR (January 28, 1961)
and regulations to be promulgated by the Secretary of Finance, upon
recommendation of the Commissioner. F: Yutivo Sons Hardware Co. bought a number of cars and trucks from General
Motors Overseas Corporation (GM). As importer, GM paid sales tax prescribed by
Change from Accrual to Installment Basis. - If a taxpayer, entitled, elects for any
sections 184, 185and 186 of the Tax Code (said tax being collected only once on
taxable year to report his taxable income on the installment basis, in computing his
income for the year of change or any subsequent year, amounts actually received original sales, Yutivo paid no further sales tax on its sales to the public. Southern
during any such year on account of sales or other dispositions of property made in Motors, Inc. (SM) was organized to engage in the business of selling cars, trucks and
any prior year shall not be excluded. spare parts. When GM decided to withdraw from the Philippines, Yutivo became the
importer and Yutivo continued its previous arrangement of selling exclusively to
SM. Now, Yutivo became subject to the tax. CIR made an assessment of deficiency
sales tax plus surcharge claiming that the taxable sales were the retail sales by SM to
the public (of course higher tax base this higher taxes due) and not the sales at
wholesale made by, Yutivo to SM. CIR disregarded the argument of Yutivo that it
Example:
cannot be taxed for sales of SM because it is a separate entity. According to the CIR
Oyie bought a condominium unit from SMDC Berkley.
Price = 2M they were one and the same corporation, the former being the subsidiary of the
Years = 4 years latter.
Downpayment = 200K in 2010
Reservation = 50k in 2010 H: SM is not a device used to evade taxes. Nevertheless, the CIR was correct in
Initial payment in year of sale = 250k considering SM as a mere department of Yutivo.
Balance in 2011 = 750k
Balance in 2013= 500T  SM was organized in June, 1946 when it could not have caused Yutivo any
2014 = 500T tax savings. At that time, it is not disputed that GM as importer, was the one
solely liable for sales taxes. Neither Yutivo nor SM was subject to the sales
2010: taxes on their sales of cars and trucks. The sales tax liability of Yutivo did
(250k / 2M) X 1M = 125k not arise until July 1, 1947 when it became the importer and simply
2011: continued its practice of selling to SM. From that alone, it could be said that
(750k / 2M) X 1M = 375k SM was not organized for tax evasion.
 However, there are certain facts that would reveal the true nature of the
relationship between Yutivo and SM (accounting system revealed that
Allocation of Income and Deductions Yutivo is the Home Office and SM is a branch; SM was mostly financed by
Yutivo; Yutivo managed SM; etc). SM being but a mere instrumentality, or
(Sec 50 NIRC) adjunct of Yutivo, the CIR and CTA correctly disregarded the technical
defense of separate corporate entity in order to arrive at the true tax COLLECTOR vs REYES (November 25, 1958)
liability of Yutivo.
F: Reyes assails the validity of using the net worth method to determine taxable
income (as employed by the CIR) and insists on the use of cash method.
Net Worth Method H: The Collector may base his assessment on documents other than the taxpayer’s
accounts and records when the taxpayer’s books DO NOT REFLECT the correct
PEREZ VS CTA (May 30, 1958)
income. Reyes in this case already underscored the dispute as to the correct value of
F: CIR assessed Perez for deficiency income taxes and surcharges. In arriving at the the inventories (he himself caused the suspicion on the part of the CIR as to the
amount of assessment, the CIR used the “net worth technique.” The net worth correct valuation of inventory when he cannot say for sure whether it was recorded
technique considers the increase in the value of the taxpayer’s capital (excluding at cost or at dealer’s price).
nontaxable income and adding back nondeductible expenses). Perez contests the
Tax Evasion vs Tax Avoidance
validity of the method employed.
In theory, tax avoidance has often been defined as an attempt to minimize the
H: The net worth method is a valid formula adopted by the Philippine tax
payment or altogether eliminate tax liability by lawful means. Meanwhile tax
authorities from the US. It may be used in this jurisdiction provided the
evasion refers to the elimination or reductions of one's correct and proper tax by
requirements are met. According to US jurisprudence, the theory of the method is
fraudulent means. The consequence of each case is also clear. The former is not
that during the tax period, the aggregate nondeductible expenses plus any increase
criminally punishable while the latter is criminally punishable.
in the net worth unaccounted for constitutes taxable income. It is not asserted as an
accounting method but merely an evidence of income. In practice, however, the distinctions become mere academic discussions rather
than real.
Requirements for applicability:
For example, when the BIR asks for a valid business purpose whenever a taxpayer
1. Establishment with reasonable certainty of an opening net worth to serve
enters into a transaction which has the effect of reducing tax liability, the taxpayer
as a starting point (referring to Capital, Beginning)
2. The net worth increase must be attributable to taxable income (BOF is on has to come up with a valid reason which must be acceptable to the BIR. An honest
the taxpayer)  not satisfied in this case because taxpayer failed to adduce answer from the taxpayer that the transaction was for purposes of tax avoidance
explanations of the items. will not be acceptable. The BIR will impose the higher tax rate in its assessment, as
FORMULA:
well as the corresponding interests and penalties. In reality, therefore, tax avoidance
Increase in Net Worth xxx per se is not considered by the BIR as a valid reason.
Add:
Nondeductible Expenses xxx
Deduct:
Nontaxable Income (xxx) CIR vs BENIGNO TODA (September 14, 2004)
Taxable Income xxx
F: Cibeles Insurance authorized Toda, (its president) to sell the Cibeles Building and
Increase in Net Worth = Capital, Beginning – Capital, Year
the 2 parcels of land it stood on for at least P90M. Toda sold the property to
End
Altonaga for P100M. Altonaga sold the property to Royal Match for P200M. For the
sale to Royal Match, Altonaga paid individual capital gains tax worth P10M. Cibeles
Capital = Assets – Liabilities
Insurance filed its corporate annual income tax return a gain from the sale of the

Cibeles building of P76,000. BIR sent an assessment notice to Cibeles Insurance, reading the same. And that her manager hired an accountant to handle her tax
now under President Choa, worth P79M. The new Cibeles Insurance asked for a obligations.
reconsideration and said that the assessment should be directed against the old
Cibeles Insurance, which was under the deceased Toda. CIR sent the estate of Toda a H: Juday is not guilty of tax evasion. Tax evasion connotes the integration of 3
notice for deficiency income tax. CTA held that the CIR failed to prove that Cibeles factors:
Insurance deprived the government of its taxes and that even if Cibeles Insurance
1. the end to be achieved i.e., the payment of less than that known by the
had a scheme to pay less taxes, it would only be considered tax avoidance, not tax
taxpayer to be legally due, or the non-payment of tax when it is shown that
evasion. a tax is due
2. an accompanying state of mind which is described as being “evil”, in “bad
H: Cibeles Insurance (estate of Toda) is guilty of tax evasion. faith”, “willful”, or “deliberate and not accidental”
3. a course of action or failure of action which is unlawful (CIR v Toda)
Tax avoidance is legal. Tax evasion is not and subjects the tax evader to increased
civil or criminal liabilities. The elements of tax evasion are: The element of willful failure to supply correct and accurate information must be
fully established as a positive act or state of mind; it cannot be presumed nor
1. The end to be achieved (payment of less than what is legally due) attributed to mere inadvertent or negligent acts. While the prosecution was able to
2. Non-payment of tax when it is shown that it is due prove that the accused failed to supply correct info in her 2002 ITR for her failure to
3. An evil/wilfull/deliberate and not accidental state of mind
declare her other income payments received from other sources the records bereft
4. Unlawful cause/failure of action
of evidence to establish the key element of willfulness on the accused’s part to
Altonaga was a close business associate of Toda’s. The representatives of the estate supply the correct info on her ITR.
of Toda admitted that the sale to Altonaga was part of the tax planning scheme of
Cibeles Insurance. THE SCHEME: making it appear that there were 2 sales (Cibeles PEOPLE vs JOEL MENDEZ (December 11, 2012)
Insurance ➠ Altonaga, and Altonaga ➠Royal Match) The 2 sales were obviously
F: A confidential letter alleged the Mendez’s non-issuance of receipts for services
undertaken to reduce the amount of tax to be paid. Since Altonaga was an individual,
rendered. After the initial investigation and recommendation, the examination of
he only had to pay 5% individual capital gains tax (NIRC Section 24D) and not 35%
books of account and other accounting records of Mendez was authorized. However,
corporate income tax. (Talino, right? Mas matalino nga lang BIR.)
Mendez failed to produce the documents demanded of him for examination.
Mendez with the violation of Section 255 of RA 8424, the Tax Reform Act of 1997
PEOPLE vs JUDAY (January 16, 2013)
(the NIRC), for failing to file his ITR with the BIR for the year 2002 and failing to
F: Accused Santos is a showbiz personality who is accused of filing a false and supply correct and accurate information in his ITR filed with the BIR for the year
fraudulent income tax return for taxable year 2002; her failure to supply correct and 2003.
accurate information resulted to a tax deficiency of P1,395,116.24 plus interest and
penalties of P1,319,500.94. Juday denied the allegations stating that she started in H: Mendez is guilty!
showbiz since 8 years old; and at the age of 12, she had engaged the services of
A. Failure to file an ITR with the BIR (Requisites):
Alfonso Lorenzo as her manager, and entrusted to him all her transactions i.e. 1. The person is required to make or file a return.
contract negotiations, contract signing, handling of fees, etc. It is her manager who is a. Section 51 and Section 47 of the NIRC provides a list of the
in charge of filing the relevant returns and paying the corresponding taxes since she persons required to make or file a return. Mendez being a resident
started working, handling all her transactions and that out of trust, respect and Filipino and the owner/sole proprietor of his salon and spa, he is
confidence on her Manager, she signed contracts and other documents without required to make or file a return.
2. The person fails to do the same.

a. There was no record of Mendez filing his return in QC, where he 1. Trust is an arrangement created by a will or an arrangement under which title
was supposed to file it. to the property is passed to another for conversion or investment with income
3. The failure is wilful. therefrom and ultimately the corpus (principal) to be distributed in
a. Wilful in tax crimes means voluntary, intentional violation of a accordance with the directions of the creator as expressed in the governing
known legal duty. Bad faith or bad purpose need not be instrument.
established.  A right of property, real or personal, held by one party for the benefit of
b. Being a doctor and a businessman, he is presumed to know all the another; that there is a fiduciary relation between a trustee and a cestui
matters concerning his practice and business, one of which is the que trust as regards certain property, real, personal, money or choses in
filing of his ITR. action
B. Failure to supply correct and accurate information (Elements): 2. Trustee – one in whom confidence is reposed as regards property for the
1. The person is required to supply the correct and accurate information in benefit of another person (1440, NCC)
his return. 3. Trustor – one who establishes the trust (1440, NCC)
2. The person so required fails to do the same. 4. Beneficiary – the person in whose benefit the trust has been created (1440,
a. Based on the evidence presented by the Prosecution, Mendez NCC)
earned a substantial income in 2003. However, he declared a net 5. Fiduciary
loss in said year.  Fiduciary" is a term which applies to all persons or corporations that
3. The failure is wilful. occupy positions of peculiar confidence towards others, such as trustees,
a. His refusal or failure to verify his compliance with his tax executors, or administrators; and a fiduciary, for income tax purposes, is
obligations constituted a wilful violation. any person or corporation that holds in trust an estate of another person
or persons (Sec. 207, RR2)
 A guardian, trustee, executor, administrator, receiver, conservator or any
person acting in any fiduciary capacity for any person (Sec. 22 (J), NIRC)
C. ESTATES AND TRUSTS (Sec. 60-66, Sec. 207-213, RR2)26  In order that a fiduciary relationship may exist, it is necessary that a legal
trust be created.
Art. 776, Civil Code

Estate (Inheritance) includes all the property, rights, and obligations of a person Taxable Estates and Trusts [Sec. 60(A), NIRC]
which are not extinguished by death The tax imposed upon individuals shall apply to the income of estates or of any kind
of property held in trust, including:
Art. 781, Civil Code (1) Income accumulated in trust for the benefit of unborn or unascertained
Estate (Inheritance) of a person includes not only the property and the person or persons with contingent interests
transmissible rights and obligations existing at the time of his death, but also those (2) Income accumulated or held for future distribution under the terms of the
which have accrued thereto since the opening of the succession will or trust;
(3) Income which is to be distributed currently by the fiduciary to the
Art. 782 Civil Code beneficiaries
Heir: a person called to te succession either by the provision of a will or by (4) Income collected by a guardian of an infant which is to be held or
operation of law distributed as the court may direct;
Devisee: a person to whom gift of real property is given by virtue of a will (5) Income received by estates of deceased persons during the period of
Legatee: a person to whom gift of personal property is given by virtue of will administration or settlement of the estate;
(6) Income which, in the discretion of the fiduciary, may be either distributed
TRUST to the beneficiaries or accumulated.
EXCEPTION:
The tax imposed on estates and trust does not apply to employee's trust if the ff. are
26
Kimmie’s Part satisfied:
1. Employee’s trust forms part of a pension, stock bonus or profit-sharing testamentary or intestate proceedings
plan of an employer for the benefit of some or all of his employees 2. Income of a trust, whether created by will or deed, for accumulation of
2. Contributions are made to the trust by such employer, or employees, or income, whether for unascertained persons or persons with contingent
both for the purpose of distributing to such employees the earnings and interests or otherwise.
principal of the fund accumulated by the trust in accordance with such plan EXCEPTION: Where under the terms of a will or deed, the trustee, may in his
3. Such contributions are made for the purpsoe of distributin the earnings discretion, distribute the income or accumulate it, the income is taxed to the
and principal of the fund accumulated by the trust trustee, irrespective of the exercise of his discretion.
4. If under the trust instrument it is impossible, at any time prior to the NOTE: The imposition of the tax is not affected by the fact that an ultimate
satisfaction of all liabilities with respect to employees under the trust, for beneficiary may be a person exempt from tax.
any part of the corpus or income to be (within the taxable year or
thereafter) used for, or diverted to, purposes other than for the exclusive
benefit of his employees When BENEFICIARY is taxed [Sec. 210, RR2]
Provided, that any amount actually distributed to any employee or distributee shall The income is taxable to the beneficiary or beneficiaries in the following cases:
be taxable to him in the year in which so distributed to the extent that it exceeds the 1. A trust the income of which is to be distributed annually or regularly;
amount contributed by such employee or distributee. 2. An estate of a decedent the settlement of which is not the object of judicial
testamentary or intestate proceedings;
3. Properties held under a co-ownership or tenancy in common
1. General Rule on Taxability – Fiduciary or Beneficiary

When income is included in the computation of NET INCOME OF GRANTOR
Sec 207, RR2 In the case of trusts which are:
GENERAL RULE: The income of a trust for the taxable year which is to be 1. In whole or in part subject to revocation by the grantor
distributed to the beneficiaries must be returned by and will be taxed to the 2. For the benefit of the grantor
respective beneficiaries
EXCEPTIONS:
1. The income of a trust which is to be accumulated or held for future 2. Personal Exemption Allowed
distribution, whether consisting of ordinary income or gain from the sale of
assets included in the corpus of the trust, must be returned by and will be Exemptions [Sec. 62]
taxed to the trustee. There shall be allowed an exemption of Twenty thousand pesos (P20,000) from the
2. Revocable trust  income from such part of the trust estate title to which income of the estate or trust.
may be revested in the grantor should be included in the grantor's return.
3. In case of trust the income of which, in whole or in part, may be held or
distributed for the benefit of the grantor  part of the income of the trust,
which may be held or distributed for the benefit of the grantor, should be 3. Decedent’s estate administration
included in the grantor's return
4. In case of a trust administered in a foreign country  trustee is not entitled Administration [Sec. 211, RR2]
to the deductions and the net income of the trust undiminished by any
 "Period of administration or settlement of the estate"  period required by the
amounts distributed, paid or credited to beneficiaries will be taxed to the
executor or administrator to perform the ordinary duties pertaining to
trustees; however, the income included in the return of the trustees is not
administration
to be included in computing the income of the beneficiaries
 In particular, the collection of assets and the payment of debts and legacies.
 Beneficiary  Estates are the sole beneficiary during the period of
When FIDUCIARY is taxed [Sec. 209, RR2]
administration
The income from estate or trust is taxed to the fiduciary in the following cases:
 When no taxable income is realized in the following events:
1. In the case of a decedent's estate the settlement of which is the object of
 From the passage of property to the executor or administrator on the death Income for Benefit of Grantor[Sec. 64]
of the decedent, even though it may have appreciated in value since the Income of a trust is held or distributed for the benefit of the grantor where any part
decedent acquired it. of the income of a trust
 From delivery of property in kind to a legatee or distributee (1) is, or in the discretion of the grantor or of any person not having a substantial
 When there is taxable income: adverse interest in the disposition of such part of the income may be held or
 When prior to the settlement of the estate, the executor or administrator accumulated for future distribution to the grantor, or
sells property of a decedent's estate for more than the appraised value (2) may, or in the discretion of the grantor or of any person not having a substantial
placed upon it at the death of the decedent, the excess is income, taxable to adverse interest in the disposition of such part of the income, be distributed to the
the estate. grantor, or
 Where property is sold after the settlement of the estate by the devisee, (3) is, or in the discretion of the grantor or of any person not having a substantial
legatee or heir at a price greater than the appraised value placed upon it at adverse interest in the disposition of such part of the income may be applied to the
the time he inherited the property from the decedent, he is taxable payment of premiums upon policies of insurance on the life of the grantor
individually on any profit derived.
 No deductions in this case: An allowance paid a widow or heir out of the RULE: Such part of the income of the trust shall be included in computing the
corpus of the estate is not deductible from gross income. taxable income of the grantor.
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
4. Computation and Payment interest in the disposition of the part of the income in question.
Sec. 60 (C) (1)  Sec. 64 is designed to prevent the taxpayer from escaping the progressive
GENERAL RULE: The tax shall be computed upon the taxable income of the estate or tax rates on individuals by the trust device where he retains control over
trust and shall be paid by the fiduciary the trust income
EXCEPTIONS:
1. Revocable trusts [Section 63] 6. Consolidation of Income of Two or More Trusts
2. Income for the benefit of grantor [Section 64]
Sec. 60 (C) (2)
GENERAL RULE: In case of two or more trusts
 Revocable Trusts  the creator of the trust in each instance is the same person
Revocable Trusts [Sec. 63]  beneficiary in each instance is the same
Where at any time the power to revest in the grantor title to any part of the corpus The taxable income of all the trusts shall be consolidated and the tax provided in
of the trust is vested this Section computed on such consolidated income
(1) in the grantor either alone or in conjunction with any person not having a  Such proportion of said tax shall be assessed and collected from each
substantial adverse interest in the disposition of such part of the corpus or the trustee which the taxable income of the trust administered by him bears to
income therefrom, or the consolidated income of the several trusts.
(2) in any person not having a substantial adverse interest in the disposition of such
part of the corpus or the income therefrom EXCEPTION: [Sec. 215, RR2]
The income of such part of the trust shall be included in computing the taxable
income of the grantor. Where a person creates two or more trusts in favor of the same beneficiary
appointing two or more trustees, the latter should each make a separate return for
each trust but in such case the CIR will consolidate the net incomes of the different
5. INCOME FOR BENEFIT OF GRANTOR trusts and compute the tax on such consolidated income, allowing only one
absolute exemption of 1,800.

Formula:
7. Taxable Income Gross Income
Less: Deductions
Sec. 61 = Net Income
GENERAL RULE: The taxable income of the estate or trust shall be computed in the Less: Exemption (20k)
same manner and on the same basis as in the case of an individual, except that: = Taxable Income
(A) Allowable deduction  the amount of the income of the estate or trust for Multiplied by graduated tax rates in Sec. 24 (A)
the taxable year which is to be distributed currently by the fiduciary to the = Amount of Tax
beneficiaries, and the amount of the income collected by a guardian of an
infant which is to be held or distributed as the court may direct
 The 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 deduction under Subsection (B) of this Section in the same or
any succeeding taxable year.
(B) In the case of income received by estates of deceased persons during the
period of administration or settlement of the estate, and in the case of
income which, in the discretion of the fiduciary, may be either distributed
to 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 or
credited during such year to any legatee, heir or beneficiary but
the amount so allowed as a deduction shall be included in
computing the taxable income of the legatee, heir or beneficiary.
(C) In the case of a trust administered in a foreign country, the
deductions 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 shall not be included in computing the income
of the beneficiaries.
COMPUTATION OF TAX
(Sec. 60 (C), NIRC)
Basis: The tax is computed upon the taxable income of the estate or trust
Rates: The same rates for individuals under Sec. 24 (A)
Personal Exemption: P20,000
Taxable Year: Calendar year

PART VIII
C. RETURNS AND PAYMENTS OF TAX27 SPECIAL RULES: Sec. 51 (D-G)

1. Husband and Wife: Married individuals, whether citizens, resident or
1. Individual Return (Sec. 51, 56) nonresident aliens, who do not derive income purely from compensation, shall
file a return for the taxable year to include the income of both spouses, but
a. Who are required to file where it is impracticable for the spouses to file one return, each spouse may
file a separate return of income but the returns so filed shall be consolidated by
Sec. 51 (A) (1) the Bureau for purposes of verification for the taxable year.
1. Every Filipino citizen residing in the Philippines; 2. Return of Parent to Include Income of Children. - The income of unmarried
2. Every Filipino citizen residing outside the Philippines, on his income from minors derived from properly received from a living parent shall be included in
sources within the Philippines; the return of the parent, except
3. Every alien residing in the Philippines, on income derived from sources (a) when the donor's tax has been paid on such property, or
within the Philippines; and (b) when the transfer of such property is exempt from donor's tax.
4. Every nonresident alien engaged in trade or business or in the exercise of 3. Persons Under Disability. - If the taxpayer is unable to make his own return, the
profession in the Philippines. return may be made by his duly authorized agent or representative or by the
guardian or other person charged with the care of his person or property, the
principal and his representative or guardian assuming the responsibility of making
b. Those not required to file the return and incurring penalties provided for erroneous, false or fraudulent
returns.
Sec. 51 (A)(2) 4. Signature Presumed Correct. - The fact that an individual's name is signed to a
The following individuals shall not be required to file an income tax return: filed return shall be prima facie evidence for all purposes that the return was
1. An individual whose gross income does not exceed his total personal and actually signed by him.
additional exemptions for dependents under Section 35: Provided, That a
citizen of the Philippines and any alien individual engaged in business or
practice of profession within the Philippine shall file an income tax return, c. Where to file
regardless of the amount of gross income;
2. An individual with respect to pure compensation income, as defined in Sec. 51 (B)
Section 32 (A)(1), derived from sources within the Philippines, the income General Rule:
tax on which has been correctly withheld under the provisions of Section 1. If person has legal residence or principal place of business in the
79 of this Code: Provided, That an individual deriving compensation Philippines: the return shall be filed with an authorized agent bank,
concurrently from two or more employers at any time during the taxable Revenue District Officer, Collection Agent or duly authorized Treasurer of
year shall file an income tax return; the city or municipality in which such person has his legal residence or
3. An individual whose sole income has been subjected to final withholding principal place of business
tax pursuant to Section 57(A) of this Code; and 2. If person has no legal residence or place of business in the Philippines:
4. A minimum wage earner as defined in Section 22(HH) of this Code or an with the Office of the Commissioner.
individual who is exempt from income tax pursuant to the provisions of Exception: in cases where the Commissioner otherwise permits
this Code and other laws, general or special. (See RA 9504)
Any individual not required to file an income tax return may nevertheless be
required to file an information return pursuant to rules and regulations prescribed d. When to file
by the Secretary of Finance, upon recommendation of the Commissioner.
Sec. 51 (C)
27 (1) The return of any individual shall be filed on or before the fifteenth (15th) day of
Kimmie’s Part
April of each year covering income for the preceding taxable year. real property, he shall be entitled to a refund of such tax upon verification of his
compliance with the requirements for such exemption.
"In case the taxpayer elects and is qualified to report the gain by installments under
Section 49 of this Code, the tax due from each installment payment shall be paid
e. Where to Pay within (30) days from the receipt of such payments.
No registration of any document transferring real property shall be effected by the
Sec. 56 Register of Deeds unless the Commissioner or his duly authorized representative
The total amount of tax shall be paid by the person subject thereto at the time the has certified that such transfer has been reported, and the tax herein imposed, if
return is filed. any, has been paid.
When the tax due is in excess of Two thousand pesos (P2,000), the taxpayer other
than a corporation may elect to pay the tax in two (2) equal installments:
1. First installment  paid at the time the return is filed g. Quarterly Declaration of Income Tax (Sec. 74)
2. Second installment  paid on or before July 15 following the close of the Declaration of Income Tax for Individuals, Sec. 74
calendar year. General Rule: Every individual subject to income tax under Sections 24 and 25(A)
If any installment is not paid on or before the date fixed for its payment, the whole of this Title, who is receiving self-employment income, whether it constitutes the
amount of the tax unpaid becomes due and payable, together with the delinquency sole source of his income or in combination with salaries, wages and other fixed or
penalties. determinable income, shall make and file a declaration of his estimated income for
the current taxable year on or before April 15 of the same taxable year.
f. Capital Gains on Shares of Stocks and Real Estate Self-employment income consists of the earnings derived by the individual from the
practice of profession or conduct of trade or business carried on by him as a sole
Sec. 51 (C) and Sec. 56 (A)(3) proprietor or by a partnership of which he is a member.
FILING A RETURN – Individuals subject to tax on capital gains  Nonresident Filipino citizens, with respect to income from without the
(a) From the sale or exchange of shares of stock not traded thru a local stock Philippines, and nonresident aliens not engaged in trade or business in the
exchange as prescribed under Section 24(c) shall file a return within Philippines, are not required to render a declaration of estimated income
thirty (30) days after each transaction and a final consolidated return on tax.
or before April 15 of each year covering all stock transactions of the  The declaration shall contain such pertinent information as the Secretary
preceding taxable year; and of Finance, upon recommendation of the Commissioner, may, by rules and
(b) From the sale or disposition of real property under Section 24(D) shall file regulations prescribe. An individual may make amendments of a
a return within thirty (30) days following each sale or other disposition. declaration filed during the taxable year under the rules and regulations
prescribed by the Secretary of Finance, upon recommendation of the
Payment of Capital Gains Tax. - The total amount of tax imposed and prescribed Commissioner.
under Section 24 (c), 24(D), 27(E)(2), 28(A)(8)(c) and 28(B)(5)(c) shall be paid on Exception: Except as otherwise provided in this Section
the date the return prescribed therefor is filed by the person liable thereto:
Provided, That if the seller submits proof of his intention to avail himself of the Estimated tax: the amount which the individual declared as income tax in his final
benefit of exemption of capital gains under existing special laws, no such payments adjusted and annual income tax return for the preceding taxable year minus the sum
shall be required : Provided, further, That in case of failure to qualify for exemption of the credits allowed under this Title against the said tax. If, during the current
under such special laws and implementing rules and regulations, the tax due on the taxable year, the taxpayer reasonable expects to pay a bigger income tax, he shall
gains realized from the original transaction shall immediately become due and file an amended declaration during any interval of installment payment dates.
payable, subject to the penalties prescribed under applicable provisions of this
Code: Provided, finally, That if the seller, having paid the tax, submits such proof of Return and Payment of Estimated Income Tax by Individuals. - The amount of
intent within six (6) months from the registration of the document transferring the estimated income as defined above with respect to which a declaration is required
shall be paid in four (4) installments.
 First installment  paid at the time of the declaration returns, only one return for the taxable year shall be filed by either spouse to
 Second installment  August 15 of current year cover the income of the spouse, which return shall be signed by the husband and
 Third installment  November 15 of current year wife unless it is physically impossible to do so, in which case signature of one of
 Fourth installment  paid on or before April 15 of the following calendar the spouse would suffice.”
year when the final adjusted income tax return is due to be filed.
g. RR 3-2002 March 22, 2002 (Substituted Filing of ITR of Salaried

Individuals as amended by RR 19-2002 October 11, 2002) Certificate of Compensation Payment/ Tax Withheld (BIR Form 2316) – RR 19-
2002
This is the concept of substituted filing Every employer or other person who is required to deduct and withhold the tax on
compensation including fringe benefits given to rank and file employees, shall
Substituted Filing of Income Tax Returns by Employees Receiving Purely furnish every employee from whose compensation taxes have been withheld the
Compensation Income Certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316), on or
Individual taxpayers receiving purely compensation income, regardless of amount, before January 31 of the succeeding calendar year, or if the employment is
from only one employer in the Philippines for the calendar year, the income tax of terminated before the close of such calendar year, on the day on which the last
which has been withheld correctly by the said employed (tax due = tax withheld), payment of compensation is made. Failure to furnish the same shall be a ground
shall not be required to filed BIR Form No. 1700. for the mandatory audit of payor’s income tax liabilities (including withholding
tax) upon verified complaint of the payee.
In lieu of this, the Annual Information Return of Income Taxes Withheld on The certificate of Compensation Payment/Tax Withheld (BIR Form No. 2316) shall
Compensation and Final Withholding Taxes filed by their employers duly stamped contain a certification to the effect that the employer’s filing of BIR Form No. 1604-
“received” by BIR shall be tantamount to the substituted filing of income tax CF shall be considered as a substituted filing of the employee’s income tax return
returns by said employees. to the extent that the amount of compensation and tax withheld appearing in BIR
Form No. 1604-CF as filed with BIR is consistent with the corresponding amounts
Not qualified for substituted filing. indicated in BIR Form No. 2316. It shall be signed by both the employee and
(A) Individuals deriving compensation from two or more employers concurrently employer attesting to the fact that the information stated therein has been verified
or successively at anytime during the taxable year. and is true and correct to the best of their knowledge. However, the withholding
(B) Employees deriving compensation income, regardless of the amount, whether agents/employers are required to retain copies of the duly signed BIR Form No.
from a single or several employers during the calendar year, the income tax of 2316 for a period of three (3) years as required under the National Internal
which has not been withheld correctly (i.e. tax dues is not equal to the tax Revenue Code.
withheld) resulting to collectible of refundable return. The employee who is qualified for substituted filing of income tax return under
(C) Employees whose monthly gross compensation income does not exceed Five these regulations, shall no longer be required to file income tax return (BIR Form
Thousand Pesos (P5,000.00) or the statutory minimum wage, whichever is higher, No. 1700) since BIR Form No. 1604-CF shall be considered as a substituted return
and opted for non-withholding of tax on said income. filed by the employer. BIR Form No. 2316, duly certified by both employee and
(D) Individuals deriving other non-business, non-profession-related income in employer, shall serve the same purpose as if a BIR Form No. 1700 had been filed,
addition to compensation income not otherwise subject to a final tax. such as proof of financial capacity for purposes of loan, credit card, or other
(E) Individuals receiving purely compensation income from a single employer, applications, or for the purpose of availing tax credit in the employee’s home
although the income tax of which has been correctly withheld, but whose spouse country and for other purposes with various government agencies. This may also
falls under Section 2.83.4(A), (B), (C) and (D) of these Regulations. be used for purposes of securing travel tax exemption, when necessary.
(F) Non-resident aliens engaged in trade or business in the Philippines deriving However, information referring to the certification, appearing at the bottom of BIR
purely compensation income, or compensation income and other non-business, Form No. 2316, shall not be signed by both the employer and the employee if the
non-profession-related income. latter is not qualified for substituted filing. In which case, BIR Form No. 2316
In case of married individuals who are still required to file returns under existing furnished by the employer to the employee shall be attached to the employee’s
provisions of the law, i.e. in those instances not covered by the substituted filing of Income Tax Return (BIR Form No. 1700) to be filed on or before April 15 of the

following year.
h. RR 16-2002, October 11, 2002 – Modes of Payment of Taxes through

Banks
Modes of Payment to Authorized Agent Banks [AAB] (Sec. 3)

Aside from the electronic payment system currently used by some taxpayers in
paying their BIR taxes, the rest shall pay their tax liabilities through any of the
following modes: ILLUSTRATIONS:
(a) “Over-the-counter-cash-payment” refers to payment of tax liabilities to 1. Sample of tax check payment where the drawee bank and presenting bank
authorized agaent bank in the currencies (paper bills or coins) that are are different from each other:
legal tendeer in the Philippines. The maximum amount allowed per tax
payment shall not exceed P10,000.
(b) “Bank debit system” refers to the system whereby a taxpayer, through a
bank debit memo/advice, authorizes withdrawals from his/its existing
bank accounts for payment of tax liabilities
The bank debit system mode is allowed only if:
 the taxpayer has a bank account with the AAB branch where he/it
intends to file and pay his/its tax return/form/declaration
 the AAB branch is within the jurisdiction of the BIR Revenue
District Office (RDO)/ Large Taxpayer District Office (LTDO)
where the tax payment is due and payable
(c) “Checks” refers to a bill of exchange or Order Instrument drawn on a bank
payable on demand.
In the issuance and accomplishment of checks for the payment of internal
revenue, the taxpayer shall indicate in the space provided for “PAY TO
THE ORDER OF” the ff. data:
 Presenting/Collecting bank or bank where tha payment is to be
coursed 2. Sample of check tax payment drawn from and presented to the same bank
 FAO (For the Account Of) Bureau of Internal Revenue as payee
“ACCOUNT NAME”
 Taxpayer indentification number (TIN)

(A) Requirements. - Every corporation subject to the tax herein imposed, except
foreign corporations not engaged in trade or business in the Philippines, shall
render, in duplicate, a true and accurate quarterly income tax return and final or
adjustment return in accordance with the provisions of Chapter XII of this Title. The
return shall be filed by the president, vice-president or other principal officer, and
shall be sworn to by such officer and by the treasurer or assistant treasurer.
Taxable Year of Corporation. - A corporation may employ either calendar year or

fiscal year as a basis for filing its annual income tax return: Provided, That the
corporation shall not change the accounting period employed without prior
approval from the Commissioner in accordance with the provisions of Section 47 of
this Code.
a. Quarterly Income Tax (Sec. 75)

Sec. 75
The following checks are no acceptable as check payments for internal revenue Every corporation shall file in duplicate a quarterly summary declaration of its gross
taxes: income and deductions on a cumulative basis for the preceding quarter or quarters
1. Accomodation checks – checks issued or drawn by a party other than the upon which the income tax, shall be levied, collected and paid. The tax so computed
taxpayer making the payment shall be decreased by the amount of tax previously paid or assessed during the
2. Second endorsed checks – checks issued to the taxpayer as payee who preceding quarters and shall be paid not later than sixty (60) days from the close of
indorses the same as payment for taxes each of the first three (3) quarters of the taxable year, whether calendar or fiscal
3. Stale checks – checks dated more than 6 months prior to presentation to year.
the AAB
4. Postdated checks – checks dated a day or several days after the date of
presentation to the AAB Time of filing
5. Unsigned checks – checks with no signature of the drawer Quarterly income tax Within 60 days after the end of each first three quarters
6. Checks with alterations/erasures returns
Annual income tax On or before the 15th day of the 4th month following the
 AABs accepting checks for the payment of BIR taxes and other charges returns close of the taxable year
must see to it that the check covers one tax type for one return period only.
 AABs must strictly comply with the systems and procedures for the
reception, processing, clearing and accounting of the checks to be
prescribed under a separate regulation. b. Final Adjustment Return (Sec. 76)
 Second indorsement of checks payable to BIR or CIR is absolutely Sec. 76
prohibited
Every corporation liable to tax under Section 27 shall file a final adjustment return
covering the total taxable income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said taxable year is not equal to
3. Corporate Regular Returns (Sec. 52, 53, 56)
the total tax due on the entire taxable income of that year, the corporation shall
either:
Sec. 52 (A)Pay the balance of tax still due; or
SEC. 52. Corporation Returns. - (B)Carry-over the excess credit; or
(C)Be credited or refunded with the excess amount paid, as the case may be.

In case the corporation is entitled to a tax credit or refund of the excess estimated not traded thru a local stock exchange as prescribed under Sections 24 (c), 25
quarterly income taxes paid, the excess amount shown on its final adjustment (A)(3), 27 (E)(2), 28(A)(8)(c) and 28 (B)(5)(c), shall file a return within thirty (30)
return may be carried over and credited against the estimated quarterly income tax days after each transactions and a final consolidated return of all transactions
liabilities for the taxable quarters of the succeeding taxable years. Once the option to during the taxable year on or before the fifteenth (15th) day of the fourth (4th)
carry-over and apply the excess quarterly income tax against income tax due for the month following the close of the taxable year.
taxable quarters of the succeeding taxable years has been made, such option shall be
considered irrevocable for that taxable period and no application for cash refund or
issuance of a tax credit certificate shall be allowed therefor. g. Return of Corporations Contemplating Dissolution/Reorganization
Sec. 52 (C)
Every corporation shall, within thirty (30) days after the adoption by the
c. When to File corporation of a resolution or plan for its dissolution, or for the liquidation of the
Sec. 77, Sec. 53 whole or any part of its capital stock, including a corporation which has been
The corporate quarterly declaration shall be filed within sixty (60) days following notified of possible involuntary dissolution by the Securities and Exchange
the close of each of the first three (3) quarters of the taxable year. Commission, or for its reorganization, render a correct return to the Commissioner,
The final adjustment return shall be filed on or before the fifteenth (15th) day of verified under oath, setting forth the terms of such resolution or plan and such other
April, or on or before the fifteenth (15th) day of the fourth (4th) month following information as the Secretary of Finance, upon recommendation of the
the close of the fiscal year, as the case may be. commissioner, shall, by rules and regulations, prescribe.
The Commissioner may, in meritorious cases, grant a reasonable extension of time
for filing returns of income (or final and adjustment returns in case of corporations), The dissolving or reorganizing corporation shall, prior to the issuance by the
subject to the provisions of Section 56 of this Code. (S53) Securities and Exchange Commission of the Certificate of Dissolution or
Reorganization, as may be defined by rules and regulations prescribed by the
Secretary of Finance, upon recommendation of the Commissioner, secure a
d. Where to File (Sec. 77) certificate of tax clearance from the Bureau of Internal Revenue which certificate
Sec. 77 shall be submitted to the Securities and Exchange Commission.
Except as the Commissioner other wise permits, the quarterly income tax
declaration required in Section 75 and the final adjustment return required I Section
76 shall be filed with the authorized agent banks or Revenue District Officer or i. Sec. 244, RR 2
Collection Agent or duly authorized Treasurer of the city or municipality having Sec. 244, RR 2
jurisdiction over the location of the principal office of the corporation filing the All corporations, partnership, joint accounts and associations, contemplating
return or place where its main books of accounts and other data from which the dissolution or retiring from business without formal dissolution shall, within 30
return is prepared are kept. days after the approval of such resolution authorizing their dissolution, and within
the same period after their retirement from business, file their income tax returns
covering the profit earned or business done by them from the beginning of the
e. When to Pay year up to the date of such dissolution or retirement and pay the corresponding
Sec. 77 income tax due thereon upon demand by the Commissioner of Internal Revenue to
The income tax due on the corporate quarterly returns and the final adjustment addition to the income tax return required to be filed they shall also submit within
income tax returns shall be paid at the time the declaration or return is filed in a the same period the following:
manner prescribed by the Commissioner (a) Copy of the resolution authorizing such dissolution;
(b) Balance sheet at the date of dissolution or retirement and a profit and loss
statement covering the period from the beginning of the taxable year to the date of
dissolution or retirement;
f. Capital Gains on Shares of Stock
(c) In the case of a corporation, the names end addresses of the shareholders and
Sec. 52 (D)
the number and par value of the shares held by each; and in the case of a
Every corporation deriving capital gains from the sale or exchange of shares of stock partnership, joint-account or association, the name of the partners or members
and the capital contributed by each;  Withholding Tax on Compensation is the tax withheld from income
(d) The value and a description of, the assets received in liquidation by each payments to individuals arising from an employer-employee relationship.
shareholder;
(e) The name and address of each individual or corporation, other than Some general principles lifted from de Leon
shareholders, if any, receiving assets at the time of dissolution together with a
description and the value of the assets received by such individuals or  Kinds of withholding tax
corporations; and the consideration, if any, paid by each of them for the assets o Withholding tax at source
received. o Withholding tax on quarterly corporate income
o Withholding tax on employer’s compensation or wages
CASE: BPI v. CIR o Withholding of VAT
Facts: On 1 July 1985, SEC approved the Articles of Merger by virtue of which, BPI o Withholding of percentage tax
 Where does the withholding tax come from?
became FBTC’s succcessor in interest. FBTC earned income consisting of rentals
o The amount of income tax withheld comes from the income
from leased properties [5%] and interest from treasury notes [15%] which were earned by the taxpayer
withheld by the lessees and CR respectively. The total amount of which was 174,065  This income is part of the taxpayer’s gross receipts
and were remitted to BIR. FBTC prior year’s excess credit plus withheld income o Note that withholding tax is a manner or system by which income
taxes amounted to 2,320,138.34. After FBTC filed an ITR which showed a creditable taxes may be collected when the income is paid by the employer
income tax withheld at source, BPI filed a letter claim with BIR asking for a refund. thus received by the employee
The BIR refunded only the prior year’s excess credit in the amount of 2,146,972.57.  Rationale for withholding tax
o To provide the taxpayer a convenient manner to meet his
FBTC ended corporate existence in 1995.
probable income tax liability
o To ensure the collection of income tax which can otherwise be lost
Held: THE CLAIM FOR REFUND HAS ALREADY PRESCRIBED. Section 78 and
or substantially reduced through failure to file the corresponding
Section 244 of RR2 required the FBTC as a dissolving corporation to file its income returns
tax return within 30 days after the cessation of its business or 30 days after the o To improve the government’s cash flow
approval of the merger on July 1, 1985 or up to July 31, 1985. Under Section 292, an  Who is the payee?
action to claim for refund of an excessively collected tax starts to run from the day in o The person on whom the tax is imposed
which a corporate taxpayer is required by law to file its final income tax return. BPI  Who is the payor?
o The withholding agent
should have filed the action for refund of the excessively collected income tax return
 When do you withhold?
within 2 years from July 31, 1985 which was July 31, 1987. Petitioner filed said o The obligation of the payor to conduct and withhold tax at source
action only on December 29, 1987, 15 days late. Court gives more weight to Section arises at the time an income is paid or payable, whichever comes
244 of RR2 when it stated “income tax return. “as a rule, regulations promulgated by first.
the Sec. of Finance for the effective enforcement of the provision of the NIRC are
presumed valid unless they are unreasonable and contrary to law or the
Constitution.
 Requisites for withholding tax
o An income payment is subject to withholding tax if
 The poayment is subject to the recipient subject to
income tax
E. WITHHOLDING TAX28  The income is fixed or determinable at the time of
payment
 It is one of the income payments subject to withholding
tax as listed in the regulations
28
Jamie’s Part  The [aye is a Philippine resident liable to pay income tax
 The payir-withholding agent is also a Philippine resident
SECTION 2.57.1. Income Payments Subject to Final Withholding Tax. — The

following forms of income shall be subject to final withholding tax at the rates
1. FINAL WITHHOLDING TAX AT SOURCE herein specified;
(A) Income payments to a citizen or to a resident alien individual;
SECTION 57 Interest from any peso bank deposit, and 20%
yield or any other monetary benefit from
SECTION 2.57. Withholding of Tax at Source deposit substitutes and from trust funds and
(A) similar arrangements
 Final Withholding Tax Royalties (except on books as well as other 20%
o The amount of income tax withheld by the withholding agent is a literary works and musical compositions)
full and final payment of the income tax due from the payee on the
Prizes (except prizes amounting to ten 20%
said income.
thousand pesos (P10,000.00) or less which
o The liability for payment of the tax rests primarily on the payor as
shall be subject to tax under Sec. 24 (A) of
a withholding agent.
the Code) and other winnings (except
 In case of his failure to withhold the tax or in case of
Philippine Charity Sweepstakes winnings
under withholding, the deficiency tax shall be collected
and lotto winnings) derived from sources
from the payor/withholding agent.
within the Philippines
 The payee is not required to file an income tax return for
Royalties on books, as well as other literary 10%
the particular income.
works and musical compositions
o The finality of the withholding tax is limited only to the payee's
Interest income received by a resident 7.5%
income tax liability on the particular income.
individual taxpayer from a depository bank
 It does not extend to the payee's other tax liability on said
under the Foreign Currency Deposit System
income, such as when the said income is further subject
to a percentage tax. Interest income from long-term deposit or Holding Period Rate
investment in the form of savings, common Four (4) years to less than five
or individual trust funds, deposit substitutes, (5) years 5%
investment management accounts and other Three (3) years to less than four
investments evidenced by certificates in such (4) years 12%
form prescribed by the Bangko Sentral ng Less than three (3) years 20%
RR 2-98 as amended by RR 6-2001 RR 12-2001 RR 14-2002 RR 30-2003 Pilipinas which was pre-terminated by the
holder before the fifth (5th) year at the rates
SECTION 2.57 RR2 herein prescribed to be deducted and
Creditable Withholding Tax withheld from the proceeds thereof based on
o Taxes withheld on certain income payments are intended to equal the length of time that the instrument was
or at least approximate the tax due of the payee on said income. held by the taxpayer
o The income recipient is still required to file an income tax return Cash and/or property dividends actually or 6% - beginning January 1, 1998
to report the income and/or pay the difference between the tax constructively received from a domestic 8% - beginning January 1, 1999
withheld and the tax due on the income. corporation, joint stock company, insurance and
o Taxes withheld on income payments covered by the expanded or mutual fund companies or on the share of 10% - beginning January 1, 2000
withholding tax and compensation income are creditable in an individual partner in the distributable net and thereafter
nature. income after tax of a partnership (except
 Income Payments Subject to Final Withholding Tax general professional partnership) or on the
Income payments to a citizen or to a resident alien individual share of an individual in the net income after
tax of an association, a joint account or a company
joint venture or consortium of which he is a (b) Share in the distributable net income 20%
member or a co-venturer after tax of a partnership (except general
On capital gains presumed to have been 6% professional partnership) of which he is
realized from the sale, exchange or other a partner, or share in the net income
disposition of real property located in the after tax of an association, a joint
Philippines, classified as capital assets, account, or a joint venture of which he is
including pacto de retro sales and other a member or a co-venturer
forms of conditional sales based on the gross (c) Interests from any currency bank 20%
selling price or fair market value as deposit and yield or any other monetary
determined in accordance with Sec. 6(E) of benefit from deposit substitutes and
the Code (i.e. the authority of the from trust funds and similar
Commissioner to prescribe the real property arrangements
values), whichever is higher (d) Royalties (except royalties on books, as 20%
well as other literary works and musical
In case of dispositions of real property made the tax to be imposed shall be compositions which shall be subject to
by individuals to the government or any of determined either under Section 10% final withholding tax)
its political subdivisions or agencies or to 24(A) of the Code for normal (e) Prizes (except prizes amounting to ten 20%
government-owned or controlled income tax for individual thousand pesos (P10,000.00) or less
corporations citizens and residents or under subject to tax under Sec. 25 (A) (1) of the
Section 24(D)(1) of the Code for Code for the normal rates of income tax
the final tax on capital gains for individuals) and other winnings
from sale of property at six (except Philippine Charity Sweepstakes
percent (6%), at the option of winnings and lotto winnings)
the taxpayer. (2) Interest income derived from long-term Four (4) years to less than
Gross income derived from contracts by 8% of its gross income derived deposit or investment in the form of savings, five (5) years 5%
subcontractors from service contractors from such contracts in lieu of common or individual trust funds, deposit Three (3) years to less than
engaged in petroleum operations as defined any and all taxes, national and substitutes, investment management four (4) years 12%
under PD 87 also known as the OIL local, as imposed under PD 1354 accounts and other investments evidenced Less than three (3) years
EXPLORATION AND DEVELOPMENT ACT in by certificates in such form prescribed by the 20%
the Philippines Bangko Sentral ng Pilipinas which was pre-
terminated by the holder before the fifth
(5th) year at the rates herein prescribed to
(B) Income Payment to Non-resident Aliens Engaged in Trade or Business in be deducted and withheld from the proceeds
the Philippines thereof based on the length of time that the
instrument was held by the taxpayer
Tax base: gross amount thereof (3) On capital gains presumed to have been 6%
realized from the sale exchange or other
(1) On Certain Passive Income disposition of real property located in the
(a) Cash and/or property dividend from a 20% Philippines, classified as capital assets,
domestic corporation or from a joint including pacto de retro sales and other
stock company, or from an insurance or forms of conditional sales based on the gross
mutual fund company or from a regional selling price or fair market value as
operating headquarter of a multinational determined in accordance with Sec. 6(E) of
the Code (i.e. the authority of the prescribe the real property values), whichever is
Commissioner to prescribe zonal values), higher
whichever is higher In case of dispositions of real property made by the tax to be imposed shall be
In case of dispositions of real property made by 6% at the option of the individuals to government or any of its political determined either under Sec.
individuals to government or any of its political taxpayer subdivisions or agencies or to government-owned 24(a) of the Code for the rates
subdivisions or agencies or to government- or controlled corporations, of income tax for individual
owned or controlled corporations, the tax to be citizens and residents or under
imposed shall be determined either under Sec. 24(D)(1) of the Code for
Section 24(A) of the code for the normal rate of the final tax on capital gains
income tax for individual citizens and residents from sale of property at six
or under Section 24(D)(1) of the Code for the percent (6%), at the option of
final tax on capital gains from sale of property the taxpayer.
(C) Income Derived from All Sources Within the Philippines by a Non-resident
Alien Individual Not Engaged in Trade or Business Within the Philippines.
The following forms of income derived from all sources within the Philippines Income Derived by Alien Individuals Employed by Regional or Area
shall be subject to a final withholding tax in the hands of a non-resident alien Headquarters and Regional Operating Headquarters of Multinational
individual not engaged in trade or business within the Philippines based on the Companies
following amounts and at the rates prescribed therefor: The gross income received by every alien individual A final withholding tax
Gross income from all sources within the 25% occupying managerial and technical positions in equivalent to 15%
Philippines by non-resident cinematographic regional or area headquarters and regional
film owners, lessors and distributors operating headquarters and representative offices
Gross income derived from contracts by 8% of its gross income established in the Philippines by multinational
subcontractors from service contractors derived from such contracts companies as salaries, wages, annuities,
engaged in 'petroleum operations' as defined in lieu of any and all taxes, compensation, remuneration, and other
under PD 87 (also known as the OIL national and local, as emoluments, such as honoraria and allowances,
EXPLORATION AND DEVELOPMENT ACT in the imposed under PD 1354 except income which is subject to the fringe benefits
Philippines) tax, from such regional or area headquarters and
On the gross amount of income derived from all 25% regional operating headquarters.
sources within the Philippines by a non-resident shall apply to Filipinos employed and occupying the A final withholding tax
alien individual who is not engaged in trade or same as those of alien employed by regional or area equivalent to 15% of
business in the Philippines as interest, cash headquarters and regional operating headquarters gross income or at the
and/or property dividends, rents, salaries, wages, of multinational companies regardless of whether regular tax rate on their
premiums, annuities, compensation, or not there is an alien executive occupying the taxable income in
remuneration, emoluments, or other fixed or same position, provided, that such Filipinos shall accordance with the Tax
determinable annual or periodic or casual gains, have the option to be taxed Code of 1997.
profits and income and capital gains (E) Income Derived by Alien Individuals Employed by Offshore Banking Units.
On capital gains presumed to have been realized 6% The gross income of alien individuals occupying A final withholding tax
from the sale, exchange or other disposition of managerial or technical positions in offshore equivalent to 15%
real property located in the Philippines, classified banking units established in the Philippines, as
as capital assets, including pacto de retro sales salaries, wages, annuities, compensations,
and other forms of conditional sales based on the remuneration and other emoluments such as
gross selling price or fair market value as honoraria and allowances, received from such
determined in accordance with Sec. 6(E) of the offshore banking units.
Code (i.e. the authority of the Commissioner to Filipinos employed and occupying the same A final withholding tax
positions as those of aliens who are employed by equivalent to 15% located in the Philippines classified as capital assets,
these offshore banking units companies regardless including pacto de retro sales and other forms of
of whether or not there is an alien executive conditional sales based on the gross selling price or fair
occupying the same position, provided, that such market value as determined in accordance with Sec.
Filipinos shall have the option to be taxed. 6(E) of the Code, whichever is higher
Gross income derived from contracts by subcontractors 8% of its gross
from service contractors engaged in 'petroleum income derived from
(F) Income of Aliens Employed by Foreign Petroleum Service Contractors and operations' as defined under PD 87 (also known as the such contracts in lieu
Subcontractors. OIL EXPLORATION AND DEVELOPMENT ACT in the of any and all taxes,
The gross income of an alien individual who is a permanent A final Philippines) national and local, as
resident of a foreign country but who is employed and withholding tax imposed under PD
assigned in the Philippines by a foreign service contractor or equivalent to 1354
by a foreign service subcontractor who is engaged in 15%
petroleum operations in the Philippines
Filipinos who are employed and occupying the same A final (H) Income Payment to a Resident Foreign Corporation.
positions as those of aliens employed by a foreign petroleum withholding tax > Tax basis: Gross amount
service contractor or subcontractor. equivalent to Offshore On income derived by offshore banking 10%
15% Banking units authorized by the Bangko Sentral
Units ng Pilipinas (BSP) from foreign currency
transactions with local commercial
(G) Income Payment to a Domestic Corporation. banks and branches of foreign banks that
> Tax basis: gross amount thereof may be authorized by the BSP to transact
Interest from any currency bank deposit and yield or 20% business with offshore banking units and
any other monetary benefit from deposit substitutes other OBUs including interest income
and from trust fund and similar arrangements derived derived from foreign currency loans
from sources within the Philippines granted to resident
Royalties derived from sources within the Philippines 20% Tax on On any profit remitted by the Philippine 15%
Interest income derived from a depository bank under 7.5% Branch Profit branch of a foreign corporation to its
the Expanded Foreign Currency Deposit System, Remittances head office abroad based on the total
otherwise known as a Foreign Currency Deposit Unit profits applied or earmarked for
(FCDU) remittance without any deduction for
Income derived by a depository bank under the 10% the tax component thereof except those
Expanded Foreign Currency Deposit System from registered with the Philippine Economic
foreign transactions with local commercial banks Zones Authority (PEZA) and other
including branches of foreign banks that may be companies within the special economic
authorized by the Bangko Sentral ng Pilipinas (BSP) to zones such as Subic Bay Metropolitan
transact business with Foreign Currency Deposit Authority (SBMA) and Clark
System Units and other depository banks under the Development Authority (CDA)
expanded foreign currency deposit system including
interest income from foreign currency loans granted by Interests, dividends, rents, royalties
such depository bank under the said expanded foreign (including remunerations for technical
currency deposit system to residents services), salaries, wages, premiums,
On capital gains presumed to have been realized from 6% annuities, emoluments or other fixed or
the sale, exchange or other disposition of real property determinable annual periodic or casual
gains, profits, income and capital gains premiums), annuities, emoluments, or
received by a foreign corporation during other fixed or determinable annual,
each taxable year from all sources within periodic or casual gains, profits and
the Philippines shall not be considered income and capital gains (except capital
as branch profits unless the same are gains realized from sale, exchange,
effectively connected with the conduct of disposition of shares of stock in any
its trade or business in the Philippines. domestic corporation which is subject to
capital gains tax under Sec. 28(B)(5)(c)
Gross income from all sources within the 25%
Philippines derived by non-resident
Interest on any currency bank deposit and yield or any other 7.5% cinematographic film owners, lessors or
monetary benefit from deposit substitutes and from trust distributors
funds and similar arrangements and royalties derived from On the gross rentals, lease and charter 4.5%
sources within the Philippines fees, derived by non-resident owner or
Income derived by a depository bank under the expanded 10% lessor of vessels from leases or charters
foreign currency deposit system from foreign currency to Filipino citizens or corporations as
transactions with local commercial banks including approved by the Maritime Industry
branches of foreign banks that may be authorized by the Authority
Bangko Sentral ng Pilipinas to transact business with foreign On the gross rentals, charter and other 7.5%
currency deposit system units and other depository banks fees derived by non-resident lessor of
under the expanded foreign currency deposit system aircraft, machineries and other
including interest income from foreign currency loans equipment
granted by such depository banks under the said expanded Interest on foreign loans contracted on 20%
foreign currency deposit system to resident or after August 1, 1986
Interest income derived from a Depository Bank under the 7.5% Dividends received from a domestic 15% of the cash and/or property
Expanded Foreign Currency Deposit system corporation dividends received from a domestic
Gross income derived from contracts by subcontractors 8% of its gross corporation subject to the condition
from service contractors engaged in 'petroleum operations' income derived that the country in which the
as defined under PD 87 (also known as the OIL from such nonresident foreign corporation is
EXPLORATION AND DEVELOPMENT ACT in the Philippines) contracts in lieu domiciled (a) shall allow a credit
of any and all against the tax due from the said
taxes, national nonresident foreign corporation
and local, as which are equivalent to taxes
imposed under deemed to have been paid in the
PD 1354 Philippines equal to 32% thereafter
on corporations and 15% tax on
dividends as herein provided; or, (b)
(I) Income Derived From all Sources Within the Philippines by Non- does not impose any income tax on
Resident Foreign Corporation. dividends received from a domestic
 Tax basis: gross income corporation.
On gross income derived from all 34% - beginning January 1, 1998
sources within the Philippines such as 33% - beginning January 1, 1999 and (J) Fringe Benefits Granted to the Employee (Except Rank and File Employee)
interests, dividends, rents, royalties, 32% - beginning January 1, 2000 and On the grossed-up monetary value of 32%
salaries, premiums (except reinsurance thereafter fringe benefits, granted or furnished by
the employer to his employees the Commissioner or any of his deputies
or agents or examiners, or the Secretary
of Finance or any of his deputies or
(K) Informer's Reward to Persons Instrumental in the Discovery of Violations of agents.
the National Internal Revenue Code and the Discovery and Seizure of
Smuggled Goods 10%
Those given to persons, except an 10% Those given to persons instrumental in
internal revenue official or employee, or the discovery and seizure of such
other public official or employee or his smuggled goods.
relative within the sixth degree of The amount of reward shall be
consanguinity, who voluntarily gives equivalent to ten percent of the market
definite and sworn information not yet in value of the smuggled and confiscated
the possession of the BIR, leading to the goods or one million pesos
discovery of frauds upon the Internal (P1,000,000.00) per case whichever is
Revenue Laws or violations of any of the lower.
provisions thereof, thereby resulting in
the recovery of revenues, surcharges and
fees and/or the conviction of the guilty 2. WITHHOLDING OF CREDITABLE TAX
party and/or imposition of any fine or
penalty. RR 2-98 as amended by RR 6-2001 RR 12-2001 RR 14-2002 RR 30-2003
10% Income Payment Subject to Creditable Withholding Tax and Rates Prescribed
Those given to an informer where the Thereon
offender has offered to compromise the  Tax basis: items of income payments to persons residing in the Philippines
violation of law committed by him and (A) Professional fees, talent fees, etc., for services rendered by individuals —
his offer has been accepted by the On the gross professional, promotional and talent fees or any other form of
Commissioner and collected from the remuneration for the services of the following individuals
offender. Those individually engaged in the practice of 10%
The amount of reward shall be professions or callings: lawyers; certified public
equivalent to ten percent (10%) of the accountants; doctors of medicine; architects; civil,
revenues, surcharges or fees recovered electrical, chemical, mechanical, structural, industrial,
and/or fine or penalty imposed and mining, sanitary, metallurgical and geodetic
collected or one million pesos engineers; marine surveyors; doctors of veterinary
(P1,000,000.00) per case whichever is science; dentist; professional appraisers;
lower. connoisseurs of tobacco; actuaries; and interior
The reward shall be paid under the rules decorators;
and regulations issued by the Secretary Professional entertainers such as but not limited to 15% if the professional
of Finance, upon the recommendation of actors and actresses, singers and emcees; entertainer's gross
the Commissioner. However, such income for the current
person shall not be entitled to a reward, year exceeds P720,000
should no revenue, surcharges or fees be and 10% if otherwise
actually recovered or collected nor shall Professional athletes including basketball players, 15% if the professional
apply to a case already pending or pelotaris and jockeys; entertainer's gross
previously investigated or examined by income for the current

year exceeds P720,000 scientific equipment, agricultural machinery and equipment,
and 10% if otherwise construction/civil engineering machinery and equipment,
All directors involved in movies, stage, radio, 15% if the professional telecommunication equipment, office furniture/machines/equipment,
television and musical productions; entertainer's gross main frame computer and all other computer machines/equipment,
income for the current materials handling equipment and auxiliary equipment
year exceeds P720,000 Note: However, the Ten Thousand Pesos (P10,000.00) threshold shall not apply
and 10% if otherwise when the accumulated gross rental or lease paid by the lessee to the same lessor
Insurance agents and insurance adjusters; 20% exceeds or is reasonably expected to exceed P10,000.00 within the year. In which
Management and technical consultants; 20% case, the lessee shall withhold the five percent (5%) withholding tax on the entire
Bookkeeping agents and agencies; 20% amount.
Other recipients of talent fees; 15% if the professional However, the Ten Thousand Pesos (P10,000.00) threshold shall not 5%
entertainer's gross apply when the accumulated gross rental or lease paid by the lessee to
income for the current the same lessor exceeds or is reasonably expected to exceed P10,000.00
year exceeds P720,000 within the year. In which case, the lessee shall withhold the five percent
and 10% if otherwise (5%) withholding tax on the entire amount.
Fees of directors who are not employees of the 10%
company paying such fees, whose duties are confined
to attendance at and participation in the meetings of (D) Cinematographic film rentals and other payments
the board of directors. On gross rentals or lease of spaces used in posting advertisements in the 5%
Note: The amounts subject to withholding under this paragraph shall include not form of billboards and/or structures similar thereto, posted in public
only fees, but also per diems, allowances and any other form of income payments places such as, but not limited to, buildings, vehicles, amusement places,
not subject to withholding tax on compensation. In the case of professional malls, street posts, etc.
entertainers, athletes, and all recipient of talent fees, the amount subject to On gross payments to resident individuals and corporate cinematographic 5%
withholding tax shall also include amounts paid to them in consideration for the film owners, lessors or distributors
use of their names or pictures in print, broadcast, or other media or for public On gross payments to the following contractors, whether individual or 2%
appearances, for purposes of advertisements or sales promotion. corporate
Cinematographic film rentals and other payments 5%
(B) Professional fees, talent fees, etc. for services of taxable juridical persons (E) Income payments to certain contractors
Professional fees, talent fees, etc. for services of taxable juridical persons 10% Income payments to certain contractors29 2%
29
(C) Rentals (1) General engineering contractors — Those whose principal contracting business in
On gross rental for the continued use or possession of real property used 5% connection with fixed works requiring specialized engineering knowledge and skill including the
following divisions or subjects:
in business which the payor or obligor has not taken or is not taking title,
or in which he has no equity (a) Reclamation works;
On gross rental or lease in excess of Ten Thousand Pesos (P10,000.00) 10% (b) Railroads;
per payment for the continued use or possession of personal property (c) Highways, streets and roads;
used in business which the payor or obligor has not taken or is not taking (d) Tunnels;
(e) Airports and airways;
title, or in which he has no equity which include, but not limited to the (f) Waste reduction plants;
following: land transport equipment, water transport equipment, air (g) Bridges, overpasses, underpasses and other similar works;
transport equipment, industrial equipment, commercial equipment, (h) Pipelines and other systems for the transmission of petroleum and other liquid or
gaseous substances;
On income distributed to the beneficiaries of estates and trust as 15% withholding tax and tax exempt income
determined under Sec. 60 of the Code, except such income subject to final
(i) Land leveling; (G) Income payments to certain brokers and agents.
(j) Excavating; On gross commissions of customs, insurance, real estate and commercial 10%
(k) Trenching; brokers and fees of agents of professional entertainers
(l) Paving; and
(m) Surfacing work.
(2) General Building contractors — Those whose principal contracting business is in connection (H) Income payments to partners of general professional partnerships.
with any structure built, for the support, shelter and enclosure of persons, animals, chattels, or Income payments made periodically or at the end of the 10% if gross income
movable property of any kind, requiring in its construction the use of more than two unrelated
building trades or crafts, or to do or superintend the whole or any part thereto. Such structure
taxable year by a general professional partnership to the does not exceed
includes sewers and sewerage disposal plants and systems, parks, playgrounds, and other partners, such as drawings, advances, sharings, 720,000 else 15%
recreational works, refineries, chemical plants and similar industrial plants requiring specialized allowances, stipends, etc.
engineering knowledge and skills, powerhouse, power plants and other utility plants and
installation, mines and metallurgical plants, cement and concrete works in connection with the
above-mentioned fixed works.
(3) Specialty Contractors — Those whose operations pertain to the performance of construction (I) Professional fees paid to medical practitioners.
work requiring special skill and whose principal contracting business involves the use of Any amount collected for and paid to medical practitioners 10% if gross
specialized building trades or crafts. (includes doctors of medicine, doctors of veterinary science income does not
(4) Other contractors — and dentists) by hospitals and clinics or paid directly to the exceed 720,000
medical practitioners by patients who were admitted and else 15%
(a) Filling, demolition and salvage work contractors and operators of mine drilling
apparatus; confined to such hospitals or clinics
(b) Operators of dockyards; Note: The withholding tax herein prescribed shall not apply whenever there is
(c) Persons engaged in the installation of water system, and gas or electric light, heat or proof that no professional fee has in fact been charged by the medical practitioner
power; and paid by his patient.
(d) Operators of stevedoring, warehousing or forwarding establishments;
(e) Transportation contractors which include common carriers for the carriage of goods
and merchandise of whatever kind by land, air or water, where the gross payments by the (J) Gross selling price or total amount of consideration or its equivalent paid
payor to the same payee amounts to at least two thousand pesos (P2,000) per month,
to the seller/owner for the sale, exchange or transfer of .
regardless of the number of shipments during the month;
(f) Printers, bookbinders, lithographers and publishers except those principally engaged Gross selling price or total amount of consideration or its equivalent paid to the
in the publication or printing of any newspaper, magazine, review or bulletin which seller/owner for the sale, exchange or transfer of Real property, other than capital
appears at regular intervals, with fixed prices for subscription and sale; assets, sold by an individual, corporation, estate, trust, trust fund or pension fund
(g) Messengerial, janitorial, private detective and/or security agencies, credit and/or and the seller/transferor is habitually engaged in the real estate business in
collection agencies and other business agencies;
accordance with the following schedule
(h) Advertising agencies, exclusive of gross payments to media;
(i) Independent producers of television, radio and stage performances or shows; Those which are exempt from a withholding Exempt
(j) Independent producers of "jingles"; tax at source as prescribed in Sec. 2.57.5 of
(k) Labor recruiting agencies these regulations
(l) Persons engaged in the installation of elevators, central air conditioning units, With a selling price of five hundred thousand 1.5%
computer machines and other equipment and machineries and the maintenance services
thereon;
pesos (P500,000.00) or less
(m) Persons engaged in the sale of computer services, computer programmers, With a selling price of more than five hundred 3.0%
software/program developer/designer, internet service providers, web page designing, thousand pesos (P500,000.00) but not more
computer data processing, conversion or base services and other computer related than two million pesos (P2,000,000.00)
activities; (n) Persons engaged in landscaping services;
(o) Persons engaged in the collection and disposal of garbage;
(p) TV and radio station operators on sale of TV and radio airtime; and With selling price of more than two million pesos 5.0%
(q) TV and radio blocktimers on sale of TV and radio commercial spots. (P2,000,000.00)
Note: A seller/transferor must show proof of registration with HLURB or HUDCC Goods - tangible personal property. It does not include intangible personal
to be considered as habitually engaged in the real estate business. property as well as real property.
Real property, other than capital asset, by an individual, estate, trust, 7.5% Local suppliers of goods - a supplier from whom any of the top five thousand
trust fund or pension fund or by a corporation who is not habitually (5,000) corporations, as determined by the Commissioner, regularly makes its
engaged in the real estate business purchases of goods. As a general rule, this term does not include a casual purchase
Notes: of goods, that is, purchases made from non-regular suppliers and oftentimes
Gross selling price - the consideration stated in the sales document or the fair involving single purchases. However, a single purchase which involves one
market value determined in accordance with Section 6 (E) of the Code, as hundred thousand pesos (P100,000.00) or more shall be subject to a withholding
amended, whichever is higher. In an exchange, the fair market value of the tax.
property received in exchange, as determined in the Income Tax Regulations shall A corporation shall not be considered a withholding agent for purposes of this
be used. Section, unless such corporation has been determined and duly notified in writing
Where the consideration or part thereof is payable on installment, no withholding by the Commissioner that it has been selected as one of the top five thousand
of tax is required to be made on the periodic installment payments where the (5,000) corporations.
buyer is an individual not engaged in trade or business. In such a case, the The withholding agent shall submit on a semestral basis a list of its regular
applicable rate of tax based on the entire consideration shall be withheld on the suppliers of goods to the Revenue District Office (RDO) having jurisdiction over
last installment or installments to be paid to the seller. the withholding agent's principal place of business on or before July 31 and
However, if the buyer is engaged in trade or business, whether a corporation or January 31 of each year.
otherwise, the tax shall be deducted and withheld by the buyer on every
installment.
(N) Income payments by government.
Income payments, except any single purchase 1% supplier 2%
which is P10,000 and below, which are made of goods supplier of
(K) Additional income payments to government personnel from importers, by a government office, national or local, or
shipping and airline companies, or their agents. their attached agencies or bodies, and
On gross additional payments by importers, shipping and airline 15% government-owned or controlled corporations,
companies, or their agents to government personnel for overtime on their purchases of goods from local
services as authorized by law suppliers
Note: For this purpose, the importers, shipping and airline companies or their Income payments made to suppliers of 1% except for income
agents, shall be the withholding agents of the Government; agricultural products payments made to casual
agricultural suppliers where
the annual gross purchases
(L) Certain income payments made by credit card companies therefrom do not exceed
On the gross amounts paid by any credit card company in the Philippines 1% 20,000
to any business entity, whether a natural or juridical person, representing Note: A government-owned or controlled corporation which is listed as one of the
the sales of goods/services made by the aforesaid business entity to top five thousand (5,000) corporations shall withhold the tax in its capacity as a
cardholders government-owned or controlled corporation rather than as one of the top five
thousand (5,000) corporations.
(M) Income payments made by the top five thousand (5,000) corporations. Commissions of independent and exclusive 10%
Income payments made by any of the top five thousand (5,000) 1% distributors, medical/technical and sales
corporations, as determined by the Commissioner, to their local supplier representatives, and marketing agents of multi-
of goods level marketing companies. — On gross
Notes: commissions paid by multi-level marketing

companies to independent and exclusive received from a domestic corporation, joint stock company,
distributors, medical/technical and sales insurance or mutual fund companies or on the share of an
representatives, and marketing agents and sub- individual partner in the distributable net income after tax of
agents on their sale of goods or services by way a partnership (except general professional partnership) or on
of direct selling or similar arrangements the share of an individual in the net income after tax of an
On the gross processing/tolling fees paid to 5% association, a joint account or a joint venture or consortium
refineries for the conversion of molasses to its of which he is a member or a co-venturer
by-products and raw sugar to refined sugar
On gross payments made to embalmers for 1% Capital gains from sales of shares of stock not traded in the
embalming services rendered to funeral stock exchange
companies.
on presumed capital gains from sale of real property, 6% final
classified as capital asset, except capital gains presumed to withholding tax
RR 1-2006 have been realized from the sale or disposition of principal
The compensation income of individuals that do not exceed the statutory residence
minimum wage or 5k per month (whichever is higher) and of employees of the
govenrment of the Philippines, or any of its political subdivisions, agencies or
instrumentalities, with Salary Grades 1 to 3 are exempted from the requirement of
withholding tax on compensation. RA 9504 – AMENDING SECTION 22, 24, 34, 35, 51, AND 79 OF REPUBLIC ACT
NO. 8424, AS AMENDED OTHERWISE KNOWN AS THE NATIONAL INTERNAL
REVENUE OF 1997
 Minimum wage earners as defined in the NIRC shall not be subject to
RR 4-2006 withholding tax
A senior citizen shall be subject to the following withholding taxes: SECTION 22 - (HH) the term 'minimum wage earner' shall refer to a worker in the
On interest income derived from currency bank deposit, 20% final private sector paid the statutory minimum wage, or to an employee in the public
foreign currency bank deposit, yield and royalties (except on withholding tax sector with compensation income of not more than the statutory minimum wage
books, as well as other literary works and musical in the non-agricultural sector where he/she is assigned
compositions); prizes (except prizes amounting to 10k or "SEC. 51. Individual Return. -
less)
"(A) Requirements. -
Interest income derived from a Depository Bank under the 7.5%
Expanded Foreign Currency Deposit system "(1) Except as provided in paragraph (2) of this Subsection, the following
individuals are required to file an income tax return:
Interest income derived from long-term deposit or Four (4) years
investment in the form of savings, common or individual to less than five "(a) x x x;
trust funds, deposit substitutes, investment management (5) years 5%
accounts and other investments evidenced by certificates in Three (3) years "x x x.
such form prescribed by the Bangko Sentral ng Pilipinas to less than four
which was pre-terminated by the holder before the fifth (5th) (4) years 12% "(2) The following individuals shall not be required to file an income tax return:
year at the rates herein prescribed to be deducted and Less than three
withheld from the proceeds thereof based on the length of (3) years 20% "(a) x x x;
time that the instrument was held by the taxpayer
"(b) An individual with respect to pure compensation income, as defined in
Cash and/or property dividends actually or constructively 10% Section 32(A)(1), derived from such sources within the Philippines, the income tax

on which has been correctly withheld under the provisions of Section 79 of this trade or business. However, insofar as taxable sale, exchange or
Code: Provided, That an individual deriving compensation concurrently from two transfer of real property is concerned, individual buyers who are not
or more employers at any time during the taxable year shall file an income tax engaged in trade or business are also constituted as withholding
return; agents;
o All government offices including government-owned or controlled
"(c) x x x; and corporations, as well as provincial, city and municipal governments
and barangays.
"(d) A minimum wage earner as defined in Section 22(HH) of this Code or an
individual who is exempt from income tax pursuant to the provisions of this Code
and other laws, general or special. SECTION 58, NIRC
 Quarterly Returns and Payments of Taxes Withheld
"x x x." o Taxes deducted and withheld under Section 57 by withholding
agents are covered by a return and paid to, except in cases where
"Section 79. Income Tax Collected at Source. - the Commissioner otherwise permits, an authorized Treasurer of
the city or municipality where the withholding agent has his legal
"(A) Requirement of Withholding. - Except in the case of a minimum wage earner as residence or principal place of business, or where the withholding
defined in Section 22(HH) of this code, every employer making payment of wages agent is a corporation, where the principal office is located.
shall deduct and withhold upon such wages a tax determined in accordance with  What are these taxes deducted and withheld under
the rules and regulations to be prescribed by the Secretary of Finance, upon Section 57?
recommendation of the Commissioner:  Compensation income
 Income payments subject to the creditable
withholding taxes; and
FISLYN V CA  Income subject to final withholding taxes shall
be covered by a return and paid as provided
F: Fislyn, a DC, withheld and paid taxes when it remitted some amount to FCs. CIR o The taxes deducted and withheld by the withholding agent shall
assessed Fislyn because the liability to withhod and pay income tax withheld at be held as a special fund in trust for the government until paid to
source from certain payments due to a foreign corporation is at the time of accrual the collecting officers.
and not at the time of actual payment or remittance thereof.
o Period for filing and payment
H: The liability to withhold tax at source on income payments to non-resident FC  FINAL WITHHOLDING TAX
arises upon accrual.  The return for final withholding tax shall be filed
and the payment made within twenty-five (25)
days from the close of each calendar quarter
 CREDITABLE WITHHOLDING TAX
3. RETURN AND PAYMENT OF TAX
 The return for creditable withholding taxes shall
be filed and the payment made not later than the
RR 2-98
last day of the month following the close of the
Persons Required to Deduct and Withhold quarter during which withholding was made:
 The following persons are hereby constituted as withholding agents for  The Commissioner, with the approval of the
purposes of the creditable tax required to be withheld on income payments Secretary of Finance, may require these
enumerated withholding agents to pay or deposit the taxes
o In general, any juridical person, whether or not engaged in trade or deducted or withheld at more frequent intervals
business when necessary to protect the interest of the
o An individual, with respect to payments made in connection with his
government. furnish and submit the return required
in this Subsection.
 Statement of Income Payments Made and Taxes Withheld
o Every withholding agent required to deduct and withhold taxes  Income of Recipient
under Section 57 shall o Income upon which any creditable tax is required to be withheld
 Furnish each recipient, in respect to his or its receipts at source under Section 57 shall be included in the return of its
during the calendar quarter or year, a written statement recipient but the excess of the amount of tax so withheld over the
showing the income or other payments made by the tax due on his return shall be refunded to him subject to the
withholding agent during such quarter or year, and the provisions of Section 204; if the income tax collected at source is
amount of the tax deducted and withheld therefrom less than the tax due on his return, the difference shall be paid in
 This is simultaneous upon payment at the request of the accordance with the provisions of Section 56.
payee, but not later than the twentieth (20th) day All taxes withheld pursuant to the provisions of this Code and its
following the close of the quarter in the case of corporate implementing rules and regulations are hereby considered trust
payee, funds and shall be maintained in a separate account and not
 For individual payee for creditable withholding taxes not commingled with any other funds of the withholding agent.
later than March 1 of the following year in the case of For (E) Registration with Register of Deeds. - No registration of any
final withholding taxes, the statement should be given to document transferring real property shall be effected by the
the payee on or before January 31 of the succeeding year. Register of Deeds unless the Commissioner or his duly authorized
representative has certified that such transfer has been reported,
 Annual Information Return and the capital gains or creditable withholding tax, if any, has been
o Every withholding agent required to deduct and withhold taxes paid: Provided, however, That the information as may be required
under Section 57 shall by rules and regulations to be prescribed by the Secretary of
 Submit to the Commissioner an annual information Finance, upon recommendation of the Commissioner, shall be
return containing the list of payees and income annotated by the Register of Deeds in the Transfer Certificate of
payments, amount of taxes withheld from each payee and Title or Condominium Certificate of Title: Provided, further, That
such other pertinent information as may be required by in cases of transfer of property to a corporation, pursuant to a
the Commissioner. merger, consolidation or reorganization, and where the law allows
 In the case of final withholding taxes - the return deferred recognition of income in accordance with Section 40, the
shall be filed on or before January 31 of the information as may be required by rules and regulations to be
succeeding year prescribed by the Secretary of Finance, upon recommendation of
 In the case of - creditable withholding taxes, not the Commissioner, shall be annotated by the Register of Deeds at
later than March 1 of the year following the year the back of the Transfer Certificate of Title or Condominium
for which the annual report is being submitted. Certificate of Title of the real property involved: Provided, finally,
o This return, if made and filed in That any violation of this provision by the Register of Deeds shall
accordance with the rules and be subject to the penalties imposed under Section 269 of this
regulations approved by the Secretary Code.
of Finance, upon recommendation of
the Commissioner, shall be sufficient
compliance with the requirements of
Section 68 of this Title in respect to the 4. TAX DEEMED PAID ON DIVIDENDS
income payments.
o The Commissioner may, by rules and CIR V P&G
regulations, grant to any withholding
agent a reasonable extension of time to ISSUE/HELD/RATIO

WON PG-Phils is a “taxpayer” who can withhold tax? Yes, since the - This RR was issued in relation to the decision in CIR and SC Johnson and Son
corp/withholding agent is directly and independently liable for the correct amount where the SC did not allow the respondent to apply a lower rate of 10%
of the tax that should be withheld from the dividend remittances. Ergo, a “person pursuant to the most favoured nation clause because the RP-US treaty does
liable for tax” has been held to be a “person subject to tax” not contain a matching credit which is present in RP-Germany treaty.
- However, the RP-China tax treaty can be used in relation to RP-US treaty
because it also does not contain a matching credit requirement. Hence, the
5. WITHHOLDING AGENT CAN FILE CLAIM FOR REFUND 30 preferential rate of 10% may be used on royalties.
- But before this can be availed of, the ff are necessary:
CIR v. Proctor and Gamble (supra) a. There must be an agreement or contract whereby the royalties paid to
the US must originate from the use of, or the right to use any patent,
trademark, design or model, plan, secret formula or process or from the
use, or the right to use, industrial, commercial or scientific experience,
6. WITHHOLDING TAX ON DIVIDENDS and
b. As long as the contract is subject to approval under PHL law, the same
Marubeni v. CIR (supra) must be duly approved by the PHL competent authorities
- This issuance is affirmed by the case of Golden Arches Development
Corporation v. CIR which allowed for the application of 10% preferential
rate on royalties to the US based on the RP-China treaty under the most
7. WITHHOLDING TAX ON ROYALTIES favoured nation clause
CIR v. CA and SC Johnsons and Sons
F: Respondent SC Johnson and Sons PHL (Respondent)was granted the right to use
the trademarks, patens and technology of SC Johnson USA. In 1993, it claimed for a F. WITHHOLDING TAX ON WAGES31
refund for overpayment of 25% withholding tax on royalty payments. Respondent
CHAPTER XIII - WITHHOLDING ON WAGES
claims that the RP0US tax treaty should apply which would entitle it to 10%
withholding tax only pursuant to the RP-US tax treaty’s “most favoured nation Nature of Withholding Tax on Wages
clause”. Under this clause, the taxpayer (respondent) is allowed to apply the more  It is a method of collecting the income tax on wages/compensation at
favourable tax treatment under a treaty between PHL and another country (in this source upon receipt of the income.
case the RP-West Germany Tax treaty) “under similar circumstances”.  If the taxpayer is an individual, the net income shall be computed on the
basis of the calendar year. Thus, all forms of taxable compensation income
H: Respondent is not entitled to 10% tax rate on royalties. are income received and not in the year earned (BIR Ruling 346-88)
 It applies to all employed individuals whether citizens or aliens, deriving
The most favoured nation clause does not apply. The RP-Germany treaty requires income from compensation for services rendered in the Philippines
that there should be matching credit (i.e. 20% of the gross amount of royalties paid)  The employer is constituted as the withholding agent of the tax due on the
between Germany and PHL in order that the preferential rate of 10% will apply. taxable compensation of the employee
Applying this tax crediting reqt to RP and US, the treaty does not contain a similar
(SEC. 78 NIRC)
crediting, hence, the 10% preferential rate cannot apply.
Definitions. - As used in this Chapter:
 Quarterly Returns and Payments of Taxes Withheld
RMC 46-2002
30 31
Cielo’s Part Kaye’s Part
o Taxes deducted and withheld under Section 57 by withholding  Quarterly Returns and Payments of Taxes Withheld
agents are covered by a return and paid to, except in cases where o Taxes deducted and withheld under Section 57 by withholding
the Commissioner otherwise permits, an authorized Treasurer of agents are covered by a return and paid to, except in cases where
the city or municipality where the withholding agent has his legal the Commissioner otherwise permits, an authorized Treasurer of
residence or principal place of business, or where the withholding the city or municipality where the withholding agent has his legal
agent is a corporation, where the principal office is located. residence or principal place of business, or where the withholding
 What are these taxes deducted and withheld under agent is a corporation, where the principal office is located.
Section 57?  What are these taxes deducted and withheld under
 Compensation income Section 57?
 Income payments subject to the creditable  Compensation income
withholding taxes; and  Income payments subject to the creditable
 Income subject to final withholding taxes shall withholding taxes; and
be covered by a return and paid as provided  Income subject to final withholding taxes shall
o The taxes deducted and withheld by the withholding agent shall be covered by a return and paid as provided
be held as a special fund in trust for the government until paid to o The taxes deducted and withheld by the withholding agent shall
the collecting officers. be held as a special fund in trust for the government until paid to
the collecting officers.
o Period for filing and payment
 FINAL WITHHOLDING TAX o Period for filing and payment
 The return for final withholding tax shall be filed  FINAL WITHHOLDING TAX
and the payment made within twenty-five (25)  The return for final withholding tax shall be filed
days from the close of each calendar quarter and the payment made within twenty-five (25)
 CREDITABLE WITHHOLDING TAX days from the close of each calendar quarter
 The return for creditable withholding taxes shall  CREDITABLE WITHHOLDING TAX
be filed and the payment made not later than the  The return for creditable withholding taxes shall
last day of the month following the close of the be filed and the payment made not later than the
quarter during which withholding was made: last day of the month following the close of the
 The Commissioner, with the approval of the quarter during which withholding was made:
Secretary of Finance, may require these  The Commissioner, with the approval of the
withholding agents to pay or deposit the taxes Secretary of Finance, may require these
deducted or withheld at more frequent intervals withholding agents to pay or deposit the taxes
when necessary to protect the interest of the deducted or withheld at more frequent intervals
government. when necessary to protect the interest of the
 Statement of Income Payments Made and Taxes Withheld government.
Every withholding agent required to deduct and withhold taxes under Section 57  Statement of Income Payments Made and Taxes Withheld
shall o Every withholding agent required to deduct and withhold taxes
under Section 57 shall
Who is an employee?
 An individual performing services under an ER-EE relationship
 Covers all EEs, including officers and EEs, whether elected or appointed, of
the Government of the EEs or any of its political subdivision, or any agency
or instrumentality

Rank-and-file EEs Subsection shall in no case relieve the employer from liability for any penalty or
 All EEs who are holding neither managerial nor supervisory positions addition to the tax otherwise applicable in respect of such failure to deduct and
Managerial EEs withhold.
 Those who are vested with powers or prerogatives to lay down and
execute management policies and/or hire, transfer, suspend, lay-off, recall, (C) Refunds or Credits. -
discharge, assign or discipline EEs
Supervisory EEs (1) Employer. - When there has been an overpayment of tax under this
 Those who, in the interest of the ER, effectively recommend such Section, refund or credit shall be made to the employer only to the extent
managerial actions if the exercise of such authority is not merely routinary that the amount of such overpayment was not deducted and withheld
or clerical in nature but require the use of independent judgment. hereunder by the employer.
(2) Employees. -The amount deducted and withheld under this Chapter
Who is an employer? during any calendar year shall be allowed as a credit to the recipient of
 Any person for whim an individual performs or performed any service, of such income against the tax imposed under Section 24(A) of this Title.
whatever nature, under an ER-EE relationship Refunds and credits in cases of excessive withholding shall be granted
 It is not necessary that the services be continuing at the time the wages are under rules and regulations promulgated by the Secretary of Finance, upon
paid in order that the status of ER may exist recommendation of the Commissioner.
 Any person having control of payment of the compensation in cases where
the services are or were performed for a person who does not exercise Any excess of the taxes withheld over the tax due from the taxpayer shall be
such control returned or credited within three (3) months from the fifteenth (15th) day of April.
o Example: In the case of retirement pay paid by a trust and the Refunds or credits made after such time shall earn interest at the rate of six percent
person for whom the services were performed has no control over (6%) per annum, starting after the lapse of the three-month period to the date the
the payment of such compensation, the trust is deemed to be the refund of credit is made.
“employer” Refunds shall be made upon warrants drawn by the Commissioner or by his duly
 Any person paying compensation on behalf of a non-resident alien authorized representative without the necessity of counter-signature by the
individual, foreign partnership, or foreign corporation, who is not engaged Chairman, Commission on Audit or the latter's duly authorized representative as an
in trade or business within the Philippines exception to the requirement prescribed by Section 49, Chapter 8, Subtitle B, Title 1
 Embraces not only an individual and an organization engaged in trade or of Book V of Executive Order No. 292, otherwise known as the Administrative Code
business, but also includes an organization exempt from income tax of 1987.
(charitable, religious orgs, etc) as well as the Gov’t (D) Personal Exemptions. -
(SEC 79) NIRC (1) In General. - Unless otherwise provided by this Chapter, the personal
and additional exemptions applicable under this Chapter shall be
Income Tax Collected at Source
determined in accordance with the main provisions of this Title.
(A) Requirement of Withholding. - Every employer making payment of wages shall
(2) Exemption Certificate. -
deduct and withhold upon such wages a tax determined in accordance with the
rules and regulations to be prescribed by the Secretary of Finance, upon
(a) When to File. - On or before the date of commencement of employment
recommendation of the Commissioner: Provided, however, That no withholding of a
with an employer, the employee shall furnish the employer with a signed
tax shall be required where the total compensation income of an individual does not
withholding exemption certificate relating to the personal and additional
exceed the statutory minimum wage, or five thousand pesos (P5,000.00) per month,
exemptions to which he is entitled.
whichever is higher.
(b) Change of Status. - In case of change of status of an employee as a result
(B) Tax Paid by Recipient. - If the employer, in violation of the provisions of this
of which he would be entitled to a lesser or greater amount of exemption,
Chapter, fails to deduct and withhold the tax as required under this Chapter, and
the employee shall, within ten (10) days from such change, file with the
thereafter the tax against which such tax may be credited is paid, the tax so required
employer a new withholding exemption certificate reflecting the change.
to be deducted and withheld shall not be collected from the employer; but this

(c) Use of Certificates. - The certificates filed hereunder shall be used by (A) Employer. - The employer shall be liable for the withholding and remittance of
the employer in the determination of the amount of taxes to be withheld. the correct amount of tax required to be deducted and withheld under this Chapter.
If the employer fails to withhold and remit the correct amount of tax as required to
(d) Failure to Furnish Certificate. - Where an employee, in violation of this be withheld under the provision of this Chapter, such tax shall be collected from the
Chapter, either fails or refuses to file a withholding exemption certificate, employer together with the penalties or additions to the tax otherwise applicable in
the employer shall withhold the taxes prescribed under the schedule for respect to such failure to withhold and remit.
zero exemption of the withholding tax table determined pursuant to
Subsection (A) hereof.
(E) Withholding on Basis of Average Wages. - The Commissioner may, under rules (B) Employee. - Where an employee fails or refuses to file the withholding
and regulations promulgated by the Secretary of Finance, authorize employers to: exemption certificate or willfully supplies false or inaccurate information
(1) estimate the wages which will be paid to an employee in any quarter of thereunder, the tax otherwise required to be withheld by the employer shall be
the calendar year; collected from him including penalties or additions to the tax from the due date of
(2) determine the amount to be deducted and withheld upon each remittance until the date of payment. On the other hand, excess taxes withheld
payment of wages to such employee during such quarter as if the made by the employer due to:
appropriate average of the wages so estimated constituted the actual
wages paid; and (1) failure or refusal to file the withholding exemption certificate; or
(3) deduct and withhold upon any payment of wages to such employee (2) false and inaccurate information shall not be refunded to the employee but shall
during ;such quarter such amount as may be required to be deducted and be forfeited in favor of the Government.
withheld during such quarter without regard to this Subsection.
(F) Husband and Wife. - When a husband and wife each are recipients of wages, (Sec 81 NIRC)
whether from the same or from different employers, taxes to be withheld shall be Filing of Return and Payment of Taxes Withheld.
determined on the following bases: Except as the Commissioner otherwise permits, taxes deducted and withheld by the
(1) The husband shall be deemed the head of the family and proper employer on wages of employees shall be covered by a return and paid to an
claimant of the additional exemption in respect to any dependent children, authorized agent bank; Collection Agent, or the duly authorized Treasurer of the city
unless he explicitly waives his right in favor of his wife in the withholding or municipality where the employer has his legal residence or principal place of
exemption certificate. business, or in case the employer is a corporation, where the principal office is
(2) Taxes shall be withheld from the wages of the wife in accordance with located.
the schedule for zero exemption of the withholding tax table prescribed in The return shall be filed and the payment made within twenty-five (25) days from
Subsection (D)(2)(d) hereof. the close of each calendar quarter: Provided, however, That the Commissioner may,
(G) Nonresident Aliens. - Wages paid to nonresident alien individuals engaged in with the approval of the Secretary of Finance, require the employers to pay or
trade or business in the Philippines shall be subject to the provisions of this Chapter. deposit the taxes deducted and withheld at more frequent intervals, in cases where
(H) Year-end Adjustment. - On or before the end of the calendar year but prior to such requirement is deemed necessary to protect the interest of the Government.
the payment of the compensation for the last payroll period, the employer shall
determine the tax due from each employee on taxable compensation income for the The taxes deducted and withheld by employers shall be held in a special fund in
entire taxable year in accordance with Section 24(A). The difference between the tax trust for the Government until the same are paid to the said collecting officers]
due from the employee for the entire year and the sum of taxes withheld from
January to November shall either be withheld from his salary in December of the Requirements for Withholding
current calendar year or refunded to the employee not later than January 25 of the  Every employer must withhold from compensation paid, an amount
succeeding year. computed in accordance with existing regulations
 Compensation income of the following shall not be subject to withholding
tax:
(Sec 80 NIRC) (RR 2-98 as amended by Section 2 of RR 1-06)
Liability for Tax.
o Individuals that do not exceed the statutory minimum wage of the adequacy and capacity of the country’s tax administration to comply with its
5,000 per month (60,000 a year), whichever is higher commitments under existing international conventions or agreements on tax
o Employees of the government of the Philippines with salary matters.
grades of 1 to 3  Government shall comply with or commit to internationally-agreed tax
 The foregoing individuals whose compensation income is not subject to standards required for the exchange of tax information with its tax treaty
withholding tax shall remain liable for income taxes and shall continue to partners
file their annual income tax returns and pay income taxes due thereon, if o to help combat international tax evasion and avoidance
any, not later than April 15 of the year immediately following the taxable o to help address tax concerns that affect international trade and
year investment.
 Government shall adopt measures and procedures to enhance cooperation
with countries in the efficient collection of taxes, consistent with the
G. WITHHOLDING TAX BY GOVERNMENT international understanding to ensure payment of taxes due to respective
taxing jurisdictions
See previous section (Government and its agencies and instrumentalities shall also
withhold tax) Sec. 3. Authority of the Commissioner of Internal Revenue to Inquire into Bank
Deposit Accounts and Related Information Held by Financial Institutions.
H. E-COMMERCE TAXATION o Commissioner is authorized to inquire about:
 Decedent to determine his gross estate
(RMC 44-2005)  Any taxpayer who has filed an application for compromise of
Payments made by the end-user to local subsidiaries, resellers, distributors of his tax liability under Sec. 204 (A) (2) by reason of financial
resellers for the purchase of copyrighted articles are business income which is incapacity to pay his tax liability
subject to 32% Income Tax, based on the net taxable income of a domestic  Taxpayer’s financial position demonstrates a clear
corporation. inability to pay the tax assessed
When making payments to the local subsidiaries, resellers, distributors of  WAIVER
resellers, the end-user shall withhold 2% Income Tax of the gross amount of the o Application not considered unless he waives
payments creditable against the taxable income of the local subsidiaries, reseller in writing his privilege under the Foreign
or distributors, provided that the end-user is any of the following persons Currency Deposit Act, or other general or
required to withhold such tax: special laws
a) A juridical person, whether or not engaged in trade or business o Such waiver shall constitute the authority of
b) An individual, with respect to payments made in connection with his the Commissioner to inquire into bank
trade or business; or deposits of taxpayer
c) A government office including a government-owned or controlled  A specific taxpayer or taxpayers subject of a request for the
corporation, a provincial, city, or municipal government. supply of tax information from a foreign tax authority
pursuant to an international convention or agreement on tax
matters to which Philippines is a signatory or party
J. TAX TREATY (US-RP Tax Treaty) [RA 10021]32 o PROVIDED that the information obtained from
banks and other financial may be used by BIR
Also known as the “Exchange of Information on Tax Matters Act of 2009” for tax assessment, verification, audit and
enforcement purposes
Sec. 2. Policy – To promote and pursue a tax environment that contributes in o In case of request from a foreign tax authority
sustaining a favourable international investment climate and instills confidence in for tax information held by banks and financial
institutions, the exchange of information shall be
done in a secure manner to ensure
32
Kimmie’s part confidentiality
o The Commissioner shall provide the tax 8. A statement that the
information obtained from banks and financial requesting foreign tax
institutions: authority has exhausted all
 PREMISE: There must be a convention means available in its own
or agreement between the Philippines territory to obtain the
and the other country information, except those that
 WHEN? Upon request of the foreign tax would give rise to
authority disproportionate difficulties.
 REQUISITES: Requesting authority  PURPOSE: to demonstrate the
must provide the ff.: foreseeable relevance of the
1. Identity of the person under information to the request
examination or investigation o Commissioner shall forward the information as promptly as possible to the
2. Statement of information requesting foreign tax authority. Commissioner shall confirm receipt of a
sought and its nature request in writing to the requesting tax authority and shall notify the latter
3. The form said foreign tax of deficiencies in the request, if any, within sixty (60) days from the receipt
authority prefers to receive of the request.
the information o If the Commissioner is unable to obtain and provide the information within
4. Tax purpose the information is ninety (90) days from the receipt of the request, due to obstacles
sought encountered in furnishing the information or when the bank or financial
5. Grounds for believing that the institution refuses to furnish the information, he shall immediately inform
information requested is held the requesting tax authority of the same, explaining the nature of the
in the Philippines or is in the obstacles encountered or the reasons of refusal.
possession or control of a o Foreign tax authority: the tax authority or tax administration of the
person within the jurisdiction requesting State under the tax treaty or convention to which the
of the Philippines Philippines is a signatory or a party of.
6. To the extent known, the name
and address of any person Sec. 4. Allowing a Foreign Tax Authority to Income Tax Returns of Taxpayers in the
believed to be in possession of Philippines. –
the requested information  Income tax returns of specific taxpayers subject of a request for exchange
7. A Statement that the request is of information by a foreign tax authority pursuant to an international
in conformity with the law and convention or agreement on tax matters to which the Philippines is a
administrative practices of the signatory or a party of, shall be open to inspection upon the order of the
said foreign tax authority, such President if the Philippines under rules and regulations as may be
that if the requested prescribed by the Secretary of Finance, upon recommendation of the
information was within the Commissioner.
jurisdiction of the said foreign
tax authority then it would be Sec. 5. Authority of the Commissioner of Internal Revenue to Supply Information to a
able to obtain the information Foreign Tax Authority Which is at his Disposal. –
under its law or in the normal o Unlawful Divulgence of Information
course of administrative  General Rule: Any officer or employee of BIR who divulges to
practice and that it is any person or makes known
conformity with a convention  HOW? Any other manner than may be provided by
or international agreement; law information regarding
and  WHAT? the business, income, or estate of any
taxpayer, the secrets, operation, style or work, or
apparatus of
 WHO? any manufacturer or producer, or confidential
information regarding the business of any taxpayer
 WHOM LIABLE? Peson whose knowledge of the
information was acquired by him in the discharge of
his official duties
 Upon conviction for each act or omission, be
punished by a fine of not less than (P50,000) but not
more than (P100,000), or suffer imprisonment of not
less than two (2) years but not more than five (5)
years, or both.
 EXCEPTION: Except as provided in Sections 6(F) and 71 of
NIRC and Section 26 of Republic Act No. 6388
Sec. 6. Willful Refusal to Supply Information. - Any officer, owner, agent, manager,
director or officer-in -charge of any bank or financial institution within the purview
of this Act who, being required in writing by the Commissioner, willfully, refuses to
supply the required information shall be punished by a fine of not less than Fifty
thousand pesos (50,000) but not more than One hundred thousand pesos
(P100,000) , or suffer imprisonment of not less than two (2) years but not more
than five (5) years, or both.
Section 7. Obligation to Maintain Confidentiality of Information Received. - Any

information received by a foreign tax authority from the Bureau of Internal Revenue
pursuant to an International convention or agreement on tax matters shall be
treated by the authority as absolutely confidential in nature in the same manner as
information obtained by the latter under its laws and shall be disclosed only to
persons or authorities, including courts and administrative bodies, involves in the
assessment or collection of, the enforcement or prosecution in respect of, or the
determination of appeals in relation to, the taxes covered by such conventions of
agreements.
Section 8. Notice to Taxpayers. - A taxpayer shall be duly notified in writing by the

Commissioner that a foreign tax authority is requesting for exchange of information
held by financial institutions pursuant to a tax convention or agreement to which
the Philippines is a signatory or a party of, under such rules and regulations as may
be prescribed by the Secretary of Finance upon recommendations of the
Commissioner

h. A non-resident alien who stays in the Philippines for less than 180 days
during the calendar year shall be entitled to personal exemption not to
2010 TAXATION LAW BAR EXAMINATION QUESTIONS33 exceed the amount allowed to citizens of the Philippines by the country of
which he is subject or citizen.
Examiner: Professor Salvador
ESSAY/COMPUTATION
ANSWER BRIEFLY
A.
a. What is the "all events test"? Explain briefly. (2%)
b. What is the "immediacy test"? Explain briefly. (2%) Mirador, Inc., a domestic corporation, filed its Annual Income Tax Return for its
c. What is the "rational basis" test? Explain briefly. (2%) taxable year 2008 on April 15, 2009. In the Return, it reflected an income tax
overpayment of P1,000,000.00 and indicated its choice to carry-over the
True or False. (1% each) overpayment as an automatic tax credit against its income tax liabilities in
subsequent years.
a. Gains realized by the investor upon redemption of shares of stock in a
mutual fund company are exempt from income tax. On April 15, 2010, it filed its Annual Income Tax Return for its taxable year 2009
b. A corporation can claim the optional standard deduction equivalent to 40% reflecting a taxable loss and an income tax overpayment for the current year 2009 in
of its gross sales or receipts, as the case may be. the amount of P500,000.00 and its income tax overpayment for the prior year 2008
c. Premium payment for health insurance of an individual who is an of P1,000,000.00.
employee in an amount of P2,500 per year may be deducted from gross
income if his gross salary per year is not more than P250,000. In its 2009 Return, the corporation indicated its option to claim for refund the total
d. The Tax Code allows an individual taxpayer to pay in two equal income tax overpayment of P1,500,000.00
installments, the first installment to be paid at the time the return is filed,
and the second on or before July 15 of the same year, if his tax due exceeds Choose which of the following statements is correct.
P2,000.
e. An individual taxpayer can adopt either the calendar or fiscal period for a. Mirador, Inc. may claim as refund the total income tax overpayment of
purposes of filing his income tax return. P1,500,000.00 reflected in its income tax return for its taxable year 2009;
f. The capitalization rules may be resorted to by the BIR in order to compel b. It may claim as refund the amount of P500,000.00 representing its income
corporate taxpayers to declare dividends to their stockholders regularly. tax overpayment for its taxable year 2009; or
g. Informer’s reward is subject to a final withholding tax of 10%. c. No amount may be claimed as refund.
Explain the basis of your answer. (5%)
33 B.
The tax reviewer group apologizes if we were not able to provide for an answer
key. According to Professor Salvador’s class last year, he patterned some of his
questions in the finals according to the 2010 Bar Questions he made. I think it will What are the conditions that must be complied with before the Court of Tax Appeals
be best to know what he thinks are the topics that are bar-worthy. Please note may suspend the collection of national internal revenue taxes? (3%)
that we have omitted those questions which fall under the coverage of Taxation
Law 2. Lastly, we apologize for not being able to provide answers
C. from his father
XYZ Shipping Corporation is a branch of an international shipping line with voyages Car which is being used by his brother in Cavite 500,000
between Manila and the West Coast of the U.S. The company’s vessels load and
Proceeds of life insurance where he named his estate as
unload cargoes at the Port of Manila, albeit it does not have a branch or sales office irrevocable beneficiary 1,000,000
in Manila. All the bills of lading and invoices are issued by the branch office in
Makati which is also the company’s principal office. Household furnitures and appliances 1,000,000
Claims against a cousin who has assets of P10,000 and

The City of Manila enacted an ordinance levying a 2% tax on gross receipts of
liabilities of P100,000 100,000
shipping lines using the Port of Manila.
Shares of stock in ABC Corp, a domestic enterprise 100,000
Can the City Government of Manila legally impose said levy on the corporation?
The expenses and charges on the estate are as follows:
Explain. (3%)
P
D. Funeral Expenses 250,000
Legal fees for the settlement of the estate 500,000

A inherited a two-storey building in Makati from his father, a real estate broker in
the ‘60s. A group of Tibetan monks approached A and offered to lease the building in Medical expenses of last illness 600,000
order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the
rental of P1 million for the whole year. Claims against the estate 300,000
The following year, the City Assessor issued an assessment against A for non- The compulsory heirs of Don Sebastian approach you and seek your assistance in
payment of real property taxes. the settlement of his estate for which they have agreed to the above-stated
professional fees. Specifically, they request you to explain and discuss with them the
Is the assessor justified in assessing A’s deficiency real property taxes? Explain. following questions. You oblige:
(3%)
a. What are the properties and interests that should be included in the
E. computation of the gross estate of the decedent? Explain. (2.5%)
b. What is the net taxable estate of the decedent? Explain. (2.5%)
Don Sebastian, single but head of the family, Filipino, and resident of Pasig City, died c. When is the due date for filing and payment of the applicable tax return
intestate on November 15, 2009. He left the following properties and interests: and tax? Are these dates extendible? If so, under what conditions or
requirements? (2.5%)
d. If X, one of the compulsory heirs, renounces his share in the inheritance in
P
favor of the other co-heirs, is there any tax implication of X’s renunciation?
House and lot (family home) in Pasig 800,000
What about the other coheirs? (2.5%)
Vacation house and lot in Florida, USA 1,500,000
F.
Agricultural land in Naic, Cavite which he inherited 2,000,000

A is a travelling salesman working full time for Nu Skin Products. He receives a
monthly salary plus 3% commission on his sales in a Southern province where he is
based. He regularly uses his own car to maximize his visits even to far flung areas.
One fine day a group of militants seized his car. He was notified the following day by
the police that the marines and the militants had a bloody encounter and his car was
completely destroyed after a grenade hit it.
A wants to file a claim for casualty loss. Explain the legal basis of your tax advice.
(3%)
G.
In 2009, Caruso, a resident Filipino citizen, received dividend income from a U.S.-
based corporation which owns a chain of Filipino restaurants in the West Coast,
U.S.A. The dividend remitted to Caruso is subject to U.S. withholding tax with
respect to a non-resident alien like Caruso.
a. What will be your advice to Caruso in order to lessen the impact of possible
double taxation on the same income? (3%)
b. Would your answer in A. be the same if Caruso became a U.S. immigrant in
2008 and had become a non-resident Filipino citizen? Explain the
difference in treatment for Philippine income tax purposes. (3%)
H.
ABC, a domestic corporation, entered into a software license agreement with XYZ, a
non-resident foreign corporation based in the U.S. Under the agreement which the
parties forged in the U.S., XYZ granted ABC the right to use a computer system
program and to avail of technical know-how relative to such program. In
consideration for such rights, ABC agreed to pay 5% of the revenues it receives from
customers who will use and apply the program in the Philippines.
Discuss the tax implication of the transaction. (5%)

Bar Examination Questionnaire for Taxation Law 201134 (B) It shall report the P200,000.00 in its corporate income tax return
Set A adjusted by the holding period.
(2) Anne Lapada, a student activist, wants to impugn the validity of a tax on text (C) It shall pay 5% tax on the first P100,000.00 of the P200,000.00 and
messages. Aside from claiming that the law adversely affects her since she sends 10% tax on the remaining P100,000.00.
messages by text, what may she allege that would strengthen her claim to the right
to file a taxpayer’s suit? (D) It shall pay a tax of one-half of 1% of the P2 million gross sales.
(A) That she is entitled to the return of the taxes collected from her in case (6) Which theory in taxation states that without taxes, a government would be
the court nullifies the tax measure. paralyzed for lack of power to activate and operate it, resulting in its destruction?
(B) That tax money is being extracted and spent in violation of the (A) Power to destroy theory
constitutionally guaranteed right to freedom of communication.
(B) Lifeblood theory
(C) That she is filing the case in behalf of a substantial number of taxpayers.
(C) Sumptuary theory
(D) That text messages are an important part of the lives of the people she
represents.
(D) Symbiotic doctrine
(3) There is no taxable income until such income is recognized. Taxable income is
(7) The spouses Helena and Federico wanted to donate a parcel of land to their son
recognized when the
Dondon who is getting married in December, 2011. The parcel of land has a zonal
valuation of P420,000.00. What is the most efficient mode of donating the property?
(A) taxpayer fails to include the income in his income tax return.
(A) The spouses should first donate in 2011 a portion of the property
(B) income has been actually received in money or its equivalent. valued at P20,000.00 then spread the P400,000.00 equally for 2012, 2013,
2014 and 2015.
(C) income has been received, either actually or constructively.
(B) Spread the donation over a period of 5 years by the spouses donating
(D) transaction that is the source of the income is consummated. P100,000.00 each year from 2011 to 2015.
(4) Keyrand, Inc., a Philippine corporation, sold through the local stock exchange (C) The spouses should each donate a P110,000.00 portion of the value of
10,000 PLDT shares that it bought 2 years ago. Keyrand sold the shares for P2 the property in 2011 then each should donate P100,000.00 in 2012.
million and realized a net gain of P200,000.00. How shall it pay tax on the
transaction? (D) The spouses should each donate a P100,000.00 portion of the value of
the property in 2011, and another P100,000.00 each in 2012. Then, in
(A) It shall declare a P2 million gross income in its income tax return, 2013, Helena should donate the remaining P20,000.00.
deducting its cost of acquisition as an expense.
(9) Double taxation in its general sense means taxing the same subject twice during
the same taxing period. In this sense, double taxation
34
The underlined letters are the correct answers. The numbering is not chronological as
those omitted fall under Taxation Law 2 (A) violates substantive due process.
(B) does not violate substantive due process. (A) P20 billion.
(C) violates the right to equal protection. (B) P5 billion.
(D) does not violate the right to equal protection. (C) P100 billion.
(10) The payor of passive income subject to final tax is required to withhold the tax (D) P85 billion.
from the payment due the recipient. The withholding of the tax has the effect of
(13) Anktryd, Inc., bought a parcel of land in 2009 for P7 million as part of its
(A) a final settlement of the tax liability on the income. inventory of real properties. In 2010, it sold the land for P12 million which was its
zonal valuation. In the same year, it incurred a loss of P6 million for selling another
(B) a credit from the recipient's income tax liability. parcel of land in its inventory. These were the only transactions it had in its real
estate business. Which of the following is the applicable tax treatment?
(C) consummating the transaction resulting in an income.
(A) Anktryd shall be subject to a tax of 6% of P12 million.
(D) a deduction in the recipient's income tax return.
(B) Anktryd could deduct its P6 million loss from its P5 million gain.
(11) Guidant Resources Corporation, a corporation registered in Norway, has a 50
MW electric power plant in San Jose, Batangas. Aside from Guidant's income from its (C) Anktryd's gain of P5 million shall be subject to the holding period.
power plant, which among the following is considered as part of its income from
sources within the Philippines? (D) Anktryd's P6 million loss could not be deducted from its P5 million
gain.
(A) Gains from the sale to an Ilocos Norte power plant of generators bought
from the United States. (14) Aplets Corporation is registered under the laws of the Virgin Islands. It has
extensive operations in Southeast Asia. In the Philippines, Its products are imported
(B) Interests earned on its dollar deposits in a Philippine bank under the and sold at a mark-up by its exclusive distributor, Kim's Trading, Inc. The BIR
Expanded Foreign Currency Deposit System. compiled a record of all the imports of Kim from Aplets and imposed a tax on Aplets
net income derived from its exports to Kim. Is the BIR correct?
(C) Dividends from a two-year old Norwegian subsidiary with operations in
Zambia but derives 60% of its gross income from the Philippines. (A) Yes. Aplets is a non-resident foreign corporation engaged in trade or
business in the Philippines.
(D) Royalties from the use in Brazil of generator sets designed in the
Philippines by its engineers. (B) No. The tax should have been computed on the basis of gross revenues
and not net income.
(12) Tong Siok, a Chinese billionaire and a Canadian resident, died and left assets in
China valued at P80 billion and in the Philippines assets valued at P20 billion. For (C) No. Aplets is a non-resident foreign corporation not engaged in trade or
Philippine estate tax purposes the allowable deductions for expenses, losses, business in the Philippines.
indebtedness, and taxes, property previously taxed, transfers for public use, and the
share of his surviving spouse in their conjugal partnership amounted to P15 billion. (D) Yes. Aplets is doing business in the Philippines through its exclusive
Tong's gross estate for Philippine estate tax purposes is distributor Kim's Trading. Inc.

(15) In 2009, Spratz, Inc.’s net profit before tax was P35 million while its operating (18) Passive income includes income derived from an activity in which the earner
expenses was P31 million. In 2010, its net profit before tax was P40 million and its does not have any substantial participation. This type of income is
operating expenses was P38 million. It did not declare dividends for 2009 and 2010.
And it has no proposed capital expenditures for 2011 and the immediate future. May (A) usually subject to a final tax.
Spratz be subject to the improperly accumulated tax on its retained profits for 2009
and 2010?
(B) exempt from income taxation.
(A) Yes, since the accumulated amounts are reasonable for operations in
(C) taxable only if earned by a citizen.
relation to what it usually needed annually.
(D) included in the income tax return.

(B) Yes, since the accumulation is not reasonably necessary for the
immediate needs of the business.
(19) In 2010, Juliet Ulbod earned P500,000.00 as income from her beauty parlor and
received P250,000.00 as Christmas gift from her spinster aunt. She had no other
(C) No, because there is no showing that the taxpayer's 2009 and 2010 net
receipts for the year. She spent P150,000.00 for the operation of her beauty parlor.
profit before tax exceeded its paid-up capital.
For tax purposes, her gross income for 2010 is
(D) No, because the taxpayer is not shown to be a publicly-listed

(A) P750,000.00.
corporation, a bank, or an insurance company.
(B) P500,000.00.
(16) The actual effort exerted by the government to effect the exaction of what is
due from the taxpayer is known as
(C) P350,000.00.
(A) assessment.
(D) P600,000.00.
(B) levy.
(20) Exempted from donor’s taxation are gifts made
(C) payment.
(A) for the use of the barangay.
(D) collection.
(B) in consideration of marriage.
(17) Although the power of taxation is basically legislative in character, it is NOT the
function of Congress to (C) to a school which is a stock corporation.
(A) fix with certainty the amount of taxes. (D) to a for-profit government corporation.
(B) collect the tax levied under the law. (21) Federico, a Filipino citizen, migrated to the United States some six years ago
and got a permanent resident status or green card. He should pay his Philippine
income taxes on
(C) identify who should collect the tax.
(A) the gains derived from the sale in California, U.S.A. of jewelry he
(D) determine who should be subject to the tax.
purchased in the Philippines.

(B) the proceeds he received from a Philippine insurance company as the (B) Property previously taxed
sole beneficiary of life insurance taken by his father who died recently.
(C) Standard deduction of P1 million
(C) the gains derived from the sale in the New York Stock Exchange of
shares of stock in PLDT, a Philippine corporation. (D) Capital of the surviving spouse
(D) dividends received from a two year old foreign corporation whose (26) Ka Pedring Matibag, a sole proprietor, buys and sells "kumot at kulambo" both
gross income was derived solely from Philippine sources. of which are subject to value-added tax. Since he is using the calendar year as his
taxable year, his taxable quarters end on the last day of March, June, September, and
(23) A corporation may change its taxable year to calendar or fiscal year in filing its December. When should Ka Pedring file the VAT quarterly return for his gross sales
annual income tax return, provided or receipts for the period of June 1 to September 30?
(A) it seeks prior BIR approval of its proposed change in accounting period. (A) Within 25 days from September 30
(B) it simultaneously seeks BIR approval of its new accounting period. (B) Within 45 days from September 30
(C) it should change its accounting period two years prior to changing its (C) Within 15 days from September 30
taxable year.
(D) Within 30 days from September 30
(D) its constitution and by-laws authorizes the change.
(28) Don Fortunato, a widower, died in May, 2011. In his will, he left his estate of
(24) What is the rule on the taxability of income that a government educational P100 million to his four children. He named his compadre, Don Epitacio, to be the
institution derives from its school operations? Such income is administrator of the estate. When the BIR sent a demand letter to Don Epitacio for
the payment of the estate tax, he refused to pay claiming that he did not benefit from
(A) subject to 10% tax on its net taxable income as if it is a proprietary the estate, he not being an heir. Forthwith, he resigned as administrator. As a result
educational institution. of the resignation, who may be held liable for the payment of the estate tax?
(B) Exempt from income taxation if it is actually, directly, and exclusively (A) Don Epitacio since the tax became due prior to his resignation.
used for educational purposes.
(B) The eldest child who would be reimbursed by the others.
(C) subject to the ordinary income tax rates with respect to incomes
derived from educational activities. (C) All the four children, the tax to be divided equally among them.
(D) Exempt from income taxation in the same manner as government- (D) The person designated by the will as the one liable.
owned and controlled corporations.
(31) Alain Descartes, a French citizen permanently residing in the Philippines,
(25) Which among the following reduces the gross estate (not the net estate) of a received several items during the taxable year. Which among the following is NOT
citizen of the Philippines for purposes of estate taxation? subject to Philippine income taxation?
(A) Transfers for public use (A) Consultancy fees received for designing a computer program and
installing the same in the Shanghai facility of a Chinese firm.
(B) Interests from his deposits in a local bank of foreign currency earned (B) sixty days from the appointment of an administrator.
abroad converted to Philippine pesos.
(C) six months from the time he died on July 31, 2011.
(C) Dividends received from an American corporation which derived 60%
of its annual gross receipts from Philippine sources for the past 7 years. (D) sixty days from the time he died on July 31, 2011.
(D) Gains derived from the sale of his condominium unit located in The (38) Income from dealings in property (real, personal, or mixed) is the gain or loss
Fort, Taguig City to another resident alien. derived
(32) Income is considered realized for tax purposes when (A) only from the cash sales of property.
(A) it is recognized as revenue under accounting standards even if the law (B) from cash and gratuitous receipts of property.
does not do so.
(C) from sale and lease of property.
(B) the taxpayer retires from the business without approval from the BIR.
(D) only from the sale of property.
(C) the taxpayer has been paid and has received in cash or near cash the
taxable income.
(39) In March 2009, Tonette, who is fond of jewelries, bought a diamond ring for
P750,000.00, a bracelet for P250,000.00, a necklace for P500,000.00, and a brooch
(D) the earning process is complete or virtually complete and an exchange for P500,000.00. Tonette derives income from the exercise of her profession as a
has taken place. licensed CPA. In October 2009, Tonette sold her diamond ring, bracelet, and
necklace for only P1.25 million incurring a loss of P250,000.00. She used the P1.25
(35) Which among the following taxpayers is required to use only the calendar year million to buy a solo diamond ring in November 2009 which she sold for P1.5
for tax purposes? million in September 2010. Tonette had no other transaction in jewelry in 2010.
Which among the following describes the tax implications arising from the above
(A) Partnership exclusively for the design of government infrastructure transactions?
projects considered as practice of civil engineering.
(A) Tonette may deduct his 2009 loss only from her 2009 professional
(B) Joint-stock company formed for the purpose of undertaking income.
construction projects.
(B) Tonette may carry over and deduct her 2009 loss only from her 2010
(C) Business partnership engaged in energy operations under a service gain.
contract with the government.
(C) Tonette may carry over and deduct her 2009 loss from her 2010
(D) Joint account (cuentas en participacion) engaged in the trading of professional income as well as from her gain.
mineral ores.
(D) Tonette may not deduct her 2009 loss from both her 2010 professional
(37) Gerardo died on July 31, 2011. His estate tax return should be filed within income and her gain.
(A) six months from filing of the notice of death. (41) Real property owned by the national government is exempt from real property
taxation unless the national government
(A) transfers it for the use of a local government unit. (48) Zygomite Minerals, Inc., a corporation registered and holding office in
Australia, not operating in the Philippines, may be subject to Philippine income
(B) leases the real property to a business establishment. taxation on
(C) gratuitously allows its use for educational purposes by a school (A) gains it derived from sale in Australia of an ore crusher it bought from
established for profit. the Philippines with the proceeds converted to pesos.
(D) sells the property to a government-owned non-profit corporation. (B) gains it derived from sale in Australia of shares of stock of Philex
Mining Corporation, a Philippine corporation.
(42) Dondon and Helena were legally separated. They had six minor children, all
qualified to be claimed as additional exemptions for income tax purposes. The court (C) dividends earned from investment in a foreign corporation that derived
awarded custody of two of the children to Dondon and three to Helena, with Dondon 40% of its gross income from Philippine sources.
directed to provide full financial support for them as well. The court awarded the
6th child to Dondon's father with Dondon also providing full financial support. (D) interests derived from its dollar deposits in a Philippine bank under the
Assuming that only Dondon is gainfully employed while Helena is not, for how many Expanded Foreign Currency Deposit System.
children could Dondon claim additional exemptions when he files his income tax
return? (51) Celia donated P110,000.00 to her friend Victoria who was getting married.
Celia gave no other gift during the calendar year. What is the donor's tax implication
(A) Six children. on Celia’s donation?
(B) Five children. (A) The P100,000.00 portion of the donation is exempt since given in
consideration of marriage.
(C) Three children.
(B) A P10,000.00 portion of the donation is exempt being a donation in
(D) Two children. consideration of marriage.
(43) Political campaign contributions are NOT deductible from gross income (C) Celia shall pay a 30% donor's tax on the P110,000.00 donation.
(A) if they are not reported to the Commission on Elections. (D) The P100,000.00 portion of the donation is exempt under the rate
schedule for donor's tax.
(B) if the candidate supported wins the election because of possible
corruption. (52) Levox Corporation wanted to donate P5 million as prize money for the world
professional billiard championship to be held in the Philippines. Since the Billiard
Sports Confederation of the Philippines does not recognize the event, it was held
(C) since they do not help earn the income from which they are to be
under the auspices of the International Professional Billiards Association, Inc. Is
deducted.
Levox subject to the donor's tax on its donation?
(D) since such amounts are not considered as income of the candidate to
(A) No, so long as the donated money goes directly to the winners and not
whom given.
through the association.

(B) Yes, since the national sports association for billiards does not sanction (59) The excess of allowable deductions over gross income of the business in a
the event. taxable year is known as
(C) No, because it is donated as prize for an international competition (A) net operating loss.
under the billiards association.
(B) ordinary loss.
(D) Yes, but only that part that exceeds the first P100,000.00 of total Levox
donations for the calendar year. (C) net deductible loss.
(55) A non-stock, non-profit school always had cash flow problems, resulting in (D) NOLCO.
failure to recruit well-trained administrative personnel to effectively manage the
school. In 2010, Don Leon donated P100 million pesos to the school, provided the
(65) Pierre de Savigny, a Frenchman, arrived in the Philippines on January 1, 2010
money shall be used solely for paying the salaries, wages, and benefits of
and continued to live and engage in business in the Philippines. He went on a tour of
administrative personnel. The donation represents less than 10% of Don Leon's
Southeast Asia from August 1 to November 5, 2010. He returned to the Philippines
taxable income for the year. Is he subject to donor's taxes?
on November 6, 2010 and stayed until April 15, 2011 when he returned to France.
He earned during his stay in the Philippines a gross income of P3 million from his
(A) No, since the donation is actually, directly, and exclusively used for investments in the country. For the year 2010, Pierre’s taxable status is that of
educational purposes.
(A) a non-resident alien not engaged in trade or business in the Philippines.
(B) Yes, because the donation is to be wholly used for administration
purposes.
(B) a non-resident alien engaged in trade or business in the Philippines.
(C) Yes, since he did not obtain the requisite NGO certification before he
(C) a resident alien not engaged in trade or business in the Philippines.
made the donation.
(D) a resident alien engaged in trade or business in the Philippines.

(D) No, because the donation does not exceed 10% of his taxable income
for 2010.
(66) Lualhati Educational Foundation, Inc., a stock educational institution organized
for profit, decided to lease for commercial use a 1,500 sq. m. portion of its school.
(58) The proceeds received under a life insurance endowment contract is NOT
The school actually, directly, and exclusively used the rents for the maintenance of
considered part of gross income
its school buildings, including payment of janitorial services. Is the leased portion
subject to real property tax?
(A) if it is so stated in the life insurance endowment policy.
(A) Yes, since Lualhati is a stock and for profit educational institution.
(B) if the price for the endowment policy was not fully paid.
(B) No, since the school actually, directly, and exclusively used the rents for
(C) where payment is made as a result of the death of the insured. educational purposes.
(D) where the beneficiary was not the one who took out the endowment (C) No, but it may be subject to income taxation on the rents it receives.
contract.
(D) Yes, since the leased portion is not actually, directly, and exclusively
used for educational purposes.
(73) Which among the following concepts of taxation is the basis for the situs of
income taxation?
(A) Lifeblood doctrine of taxation
(B) Symbiotic relation in taxation
(C) Compensatory purpose of taxation
(D) Sumptuary purpose of taxation
(75) The head priest of the religious sect Tres Personas Solo Dios, as the corporation
sole, rented out a 5,000 sq. m. lot registered in its name for use as school site of a
school organized for profit. The sect used the rentals for the support and upkeep of
its priests. The rented lot is
(A) not exempt from real property taxes because the user is organized for
profit.
(B) exempt from real property taxes since it is actually, directly, and
exclusively used for religious purposes.
(C) not exempt from real property taxes since it is the rents, not the land,
that is used for religious purposes.
(D) exempt from real property taxes since it is actually, directly, and
exclusively used for educational purposes.

2009 TAXATION LAW BAR QUESTIONS finding that KIA's airline ticket sales constituted income derived from sources
PART I
KIA filed a protest on the ground that the P2,968,156.00 should be considered as
I income derived exclusively from sources outside the Philippines since KIA only
serviced passengers outside Philippine territory.
TRUE or FALSE. Answer TRUE if the statement is true, or FALSE if the statement is
false. Explain your answer in not more than two (2) sentences. (5%) Is the position of KIA tenable? Reasons. (4%)
a. A law that allows taxes to be paid either in cash or in kind is valid. VII
b. When the financial position of the taxpayer demonstrates a clear inability
to pay the tax, the Commissioner of Internal Revenue may validly Kenya International Airlines (KIA) is a foreign corporation, organized under the
compromise the tax liability. laws of Kenya. It is not licensed to do business in the Philippines. Its commercial
c. The doctrine of equitable recoupment allows a taxpayer whose claim for airplanes do not operate within Philippine territory, or service passengers
refund has prescribed to offset tax liabilities with his claim of overpayment. embarking from Philippine airports. The firm is represented in the Philippines by its
d. A law imposing a tax on income of religious institutions derived from the general agent, Philippine Airlines (PAL), a Philippine corporation.
sale of religious articles is valid.
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA
III airplanes outside the Philippines. The total sales of airline tickets transacted by PAL
for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue
Melissa inherited from her father a 300-square-meter lot. At the time of her father's assessed KIA deficiency income taxes at the rate of 35% on its taxable income,
death on March 14, 1995, the property was valued at P720,000.00. On February 28, finding that KIA's airline ticket sales constituted income derived from sources
1996, to defray the cost of the medical expenses of her sick son, she sold the lot for within the Philippines.
P600,000.00, on cash basis. The prevailing market value of the property at the time
of the sale was P3,000.00 per square meter. KIA filed a protest on the ground that the P2,968,156.00 should be considered as
income derived exclusively from sources outside the Philippines since KIA only
a. Is Melissa liable to pay capital gains tax on the transaction? If so, how much serviced passengers outside Philippine territory.
and why? If not, why not? (4%)
Is the position of KIA tenable? Reasons. (4%)
VII
X
Kenya International Airlines (KIA) is a foreign corporation, organized under the
laws of Kenya. It is not licensed to do business in the Philippines. Its commercial ABCD Corporation (ABCD) is a domestic corporation with individual and corporate
airplanes do not operate within Philippine territory, or service passengers shareholders who are residents of the United States. For the 2 nd quarter of 1983,
embarking from Philippine airports. The firm is represented in the Philippines by its these U.S.-based individual and corporate stockholders received cash dividends
general agent, Philippine Airlines (PAL), a Philippine corporation. from the corporation. The corresponding withholding tax on dividend income ---
30% for individual and 35% for corporate non-resident stockholders --- was
KIA sells airplane tickets through PAL, and these tickets are serviced by KIA deducted at source and remitted to the BIR.
airplanes outside the Philippines. The total sales of airline tickets transacted by PAL
for KIA in 1997 amounted to P2,968,156.00. The Commissioner of Internal Revenue On May 15, 1984, ABCD filed with the Commissioner of Iternal Revenue a formal
assessed KIA deficiency income taxes at the rate of 35% on its taxable income, claim for refund, alleging that under the RP-US Tax Treaty, the deduction withheld
at source as tax on dividends earned was fixed at 25% of said income. Thus, ABCD
asserted that it overpaid the withholding tax due on the cash dividends given to its services rendered in 2007, the law firm billed the corporation only in 2008. The
non-resident stockholders in the U.S. The Commissioner denied the claim. corporation duly paid.
On January 17, 1985, ABCD filed a petition with the Court of Tax Appeals (CTA) YYY Corporation claimed this expense as a deduction from gross income in its 2008
reiterating its demand for refund. return, because the exact amount of the expense was determined only in 2008. Is
YYY's claim of deduction proper? Reasons. (4%)
a. Does ABCD Corporation have the legal personality to file the refund on
behalf of its non-resident stockholders? Why or why not? (3%) XIII
b. Is the contention of ABCD Corporation correct? Why or why not? (3%)
In 1999, Xavier purchased from his friend, Yuri, a painting for P500,000.00. The fair
market value (FMV) of the painting at the time of the purchase was P1-million. Yuri
paid all the corresponding taxes on the transaction. In 2001, Xavier died. In his last
PART II will and testament, Xavier bequeathed the painting, already worth P1.5-million, to
his only son, Zandro. The will also granted Zandro the power to appoint his wife,
Wilma, as successor to the painting in the event of Zandro's death. Zandro died in
XI
2007, and Wilma succeeded to the property.
Raffy and Wena, husband and wife, are both employed by XXX Corporation. After
a. Should the painting be included in the gross estate of Xavier in 2001 and
office hours, they jointly manage a coffee shop at the ground floor of their house.
thus, be subject to estate tax? Explain. (3%)
The coffee shop is registered in the name of both spouses. Which of the following is
b. Should the painting be included in the gross estate of Zandro in 2007 and
the correct way to prepare their income tax return? Write the letter only. DO NOT
thus, be subject to estate tax? Explain. (3%)
EXPLAIN YOUR ANSWER. (2%)
c. May a vanishing deduction be allowed in either or both of the estates?
Explain. (3%)
a. Raffy will declare as his income the salaries of both spouses, while Wena
will declare the income from the coffee shop.
XIX
b. Wena will declare the combined compensation income of the spouses, and
Raffy will declare the income from the coffee shop.
c. All the income will be declared by Raffy alone, because only one Johnny transferred a valuable 10-door commercial apartment to a designated
consolidated return is required to be filed by the spouses. trustee, Miriam, naming in the trust instrument Santino, Johnny's 10-year old son, as
d. Raffy will declare his own compensation income and Wena will declare the sole beneficiary. The trustee is instructed to distribute the yearly rentals
hers. The income from the coffee shop shall be equally divided between amounting to P720,000.00. The trustee consults you if she has to pay the annual
them. Each spouse shall be taxed separately on their corresponding taxable income tax on the rentals received from the commercial apartment.
income to be covered by one consolidated return for the spouses.
e. Raffy will declare his own compensation income and Wena will declare a. What advice will you give the trustee? Explain. (3%)
hers. The income from the coffee shop shall be equally divided between b. Will your advice be the same if the trustee is directed to accumulate the
them. Raffy will file one income tax return to cover all the income of both rental income and distribute the same only when the beneficiary reaches
spouses, and the tax is computed on the aggregate taxable income of the the age of majority? Why or why not? (3%)
spouses.
XX
XII
Masarap Food Corporation (MFC) incurred substantial advertising expenses in
YYY Corporation engaged the services of the Manananggol Law Firm in 2006 to order to protect its brand franchise for one of its line products. In its income tax
defend the corporation's title over a property used in the business. For the legal
return, MFC included the advertising expense as deduction from gross income,
claiming it as an ordinary business expense. Is MFC correct? Explain. (3%)

I. monthly consecutive installments. Upon the advice of a tax lawyer, Maria Suerte
exchanged her Makati property for shares of stock of MAS Corporation. A BIR ruling,
In January 1970, Juan Gonzales bought one hectare of agricultural land in Laguna for confirming the tax-free exchange of property for shares of stock, was secured from
P100,000. This property has a current fair market value of P10 million in view of the the BIR National Office and a Certificate Authorizing Registration was issued by the
construction of a concrete road traversing the property. Juan Gonzales agreed to Revenue District Officer (RDO) where the property was located. Subsequently, she
exchange his agricultural lot in Laguna for a one-half hectare residential property sold her entire stock holdings in MAS Corporation to EIP Corporation for P300
located in Batangas, with a fair market value of P10 million, owned by Alpha million. In view of the tax advice, Maria Suerte paid only the capital gains tax of
Corporation, a domestic corporation engaged in the purchase and sale of real P29,895,000 ( P100,000 x 5% plus P298,900,00 x 10% ), instead of the corporate
property. Alpha Corporation acquired the property in 2007 for P9 million. income tax of P104,650,00 ( 35% on P299 million gain from sale of real property ).
After evaluating the capital gains tax payment, the RDO wrote a letter to Maria
Suerte, Slating that she commited tax evasion.
a. What is the nature of real properties exchanged for tax purposes - capital
asset or ordinary asset? Explain. ( 3% )
b. Is Juan Gonzales subject to income tax on the exchange of property? If so, Is the contention of the RDO tenable? Or was it tax avoidance that Maria Suerte had
what is the tax based and rate? Explain. ( 3% ) resorted to? Explain. ( 6% )
c. Is Alpha Corporation subject to income tax on the exchange of property? If
so, what is the tax base and rate? Explain. ( 3% ) VI
II While driving his car to Baquio last month, Pedro Asuncion, together with his wife
Assunta, and only son Jaime, met an accident that caused the instantaneous death of
Jose Cerna, Filipino citizen, married to Maria Cerna, died in a vehicular accident in Jaime. The following day, Assunta also died in the hospital. The spouses and their
NLEX on July 10, 2007. The spouses owned, among others, a 100-hectare son had the following assets and liabilities at the time of death :
agricultural land in Sta. Rosa, Laguna with current fair market value of P20 million,
which was subject to matter of a Joint Venture Agreement about to be implemented
Assunta Jaime
with Star Land Corporation ( SLC ), a well-known real estate development company.
Exclusive Conjugal Exclusive
He bought the said real property for P2 million fifty years ago. On January 5,2008,
the administrator of the estate and SLC jointly announced their big plans to start
conversion and development of the agricultural lands in Sta. Rosa, Laguna, into first-
class residential and commercial centers. As a result, the prices of real properties in Cash P10,000,000.00 P1,200,00.00
the locality have doubled. The administrator of the Estate of Jose Cernan filed the Cars P2,000,000.00 500,000.00
estate tax return on January 9, 2008, by including in the gross estate the real
property at P2 million. After 9 months, the BIR issued deficiency estate tax Land 5,000,000.00 2,000,000.00
assessment, by valuing the real property at P40 million. A ) Is the BIR correct in
valuing the real property at P40 million? Explain. ( 3% ) B ) If you disagree, what is Residential House 4,000,000.00
the correct value to used for estate tax purposes? Explain. ( 3% )
Mortgage Payable 2,500,000.00
V Funeral Expenses 300,000.00
Maria Suerte, a Filipino citizen, purchased a lot in Makati City in 1980 at a price of
P1 million. Said property has been leased to MAS Corporation, a domestic a. Is the Estate of Jaime Asuncion liable for estate tax? Explain. ( 4% )
corporation engaged in manufacturing paper products, owned 99% by Maria Suerte. b. Is vanishing deduction applicable to the Estate of Assunta Asuncion?
In October 2007, EIP Corporation, a real estate developer, expressed its desire to Explain ( 4% )
buy the Makati property at its fair market value P300 million, payable as follows :
(a) P60 million down payment; and (b) balance, payable equally in twenty four (24)
X July 1, 2007 to December 31, 2007 P 15,000,000.
John McDonald, a U.S. Citizen residing in Makati City, bought shares of stock of a
domestic corporation whose shares are listed and traded in the Philippine Stock Since MNO Corporation adopted fiscal year ending June 30 as its taxable year for
Exchange at the price of P2 million Yesterday, he sold the shares of stock through income tax purpose, it paid its 2% business tax for fiscal year ending June 30, 2007
his favorite Makati stockbroker at a gain of P200,000. based on gross dales of P15 million. However, the Quezon City Treasurer assessed
the corporation for deficiency business tax for 2007 based on gross sales of P25
a. Is John McDonald subject to Philippine Income Tax on the sale of his shares million alleging that local business taxes shall be computed based on calendar year.
through his stockbroker? Is he liable for any other tax? Explain. ( 3% )
b. If John McDonald deriectly sold the shares to his best friend, who is another a. Is the position of the city treasurer tenable? Explain. (3%)
U.S. Citizen residing in Makati, at a gain of P200,000. Is he liable for b. May the deficiency business tax be paid in installments without surcharge
Philippine Income Tax? If so, what is the ntax base and rate? ( 3% ) and interest? Explain. (3%)
XI XIV
Pedro Manalo, A Filipino citizen residing in Makati City, owns a vacation house and Spouses Jose San Pedro and Clara San Pedro, both Filipino citizens, are the owners
lot in San Francisco, California, U.S.A, which he acquired in 2000 for P15 million. On of a residential house and lot in Quezon City. After the recent wedding of their son,
January 10, 2006 he sold said real property to Juan Mayaman, another Filipino Mario, to Maria, the spouses donated said real property to them. At the time of
citizen residing in Quezon City, for P20 million. On February 9, 2006 Manalo filed donation, the real property has a fair market value of P2 million.
the capital gains tax return and paid P1.2 million representing 6% capital gain tax.
Since Manalo did not derive any ordinary income, no income tax returnn was filed a. Are Mario and Maria subject to income tax the value of the real property
by him for 2006. After the tax audit conducted in 2007, the BIR officer assessed donated to them? Explain. (4%)
Manalo for deficiency income tax computed as follows: P5 million ( P20 million less b. b) Are Jose and Clara subject to donor's tax? If so, how much is the taxable
P 15 million ) x 35% = P1.75 million, without the capital gains tax paid being gift of each spouse and what rate shall be applied to the gift? Explain. (4%)
allowed as tax credit. Manalo consulted a real estate broker who said that the P1.2
million capital gains tax should be credited from P1.75 million deficiency income XV
tax.
In 2007, spouses Renato and Judy Garcia opened peso and dollar deposits at the
a. Is the BIR officer's tax assessment correct? Explain. ( 3% ) Philippine branch of the Hong Kong Bank in Manila. Renato is an overseas worker in
b. If you were hired by Manalo as his tax consultant, what advice would you Hong Kong while Judy lives and works in Manila. During the year, the bank paid
give him to protect his interest? Explain. ( 3% ) interest income of P10,000 on the peso deposit and USS1,000 on the dollar deposit.
The bank withheld final income tax equivalent to 20% of the entire interest income
XIII and remitted the same to the BIR.
MNO Corporation was organized on July 1, 2006, to engage in trading of school a. Are the interest incomes on the bank deposits of spouses Renato and Judy
supplies, with principal place of business in Cubao, Quezon City. Its book of account Garcia subject to income tax? Explain. (4%)
and income statement showing gross sales as follows: b. Is the bank correct in withholding the 20% final tax on the entire interest
income? Explain. (3%)
July 1, 2006 to December 31, 2006 P 5,0000,000.
January 1, 2007 to June 30, 2007 P 10,000,000.

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A 2015

Chan, Gono, de Chavez, Manalo

1 | Chan, Gono, de Chavez, Manalo

RC/ NRC/ RA NRA ETB NRA NETB DC RFC NRFC

2 | Chan, Gono, de Chavez, Manalo

For Prizes: Except those 10k or less  subject to (Same XPNs)

3 | Chan, Gono, de Chavez, Manalo

5 | Chan, Gono, de Chavez, Manalo

6 | Chan, Gono, de Chavez, Manalo

7 | Chan, Gono, de Chavez, Manalo

8 | Chan, Gono, de Chavez, Manalo

Interest income from a depository bank 7.5%

9 | Chan, Gono, de Chavez, Manalo

10 | Chan, Gono, de Chavez, Manalo

11 | Chan, Gono, de Chavez, Manalo

F: Petitioners are domestic pharmaceutical corporations assailing the

12 | Chan, Gono, de Chavez, Manalo

6. Attrition Act of 2005

- A Revenue Fund is created from the excess of target collection as incentive

Abakada Guro v. Purisima (2008)

F: Petitioner is assailing the constitutionality of the Attrition act.

H: It is constitutional. It is pursuant to the constitutional provision as regards to

13 | Chan, Gono, de Chavez, Manalo

2. Classification of Corporations and Taxes

15 | Chan, Gono, de Chavez, Manalo

i. Private Educational Institutions and Non-Profit Hospitals

16 | Chan, Gono, de Chavez, Manalo

o International Carrier: An international carrier doing business in the

18 | Chan, Gono, de Chavez, Manalo

20 | Chan, Gono, de Chavez, Manalo

Contractor - the contractor in a service contract

23 | Chan, Gono, de Chavez, Manalo

P 65. 00 F: Wander Philippines, Inc. is a domestic corporation organized under Philippine

25 | Chan, Gono, de Chavez, Manalo

26 | Chan, Gono, de Chavez, Manalo

27 | Chan, Gono, de Chavez, Manalo

Notes for this example:

 The taxpayer shall pay the MCIT whenever it is greater than

SEC 27 (E) Minimum Corporate Income Tax on Domestic Corporations

29 | Chan, Gono, de Chavez, Manalo

30 | Chan, Gono, de Chavez, Manalo

31 | Chan, Gono, de Chavez, Manalo

33 | Chan, Gono, de Chavez, Manalo

34 | Chan, Gono, de Chavez, Manalo

Fringe Benefits Not Taxable

35 | Chan, Gono, de Chavez, Manalo

 Housing privilege  Valuation of Expense Account

36 | Chan, Gono, de Chavez, Manalo

 Valuation of expenses for foreign travel

38 | Chan, Gono, de Chavez, Manalo

39 | Chan, Gono, de Chavez, Manalo

40 | Chan, Gono, de Chavez, Manalo

8. A nonstock and nonprofit educational institution Requisites

Facts: PR V. Sinco, with his immediate family as incorporators, founded the V. G.

44 | Chan, Gono, de Chavez, Manalo

45 | Chan, Gono, de Chavez, Manalo

Sec 32 NIRC (B):

F. INCLUSIONS AND EXCLUSIONS FROM GROSS INCOME 11

47 | Chan, Gono, de Chavez, Manalo

48 | Chan, Gono, de Chavez, Manalo

49 | Chan, Gono, de Chavez, Manalo

50 | Chan, Gono, de Chavez, Manalo

3. Exclusion of 13th Month Pay

c. RMC 36-94 [Dec 14, 1994]