Cta 2003

 TAX LAW REVIEWER 
1 SAINT LOUIS UNIVERSITY BAR OPERATIONS
GENERAL PRINCIPLES e. Protectionism – in some important sectors of the economy,

as in the case of foreign importations, taxes sometimes provide
I. Concepts, Nature and Characteristics of Taxation and protection to local industries like protective tariffs and customs.
Taxes.
Taxes Defined
Taxes are the enforced proportional contributions from

Taxation Defined:
persons and property levied by the law-making body of the State
by virtue of its sovereignty for the support of government and for
As a process, it is a means by which the sovereign, through
public needs.
its law-making body, raises revenue to defray the necessary
expenses of the government. It is merely a way of apportioning the
Essential Characteristic of Taxes [ LEMP3S ]
costs of government among those who in some measures are
privileged to enjoy its benefits and must bear its burdens.
1. It is levied by the law-making body of the State
The power to tax is a legislative power which under the
As a power, taxation refers to the inherent power of the state
Constitution only Congress can exercise through the enactment of
to demand enforced contributions for public purpose or purposes.
laws. Accordingly, the obligation to pay taxes is a statutory liability.
Rationale of Taxation - The Supreme Court held:
2. It is an enforced contribution
“It is said that taxes are what we pay for civilized society.
A tax is not a voluntary payment or donation. It is not
Without taxes, the government would be paralyzed for lack of the
dependent on the will or contractual assent, express or implied, of
motive power to activate and operate it. Hence, despite the natural
the person taxed. Taxes are not contracts but positive acts of the
reluctance to surrender part of one’s hard-earned income to the
government.
taxing authorities, every person who is able must contribute his
share in the running of the government. The government for its
3. It is generally payable in money
part is expected to respond in the form of tangible and intangible
Tax is a pecuniary burden – an exaction to be
benefits intended to improve the lives of the people and enhance
discharged alone in the form of money which must be in legal
their moral and material values. The symbiotic relationship is
tender, unless qualified by law, such as RA 304 which allows
the rationale of taxation and should dispel the erroneous notion
backpay certificates as payment of taxes.
that it is an arbitrary method of exaction by those in the seat of
power.
4. It is proportionate in character - It is ordinarily based on the
Taxation is a symbiotic relationship, whereby in
exchange for the protection that the citizens get from the taxpayer’s ability to pay.
government, taxes are paid.” (Commissioner of Internal Revenue
5. It is levied on persons or property - A tax may also be
vs Allegre, Inc.,et al., L-28896, Feb. 17, 1988)
imposed on acts, transactions, rights or privileges.
Purposes and Objectives of Taxation
6. It is levied for public purpose or purposes - Taxation
involves, and a tax constitutes, a burden to provide income for
1. Revenue – to provide funds or property with which the State
public purposes.
promotes the general welfare and protection of its citizens.
7. It is levied by the State which has jurisdiction over the persons
2. Non-Revenue [PR2EP]
or property. - The persons, property or service to be taxed must be
subject to the jurisdiction of the taxing state.
a. Promotion of General Welfare – Taxation may be used as
an implement of police power in order to promote the general
welfare of the people. [see Lutz vs Araneta (98 Phil 148) and
Theory and Basis of Taxation
Osmeňa vs Orbos (G.R. No. 99886, Mar. 31, 1993)]
b. Regulation – As in the case of taxes levied on excises and

privileges like those imposed in tobacco or alcoholic products or 1. Necessity Theory
amusement places like night clubs, cabarets, cockpits, etc. Taxes proceed upon the theory that the existence of the
In the case of Caltex Phils. Inc. vs COA (G.R. No. government is a necessity; that it cannot continue without the
92585, May 8, 1992), it was held that taxes may also be imposed means to pay its expenses; and that for those means, it has the
for a regulatory purpose as, for instance, in the rehabilitation and right to compel all citizens and properties within its limits to
stabilization of a threatened industry which is affected with public contribute.
industry like the oil industry. In a case, the Supreme Court held that:
Taxation is a power emanating from necessity. It is a
c. Reduction of Social Inequality – this is made possible necessary burden to preserve the State’s sovereignty and a
through the progressive system of taxation where the objective is means to give the citizenry an army to resist aggression, a navy to
to prevent the under-concentration of wealth in the hands of few defend its shores from invasion, a corps of civil servants to serve,
individuals. public improvements designed for the enjoyment of the citizenry
and those which come with the State’s territory and facilities, and
d. Encourage Economic Growth – in the realm of tax protection which a government is supposed to provide. (Phil.
exemptions and tax reliefs, for instance, the purpose is to grant Guaranty Co., Inc. vs Commissioner of Internal Revenue, 13
incentives or exemptions in order to encourage investments and SCRA 775).
thereby promote the country’s economic growth.
 Prepared by the TAX LAW SECTION  Chief JOCELYN ROSARIO Assistant Chief SOCRATES PADUA Members MONDAE BUENAFE,
MYLENE CANAO, MONALISA IBARRA, CESAR LACDAO, GLORIFE LICLICAN, DULCE MARTINEZ, ELILYN NATURA, DONNA
MICHELLE PINLAC, CECILYNNE ANDRADE and LOUBELLE ORTIZ. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE
OF LAW BAR OPERATIONS  2003.
they are those which spring from the nature of the taxing power
itself although, they may or may not be provided in the
Constitution.
2. The Benefits-Protection Theory
The basis of taxation is the reciprocal duty of protection
between the state and its inhabitants. In return for the Scope of Legislative Taxing Power [S2 A P K A M]
contributions, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his 1. subjects of Taxation (the persons, property or occupation
property. etc. to be taxed)
2. amount or rate of the tax
3. purposes for which taxes shall be levied provided they
Qualifications of the Benefit-Protection Theory: are public purposes
4. apportionment of the tax
a. It does not mean that only those who are able to pay and do 5. situs of taxation
pay taxes can enjoy the privileges and protection given to a citizen 6. method of collection
by the government.
b. From the contributions received, the government renders no Is the Power to Tax the Power to Destroy?
special or commensurate benefit to any particular property or
person. In the case of Churchill, et al. vs Concepcion (34 Phil
c. The only benefit to which the taxpayer is entitled is that 969) it has been ruled that:
derived from his enjoyment of the privileges of living in an The power to impose taxes is one so unlimited in force
organized society established and safeguarded by the devotion of and so searching in extent so that the courts scarcely venture to
taxes to public purposes. (Gomez vs Palomar, 25 SCRA 829) declare that it is subject to any restriction whatever, except such as
d. A taxpayer cannot object to or resist the payment of taxes rest in the discretion of the authority which exercise it. No attribute
solely because no personal benefit to him can be pointed out as of sovereignty is more pervading, and at no point does the power
arising from the tax. (Lorenzo vs Posadas, 64 Phil 353) of government affect more constantly and intimately all the
relations of life than through the exaction made under it.
And in the notable case of McCulloch vs Maryland, Chief
Justice Marshall laid down the rule that the power to tax
3. Lifeblood Theory
involves the power to destroy .
Taxes are the lifeblood of the government, being such,
According to an authority, the above principle is pertinent
their prompt and certain availability is an imperious need.
only when there is no power to tax a particular subject and has no
(Collector of Internal Revenue vs. Goodrich International Rubber
relation to a case where such right to tax exists. This opt-quoted
Co., Sept. 6, 1965) Without taxes, the government would be
maxim instead of being regarded as a blanket authorization of the
paralyzed for lack of motive power to activate and operate it.
unrestrained use of the taxing power for any and all purposes,
irrespective of revenue, is more reasonably construed as an
epigrammatic statement of the political and economic axiom that
Nature of Taxing Power
since the financial needs of a state or nation may outrun any
human calculation, so the power to meet those needs by taxation
1. Inherent in sovereignty – The power of taxation is inherent
must not be limited even though the taxes become burdensome or
in sovereignty as an incident or attribute thereof, being essential to
confiscatory. To say that “the power to tax is the power to destroy”
the existence of every government. It can be exercised by the
is to describe not the purposes for which the taxing power may be
government even if the Constitution is entirely silent on the
used but the degree of vigor with which the taxing power may be
subject.
employed in order to raise revenue (I Cooley 179-181)
a. Constitutional provisions relating to the power of taxation do
not operate as grants of the power to the government. They merely
constitute limitations upon a power which would otherwise be
practically without limit.  Constitutional Restraints Re: Taxation is
b. While the power to tax is not expressly provided for in our the Power to Destroy
constitutions, its existence is recognized by the provisions relating While taxation is said to be the power to destroy, it is by
to taxation. no means unlimited. It is equally correct to postulate that the
In the case of Mactan Cebu International Airport “power to tax is not the power to destroy while the Supreme
Authority vs Marcos, Sept. 11, 1996, as an incident of sovereignty, Court sits,” because of the constitutional restraints placed on a
the power to tax has been described as “unlimited in its range, taxing power that violated fundamental rights.
acknowledging in its very nature no limits, so that security against In the case of Roxas, et al vs CTA (April 26, 1968), the
its abuse is to be found only in the responsibility of the legislative SC reminds us that although the power of taxation is sometimes
which imposes the tax on the constituency who are to pay it.” called the power to destroy, in order to maintain the general
public’s trust and confidence in the Government, this power must
2. Legislative in character – The power to tax is exclusively be used justly and not treacherously. The Supreme Court held:
legislative and cannot be exercised by the executive or judicial “The power of taxation is sometimes called also the
branch of the government. power to destroy. Therefore it should be exercised with caution to
minimize injury to the proprietary rights of a taxpayer. It must be
3. Subject to constitutional and inherent limitations – exercised fairly, equally and uniformly, lest the tax collector kill the
Although in one decided case the Supreme Court called it an ‘hen that lays the golden egg’. And, in order to maintain the
awesome power, the power of taxation is subject to certain general public’ trust and confidence in the Government this power
limitations. Most of these limitations are specifically provided in the must be used justly and not treacherously.”
Constitution or implied therefrom while the rest are inherent and
The doctrine seeks to describe, in an extreme, the taxing power without regard to the amount of their property or
consequential nature of taxation and its resulting implications, to occupations or businesses in which they may be engaged in.
wit: example: community tax
a. The power to tax must be exercised with caution to minimize
injury to proprietary rights of a taxpayer; 2. Property Taxes – taxes on things or property of a certain
b. If the tax is lawful and not violative of any of the inherent and class within the jurisdiction of the taxing power.
constitutional limitations, the fact alone that it may destroy an example: real estate tax
activity or object of taxation will not entirely permit the courts to
afford any relief; and 3. Excise Taxes – charges imposed upon the performance of an
c. A subject or object that may not be destroyed by the taxing act, the enjoyment of a privilege, or the engaging in an occupation.
authority may not likewise be taxed. (e.g. exercise of a examples: income tax, value-added tax, estate tax or
constitutional right) donor’s tax
Power of Judicial Review in Taxation

The courts cannot review the wisdom or advisability or B. As to Burden
expediency of a tax. The court’s power is limited only to the
application and interpretation of the law. 1. Direct Taxes – taxes wherein both the “incidence” as well as
Judicial action is limited only to review where involves: the “impact” or burden of the tax faces on one person.
1. The determination of validity on the tax in relation to examples: income tax, community tax, donor’s tax,
constitutional precepts or provisions. estate tax
2. The determination, in an appropriate case, of the application of
the law. 2. Indirect Taxes – taxes wherein the incidence of or the liability
for the payment of the tax falls on one person, but the burden
thereof can be shifted or passed to another person.
Aspects of Taxation examples: VAT, percentage taxes, customs duties excise
1. Levy – determination of the persons, property or excises to be taxes on certain specific goods
taxed, the sum or sums to be raised, the due date thereof and the
time and manner of levying and collecting taxes (strictly speaking, Important Points to Consider regarding Indirect
such refers to taxation) Taxes:
1. When the consumer or end-user of a manufacturer product is
2. Collection – consists of the manner of enforcement of the tax-exempt, such exemption covers only those taxes for which
obligation on the part of those who are taxed. (this includes such consumer or end-user is directly liable. Indirect taxes are not
payment by the taxpayer and is referred to as tax administration) included. Hence, the manufacturer cannot claim exemption from
The two processes together constitute the “taxation the payment of sales tax, neither can the consumer or buyer of the
system”. product demand the refund of the tax that the manufacturer might
have passed on to him. (Phil. Acetylene Co. inc. vs Commissioner
Basic Principles of a Sound Tax System [FAT] of Internal Revenue et. al., L-19707, Aug.17, 1987)
2. When the transaction itself is the one that is tax-exempt but

1. Fiscal Adequacy – the sources of tax revenue through error the seller pays the tax and shifts the same to the
should coincide with, and approximate the needs of government buyer, the seller gets the refund, but must hold it in trust for buyer.
expenditure. Neither an excess nor a deficiency of revenue vis-à- (American Rubber Co. case, L-10963, April 30, 1963)
vis the needs of government would be in keeping with the
principle. 3. Where the exemption from indirect tax is given to the
contractee, but the evident intention is to exempt the contractor so
that such contractor may no longer shift or pass on any tax to the
contractee, the contractor may claim tax exemption on the
2. Administrative Feasibility – tax laws should be
transaction (Commissioner of Internal Revenue vs John Gotamco
capable of convenient, just and effective administration.
and Sons, Inc., et.al., L-31092, Feb. 27, 1987)
4. When the law granting tax exemption specifically includes

3. Theoretical Justice – the tax burden should be in indirect taxes or when it is clearly manifest therein that legislative
proportion to the taxpayer’s ability to pay (ability-to-pay principle). intention to exempt embraces indirect taxes, then the buyer of the
The 1987 Constitution requires taxation to be equitable and product or service sold has a right to be reimbursed the amount of
uniform. the taxes that the sellers passed on to him. (Maceda vs
Macaraig,supra)
II. Classifications and Distinction

C. As to Purpose
Classification of Taxes
1. General/Fiscal/Revenue – tax imposed for the general
A. As to Subject matter purposes of the government, i.e., to raise revenues for
governmental needs.
1. Personal, capitation or poll taxes – taxes of fixed amount Examples: income taxes, VAT, and almost all taxes
upon all persons of a certain class within the jurisdiction of the
2. Special/Regulatory – tax imposed for special purposes, i.e., Tax vs Toll

to achieve some social or economic needs. 1. demand of sovereignty 1. demand of proprietorship
Examples: educational fund tax under Real Property 2. paid for the support of the 2. paid for the use of another’s
Taxation government property
3. generally, no limit as to 3. amount depends on the
D. As to Measure of Application amount imposed cost of construction or
maintenance of the public
1. Specific Tax – tax imposed per head, unit or number, or by improvement used
some standard of weight or measurement and which requires no 4. imposed only by the 4. imposed by the government
assessment beyond a listing and classification of the subjects to government or private individuals or entities
be taxed.
Examples: taxes on distilled spirits, wines, and b. Penalty vs Tax
fermented liquors Penalty – any sanctions imposed as a punishment for
violations of law or acts deemed injurious.
2. Ad Valorem Tax – tax based on the value of the article or
thing subject to tax. Tax vs Penalty
example: real property taxes, customs duties 1. generally intended to raise 1. designed to regulate
revenue conduct
E. As to Date 2. imposed only by the 2. imposed by the government
government or private individuals or entities
1. Progressive Tax – the rate or the amount of the tax increases
as the amount of the income or earning (tax base) to be taxed c. Special Assessment vs Tax
increases. Special Assessment – an enforced proportional
examples: income tax, estate tax, donor’s tax contribution from owners of lands especially or peculiarly benefited
by public improvements.
2. Regressive Tax – the tax rate decreases as the amount of
income or earning (tax base) to be taxed increases.
Tax vs Special Assessment
Note: We have no regressive taxes (this is according to
1. imposed on persons, 1. levied only on land
De Leon)
property and excise
2. personal liability of the 2. not a personal liability of the
3. Mixed Tax – tax rates are partly progressive and partly
person assessed person assessed, i.e. his
regressive.
liability is limited only to the land
involved
4. Proportionate Tax – tax rates are fixed on a flat tax base.
examples: real estate tax, VAT, and other percentage 3. based on necessity as well 3. based wholly on benefits
taxes as on benefits received
4. general application (see 4. exceptional both as time
Apostolic Prefect vs Treas. Of and place
F. As to Scope or authority imposing the tax Baguio, 71 Phil 547)
1. National Tax – tax imposed by the National Government. Important Points to Consider Regarding Special
examples: national internal revenue taxes, customs Assessments:
duties 1. Since special assessments are not taxes within the
constitutional or statutory provisions on tax exemptions, it follows
2. Municipal/Local Tax – tax imposed by Local Government that the exemption under Sec. 28(3), Art. VI of the Constitution
units. does not apply to special assessments.
examples: real estate tax, professional tax 2. However, in view of the exempting proviso in Sec. 234 of the
Local Government Code, properties which are actually, directly
 Regressive System of Taxation vis-à-vis Regressive and exclusively used for religious, charitable and educational
Tax purposes are not exactly exempt from real property taxes but are
A regressive tax, must not be confused with regressive exempt from the imposition of special assessments as well.( see
system of taxation. Aban)
Regressive Tax: tax the rate of which decreases as the 3 .The general rule is that an exemption from taxation does not
tax base increases. include exemption from special assessment.
Regressive System of Taxation: focuses on indirect
taxes, it exists when there are more indirect taxes imposed than d. License or Permit Fee vs Tax
direct taxes. License or Permit fee – is a charge imposed under the
police power for the purposes of regulation.
Taxes distinguished from other Impositions
Tax vs License/Permit Fee
a. Toll vs Tax 1. enforced contribution 1. legal compensation or
Toll – sum of money for the use of something, generally assessed by sovereign reward of an officer for specific
applied to the consideration which is paid for the use of a road, authority to defray public purposes
bridge of the like, of a public nature. expenses
2. for revenue purposes 2. for regulation purposes
3. an exercise of the taxing 3. an exercise of the police
power power Exception: Where both the claims of the government and the
4. generally no limit in the 4. amount is limited to the taxpayer against each other have already become due and
amount of tax to be paid necessary expenses of demandable as well as fully liquated. (see Domingo vs Garlitos, L-
inspection and regulation 18904, June 29, 1963)
5. imposed also on persons 5. imposed on the right to
and property exercise privilege
6. non-payment does not 6. non-payment makes the act
necessarily make the act or or business illegal Pertinent Case:
business illegal
Philex Mining Corp. vs Commissioner of Internal Revenue
Three kinds of licenses are recognized in the law: G.R. No. 125704, Aug. 28, 1998
1. Licenses for the regulation of useful occupations.
2. Licenses for the regulation or restriction of non-useful The Supreme Court held that: “We have consistently
occupations or enterprises ruled that there can be no offsetting of taxes against the claims
3. Licenses for revenue only that the taxpayer may have against the government. A person
cannot refuse to pay a tax on the ground that the government
owes him an amount equal to or greater than the tax being
Importance of the distinctions between tax and collected. The collection of a tax cannot await the results of a
license fee: lawsuit against the government.”
1. Some limitations apply only to one and not to the other, and
that exemption from taxes may not include exemption from license f. Tax Distinguished from other Terms.
fees.
2. The power to regulate as an exercise of police power does not 1. Subsidy – a pecuniary aid directly granted by the government
include the power to impose fees for revenue purposes. (see to an individual or private commercial enterprise deemed beneficial
American Mail Line vs City of Butuan, L-12647, May 31, 1967 and to the public.
related cases)
3. An extraction, however, maybe considered both a tax and a 2. Revenue – refers to all the funds or income derived by the
license fee. government, whether from tax or from whatever source and
4. But a tax may have only a regulatory purpose. whatever manner.
5. The general rule is that the imposition is a tax if its primary
purpose is to generate revenue and regulation is merely incidental; 3. Customs Duties – taxes imposed on goods exported from or
but if regulation is the primary purpose, the fact that incidentally imported into a country. The term taxes is broader in scope as it
revenue is also obtained does not make the imposition of a tax. includes customs duties.
(see Progressive Development Corp. vs Quezon City, 172 SCRA
629) 4. Tariff – it may be used in 3 senses:
a. As a book of rates drawn usually in alphabetical order
e. Debt vs Tax containing the names of several kinds of merchandise with the
Debt is based upon juridical tie, created by law, corresponding duties to be paid for the same.
contracts, delicts or quasi-delicts between parties for their private b. As duties payable on goods imported or exported (PD No.
interest or resulting from their own acts or omissions. 230)
c. As the system or principle of imposing duties on the
Tax vs Debt importation/exportation of goods.
1. based on law 1. based on contracts,
express or implied 5. Internal Revenue – refers to taxes imposed by the legislative
2. generally, cannot be 2. assignable other than duties or imports and exports.
assigned
3. generally payable in money 3. may be paid in kind 6. Margin Fee – a currency measure designed to stabilize the
currency.
4. generally not subject to set- 4. may be subject to set-off or
off or compensation compensation
7. Tribute – synonymous with tax; taxation implies tribute from
5. imprisonment is a sanction 5. no imprisonment for non-
the governed to some form of sovereignty.
for non-payment of tax except payment of debt
poll tax
8. Impost – in its general sense, it signifies any tax, tribute or
6. governed by special 6. governed by the ordinary
duty. In its limited sense, it means a duty on imported goods and
prescriptive periods provided periods of prescriptions
merchandise.
for in the Tax Code
7. does not draw interest 7. draws interest when so Inherent Powers of the State
except only when delinquent stipulated, or in case of default
1. Police Power
General Rule: Taxes are not subject to set-off or legal 2. Power of Eminent Domain
compensation. The government and the taxpayer are not creditors 3. Power of Taxation
and debtors or each other. Obligations in the nature of debts are
due to the government in its corporate capacity, while taxes are
due to the government in its sovereign capacity ( Philex Mining
Corp. vs CIR, 294 SCRA 687; Republic vs Mambulao Lumber Co.,
6 SCRA 622)
Distinctions among the Three Powers b. Constitutional Limitations or those expressly found in the
constitution or implied from its provision
Taxation Police Power Eminent Domain
PURPOSE 1. Due process of law
- levied for the - exercised to - taking of property for 2. Equal protection of law
purpose of promote public public use 3. Freedom of Speech and of the press
raising revenue welfare thru 4. Non-infringement of religious freedom
regulations 5. Non-impairment of contracts
AMOUNT OF EXACTION 6. Non-imprisonment for debt or non-payment of poll tax
- no limit - limited to the - no exaction, 7. Origin of Appropriation, Revenue and Tariff Bills
cost of compensation paid by 8. Uniformity, Equitability and Progressitivity of Taxation
regulations, the government 9. Delegation of Legislative Authority to Fx Tariff Rates, Import
issuance of the and Export Quotas
license or 10. Tax Exemption of Properties Actually, Directly, and
surveillance Exclusively used for Religious Charitable
BENEFITS RECEIVED 11. Voting requirements in connection with the Legislative Grant
- no special or - no direct - direct benefit results of Tax Exemption
direct benefits benefits but a in the form of just 12. Non-impairment of the Supreme Courts’ jurisdiction in Tax
received but the healthy economic compensation Cases
enjoyment of standard of 13. Tax exemption of Revenues and Assets, including Grants,
the privileges of society or Endowments, Donations or Contributions to Education Institutions
living in an “damnum
organized absque injuria” is c. Other Constitutional Provisions related to Taxation
society attained
NON-IMPAIRMENT OF CONTRACTS 1. Subject and Title of Bills
- the impairment - contract may be - contracts may be 2. Power of the President to Veto an items in an Appropriation,
rule subsist impaired impaired Revenue or Tariff Bill
3. Necessity of an Appropriation made before money
TRANSFER OF PROPERTY RIGHTS
4. Appropriation of Public Money
- taxes paid - no transfer but - property is taken by
5. Taxes Levied for Special Purposes
become part of only restraint on the gov’t upon
6. Allotment to LGC
public funds the exercise of payment of just
property right compensation
Inherent Limitations
exists
SCOPE
A. Public Purpose of Taxes
- affects all - affects all - affects only the 1. Important Points to Consider:
persons, persons, particular property a. If taxation is for a public purpose, the tax must be used:
property and property, comprehended a.1) for the support of the state or
excise privileges, and a.2) for some recognized objects of governments or
even rights a.3) directly to promote the welfare of the community
BASIS (taxation as an implement of police power)
- public - public necessity -public necessity,
necessity and the right of private property is b. The term “public purpose” is synonymous with
the state and the taken for public use “governmental purpose”; a purpose affecting the inhabitants of the
public to self- state or taxing district as a community and not merely as
protection and individuals.
self-preservation
AUTHORITY WHICH EXERCISES THE POWER c. A tax levied for a private purpose constitutes a taking of
- only by the - only by the - may be granted to property without due process of law.
government or government or its public service,
its political political companies, or public d. The purposes to be accomplished by taxation need not be
subdivisions subdivisions utilities exclusively public. Although private individuals are directly
benefited, the tax would still be valid provided such benefit is only
III. Limitations on the Power of Taxation incidental.
Limitations, Classified e. The test is not as to who receives the money, but the
character of the purpose for which it is expended; not the
a. Inherent Limitations or those which restrict the power immediate result of the expenditure but rather the ultimate.
although they are not embodied in the Constitution [P N I T E]
g. In the imposition of taxes, public purpose is presumed.
1. Public Purpose of Taxes
2. Non-delegability of the Taxing Power
3. Territoriality or the Situs of Taxation
4. Exemption of the Government from taxes
5. International Comity
2. Test in determining Public Purposes in tax c. Delegation to Administrative Agencies with respect to
aspects of Taxation not legislative in character.
example: assessment and collection
a. Duty Test – whether the thing to be threatened by 3. Limitations on Delegation
the appropriation of public revenue is something which is the duty
of the State, as a government. a. It shall not contravene any Constitutional provisions or
inherent limitations of taxation;
b. The delegation is effected either by the Constitution or
by validly enacted legislative measures or statute; and
b. Promotion of General Welfare Test – whether the
c. The delegated levy power, except when the delegation
law providing the tax directly promotes the welfare of the
is by an express provision of Constitution itself, should only be in
community in equal measure.
favor of the local legislative body of the local or municipal
government concerned.
Basic Principles of a Sound Tax System (FAT)
4. Tax Legislation vis-à-vis Tax Administration - Every
system of taxation consists of two parts:
a. the elements that enter into the imposition of the tax
a. Fiscal Adequacy – the sources of tax revenue [S2 A P K A M], or tax regulation; and
should coincide with, and approximate the needs of government b. the steps taken for its assessment and collection or
expenditure. Neither an excess nor a deficiency of revenue vis-à- tax administration
vis the needs of government would be in keeping with the If what is delegated is tax legislation, the delegation is
principle. invalid; but if what is involved is only tax administration, the non-
delegability rule is not violated.
b. Administrative Feasibility – tax laws should be C. Territoriality or Situs of Taxation

capable of convenient, just and effective administration.
1. Important Points to Consider:
a. Territoriality or Situs of Taxation means “place of taxation”
depending on the nature of taxes being imposed.
c. Theoretical Justice – the tax burden should be in b. It is an inherent mandate that taxation shall only be
proportion to the taxpayer’s ability to pay (ability-to-pay principle). exercised on persons, properties, and excise within the territory of
The 1987 Constitution requires taxation to be equitable and the taxing power because:
uniform. b.1) Tax laws do not operate beyond a country’s
territorial limit.
b.2) Property which is wholly and exclusively within the
B. Non-delegability of Taxing Power jurisdiction of another state receives none of the
protection for which a tax is supposed to be
1. Rationale: Doctrine of Separation of Powers; Taxation compensation.
is purely legislative, Congress cannot
delegate the power to others. c. However, the fundamental basis of the right to tax is the
capacity of the government to provide benefits and
2. Exceptions: protection to the object of the tax. A person may be taxed,
a. Delegation to the President (Art.VI. Sec. 28(2) 1987 even if he is outside the taxing state, where there is between
Constitution) him and the taxing state, a privity of relationship justifying the
The power granted to Congress under this constitutional levy.
provision to authorize the President to fix within specified limits
and subject to such limitations and restrictions as it may impose, 2. Factors to Consider in determining Situs of Taxation
tariff rates and other duties and imposts include tariffs rates even a. kind and Classification of the Tax
for revenue purposes only. Customs duties which are assessed at b. location of the subject matter of the tax
the prescribed tariff rates are very much like taxes which are c. domicile or residence of the person
frequently imposed for both revenue-raising and regulatory d. citizenship of the person
purposes (Garcia vs Executive Secretary, et. al., G.R. No. 101273, e. source of income
July 3, 1992) f. place where the privilege, business or occupation is being
exercised
b. Delegations to the Local Government (Art. X. Sec. 5,
1987 Constitution)
It has been held that the general principle against the D. Exemption of the Government from Taxes
delegation of legislative powers as a consequence of the theory of
separation of powers is subject to one well-established exception, 1. Important Points to Consider:
namely, that legislative power may be delegated to local Reasons for Exemptions:
governments. The theory of non-delegation of legislative powers a.1) To levy tax upon public property would render
does not apply in maters of local concern. (Pepsi-Cola Bottling Co. necessary new taxes on other public property for the
of the Phil, Inc. vs City of Butuan, et . al., L-22814, Aug. 28, 1968) payment of the tax so laid and thus, the government
would be taxing itself to raise money to pay over to itself;
a.2) In order that the functions of the government shall

not be unduly impede; and b. Requisites for a Valid Classification
a.3) To reduce the amount of money that has to be 1. Must not be arbitrary
handed by the government in the course of its 2. Must not be based upon substantial distinctions
operations. 3. Must be germane to the purpose of law.
2. Unless otherwise provided by law, the exemption applies 4. Must not be limited to exiting conditions only; and
only to government entities through which the government 5. Must play equally to all members of a class.
immediately and directly exercises its sovereign powers
(Infantry Post Exchange vs Posadas, 54 Phil 866) 3. Uniformity, Equitability and Progressivity of Taxation
3. Notwithstanding the immunity, the government may tax
itself in the absence of any constitutional limitations. a. Basis: Sec. 28(1) Art. VI. The rule of taxation shall be
4. Government-owned or controlled corporations, when uniform and equitable. The Congress shall evolve a
performing proprietary functions are generally subject to progressive system of taxation.
tax in the absence of tax exemption provisions in their b. Important Points to Consider:
charters or law creating them. 1. Uniformity (equality or equal protection of the laws)
means all taxable articles or kinds or property of the same class
E. International Comity shall be taxed at the same rate. A tax is uniform when the same
force and effect in every place where the subject of it is found.
1. Important Points to Consider: 2. Equitable means fair, just, reasonable and
a. The property of a foreign state or government may not be proportionate to one’s ability to pay.
taxed by another. 3. Progressive system of Taxation places stress on
direct rather than indirect taxes, or on the taxpayers’ ability to pay
b. The grounds for the above rule are: 4. Inequality which results in singling out one
b.1) sovereign equality among states particular class for taxation or exemption infringes no constitutional
b.2) usage among states that when one enter into the limitation. (see Commissioner vs. Lingayen Gulf Electric, 164
territory of another, there is an implied understanding that the SCRA 27)
power does not intend to degrade its dignity by placing itself under 5. The rule of uniformity does not call for perfect
the jurisdiction of the latter uniformity or perfect equality, because this is hardly attainable.
b.3) foreign government may not be sued without its
consent so that it is useless to assess the tax since it cannot be 4. Freedom of Speech and of the Press
collected
b.4) reciprocity among states a. Basis: Sec. 4 Art. III. No law shall be passed abridging
the freedom of speech, of expression or of the pressx x x “
Constitutional Limitations b. Important Points to Consider:
1. There is curtailment of press freedom and
1. Due Process of Law freedom of thought if a tax is levied in order to suppress the basic
right of the people under the Constitution.
a. Basis: Sec. 1 Art. 3 “No person shall be deprived of life, 2. A business license may not be required for the
liberty or property without due process of law x x x.” sale or contribution of printed materials like newspaper for such
would be imposing a prior restraint on press freedom
Requisites : 3. However, an annual registration fee on all
1. The interest of the public generally as persons subject to the value-added tax does not constitute a
distinguished from those of a particular class require the restraint on press freedom since it is not imposed for the exercise
intervention of the state; of a privilege but only for the purpose of defraying part of cost of
2. The means employed must be reasonably registration.
necessary to the accomplishment for the purpose and not unduly
oppressive; 5. Non-infringement of Religious Freedom
3. The deprivation was done under the authority
of a valid law or of the constitution; and a. Basis: Sec. 5 Art. III. “No law shall be made respecting
4. The deprivation was done after compliance an establishment of religion or prohibiting the free exercise
with fair and reasonable method of procedure prescribed by law. thereof. The free exercise and enjoyment of religious
In a string of cases, the Supreme Court held that in profession and worship, without discrimination or preference,
order that due process of law must not be done in an arbitrary, shall be forever be allowed. x x x”
despotic, capricious, or whimsical manner. b. Important Points to Consider:
1. License fees/taxes would constitute a restraint on the
2. Equal Protection of the Law freedom of worship as they are actually in the nature of a condition
or permit of the exercise of the right.
a. Basis: Sec.1 Art. 3 “ xxx Nor shall any person be denied 2. However, the Constitution or the Free Exercise of
the equal protection of the laws. Religion clause does not prohibit imposing a generally applicable
Important Points to Consider: sales and use tax on the sale of religious materials by a religious
1. Equal protection of the laws signifies that all organization. (see Tolentino vs Secretary of Finance, 235 SCRA
persons subject to legislation shall be treated under circumstances 630)
and conditions both in the privileges conferred and liabilities
imposed
2. This doctrine prohibits class legislation which
discriminates against some and favors others.
4. The exemption is not limited to property

6. Non-impairment of Contracts actually indispensable but extends to facilities which are incidental
to and reasonably necessary for the accomplishment of said
a. Basis: Sec. 10 Art. III. “No law impairing the obligation of purposes.
contract shall be passed.” 5. The constitutional exemption applies only to
b. Important Points to Consider: property tax.
1. A law which changes the terms of the contract by 6. However, it would seem that under existing
making new conditions, or changing those in the contract, or law, gifts made in favor or religious charitable and educational
dispenses with those expressed, impairs the obligation. organizations would nevertheless qualify for donor’s gift tax
2. The non-impairment rule, however, does not apply exemption. (Sec. 101(9)(3), NIRC)
to public utility franchise since a franchise is subject to
amendment, alteration or repeal by the Congress when the public 11. Voting Requirements in connection with the
interest so requires. Legislative Grant for tax exemption
7. Non-imprisonment for non-payment of poll tax a. Basis: Sec. 28(4) Art. VI. “No law granting any tax
exemption shall be passed without the concurrence of a
a. Basis: Sec. 20 Art. III. “No person shall be imprisoned for majority of all the members of the Congress.”
debt or non-payment of poll tax.” b. The above provision requires the concurrence of a
b. Important Points to Consider: majority not of attendees constituting a quorum but of all
1. The only penalty for delinquency in payment is members of the Congress.
the payment of surcharge in the form of interest at the rate of 24%
per annum which shall be added to the unpaid amount from due 12. Non-impairment of the Supreme Courts’ jurisdiction
date until it is paid. (Sec. 161, LGC) in Tax Cases
2. The prohibition is against “imprisonment” for
“non-payment of poll tax”. Thus, a person is subject to a. Basis: Sec. 5 (2) Art. VIII. “The Congress shall have the
imprisonment for violation of the community tax law other than for power to define, prescribe, and apportion the jurisdiction of
non-payment of the tax and for non-payment of other taxes as the various courts but may not deprive the Supreme Court of
prescribed by law. its jurisdiction over cases enumerated in Sec. 5 hereof.”
Sec. 5 (2b) Art. VIII. “The Supreme Court shall have
8. Origin or Revenue, Appropriation and Tariff Bills the following powers: x x x(2) Review, revise, modify or
affirm on appeal or certiorari x x x final judgments and orders
a. Basis: Sec. 24 Art. VI. “All appropriation, revenue or tariff of lower courts in x x x all cases involving the legality of any
bills, bill authorizing increase of the public debt, bills of local tax, impost, assessment, or toll or any penalty imposed in
application, and private bills shall originate exclusively in the relation thereto.”
House of Representatives, but the Senate may propose or
concur with amendments.” 13. Tax Exemptions of Revenues and Assets, including
b. Under the above provision, the Senator’s power is not grants, endowments, donations or contributions to
only to “only concur with amendments” but also “to propose Educational Institutions
amendments”. (Tolentino vs Sec. of Finance, supra)
a. Basis: Sec. 4(4) Art. XIV. “Subject to the conditions
9. Delegation of Legislative Authority to Fix Tariff prescribed by law, all grants, endowments, donations or
Rates, Imports and Export Quotas contributions used actually, directly and exclusively for
educational purposes shall be exempt from tax.”
a. Basis: Sec. 28(2) Art. VI “x x x The Congress may, by b. Important Points to Consider:
law, authorize the President to fix within specified limits, and 1. The exemption granted to non-stock, non-profit educational
subject to such limitations and restrictions as it may impose, institution covers income, property, and donor’s taxes, and custom
tariff rates, import and export quotas, tonnage and wharfage duties.
dues, and other duties or imposts within the framework of 2. To be exempt from tax or duty, the revenue, assets,
the national development program of the government. property or donation must be used actually, directly and exclusively
for educational purpose.
10. Tax Exemption of Properties Actually, Directly and 3. In the case or religious and charitable entities and non-
Exclusively used for Religious, Charitable and Educational profit cemeteries, the exemption is limited to property tax.
Purposes 4. The said constitutional provision granting tax exemption to
non-stock, non-profit educational institution is self-executing.
a. Basis: Sec. 28(3) Art. VI. “Charitable institutions, 5. Tax exemptions, however, of proprietary (for profit)
churches and parsonages or convents appurtenant thereto, educational institutions require prior legislative implementation.
mosques, non-profit cemeteries, and all lands, building, and Their tax exemption is not self-executing.
improvements actually, directly and exclusively used for 6. Lands, Buildings, and improvements actually, directly, and
religious, charitable or educational purposes shall be exempt exclusively used for educational purposed are exempt from
from taxation.” property tax, whether the educational institution is proprietary or
b. Important Points to Consider: non-profit.
1. Lest of the tax exemption: the use and not
ownership of the property
2. To be tax-exempt, the property must be
actually, directly and exclusively used for the purposes mentioned.
3. The word “exclusively” means “primarily’.
c. Department of Finance Order No. 137-87, dated 5. Taxes levied for Special Purpose (Sec. 29(3), Art. VI
Dec. 16, 1987 of the 1987 Constitution)
The following are some of the highlights of the DOF order “All money collected or any tax levied for a special
governing the tax exemption of non-stock, non-profit educational purpose shall be treated as a special fund and paid out for such
institutions: purpose only. It the purpose for which a special fund was created
1. The tax exemption is not only limited to revenues and has been fulfilled or abandoned the balance, if any, shall be
assets derived from strictly school operations like income from transferred to the general funds of the government.”
tuition and other miscellaneous feed such as matriculation, library,
ROTC, etc. fees, but it also extends to incidental income derived  An example is the Oil Price Stabilization Fund created
from canteen, bookstore and dormitory facilities. under P.D. 1956 to stabilize the prices of imported crude oil. In
2. In the case, however, of incidental income, the facilities a decide case, it was held that where under an executive order
mentioned must not only be owned and operated by the school of the President, this special fund is transferred from the
itself but such facilities must be located inside the school campus. general fund to a “trust liability account,” the constitutional
Canteens operated by mere concessionaires are taxable. mandate is not violated. The OPSF, according to the court,
3. Income which is unrelated to school operations like remains as a special fund subject to COA audit ( Osmeňa vs
income from bank deposits, trust fund and similar arrangements, Orbos, et al., G.R. No. 99886, Mar. 31, 1993)
royalties, dividends and rental income are taxable.
4. The use of the school’s income or assets must be in 6. Allotment to Local Governments
consonance with the purposes for which the school is created; in  Basis: Sec. 6, Art. X of the 1987 Constitution
short, use must be school-related, like the grant of scholarships, “Local Government units shall have a just share, as
faculty development, and establishment of professional chairs, determined by law, in the national taxes which shall be
school building expansion, library and school facilities. automatically released to them.”
Other Constitutional Provisions related to Taxation

IV. Situs of Taxation and Double Taxation
1. Subject and Title of Bills (Sec. 26(1) 1987
Constitution) Situs of Taxation
“Every Bill passed by Congress shall embrace only 1. Situs of Taxation literally means the Place of Taxation.
one subject which shall be expressed in the title thereof.” 2. Basic Rule – state where the subject to be taxed has a
situs may rightfully levy and collect the tax
 in the Tolentino E-VAT case, supra, the E-vat, or the
Expanded Value Added Tax Law (RA 7716) was also  Some Basic Considerations Affecting Situs of
questioned on the ground that the constitutional requirement Taxation
on the title of a bill was not followed. 1. Protection
A legal situs cannot be given to property for the purpose
2. Power of the President to Veto items in an of taxation where neither the property nor the person is within the
Appropriation, Revenue or Tariff Bill (Sec. 27(2), Art. VI of protection of the taxing state
the 1987 Constitution) In the case of Manila Electric Co. vs Yatco (69 Phil 89) ,
the Supreme Court ruled that insurance premium paid on a fire
“The President shall have the power to veto any insurance policy covering property situated in the Phils. are taxable
particular item or items in an Appropriation, Revenue or Tariff bill in the Phils. Even though the fire insurance contract was executed
but the veto shall not affect the item or items to which he does not outside the Phils. and the insurance policy is delivered to the
object.” insured therein. This is because the Philippines Government must
get something in return for the protection it gives to the insured
3. Necessity of an Appropriation made before money property in the Phils. and by reason of such protection, the insurer
may be paid out of the Treasury (Sec. 29(1), Art. VI of the is benefited thereby.
1987 Constitution)
“No money shall be paid out of the Treasury except

in pursuance of an appropriation made by law.” 2. The maxim of Mobilia Sequuntur Personam
and Situs of Taxation
4. Appropriation of Public Money for the benefit of any According to this maxim, which means ”movable follow
Church, Sect, or System of Religion (Sec. 29(2), Art. VI of the person,” the situs of personal property is the domicile of the
the 1987 Constitution) owner. This is merely a fiction of law and is not allowed to stand in
the way of taxation of personalty in the place where it has its
”No public money or property shall be appropriated, actual situs and the requisite legislative jurisdiction exists.
applied, paid or employed, directly or indirectly for the use, benefit,
support of any sect, church, denomination, sectarian institution, or Example: shares of stock may have situs for purposes
system of religion or of any priest, preacher, minister, or other of taxation in a state in which they are permanently kept
religious teacher or dignitary as such except when such priest, regardless of the domicile of the owner, or the state in which he
preacher, minister or dignitary is assigned to the armed forces or corporation is organized.
to any penal institution, or government orphanage or leprosarium.”
Remedy – taxation jurisdiction may provide:

3. Legislative Power to Fix Situs a. Exemption or allowance of deductions or tax credit for
If no constitutional provisions are violated, the power of foreign taxes
the legislative to fix situs is undoubted. b. Enter into treaties with other states
Example: our law fixes the situs of intangible personal Double Taxation
property for purposes of the estate and gift taxes. (see Sec. 104,
1997 NIRC) Two (2) Kinds of Double Taxation
1. Obnoxious or Direct Duplicate Taxation (Double
Note: In those cases where the situs for certain taxation in its strict sense) - In the objectionable or prohibited
intangibles are not categorically spelled out, there is room for sense means that the same property is taxed twice when it should
applying the mobilia rule. be taxed only once.
4. Double Taxation and the Situs Limitation (see later Requisites:

topic) 1. Same property is taxed twice
2. Same purpose
Criteria in Fixing Tax Situs of Subject of Taxation 3. Same taxing authority
4. Within the same jurisdiction
a. Persons – Poll tax may be levied upon persons who are 5. During the same taxing period
residents of the State. 6. Same kind or character of tax
b. Real Property – is subject to taxation in the State in
which it is located whether the owner is a resident or non-resident, 2. Permissive or Indirect Duplicate Taxation (Double
and is taxable only there. taxation in its broad sense) – This is the opposite of direct double
 Rule of Lex Rei Sitae taxation and is not legally objectionable. The absence of one or
c. Tangible Personal property – taxable in the state more of the foregoing requisites of the obnoxious direct tax makes
where it has actual situs – where it is physically located. Although it indirect.
the owner resides in another jurisdiction.
 Instances of Double Taxation in its Broad Sense
 Rule of Lex Rei Sitae 1. A tax on the mortgage as personal property when the
mortgaged property is also taxed at its full value as real estate;
d. Intangible Personal Property – situs or personal 2. A tax upon a corporation for its capital stock as a whole
property is the domicile of the owner, in accordance with the and upon the shareholders for their shares;
principle “MOBILIA SEQUUNTUR PERSONAM”, said principle, 3. A tax upon a corporation for its capital stock as a whole
however, is not controlling when it is inconsistent with express and upon the shareholders for their shares;
provisions of statute or when justice demands that it should be, as 4. A tax upon depositions in the bank for their deposits and a
where the property has in fact a situs elsewhere. (see Wells Fargo tax upon the bank for their property in which such deposits are
Bank v. Collector 70 PHIL 325; Collector v. Fisher L-11622, invested
January, 1961) 5. An excise tax upon certain use of property and a property
tax upon the same property; and
e. Income – properly exacted from persons who are 6. A tax upon the same property imposed by two different
residents or citizens in the taxing jurisdiction and even those who states.
are neither residents nor citizens provided the income is derived
from sources within the taxing state.  Means to Reduce the Harsh Effect of Taxation
1. Tax Deduction – subtraction from gross income in
f. Business, Occupation, and Transaction – power to arriving a taxable income
levy an excise tax depends upon the place where the business is 2. Tax Credit – an amount subtracted from an individual’s or
done, of the occupation is engaged in of the transaction not place. entity’s tax liability to arrive at the total tax liability
 A deduction differ from a tax credit in that a deduction

g. Gratuitous Transfer of Property – transmission of reduces taxable income while credit reduces tax liability
property from donor to donee, or from a decedent to his heirs may
be subject to taxation in the state where the transferor was a 3. Exemptions
citizen or resident, or where the property is located. 4. Treaties with other States
5. Principle of Reciprocity
V. Multiplicity of Situs
 Constitutionality
There is multiplicity of situs when the same subject of Double Taxation in its stricter sense is undoubtedly
taxation, like income or intangible, is subject to taxation in several unconstitutional but that in the broader sense is not necessarily so.
taxing jurisdictions. This happens due to: General Rule: Our Constitution does not prohibit double
a. Variance in the concept of “domicile” for tax purposes; taxation; hence, it may not be invoked as a defense against the
b. Multiple distinct relationship that may arise with respect to validity of tax laws.
intangible personality; and a. Where a tax is imposed by the National Government and
c. The use to which the property may have been devoted, another by the city for the exercise of occupation or business as
all of which may receive the protection of the laws of jurisdiction the taxes are not imposed by the same public authority ( City of
other than the domicile of the owner Baguio vs De Leon, Oct. 31, 1968)
b. When a Real Estate dealer’s tax is imposed for engaging b. Substantial underdeclaration of income tax returns of the
in the business of leasing real estate in addition to Real Estate Tax taxpayer for four consecutive years coupled with overstatement of
on the property leased and the tax on the income desired as they deduction.
are different kinds of tax
c. Tax on manufacturer’s products and another tax on the  Evasion of the tax takes place only when there are no
privilege of storing exportable copra in warehouses within a proceeds. Evasion of Taxation is tantamount, fiscally speaking, to
municipality are imposed as first tax is different from the second the absence of taxation.
d. Where, aside from the tax, a license fee is imposed in the
exercise of police power. 5. Tax Avoidance – is the use by the taxpayer of legally
permissible alternative tax rates or method of assessing taxable
Exception: Double Taxation while not forbidden, is something not property or income in order to avoid or reduce tax liability.
favored. Such taxation, it has been held, should, whenever  Tax Avoidance is not punishable by law, a taxpayer has the
possible, be avoided and prevented. legal right to decrease the amount of what otherwise would be his
a. Doubts as to whether double taxation has been imposed taxes or altogether avoid by means which the law permits.
should be resolved in favor of the taxpayer. The reason is to avoid
injustice and unfairness. Distinction between Tax Evasion and Avoidance
b. The taxpayer may seek relief under the Uniformity Rule or
the Equal Protection guarantee. Tax Evasion vs Tax Avoidance
Forms of Escape from Taxation accomplished by breaking accomplished by legal
the letter of the law procedures or means which
 Six Basic Forms of Escape from Taxation maybe contrary to the intent of
1. Shifting the sponsors of the tax law but
2. Capitalization nevertheless do not violate the
3. Transformation letter of the law
4. Evasion
5. Avoidance
6. Exemption VI. Exemption from Taxation
1. Shifting – Transfer of the burden of a tax by the original A. Tax Exemption – is a grant of immunity, express or implied,
payer or the one on whom the tax was assessed or imposed to to particular persons or corporations from the obligations to pay
another or someone else taxes.
Impact of taxation – is the point at which a tax is
originally imposed. B. Nature of Tax Exemption
Incidence of Taxation – is the point on which a tax 1. It is merely a personal privilege of the grantee
burden finally rests or settles down. 2. It is generally revocable by the government unless the
Relations among Shifting, Impact and Incidence of exemption is founded on a contract which is protected from
Taxation – the impact is the initial phenomenon, the shifting is the impairment, but the contract must contain the other essential
intermediate process, and the incidence is the result. elements of contracts, such as, for example, a valid cause or
Kinds of Shifting: consideration.
a. Forward Shifting – the burden of tax is 3. It implies a waiver on the part of the government of its
transferred from a factor of production through the factors of right to collect what otherwise would be due to it, and in this sense
distribution until it finally settles on the ultimate purchaser or is prejudicial thereto.
consumer 4. It is not necessarily discriminatory so long as the
b. Backward Shifting – effected when the burden exemption has a reasonable foundation or rational basis.
of tax is transferred from the consumer or purchaser through the
factors of distribution to the factor of production C. Rationale of tax Exemption
c. Onward Shifting – this occurs when the tax is Public interest would be subserved by the exemption
shifted two or more times either forward or backward allowed which the law-making body considers sufficient to offset
monetary loss entailed in the grant of the exemption. (CIR vs
2. Capitalization, defined – the reduction in the price of the Bothelo Shipping Corp., L-21633, June 29, 1967; CIR vs
taxed object equal to the capitalized value of future taxes which PAL, L-20960, Oct. 31, 1968)
the purchaser expects to be called upon to pay
D. Grounds for Tax Exemptions
3. Transformation – The method whereby the manufacturer 1. May be based on a contract in which case, the public
or producer upon whom the tax has been imposed, fearing the loss represented by the Government is supposed to receive a full
of his market if he should add the tax to the price, pays the tax and equivalent therefore
endeavors to recoup himself by improving his process of 2. May be based on some ground of public policy, such as, for
production thereby turning out his units of products at a lower cost. example, to encourage new and necessary industries.
3. May be created in a treaty on grounds of reciprocity or to
4. Tax Evasion – is the use of the taxpayer of illegal or lessen the rigors of international double or multiple taxation which
fraudulent means to defeat or lessen the payment of a tax. occur where there are many taxing jurisdictions, as in the taxation
of income and intangible personal property
 Indicia of Fraud in Taxation
a. Failure to declare for taxation purposes true and actual E. Equity, not a ground for Tax Exemption
income derived from business for two consecutive years, and There is no tax exemption solely on the ground of equity,
but equity can be used as a basis for statutory exemption. At
times the law authorizes condonation of taxes on equitable 2. Tax laws are neither political nor penal in nature they are
considerations. (Sec 276, 277, Local Government Code) deemed laws of the occupied territory rather than the occupying
enemy. (Hilado vs Collector, 100 PHIL 288)
F. Kinds of Tax Exemptions 3. Tax laws not being penal in character, the rule in the
1. As to basis Constitution against the passage of the ex post facto laws cannot
a. Constitutional Exemptions – Immunities from taxation be invoked, except for the penalty imposed.
which originate from the Constitution
b. Statutory Exemptions – Those which emanate from Imprescriptibility of Taxes
Legislation
General Rule: Taxes are imprescriptible
2.As to form
a. Express Exemption – Whenever expressly granted by Exception: When provided otherwise by the tax law itself.
organic or statute of law Example: NIRC provides for statutes of limitation in the
b. Implied Exemption – Exist whenever particular assessment and collection of taxes therein imposed
persons, properties or excises are deemed exempt as they fall
Important Point to Consider
outside the scope of the taxing provision itself
1. The law on prescription, being a remedial measure, should
be liberally construed to afford protection as a corollary, the
3. As to extent
exceptions to the law on prescription be strictly construed. (CIR vs
a. Total Exemption – Connotes absolute immunity
CA. G.R. No. 104171, Feb. 24, 1999)
b. Partial Exemption – One where collection of a part of
the tax is dispensed with
Doctrine of Equitable Recoupment
It provides that a claim for refund barred by prescription
G. Principles Governing the Tax Exemption
may be allowed to offset unsettled tax liabilities should be pertinent
1. Exemptions from taxation are highly disfavored by law,
only to taxes arising from the same transaction on which an
and he who claims an exemption must be able to justify by the
overpayment is made and underpayment is due.
clearest grant of organic or statute of law. (Asiatic Petroleum vs
Llanes, 49 PHIL 466; Collector of Internal Revenue vs. Manila This doctrine, however, was rejected by the Supreme
Jockey Club, 98 PHIL 670) Court, saying that it was not convinced of the wisdom and
2. He who claims an exemption must justify that the proprietary thereof, and that it may work to tempt both the
legislative intended to exempt him by words too plain to be collecting agency and the taxpayer to delay and neglect their
mistaken. (Visayan Cebu Terminal vs CIR, L-19530, Feb. 27, respective pursuits of legal action within the period set by law.
1965) (Collector vs UST, 104 PHIL 1062)
3. He who claims exemptions should convincingly proved
that he is exempt Taxpayer’s Suit - It is only when an act complained of, which
4. Tax exemptions must be strictly construed (Phil. may include legislative enactment, directly involves the illegal
Acetylene vs CIR, L-19707, Aug. 17, 1967) disbursement of public funds derived from taxation that the
5. Tax Exemptions are not presumed. (Lealda Electric Co. taxpayer’s suit may be allowed.
vs CIR, L-16428, Apr. 30, 1963)
6. Constitutional grants of tax exemptions are self-executing
(Opinion No. 130, 1987, Sec. Of Justice) VIII. Interpretation and Construction of Tax Statutes
7. Tax exemption are personal. Important Points to Consider:
8. Deductions for income tax purposes partake of the nature 1. On the interpretation and construction of tax statutes,
of tax exemptions, hence, they are strictly construed against the legislative intention must be considered.
tax payer
9. A tax amnesty, much like a tax exemption is never 2. In case of doubt, tax statutes are construed strictly
favored or presumed by law (CIR vs CA, G.R. No. 108576, Jan. against the government and liberally construed in favor of the
20, 1999) taxpayer.
10. The rule of strict construction of tax exemption should not
be applied to organizations performing strictly religious, charitable, 3. The rule of strict construction against the government is
and educational functions not applicable where the language of the tax law is plain and there
is no doubt as to the legislative intent.
VII. Other Doctrines in Taxation
4. The exemptions (or equivalent provisions, such as tax
Prospectivity of Tax Laws amnesty and tax condonation) are not presumed and when
granted are strictly construed against the grantee.
General Rule: Taxes must only be imposed prospectively
5. The exemptions, however, are construed liberally in favor
Exception: The language of the statute clearly demands or of the grantee in the following:
express that it shall have a retroactive effect. a. When the law so provides for such liberal construction;
b. Exemptions from certain taxes granted under special
Important Points to Consider circumstances to special classes of persons;
1. In order to declare a tax transgressing the due process c. Exemptions in favor of the Government, its political
clause of the Constitution it must be so harsh and oppressive in its subdivisions;
retroactive application (Fernandez vs Fernandez, 99 PHIL934) d. Exemptions to traditional exemptees, such as, those in
favor of charitable institutions.
6. The tax laws are presumed valid.
7. The power to tax is presumed to exist.
1968). Estoppel does not apply to preclude the subsequent

TAX ADMINISTRATION AND ENFORCEMENT findings on taxability (Ibid.)
The principle of tax law enforcement is: The

Agencies Involved in Tax Administration Government is not estopped by the mistakes or errors of its
agents; erroneous application and enforcement of law by
1. Bureau of Internal Revenue and the Bureau of public officers do not block the subsequent correct
Customs for internal revenue and customs law application of statutes (E. Rodriguez, Inc. vs. Collector of
enforcement. It is noteworthy to note that the BIR is Internal Revenue, L-23041, July 31, 1969.)
largely decentralized in that a great extent of tax
enforcement duties are delegated to the Regional Similarly, estoppel does not apply to deprive the
Directors and Revenue District Officers. government of its right to raise defenses even if those defenses
are being raised only for the first time on appeal (CIR vs Procter &
2. Provincial, City and Municipal assessors and Gamble Phil. G.R. No. 66838, 15 April 1988.)
treasures for local and real property taxes.
Exceptions:
Agents and Deputies for Collection of National Internal The Court ruled in Commissioner of Internal Revenue
Revenue Taxes vs. C.A., et. al. G.R. No. 117982, 6 Feb 1997 that like other
principles of law, the non-application of estoppel to the government
Under Sec. 12 of the 1997 NIRC, the following are admits of exceptions in the interest of justice and fair play,
constituted as agents of the Commissioner: as where injustice will result to the taxpayer.
a. The Commissioner of Customs and his Estoppel Against the Taxpayer

subordinates with respect to the collection of
national internal revenue taxes on imported goods; While the principle of estoppel may not be invoked
b. The head of the appropriate government office and against the government, this is not necessarily true in case of the
his subordinates with respect to the collection of taxpayer. In CIR vs. Suyac, 104 Phil 819, the taxpayer made
energy tax; and several requests for the reinvestigation of its tax liabilities such that
c. Banks duly accredited by the Commissioner with the government, acceding to the taxpayers request, postponed the
respect to receipt of payments of internal revenue collection of its liability. The taxpayer cannot later on be permitted
taxes authorized to be made through banks. to raise the defense of prescription inasmuch as his previous
requests for reinvestigation have the effect of placing him in
estoppel.
Bureau of Internal Revenue
Nature and Kinds of Assessments
 Powers and Duties
An assessment is the official action of an
a. Exclusive and original power to interpret provisions administrative officer determining the amount of tax due
of the NIRC and other tax laws, subject to review by from a taxpayer, or it may be the notice to the effect that
the Secretary of Finance; the amount therein stated is due from the taxpayer that the
b. Assessment and Collection of all national internal payment of the tax or deficiency stated therein. (Bisaya
revenue taxes, fees and charges; Land Transportation Co. vs CIR, 105 Phil 1338)
c. Enforcement of all forfeitures, penalties and fines
connected therewith; Classifications:
d. Execution of judgment in all cases decided in its
favor by the Court of Tax Appeals and the ordinary a. Self-assessment- Tax is assessed by the taxpayer
courts. himself. The amount is reflected in the tax return
e. Effecting and administering the supervisory and that is filed by him and the tax is paid at the time he
police powers conferred to it by the Tax Code or files his return. (Sec. 56 [A] {1], 1997 NIRC)
other laws. b. Deficiency Assessment- This is an assessment
f. Obtaining information, summoning, examining and made by the tax assessor whereby the correct
taking testimony of persons for purposes of amount of the tax is determined after an
ascertaining the correctness of any return or in examination or investigation is conducted. The
determining the liability of any person for any liability is determined and is; therefore, assessed for
internal revenue tax, or in collecting any such the following reasons:
liability. 1. The amount ascertained exceeds that
which is shown as tax by the taxpayer in
Rule of “ No Estoppel Against the Government” his return;
2. No amount is shown in the return or;
It is a settled rule of law that in the performance of its 3. The taxpayer did not file any return at all.
governmental functions, the state cannot be estopped by the (Sec. 56 [B] ]1] and [2] 1997 NIRC)
neglect of its agents and officers. Nowhere is it more true than in
the field of taxation (CIR vs. Abad, et. al., L-19627, June 27, c. Illegal and Void Assessments- This is an
assessment wherein the tax assessor has no power
to act at all (Victorias Milling vs. CTA, L-24213, 13 party to whom the assessment should be sent (Republic
Mar 1968) vs. dela Rama, L-21108, 29 Nov. 1966), and not the heirs
d. Erroneous Assessment – This is an assessment of the decedent
wherein the assessor has the power to assess but
errs in the exercise of that power (Ibid.)
Means Employed in the Assessment of Taxes
Principles Governing Tax Assessments

A. Examination of Returns: Confidentiality Rule
1. Assessments are prima facie presumed correct
The Tax Code requires that after the return is filed, the
and made in good faith.
Commissioner or his duly authorized representative shall examine
the same and assess the correct amount of tax. The tax or the
 The taxpayer has the duty of proving otherwise
deficiency of the tax so assessed shall be paid upon notice and
(Interprovincial Autobus vs. CIR, 98 Phil 290)
demand from the Commissioner or from his duly authorized
 In the absence of any proof of any irregularities in
representative. Any return, statement or declaration filed in any
the performance of official duties, an assessment
office authorized to receive the same shall not be withdrawn.
will not be disturbed. (Sy Po. Vs. CTA, G.R. No
However, within three (3) days from the date of such filing, the
81446, 8 Aug 1988
same may be modified, changed or amended, provided that no
 All presumptions are in favor of tax assessments
notice for audit or investigation of such return, statement or
(Dayrit vs. Cruz, L-39910, 26 Sept. 1988)
declaration has in the meantime been actually served upon the
 Failure to present proof of error in the assessment
taxpayer. (Sec 6[A], 1997 NIRC)
will justify judicial affirmation of said assessments.
(CIR vs C.C. G.R. No. 104151 and 105563, 10 Mar
Although Sec. 71 of the 1997 NIRC provides that tax
1995)
returns shall constitute public records, it is necessary to know that
 A party challenging an appraiser’s finding of value is
these are confidential in nature and may not be inquired into in
required to prove not only that the appraised value
unauthorized cases under pain of penalty of law provided for in
is erroneous but also what the proper value is
Sec 270 of the 1997 NIRC.
(Caltex vs. C.C. G.R. No. 104781, 10 July 1998)
2. Assessments should not be based on presumptions no The aforesaid rule, however, is subject to certain
exceptions. In the following cases, inquiry into the income tax
matter how logical the presumption might be. In order to
returns of taxpayers may be authorized:
stand the test of judicial scrutiny it must be based on
actual facts .
1. When the inspection of the return is authorized
upon the written order of the President of the
Philippines.
3. Assessment is discretionary on the part of the
2. When inspection is authorized under the Finance
Commissioner. Mandamus will not lie to compel him to
Regulation No. 33 of the Secretary of Finance.
assess a tax after investigation if he finds no ground to
3. When the production of the tax return is material
assess. Mandamus to compel the Commissioner to
evidence in a criminal case wherein the
assess will result in the encroachment on executive
Government is interested in the result. (Cu Unjieng,
functions (Meralco Secuirities Corp. vs. Savellano, L-36181
et. al. vs. Posadas, etc, 58 Phil 360)
and L-36748, 23 Oct 1992).
4. When the production or inspection thereof is
authorized by the taxpayer himself (Vera vs Cusi L-
33115, 29 June 1979).
Except:
The BIR Commissioner may be compelled to
assess by mandamus if in the exercise of his discretion B. Assessment Based on the Best Evidence Obtainable
there is evidence of arbitrariness and grave abuse of
discretion as to go beyond statutory authority (Maceda The law authorizes the Commissioner to assess taxes
vs. Macaraig, G.R. No. 8829, 8 June 1993). on the basis of the best evidence obtainable in the following cases:
1. if a person fails to file a return or other document at

4. The authority vested in the Commissioner to assess taxes the time prescribed by law; or
may be delegated. An assessment signed by an 2. he willfully or otherwise files a false or fraudulent
employee for and in behalf of the Commissioner of return or other document.
Internal Revenue is valid. However, it is settled that the
power to make final assessments cannot be delegated. When the method is used, the Commissioner makes or
The person to whom a duty is delegated cannot amends the return from his knowledge and from such information
lawfully delegate that duty to another. (City Lumber vs. as he can obtain through testimony or otherwise. Assessments
Domingo, L-18611, 30 Jan 1964). made as such are deemed prima facie correct and sufficient for all
legal purposes. (Sec. 6 [B], 1997 NIRC)
5. Assessments must be directed to the right party. Hence, Best Evidence Obtainable refers to any data, record,
if for example, the taxpayer being assessed is an papers, documents, or any evidence gathered by internal revenue
estate of a decedent, the administrator should be the officers from government offices or agencies, corporations,
employers, clients or patients, tenants, lessees, vendees and from
all other sources, with whom the taxpayer had previous

transactions or from whom he received any income, after
ascertaining that a report required by law as basis for the
assessment of any internal revenue tax has not been filed or when E. Fixing of Real Property Values
there is reason to believe that any such report is false, incomplete
or erroneous. For purposes of computing any internal revenue tax, the
value of the property shall be whichever is the higher of : (1) the
A case in point on the use of the best evidence fair market value as determined by the Commissioner; or (2) the
obtainable is Sy Po vs CTA. In that case, there was a demand fair market value as shown in the schedule of values of the
made by the Commissioner on the Silver Cup Wine Company Provincial and City Assessors for real tax purposes (Sec 6 [E],
owned by petitioner’s deceased husband Po Bien Seng. The 1997 NIRC).
demand was for the taxpayer to submit to the BIR for examination
the factory’s books of accounts and records, so BIR investigators
raided the factory and seized different brands of alcoholic F. Inquiry into Bank Deposits
beverages.
Examination of bank deposits enables the Commissioner
The investigators, on the basis of the wines seized and to assess the correct tax liabilities of taxpayers. However, bank
the sworn statements of the factory’s employees on the quantity of deposits are confidential under R.A. 1405. Notwithstanding any
raw materials consumed in the manufacture of liquor, assessed the contrary provisions of R.A. 1405 and other general or special laws,
corresponding deficiency income and specific taxes. The Supreme the Commissioner is authorized to inquire into the bank deposits
Court, on appeal, upheld the legality of the assessment. of;
1. a decedent to determine his gross estate; and

C. Inventory-Taking, Surveillance
and Presumptive Gross Sales 2. any taxpayer who has filed an application for
and Receipts compromise of his tax liability under Sec. 204 (A) (@) of the Tax
Code by reason of his financial incapacity to pay his tax liability. In
The Commissioner is authorized at any time during the this case, the application for compromise shall not be considered
taxable year to order the inventory-taking of goods of any unless and until he waives in writing his privilege under R.A. 1405,
taxpayer as a basis for assessment. or under other general or special laws, and such waiver shall
constitute the authority of the Commissioner to inquire into bank
deposits of the taxpayer (Sec. 6[F], 1997 NIRC).
If there is reason to believe that a person is not declaring
his correct income, sales or receipts for internal revenue tax
Net Worth Method in Investigation
purposes, his business operation may be placed under
observation or surveillance. The finding made in the surveillance
The basis of using the Net Worth Method of investigation
may be used as a basis for assessing the taxes for the other
is Revenue Memorandum Circular No. 43-72. This method of
months or quarters of the same or different taxable years. (Sec. 6
investigation, otherwise known as “inventory method of income tax
[C], 1997 NIRC)
verification” is a very effective method of determining taxable
income and deficiency income tax due from a taxpayer.
D. Termination of Taxable Period
Basic Concept and Theory
The Commissioner shall declare the tax period of a taxpayer
The method is an extension of the basic accounting
terminated at any time when it shall come to his knowledge:
principle: assets minus liabilities equals net worth. The taxpayer’s
net worth is determined both at the beginning and at the end of the
a. That the taxpayer is retiring from business subject same taxable year. The increase or decrease in net worth is
to tax; adjusted by adding all non-deductible items and subtracting
b. That he intends to leave the Philippines or remove therefrom non-taxable receipts. The theory is that the unexplained
his property therefrom; increase in net worth of a taxpayer is presumed to be derived from
c. That the taxpayer hides or conceals his property; or taxable sources.
d. That he performs any act tending to obstruct the
proceedings for the collection of the tax for the past
or current quarter or year or to render the same Legal Source of authority for use of the Method
totally or partly ineffective unless such proceedings The Commissioner’s authority to use the net worth
are begun immediately. method and other indirect methods of establishing taxable income
is found in Sec. 43, 1997 NIRC. This authority has been upheld by
The written decision to terminate the tax period shall be the courts in a long line of cases, notable among which is the
accompanied with a request for the immediate payment of the tax leading case of Perez vs. CTA, 103 Phil 1167 . The method is a
for the period so declared terminated and the tax for the preceding practical necessity if a fair and efficient system of collecting
year or quarter, or such portion thereof as may be unpaid. Said revenue is to be maintained.
taxes shall be due and payable immediately and shall be subject
to all the penalties prescribed unless paid within the time fixed in Moreover, Sec. 6[B], 1997 NIRC, provides for a broad
the demand made by the Commissioner (Sec. 6 [d], 1997 NIRC) and general investigatory power to assess the proper tax on the
best evidence obtainable whenever a report required by law as
basis for the assessment of any national internal revenue tax shall
not be forthcoming within the time fixed by law or regulation, or expenditures were made and correct, fair and
when there is reason to believe that any such report is false, equitable credit adjustments were given by
incomplete or erroneous. way of eliminating non-taxable items. (Proper
Conditions for the use of the method adjustments to conform to the income tax
laws)
(a) That the taxpayer's books of accounts do not
clearly reflect his income, or the taxpayer has Proper adjustments for non-deductible items
no books, or if he has books, he refuses to must be made. The following non-deductibles, as
produce them (Inadequate Records). the case may be, must be added to the increase or
decrease in the net worth:
The Government may be forced to
resort to the net worth method of proof where the 1. personal, living or family expenses;
few records of the taxpayer were destroyed; for, to 2. premiums paid on any life insurance
require more would be tantamount to holding that policy;
skillful concealment is an inevitable barrier to proof. 3. losses from sales or exchanges of
property between members of the family;
(b) That there is evidence of a possible source or 4. income taxes paid;
sources of income to account for the increase 5. estate, inheritance and gift taxes;
in net worth or the expenditures (Need for 6. other non-deductible taxes;
evidence of the sources of income) . 7. election expenses and other expenses
against public policy;
In all leading cases on this matter, 8. non-deductible contributions;
courts are unanimous in holding that when the tax 9. gifts to others;
case is civil in nature, direct proof of sources of 10. net capital loss, and the like
income is not essential-that the government is not
required to negate all possible non-taxable sources On the other hand, non-taxable items should
of the alleged net worth increases. The burden of be deducted therefrom. These items are necessary
proof is upon the taxpayer to show that his net adjustments to avoid the inclusion of what
worth increase was derived from non-taxable otherwise are non-taxable receipts. They are:
sources.
As stated by the Supreme Court, in 1. inheritance, gifts and bequests received;
civil cases, the assessor need not prove the 2. non-taxable capital gains;
specific source of income. This reasonable on the 3. compensation for injuries or sickness;
basic assumption that most assets are derived 4. proceeds of life insurance policies;
from a taxable source and that when this is not 5. sweepstakes winnings;
true, the taxpayer is in a position to explain the 6. interest on government securities and the
discrepancy. (Perez vs. CTA, supra) like
However, when the taxpayer is
criminally prosecuted for tax evasion, the need for Increase in net worth are not taxable if
evidence of a likely source of income becomes a they are shown not to be the result of unreported
prerequisite for a successful prosecution. The income but to be the result of the correction of
burden of proof is always with the Government. errors in the taxpayer’s entries in the books relating
Conviction in such cases, as in any criminal case, to indebtedness to certain creditors, erroneously
rests on proof beyond reasonable doubt. listed although already paid. (Fernandez
Hermanos Inc. vs. CIR, L-21551, 30 Sept. 1969)
(c) That there is a fixed starting point or opening
net worth, i.e., a date beginning with a taxable
year or prior to it, at which time the taxpayer’s Enforcement of Forfeitures and Penalties
financial condition can be affirmatively
established with some definiteness. Statutory Offenses and Penalties
This is an essential condition, 1. Additions to the Tax

considered to be the cornerstone of a net
worth case. If the starting point or opening net Additions to the tax are increments to the basic
worth is proven to be wrong, the whole tax incident due to the taxpayer’s non-compliance with
superstructure usually fails. The courts have certain legal requirements, like the taxpayer’s refusal or
uniformly stressed that the validity of the result failure to pay taxes and/or other violations of taxing
of any investigation under this method will provisions.
depend entirely upon a correct opening net
worth. Additions to the tax consist of the:
(d) That the circumstances are such that the (1) civil penalty, otherwise known as
method does not reflect the taxpayer’s income surcharge, which may either be 25% or 50 % of the tax
with reasonable accuracy and certainty and depending upon the nature of the violation;
proper and just additions of personal
expenses and other non-deductible
(2) interest either for a deficiency tax or 3. Where a doubt existed on the part of the Bureau as
delinquency as to payment; to whether or not R.A. 5431 abolished the income
tax exemptions of corporations (including electric
(3) other civil penalties or administrative fines power franchise grantees) except those exempt
such as for failure to file certain information returns and under Sec. 27 (now, Sec. 30, 1997 NIRC), the
violations committed by withholding agents. (Secs. 247 imposition of the surcharge may be dispensed with
to 252, 1997 NIRC) (Cagayan Electreic Power & Light Co. vs CIR, G.R.
No. 60126, 25 Sept. 1985)
General Considerations on the Addition to tax 4. In the case of failure to make and file a return or list
a. Additions to the tax or deficiency tax apply to within the time prescribed by law, not due to willful
all taxes, fees, and charges imposed in the Tax Code. neglect, where such return or list is voluntarily filed
by the taxpayer without notice from the CIR or other
b. The amount so added to the tax shall be officers, and it is shown that the failure to file it in
collected at the same time, in the same manner, and due time was due to a reasonable cause, no
as part of the tax. surcharge will be added to the amount of tax due on
the return. In such case, in order to avoid the
c. If the withholding agent is the government or imposition of the surcharge, the taxpayer must
any of its agencies, political subdivisions or make a statement showing all the facts alleged as
instrumentalities, or a government owned or controlled reasonable causes for failure to file the return on
corporation, the employee thereof responsible for the time in the form of an affidavit, which should be
withholding and remittance of the tax shall be attached to the return.
personally liable for the additions to the tax prescribed
(Sec. 247[b], 1997 NIRC) such as the 25% surcharge
and the 20% interest per annum on the delinquency Interest
(Secs. 248 and 249 [C], 1997 NIRC) This is an increment on any unpaid amount of
tax, assessed at the rate of twenty percent (20%) per
annum, or such higher rate as may be prescribed y rules
Surcharge and regulations, from the date prescribed for payment
The payment of the surcharge is mandatory until the amount is fully paid. (Sec. 249 [A], 1997 NIRC)
and the Commissioner of Internal Revenue is not vested
with any authority to waive or dispense with the Interest is classified into:
collection thereof. In one case, the Supreme Court held 1. Deficiency interest
that the fact that on account of riots directed against the Any deficiency in the tax due, as the term is
Chinese on certain dates, they were prevented from defined in this code, shall be subject to the interest of
paying their internal revenue taxes on time, does not 20% per annum, or such higher rate as may be
authorize the Commissioner to extend the time prescribed by rules and regulations, which shall be
prescribed for the payment of taxes or to accept them assessed and collected from the date prescribed for its
without the additional penalty (Lim Co Chui vs. Posadas, payment until the full payment thereof (Sec. 249 [B],
47 Phil 460) 1997 NIRC)
The Commissioner is not vested with any 2. Delinquency interest

authority to waive or dispense with the collection therof. This kind of interest is imposed in case of failure to
(CIR vs. CA, supra). The penalty and interest are not pay:
penal but compensatory for the concomitant use of the (1) The amount of the tax due on any return
funds by the taxpayer beyond the date when he is required to be filed, or
supposed to have paid them to the Government. (2) The amount of the tax due for which no
(Philippine Refining Company vs. C.A., G.R. No. return is required, or
1188794, 8 May 1996). (3) A deficiency tax, or any surcharge or
interest thereon on the due date
An extension of time to pay taxes granted by appearing in the notice and demand of
the Commissioner does not excuse payment of the the Commissioner.
surcharge (CIR vs. Cu Unjieng, L-26869, 6 Aug. 1975)
The following cases, however, show the 3. Interest on Extended Payment

instances when the imposition of the 25% surcharge had Imposed when a person required to pay the tax is
been waived: qualified and elects to pay the tax on installment under the
provisions of the Code, but fails to pay the tax or any installment
1. Where the taxpayer in good faith made a mistake in thereof, or any part of such amount or installment on or before the
the interpretation of the applicable regulations date prescribed for its payment, or where the Commissioner has
thereby resulting in delay in the payment of taxes. authorized an extension of time within which to pay a tax or a
(Connel Bros. Co. vs. CIR, L-15470, 26 Dec. 1963) deficiency tax or any part thereof. (Sec. 249[d], 1997 NIRC)
2. A Subsequent reversal by the BIR of a prior ruling
relied upon by the taxpayer may also be a ground Administrative Offenses
for dispensing with the 25% surcharge. (CIR vs. 1. Failure to File Certain Information Returns
Republic Cement Corp., L-35677, 10 Aug. 1983) 2. Failure of a Withholding Agent to Collect and
Remit Taxes
3. Failure of a Withholding Agent to Refund Excess

Withholding Tax
GENERAL CONCEPT AND ITEMS OF INCOME 4. Capital Gain – an income

derived from the sale of assets not used in trade or
I. Income in General business. e.g. income from sale of personal property
A. Income means all wealth which

flows into the taxpayer other than as a mere return on capital.
It denotes the amount of money or property received E. Distinction between Other Terms and Income
by a person or corporation within a specified time, whether as
payment for services, interests, or profits from investments.(Fisher Income Capital
vs. Trinidad, 43 Phil 973) -- Flow of wealth -- Original investment or fund
“A mere return of capital” used in order to generate
e.g. Payments of loans earnings
vs.
“Other than a mere return of capital”
e. g. interest paid on such loans
-- Service of wealth -- wealth
 Income is not merely increase in value of property; but a
gain, a profit in excess of capital as a result of exchange -- Fruit -- Tree
transactions.
Income Revenue
B. Basic Feature of our Present Income Tax System -- Refers to the earnings of -- Refers to all funds occurring
1. The law has adopted the individual person, to the treasury of the gov’t.
most comprehensive tax situs by using all possible legal criteria partnership, corporation or
in the determination of its tax base as well as the source of the estate and trust.
taxable income.
2. The individual income tax
system, in the main, is progressive in nature, i. e. the tax rates
Income Receipts
increase as the tax base increases. In certain cases, however, final
-- Refers to the amount after -- Refer to all wealth collected
taxes are imposed on passive income.
excluding capital invested, over a certain period. It may
3. The present income tax
cost of goods, and other include capital as well as
law is now more schedular than global in the case of individual
allowable deductions. income.
income taxpayers, but it has maintained much of its global
treatment on corporation.
F. Income may be classified as Non – taxable or Taxable;
C. Forms of Income
Income may either be received in the form of: 1. Non – Taxable Income –
income received but not included in determination of taxable
1. Cash – income pertains to income, nor as part of the gross income.
money or money substitutes derived as compensation or E. g.
earning derived from labor, practice of profession and  13th month pay not exceeding P30k
conduct of business.  Winnings from lotto or sweepstakes
2. Property – income
denotes the earned right of ownership over tangible or 2. Taxable Income – it is the
intangible thing as a result of labor, business or practice of amount of the income upon which the tax rate prescribed by
profession. law is applied to obtain the amount of Income Tax.
3. Services – income based
on the performance received in payment for the work Taxable Income may be grouped into three (3) categories:
previously rendered by one person to another.  Passive investment income subject to final tax = eg.
4. Combination of cash, Royalties, interest from Phil. Bank deposit.
services or property.  Compensation income – refers to all income
payments, in money or in kind, “arising from
personal” services under an employer – employee
D. Classification of Income relationship.
 Non – compensation income or Business /
1. Compensation Income – Professional Income – any other income that is not
the gain derived from labor derived from personal services or not related to an
especially employment such as salaries and commission. ER – EE (employer – employee) relationship and is
2. Profession or Business generally subject to tax on net income basis.
Income – the value derived from an exercise of profession,
business or utilization of capital assets. e.g. income
derived from sale of assets used in trade or business G. Requisites for income to be taxable.
3. Passive Income – 1. There must be gain – there must be a value received in the
income in which the taxpayer merely waits for the amount form of cash or its equivalent as a result of rendition of
to come in. e. g. interest derived from bank accounts service or earnings in excess of capital invested.
irrespective of the voluntary or involuntary action of

 A mere expectation of profits is not an income the taxpayer in producing the gains.
 A transaction whereby nothing of exchangeable  It includes illegal gains arising from – gambling,
value comes to or is received by the taxpayer does betting, lotteries extortion and fraud.
not give rise to or create taxable income.
 Items or amounts received which do not add to the
taxpayer’s net worth or redound to his benefits such B. Items included in the determination of Gross
as amounts merely deposited or entrusted to him Income, but not limited to the following; (C -
are not considered as gains (CIR vs. Tours G2IR2P3AD)
specialist, 183 SCRA 402).
 Gain need not be necessarily in cash. It may be in 1. Compensation for
form of payment, reduction or cancellation of T’s services in whatever form paid, including
indebtedness, or gain from exchange of property. but not limited to;
a. Salaries – refer to earnings received periodically

2. The gain must actually be or constructively realized or for regular work other than manual labor.
received.
b. Wages – are earnings received usually
GENRULE: A mere increase in the value of property without actual according to specified intervals of work, as by
realization, either through sale or other disposition, is not taxable. the hour, day or week.
The increase in value is a mere unrealized increase in capital.
c. Fees - amount received by an employee for
the services rendered to the employer.
EXCEPT: ECONOMIC BENEFIT PRINCIPLE (BIR d. Commission – refers to percentage of total or

RULING NO. 029 – 98, MARCH 19, 1998) an certain quota of sales volume attained as
-That even without the sale or other disposition if by part of incentives, such a sales commission.
reason of appraisal, the cost basis is used as the new tax base fro
purposes of computing the allowable depreciation expense, the net e. Similar items – like pension or retiring
difference between the original cost basis and new basis due to allowance.
appraisal is taxable.
 An income is constructively received by a person  A pension awarded to a person where no

when - it is credited to the amount of or segregated services have been rendered are mere gifts or
in his favor and which maybe drawn by him at any gratuities and not taxable as income. They
time without any limitations e. g.: are subject to donor’s tax payable by the
 Interest credited on savings bank deposits donee.
 Dividends applied by the corporation against the
indebtedness of stockholder  Compensation for personal services is taxable
 Share in the profit of a partner in General when:
Professional Partnership a. Income for services rendered is taxable in the
year of receipt.(cash basis)
b. Cash, property or services earned during the
3. The gain must not be excluded by the law or treaty from taxable year though not actually received are
the taxation. deemed to have accrued to the taxpayer and are
classified as income (accrual basis).
 The gain must be exempted.
 Property or money received by a taxpayer in which  Forms of Compensation
he has “no business transaction right to retain, but a a. money
duty to return “To the one person from whom it was b. in kind
received is not considered as income (e. g.  Compensation paid to an employee of a
payment by mistake). Reason: The receipt is offset corporation in its stock is to be treated as
by a liability to the party making the excess if the corporation sold the stock for its
payment. However, where the duty to return is market value and paid to the employee in
unclear, the recipient may be required to pay the cash.
tax.  Living quarters furnished to the employee
in addition to cash salary. The rental value
should be reported as income.
II. GROSS INCOME  Meals given to employee, the value
thereof substitutes income.
A. Gross Income – means all
income derived during a taxable year by a taxpayer
from whatever source, whether legal or illegal. CONVENIENCE OF THE EMPLOYER RULE
The allowances furnished to the employee which are for the
convenience and advantage of the employer or for proper
 The term “derived from whatever source “implies
the inclusion of all income under the law,
performance of the employees’ duty, shall not be taxable on the other obligations assumed to be paid by the lessee to the
part of the employee receiving the same. third party in behalf of the lessor.
REQUISITES:
a. They must be furnished within the employer  Taxes paid by the tenant (lessee) to or for a
business permit. lessor for a business property are additional rent
b. The employer accepts the same as a and constitute income taxable to the lessor.
condition of his employment
 Advanced rentals:
--- Promissory notes or other evidence of indebtedness (a). if the advanced rental is a Security Deposit
received in payment of services are considered as income to the which restricts the lessor as to its use -- such
extent of their fair market value. amount shall be “excluded” in the determination of
rental income.
--- An individual who performs services for a creditor,
who in consideration thereof cancels his debt, income to that (b). If the advance rental is Prepaid Rental received
amount is realized by the debtor as compensation for his services. without restriction as to its use – the entire amount
However, if the creditor condones /cancels the debt without any is “taxable” in the year it is received.
service rendered by the debtor, the amount of such debt is a gift
and need not be included in the gross income of the debtor. The  Permanent improvements made by the lessee
amount is subjects to donor’s tax. on leased property.
When the lessee makes improve – ments on
c. Both in money and in kind. the leased property and the said improvements will
belong to the lessor upon the expiration of the lease
2. Gross income derived from the conduct of contract, the lessor may report the income there
trade, business or the exercise of a profession. from upon either by the following methods:
(a). Outright method – the lessor will report as
(a). Determination of gross income in case of income the FMV (fair market value) of the
manufacturing, merchandising or mining improvements on the year of completion.
business.
(b). Spread out method – the lessor may
Formula: Gross Income = (Gross Sales – cost of goods sold) + spread over the life of the lease the estimated
other income depreciated value of such improvements at the
termination of the lease and report as income of
(b). Income from a long term contract – long term each year of the lease an aliquot part theory.
contract means building, installation and
construction contract covering a period in excess  Income resulting from pre – mature termination
of one year. of the lease contract.
NOTE: any income derived from these contracts shall be reported RULES:
upon the basis of Percentage of Completion. (a). If the improvement is destroyed before the
termination of the lease contract -- the lessor is entitled to “deduct”
(c). Income from farming may be reported in any of as a loss for the year when such destruction takes place the
the following methods: amount previously reported as income.
(b). If the lease is terminated prior to the expiration of the
(1). Cash basis – no inventory is used in lease contract for any reason, other than a bonafide sale to the
determining profits. lessor – the lessor received “additional income” for the year the
(2). Accrual basis – an inventory is used in value of the improvements exceed the amount of income already
determining profits. reported.
(3). Crop basis – it is generally used when the
farmer is engaged in producing crops which  Income of corporation from leased property.
take more than a year to gather and dispose of Where the property of a corporation is leased
from the time of planting. to the lessee in consideration that the latter
shall pay in lieu of rental an amount equivalent
3. Gains derived from dealings in property – to a certain rate of dividend on the lessor’s
refers to the income derived from the sale and or exchange of capital stock; it shall be considered as;
assets, which result in gain because of the excess of the (a). Rentals (income) – to lessee
amount of value received by the taxpayer. and lessor (income to the corp.)
GENRULE: The entire amount of the gain or loss
arising from the transaction shall be taxable or (b). Dividend from the lessor
deductible, or the case may be. corporation – as far as the shareholders
are concerned.
4. Royalty Income – these are the compensations
or payments for the use of property and are paid to the owner
of a right. 6. Interest Income
An earning derived from depositing or lending of money,
5. Rental Income – refers to earning derived from goods or credits.
leasing real estate as well as personal property. It includes all
GENRULE: Interest received by a taxpayer, whether usurious or (b) Liquidating dividend – a dividend
not, is subject to income tax. distributed to the SHs upon dissolution of
the corporation.
EXCEPT: When interest income is exempted by law from income
tax. (c) Scrip Dividend – issued in a form of
promissory note and it is taxable in its
FMV
7. Prizes and winnings
GENRULE: Prizes and winnings whether in cash or in kind are (d) Indirect dividend – when a corporation
taxable. forgives the indebtedness of its
stockholders, the transaction has the
 Prizes and winnings are subject to 20% final effect of payment of dividend to the extent
tax. of the amount of the debt.
 Where the amount of prizes or winning is P10k (e) Property dividend—a dividend paid in
or less – subject to schedular rate. property of a corporation such as stock
investment, bands or securities held by
8. Pension the corporation and to the extent of the
Refers to allowance paid regularly to a person on his FMV of the property received at the time
retirement or to his dependents on his death, in consideration of of the distribution.
past services, meritorious work, age, loss or injury.
(f) Stock Dividend -- Involves the transfer of

9. Partner’s distributive profits from the net a portion of retained earning to capital
income of a General Professional Partnership. stock by action of stockholders. it simply
means the capitalization of retained
NOTE: Gen. Professional Partnership -- is created by a group of earnings.
individuals for the purpose of exercising their common profession
E. g. Law firm GENRULE: A mere issuance of stock dividends is not subject to
income tax, because it merely represents capital and it does not
constitute income to its recipient. Before disposition thereof, stock
10. Annuities dividends are nothing but a representation of interest in the
Amount payable yearly or at other regular intervals for a corporate entity.
certain or uncertain period
They also represent as installment payments for life EXCEPTIONS: When stock dividends are subject to tax;
insurance sold by insurance companies. a.) These shares are later redeemed for a
consideration by the corporation or otherwise
 If the part of annuity payments represent “ interest” conveyed by the stockholder to the extent of such
= taxable income. contribution. Under the NIRC, if a corporation,
after the distribution of a non-taxable stock
 If the annuity is a mere return of premium = not dividend, proceeds to cancel or redeem its stock
taxable. at such time and in such manner as to make the
distribution and cancellation or redemption
11. Dividends essentially equivalent to the distribution of a tax of
-- Means any distributions made by a stock a taxable dividend, the amount received in
corporation to its SH’s (stockholders) out of its earnings or profits redemption or cancellation of the stock shall be
and payable to its SH’s in money or other property. treated as a taxable dividend to the extent that it
represents a distribution of earnings or profits.
(Sec.73 (B), NIRC). Depending on the
circumstances, corporate earnings may be
NON – TAXABLE INTER – CORPORATE distributed under the guise of initial capitalization
PRINCIPLE by declaring the stock dividends previously issued
 Dividends from the domestic corporation and and later redeem or cancel said dividends by
shares in profits of taxable partnerships received by paying cash to the stockholder. This process
domestic corp. are exempt from income tax. amounts to distribution of taxable dividends which
is just delayed so as to escape the tax. (CIR vs.
 Sources of dividends payment: Every dividend CA, 301 SCRA 152)
declared by a corporation is presumed to come b.) The recipient is other than the stockholder.
from the “most recently accumulated profit”. (Bachrach vs. Seifert, 57 PHIL 483)
c.) A change in the stockholder’s equity results by
 Taxable dividends include the following: virtue of the stock dividend issuance.
(a) Cash Dividend – a dividend paid in cash
and is taxable to the extent of the cash Stock dividend is classified into;
received. (1). Non – taxable – is one where the new shares confer the same
rights and interest as the old share. There is no change in
the corporate identity. After the distribution thereof, there is interest is included in determination of gross
no change in the proportionate interest of SHs. income.
b.) Where the transfer is for valuable
(2). Taxable Stock dividend – is one where there either has been a consideration.
change of corporate identity or a change in the nature of the
shares, where the proportionate interest of the SHs changes. 2.) Amount Received by Insured as Return of Premium
The amount received by the insured as a return of premiums
 Under the corp. code, stock dividend paid by him under life insurance, endowment, or annuity contracts,
being one payable in capital stock, cannot be either during the term or at the maturity of the term of the contract
declared out of outstanding capital stock but of upon surrender.
from retained earnings of the corporation.
Reason for the exclusion: The return of premium is a mere return
 Where corporate earnings are used to of capital. However, where the included in the gross amount
purchase outstanding stocks treated as received exceed the aggregate premiums paid, the excess shall
treasury stock (stocks issued and fully paid for be income.
and subsequently reacquired by the
corporation of purchase, redemption or 3.) Gift, Bequests, and Devises
through same other means) as a technical but The value the property acquired by gift, devise, or descent
prohibited device, to avoid the effects of shall be excluded. However, the income from such property, as
income taxation, distribution of said corporate well as gift, bequest, devise, or descent of income from property, in
earnings in the form of stock dividend will cases of transfers of divided interest, shall be included in gross
subject SHs receiving them to income tax. The income.
corporation parting with a portion of its
earnings “to buy” the outstanding stock is in 4). Income Exempt under Treaty
ultimate effect and result making a distribution Income of any kind, to the extent required by any treaty
of such earnings to the stockholders. obligation binding upon the Government of the Philippines.
(Commissioner vs. Manning, 66 SCRA 14)
5.) Compensation for Injuries or Sickness
Amounts received, through Accident or Health Insurance or
under Workmen’s Compensation Acts, as compensation for
III. EXCLUSION FROM INCOME personal injuries or sickness, plus the amounts of any damages
received, whether by suit or agreement, on the account of such
A. Exclusion – refers to income received or earned but injuries or sickness.
is not taxable as income because it is exempted
by law or by treaty. Receipts which are not in fact  Example of damages recovered from personal
income are also excluded from Gross Income. injuries: Moral damages for personal injuries.
 If the award of damages is to compensate loss of
Exclusion Deductions property or an award of damages to compensate
-- not taken into they are subtracted loss of income / profits, such is subject to tax.
account in from gross income
determining gross 6.) Miscellaneous Items
income
a.) Income derived by Foreign Government – Income
derived from investments in the Philippines in loans, stocks, bonds
 Exclusions are in the nature of tax exemptions, thus or other domestic securities or from interest on deposits in banks
the claimant must establish them convincingly. in the Philippines by:
(i) Foreign governments,
(ii) Financing institutions owned, controlled or
B. Exclusion under the Code. (LAGI C MR G 2) enjoying refinancing from foreign governments,
and
1). Life Insurance Proceed (iii) International or regional financial institutions
The proceeds of life insurance policies paid to the heirs or established by foreign governments.
beneficiaries upon the death of the insured, whether in a single b.) Income derived by the Government or its Political
sum or otherwise. Subdivision – Income derived from any public utility or from the
exercise of any essential governmental function accruing to the
Government of the Philippines or to any political subdivision
Note: thereof.
 Reason for exclusion: The contract of c.) Prizes and Award - Prizes and award to be
insurance is a contract of indemnity hence, the excluded, the following conditions must concur;
proceeds thereof are considered indemnity (1) Prizes and award made primarily
rather than a gain or profits. in recognition of religious,
 Instances when proceeds from insurance are charitable, scientific, educational,
taxable: artistic, literary, or civic
a.) Where proceeds are held by the insurer achievement.
under an agreement to pay interest. The
(2) The recipient was selected 8.) Gains from the Sale of Bonds, Debentures or other
without any action on his part to Certificates of Indebtedness with maturity of more than five
enter the contest or proceeding. (5) years.
(3) The recipient is not required to
render substantial future services 9.) Gains from Redemption of Shares in Mutual Fund.
as a condition in receiving the
award.
C. Exclusion from income under Special Laws
d.) Prizes and Award in Sports Competition - All
prizes and award granted to athletes in local and international 1. Prizes received by winners in charity horse race sweepstakes
sports competitions and tournaments whether held in the from PCSO.
Phils. Or abroad and sanctioned by sports associations.
2. Back pay benefits
e.) 13th Month Pay and Other Benefits - The
total exclusion shall not exceed P30k. 3. Income of cooperative marketing association
f.) GSIS, SSS, Medicare and Other 4. Salaries and stipends in dollars received by non – Filipino
Contributions citizens on the technical staff of IRRI (International Rice Research
Institutes).
7.) Retirement Benefits, Pension, Gratuities, etc.
5. Supplemental allowances per diem, benefits received by
The following items are exempt from taxation: officer or employees of the Foreign Service.
(a). Retirements benefits received under RA 7641 and those
received by officials and employees of private firms in accordance 6. Income from bonds and securities for sale in the international
with reasonable PRIVATE BENEFIT PLAN. market.
Requisites:
(1.) The retiring official or employees has been in service of the
same employer for at least ten years. IV. FRINGE BENEFITS
(2.) Is not less than 50 yrs. of age at the time of his retirement.
(3.) And is available to official or employee only once. A. FRINGE BENEFITS – mean any good, service or other benefit
furnished or granted in cash or in kind by an employer to an
 Private retirement benefit plan individual employee, except rank and file employee.
 A “reasonable private benefit plan ” means a
pension; gratuity, stock bonus or profit sharing plan  Pursuant to Revenue Regulations No. 3 –
maintained by an employer for the benefit of some or all 98 (dated May 21, 1998) implementing section
of his employees – 33 of the Tax Code, the special treatment of
a.) wherein contributions are made by such employer fringe benefits shall be applied to fringe benefits
or employees, or both, for the purpose of given or furnished to managerial or supervising
distributing to such employer the earnings and employees and not to the rank and file.
principal of the fund thus accumulated; and
b.) wherein said plan provides that at no time shall any  Rank and file – means all employees who are
part of the principal or income of the fund be used holding neither managerial nor
for, or be diverted to, any purpose other than for
the exclusive benefit of said employee  Managerial Employee – is one who is vested
with powers or prerogatives to lay down and
(b). Any amount received by an official or employees or by his execute management policies and/or to hire,
heirs from the employer as a “consequence of separation from transfer, lay – off, recall, discharge, assign, or
service due to death, sickness or other physical disability beyond discipline employees.
the control of the said official or employer.
 Supervisory Employees – are those who, in
(c). Terminal leave and other social security benefits. the interest of the employer, effectively
The terminal leave pay of government employees whose recommend such managerial actions if the
employment is co-terminous is exempt since it falls within the exercise of such authority is not merely routinely
meaning of the phrase “ for any cause beyond the control of the or clerical in nature but requires the use of
said official or employees” (BIR Ruling 143-98) independent judgment.
(d). Benefits received under the US veterans Administration.  The regulation does not cover those benefits
properly forming part of compensation income
(e). Benefits received from SSS subject to withholding tax.
(f) Benefits received from GSIS  Fringe Benefit Tax (FBT) – refers to monetary
burden imposed on any good, services or other
benefits furnished or granted by an employer, in
cash or in kind, in addition to basic salaries, to an
individual employee, except rank and file  Applicable to installment payment or loan with
employee. interest rate lower than 12 % starting January 1,
1998.
Formula:
GMV = MV divided 68% (as of Jan. 1, 2000) 4). Expenses for Foreign Travel
GENRULE: Expenses for foreign travel insured by the employee
FBT = (fb) GMV x 32% (as of Jan 1, 2000) and/or family members of the employee borne by the
employer shall be treated as taxable fringe benefits of
B. VALUATION OF THE FRINGE BENEFITS the EE.
Fringe Benefit (forms) Value of Fringe Benefits EXCEPT:

 Where the expenses for foreign travel paid by the
1). Money The value is the amount employer for the employee are for the purpose of
received attending business meeting or convention. The
2). Property with owner ship Fair market value of the exemption covers only the following expenses:
transferred to the employee. property a. Inland travel expenses except lodging cost
3). Property w/o transfer of Depreciation value of the in hotel averaging US$ 300 or less per
ownership property day; and
b. Cost of economy or business class airline
C. ITEMS WHICH ARE CONSIDERED AS FRINGE ticket [*However, if the ticket is a first
BENEFITS class one, 30% of the cost of the ticket
(H2 IT – FIV2E2) shall be subject to a fringe benefit tax].
 Travel expenses should be supported by documents
1). Housing proving the actual occurrences of the meetings or
Housing Privilege FB tax base conventions. Likewise, documents and evidence
(a) Lease of residential property for MV = 50% x rental showing the business purpose of the employees’
the use of the employee as his usual payments travel must be presented otherwise, the entire cost will
place of residence. be considered taxable fringe benefit.
(b) Residential Property owned by ER MV = [5% (FMV or Zonal
and Assigned to employee as his Value whichever is 5). Membership fees, dues and other expenses borne by
usual place of residence. higher)] x 50% the ER for his EE, in social or athletic clubs or other similar
organizations – These are treated as taxable Fringe Benefits of
(c) Residential property purchased by MV = [5% x AC the EE in full.
ER on installment basis for the use of (Acquisition)] x 50%
ER as his usual place of residence.
(d) Residential property purchased by MV = FMV or 2V W/ever 6). Life or Health Insurance -
ER and ownership is transferred to EE is increase GENRULE: The cost of life or health insurance and other non – life
as his usual place of residence. insurance premiums or similar amounts in excess of what the law
(e) Residential property transferred to MV = FMV or Zonal Value allows borne by the ER for his EE shall be treated as taxable fringe
employee at less than employer’s (whichever is higher) – benefits.
acquisition cost. Acquisition Cost
EXCEPT:
 Non – taxable Housing Fringe Benefits (a.) Contribution of the ER for the benefits of the EE pursuant to
(a) Housing privilege of military officials of AFP existing laws such as RA 8287 (SSS) or RA 8291 (GSIS).
(b) Housing unit, which is situated inside or adjacent (b.) The cost of premium borne by the ER for the group
to the premise of a business or factory. A housing unit is insurance of his EE.
considered adjacent if it is located within the maximum 50
meters from the perimeter of the business premises. 7). Holidays and Vacation Expense
(c) Housing benefit granted to employees on a
temporary basis not exceeding three (3) months. 8). Motor Vehicle
 Valuation of Motor Vehicle of any kind
2). Household Expenses – Refer to expenses of the employee
paid by the employer for household personnel or other personal (a.) Motor vehicle purchased by ER in MV = AC (acquisition
expenses. Household expenses shall include: name of EE Cost)
(a) salaries of household helper (b.) “cash for the purchased provided by MV = cash received by
(b) personal driver of the EE (employee) the ER, the ownership is placed in the the EE
(c) Payment for homeowner assoc., etc. name of the EE
(c.) Purchase on “Installment” basis, the MV = AC (exclusive of
3). Interest on loan at less than market rate ownership is placed in the name of the interest)/ 5 years
 if the ER (employer) lends money to his employee EE
-- free of interest or at a rate lower than 12% (or (d.) “Portion” of purchased price MV = amount
prevailing market rate) the interest foregone by the shouldered by ER shouldered by the ER
ER or the difference of the interest assumed by the (e.) Fleet of motor vehicle “leased” by MV = 50% x rental
ER and the 12% rate shall be treated as taxable the ER payment
fringe benefit. (f) Fleet of Motor vehicles owned and MV = [AC/5] x 50%
maintained by the ER
(1.) Educational grant whereby the study is

Note: In case of letters a, b, c and d, regardless of whether the directly connected with the trade, business or
motor vehicle is used for the personal purpose of the EE and partly profession of the ER.
for the benefit of his ER, the monetary value shall be the entire (2.) And there is a written contract obligating
value of the benefit. the EE to remain under the employment for a
Under letters e and f, the fleet of motor vehicles is for certain period.
the use of the business and the EEs. The value of the benefit shall
be the rental payments (e) or the acquisition cost (f) of all motor (b.) Educational Assistance granted to the
vehicles not normally used for sales, freight, delivery service and dependents of the employee in the nature of
non-personal use. educational assistance to the dependents of the
 The use of YACHT whether owned and maintained or EE through a competitive scheme under a
leased by the ER shall be treated as taxable fringe scholarship program of the company.
benefit – the value of the benefit shall be measured
based on the depreciation of the Yacht at an estimated
useful life of 20 yrs. D. FRINGE BENEFITS NOT SUBJECT TO THE FRINGE
BENEFIT TAX
 The use of AIRCRAFT (including helicopters) owned
and maintained by the ER shall be treated as “business 1). Contributions of ER for the benefits of EE to retirement,
use” and not subject to FBT. insurance, and hospitalization benefits plans.
9). Expense Account 2). Benefits given to rank and file EEs whether granted under CBA
or not.
NOTE:
 Expense Account subject to Fringe Benefit Tax 3). Fringe Benefits which are exempted from income tax under the
(a.) Expenses incurred by the EE but paid by his tax code or other special laws.
ER.
(b.) Expenses paid by the EE but reimbursed by 4). Fringe Benefits which are required by the nature of, or
his ER. necessary to the trade, business or profession of the ER.
 Expense account not subject to 5). Fringe Benefits granted for the convenience or advantage of
FBT. the ER.
(a.) expenses duly receipted for in the name of
the ER and 6). De minimis benefits as may be define by the Secretary of
(b.) The expenditures do not partake the Finance.
nature of personal expenses attributable to
the EE. NOTE:
 Personal expenses of the EE (like groceries)  DE MINIMIS Benefits – are privileges granted
paid for or reimbursed by the ER are taxable by the ER to the EEs which are relatively of small
fringe benefits, whether or not duly receipted value for the purpose of the promoting the health,
for in the name of the EE. goodwill, contentment and efficiency of the EEs.
 Representation and Transportation  Examples of De minimis benefits are the

Allowances (RATA) following:
--- refers to fixed amounts which are regularly (1.) Monetized unused vacation leave credits of not
received by the EEs as part of their monthly more than ten (10) days during the year.
compensation income. (2.) Medical cash allowance to dependent of the EES
--- they are not treated as Taxable Fringe not more than P750 per employee per semester or
Benefits but the same are treated as Taxable P125 per month.
Compensation Income.
(3.) Rice Subsidy – worth P1000 or one (1) sack of 50
kg. rice per month
10). Educational Assistance
(4.) Uniform and clothing allowances – not more than
NOTE: P3k per annum.
GENRULE: The cost of the educational assistance to the EE or his
dependents which are borne by the ER shall be treated as Taxable (5.) Medical Benefit yearly – not more than P10k per
Fringe Benefits. annum.
EXCEPTION:
 Educational assistance not treated as V. DEDUCTIONS FROM GROSS INCOME
Taxable Fringe Benefits
A. Deductions -- these are items or amounts authorized by the
a) Education granted to EE law to be subtracted from the pertinent items of the gross
Requisites: income to arrive at the taxable income.
 Basic Principle governing deductions:

(1.) The taxpayer seeking a deduction must  These deductions may be availed of by:
point out some specific provisions of the statue (a.) Insurance companies
authorizing the deduction; and (b.) Estate and Trust
(c.) Private educational Institutions.
(2.) He must be able to prove that he is entitled C. The following are the taxpayers who are entitled to avail of
to the deduction authorized or allowed. deduction.
1). Citizens of the Philippines
 Time of availing deductions: a taxpayer has the right
to deduct all authorized allowances for the taxable 2). Resident aliens
year. He cannot deduct them from the income of
the next or any succeeding year. 3). Non – resident aliens engaged in trade or business in the Phils
4). Domestic corporation

B. Kinds of Deductions
5). Resident foreign corporation/ engaged in trade or business in
1). Deductions from compensation income of individual taxpayers the Philippines
– taxpayers whose income is derived purely from compensation
income (one that arises from an ER – EE relationship). 6). Taxable co – partnership and General Professional Partnership
 The following items are allowed to be deducted
from gross compensation income of an individual 7). Estates and Trusts
taxpayer;
(a.) Basic personal exemption on  Taxpayers who are taxed only on the basis of their
account of the status of the “T”. gross income received from within the Phils.
(a.) NRA (ETB) – non – resident aliens not
(b) Additional personal exemption on engaged in trade or business in the Phils.
account of qualified dependent. (b.) NRFC – non resident foreign corp. those
not engaged in trade or business in the Phils.
(c) Premium payment on Health and/or
Hospitalization Insurance, if applicable.
VI. ALLOWABLE ITEMIZED DEDUCTIONS
 An individual taxpayer whose income is derived
from ER-EE relationship is also not allowed to  Available only to taxpayers :
deduct itemized deductions (Sec. 34 NIRC), (a.) self – employed/ those in the exercise
except Premium Payments on Health and/or of their profession
Hospitalization Insurance, if applicable. (b.) Corporations
 An individual taxpayer whose income derived from

ER – EE relationship is not allowed to elect an A. Business Expenses
optional standard deduction (OSD) of 10% of his
income.  General Requisites for Deductibility:
(1.) The expenses must be ordinary and necessary
2). Deduction for self – employed and Professionals – individual  Ordinary – expenses which are commonly incurred
taxpayer who are self employed and /or professionals engaged in in the trade or business of the taxpayers as
the practice of their profession may deduct the following items distinguished from capital expenditures. An
from their gross income: expense is ordinary if it is normal or usual to the line
of business.
(a.) itemized deductions or the optional
deduction (OSD). 2 kinds of expenditures
(b.) Personal and additional exemptions (a.) capital expenditure (b.) ordinary expenditure
(c.) Premium payments on health or
-- not deductible from the gross -- deductible from the gross
hospitalization insurance.
income income in the year it was
incurred
3). Deductions from corporate income.
-- has the effect of prolonging -- does not prolong the life of an
the life of an asset asset for more than a year
NOTE:
-- if the property acquired has a --The acquired property has a
 Corporations include :partnership” other than
useful life of more than 1 yr. the useful life of not more than 1 yr.
general professional partnership engaged in trade
expenses thereof are considered
or business in the Phils.
capital expenditure
 They are entitled to claimed the itemized
-- expenditure for extra -- expenditure for minor/ordinary
deductions.
ordinary/major repairs repair
4). Special Deduction
 Necessary expenses – expenses which are
-- Deductions allowed to be subtracted in addition to the
appropriate and helpful to the taxpayer’s business
itemized deductions allowable to corporations.
or if it is intended to realized profit or to minimize a
loss.
NOTE:
 Extraordinary repairs - those in the nature of  Some factors in determining reasonableness

replacements, alteration, and expansion to the of compensation.
extent that they arrest deterioration and prolong the (a.) Payment must be made in good faith
life of the property. (b.) Character of taxpayer’s business
 Ordinary repairs – those made to keep the property (c.) Volume and amount of its net earning
ordinarily efficient working condition and do not (d.) Locality in which the business is in
materially add to the value of the property. (e.) General and economic conditions, etc.
(2.) It must be paid or incurred during the taxable year.
 There is no fixed test for determining the
NOTE: reasonableness of a given compensation. It is
 Paid – the payment is on cash receipt basis, just to assume that a reasonable
expenses are deductible in the year they are compensation is only such amount as would
incurred. be ordinarily be paid for like services by like
 Incurred – the payment thereof is on accrual basis, enterprises in like circumstances.
expenses are deductible in the year they are
incurred, whether paid or not.  Bonuses to be deductible must be:
(a.) made in good faith
(3.) It must be directly connected with trade or business or (b.) for service actually rendered
profession of the taxpayer. (c.) must be reasonable
* If the bonuses were granted without any
(4.) it must b substantiated by adequate proof service rendered, they are not considered as
deductible from gross income.
NOTE:
 The claimed deduction must be evidenced by  Premiums paid on life insurance of an officer,
official receipts or other adequate records. employee, or business associate, where the
 The evidenced must established the following ; taxpayer is directly or indirectly a beneficiary
(a.) the amount of expenses being under the policy is not deductible.
deducted  Pension and compensation for injuries are also
(b.) the direct relation of such to the deductible limited to the amount not
development, management, compensated for by insurance or otherwise.
operation, and/or conduct of the trade,
business or profession of the
taxpayer. (2.) Travel Expenses
 Travel expenses include – transportation expenses
(5.) It must not be against the law, morals, public policy or public and meals and lodging, here and/or abroad.
order.  Requisites for deductibility: (In addition to
the general requisites)
 Examples of illegitimate business expenses: (a.) reasonable and necessary
(not deductible)
(a.) Bribe given to obtain protection from (b.) incurred or paid “while away from
arrest and prosecution home” – it means away from
(b.) Kickback principal place of business
(c.) Payments to secure political influence
to obtain favorable public contracts. Note: If the trip is undertaken for purposes other than business or
(d.) Protection payments exercise of profession, the transportation expenses are personal
- The legitimate expenses of an expenses and the meals and lodging are living expenses and are
illegitimate business however, are not deductible.
deductible on the theory that income Transportation expenses of an employee from his
tax is not a tax on gross income even residence to his office and back are not deductible. They are
if such income is earned as an illegal personal expenses. However, transportation expenses from his
business. office to his customer’s place of business and back are deductible.
They are business expenses.
Specific expenses that are part of expense in general.
(c) Paid or incurred in the conduct of trade or
(1) Compensation for personal services. (Including Grossed Up business.
monetary value of fringe benefit)
(3.) Rentals
NOTE:  Requisites for deductibility (In addition to
 Requisites for deductibility; (In addition to the the general requisites)
general requisites for deductibility) (a.) Must be made on condition to the continued
(a.) They are reasonable use or possession of the property.
(b.) Payments for personal service (b.) The taxpayer has not taken or is not taking
actually rendered. title to the rented property.
(c.) Withholding tax imposed has (c.) Rented property is used in conduct of the
been paid. business, trade, or profession of the
employer.
(d.) Must be paid or incurred within the taxable

year.  Interest expenses that cannot be deducted from gross
income:
(4.) Entertainment, Amusement and Recreation expenses. (1.) Interest paid in advance by a taxpayer reporting income
 Requisites for Deductibility (In addition to on cash basis provided:
the general requisites) (a.) Such interest may be allowed as deduction in the
(a.) The expenses are directly related to or in furtherance year the indebtedness is paid: and
of the trade, business or profession of the taxpayer
(b.) If the indebtedness is payable in periodic
(b.) The same must be directly connected in the amortization -- the interest corresponding to the amortized
development, management and operation of the trade, principal may be deducted during the taxable year.
business or profession of the Taxpayer
(2.) If the indebtedness is incurred to finance petroleum
(c.) The expenses must be reasonable and not contrary exploration.
to the law, morals, public policy or public order
(3.) Interest on loans between related taxpayer:
(d.) Substantiated by adequate receipts and/or records. (a) between members of a family
- Brothers and sisters (whether by whole or by
(e.) Must be paid or incurred during the taxable year. half blood).
- Spouse
(f.) Must not exceed the ceiling provided by the Sec. of - Ancestors
Finance - Lineal descendants
(b.) between an individual and a corporation ---

where more than 50 % in the value of outstanding
COHAN RULE capital stock is owned by such individual except in
Where it is certain from the evidence adduced that the the case of distribution in liquidation.
taxpayer did incur expenses but that the actual amount thereof has
not been established, the commissioner should make a close (c.) between two corporations – where more than
“approximate” thereof and his determination thereof shall bear 50% of the OCS of which is owned directly or
heavily on the taxpayer for his inexactitude. ( Visayas Cebu indirectly by or for the same individual except
Terminal v. Collector 108 PHIL 320). distribution in liquidation.
 OPTION GRANTED TO PRIVATE EDUCATIONAL (d.) between the Grantor and the fiduciary in Trust
INSTITUTIONS.
- Private educational institution may, at its option, elect either: (e.) between the fiduciary of a trust and a fiduciary
(a.) To deduct expenditure otherwise considered as capital of another trust if the same person is a grantor with
outlays of depreciable assets incurred during the taxable respect to each trust.
year, for the expansion of school facilities or
(b.) to deduct an allowance for depreciation thereof.  The taxpayer has the option of either treating the interest
incurred to acquired property used in trade, business or exercise of
a profession as a;
B. Interest Expenses (a.) as deductions or
(b.) as capital expenditures
 Interest – refers to the compensation allowed by the law of
fixed by the parties for the loan or forbearance of money, Rule: -- but the election of one excludes the other.
goods or credits.
 Other deductible interest
 Requisites for Deductibility: (a.) interest paid on account of delinquency in the
(a.) there must be indebtedness. payment of tax because a tax obligation is considered
indebtedness to the government for purpose of income
(b.) the indebtedness must be that of the taxpayer tax.
Except: fines and penalties
(c.) the indebtedness must be connected with the trade,
business or profession of the taxpayer (b.) Interest on scrip dividend given by a corporation to a
SH in the form of a promissory note.
(d.) the interest must have been paid or incurred during the --- It is deductible expense on the part of the corporation
taxable year Except: interest in preferred stock is not deductible because it is
not interest expense incurred in indebtedness but actually a
(e.) the interest must have been stipulated in writing dividend on shares of stocks.
(f.) the deduction for interest expense shall be reduced by an (c) In the case of banks and loan or trust companies,
amount equal to 38% of the interest income subject to final interest paid within the year on deposits or on savings
tax (beginning Jan. 1, 2000). received for investment and secured by interest-bearing
certificates of indebtedness issued by such bank or

company. Note: To be deductible, the taxes must be imposed by law and
payable by the taxpayer. Thus, a value- added tax is not deductible
C. Taxes by the customer upon whom the burden of the tax is shifted by the
 The deduction is allowed to taxes proper only and not allowed seller. However, the customer may consider the tax burden as part
in amounts representing; of his cost as an ordinary or capital expenditure if incurred in
(a.) surcharge business or trade.
(b.) penalties
(c.) Fines incident to delinquency D. Tax Credit
--- refers to the taxpayer’s right to deduct from the
 Taxes that are deductible [BILDAP] income tax due, the amount of tax he has paid to foreign country.
1. business taxes NOTE:
2. import duties Tax Credit Tax deduction
3. license taxes -- deducted from Phil income -- deducted from the gross
4. documentary stamp taxes tax income
5. any other taxes paid directly to the government, -- all taxes are allowed to be -- only foreign income taxes
national or local, paid or accrued within the taxable deducted with the exception of may be claimed as credits
year, in connection with taxpayer’s trade, business the taxes expressly excluded
or profession.
6. privilege taxes  Persons entitled to tax credit
1. Resident Citizen of the Philippines
 Taxes that are not deductible [F2ESTIVE] 2. Domestic Corp. except General Professional
1. Foreign income tax, if not claim as tax credit Partnership
 Income tax imposed by a foreign country are 3. Members of the GPP
deductible only if: 4. Beneficiaries of Estates and Trusts.
(a.) the taxpayer is qualified to avail of tax  Persons not entitled to Tax credit
credit; 1. Non Resident Citizen
(b.) He does not signify in its return his desire 2. Aliens, whether residents or non – residents
to avail of the same. 3. Foreign Corporation, whether residents or non -
residents
GENRULE: Taxes allowed as deduction, when
refundable or credited shall be included as part of gross  Conditions for allowance of tax credit:
income in the year of receipt to the extent of the income (a.) The taxpayer must signify in his income
tax benefit of said deduction. tax return his desire to claim tax credit
 The right to deduct income taxes paid to a (b.) The return must be accompanied by
foreign government is given only as an appropriate form prescribed by CIR
“alternative or substitute “to his right to claim a (c.) The form must be carefully filed with all the
tax credit for such foreign income taxes. informations required.
(d.) Additional information must be furnished
 Limitation on deduction (e.) If the credit is sought for taxpayer already
(a.) non – resident alien engaged in trade or paid, the form must have attached to it the receipt for tax
business in the Phils. payment.
(b.) resident foreign corporation --- the  Limitations on Tax Credit

deductions for taxes shall be allowed only if (a.) For taxes paid to one foreign country- The
and to the extent that they are connected with amount of tax credit in respect of the tax paid or incurred
income from “sources within” the Phils. to any country shall not exceed the same proportion of
the tax against which such credit is taken, which the
2. Final Taxes taxpayer’s net income from sources within such country
taxable under the tax code bears to his entire taxable
3. Estate and donor’s taxes income for the same year.
Formula: Net Income from Foreign country x Phil.
4. Stock transaction tax on the sale, barter or exchange Income Tax = Limit on the amount of credit.
of s/s listed and traded through the local stock exchange. (b.) For taxes paid to two or more foreign
countries. The total amount of the credit shall not
5. Taxes assessed against local benefits tending to exceed the same proportion of the tax against which
increase the value of the property (special assessment or levies). such credit is taken, which the taxpayer’s net income
from sources outside the Phils. taxable under the tax
6. Taxes which are not in connection with the trade, code.
business or profession of Taxpayer. Formula:
Net Income from sources outside the Phils x Phil.
7. Income tax imposed by the Philippine gov’t. Income Tax = Limit on the amount of credit.
Net income from all sources
8. Value – added Tax (VAT)
9. Energy Taxes
E. Losses - implies an unintentional parting with something of (3.) The taxpayer has acquired
value substantially identical stocks or
securities.
 Requisites for Deductibility:  However, if losses from wash sales are claimed by
(a.) The loss must be that of the taxpayer. a “dealer” in securities in the ordinary course of
business, such losses are deductible.
(b.) There must be an actual loss suffered in a closed
and completed transaction. (b.) Losses of the useful value of capital assets
--- “closed transaction “means that taxable due to same change in business conditions.
year when the amount of loss was finally ascertained. E. g. Where a new law is passed
directly or indirectly making the continued
(c.) The loss must be connected with the taxpayer’s profitable use of the property impossible.
trade, business or profession.
(c.) Abandonment losses in petroleum
(d.) The loss must not be compensated for by insurance operations.
or otherwise.
NOTE:
(e.) The loss must be liquidated and charge – off during  In case of petroleum operations which are
the taxable year. abandoned in whole or in part, all
-- The deduction shall be in full or not at all. accumulated exploration and
development expenditures to a certain
(f.) The loss must be reported to BIR within 45 days from extent may be allowed as deduction.
date of loss.  In case of producing well subsequently
abandoned, the amortized cost therof as
(g.) The loss must not be claimed as deduction for estate well as the undepreciated cost of
tax purposes in the estate tax return. equipment directly used therein shall be
allowed as a deduction in the year of
 Classifications of Losses: abandonment.
1). Ordinary Losses
(a.) Losses incurred in trade, business or (d.) Losses due to voluntary removal of
profession. building, machinery, etc.,
 If the demolition is incident to renewal and
(b.) Losses incurred of property connected with replacement = deductible
the trade, business or profession, if due to casually or  If the demolition or removal of building is
from robbery, theft or embezzlement. for the purpose of erecting a new one =
not deductible expense.
2). Capital Losses
(a.) Losses from sale or exchange of capital (e.) Wagering Losses (gambling)
assets.
 Wagering losses are deductible only to
(b.) Losses resulting from securities becoming the extent of the gains from such
worthless and which are capital assets. wagering transaction. If there is no gain
A mere loss on account of the shrinkage in from the wagering transaction, the loss
value of securities or shares of stock is not therefrom cannot be deducted from gross
deductible. The loss to be deducted must be income.
actually suffered when the stock is disposed.  Wagering transactions - are those in
which the outcome is uncertain or those
(c) Losses from short sales of property. that involve games of chance.
(d) Losses due to failure to exercise privilege
or options to buy or sell.
3). Special Kinds of Losses NET OPERATING LOSS CARRY – OVER

(a.) Losses from wash sale of stock or (NOLCO)
securities
NOTE:
 Loss on wash sales not deductible  Net Operating Loss – denotes the excess of allowable
when; deductions over gross income.
(1.) A taxpayer who is not a dealer of
stocks in trade has disposed  Net Operating loss Carry – over – it means that the net
shares and operating loss for the taxable year immediately preceding the
(2.) Within the period of 60(sixty) days current taxable year shall be carried over as a deduction from
beginning 30 days before the date gross income for the next three (3) consecutive taxable yrs.
of such sale and ending 30 days immediately following the year of such loss.
after such date.
 Limitations of availability of NOLCO
(a.) There must be no substantial change in ownership of the value of the outstanding stock of which is owned,
business or enterprise in that: directly or indirectly, by or for such individual; or
1. Not less than 75% in nominal value of the outstanding iii. Except in the case of distributions in
issued shares, if the business is on the name of the liquidation, between two corporations more
corporation, is held by or on behalf of the same persons; than fifty percent (50%) in value of the
or outstanding stock of each of which is owned,
2. Not less than 75% of the paid up capital of the directly or indirectly, by or for the same individual,
corporation, if the business is in the name of the if either one of such corporations, with respect to
corporation, is held by or on behalf of the same persons. the taxable year of the corporation preceding the
date of the sale or exchange was, under the law
(b.) Where one business operation is income tax – exempt applicable to such taxable year, a personal
and the other is not, the losses in the latter operations are not holding company or a foreign personal holding
deductible from the profits in the taxable operation. company;
(c.) Any net loss incurred in a taxable year during which the iv. Between the grantor and a fiduciary of
taxpayer was exempt from income tax shall not be allowed to any trust ; or
be carried over to the next three years.
v. Between the fiduciary of a trust and the
fiduciary of another trust if the same person is
 NOLCO For mines other than oil and gas wells. a grantor with respect to each trust; or
--- the net operating loss of mines incurred in the first 10
yrs. of operation shall be carried over to the next five (5) yrs vi. Between a fiduciary of a trust and a
following the loss. beneficiary of such trust.
F. Bad Debts 4. The same must be actually charged-off the books

of accounts of the taxpayer as of the end of the
 Definitions taxable year;
1. Bad debts are debts due to the taxpayer when
actually ascertained to be worthless and charged-  A partial writing-off of a bad debt is not
off within the taxable year. (Sec.34 [E1], NIRC). allowed; it must be charged-off in full or not at all
(Fernandez Hermanos, Inc. vs. Commissioner, 29
2. They refer to those debts resulting from the SCRA 552; Philippine Refining Co. vs. Court of
worthlessness or uncollectibility, in whole or in part, appeals, 70 SCAD 544, 256 SCRA 667).
of amounts due to the taxpayer by others, arising
from money lent or from uncollectible amounts of 5. The same must be actually ascertained to be
income from goods sold or services rendered. worthless and uncollectible as of the end of the
(Sec.2 [a], Rev. Regs. No.5-99) taxable year.
 Requisites for deductibility of bad debts  In general, a debt is not worthless simply
1. There must be a valid and subsisting debt. because it is of doubtful value or difficult to
 A valid and subsisting debt is one the collect . Worthlessness is determined upon the
collection of which may be enforced in a court of exercise of a sound business judgment. The
law. A debt which had prescribed is no longer valid determination of worthlessness in a given case
and subsisting. must depend upon the particular facts and
circumstances of the case.
2. The same must be connected with the taxpayer’s
trade, business or practice of profession.  The following, coupled with the creditor’s
reasonable efforts to collect, may justify an
3. The same must not be sustained in a transaction ascertainment of the worthlessness of a debt.
entered into between related parties enumerated i. The flight or disappearance of the debtor
under Sec. 36 (B) of the NIRC. (Connel Bros. Co. [Phil.] vs. Comm., CTA Case
 The said section provides: Nos. 411 and 610, April 20, 1966);
In computing net income, no deduction shall in ii. Insufficiency of collateral (par. 1, Sec. 102,
any case be allowed in respect of losses from sales Regs.; Phil. Trust Co. vs. Coll., CTA Case No.
or exchange of property directly or indirectly. 367, January 30, 1961);
iii. Bankruptcy or insolvency;
i. Between members of a family . For the iv. Loss of evidence of indebtedness (Western
purpose of this paragraph, the family of an Pacific Corp. vs. Coll., CTA Case No. 720);
individual shall include only his brothers and v. Death of debtor leaving no assets;
sisters (whether by the whole half-blood), vi. Injury to debtor incapacitating him from work
spouse, ancestors, and lineal descendants; or vii. Absence of visible properties of the debtor
(Esso Standard Eastern, Inc. vs. Comm., CTA
ii. Except in the case of distributions in Case No. 1530, Nov. 11, 1968); and
liquidation, between an individual and a viii. Fruitless efforts to collect small amounts
corporation more than fifty percent (50%) in from debtors scattered all over the country. (El
Powenir Rubber Products, Inc. vs. Vera, CTA subsequent recovery thereof shall be treated as a receipt
Cases Nos. 1702 and 1705, July 26, 1969.) of realized taxable income.
 In the case of banks, in lieu of requisite No.  If a taxpayer did not benefit from the deduction of
(5), the Bangko Sentral ng Pilipinas (BSP), thru its the bad debt because it did not result to any reduction of
Monetary Board, shall ascertain the worthlessness his income tax in the year of such deduction (i.e. where
and uncollectibility of the bad debts and it shall the result of his business operation was a net loss
approve the writing off of the said indebtedness even without deduction of the bad debts written-
from the banks’ books of accounts at the end of the off) ; then his subsequent recovery shall be treated as a
taxable year. mere recovery or a return of capital. (Sec. 4, Rev.
Regs. No. 5-99), hence not taxable.
 In no case may a receivable from an insurance

or surety company be written-off from the taxpayers’  Where the bad debt expense was disallowed by the
books and claimed as bad debts deduction unless BIR as a deduction, the subsequent collection of the
such company has been declared closed due to debt is not taxable.
insolvency or for any such similar reason by the
Insurance Commission. (Sec. 3, Rev. Regs. No. 5-
99)  Recoveries of bad debts previously deducted from
gross income do not constitute taxable income unless
 In order that bad debts may be deducted from the deduction in prior years resulted in a reduction of
gross income it must be “actually ascertained to be income tax liability. This has given rise to the “equitable
worthless and charge-off within the taxable doctrine of tax benefit.”
year.“ The law does not permit the charging off and
the deduction of a bad debt in year other than in the
year in which it is determined to be worthless. (Phil. G. Depreciation
Trust Co. vs. Collector.)
 Definition
 Where under a foreclosure of a mortgage, the 1. Depreciation is the gradual diminution in the useful
mortgagee buys the mortgaged property and credits value of tangible property used in trade or
the indebtedness with the purchase price, the business resulting from exhaustion , wear and
difference between the purchase price and the tear, and normal obsolescence .
indebtedness will not be allowed as a deduction for
bad debts. The determination of loss is deferred 2. The term is also applied to amortization of value of
until the disposal of the property. intangible assets the use of which in trade or
business is definitely limited in duration . (Basilan
 Securities becoming worthless Estates, Inc. vs. Comm., 21 SCRA 17).
 If any securities which are capital assets, are  Rationale
ascertained to be worthless and charged-off within the  The taxpayer is entitled to see that from earnings
taxable year, the loss resulting therefrom to the taxpayer the value of the property invested is kept unimpaired,
(other than a bank or trust company incorporated under so that at the end of any given term of years, the
the laws of the Phil.) is not considered as a bad debt original investment remains as it was in the
but as a capital loss . beginning. Accordingly, the law permits the taxpayer to
recover gradually his capital investment in wasting
 Losses from theft or embezzlement assets free from tax. ( Basilan Estate, Inc. vs. Comm.,
supra).
 The bad debt theory holds that since
the embezzlement of funds creates a debtor-creditor
 The necessity for depreciation allowance arises
relationship; the loss is deductible as bad debt in the
from the fact that certain property used in business
year when the right of recovery becomes worthless.
gradually approaches a point where its usefulness is
exhausted.
 Tax Benefit Rule  Persons Entitled to claim depreciation allowance

1. Resident citizens and resident aliens (Sec. 34
 The rule provides that the recovery of bad debts [F, 1], NIRC)
previously allowed as deduction in the preceding years a.) In general
shall be included as part of the gross income in the year i. A taxpayer who owns property and has a
of recovery to the extent of the Income Tax Benefit capital investment in the property may claim
of said deduction. (Sec. 34 [E, 1] NIRC) depreciation.
 If a taxpayer realized a reduction of income tax from ii. In the case of property held by one person
him on account of his bad debt deduction, his for life with remainder to another person (e.g.
usufruct or fideicommissary substitution), the

deduction shall be computed as if the life  Requisites for deductibility
tenant were the absolute owner of the 1. The allowance for depreciation must be reasonable
property and shall be allowed to the life (Bacolod-Murcia Milling Co. Inc. vs. Comm., CTA
tenant. Case No. 1402, Oct. 31, 1969).
2. It must be for property arising out of its use or

iii. In the case of property held in trust, the employment in the business or trade, or out of its
allowable deduction shall be apportioned not being used temporarily during the year (Connel
between the income beneficiaries and the Bros. Co. vs. Collector, CTA Cases No. 411 & 610,
trustee in accordance with the pertinent April 30, 1966).
provisions of the instrument creating the
trust, or, in the absence of such provisions, 3. It must be charged-off during the taxable year;
on the basis of the trust income allowable to  The deduction must be made in the year in
each. which the wear & tear occurs. Depreciation may not
be accumulated.
iv. If the remainder of the terms of lease is 4. A statement on the allowance must be attached to
greater than the probable life of the building the return.
erected or of the improvements made by the
lessee in pursuance of an agreement with
the lessee, an annual deduction in the form 5. The property must have a limited useful life.
of an allowance for depreciation may be
made (Sec. 49, 74, regulations).  The following property may not be
depreciated:
b.) Depreciation of properties used in petroleum 2. Inventories or stock in trade;
operations 3. Land, apart from improvements or
physical development added to it;
 The service contractor at his option may 4. Bodies of minerals which through the
use the declining method or the straight-line process of removal suffer depletion
method of depreciation. However, if the service 5. Automobiles or other transportation
contractor initially elects the declining balance equipment used solely by the taxpayer for
method, it may, at any subsequent date, shift pleasure;
to the straight-line method. 6. Building used solely by the taxpayer as
his residence;
 The useful life of properties directly 7. Furniture or furnishing used in the said
related to production of petroleum shall be ten building;
(10) years of such shorter life as may be 8. Personal effects or clothing except
permitted by the Commissioner of Internal properties or costumes used exclusively
Revenue in a business such as theatrical business
9. Intangibles, the use of which in business
or trade is not of limited duration; and
 Properties not used directly in production 10. Incidental repairs which neither materially
of petroleum shall be depreciated under the add to the value of property nor prolong
straight line method on the basis of an the life, but keep it in an ordinary efficient
estimated useful life of five (5) years (Sec. 34 operating condition.
[F, 4], NIRC).
c.) Depreciation of properties used in mining  Limitation of Deduction
operations  The law allows a deduction from gross income of
i. It shall be computed at the normal rate of depreciation but limits the recovery to the capital
depreciation if the expected life is ten (10) invested in the assets being appreciated. It does not
years or less ; or authorize depreciation of assets beyond its acquisition
ii. Depreciated over any number of years cost.
between five (5) years and the expected life Reason: Deductions are mere privileges.
is more than ten (10) years (Sec. 34 [F, 5], Moreover, it will transgress the underlying purpose of
NIRC). depreciation allowance.
2. Non-resident aliens engaged in trade or  Methods of computing depreciation allowance

business and resident foreign corporations  Some of the common methods are:
1.) Straight-line method/ Fixed Percentage
 A reasonable allowance for the deterioration of Method - This method spreads the total
property arising out of its use or employment or its depreciation over the useful life of the asset
non-use in the business, trade or profession and generally results in an equal depreciation
conducted by them in the Phils. shall be permitted per unit of time regardless of the use to which
only when such property is located within the the properties are put.
Phils. (Sec. 34 [F, 6], NIRC).
2.) Declining Balance Method - This method uses deposit or those which have capital investment in the
a rate (usually 1.5 or 2 times the straight-line mineral deposit. (Sec. 3, Rev. Regulation No. 5-76).
rate) to the declining book value of the asset.
Depreciation is largest in amount the first year  In the case of a resident foreign corporation or an
and declines in the years thereafter. alien individual engaged in trade or business in the Phils.
allowance for depreciation of oil and gas wells or mines
shall be authorized only in respect to oil and gas wells or
3.) Working-Hours Method –The total working
mines located within the Phils. (Sec. 34 [G, 3], NIRC).
hours of the machine until its retirement is
estimated and a charge per hour is determined
using the following formulas:
I. Charitable and other Contributions
4.) Unit of production method – This is similar to  Kinds of contributions allowed as deduction:
the working-hours method with the difference 2.) Ordinary or contributions with limit or subject to
that the estimated service life is stated in units limitation
of products instead of working hours. 3.) Special or contributions deductible in full
5.) The sum of the Years – Digits Method – This  Requisites for deductibility
method requires the application of a changing 1.) The contribution must actually be paid or made to
fraction to the cost basis of the property, the Phil. Government or any of its agencies or
reduced by the estimated residual salvage political subdivision or to any domestic corporations
value. or associations specified by the Tax Code or other
entities as allowed by the Tax Code and existing
special laws.
 Agreement as to useful life on which depreciation 2.) It must be made within the taxable year;
rate is based
 The taxpayer and the Commissioner of Internal 3.) It must not exceed 10% of the individual’s taxable
Revenue may enter into agreement in writing specifically income and 5% of the corporation’s taxable
dealing with the useful life and rate depreciation of any income before deducting the contribution
property. (applicable only to contributions with limit); and
 In case of modification in the agreed rate and useful
life of depreciation, the taxpayer must notify the 4.) It must be evidenced by adequate records or
Commissioner in writing. receipts (Sec. 34 [H], NIRC).
 Contributions with limit

H. Depletion  The following are subject to limit (5%\10% limit):
1.) Donations to the Philippine government or any
of its agencies or any political subdivision
 Definitions
thereof exclusively for public purposes ;
2.) Depletion is the exhaustion of natural resources like
mines and oil or gas wells as a result of production
2.) Donations to accredited domestic corporations
or severance from such mines or wells.
or associations organized and operated
exclusively for:
3.) It also refers to the periodic allocation of the cost of
a wasting asset over the period the natural
a.) Religions;
resources is extracted or produced.
b.) Charitable;
 Wasting assets refer to natural resources,
c.) Scientific;
which are physically consumed and once
d.) Youth and sports development;
consumed, are irreplaceable. Examples include
e.) Cultural; or
coal, oil, ore, precious metals like gold and silver,
f.) Educational purposes; or for the
and timber.
g.) Rehabilitations of veterans; and
 Rationale 3.) Donations to social welfare institutions or to
 As the product of the mine is sold, a gradual sale is non-government organizations in accordance
being made of the taxpayer’s capital interest in the with rules and regulations promulgated by the
property. Depletion allowance enables the taxpayer to Secretary of Finance, provided no part of the
recover that capital interest free of income tax. net income of which inures to the benefit
of any private stockholders or individual .
 When the allowance shall equal the capital invested, (Sec. 34 [H,1], NIRC).
no further allowance shall be granted.
 Personal entitled to claim depletion allowance  Contributions deductible in full under the Tax
 Annual depletion deduction are allowed only to mining Code:
entities which own an economic interest in mineral 1.) Donations to the government of the Philippines or to
any of its agencies or political subdivisions including
fully-owned government corporations exclusively

to finance, to provide for, or to be used in
3.) Donations to certain accredited non-government
undertaking priority activities in:
organization (see Sec. 34, [H, 2]).
a.) Education;
b.) Health;
Under P.D. No. 507:
c.) Youth and sports development;
 Contributions, donations, gifts and bequests to
d.) Human settlements;
social welfare, cultural and charitable
e.) Science and culture; and
Institutions, no part of the net income of which
f.) Economic development
inures to the benefit of any individual , are
According to the national priority plan
deductible in full in computing the donor’s taxable
determined by NEDA provided, that donations not
income and are also exempt from donor’s and
in accordance with the said annual priority plan
estate tax.
shall be with limit;
2.) Donations to foreign institutions or international  Valuation of Contributions

organizations in pursuance or compliance with  The amount of any charitable contribution of
agreements, treaties, or commitments entered into property other than money shall be based on the
by the government of the and the foreign laws or acquisition cost of said property.
international organizations or in pursuance of
special laws, and
J. Research and Development 1.) Contributions to such trusts during the taxable year to
cover the pension liability accruing during the year.
 A taxpayer may treat research or development expenditures
 These are considered as ordinary and necessary
which are paid or incurred by him during the taxable year in
business expenses allowed as a deduction under
connection with his trade, business or profession as
Sec. 34, [A, 1], of the NIRC.
ordinary and necessary expenses which are not chargeable to
capital account. The expenditures so treated shall be allowed as
2.) A reasonable amount transferred or paid into such trust
deduction during the taxable year when paid or incurred .
during the taxable year in excess of the
(Sec. 34, [I, 1], NIRC).
contributions but only if such amount:
a.) has not therefore been allowed as a deduction;
 Two ways of treating Research and Development Cost and
1.) As an outright expense , in which case it may be b.) is apportioned in equal parts over a period of ten
deducted during the taxable year when paid or incurred; (10) consecutive years beginning with the year in
or (Sec.34, [I, 1], NIRC). which the transfer or payment is made
 these are those referred to as payments to the
2.) As a deferred expense , in which case it is to be pensions trust deductible pursuant to Section 34 (J) of
amortized over a period of not less than 60 months . the NIRC.
(Sec 34, [I, 2], NIRC).
The following research and development expenditures
at the option of the taxpayer may be treated as deferred L. Optional Standard Deduction
expenses:  Elements of Optional Standard Deduction:
1.) paid or incurred by the taxpayer in connection with 1.) It is in lieu of itemized deductions allowed under
his trade, business or profession; Section 34 (A to J), NIRC.
2.) not treated as expenses; 2.) It is available only to individual taxpayers other
3.) the expenditure must not be chargeable to capital than one with pure compensation income and a
account nonresident alien,
3.) The amount deductible should not exceed 10% of the
 Limitations on Deductions taxpayer’s gross income.
 The following are not deductible as research and 4.) The taxpayer must signify in his return his intention to
development costs: avail of the OSD, otherwise he shall be considered as
1.) Any expenditures for the acquisition or improvement of having availed himself of the itemized deductions.
land, or for the improvement of property to be used in 5.) Once elected, it is irrevocable for the taxable year for
connection with research and development of a which the return is made
character which is subject to depreciation and 6.) The taxpayer need not submit with his return, financial
depletion; and statements, however, he must keep such records
pertaining to his gross income during the taxable year.
2.) Any expenditures paid or incurred for the purpose of
ascertaining the existence, location, extent, or quality of
any deposit of ore or other mineral, including oil or gas. M. Premium Payments
(exploration expenditures subject to depletion) [Sec. 34,  The premiums payments or health and/ or hospitalization
[I, 3], NIRC]. insurance of an individual taxpayer including his family are
deductible regardless of whether the taxpayer is engaged in
trade, business, or profession, or deriving compensation
income out of an employer-employee relationship.
K. Pension Trusts
 An individual taxpayer who elects the OSD may still deduct
 Requisites for deductibility of payments to pension the premium payments when applicable.
trust (under Sec. 34, [J], NIRC)
1.) The employer must have established a pension or  Requisites for allowance as deduction
retirement plan to provide for the payment of 1.) The amount of premiums that may be deducted shall
reasonable pensions to its employees; not exceed P2,400 per family or P200 a month during
the taxable year;
2.) The pension plan is reasonable and actuarially sound
(Sec. 118, Regs.); 2.) The health and/ or hospitalization insurance is taken by
the taxpayer for himself or for any member or members
3.) It must be funded by the employer; i.e., the employer of his family;
contributes cash to the plan;
3.) The family of the taxpayer has a gross income of not
4.) The amount contributed must no longer be subject to its more than P250,000 for the taxable year; and
control or disposition; and
4.) In case the taxpayer is married, only the spouse
5.) The payment has not therefore been allowed as a claiming the additional exemption for dependents shall
deduction. be entitled to the deduction.
 Allowable deductions in relation to pension trusts
 Prepared by the TAX LAW SECTION  Chief JOCELYN ROSARIO Assistant Chief SOCRATES PADUA Members MONDAE BUENAFE, MYLENE
CANAO, MONALISA IBARRA, CESAR LACDAO, GLORIFE LICLICAN, DULCE MARTINEZ, ELILYN NATURA, DONNA MICHELLE PINLAC,
CECILYNNE ANDRADE and LOUBELLE ORTIZ. All Rights Reserved by the SAINT LOUIS UNIVERSITY COLLEGE OF LAW BAR OPERATIONS 
2003.
VII. Special Deductions No.2 does not apply to intangible drilling and
development cost incurred in petroleum operations
 The NIRC provides special rules for deductible from gross which are deductible under Sec.34
income for the following: (G,1) of the NIRC.(Depletion)
1.) Insurance companies;
2.) Mutual Insurance companies; 3.) Any amount expended in restoring property or in
3.) Mutual marine insurance companies; making good the exhaustion thereof for which as
4.) Assessment insurance companies; allowance is or has been made;
5.) Estates and trusts; and  Items in nos. 2 and 3 are capital expenditures or
6.) Private educational institutions those expenditures that result in obtaining benefits of a
permanent nature such as lands, buildings and
Insurance companies machineries
 Whether domestic or foreign, doing business in the
Phils., they are allowed to deduct, in addition to the 4.) Premiums paid on any life insurance policy covering the
itemized deductions under Section 34 of the Tax Code, life of any officer or employee, or of any person
the following: financially interested in any trade or business carried on
1.) Net additions, if any, required by law to be made by the taxpayer, individual or corporate, when the
within the year to reserve funds, and taxpayer is directly or indirectly a beneficiary under
such policy; and
2.) Sums other than dividends paid within the year on  A person is said to be financially interested in
policy and annuity contracts. The released reserve the taxpayer’s business, if he is a stockholders thereof
shall be treated as income for the year of release. or he is to receive as his compensation a share of the
(Sec. 37, [A], NIRC, Sec. 126, Regs.) property of the business.
Mutual insurance companies 5.) Losses from sales or exchange of property between
 These companies (other than mutual life & mutual related taxpayers (Sec. 36, NIRC).
marine) are allowed to deduct from gross income the
following:
1.) Any portion of the premium deposits returned to
the policy holders
2.) Such portion of the premium deposits as are

retained for the payment of losses, expenses and
reinsurance reserves. (Sec. 37, B, NIRC; Sec.
127, Regs.)
Mutual marine insurance companies

 They are entitled to deduct from gross income the
following:
1.) Amounts repaid to policy holders on account of
premium previously paid by them; and
2.) Interest paid upon those amounts between the

ascertainment date and the date of its payment.
(Sec. 37, [C], NIRC, Sec. 128, Regs.)
Assessment insurance companies

 Whether domestic or foreign, they may deduct in a
taxable year the sum actually deposited with the officers
of the govt. of the Phils., pursuant to law as additions to
guarantee or reserve funds. (Sec. 37 [D], NIRC).
VIII. Items not Deductible
 In computing taxable net income, the following are not

deductible:
1.) Personal living or family expenses;
 These are not deductible from compensation and
business/professional income under Section 24, (A),
NIRC.
2.) Any amounts paid for new buildings or for permanent

improvements, or betterments made to increase the
value of any property or estate;
2003.
Income Tax Treatment on the Sale or Exchange of Property

2.) SALE OR EXCHANGE OF CAPITAL ASSETS
Categories of Sale or Exchange Transactions  Definitions

a.) Capital Asset means property held by the taxpayer
(whether or not connected with his trade or business)
1.) SALE OR EXCHANGE OF ORDINARY ASSETS but does not include:
i. Stock in trade;
 Definitions ii. Property of a kind which would properly be
a.) Ordinary Assets – refer to properties held by the included in the inventory if on hand at the close of
taxpayer in the pursuit of his profession, trade or the taxable year;
business, they are: iii. Property held by the taxpayer primarily for sale to
i. Stock in Trade; customers in the ordinary course of trade or
ii. Property of a kind which would properly be business;
included in the inventory if on hand at the close of iv. Property used in trade or business which in subject
the taxable year; to the allowance for depreciation; and
iii. Property held by the taxpayer primarily for sale to v. Real property used in trade or business. (Sec. 39,
customers in the ordinary course of trade or [A], NIRC)
business;  This is an enumeration by exclusion, all others not
iv. Property used in trade or business which in subject enumerated are capital assets.
to the allowance for depreciation; and
v. Real property used in trade or business. (Sec. 39, b.) Capital gain is the gain from the sale or exchange of
[A], NIRC) capital assets.
b.) Ordinary income (ordinary gain) – includes any gain c.) Capital loss is the loss incurred from the sale or
from the sale or exchange of property which is not a exchange of capital assets.
capital asset (Sec. 22, [Z], NIRC)
d.) Net Capital gain is the excess of the gains from sales or
c.) Ordinary Loss – includes any loss from the sale or exchange of capital assets over the losses from such
exchange of property which is not a capital asset. (Sec. sales or exchanges (Sec. 39, [A, 2], NIRC).
22, [Z], NIRC)
e.) Net capital Loss is the excess of the losses from sales
 Income Tax Treatment on the Sale or Exchange of Ordinary or exchanges of capital assets over the gains from such
Assets sales or exchanges. (Sec. 39, [A, 3], NIRC).
 The general rule in income taxation apply both as to the
gain and as to the loss, any gain shall be reported as f.) Net Capital Loss Carry Over (NCLCO) means that:
ordinary income and any loss may be allowed as a i. If any taxpayer, other than a corporation, sustains
deduction in gross income. in any taxable year a net capital loss;
ii. Such net capital loss cannot be deducted from
 Exemplification of Rules ordinary income due to the loss limitation rule;
1.) If an individual taxpayer is engaged in real estate iii. Such loss could be carried over to the next taxable
business or is a real estate dealer, the gains he may year (not thereafter) as a deduction against net
derive from the said activity will be considered as capital gain in an amount not in excess of the
ordinary income and the losses he may incur is taxable income (i.e. net income before
deductible from his gross income. The 6% tax imposed exemptions) in the year the loss was sustained ;
on the sale of real property which is a capital asset is and
inapplicable to him. iv. Such loss shall be treated as a loss from the sale
or exchange of capital assets held for not more
2.) If a domestic corporation is engaged in real estate than twelve (12) months. (Sec. 39, [D], NIRC)
business, the gains he may derive from said activity is
considered as ordinary income and any loss incurred is g.) Holding period refers to the percentages of the gain or
considered as an ordinary loss. The loss is deductible loss taken into account in computing the net capital gain
from the corporation’s compensation income and from net capital loss and net income. The percentages are:
its income from any other source whether ordinary or 100% - if the capital asset has been held for not more
capital. than twelve (12) months (short-term); and
 Ordinary losses (whether the taxpayer is an 50% - if the capital asset has been held for more than
individual or a corporation) are deductible either from twelve (12) months (long-term)
ordinary gains or capital gains.  The holding period of capital assets is only
applicable to individual taxpayer and not to
corporations.
2003.
tax rate or the graduated income

tax rates may be used, at the option
h.) Loss Limitation Rule provides that Capital of the taxpayer; and
losses are deductible only to the extent of capital gains. B. If the principal residence of the
individual taxpayer is sold and the
 Specific Examples of Properties classified as capital assets proceeds of the sale is used to
 Capital assets include personal property (not used in acquire or construct a new
trade or business) such as movables in one’s residence, residence within 18 months from
personal vehicles, appliances and furniture for personal use, the date of the sale, the sale is
jewelries etc. as well as real property ( not used in trade or exempt from income tax provided:
business) such as residential land, idle land not used in B.1) That the Commissioner is
business operations and residential house. notified by the taxpayer within thirty
(30) days from the date of the sale
 Tax Treatment of Capital gains and Capital losses or disposition through a prescribed
return of his intention to avail of tax
a.) As to Individual Taxpayers exemption;
1) On personal property classified as capital asset B.2) The tax exemption can only be
(other than shares of stock) availed of once every ten (10)
 The following are the applicable rules: years; and
a. The percentages of gain or loss to be B.3) If there is no full utilization of
taken into account shall be - the proceeds of the sale or
a.1) 100% if the capital asset has been held disposition, the portion of the gain
for 12 months or less; and presumed to have been realized
a.2) 50% if the capital asset has been held for from the sale or disposition shall be
more than 12 months (holding period subject to capital gains tax.
rule)
e. The sale of rights over realty, although
b. Capital losses shall be deducted only to classified as real property under the Civil
the extent of the capital gains (loss Code, is not subject to capital gains tax
limitation rule) because the situs of these rights follow
their owner who may not be located in
c. Net Capital Loss Carry Over Rule is the Phils. Only real property located in
applicable. the Phils. is subject to capital gains tax.
(Sec. 24 [b, 1], NIRC; BIR Ruling No.
2) On real property classified as capital assets 083-99, June 22, 1999).
 The following are the applicable rules;
a. A final capital gains tax is imposed on 3) On shares of stock not held by dealers in
individuals including estates and trusts securities
computed as follows:  The following are the applicable rules:
tax base: gross selling price or fair market a. A final capital gains tax is imposed on
value, whichever is higher capital gain from sale of shares of stock,
tax rate: 6% computed as follows:
A. On listed shares sold through the
b. The tax is imposed on capital gains stock exchanges: ½ of 1% of the
presumed to have been realized from gross selling price or gross value in
the sale, exchange or disposition of real money of the shares
property located in the Phils. classified B. On non-listed stocks or on sales of
as capital assets including pacto de retro shares (listed or unlisted with stock
sales and other forms of conditional exchanges): not effected through
sales (such as mortgage foreclosure the stock exchanges:
sale) 5% on net capital gains not
over P100, 000
c. The tax shall be in lieu of the income tax 10% on net capital gains in
imposed on individuals under graduated excess of P100, 000 (Sec. 24,
rates in Sec. 24, [A].Capital gains from [C], 25 [B], 27 [D, 2], 28 [A, 7, C],
sale of real property shall not be [B, 5, C])
included in the gross income of the
individual taxpayer. b. The final capital gains tax is in lieu of
the income tax on individuals,
d. There are two situations wherein the 6% corporations and other taxpayers
final tax rate may not be applied, to wit: (estates & trusts).
A. If the real property classified as
capital asset is sold to the c. The net capital gains on stock
government or any of its political transactions shall not be included in
subdivisions or to gov’t. owned or the gross income of the seller or
controlled corporations, the 6% final
2003.
transferor in computing his income tax any corporation including those issued by the government is
liability. considered as an ordinary loss and deductible from
ordinary income .
d. It is a final tax, which shall in no case,
be allowed as a deduction against Reason: Banks and trust companies are considered as
income or credited against income tax dealers in securities , hence, these securities are
or any other tax considered as property primarily held for sale to
customers in the ordinary course of business.
e. Also subject to a stock transfer tax at  Other Capital Asset Transactions

a different rate are shares of stock
sold or exchanged through initial  The following are considered as sales or exchanges of
public offering. capital assets:
1. Retirement of bonds with interest coupons or in
registered form
b.) As to Corporations  Amounts received by the holder upon the
 The following rules apply whether the capital asset retirement of bonds, debentures, notes or certificates or
is personal or real property: other services of indebtedness issued by any
b.1) Capital gains and losses are recognized to the corporation (including those issued by a gov’t. or
extent of 100% regardless of the holding period political subdivision thereof) with the interest coupons or
(holding period is not applicable); in registered forms, shall be considered as amounts
received in exchange thereof. (Sec. 39, [E], NIRC)
b.2) The net capital loss carry-over is not applicable;
2. Short sales of property
b.3) Capital losses are deductible only to the extent  A short sale takes place when a seller first make a
of capital gains; and sale of stock or security which he does not own (he
merely borrows the stock certificate through or from his
b.4)Ordinary losses are deductible from capital gains stock broker) and subsequently buys or covers the
but net capital loss cannot be deducted from stock to complete the transaction.
ordinary gain or income. The seller sells the shares short in the expectation
of a decrease in value thereof within a reasonably short
1. On personal property classified as capital period of time. He covers his short sale when the
asset (other than shares of stock)] expected decrease in the value materializes or when
- Only the Loss Limitation Rule applies. the time for the return of the borrowed shares comes.
2. On real property classified as capital assets 3.) Failure to exercise privilege or option to buy or
- The following are the additional rules sell property
applicable:  Gains or losses attributable to the failure to
i. A final tax of six percent (6%) is imposed exercise privileges or options to buy and sell property
on the gain based on the gross selling price shall be considered as capital gains or losses, such as
or fair market value, whichever is higher, of the option given to a taxpayer to buy an agricultural
such lands and/or buildings. (Sec. 27, [A, 5], land is a capital asset and the gain or the loss that
NIRC) may be incurred by him from the disposition of said
ii. The tax shall be in lieu of the income tax option is either a capital gain or a capital loss .
imposed on corporations under the graduated
rates in Sec. 27 (A) of the Tax Code. 4.) Securities becoming worthless
 If any securities which are capital assets are
3. On shares of stock not held by dealers in ascertained to be worthless and written off during the
securities taxable year, the loss resulting therefrom in the case of
- The rules applicable to individual taxpayer a taxpayer other than a bank or a trust company
are also applicable. incorporated under the laws of the Phils. a substantial
part of whose business is the receipt of deposits, is
 Requisites for recognition of capital gain or loss considered a capital loss.
 They are:
1.) The transaction must involve property classified as 5.) Distribution in liquidation
capital asset; and  If, in liquidation or dissolution, the corporation
2.) The transaction must arise from sale or exchange. acquires its own stock and exchanges its assets (land)
for the shares, the shareholders who surrendered their
shares for land shall likewise be subject to the capital
 Limitation on Capital losses gains tax prescribed under Section 24 (C) of the Tax
 General Rule: Capital losses are allowed only to the Code.
extent of capital gains. Gains or losses from liquidating dividends are
considered as capital gains or losses inasmuch as
Exception: Any loss sustained by a domestic bank or liquidating dividends are considered as full payment
trust company from the sale of bonds, debentures, notes or from the corporation in exchange for stocks held by the
certificates or other evidences of indebtedness issued by stockholders.
2003.
1) The sale or other disposition of stocks or securities

6.) Readjustment of interest in a general professional resulted in a loss;
partnership 2) There was an acquisition, or contract or option for
 When a partner retires from a general professional acquisition of stock or securities within thirty (30)
partnership or the partnership is dissolved, he realizes a days before the sale or thirty (30) days after the
gain or loss measured by the difference between the sale; and
price he received for his interest and cost to him of his 3) The stock or securities sold where substantially the
interest in the partnership. same as those acquired within the 61-day period.
 The word “ acquired ” means acquired by
purchase or by an exchange, and comprehends
3.) SALES OR EXCHANGES RESULTING IN NON- cases where the taxpayer has entered into a
RECOGNITION OF GAINS OR LOSSES contract or option within the sixty-one-day period
to acquire by a purchase or by such an exchange
a.) Exchange solely in kind (exchange of property solely for (Sec. 131, [f], Regs.)
stocks) in legitimate mergers or consolidations.
1) A corporation which is a party to a merger or  “ Substantially identical ” means that the
consolidation exchanges property solely for stock in a stock must be of the same class, or in the case of
corporation which is a party to the merger or consolidation; bonds, the terms thereof must be the same.
2) A corporation which is a party to a merger or

consolidation receives in exchange for property not only The following are not substantially identical:
stock of another corporation but also money and/or
other property and distributes it in pursuance of the i. The common stock and the preferred stock of
plan of merger or consolidation . the same corporation;
ii. A non-voting stock and a stock with voting
3) A shareholder exchanges stock in a corporation which power;
is a party to the merger or consolidation solely for the iii. The stock of the corporation and the stock of
stock of another corporation, also a party to the merger or another corporation; and
consolidation. iv. Two series of bonds where one is secured by
a mortgage and the other is not; or which
4) A security holder of a corporation which is a party to the differ as to interest rates.
merger or consolidation exchanges his securities in such
corporation solely for stock or securities in another d.) Exchanges not solely in kind in mergers and
corporation, a party to the merger or consolidation. consolidations
b.) Transfer or exchange of property for stock resulting in 1) If in connection with an exchange described earlier
acquisition of corporate control resulting in non-recognition of gains or losses, an individual,
 A person exchanges his property for stock or unit of a shareholder, a security holder or a corporation receives not
participation in a corporation of which as a result of such only stock or securities permitted to be received without the
exchange said person, alone or together with others, not recognition of gain or loss, but also money and/or
exceeding four persons, gains control of said corporation property , the gain , if any, but not the loss , shall be
 “ Control ” means ownership of stocks in a corporation recognized but in an amount not in excess of the sum of the
possessing at least 51% of the total voting power of all money and the fair market value of such other property
classes of stock entitled to vote. received.
 The items enumerated above are also called “ tax-
exempt exchanges .” Provided, that as to the shareholder, if the money
and/or property received has the effect of a distribution of
a taxable dividend , there shall be taxed as dividend to the
4,) TRANSACTIONS RESULTING IN TAXABLE GAINS BUT shareholder an amount of the gain recognized not in excess
NON-RECOGNITION OF LOSSES of his proportionate share of the undistributed earnings and
profits of the corporation, the remainder if any, of the gain
a.) Transactions between related taxpayers (Sec, 36, NIRC) recognized shall be treated as a capital gain. (Sec. 40, [3, a])
b.) Illegal transactions

2) If a corporation which is a party to the merger or
consolidation receives not only stock permitted to be
c.) Wash sales (except those made by dealers in securities) received without the recognition of gain or loss, but also
money and/or property, and does not distribute it in
 Wash sale is a sale of securities where substantially pursuance of the plan of merger or consolidation , the
identical securities are acquired or purchased within a 61- gain, if any, shall be recognized in an amount not in excess
day period beginning 30 days before the sale and ending 30 of the sum of such money and the fair market value of such
days after the sale. (Sec. 38, [A], NIRC). other property so received, which is not distributed. (Sec.
40, [3, b])
Requisites for non-deductibility:
2003.
3) If a taxpayer receives stock or securities which e.) If as a part of the consideration, the transferee
would be permitted to be received without the recognition of assumes liability of the transferor or acquires from the
the gain if it were the sole consideration, and as part of latter property subject to a liability such assumption or
consideration, another party to the exchange assumes a acquisition shall be treated as money received by the
liability of the taxpayer, or acquires from the taxpayer transferor.
property subject to a liability, then such assumption or f.) For the boot received: its fair market value. (Sec.
acquisition shall not be treated as money and/or other 40, [C, 5])
property, and, therefore any gain or loss would still not
be recognized if no money and/or property was involved in
the exchange.
4) If the amount of the liabilities assumed plus the

amount of the liabilities to which the property is subject,
exceed the total of the adjusted basis of the property
transferred pursuant to such exchange, then such 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. (Sec. 40, [C, 4], NIRC)
e.) Sales or exchanges which are not at arms length
Determination of Gain or Loss
 Computation of Gain or Loss

 The gain from the sale or other disposition of property
shall be the excess of the amount realized over the basis or
adjusted basis for determining gain.
 The loss shall be the excess of the basis or adjusted
basis for determining loss over the amount realized.
 The amount realized from the sale or other disposition
of property shall be the sum of money received plus the fair
market value of the property (other than money) received.
 Basis of Property
 In case the property was acquired before March 1,
1913: fair market value as of said date
 In case the property was acquired on or after March 1,

1913:
a.) By purchase – the cost
b.) By gratuitous title –
b.1) Inheritance – the fair market price or value at the
date of acquisition
b.2) Gift – 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
c.) For less than an adequate consideration in money or
money’s worth: amount paid by the transferee for the
property
d.) In a transaction where gain or loss is not recognized in
pursuance of a plan of merger or consolidation: the
basis of the stock or securities received by the
transferor – same as the basis of the property, stock or
securities exchanged decreased by:
1) the money received and
2) fair market value of the other property
received
increased by:
1) the amount treated as dividend of the
shareholder and
2) the amount of any gain recognized on the
exchange
2003.
of such dividends (or for such part of such period as the

Sources of Income corporation within the Phils. (Sec. 42, [A, 2], NIRC)
has been in existence) was derived from sources
Sources of Income in General It must be only in an amount which bears the same ratio
to such dividends as the gross income of the
 The source of an income is the property, activity or corporation for such period derived frossm sources
services that produce the income. (Commissioner vs. British within the Philippines bears to its bears to its gross
Overseas Airways Corp., 149 SCRA 395) income from all sources.
 The term “source” is not a place but an activity or
property and as such, it has a situs or location.
 The ascertainment of the sources of income becomes 3) Compensation for labor or personal services performed
important when it is considered that not all taxpayers, in the Phils. (Sec. 42, [A, 3], NIRC)
whether natural or juridical, pay income taxes on all their
income. 4) Rentals and Royalties from property located in the
Phils. or from any interest in such property, including
1) Resident citizens of the Phils. – taxable upon income rentals or royalties for –
derived from all sources (from sources within and a.) The use of, or the right or privilege to use in the
without the Phils.) Phils. any copyright, patent, design or model, plan,
secret formula or process, goodwill, trademark,
2) Domestic corporations – taxable income derived from trade brand or other like property or night;
all sources (from sources within and without the Phils.) b.) The use of, or the right to use in the Phils. any
industrial, commercial or scientific equipment;
3) Nonresident citizens of the Phils. – taxable upon c.) The supply of scientific, technical, industrial or
income derived from Phil. sources only (only from commercial knowledge or information;
sources within the Phils.) d.) The supply of any assistance that is ancillary and
subsidiary to, and is furnished as a means of
4) Resident aliens – taxable upon income derived from enabling the application or enjoyment of, any such
Phil. sources only (only from sources within the Phils.) property or right as is mentioned in paragraph (a),
any such equipment as is mentioned in paragraph
5) Non-resident aliens (b) or any such knowledge or information as is
a.) Engaged in trade or business in the Phils. – mentioned in paragraph (c);
taxable upon income derived from Phil. sources only e.) The supply of services by a nonresident person or
(only from sources within the Phils.) his employee in connection with the use of
b.) Not engaged in trade or business in the Phils. – property or rights belonging to, or the installation or
taxable upon income derived from Phil. sources only operation of any brand, machinery or other
(only from sources within the Phils.) apparatus purchased from such nonresident
person;
6) Foreign f.) Technical advice, assistance or services rendered
a.) Resident (engaged in trade or business in the in connection with technical management or
Phils.) – taxable upon income derived from Phil. administration of any scientific, industrial or
sources only (only from sources within the Phils.) commercial undertaking, venture, project or
b.) Non-resident (not engaged in trade or business in scheme; and
the Phils.) – taxable upon income derived from Phil. g.) The use of, or the right to use:
sources only (only from sources within the Phils.) 1. Motion picture films;
2. films or video tapes for use in connection with
Classification of income as to source television; and
3. tapes for use in connection with radio
1) Income which is derived in full from source within the broadcasting
Phils.
2) Income which is derived in full from source outside the 5) Gains, profits, and income from the sale of real property
Phils. located in the Phils . and
3) Income which is derived partly from sources within and
partly from sources outside the Phils. (Sec. 42, NIRC) 6) Gains, profits, and income from sale of personal
property, treated as derived entirely from the country
 Gross income from sources within the Phils. where it is sold .
1) Interests: Exception to the rule : gain from the sale of
a.) Interests derived from sources within the Phils. shares of stock in a domestic corporation which is
b.) Interests on bonds, notes or other interest-bearing treated as derived entirely from sources within the Phils.
obligations of residents, corporate or otherwise. (Sec. regardless of where the shares are sold.
42, [A, 1], NIRC) Passage of title test : it is the prevailing view that
in ascertaining the place of sale, the determination of
2) Dividends: where and when the title to the goods passes from the
a.) From a domestic corporation, and seller to the buyer is decisive.
b.) From a foreign corporation 50% or more of the
gross income of which for the 3-year period ending with  Enumeration in Section 42 not all-inclusive
the close of the taxable year preceding the declaration
2003.
In the case of Commissioner vs. British Overseas and sold outside the Phils.; or produced in whole
Airways Corporation (BOAC) [149 SCRA 395 ], the Supreme or in part by the taxpayer outside and sold within
Court held: the Phils.
“xxx Section 37 (now Section 42) by its
language, does not intend the enumeration to be
exclusive. It merely directs that the types of
income listed therein be treated as income from
sources within the Phils. a cursory reading of the
section will show that it does not state that it is an
all-inclusive enumeration, and that no other kind
of income may be so considered .xxx”
. The Supreme Court further held:
“xxxThe absence of flight operations to and from

the Phils. is not determination of the source of income
on the situs of income taxation. Admittedly, BOAC was
an off-line international airline at the time pertinent to
this case. The test of taxability is the source, and
the source of an income is that activity xxx which
produced the income . Unquestionably the passage
documentations in these cases were sold in the Phils.
and the revenue therefrom was derived from a business
activity regularly pursued within the Phils.xxx”
 Gross Income from sources outside the Philippines

7.) Interest other than that derived from sources within the
Phils.
8.) Dividends other than those derived from sources within
the Phils.
a. Dividends from foreign corporations in general;
and
b. Dividends derived from foreign corporations, 50%
or more of the gross income of which for the 3-
year period preceding the declaration of dividends
(or for such part of such period as the corporation
has been in existence was derived from foreign
sources
9.) Compensation for labor or personal services performed
outside the Phils.
10.) Rentals or royalties from property located outside the
Phils. or from any interest in such property including
rentals or royalties for the use of or for the privilege of
using outside the Phils., patents, etc.
11.) Gains, profits and income from the sale of real property
located outside the Phils.
12.) Gains, profits and income from the sale of personal
property located outside the Phils., and
13.) Income derived from the purchase of personal property
within and its sale outside the Phils. (Sec. 42, NIRC)
 Gross Income from sources partly within and partly

outside the Phils.
Special rules are provided by the Regulations on the
following classes of income which are treated as derived
from sources partly within and partly outside the Phils.
1) Income from transportation such as foreign
steamship companies whose vessel touch the Phil.
ports (Sec. 163, Regulations) and other services
rendered partly within and partly outside the Phils.
such as foreign corporations carrying on the
business of transmission of telegraph and cable
messages between points outside the Phils. (Sec.
164, Regulations)
2) Income from the sale of personal property
produced in whole or in part by the taxpayer within
2003.
GENERAL PRINCIPLES OF PHILIPPINE INCOME TAXATION 1. International. Within gross Phil. 2.5%
carrier billing
I. CLASSIFICATION OF TAXPAYERS 2.Remittance Within 15%

Branch Office
Table 1. Gen. View
Sources
of 3. OBU Within gross 10%
Tax Base Tax Rate
Taxable income
Income 4. RAHQ Tax exempt
A.) Individuals 5. ROHQ within 10%
(1) CITIZEN (b) Non-resident within gross 32%
a. Resident Citizen Within net income 5% - 32% income
(RC) and 1. within gross 25%
without Cinematographic income
b. Non-Resident Within net income 5% - 32% Film owner, lessor
citizen (NRC) or Distributor
c. OCW / Seamen Within net income 5% - 32% 2. Owner /Lessor within gross 7 ½%
(2) ALIEN / of aircraft, rentals/
FOREIGNERS machineries and fees
a. Resident aliens Within net income 5% - 32% other equipment
(RA) 3. Owner / lessor within gross 4 ½%
b. Non-Resident of vessels rentals
alien (NRA) chartered by Phil.
1. Non Resident Within net income nationals.
Alien Engaged in (3) ESTATE within & net income 5% - 32%
Trade or Business UNDER JUDICIAL without
(NRAETB) SETTLEMENT
2. Non Resident within gross 25% (Final (4) within net income 5% - 32%
Alien Not Engaged income tax withheld) IRREVOCABLE and
in Trade or TRUST without
Business
(NRANETB)
(3) SPECIAL II. TAX ON INDIVIDUALS
ALIENS
a. Employed by within gross 15% (flat
Regional / area income rate) A.) Classification of Individual Taxpayer
headquarters
(RAHQ) 1. Citizens of the Philippines may be classified into;
b. Employed by within gross 15%
Regional income (a) Resident Citizens (RC) -> those residing in the Phils.
Operating
Headquarters (b) Non-resident Citizens -> those not residing in the Phils.
(ROHQ)
c. Employed by within gross 15%  A “non-resident citizens” means (sec. 22 (E) National
Offshore Banking income Internal Revenue Code (NIRC)
Units (OBUs)
d. Employed by within gross 15% 1. One who establishes to the satisfaction of the
petroleum service income Commissioner of Internal Revenue (CIR) the fact of his
contractors and physical presence abroad with a definite intention to
subcontractors reside therein.
B.) Corporations
(1) DOMESTIC within net income 32% / 15% 2. A citizen of the Phils. who leaves the country during the
and taxable year to reside abroad, either as immigrant or for
without employment or on permanent basis.
a. Proprietary within net income 10%
Educational and 3. A citizen of the Phils. who works and derive from abroad
Institution & without and whose employment thereat requires him to be
Hospital physically present abroad most of the time during the
b. GOCC except within net income 32% taxable year.
GSIS, SSS, PHIC, and
PCSO and without 4. A citizen who has been previously considered as non-
PAGCOR resident citizen and who arrives in the Phils. at any time
(2) FOREIGN during the taxable year to reside permanently in the
(a) Resident Within gross 32% country. (He shall be considered a NRC for the taxable
(engaged in trade income year in which he arrives in the Phils. with respect to his
or business) income derived from sources abroad until the date of his
arrival in the Phils.)
5. A citizen who shall have stayed outside the Phils. for 183 5.
days or more by the end of the year.
NRANE X X X
Rev. Regs. No. 9-73, November 26, 1973 - The BT
continuity of residence abroad is not essential. If physical presence is 6. Estate √ (only up to
X X
established, such physical presence for the calendar year is not P20k)
interrupted by reasons of travels to the Phils. 7. Trust √ (only up to
X X
2. Aliens / Foreigners P20k)
(a.) Resident aliens  Reciprocity means that the foreign country where the
(RA) -> those residing in the Philippines though not a nonresident alien is a citizen or subject grants exemption to
citizen thereof. Filipinos not residing there but doing trade or business, or
exercising profession therein.
(b.) Non resident aliens  The extent of personal exemptions allowed to such non-
(NRA) -> those not residing in the Phils. resident alien shall be in the amount equal to the exemptions
allowed in the income tax law in the country of which he is a
1.) Those engaged in trade or business in the Phils. subject or citizen, to citizens of the Phils. not resident in such
(NRAETB) country not to exceed the amount fixed under our laws. (Sec.
36 [D], NIRC).
2.) Those not engaged in trade / business in the Phils.
(NRANETB). Table 3 : Basic Personal Exemptions for RC, NRC, and RA
Taxpayer Exemption (amount)
 A “non-resident alien” individual who came to the Phils.
and stayed therein for an aggregate period of more than 180 days 1. Single person
during any calendar year shall be deemed a NRA doing business in including a married
the Phils. person judicially P 20k
decreed as legally
 The term “engaged in trade / business” denotes separated
habitually or sustained activity.
2. Each married person P 32k
 “Resident aliens” are those who are actually present in 3. Head of family P 25k
the Phils. and who are not mere transients or sojourners. For tax
purposes a resident alien is; HEAD OF FAMILY > is one who is unmarried or legally separated
man or woman with;
1.) An alien who lives in the Phils. with no definite intention to
stay as a resident. (1) One or both parents –
(a) Living with the taxpayer.
2.) One who comes in the Phils. for definite purposes which (b) Dependent upon the taxpayer for their chief support.
in its very nature would require on extended stay and to
that end, makes his home temporarily in the Phils. (2) one or more brothers -
(a) Living with the taxpayer
3.) An alien who stay within the Phils. for more than 12 (b) Dependent upon the T for chief support
months from the date of his arrival in the Phils. (c) Not more than 21 yrs. of age
(d) Not married
B.) Personal and Additional Exemptions (e) Not gainfully employed
 Nature & Purpose: Personal and additional (3) one or more legitimate recognized natural / legally adopted
exemptions are fixed amounts which are in the nature of deduction children.
and are intended to substitute for the disallowance of personal or
living expenses as deductible items. (a) living with the T
(b) dependent upon the T for chief support
(c) not more than 21 yrs. of age
(d) not married
Table 2: Persons entitled to personal and additional exemption (e) not gainfully employed
T PE AE HHIP  Regardless of age, such children, brothers or sisters

qualify a Taxpayer as head of family is they are incapable of self-
1. support because of mental or physical defect.
Resident √ √ √
citizen  “CHIEF SUPPORT” -> means principal or main support.
2.Non- More than fifty percent (50%) being provided to certain
√ (for income √ (income dependents is enough. This phrase does not necessarily mean
resident X
derived w/in) from w/in) that the dependent derives no name at all, he may still derive
(NRC) income but the same is insufficient to support him.
3.
Resident √ (income  “LIVING WITH” -> requires the Taxpayer and his
√ (w/in) √ dependent to actually be residing together but temporary absence
alien from w/in)
from their common residence brought by face of circumstances
(RA)
such as:
4. √ (by way of (a) The Taxpayer is away on business
X X
NRAETB reciprocity)
(b) The dependent who may be boarding elsewhere is in pursuit exemption for himself and his dependents as if he
of education. died at the close of such year.
 “GAINFULLY EMPLOYED ” means that the 3.) If the spouse or any of the dependents dies or if
dependent will only qualify as such if he derives no income for any of such dependents marries, becomes twenty-
himself, or he is employed but his income is not sufficient to one (21) years old or becomes gainfully employed
support him independently outside of the principal/chief support during the taxable year, the taxpayer may still
afforded to him by the taxpayer. claim the same exemptions as if the spouse or any
of the dependents died, or as if such dependents
married, became twenty-one (21) years old or
 RA 7432 in relation to exemptions become gainfully employed at the close of such
 RA 7432 (approved April 23, 1992) expressly allows a year.
qualified senior citizens to be claimed as dependents by those
who care for them whether a relative or not. Table 4. Rates of Tax on Certain Passive Income of Individual
Taxpayer
Additional Exemption
Tax Rate & Tax Base
Rule: An additional exemption of P8,000 is granted to Taxpayer for Passive Income CITIZEN &
NRAETB NRANETB
each, but not exceeding four (4) of his : (Subject to Final Tax) RA
(a) Legitimate, illegitimate and/or legally adopted children 1. Royalties 20% 20% -
(b) Living with the T except:
(c) Chiefly dependent upon him for support (a) Books, literacy
(d) Not more than 21 yrs. old works 10% 10%
(e) Unmarried (b) musical
(f) Not gainfully employed. compositions 10% 10%
 Take note of the following rules: 2. Prizes (exceeding 20% 20% -

P10k) & other
1. Personal exemption of married persons: winnings (except:
a. If not legally separated, each spouse is entitled to PCSO & LOTTO
P32k as personal exemption. winnings)
3. Interest on bank 20% 20% -
b. If legally separated, each is entitled to P20k as a deposits
single individual unless qualifies as head of family. 4. Interest under 7.5% exempt exempt
Expanded foreign
c. Where only one (1) of the spouses is deriving income, currency deposit
only such spouse shall be allowed the personal system
exemption. 5. Interest on long-term
deposits
2. For additional exemption > 5 yrs. exempt exempt exempt
a. For married individuals can be claimed by only 1 of the < 3 yrs. 20% 20% 20%
spouses. 3 to < 4 yrs. 12% 12% 12%
6. Dividend from 10% 10% 10%
b. For legally separated spouses, it can be claimed only Domestic corporation,
by the spouse who has custody of the children; but the joint stock company
amount claimed by both shall not exceed the insurance or mutual
maximum allowed. fund comp. and
ROHQs of
c. Additional exemption can be claimed only by the Multinational comp.
“husband” unless: 7. Capital gains from the 6% (GSP/ 6% 6%
i. he waives his right in favor of his wife sale of real property FMV,
ii. the husband is working abroad located in the Phils. whichever is
iii. the wife is the on deriving income. higher)
8. Sale of Shares of ½ of 1%
3. The law requires that married individuals, the husband and wife Stocks of domestic (Gross
although required to file one (1) income tax return, should corp. listed in or Selling Price
nevertheless compute their individual income separately. If any traded in the local – Stock
income of the spouses can not be definitely attributable to or stool exchange transfer tax)
identifiable as income exclusively earned as realized by either of 9. Sales of Shares of 5% - not 5% 5%
the spouses, the same shall be divided equally between the Stocks not traded in exceeding
spouses. local exchange P100k 10% 10%
10% -
 Rules on change of Status amount in
 These are: excess of
1.) If the taxpayer marries or should have additional P100k
dependent(s) during the taxable year, the taxpayer 10. Cash and/ or
may claim the corresponding additional exemption, property dividends
as the case may be, in full for such year.  beginning 6% 20% 25%
Jan. 1998
2.) If the taxpayer dies during the taxable year, his  beginning 8%
estate may still claim the personal and additional Jan. 1999
 beginning 10%
Jan. 2000 Net Net Gross
income Income Income
 Any income or gain derived in which a final tax is imposed shall no 1.) Normal Corporate 32% (Jan. 32% 32%
longer be included in the taxable net income of the taxpayer Income Tax (NCIT) 1, 2000)
(applicable only to citizens and aliens) 2.) Minimum Corporate 2% 2%
Income Tax (MCIT)
 Final tax is imposed without deduction. Neither is the provision on 3.) Branch Remittance 15%
personal additional applicable. Tax
4.) Improperly 10% 10% 10%
 Aliens employed by RAHQs & ROHQs, OBUs, Petroleum service Accumulated Earning
contractor & subcontractor of a multinational corporations are Tax (IAET)
entitled to 15% tax, only on those: 5.) Passive Incomes
(Final tax)
 Salaries, wages, annuities, honoraria and a. Interest
the like as received from such RAHQs or  Peso bank 20% 20%
ROHQs. deposits exempt
 - Foreign
 Provided that the same tax treatment is Currency Deposit 7.5% 7.5%
extended to Filipino employees having Units
the same position in such entities. b. Royalties 20% 20%
c. Capital gains from
sales of share of stock
III. TAX ON CORPORATIONS (CORPORATE not traded in the stock
TAXPAYERS) < P100k
> P 100k 5% 5% 5%
CORPORATION DEFINED (Sec. 24(b) Tax Code) - The term shall d. Income of a 10% 10% 10%
include partnership, no matter how created or organized, joint stock depository bank under
companies, joint accounts, or insurance companies, but does not Foreign Currency
include general professional partnerships and a joint venture or Deposit Units
consortium formed for the purpose of undertaking construction projects e. Capital gains from
or engaging in petroleum, coal, geothermal and other energy sale of real property 10% 10%
operations pursuant to operating or consortium agreement under a situated in the Phils.
service contract with the government. (capital assets)
GENERAL PROFESSIONAL PARTNERSHIP (GPP ) - are formed by

persons for the role purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade & 6%
business. f. Interest on foreign
10% 10% 20%
loan
CORPORATIONS ARE CLASSIFIED INTO TWO CLASSES NAMELY: g. Intercorporate
exempt exempt 15%
dividends
(1) Domestic -> those created or organized in the Phils.
or under its laws.
A. Tax On Domestic Corporation (Sec. 27 of NIRC)
(2) Foreign -> those created organized or existing under
any laws other than those of the Phils. and they are
either; Except as otherwise provided in the Tax Code, Domestic
corporations duly organized and existing under the Philippine laws shall
 Resident foreign = those foreign be subject to the following tax rates based on their gross income
corporation engaged in trade or business derived from sources within or without the Phils.
within the Phils.
35% - for 1997 and prior years
 Non-resident = those foreign corporation 34% - effective January 01, 1998
not engaged in trade or business within the 33% - effective January 01, 1999
Phils. 32% - effective January 01, 2000
“DOING OR ENGAGING IN” or “TRANSACTING BUSINESS” (1) Proprietary Educational Institutions / non-profit hospitals - Except
-> The term implies a continuity of commercial dealings and those income subject to final tax, proprietary educational
arrangements and contemplates to that extent, the performance of acts institutions/ non-profit are taxable with the tax rate of 10% on their
or works or the exercise of some of the functions normally insistent to gross income.
and in the progressive prosecution of commercial gain or for the
purpose and the object of the business organization (Comm. vs. British  Proprietary Educational Institution means any private
Overseas Airways Corporation – BOAC case 149 S 395) school maintained and administered by private individuals
or groups within an issued permit from the DECS, CHED
or TESDA.
Table 5 Rates and Tax base on Corporate Taxpayers in General
Taxpayers  Predominance Test / Preponderance Test means that
if the gross income from unrelated trade, business or other
activity exceeds 50% of the total gross income derived by
Taxes Imposed (Tax Rates and Tax Base) any educational institution or hospital from all sources the
Domestic normal tax shall be imposed on the entire taxable income.
Taxes Imposed RFC NRFC
Corp.
 “Unrelated trade, business or other activity” means (3.) Minimum Corporate Income Tax (MCIT) -> a tax rate of
any trade business or other activity, the conduct of which is 2% is imposed on the gross income of domestic corporations
not substantially related to the exercise or performance by and resident foreign corporations.
such educational institution or hospital of its primary
purpose or function. Rationale: MCIT is designed to forestall the prevailing practice
of corporation or over-claiming deductions in order to
 Article XIV Sec. 4 (3) of the Constitution provides that “all reduce their income tax payments.
revenues and assets of non-stock and non-profit
educational institution used actually, directly and  Requisites:
exclusively for educational purposes are exempt from a. It is imposed beginning the fourth (4th) taxable year
taxes and duties. immediately following the taxable yr. in which such
corporation starts its business operation.
(2) Government owned or controlled corporations (GOCCs) –
GOCCs, agencies or its instrumentality shall pay applicable b. It is imposable only if such corporation has zero or
corporate income tax rates except: GSIS, SSS, PHIC, PCSO and negative taxable income or whenever the amount of
PAGCOR. MCIT is greater than the Normal Corporate Income
Tax (NCIT) due from such corporation.
B. Tax Imposed on Domestic corporations  Carry Forward of Excess Minimum Tax

-> any excess of the minimum corporate income tax
(MCIT) over the normal income tax shall be carried
(1.) Normal Corporate Income Tax (NCIT) -> the tax rate of
forward on an annual basis and credited against the
32% (as of Jan. 1, 2000) is imposed on any income derived,
normal income tax for the three (3) immediately
within and without the Phils. Except on those passive income
succeeding taxable yrs.
(Section 27 (A) NIRC)
 Instances when MCIT may be suspended by the
(2.) Gross Income Tax Option -> The President upon the
Secretary of Finance
recommendation of the Secretary of Finance may, effective
January 1, 2000, allow corporations the option to be taxed at
-> The Sec. of Finance, upon recommendation of the
fifteen percent (15%) of gross income provided that the
Commissioner may suspend the imposition of MCIT, upon
following conditions are met therein:
showing that the corporation suffers losses due to any of
a. a tax effort ratio of 20% of GNP
the following causes:
b. a ratio of 40% of income tax collection to total tax revenues
c. a VAT effort of 4% of GNP and
a. Prolonged labor dispute (e.g. strikes for more than 6
d. a 0.9% ratio of the Consolidated Public Sector Final Position
months)
(CPSFP) to Gross National Product (GNP)
b. Legitimate business reverses (e.g. theft)
c. Force majeure (e.g. war)
 The option to be taxed based on gross income shall be
available only to firms whose ratio of cost of sales to gross
(4.) Final tax on certain Passive Income
sales or receipts from all sources does not exceed fifty-five
percent (55%).
-> refer to previous note
 The election of the gross income tax option shall be The following corporations are not subject to MCIT
irrevocable for three (3) consecutive taxable years during (1.) Proprietary Educational Institution
which the corporation is qualified under the scheme. (2.) Non-profit hospitals
(3.) Depository banks under expended FCDU
Definition of Terms (4.) International carriers
(5.) Offshore Banking Units
a. “Gross Income” derived from business shall be (6.) ROHQs of resident foreign corp.
equivalent to gross sales returns, discounts and allowance B. TAX ON FOREIGN CORPORATIONS (Sec. 28 of NIRC)
and cost of goods.
(1.) Resident Foreign Corporation Engaged in Trade or
b. “Cost of goods sold” shall include all business expenses business in the Phils. (RFC) - Foreign Corporation shall be
directly incurred to produce the merchandize to bring them taxed on income derived from sources “within” the Philippines.
to their present location and use.
Tax Imposed on Resident Foreign Corporation (RFC)
c. For trading and merchandising concern, “Cost of goods
sold” shall include the invoice cost of the goods sold, plus
import duties freight in transporting the goods to the place
where the goods are actually sold, including insurance (1.) NCIT -> 32% effective Jan. 01, 2000 and thereafter
while the goods are in transit.
(2.) Gross Income Tax Option -> 15% tax rate on gross income of
d. For manufacturing concern, “Cost of goods RFC is also applicable.
manufactured and sold” shall include all costs of
production of finished goods, such as raw materials used, (3.) Minimum Corporate Income Tax (MCIT ) -> 2% based on gross
direct labor and manufacturing overhead, freight cost, income is also applicable
insurance premiums and other costs incurred to bring the
raw materials to the factory or warehouse. (4.) Tax on Branch Profits Remittances -> subject to 15% based
on the “total profits” applied or earmarked for
e. In sale of service, “gross income” means gross receipt less remittance w/o any deduction for the tax
sales returns, allowance and discounts. component thereof:
except : Those activities registered w/ the PEZA; interests received from a domestic corporation by non-resident Foreign
corporation subject to the condition that the country in which the
dividends, rents and royalties; remuneration for NRFC is domiciled shall allow a credit against the tax due from
NRFC taxes deemed to have been paid in the Phils. equivalent
technical services, salaries, and wages; premiums, to 17% which represents the difference between the regular
income tax rate of 32% and the usual corporate rate of 15%.
annuities, emoluments; capital gains, profit and
Take note:
income.  Tax sparing credit applies only when the conditions for its
availment are clearly established by the taxpayer. Since the
concession is in the nature of a tax exemption.
(5.) Final tax on certain Passive Income - the same tax rates as
imposed to domestic corporation = is also applicable to RFC
except: the imposition of capital gain tax (6%) on sale of real  The 15% reduced tax must actually be paid and the 17%
property (capital asset) located in the Phils. must be deemed paid tax.
 A different tax rate is imposed on the following RFCs  The 15% tax on dividends is applicable if the country where
the recipient NREC is domiciled does not imposed any tax on
(a.) Int’l carrier -> 2 ½% on Gross Philippine Billing dividend received by said recipient foreign corporation (BIR
Ruling, March 30, 1977)
 Int’l air carrier = “Gross Philippine Billings” refer to the
amount of gross revenue from (a) carriage of persons, excess
baggage cargo and mail originating from the Phils. in a (b)
IMPROPERLY ACCUMULATED EARNINGS TAX (IAET) (Sec. 29
continuous and uninterrupted flight, irrespective of the place of
NIRC)
sale or issue and the place of payment of the ticket or passage
document.
 Nature and Purpose: The improperly accumulated earning
tax of 10% in addition to the regular corporate income tax shall
 Take note: For a flight w/c originates from the Phils. but
apply to every corporation formed or availed for the purpose of
transshipment of passenger takes place at any port outside
avoiding of any other corporation by permitting earnings and
the Phils., only the aliquot portion of the cost of the ticket
profit to accumulate instead of being divided or distributed.
corresponding to the leg flow from the Phils. to the point of
transshipment shall form part of the GPB.
 The term “Improperly accumulated taxable income”
means taxable income adjusted by:
 In International shipping, “Gross Phil. Billing” means gross
revenue whether for passenger, cargo or mail originating from
(1) Income exempt from tax
the Phils. up to the final destination, regardless of the place of
(2) Income excluded from gross income
sale or payments of the passage or freight documents.
(3) Income subject to final tax
(4) The amount of NOLCO deducted and reduced by the
(b) Regional / Area Headquarters (RAHQs) -> tax exempt
sum of:
-> These are branches established in the Phils. by a
a. Dividends actually or constructively paid and
multinational companies but they do not earn or derive
b. Income tax paid for the Taxable year.
income here and their functions are limited to being a
supervisory communication and coordinating center for their
Formula:Taxable income
affiliates.
add: Income exempt from tax
Income subject to final tax
(c.) Regional Operating Headquarters (ROHQs) -> subject to
Income excluded from gross income
10% tax.
Amount of NOLCO deducted
-> these are branches established in the country by
Less: Dividends actually or constructively paid
multinational companies which are engaged in any of the
following:
 general administration & planning; Income tax paid for the yr.
 business planning Improperly accumulated Taxable
 business development (and the like) Income
(d.) Offshore Banking Units authorized by Bangko Sentral ng  Improperly Accumulated Earnings Tax does not apply to the
Pilipinas following:
-> 10% on their taxable income (1.) Banks and other non-banks financial intermediaries
Take Note: Any income derived by a taxpayer whether (2.) Publicly held corporations
individuals or corporation from transaction w/ OBU is Tax (3.) Insurance companies
Exempt.
 Presumptions of Improper accumulations - There is a “prima
(2.) Non-Resident Foreign Corporations (NRFCNETB) - are facie” evidence of a purpose by a corporation to avoid the tax
subject to 32% tax rate (effective Jan. 1, 2000 and thereafter) upon its shareholders or members:
on all income derived from sources within the Phils. except on
certain passive income (refer to Table #1). (1) Where the corporation is a mere holding company.
(2) Where the corporation is an investment company where
 NRFCs are not entitled to deduction as well as exemption more than 50% of its outstanding stock is owned directly/
(personal and additional exemption) indirectly by one person during the taxable year.
 TAX SPARING RULE / CREDIT (3) Where the corporation permits its earnings or profits to be
accumulated “beyond the reasonable needs of the business”.
-> provides that a final withholding tax at the rate of 15% shall
be imposed for the amount of cash and /or property dividends
“Reasonable needs of the business” includes the
reasonably anticipated needs of the business e.g. investment (1.) Partnership not subject to income tax, which include
of corporation’s profits in a business related to taxpayer’s the following;
business.
a. General Professional partnership
 Purpose: To compel the corporations to distribute dividends to b. Joint venture or consortium agreement formed for
the stockholders (subject to dividend tax) the purpose of undertaking
 construction projects or
 Instances of Reasonable Accumulations:  engaging in petroleum, coal, geothermal and
other energy operations pursuant to an
(1) It is retained for working capital needed by the business operating or consortium agreement under a
(2) It is invested in addition to plant property and equipment service contract with the government.
reasonably by the business
(3) In accordance with contract obligations, it is placed to the (2.) Partnership subject to income tax / Business
credit of a sinking fund for the purposes of retiring bonds Partnership
issued by the corporation. -> All other partnership except GPP and Joint Venture,
no matter how created or organized are considered
corporation subject to corporate income tax.
 EXEMPTIONS FROM TAXES ON CORPORATIONS (Sec.
30 of NIRC): The following shall not be taxed in respect to Table 6. Tax liability of Partnerships and the Partners Taxpayers.
income received by them:
Tax Liability GPP (Partnership Business
(a.) Labor, agricultural or horticultural organization not not subject to tax) Partnership
organized principally for profit. (Subject to tax)
(b.) Mutual savings bank not having a capital stock Partnership itself - The entity itself - Taxable like a
represented by shares and cooperative banks w/o capital is not taxable corporation
stock organized and operated for mutual purposes and (32%)
without profit. Partners - The partners - Partners are
(c.) A beneficiary society or association operating for exclusive share in the net considered as
benefit of the members or a mutual aid association or non- income of the stockholders
stock corporation organized by employees providing partnership and the profits
benefits exclusively to its members or their dependents. shall be taxable distributed to
(d.) Cemetery company owned and operated for the exclusive to the partners them are
benefits of its member whether considered
(e.) Non-stock corporation or association organized and distributed or dividends.
operated exclusively for religious, scientific, athletic, or not.
cultural purposes, or for the rehabilitation of veterans, no Partners share in - may be claimed - not deductible
part of it net income or asset shall belong to or inure to the the net loss of the by the partner
benefit of any member, organizer, or officer or any specific partnership as a deductible
person expense in his
(f.) Business league chamber of commerce, or board of trade personal
not organized for profit and no part of the net income of income tax
which inures to the benefit of any private stockholder or retain
individual Payment made by a - considered as - considered as
(g.) Civic league or association not organized for profit but partner to a partner additional share compensation
operated exclusively for the promotion of social welfare for services in the net income of the
(h.) A non-stock and non-profit educational institution. rendered income of the partner.
(i.) Farmers’ fruit growers or like organization organized and partner –
operated as sales agent for the purpose of marketing the (ordinary
products of its member. business
(j.) Farmers’ or other mutual typhoon or fire insurance income)
company or like organization of a purely local character, Filing of return - Partner should - file a quarterly
the income of which consists solely of assessment, dues file an “annual income tax
and fees collected from members for the sole purpose of income tax” returns.
meeting its expenses. return
(k.) Government educational institution Reason: To furnish
the BIR of
Income of whatever kind and character of the foregoing information as
organizations from any of their properties, real or personal or from any to the share of
of their activities “conducted for profit” regardless of the disposition each partner
made of such income shall be subject to tax. shall be part
and include in
his personal
IV. TAX ON PARTNERSHIP AND CO-OWNERSHIP income tax
return
Partner’s - subject to - final tax of 10%
PARTNERSHIP is a contract whereby two or more persons bind distributive share in graduated income
themselves to contribute money, property, or industry to a common fund the net income of tax rates
with the intention of dividing the profits among themselves. the partnership
 For income tax purposes, partnership may be classified as

follows:  BIR RULING No. 162 June 11, 1987
 A partner’s contribution of real property to the partnership (b.) in any person not having a substantial adverse interest in the
fund is not subject to income tax. disposition of such part of the corpus or the income
therefrom.
CO-OWNERSHIP -> it is created whenever the ownership of an
undivided thing or right belongs to different persons. NOTE: The tax shall be imposed on taxable income of the
GEN. RULE: Co-ownership is exempt from income tax because the grantor.
activities of the co-owners are usually limited to the “preservation” of
the properties owned in common and the collection of the income  Various trusts subject to income tax.
therefrom.
(1.) Trust where income is accumulated for the benefit of certain
EXCEPTIONS: (When co-ownership is subject to tax). or uncertain persons or persons with contingent interest.
(2.) Trust where income is accumulated or held for future
(1) When the income of the co-ownership is invested by the distribution under the terms of the will or trust.
co-owners in other income-producing properties or income-producing (3.) Trust where income is to be distributed currently by the
activities, and fiduciary to the beneficiaries.
(4.) Trust where income collected by a guardian of an infant is
(2) When there is no attempt to divide inherited property for held or distributed as the court may direct.
more than ten (10) years and the said property was not under any (5.) Trust where income in the discretion of the fiduciary may be
administration proceedings nor held in trust, an unregistered either distributed to the beneficiaries or accumulated.
partnership is deemed to exist.
 Exempt Trust -The tax imposed on estate and trust
 Tax liability of co-owners -> The co-owners in exempt co- does not apply to EMPLOYER’S TRUST provided that the
ownership shall be viable for income tax only in their following conditions are satisfied:
separate and individual capacity.
(1.) The employee’s trust forms part of a pensions, stocks, bonus
 Filing of return -> The owners shall report and include in their or profit sharing plan of an employer for the benefit of
respective personal income tax returns their shares of the some or all of its employees.
net income of the co-ownership. (2.) Contributions are made to the trust by such employer, or
employees, or both for the purpose of distributing to such
employees the earnings and principal of the trust and
V. TAX ON ESTATES AND TRUSTS (Sec. 60. NIRC) accumulated by the trust in accordance with such plan.
(3.) No part of the corpus or income shall be used for or diverted
to, purpose other than for the exclusive benefit of his
Estate is the mass of property, rights and obligations left behind by the employees.
decedent upon his death.
 Estates may be classified as follows:  Consolidation of income in trusts

1. Estates not under judicial settlement - are subject to (1.) If there are two or more trusts created
income tax generally as mere co-ownership. (2.) The same are created by the same person (grantor)
- The tax liability on income of the co-ownership levied directly (3.) and the beneficiary of such is the same person in each
on the co-owners. Thus, the heirs shall include in their instance.
respective returns their distributive shares of the net income of
the estate. Take note: Rules applicable in the computation of the tax on estates
and trusts:
2. Estates under judicial settlement - are subject to income
tax in the same manner as individual. (1.) The same rules in the determination of gross income for
individuals are applicable.
- Income received during the settlement of the estate is
taxable to the fiduciary (guardian, executor, trustee, and (2.) The same deductions allowed to an individual taxpayer are
administrator). also allowed, in addition of the following deductions:
- The return should be filed by executor or administrator of the (a.) amount of its income which is to be distributed
trust. currently to the beneficiaries, and
Trust is an arrangement created by will or co-agreement under which (b.) Amounts of its income for the taxable year
title to property is passed to another for conservation or investment with which is properly paid or credited during such
the income therefrom and ultimately the corpus (principal) to be year to any heir, legatee, or beneficiary, but the
distributed in accordance with the directions of the creator as amount so allowed as a deduction shall be
expressed in the governing instrument. included in computing the taxable income of the
heir, legatee, or beneficiary.
 2 Kinds of Trust :
(3.) Personal Exemption of P20k is also applicable
1. Irrevocable Trust -> is considered as a separate taxpayer. (4.) The graduated rates of tax used for individuals taxpayers are
2. Revocable Trust -> is one where at anytime the power to also applicable
revest the title to any part of the corpus of the trust is vested:
 The deductions mentioned are not available to TRUSTS
(a.) in the grantor (creator of the trust) either alone or in administered in foreign country.
conjunction with any person not having a substantial
adverse interest in the disposition of such part of the
corpus or the income therefrom; or
TRANSFER TAXES
c.) Ability-to pay- theory
Transfer Taxes Defined The receipt of inheritance places assets in the hands of the
heirs and beneficiaries thereby creating an ability to pay the
 Are those imposed upon the gratuitous disposition of private tax and thus to contribute to governmental income; and
property.
d.) Privilege theory or State Partnership theory
 Under our law, they are taxes levied on the transmission of Inheritance is not a right but a privilege granted by the state
private properties from a prior decedent to his heirs in the and large estates have been acquired only with the
case of estate tax, or from a donor to a donee in the case of protection of the state. The State, as a “passive and silent
donor’s tax. partner” in the accumulation of property has the right to
collect the share which is properly due to it.
Kinds of Transfer Taxes Incidence or burden of estate of tax

Three views on who is the taxpayer in estate taxation:
1. Death taxes or duties
 Are those levied on the gratuitous transfers of property upon 1. PREDECESSOR – the object of the tax is the property which
one’s death, formerly comprised of the estate and has been held or accumulated by the deceased and the tax
inheritance taxes: Both taxes are now integrated into one has fallen upon him in the sense it has affected the amount
estate tax. of the property which he could dispose.
2. Gift Taxes 2. SUCCESSOR – the tax is not paid by the predecessor who
 Are imposed on the gratuitous transfers of property during has no liability till he dies and who is free to ignore the duty if
one’s lifetime, formerly comprised of the donor’s and donee’s he wishes, while the successor comes into less than he
gift taxes; both taxes are now integrated into a donor’s tax. would have, and has no kind of redress.
Estate Tax 3. No personal Incidence the estate tax has no personal

incidence at all, merely falling upon the estate as such.
Estate tax defined
Law applicable:
 Is a graduated tax imposed on the privilege of the decedent Estate taxation is governed by the statute in force at the time
to transmit property at death and is base on the entire net of the death of the decedent.
estate, regardless of the number heirs and relations to the
decedent. Meaning of Gross Estate:
 It is a “transfer” tax not a property tax. Gross estate

 Is the total value of all property, whether real or personal,
tangible or intangible belonging to the decedent at the time
 The tax on the right to transmit property at death and on of his death, situated within or outside the Philippines, where
certain transfers which are made by the statute the such decedent was a resident or citizen of the Philippines. In
equivalent of testamentary dispositions. the case of a nonresident alien decedent, it shall include only
property situated in the Philippines.
Property Included in the Gross Estate:

Nature of Estate Tax
 It is not a direct tax on property nor is it a capitation tax, that
is, the tax is laid neither on the property, nor on the
transferee or transferor, but on the right of the decedent to
transmit his estate. In case of resident citizens, nonresident citizens and resident aliens :
 It is not a property tax but an excise tax. 1. Real Property within and without the Philippines;
2. Tangible personal property within and without the Philippines;
Purpose and justification of estate tax: and
The following theories have been advanced to justify death 3. Intangible personal property within and without the Philippines.
taxation: (BRAP)
In cases of nonresident aliens:
1. Real property within the Philippines;
2. Tangible personal property within the Philippines and;
3. Intangible personal property within the Philippines, unless
there is reciprocity in which case, it is not taxable.
a.) Benefit-Received Theory

Meaning of RECIPROCITY;
For the performance of services rendered by the government
There is reciprocity if the foreign country of which the
in the distribution of the estate of the decedent and other
decedent was a citizen or resident at the time of his death:
benefits that accrue to the estate and the heirs, the state
1.) Did not impose an estate tax; or
collects the tax.
2.) allowed a similar exemption from estate tax with respect
b.) Redistribution of Wealth Theory
to intangible personal property owned by Filipino citizens not residing
Is a contributing factor to the inequalities in wealth and
in that foreign country.
income. The imposition of death tax reduces the property
received by the successor bringing about a more equitable
Note:
distribution of wealth in society.
1. Reciprocity applies only when:  The following are examples of motives precluding the
A.) The property is an intangible; and category of a transfer in contemplation of death:
B.) The decedent is a nonresident alien a.) To relieve the donor from the burden of
management;
2. The following intangibles are deemed located in the b.) To save income or property taxes;
Philippines: c.) To settle family litigated and unlitigated disputes;
d.) To provide independent income for dependents;
1.) Franchises which must be exercised in the Philippines; e.) To see the children enjoy the property while the
2.) Shares, obligations or bonds issued by any corporation or donor is alive.
sociedad anonima organized or constituted in the Philippines in f.) To protect the family from hazards of business
accordance with its laws; operations; and
3.) Shares, obligations or bonds issued by any foreign corporation g.) To reward services rendered.
85% of the business of which is located in the Philippines;
4.) Shares, obligations or bonds issued by any foreign corporation Note:
if such shares obligations or bonds have acquired a business
situs in the Philippines; and
5.) Shares or rights in any partnership, business, or industry
established in the Philippines. The THREE (3) YEAR PRESUMPTION
provides that any transfer of a material part of his property in the
Inter Vivos Transfers Subject to Estate Tax nature of a final disposition or distribution thereof made by the
decedent within three years prior to his death without such adequate
The gross estate extends to gratuitous transfers made by the and full consideration shall , unless shown to the contrary, be deemed
decedent during his lifetime which are treated by the law as to be have been made in contemplation of death.
substitutes for testamentary dispositions. They are transfers inter This provision, however, has been already deleted in Sec.
vivos in form but mortis causa in substance. 100 (b) now sec. 85 (B) of the Tax Code by PD No. 1705.
Under BIR Ruling No. 261 September 2, 1987, the law does
Rationale for taxability: not specify the number of years prior to a decedent’s death within
which a transfer can be considered in contemplation of death.
To reach such transfers which are really substitutes for
testamentary dispositions and thus to prevent the evasion of the 2.) Transfer with retention or reservation of certain rights
estate tax.  This contemplates the instances where the owner transfers
his property during life but still retains economic benefits (the
These transfers are: possession or enjoyment of the property or the power to
a.) transfers in contemplation of death (sec.85 b); designate the person who may exercise such rights).
b.) transfers with retention or reservation of certain rights It includes:
(sec.85 b); A. Transfer without retention of interest but intended to take
c.) revocable transfers (sec.85 c) effect at or after the decedents death.
d.) transfers of property arising under a general power of Example: donations mortis causa.
appointment ( sec.85 d); and B. Transfer with retention of interest in respect to:
e.) transfers for insufficient consideration (sec.85 g)  The possession or enjoyment of or the right to the income
from the property; or
Note:  The right either alone or in conjunction with any person, to
Transfers by virtue of a bonafide sale of property for an designate the person who shall possess or enjoy the
adequate and full consideration in money or money’s worth are property or the income therefrom. And such interest is
excluded and not taxable. retained by the decedent for his life or for any period which
does not in fact end before his death.
C. Transfer with reversionary interest, wherein there is a
Inclusions in the Gross Estate (CR 2IG DIP) possibility that the transferred property may return to the
decedent or his estate or that it may become subject to a
power of disposition by the decedent.
Illustration:
A transfers his property to B in naked ownership and to
1) Transfer in contemplation of death C in usufruct throughout C’s lifetime subject to the condition
 A transfer with the thought of death. The term “in that if C predeceases A, the property shall return to A. If A
contemplation of death” means that the impelling or dies during C’s lifetime, the value of the reversionary interest
controlling motive is the thought of death, regardless of of A at death is included in his gross estate.
whether the transferor is near the possibility of death or not,
which induces the disposition of the property for the purpose
of avoiding the tax. Example: donation was made 3.) Revocable transfer
concurrently with the execution of a will (Vidal de Rocs  A transfer where:
vs.Posadas, 58 Phil 108) a.) The decedent or in conjunction with any other person has
 The following circumstances are taken into account in reserved the right to alter, amend, revoke, or terminate; or
determining in whether the transfer was made in b.) Any such power is relinquished in contemplation of the
contemplation of death: decedent’s death.
A.) Age and state of health of the decedent at the time The power to alter, amend or revoke shall be
of the gift; considered to exist on the date of the decedent’s death even
B.) Length of time between the gift and the date of though:
death; and a.) the exercise of the power is subject to a precedent
C.) Concurrent making of a will or making a will within a giving of notice; or
short time after the transfer. b.) The alteration, amendment or revocation takes
effect only upon the expiration of a stated period
after the exercise of the power.
If the notice has not been given or the  To the extent of the interest therein of the decedent
power has not been exercised on or before the at the time of his death. (Sec. 85 A) NIRC
decedent’s death, such notice or the power shall
be considered to have been given or exercised on
the date of the decedent’s death.(sec.85 C.2) Exclusions from Gross Estate
NIRC
The following properties are excluded from gross estate:
4.) Transfer of property under a general power of
appointment 1) Amount receivable by any beneficiary irrevocably designated
in the policy of insurance by the insured.
 A transfer where the donor of the power of appointment 2) Proceeds of a group insurance policy taken out by a
authorizes the donee of such power to designate any person company for its employees.
he chooses to be given the right over the appointed property. 3) Proceeds of insurance policies issued by the GSIS to
government officials and employees.
General power of appointment vs. special power of 4) Benefits accruing under the Social Security Act.
appointment: 5) Proceeds of life insurance payable to the heirs of deceased
members of the military personnel of the United States Army
A.) A power is general, when it authorizes the donee of the or Philippine Army under laws administered by the United
power to appoint any person he pleases including himself, State veterans Administration.
thus having a full dominion over the property as if he owned 6) Accident insurance proceeds.
it. Note: Items 1 – 6 are proceeds of insurance not includible in the
B.) It is special when, the donee can appoint only among a gross estate of the decedent.
restricted or designated class of persons other than himself.
7) Separate property of the surviving spouse.
Note: Note:
If the power of appointment is general, it makes the In the determination of the gross estate, the nature of the
appointed property a part of the donee’s property. property, whether common property of the spouses, separate or
Under a general power of appointment, title to the exclusive property either of the deceased or of the surviving
property is legally transferred to the donee. Therefore the spouse, becomes of vital importance. What regime of property
property shall form part of the gross estate of the donee. relations shall govern the spouses?
Under the Civil Code, the husband and wife who got married
5.) Transfer for insufficient consideration before August 3, 1988 are governed by the Conjugal Partnership
of Gains, while those who got married on or after August 3, 1988
 A transfer that is not a bona fide sale of property for an are governed by the Absolute Community of Property, unless a
adequate and full consideration in money or money’s worth. different regime was agreed upon in the marriage settlement.
The excess of the fair market value at the time of death over
the value of the consideration received by the decedent shall
form part of his gross estate. (Sec. 85, NIRC) Exemption from Estate Tax
 However, if the purported absolute sale inter vivos by the
decedent is shown to be fictitious, then the total value of the A. The first P200, 000.00 value of the estate (sec. 84 NIRC)
property transferred is subject to inclusion in the taxable B. The merger of the usufruct in the owner of the naked title.
estate. C. The transmission from the first heir, legatee, or donee in favor of
another beneficiary in accordance with the desire of the predecessor.
6.) Proceeds of life insurance D. All bequest, devises, legacies or transfers to social welfare, cultural
and charitable institutions, no part of the net income of which inured to
 Proceeds of life insurance taken by the decedent on his own the benefit of any individual and provided that not more than 30% of
life shall be included in the gross estate if the beneficiary: the said bequest, etc shall be used by such institution for
A.) Is the estate of the decedent, his executor, or administration purposes.
administrator (regardless whether the designation is revocable or E. Intangible personal property of non-resident aliens under the
irrevocable); or principle of reciprocity.
B.) Third person other than the estate, executor, F. Retirement benefits of employees of private firms from private
administrator but the designation of the beneficiary is revocable. pension plans approved by the BIR.
G. Amount received for war damages.
7.) Prior Interest H. Grants and donations to the Intramuros administration.
 Except as otherwise specifically provided therein,

subsections (B), (C), (E) of section 85 referring to transfer in Allowable Deductions from the Gross Estate
contemplation of death, revocable transfer and proceeds of
life insurance respectively shall apply to the transfers, trusts, The following are the expenses, losses, indebtedness and
estates, interests, rights, powers and relinquishment of taxes that may be allowed as deductions from the gross estate:
powers as severally enumerated and described therein,
whether made, created, arising, existing, exercised or A.) If decedent is a resident decedent:
relinquished before or after the effectivity of the CTRP.
ORDINARY DEDUCTIONS:
NOTE:
In most of these transfers the property remains substantially 1) Funeral Expenses
that of the transferor during his lifetime notwithstanding the  The amount deductible is equal to 5% of the gross estate or
transfer since he still retain either the “beneficial ownership” or the amount of the actual funeral expenses whichever is
“naked title” to the property. lower, but in no case to exceed P200, 000;
 “Actual funeral expenses” are those which were actually
8.) Decedent’s Interest incurred in connection with the interment or burial of the
deceased and paid for from the estate of said deceased.
A. The fair market value of the property mortgaged without
 Funeral expenses include: deducting the mortgage indebtedness has been initially
a) Costs of coffin, tombstone, mausoleum, and burial lot; included as part of his gross estate; and
b) Funeral parlor fees; B. The mortgage indebtedness was contracted in good faith
c) Mourning clothing of the surviving spouse and the and for an adequate and full consideration in money or
unmarried minor children; money’s worth.
d) Costs of obituary notices; and
e) Expenses during the wake. 7) Casualty Losses
 The following cannot be deducted under funeral expenses:  They include all losses incurred during the
a) Cash advances of the surviving spouse and the settlement of the estate arising from fires, storms,
heirs; shipwreck or other casualties or from robbery, theft
b) Expenses paid by the relatives and friends; and or embezzlement.
c) Expenses after the burial. Provided, that the following requisites are met:
a.) Losses not compensated by an insurance or otherwise;
b.) Losses not have been claimed as a deduction for income
2) Medical expenses tax purposes; and
c.) Losses incurred not later than the last day for payment of
 Provided, that the following requisites are met: the estate tax (6 months from death).
a. Must be incurred by the decedent within one (1) year
prior to his death 8) Unpaid Taxes
b. Must be duly substantiated by receipts; and
c. Must not exceed P500, 000.00.  Unpaid income tax on income due or received
before death of the decedent, and real property
taxes, which have accrued prior to the death of the
3) Judicial expenses of the testamentary or intestate decedent (real property taxes accrued at the
proceedings beginning of the year but may be paid before or at
 Include “administration expenses” to those actually the end of each quarter) are deductible.
incurred in the administration of the estate.
 Examples:  Income taxes upon income received after the
a) fees of the executor or administrator; death of the decedent, or property taxes not
b) attorney’s fees; accrued before his death, or any estate tax cannot
c) accountant’s fees; be deducted because they are chargeable to the
d) court fees; income of the estate.
e) salaries of employees; and
f) All other expense related to the administration of the 9) Vanishing deduction (property – previously taxed)
estate.
Note:  Is an amount allowed to reduce the taxable estate of a
Expenses not essential to the proper settlement of the estate decedent where the property:
but incurred for the individual benefit of the heirs, legatees, or a. received by him from prior decedent by gift, bequest,
devisees are not allowed as deductions. devise or inheritance, or
b. transferred to him by gift, has been the object of
4) Claims against the decedent’s estate previous transfer deduction.
 It is so-called a vanishing deduction because the rate of

 Debts or obligations of the decedent that is deduction gradually diminishes and entirely vanishes
enforceable against the estate provided that the following depending upon the time interval between the two (2)
requisites are met: successive transfers.
a.) They were contracted in good faith and for an adequate
 There are two (2) factors necessary in vanishing deduction,
and full consideration in money or money’s worth. these are;
a. There are two (2) deceased persons and the first is
the donor; and
b.)They must be existing against the estate. b. The second decedent dies within five (5) years after
c.) They must be legally enforceable obligations of the the death of the prior decedent or in the case of gifts
decedent and ought to be enforced by the claimants. the decedent – donee dies within the same period after
d.)They must be reasonably certain in amount; and; the date of the gift.
e.)At the time the indebtedness was incurred, the debt
instrument was duly notarized and if the loan was contracted Rationale:
within three (3) years before the death of the decedent, the The deduction operates to ease the harshness of
administrator or executor shall submit a statement showing successive taxation of the same property within a relatively
the disposition of the proceeds of the loan. short period of time.
5) Claims against the insolvent persons Requisites for deductibility:
Requisites for deductibility:
A. The amount of said claims has been initially included as 1. The present decedent must have acquired the property by
part of the gross estate; and inheritance or by donation.
B. The incapacity of the debtors to pay their obligations is
proven and not merely alleged. 2. The property must have been acquired within five (5) years prior to
the death of the present decedent
6) Unpaid mortgages indebtedness
Requisites for deductibility:
3. The property must have formed part of the gross estate of the prior 14) Net share of the surviving spouse in the
decedent if acquired by inheritance, or the taxable gift of the donor if conjugal / community property.
acquired by donation.
4. The estate tax or the donor’s tax, as the case may be, must have 15) Tax credit for estate tax paid to a foreign country.
been paid on the previous transfer.
5. The property must be identified as the one received from the prior
decedent or from the donor, as the case may be; and B.) If decedent is a non – resident alien.
6. The estate of the prior decedent must not have previously availed of
the vanishing deduction on the subject property. The deductions allowed to citizens or residents of the
Philippines are also extended to a non-resident alien decedent with
Procedure in computing vanishing deductions: respect to his estates situated in the Philippines at the time of his
1. Value taken of property previously taxed death.
Less:Mortgage paid by the present decedent on property previously In case of deductions for expenses, losses, indebtedness
mortgaged by prior decedent / donor, if any (Ist deduction) and taxes, the amount of the allowable deduction is limited only to the
proportion of such deductions with the value of such part of his gross
= Initial basis estate which at the time of his death, is situated in the Philippines,
bears to the value of his entire gross estate wherever situated. (Sec.
2. Initial basis X Expenses, etc and transfer for public purpose 86 (B))
value of the gross estate of present decedent
Formula:
=2nddeduction
Philippine Gross Estate x Deductions Claimed
3. Initial Basis Entire Gross estate
Less: 2nd deduction
Final Basis = allowable deduction of non-resident estate
Multiplied by rate deduction (sec.86 (A.2), NIRC)
VANISHING DEDUCTION As a prerequisite to the deduction, it must be included in the
return required to be filed the value at the time of his death, of that part
10) Transfer for public use of the gross estate of the non-resident not situated in the Philippines,
to determine the ratable portion of the deduction for expenses
Requisites: allowable.
1. The disposition must be testamentary in character.
2. To take effect after death. Tax Credit
3. In favor of the government of the Philippines, or any political
subdivision thereof. The estate tax imposed by the tax code shall be credited
1. Exclusively for public purpose. with the amount of any estate tax paid to a foreign country.
11) Family home Limitations on credit:

A.)The tax credit limit for estate taxes paid to one foreign
 Refers to the dwelling house, including the land on which it is country is determined by the following:
situated, where the husband and wife, or an unmarried
person who is the head of the family and members of their
immediate family resides as certified by the Barangay Decedent’s Net Estate situated in a foreign country x Phil. Estate tax
Captain of the locality. Entire net estate
 For the purpose of availing of a family home deduction to the
extent provided by law, a person may constitute only one = TAX CREDIT LIMIT
family home.
 The amount deductible is equivalent to the current fair B.) The tax credit limit for estate taxes paid to two or more
market value of the decedent’s family home if said current countries is determined as follows:
fair market value exceeds P1, 000,000.00., the excess
shall be subject to estate tax. Decedent’s net estate situated outside of the Phil X Phil. Estate tax
Entire net Estate
Requisites to be deductible:
a. The family home must be the actual residential home of =Tax Credit limit
the decedent and his family at the time of his death as certified by the
barangay Captain of the locality where the family is situated. Note:
b. The total value of the family home must be included in the 1.) Under limitation A the allowable tax credit is the lower amount
gross estate of the decedent. between the tax credit limit and the estate tax paid to the foreign
c. The allowable deduction must be in an amount equivalent country.
to the current fair market value of the family home as declared or 2.) under limitation B the allowable tax credit is the lower amount
included in the gross estate not exceeding P1, 000,000.00. between the tax credit limit computed under (A) and that computed
under (B)
12) Standard deduction equivalent to P1, 000,000.00
(does not include the P 200,000.00 exemption). Valuation of Property
The estate shall be appraised at its FAIR MARKET VALUE
13) Amounts received by heirs under RA NO.4917 AT THE TIME OF DEATH of the decedent (sec.88, NIRC)
from the decedent’s employer as a consequence of the This is regardless of any subsequent contingency affecting
death of the decedent –employee provided that such the estate. (Lorenzo vs. Posadas, 64 Phil. 353)
amount is included in the gross estate of the
decedent. Transfers Exempt from Estate Tax
1.) The merger or usufruct in the owner of the naked title.

2.) The transmission or delivery of the inheritance or legacy of
the fiduciary heir or legatee to the feideicomissary.
3.) The transmission from the first heir, legatee or donee in favor Measures to Insure Payment of Estate Tax
of another beneficiary, in accordance with the will of the
predecessor. a. In judicial settlement of estates, the court is required to
4.) All bequests, devices, legacies or transfer to social welfare, furnish the commissioner of Internal Revenue a certified copy of the
cultural and charitable institutions no part of the net income schedule of participation and the court order approving the same
pf which inures to the benefit of any individual. within 30 days after its promulgation. (sec. 91(b));
Provided, that not more than 30% of the said bequests,
legacies or transfers shall be used by such institutions for b. The estate tax shall be paid by the executor or
administration purposes. administrator before delivery to any beneficiary his distributive share of
the estate (sec. 91 (c)). He may be discharged from personal liability
Filing of Notice of Death for deficiency in the estate tax only after written application to the
Where the gross value of the estate exceeds twenty commissioner and upon determination that no such deficiency
thousand pesos (P 20,000.00) although exempt, the executor, appears. (sec. 92)
administrator, or any of the legal heirs shall give, within two (2) months
after the decedent’s death or within like period after the executor or c. No judge shall authorize the executor or judicial
administrator qualifies as such, a written notice thereof, to the administrator to deliver a distributive share to any party interested in
Commissioner of Internal Revenue.(sec. 89, NIRC) the estate unless a certification from the Commissioner that the estate
tax has been paid as shown. (sec.94)
Filing of Return and Payment of Tax
1.) By whom? d. Registers of Deeds shall not register in the Registry of
 An estate tax return under oath is required by law to be filed property any document transferring real property any document
by the executor, administrator, or any of the legal heirs; transferring real property or real right therein or any chattel mortgage,
a.) Where the gross value of the estate exceeds p200, by way of gift inter vivos or mortis causa, legacy or inheritance, unless
000.00 though exempt from the estate tax; or certification from the commissioner that the tax has been paid and the
b.) Regardless of the gross value of the estate, where y shall immediately notify the Commissioner, Regional Director,
the said estate consists of registered or registrable Revenue District Officer, or Revenue collection Officer or treasurer of
real property, such as real property, motor vehicle, the city or municipality where their officer are located, of the non-
shares of stock or other similar property for which payment of the tax discovered by them.
a clearance from the Bureau of Internal Revenue
is required as a condition precedent for the e. Any lawyer notary public, or any Government Officer who,
tr5ansfer of ownership thereof in the name of the by reason of his official duties, intervenes in the preparation or
transferee. acknowledgement of documents regarding partition or disposal of
2.) When to file? donation inter vivos or mortis causa, legacy or inheritance, shall have
 The return shall be filed within six (6) months from the the duty of furnishing the Commissioner, etc., with copies of such
decedent’s death. documents and any information whatsoever, which may facilitate the
 The Commissioner shall have the authority to grant, in collection of the aforementioned tax.
meritorious cases, a reasonable extension not
exceeding thirty (30) days for filing the return. f .Neither shall a debtor of a deceased pay his debts to the
 The executor or the administrator, or any of the legal heirs, legatees, executor or administrator of his creditor, unless a
heirs, as the case may be, is required to give a written certification of the Commissioner that the tax fixed has been paid is
notice of death to the commissioner within two (2) shown; but he may pay the executor or judicial administrator without
months after the decedent’s death or after qualifying as said certification if the credit is included in the inventory of the estate of
such executor or administrator. the deceased.
3.) Where to file? g. Corporations, sociedad anonima, partnerships, business

Except in cases where the Commissioner of the Internal or industry organized in the Philippines shall not transfer in their books
Revenue otherwise permits, the return shall be filed with an any shares obligations, bonds or rights by way of gift inter vivos or
authorized agent bank or the Revenue District Officer, Revenue mortis causa, legacy or inheritance to the new owner unless a
Collection Officer, or duly authorized treasurer of the city or certification from the Commissioner that the taxes fixed and due
municipality where the decedent was domiciled at the time of his thereon have been is shown; and
death, or if there be no legal residence in the Philippines, with the
Office of the Commissioner of Internal Revenue. h. If a bank has knowledge of the death of a person who
maintained a bank deposit account alone or jointly with another, it shall
4.)Copies: not allow any withdrawal from the said joint deposit account unless the
The return shall be filed in triplicate, two (2) for the BIR and Commissioner has certified that the estate taxes imposed thereon
one (1) copy for the taxpayer. have been paid. However, the administrator of the estate or any of the
heirs of the decedent may, upon authorization by the Commissioner of
Liability for Payment of Estate Tax Internal Revenue withdraw an amount not exceeding twenty thousand
 The estate tax shall be paid by the executor or pesos (P 20,00.00) without the said certification . For this purpose,
administrator who is primarily liable to pay it. all withdrawal slips shall contain a statement to the effect that all of the
(Commissioner vs. Gonzales, 18 SCRA 757) before joint depositors are still living at the time of withdrawal by any on e of
delivery to any beneficiary of his distributive shares. the joint depositors and such statement shall be under oath.
(sec. 91 (c), NIRC).
 After due payment, the executor or administrator shall i. The estate tax together with interest, penalties, and costs
be discharged from personal liability. (Collector vs. Mc that may accrue in addition thereto constitutes a lien upon all property
Grath 1 SCRA 638) and rights to property belonging to the taxpayer. The lien attaches
 The beneficiary shall, to the extent of his distributive when the taxpayer neglects or refuses to pay after demand. (sec. 219)
share, be subsidiarily liable for the portion of the estate
tax as his distributive share bears to the value of the
total net estate. (sec.91 (c), NIRC) Procedure for Computing Net Estate and Estate Tax
2. The itemized deductions from the gross estate.
FORMULA: 3. The amount of tax due, whether paid or still due and
outstanding.
Gross Estate
LESS: Allowable deductions Payment of the Estate Tax:
Estate after allowable deductions
The estate tax shall be paid at the time when the estate tax
LESS: ½ net share of surviving spouse on conjugal or community return is filed.
property (if applicable) When the Commissioner finds that the payment of the estate
Family home allowance (if applicable) tax on the due date would impose undue hardships upon the estate, or
any heir;
= Net estate of decedent A.)The payment of the estate tax may be extended for a
LESS: P200, 000.00 exemptions period not to exceed five years, if there is a judicial settlement of the
estate; or
= Taxable net estate X Tax Rate in section 84 b.) The payment of the estate tax may be extended for a
period not to exceed two years if there is an extra-judicial settlement of
= Amount of estate tax due the estate.
Conditions for Extension of Time Payment:

WHEN THE GROSS ESTATE
EXCEEDS P 2,000,000.00, THE ESTATE TAX RETURN SHALL A.) The taxpayer is not guilty of negligence, intentional disregard of
BE ACCOMPANIED BY A STATEMENT, WHICH IS CERTIFIED rules and regulations, or fraud; otherwise, no extension maybe
BY AN INDEPENDENT PUBLIC ACCOUNTANT STATING: granted; and
1. The itemized assets of the decedent with its
corresponding gross value at the time of his death or in the B.) The executor, administrator, or beneficiary may be required to
case of a non-resident, not citizen of the Philippines that furnish a performance bond in an amount not exceeding double the
part of his gross estate situated in the Philippines. amount of the tax due.
Donor’s Tax
DISTINCTION BETWEEN DONOR’S

TAX AND ESTATE TAX
DONOR’S TAX
a.) Tax on the privilege to transmit property during the lifetime ESTATE TAX
of the donor.
a.) Tax on the privilege to transmit property upon one’s
b.) Tax rates are lower.
death.
c.) Exemption is only P100, 000.00
b.) Tax rates are higher.
d.) Notice of donation is not required.
c.) Tax exemption is P200, 00.00
e.) Extension of payment is not provided.
d.) Notice of death is required.
f.) Payable within 30 days from the date of gift.
e.) Extension of payment maybe granted by the
g.) Imposed on the net gift
Commissioner of Internal Revenue.
f.) Payable within 6 months from the date of death.
g.) Imposed on the net estate.
2.) Donee’s tax or tax levied on the act of receiving; it was
Meaning of donation or gift. formerly the counterpart of the inheritance tax, which has
been integrated into an estate tax.
 Is an act of liberality whereby a person disposes gratuitously
of a thing or right in favor of another who accepts it. Note: Both taxes have been integrated into a donor’s tax.
For tax purposes, the term has a much wider meaning, it NATURE OF GIFT TAX
includes:
 It is an excise (privilege) tax, imposed on the privilege of the
A. any transfer of property by gift, except in forced sales and donor to give or on the privilege of the donee to receive. It is
in the sale of real property which is a capital asset, for less than not a tax on the property as such because its imposition
and adequate and full consideration in money or money’s worth. does not rest upon general ownership.
(sec. 100)  The tax is imposed without reference to the death of the
donor unlike in the case of estate tax.
B. Condonation or remission of debt, where the creditor
merely desires to benefit a debtor and without any consideration
therefore cancels the debt.
PURPOSE OF GIFT TAX
PARTIES TO A DONATION : 1.) The gift tax was enacted originally to supplement the estate
and inheritance taxes by preventing their avoidance through
Donor the taxation of gifts inter vivos.
 The Person who disposes of his property or right. 2.) The donor’s tax is also intended to prevent the avoidance of
income tax through the device of splitting income among
numerous/different donees with the donor thereby escaping
Donee the effect of the progressive rates of income taxation.
 The Person who receives the property or right.
PROPERTY INCLUDED IN THE TERM “GIFT”
WHAT MAYBE DONATED?
(A). In the case of resident citizens, non-resident citizens and
 THING or RIGHT resident aliens:
1. Real property within and without the Philippines.
KINDS OF DONATIONS: 2. Tangible personal property within and without the Philippines;
and
According to its date of effectivity: 3. Intangible personal property within and without the Philippines.
1.) Donation Inter vivos

 If made between living persons to take effect during the (B.) In the case of non-resident aliens:
lifetime of the donor. 1. Real property within the Philippines.
2. Tangible personal property within the Philippines.
2.) Donation Mortis Causa 3. Intangible personal property within the Philippines, unless there
 If made in the nature of a testamentary disposition that is it is reciprocity in which case, it is not taxable:
shall take effect at the time of death of the donor.
Note:
DONATIONS NOT SUBJECT TO DONOR’S TAX The specific items includible in the “gross estate” are
applicable to and are embraced by the term “gift”.
Only donations inter vivos are subject to donor’s tax.
TRANSFERS SUBJECT TO DONOR’S TAX:
1. Donations mortis causa
Donor’s tax shall apply:
 Is subject to estate tax. The laws on succession govern A. whether the transfer is in trust or otherwise;
them. B. whether the gift is direct or indirect (remission/condonation of
debt)
2. Donation Inter vivos C. whether the property is real or personal, tangible or intangible.
 Of the amount of P50, 00.00 or less and those declared Note:

exempt by the tax code and special laws are also not subject It includes not only the transfer of ownership in the fullest
to Donor’s tax. sense but also the transfer of any right or interest in property but
less than title.
Meaning of gift tax
REQUISITES OF A TAXABLE GIFT:
Donor’s tax is a tax imposed on the transfer without the
consideration of property between two or more persons who are living 1.) CAPACITY of the donor to make the donation;
at the time the transfer is made. 2.) DONATIVE INTENT or INTENT on the part of the donor
to make a gift;
KINDS OF GIFT TAXES: 3.) DELIVERY, whether actual or constructive, of the gift; and
4.) ACCEPTANCE of the gift by the donee.
They are:
1.) Donor’s tax or tax levied on the act of giving; it supplements Note:
the estate tax; and A. the donee, unlike the donor need not be capacitated.
B. donor’s tax applies now to both natural and judicial For purposes of exemption, a non-profit educational and/or
persons. charitable corporation, institution, accredited non-government
C. donative intent must be present in direct gift but with organization, trust or philanthropic organization is defined as:
respect to indirect gift, e.g. transfer of property for less than an  school, trust or university and/ or charitable corporation,
adequate and full consideration, donative intent is superfluous. foundation trust or philanthropic organization and/ or
Thus, donative intent is not always essential to constitute a gift. research institution or organization incorporated as a non-
stock entity:
LAW APPLICABLE:  paying no dividends.
 governed by trustees who receives no compensation; and
The law in force at the time of the perfection /  devoting all its income to the accomplishment and promotion
completion of the donation shall govern the imposition of donor’s of the purposes enumerated in its articles of incorporation.
tax.
d.) Encumbrances on the property donated if assumed by the donee;
and
STRANGER
e.) Those specifically provided by the donee as a diminution of the
 A person who is not a brother, sister, spouse, ancestor and property donated.
lineal descendant or of a relative by consanguinity in the
collateral within the 4th civil degree. f.) The first P100, 000.00 value of the gift (exemption).
TAX PAYABLE WHEN THE DONOR IS A STRANGER: g.) Tax credit for donor’s tax paid to a foreign country.
When the donee is a stranger, the tax payable by the donor

shall be 30% of the net gifts.
Gifts made by a Non-Resident not a Citizen of the Philippines
Note:
If the beneficiary is not a stranger, the applicable rate is that
provided in sec.99, NIRC.
POLITICAL CONTRIBUTIONS A.) Gifts made to or for the use of the National Government or any
entity created by of its agencies which is not conducted for
Any contribution in cash or in kind to any candidate, political profit, or to any political subdivision of the said government.
party, or coalition of parties for campaign purposes, shall be
governed by the Election code. B.) Gifts in favor of educational, charitable, religious, cultural or
social welfare corporation, institution, foundations trust or
MEANING OF NET GIFT philanthropic organization, research organization or institution or
accredited NGO. Provided, that no more than 30% of said gifts
Net gift shall be used by such donee for administration purposes.
 Means the total amount of gifts less the allowable deductions
and specific exemptions. C.) First P100, 000.00 of the gift. (Exemption)
 The donor’s tax is computed on the basis of the total net gifts
made during the calendar year.
Note:
ALLOWABLE DEDUCTIONS:
1. Intangible personal property in the gross gift of a NON-
Gifts Made by a Resident: RESIDENT ALIEN donor shall be taxable in the Philippines, if the
PRINCIPLE OF RECIPROCITY is not cognizable.
a.) Dowries or gifts made on account of marriage before its celebration
or within one year thereafter by parents to each of their legitimate, 2. Intangible personal properties considered situated in the
illegitimate or adopted children to the extent of the first P10,000.00. Philippines.
 Franchise which must be exercised in the
Requisites: Philippines
1. The donation must be given on account of  Shares of stocks issued by any corporation or
marriage. sociedad anonima organized or constituted in
2. The parent must give it to his child. the Philippines in accordance with its laws.
3. The child must be either the legitimate, recognized
 Shares of stocks issued by any foreign
natural or legally adopted child of the donor, and;
corporation 85% of the business of which is
4. It must be given within one year before or after the
situated in the Philippines.
celebration of the marriage.
 Shares of stock issued by a foreign
corporation, if such shares, obligations, or
b.) Gifts made to or for the use of the National Government or any of
bonds, have acquired a business situs in the
its agencies which is not conducted for profit, or to any political
Philippines; and
subdivision of the said government.
 Shares or rights in any partnership, business
or industry established in the Philippines.
c.) Gifts in favor of educational, charitable, religious, cultural or social
welfare corporation, institutions, foundations, trust or philanthropic
3. VOID DONATIONS ARE NOT SUBJECT TO
organization, research institution or organization, or accredited non-
DONOR’S TAX
government organization. Provided, that no more than 30% of said
gifts shall be used by such donee for administration purposes.
Such as:
Note:
 Between husband and wife, even if the relationship has 1.) Donor was a Filipino citizen or resident alien, at the time of
not been solemnized. foreign donation
 Between persons guilty of adultery or concubinage. 2.) Donor’s taxes of any character and description are imposed
 Between those found guilty of the same criminal and paid by the authority of a foreign country.
offenses.
 Between those made to a public officer or his wife, Limitations:
descendants, ascendants by reason of his office.
A.) For donor’s tax paid to one foreign country;
4. Renunciation of inheritance in favor of a co-heir is not subject
to donor’s tax but, if it is renounced in favor of a third person it shall be The amount of tax credit in respect to the tax paid to any
subject to donor’s tax. country shall not exceed the same proportion of the tax against
which credit is taken which the net gifts situated within such
country taxable under the National Internal Revenue Code bears
to his entire net gift, and
TAX CREDIT FOR DONOR’S TAXES PAID TO A FOREIGN B.) For donor’s tax paid to two or more foreign countries:
COUNTRY The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken, which the
donor’s net gift situated outside the Philippines taxable under the
National Internal Revenue Code bears to his entire net gift.
FORMULA:
1. Donor’s Tax Paid to 1 Foreign Country
Net gift situated in a foreign country X Phil. Donor’s Tax = Tax Credit Limit
Entire net gifts
2. Donor’s Taxes paid to 2 or more Foreign Countries
Net gifts outside the Philippines X Phil. Donor’s Tax = Tax Credit Limit
Entire net gifts
Note:
 Under limitation A the allowable tax credit limit is the LOWER AMOUNT between the tax credit limit and the gift
tax paid to the foreign country.
 Under limitation B the allowable tax credit is the LOWER AMOUNT between the tax credits; limit computed
under A and that computed Under B.
Valuation of Gifts of Property
The fair market value of the property given at the time of

the gift shall be the value of the gift.
Intangible Personal Properties with Situs in the Philippines
 Subject to the RECIPROCITY RULE
FILING OF THE RETURN AND PAYMENT OF THE TAX
The donor’s tax return is filed and the donor’s tax due is paid
within thirty (30) days after the date the gift is made.
The return shall be under oath in duplicate containing the
Following:
a.) Each gift made during the calendar year which is to be
included in computing the gifts.
b.) The deductions claimed and allowable
c.)Any previous net gifts made during the same calendar
year.
d.)The name of the Donee; and
e.)Other information’s as may be required by the NIRC.
GIFT SPLITTING :
Spreading the gift over numerous/different calendar years

inorder to avail of lower donor’s tax is allowed, as this is tax avoidance.
But, if the gift is split within the same calendar year it is not allowed
and will still be subject to the tax because the computation of gift tax is
cumulative in nature.

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 TAX LAW REVIEWER 

1 SAINT LOUIS UNIVERSITY BAR OPERATIONS

GENERAL PRINCIPLES e. Protectionism – in some important sectors of the economy,

Taxes are the enforced proportional contributions from

b. Regulation – As in the case of taxes levied on excises and

Power of Judicial Review in Taxation

2. When the transaction itself is the one that is tax-exempt but

4. When the law granting tax exemption specifically includes

II. Classifications and Distinction

2. Special/Regulatory – tax imposed for special purposes, i.e., Tax vs Toll

b. Administrative Feasibility – tax laws should be C. Territoriality or Situs of Taxation

a.2) In order that the functions of the government shall

4. The exemption is not limited to property

Other Constitutional Provisions related to Taxation

“No money shall be paid out of the Treasury except

Remedy – taxation jurisdiction may provide:

4. Double Taxation and the Situs Limitation (see later Requisites:

 A deduction differ from a tax credit in that a deduction

6. The tax laws are presumed valid.

7. The power to tax is presumed to exist.

1968). Estoppel does not apply to preclude the subsequent

The principle of tax law enforcement is: The

a. The Commissioner of Customs and his Estoppel Against the Taxpayer

Principles Governing Tax Assessments

1. if a person fails to file a return or other document at

all other sources, with whom the taxpayer had previous

1. a decedent to determine his gross estate; and

This is an essential condition, 1. Additions to the Tax

The Commissioner is not vested with any 2. Delinquency interest

The following cases, however, show the 3. Interest on Extended Payment

3. Failure of a Withholding Agent to Refund Excess

GENERAL CONCEPT AND ITEMS OF INCOME 4. Capital Gain – an income

A. Income means all wealth which

irrespective of the voluntary or involuntary action of

a. Salaries – refer to earnings received periodically

EXCEPT: ECONOMIC BENEFIT PRINCIPLE (BIR d. Commission – refers to percentage of total or

 An income is constructively received by a person  A pension awarded to a person where no

(f) Stock Dividend -- Involves the transfer of

Fringe Benefit (forms) Value of Fringe Benefits EXCEPT:

(1.) Educational grant whereby the study is

 Representation and Transportation  Examples of De minimis benefits are the

 Basic Principle governing deductions:

4). Domestic corporation

 An individual taxpayer whose income derived from

 Extraordinary repairs - those in the nature of  Some factors in determining reasonableness

(d.) Must be paid or incurred within the taxable

(b.) between an individual and a corporation ---

certificates of indebtedness issued by such bank or

(b.) resident foreign corporation --- the  Limitations on Tax Credit

3). Special Kinds of Losses NET OPERATING LOSS CARRY – OVER

F. Bad Debts 4. The same must be actually charged-off the books

 In no case may a receivable from an insurance

 Tax Benefit Rule  Persons Entitled to claim depreciation allowance

usufruct or fideicommissary substitution), the

2. It must be for property arising out of its use or

2. Non-resident aliens engaged in trade or  Methods of computing depreciation allowance

 Contributions with limit