2018 2019 Tax1 Review by Quibod

FIRST EXAM TAXATION LAW REVIEW
Dean Manuel P. Quibod || 4-Manresa 2018-2019
04 DECEMBER 2018
Jardinel & Ceballos
CANONS/FEATURES of a SOUND TAX SYSTEM
GENERAL OVERVIEW  Fiscal Adequacy
 Theoretical Justice
 Administrative Feasibility
DEFINITION OF TAXATION
Q: What will the state impose in the exercise of that
Taxation is defined as the power of the sovereign to impose
power?
burdens or charges upon persons, property or property rights for
the use and support of the government to discharge its functions.
It will impose burdens or charges. And these burdens and charges
are what we call the tax.
This is also the power by which the sovereign raises revenue to
defray the necessary expenses of the government.
DEFINITION OF TAX
It is also defined as a way of apportioning the cost of the
government among those who, in some measure, are privileged
Tax is defined as an exaction for revenue for the support of the
to enjoy its benefits and must bear its burdens. The power
government. It is a forced burden because of the nature of the
emanates from the sovereign. That power is to impose charges
power of the sovereign to impose. Therefore, it is not voluntary. It
and burdens and that burden is what we call tax.
is a forced charge, exaction, imposition or contribution.
Object of the tax

DISTINCTIONS
 Persons,
 Property or
Tax distinguished from:
 Property rights.
(1) Debt – when a subject is covered with a tax, is that an
indebtedness on the part of the subject? Since you are
The revenue raised from taxation are for the use and support of
subject to the levy or imposition in the hands of the
the government so that the government may be able to discharge
taxpayer, is that liability on the tax added? So be aware
its functions. Therefore, taxation is a revenue raising power. It is
of the distinction that there is a difference between a tax
a power within which the government or the state is able to raise
and a debt.
money so that it will be able to deliver and discharge its functions
(2) License Fee
like services, building of roads, hospitals, schools, bridges,
(3) Toll
payment of our governmentemployees and other governmental
(4) Penalty
functions. In order that the government may be able to operate, it
(5) Special Assessment/Levy – you can find in the Local
needs money. And the manner that the money will be released is
Government Code when the LGU would introduce public
by way of taxation.
works or infrastructure and to recover that investment,
they will impose that special levy. So is that the same as
a tax?
POWER OF THE SOVEREIGN
You have to know the kinds or classes of taxes:
From that definition, you have the term the power of the
 As to their purpose
sovereign. In other words the power of taxation is one of the
 Object
inherent powers of the State. Aside from the power of taxation,
 Incidence
we have two others – Eminent Domain and Police Power.
 Rates
 Base
As regards the power of taxation being inherent in sovereignty,
 Authority
the nature of that power is inherent because taxation is a
necessity. Being an inherent power, it originates or emanates
from the law making body. Taxation is legislative in character. It
NATURE OF TAX
cannot be delegated. It is generally assigned to the legislative.
Since the power is plenary or comprehensive, it is subject to
Our tax laws are not penal or criminal in nature. It is civil. So you
restrictions and limitations. The limitations may either be
do not apply the ex post facto law or the bill of attainder. While
inherent or constitutional in nature.
our tax laws have penal sanctions – there is an imposition of a
fine or imprisonment or both in case of a violation. But that will
The power of the sovereign is to impose, which dictates that that
not make our tax laws penal or criminal in nature. The penalties
power is compulsory. Being compulsory in nature, the power is
are there to insure prompt payment of taxes.
subject to stages or phases – the levying, assessment, and
collection and payment.
APPLICATION AND CONSTRUCTION OF TAX LAWS
Stages or phases of taxation
Our tax laws are to be applied prospectively. We do not apply it
retroactively because that violates the process. As to construction,
(1) Levying – this is the one which is legislative in we apply liberal construction. So taxes are to be construed
character. The levy must be contained in the law. liberally unless the taxes are in the nature of tax exemption
Otherwise, the imposition is ultra vires since it is not where we apply the strict construction.
supported by any act or grant of legislation.
(2) Collection of payment – is what we call the tax SOURCES OF TAX LAWS
administration aspect. It will not require legislation but it  Constitution
requires promulgations of rules and regulations to  Legislations
implement the statute of the tax law.  Decisions of Courts
 BIR Rulings
Added to this power to impose is – since the power of taxation is
comprehensive and compulsory in nature it must therefore
conform to the canons/features of a sound tax system. TAXPAYER’s RELIEF
ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |1

You have that requirement that all tax bills should come from the
The taxpayer may seek a relief by filing a case. If it affects the House of Representatives. This constitutional provision does not
interest of the taxpayer, he can file a tax payer’s suit. mean that the House of Representativesis superior to the Senate.
They are still co-equal. But it is the constitution requirement that
Added to that definition that the power of tax is the power of the the revenue measure magsimuladapatsaHouse. The Senate
sovereign to impose burdens and charges upon persons, property thereafter can make its own version. But before they can make
or property rights. their own version, it must originate first in the House for purposes
of that constitutional compliance. The members of the House are
We could therefore say that the scope of power is unlimited and elected through their legislative districts which more or less
plenary. We have that principle that the power to tax may represents the sovereign unlike the senate which are elected at
involve the power to destroy. But this will apply to those which large. They do not have constituents.
are not constitutionally protected since taxation cannot be used to
destroy natural and fundamental rights.
RULE ON SITUS, AND DOUBLE TAXATION
This power is subject to constitutional limitations and
inherent limitations. Double taxation is not prohibited. If a stature would result to a
double taxation, you attack it, not on the basis that it is a double
tax, but rather, that it violates due process and equal protection
INHERENT LIMITATIONS: and therefore unconstitutional.
 Public purpose
 Territorial Jurisdiction/situs
 Non-delegation FORMS OF ESCAPE AND TAX EXEMPTIONS
 International Comity
 Government immunity from the tax You also have the forms of escapes. Taxes are burdens.
Taxpayers could resort to remedies to escape or avoid the impact
of the tax.
CONSTITUTIONAL LIMITATIONS:
 Public Purpose You have the tax exemptions, which we apply the strict
 Due Process construction.
 Situs
 Retroactive Application
 Double Taxation, etc. “FOR USE AND SUPPORT OF GOVERNMENT”
When tax is contrary to those mentioned above, it will result to a The government does not make income from taxation. Rather, it
corresponding violation of due process. In other words, the raises revenue from taxation. This revenue raising power admits
violation of the inherent limitations carries with it a corresponding incidental or non-revenue purposes. The power may go hand in
violation of the constitution according to the requirement of due hand with non-revenue purposes. You will impose a tax for the
process. purpose of protecting local industry. You impose a tax or you
grant an exemption to protect certain group of taxpayers. Like in
the case of nonresident citizens who are working abroad as OFWs,
THE PROGRESSIVE SYSTEM so you can grant an exemption because there is public interest in
granting the exemption.
The Progressive Systemwhich is a mandate provided by the
constitution that there shall always be a progressive system of
taxation. INCIDENTAL/NONREVENUE PURPOSES:
 Structural development
Q: What does that mean? Is that constitutionally mandated  Protect local industry
or is that a directive?  Reduce inequalities in wealth
NON-IMPAIRMENT CLAUSE  Use as an implement of regulation
 Police power
As a rule, the power of taxation yields to the non-impairment  Eminent domain
clause. Freedom of religion is superior to the power of taxation.
The power of tax can go hand in hand with these purposes. For
Then you have the rule on the exemption on property tax, when example, when the State would grant establishments to give
they are used for religious, charitable, educational purpose. discounts to senior citizens, the establishments could not recover
the discount and ask reimbursement from the government. There
was a taking of your property, so what the government did is to
LGU’s POWER OF TAXATION compensate that discount and it will be used as a tax credit. So it
can be used as an implement of Eminent Domain.
Then you have the LGU‟s power of taxation. They are granted by
the constitution. There is no inherent power of taxation to the Now later in the Manila Memorial Park vs. DSWD, the
LGU. But the power is granted by the Constitution. Then you have discounts were now used as tax deductions against gross income
the Local Government Code which grants the scope of the power. and no longer tax credits. (all digests taken from 2016 TSN)
MANILA MEMORIAL PARK vs. DSWD

RATIFICATION OF TAX LAWS G.R. No. 175356
You have the ratification requirement. Ordinarily, tax laws are FACTS: Petitioners Manila Memorial Park, Inc. and La
enacted and ratified through the regular majority but not in a case Funeraria Paz-Sucat, Inc. are domestic corporations
of a tax exemption statue. This will require a higher ratification engaged in the business of providing funeral and burial
requirement than the regular revenue measures. services. They assail the constitutionality of Section 4 of
RA 7432,as amended by RA 9257,and the implementing
rules and regulations issued by the DSWD and DOF
ORIGIN OF TAX LAWS insofar as these allow business establishments to claim
the 20% discount given to senior citizens as a tax
deduction.

permanent reduction in total revenues is a forced subsidy

Petitioners likewise seek a reversal of the ruling in Carlos corresponding to the taking of private property for public
Superdrug Corporationthat the tax deduction scheme use or benefit. The flaw in this reasoning is in its
adopted by the government is justified by police power. premise. It presupposes that the subject regulation,
Petitioners also contend that the tax deduction scheme which impacts the pricing and, hence, the profitability of
violates Article XV, Section and Article XIII, Section 11of a private establishment, automatically amounts to a
the Constitution because it shifts the State‟s deprivation of property without due process of law. If this
constitutional mandate or duty of improving the welfare were so, then all price and rate of return on investment
of the elderly to the private sector. control laws would have to be invalidated because they
impact, at some level, the regulated establishment‟s
Under the tax deduction scheme, the private sector profits or income/gross sales, yet there is no provision
shoulders 65% of the discount because only 35% of it is for payment of just compensation. It would also mean
actually returned by the government.Consequently, the that government cannot set price or rate of return on
implementation of the tax deduction scheme prescribed investment limits, which reduce the profits or
under Section 4 of RA 9257 affects the businesses of income/gross sales of private establishments, if no just
petitioners. Petitioners posit that the resolution of this compensation is paid even if the measure is not
case lies in the determination of whether the legally confiscatory. The obiter is, thus, at odds with the settled
mandated 20% senior citizen discount is an exercise of doctrine that the State can employ police power
police power or eminent domain. If it is police power, no measures to regulate the pricing of goods and services,
just compensation is warranted. But if it is eminent and, hence, the profitability of business establishments in
domain, the tax deduction scheme is unconstitutional order to pursue legitimate State objectives for the
because it is not a peso for peso reimbursement of the common good, provided that the regulation does not go
20% discount given to senior citizens. too far as to amount to "taking."
Thus, it constitutes taking of private property without There is no compelling reason has been proffered to
payment of just compensation. Petitioners further argue overturn, modify or abandon the ruling in Carlos
that the Supreme Court has previously ruled in Central Superdrug Corporation. We note that the above-quoted
Luzon Drug Corporation that the 20% discount is an disquisition on eminent domain in Central Luzon Drug
exercise of the power of eminent domain, thus, requiring Corporationis obiter dicta and, thus, not binding
the payment of just compensation. They urge us to precedent. A fair reading of Carlos Superdrug
reexamine our ruling in Carlos Superdrug Corporation Corporationwould show that we categorically ruled
which allegedly reversed the ruling in Central Luzon Drug therein that the 20% discount is a valid exercise of police
Corporation power. Thus, even if the current law, through its tax
deduction scheme (which abandoned the tax credit
ISSUE: W/N the tax deduction scheme is a legitimate scheme under the previous law), does not provide for a
exercise of the State‟s police power. peso for peso reimbursement of the 20% discount given
by private establishments, no constitutional infirmity
RULING: YES obtains because, being a valid exercise of police power,
payment of just compensation is not warranted. We have
The 20% senior citizen discount is an exercise of police carefully reviewed the basis of our ruling in Carlos
power. The 20% discount is intended to improve the Superdrug Corporation and we find no cogent reason to
welfare of senior citizens who, at their age, are less likely overturn, modify or abandon it.
to be gainfully employed, more prone to illnesses and
other disabilities, and, thus, in need of subsidy in
purchasing basic commodities. As to its nature and BASIS OF TAXATION
effects, the 20% discount is a regulation affecting the
ability of private establishments to price their products Necessity is the basis of taxation. The power taxation
and services relative to a special class of individuals, proceeds upon the theory that the existence of government is a
senior citizens, for which the Constitution affords necessity.
preferential concern. In turn, this affects the amount of
profits or income/gross sales that a private establishment GENERAL PRINCIPLES PROPER
can derive from senior citizens. In other words, the
subject regulation affects the pricing, and, hence, the
Taxation
profitability of a private establishment.
 Is the power of the sovereign to impose burden or
charges upon person, property and property rights for
However, it does not purport to appropriate or burden
the use and support of government to enable it to
specific properties, used in the operation or conduct of
discharge its functions.
the business of private establishments, for the use or
benefit of the public, or senior citizens for that matter,
Purpose
but merely regulates the pricing of goods and services
 To raise revenue
relative to, and the amount of profits or income/gross
sales that such private establishments may derive from,
Incidental Purpose
senior citizens. The subject regulation may be said to be
 Reduce inequalities in wealth
similar to, but with substantial distinctions from, price
 Protect local industry
control or rate of return on investment control laws which
 Use as an implement of regulation
are traditionally regarded as police power measures.
 Police power
 Eminent domain
The obiter in Central Luzon Drug Corporation, however,
describes the 20% discount as an exercise of the power
Theory and Basis of Taxation
of eminent domain and the tax credit, equivalent to the
 Power of taxation proceeds upon the theory that the
amount of discount given as the just compensation
existence of government is a necessity. So that the
therefor.
government may be able to discharge its functions. The
government cannot exist without revenue or funds.
The reason is that (1) the discount would have formed
part of the gross sales of the establishment were it not
Taxes are the lifeblood of the government
for the law prescribing the 20% discount, and (2) the

 The basis is the reciprocal duties of the government or a judicially enforceable right, so that provision there that
state to provide protection and the citizens to give congress shall evolve a progressive system is not a
support by way of taxes. But this does not mean that judicially enforceable right. The tax policy or the motive
those who pay more shall be given more protection. of tax enactment is purely a discretion given to the
Whether you pay less or you pay more, the state will graduating body.
give the same protection to all the inhabitants.
PROGRESSIVE SYSTEM OF TAXATION

Nature of the power
 It is inherent in sovereignty. It exists independent of the The state must evolve a progressive system but in the case of the
Constitution that even without the Constitution, the VAT, it is a case of a regressive tax. It contravenes to the
power is already there in the state, together with the principle of progressive system. Can you go to court to question
other two powers – eminent domain and police power. that? NO! Because the fiscal policy is at the discretion of the law-
 It is legislative in character because the power to tax is making body. But this does not preclude, once the law has been
assigned to the legislative. The power must emanate made effective then citizens can then question the
from the law making body. constitutionality and legality of the law. But while it is still there in
 That power is subject to inherent and constitutional congress, you do not challenge that.
limitations.
PRINCIPLES OF A SOUND TAX SYSTEM

Aspects/Phases of Taxation
 Levying (legislative) – so the determination of the (1) Fiscal Adequacy – the sources of revenue should be
fiscal policy of the state is determined by the law making sufficient to meet varying levels of government
body. The law making body will see to it that it has expenditures regardless of business conditions and
sufficient tax legislations so that it can raise the problems of economy. In other words, your tax laws
necessary revenue to enable it to discharge its function. must be able to expand and contract regardless of
So the legislative what will be the fiscal policy. That is business conditions. It is not correct that if there are
the discretion that is given to the legislative. shortages in revenue collection, the revenue will go back
 Assessments and collection and payment (tax to congress and add more taxes or increase the rates.
administration) – executive That is the requirement of fiscal adequacy. The sources
of revenue should be able to address the varying
economic conditions within the state.
Extent of the legislative power to tax/ Legislative
determines: (2) Theoretical Justice – ability to pay.
 Who will be the subjects or objects to be taxed
 Purpose of the tax (public purpose) (3) Administrative Feasibility – this follows the principle
 Amount or rate of the tax of convenience. Each tax should be clear and plain to the
 Manner or means or agencies who collect taxpayers, capable of enforcement by adequate and well
trained staff of public officials convenient as to time and
manner of payment and not unduly burdensome or
The power to tax is the power to destroy discouraging to business activity. Now, you can pay
 The power to tax is unlimited and can be made online or through banks. Dilinamano-manoang filing and
burdensome as to its subjects. But it can be used to submit personally sa BIR.
destroy only those activities which are non-useful.
Distinction of Taxation with Police Power and Eminent

COURT INTERFERENCE Domain
Since taxation is legislative, courts cannot interfere or question (1) As to similarities:

the motive of the legislative on the levy. Wisdom of the fiscal  These three are attributes of sovereignty
policy is given to the law-making body. Therefore, you cannot go  Exist independently of the constitution
to court to question why the congress enacted this kind of tax  Methods which the state interferes on private
law, like what happened in rights & property
 Legislative in nature and character
TOLENTINO vs. SECRETARY OF FINANCE  Each presupposes an equivalent compensation
FACTS: There are issues raised regarding EVAT, that (2) Distinctions:
expansion of the VAT covering more transactions,
violated the constitution under Section 28 because TAXATION POLICE EMINENT
Congress was no longer enacting towards a progressive POWER DOMAIN
system. In the nature One gets the You live One can get
of service and in a just
ISSUE: Is the contention correct? compensation protection peaceful compensation
for property from the and order
RULING: NO taken government society
Police power and eminent
Regressivity is not a negative standard for courts to In relation to Taxation is domain are superior to the
enforce. To evolve a progressive system of taxation is the impairment inferior to non-impairment clause.
directive to Congress. It is not required or mandated clause in the non-
upon Congress, and therefore you could not compel constitution impairment Note:Police power is
Congress to evolve, you could only direct or persuade clause broader and is subject to
Congress to evolve a progressive system. This is directive less restrictions than the
to Congress similar to the directive to enact laws of power to tax.
human dignity, laws on social justice, economic and In the use to It is for the The The property
political equalities or quality education, etc.They are in which the consumption property taken is for
the Constitution as moral incentives to legislation, not as property taken of the taken is public use

is devoted government for public government and their amount is regulated by the
welfare legislative.
As to whom Taxation and police power Only against
directed are directed against the a particular  Penalty – operates as a sanction for violation whether it
whole citizenry property is a fine or imprisonment or both. But a tax is in a
nature of forced contribution
CLASSIFICATIONS AND DISTINCTIONS  Special Assessment/Levy –
Tax is a burden or charge assessed in accordance with some SPECIAL ASSESSMENT TAXES
reasonable rule of apportionment by authority of a sovereign state Levied only on land Imposed on persons,
upon person or property within its jurisdiction to raise revenue to property or property rights
support the govt. Cannot be made a Can be made a personal
personal liability on the liability on the person
person assessed assessed
Characteristics of tax: Once there is recovery of As long as the tax law is in
 Enforced contributions that infrastructure or the effect, it shall continue to
 Proportionate in character investment made then the be collected
 It is levied by the state which has jurisdiction collection stops
 Levied on persons or property Collection should be made Collection is
 Levied by the law making body only to those who are comprehensive
 Levied for a public purpose benefitted by that
improvement.
As to who bears the burden Kung wala ka nakinabang

 Direct tax dili ka covered and there is
 Indirect tax a period within which to
collect – 5 years
As to determination of amount  License Fee/Permit Fee

 Specific tax o License Tax – the same as the regular tax
 Ad valorem tax o License Fee – to regulate a useful occupation;
o Permit Fee – to regulate a non-useful
occupation; to regulate, more like police power
As to purpose
 General, fiscal or revenue tax TAXES LICENSE FEE
 Special or regulatory tax Taxes arise from the License fee is exercised
exercise of the taxing from the police power
power
As to scope or authority imposing the tax Taxes are revenues Regulation
 National tax Not so limited Cannot exceed the
 Municipal/ local tax reasonable cost of
regulation
As to graduation rate
Therefore, the amount of license fee that could be imposed and
 Proportional tax
collected is regulated and restricted to the cost of the regulation,
 Progressive/ graduated tax
inspection and police surveillance. The amount collected should
 Regressive tax
not go over and above the cost of regulation. Otherwise, it
Progressive or Regressive Tax vs. Progressive or
becomes a tax. If it becomes a tax, it ceases to be for regulation.
Regressive System of Taxation
It becomes now a revenue raising power.
When we say progressive or regressive tax this is different from
Taxes are imposed whether you are in a legal or an illegal
the concept of progressive system of taxation and regressive
business.
system of taxation. It does not mean that when you have a
progressive tax, you have a progressive system.
License Fee – if the intention is to regulate a useful occupation,
the license fee should not exceed the reasonable cost of
A progressive system of taxation is one where there is more
regulation or inspection but if what you will regulate is the non-
direct taxes than indirect. So in the case of direct taxes, it is
useful occupation because you want to discourage them, then the
when the burden and the liability of the tax is upon the statutory
amount that can be charged can go over and above the
tax payer. The statutory tax payer is the one required by law to
reasonable cost of regulation and inspection.
pay. You shoulder the burden. But when you say indirect tax,
the statutory taxpayer who is required by law to be the one liable
This is illustrated in that old case of Physical Therapy Org vs.
for the tax is allowed to pass on or to shift, not the liability but
Municipal Board of Manila. When the masahistas were
the burden. When the system of taxation has more direct than
discriminated then and they were imposed 100 pesos occupation
indirect, you have a progressive system.
fees. So they challenged the ordinance since the amount is so
high making it already a tax. The SC said that the imposition is
Unlike in the regressive, you have more indirect than direct.
valid since what the LGU intends to regulate is a non-useful
When you have a regressive system, it does not follow that the
occupation so the amount that could be imposed could be higher
system is unconstitutional.
than the reasonable cost of regulation without making it a tax. It
is to discourage others to go that place. You cannot prohibit a
non-useful occupation, you can only regulate.
DISTINGUISH TAX FROM:
PHYSICAL THERAPY ORGANIZATION vs. MUNICIPAL BOARD
 Toll – compensation for the use of a property or
OF MANILA
improvement. The amount is determined by the cause of
101 Phil 1142
the property. Taxes are levied for the support for the

Mambulao had a liability for forest charges and there is a

FACTS: This is an old case. Way back in the 50‟s, the collectible by way of reimbursement from the
masahistas compose the physical therapists organization. Government on the reforestation expenses, it is now
The City of Manila passed an ordinance imposing a asking for set-off or compensation.
license fee to all the masahistas, and this was
challenged. They contend that it was no longer covered ISSUE: W/N set-off can be allowed.
by police power for it has exceeded the cost of
regulation, the police inspection, and surveillance. So RULING: NO
that imposition daw was no longer in the nature of a
license fee but is now a tax. The Supreme Court disallowed the set-off in this case
because of the distinctions between taxes and debts.
ISSUE: Is that contention correct? There is no debtor-creditor relationship between the
Government and Mambulao and taxes are not debts
RULING: NO where the set-off or compensation could be granted.
The ordinance was upheld. There is no violation of equal

protection, no violation of the constitution. The SC court Same ruling in the case of Republic vs. Ericta and Francia vs.
declared that in the exercise of a lawful occupation, the IAC. In the case of Francia, there was an expropriation
license fee to be collected should only be an amount to proceeding in the property of Franciaso merong just compensation
cover the reasonable cause of regulation, the police na natanggap and meron siyang babayrang property taxes. Set
inspection, and surveillance. But if what we regulate is a off is not allowed, no debtor creditor relationship.
non-useful occupation, like here na massage parlors na
parang isang ground ng prostitution, you will make the FRANCIA vs. IAC
fees exorbitant so as to discourage people to go to those 162 SCRA 753
kinds of occupation. The SC said that it is upheld. The
fees may be exorbitant but it will not necessarily be a FACTS: The land of Francia in Pasay City was subjected
tax. The 100 peso license fee imposition remains valid. to expropriation proceedings. Under Eminent Domain,
meron yang just compensation. Francia was also
assessed for real property tax by the City of Pasay. So
Q: How do you determine whether the imposition is an act meron siyang utang by way of real property tax to the
of taxation or an act of police power? City of Pasay. Since the Government will be liable to
Francia for the just compensation and then si Francia
You are guided on the rule of PRIMARY PURPOSE. may utang din sa City of Pasay, Francia now asks for set-
 If the principal purpose of the exaction is to raise off na lang.
revenue even though it carries with it police power, it is
still a tax. ISSUE: W/N set-off can be allowed.
 But if the principal purpose is to regulate, even though
there will be an incidental revenue collection, it is an act RULING: NO
of police power and it is a license fee.
Again, the Supreme Court reiterated the ruling in
Mambulao. The Supreme Court said No on the same
TAX vs. DEBT basis that again, there is no debtor-creditor relationship
between the Government and the taxpayer. Taxes are
TAX DEBT not debts which could be subject to set-off or
A tax is created by law. It A debt arises from compensation. One peculiar distinction then in this case
does not emanate from a contracts express or which also disallowed compensation is yung utang for
contract. implied. just compensation is utang ng National Government
A person may be No person will be tapos yung collectible ng Government by way of the real
imprisoned for non- imprisoned for non- property tax against Francia is a collectible by the local
payment of taxes payment of debts. government of the City of Pasay. So di rin pwede yung
There is no set-off. There Debts can be set-off. compensation.
is no debtor-creditor
relationship between the Same thing with Caltexvs. COA, San Carlos Milling vs. CIR,
government and the Philex Mining vs. CIR.
taxpayer. NO
compensation. In the case of Philex, there was a tax obligation by Philexby
reason of the activity that was engaged in its mining. It passed a
You have the case of Republic vs. Mambulao where the pending application for refund. Meron silang ico-collect sa
Mambulao Lumber had obligations for forestry charges and gobyerno they asked to set it off. The SC disallowed. However, if
Mambulao has to recover reimbursements from the government na approve ang application, they can now ask for a set off.
from the reforestation program. Kasi nag reforest sila, gumastos
sila so meron silang sisingilin sa gobyerno at meron din silang PHILEX MINING vs. CIR
babayaran sa gobyerno because of the logging activity which had 294 SCRA 687
a fee. So they set up, compensation. The SC said NO because
there is no debtor and creditor relationship. FACTS: Philex Mining had a liability for VAT in their
mining operations. Philex has applied for a tax refund for
REPUBLIC vs. MAMBULAO excessive or overpayment of their taxes. They filed an
4 SCRA 622 application for a tax refund and since meron silang
babayaran for their taxes, Philex now asks for a set-off or
FACTS: Mambulao Lumbers, being engaged in the compensation.
exploitation of natural resources by its logging
operations, was subject to forestry charges and was RULING:The ruling, following that case of Mambulao, is
required under its logging grant or timber license hindi pwede ang set-off. Because again, you have no
agreement to undertake reforestation. Mambulao was debtor-creditor relationship and that the same principle
allowed to seek reimbursement from the Government for that taxes are not debts. One peculiar circumstance in
the expenses to be incurred for reforestation. Since this case, if you'll analyze further the case of Philex and

posing the question that “Had the tax refund been

approved, and then they had been issued a tax credit FACTS: The money that was appropriated was to
certificate, can they now ask for set-off or improve or construct a private road within a private
compensation?” The answer now would be YES. Kasi the subdivision. When they learned that medyo malabo, they
tax credit certificate could be used to pay for the have it donated to the Government.
payment of internal revenue taxes. So pwede yun. But it
was not applicable then in the case of Philex kasi ISSUE:Will that donation cure the defect?
application pa lang. So moving further, had that tax
refund application been approved, and then there is now RULING: NO
an order for the issuance of a tax credit certificate, then
set-off or compensation therefore will be allowed. A law appropriating public funds for construction of
You only have one case where the SC allowed the set off and feeder‟s roads owned by private persons is illegal being
compensation. for a private purpose. The fact that the roads were then
donated to the Government would not render the law
DOMINGO vs. GARLITOS valid since the donation was made after the approval of
8 SCRA 443 the law.Appropriating money for a private road is a
violation of public purpose.
There was an unpaid claim by the deceased who died,
during his lifetime meron siyang unpaid claim against the
Government. And then may utang for taxes ang estate. Q: What is included in public purpose?
Since the unpaid claim was approved already by the
Government and was ready for disbursement, in that Public purpose is no longer limited to governmental purpose. It
situation the set-off and compensation was allowed by can extend to the concern to the poor, and pauper assistance
the Supreme Court. burial programs. Because of the case of PPI vs. Fertiphil, you
have now a broader concept of public purpose – like the
Where the claims of the Government for taxes and promotion of the common good, social justice, housing for the
taxpayer for services rendered have already become due poor, agrarian reform, urban land reform. Since these are in the
and demandable, as well as fully liquidated, then nature of social justice therefore they are now public purpose.
compensation takes place by operation of law in
accordance with the provisions of Articles 1279 and 1290 PLANTERS PRODUCTS INC vs. FERTIPHIL CORP
of the Civil Code, and both debts are extinguished to the 548 SCRA 425
concurrent amount.
FACTS: PPI and Fertilizers Philippines Corporations are
private and domestic corporations engaged in the
Sources of Revenue importation and distribution of fertilizers, pesticides and
 Taxes, Fees and charges agri-chemicals. In 1985, prior to EDSA, Marcos issued a
 Internal Revenue (taxes collected in the NIRC) – Taxes, Letter of Instruction (LOI) directing the Fertilizers and
fees and charges imposed on local and domestic Pesticides Authority (FPA) to impose a 10-peso levy for
transactions every bag of fertilizers sold as capital recovery
 Customs duties/ tariff – taxes imposed on account of component on the sale of fertilizers. The proceeds of the
importation levy will go to PPI as capital contribution until adequate
 Taxes in its generic sense – may mean internal revenue capital is raised to make PPI viable. Fertiphil, who was
taxes and customs duties/tariff engaged in the business of buying and selling fertilizers,
paid 10- pesos per bag for every sale of fertilizers to the
FPA. Later, FPA remitted the amounts to PPI. After the
LIMITATIONS ON THE POWER OF TAXATION 1986 EDSA Revolution, FPA stopped the imposition of
that levy. Fertiphil demanded from PPI the refund of the
1. Inherent amount it paid under that LOI. Fertiphil is claiming an
2. Constitutional amount of P6,689,144 it had paid then so far, claiming
that it was illegal and unconstitutional. PPI refused to
refund.
INHERENT LIMITATIONS – those limitations which spring from
its own power. ISSUE: Whether the 10-peso levy under that LOI was a
valid tax imposition (Remember that Marcos at that time
(1) Public purpose – taxes must be levied for a public was exercising both executive and legislative powers:
purpose. When we say public purpose, it is synonymous Constitutional authoritarianism).
to governmental purpose. Anything related to public
welfare, for the common good, and for the promotion of RULING: NO
social justice is a public purpose.
The levy was not a valid tax imposition nor was it
LUZ vs. ARANETA imposed validly for a regulatory purpose. It was clearly
unconstitutional. The imposition was not for public
In the case of, when the taxes imposed by purpose. Sino ba yung nakinabang? PPI only, which was
Commonwealth Act 567, imposing tax for the promotion a private and domestic corporation.
of the sugar industry, it is not a violation of the public
purpose. The benefit is for the protection of the sugar - The 10-peso levy was unconstitutional because it was not
industry that is not a protection of a private purpose for a public purpose. It was imposed to give undue
because the sugar industry is a national concern. In the benefit to PPI or for a private purpose. Taxation should
same way that you can impose some regulations to be used for a public purpose, otherwise, it would be a
protect the coconut industry. That is also a public robbery for the State to tax its citizens and use the funds
purpose. It serves a benefit to a certain industry but that generated for a private purpose.
industry is of a national concern. It complies the
requirement of public purpose and therefore that law is The SC expanded the concept of what is public purpose
not questionable. and what has been the traditional view on public
purpose. It defined public purpose beyond its traditional
PASCUAL vs. SECRETARY OF PUBLIC WORKS view. SC said that public purpose is the heart of a tax

law. It is an elastic concept that can be hammered to fit b. Sovereign may not be sued without its consent
modern standards. It does not only pertain to those
purposes which are traditionally viewed as essentially (5) Immunity/Exemption of Gov’t from Tax –this will
government functions, such as building roads and only apply if the state exercises governmental or
delivery of basic services, but also includes those sovereign functions. But when the state exercises
purposes designed to promote social justice. proprietary functions then taxation is the general rule.
The immunity is the exception. So in the case of GOCC‟s
Thus, public money may now be used for the relocation taxation is the rule unless their charter grants the
of illegal settlers, low-cost housing and urban or agrarian exception.
reform. Kasi dati, there was a traditional view of
governmental purpose. Ang Gobyerno hindi
nanghihimasok then on low-cost housing, unlike with the CONSTITUTIONAL LIMITATIONS
expanded role of Government. The Government now gets
involved to the promotion of the common good, social (1) Due process of law – Art. III, Sec. 1. This means that
justice (i.e. relocating squatters, providing low-cost in the taking of property for tax purposes, there must be
housing, urban reform or agrarian reform). a basis. The deprivation of life, liberty or property should
be done under the authority of a valid law. If it is not
So what may constitute a public purpose is continually supported by any statute then the taking is
expanding in light of the expansion of government unconstitutional. It covers substantive and procedural
functions but the inherent requirement that taxes can due process. So there must be a substantive law that
only be exacted for a public purpose still stands. In other would support the taking and in the questioning of the
words, regardless na nag-expand yung view ng taking, there must be a process to follow, providing you
governmental purpose, public purpose meaning has remedies to protest and to challenge the taking of the
remained. It is also utterly repulsive that a tax law would property.
expressly name a private company as the ultimate
beneficiary of the taxes to be levied from the public. It is When a tax law violates public purpose, there is also a
a clear case of what then was called, prior to EDSA, the violation of due process. When a tax law is to operate
principle of crony capitalism. The LOI was not even an outside of the authority of the taxing state, there is also
exercise of police power because it would still be invalid a violation of due process. When a tax law is made to
since it did not promote public interest. apply retroactively, there is a violation of due process.
EXCEPTION: When retroactivity is not harsh or

(2) Non-delegation of legislative power of Taxation oppressive. Or when the legislative intent is the
retroactive application.
Exceptions:
(2) Equal Protection of Laws – Art. III, Sec. 1
1. Art. VI, Sec. 28(2) – delegation to the President to fix
rates, import & export quotas, tonnage and wharfage (3) Taxation shall be uniform and equitable– Sec.
dues, and other duties or imports; 28(1), Art. VI. Equality and uniformity in taxation now
2. Art. X, Sec, 5 – delegation to local government units to have the same meaning. For as long as the statute will
create their own sources or revenue, levy taxes, fees complyto the requirements of a valid and reasonable
and charges; Sec. 6 – LGU‟s to have a just share in the classification, there is equality and uniformity in
national taxes which shall automatically be released to taxation.
them;
3. Delegation to administrative agencies and bodies for Requisites for a reasonable classification
purposes of tax administration. In the implementation of a. Must be based in substantial distinction
a tax law, promulgation of regulations, assessment, b. Must be germane to the purpose of the law
collection & payment of the tax. c. Must apply to future conditions, not only to
4. Art. VI, Sec. 32; RA 6735 - People‟s initiative and present ones
referendum d. Must apply equally for those who belong to the
same class wherever he may be found within
(3) Territorial Jurisdiction – taxation is limited to the jurisdiction of the taxing state
territorial jurisdiction or within the territory of a taxing
state; no extra-territorial application of tax law. You do Q: How is this illustrated?
not tax a person if he is outside the PH.
For example in the case of Luz vs. Araneta. Ang
Exception: the State exercises personal jurisdiction. Like the nakinabang lang ang sugar industry. The SC said there
income earned abroad by the OFW. The income earned abroad is no violation of uniformity and equality because
were subject to tax. So they pay a tax there where the income is congress as a law making body, is free to choose who
earned and they also pay a tax in the PH where they are citizens. are the subjects of taxation. Inequalities resulting from
Starting Jan. 1, 1978 we no longer tax the income of the OFWs. singling out one particular class for exemption, infringes
So the tax where they are liable is the place where they earn no constitutional prohibition. So pag nag single out ka,
income. eto lang mag benefit to the exclusion of others, it does
not necessarily follow that there is inequality.
(4) International comity – founded under Section 2, Art.
II – principles of international law as part of the law of You have that case of SHELL kasi isa lang ang subject ng
the land and the basis is this recognition is the principle occupation tax. So shell questioned since it is
of sovereign equality among the states; a sovereign discriminatory.
does not tax another sovereign. That courtesy is
practiced and that is the usage among the states. They SHELL vs. VANO
do not sue each other. 94 Phil 389
a. Non-suability of states – the State does not tax itself. FACTS: The Municipality of Cordova in Cebu had this
This is a self-imposed practical considerations. While ordinance imposing an occupation tax on the installation
there is no prohibition that the State can tax itself it engineer. At that time, there was only one person who
becomes absurd for the state to tax itself. was exercising in that occupation, who was working at

Shell. So Shell questioned the validity of the ordinance,

that it discriminated the employee/engineer. ISSUE: If later on, Congress will make that activity a
taxable activity, can that grantee, who was given a
ISSUE: Is that contention correct? privilege of tax exemption, is he protected from the non-
impairment clause?
RULING: NO
RULING: That grantee can invoke the non-impairment
No violation of equal protection because that ordinance clause. That will impair the obligation on contacts. So the
applies not only to present conditions but also to future taxing power should not and cannot alter or revoke
conditions substantially identical to those of the present. existing rights and obligations under a valid contract.
In other words, while at that time, there is only person Under the principle of contractual tax exemptions, the
covered by the ordinance doing that kind of occupation, state surrenders what it is obliged to do: to tax. Since
then it applies also in the future, when the number of the State now surrendered that privilege and gave an
individuals engaged in that occupation increases, then exemption, it could not later on make a similar activity
similarly, they will be subject to the occupation tax. taxable, in making that grantee now subject to tax.
MANILA RACE HORSES vs. DELA FUENTE

GRANT OF FRANCHISE
FACTS: The owners of the race horses were subjected to
that ordinance, while the owners of non-race horses, The non-impairment clause does not apply when we talk about
yung mga kabayong ginagamit sa karetela, were not franchise because the grant of a franchise is subject to a different
subject to tax. So the Manial Race Horses Association provision. You have Art. XII Sec. 11. In the case of franchises to
questioned the validity of that ordinance. Bakit sila tina- operate public utilities, they are always subject to amendment,
tax, pero yung mga kabayong di ginagamit pang karera alteration or repeal by congress when public interest so requires.
ay hindi, when all of them are the same. Pareha silang Franchise grantees are not protected by the non-impairment
kabayo. clause.
ISSUE: Is there a substantial distinction? TOLENTINO vs. SECRETARY OF FINANCE

AUGUST 25, 1994
RULING: YES
FACTS: One of the petitioners there questioning the
They are subject to tax because it is earning income, coverage of the VAT was Phil Airlines. Phil Airlines under
ginagamit sa karera, where those horses not used for its franchise, was given a preferential tax rate. When the
karera are not earning income. Kahit yung ginagamit sa VAT or RA 7716 took effect, the sale of tickets was
karetela as mode of transportation, they earn but subject to or itong mag airlines were now subject to the
marginalized yan sila. So in this case, the ordinance 10% VAT which is a higher rate than the franchise given
which imposed tax on the stables depending on the to Phil Airlines. Phil Airlines invoked the non-impairment
number of race horses kept or maintained is not clause.
discriminatory on the alleged ground that it does not
apply to stables of non-race horses because it taxes all of ISSUE: Can Phil Airlines invoke the non-impairment
the same class. Ano yung of the same class? Not because clause?
they are all horses, but in a way that all of them are race
horses. They belong to the same class. RULING: NO
(4) Equitable taxation under Art. VI, Sec. 22- equity in The SC said you cannot invoke the non-impairment
taxation. This requires that the apportionment of the tax clause because the provision under Section10, Art III is
burden among the taxpayers shall be based on the not applicable in the case of franchises. In other words,
ability to pay. later on, when there is a law that subjects you to a
higher tax rate, then ma-aamend, alter na yung grant
(5) Congress shall evolve a progressive system of mo and will be subject to a new legislation or to a new
taxation under Art VI Sec. 28(1) – directory provision. tax rate or tax law. Because that is subject to the
Not self-executing. You cannot go to court to invoke constitutional limitation.
this. Not a judicially demandable right.
(6) No imprisonment for non-payment of poll tax PRIVATE CONTRACT
(7) Non-impairment of obligations of contracts under It is also different when parties enter into a private contract
Art. III, Sec 10 – the non-impairment clause is superior because they cannot invoke the non-impairment clause. The
to the power of taxation. Taxation cannot alter or revoke imposition of a tax which affects an existing contract, so as to
existing rights and obligations under valid contracts. increase the debt of one party or lessen the security of another or
When the State would impose a tax on an activity which impose burdens on one class and release the burden of the
would infringe or alter or revoke rights and obligations of other… it does not impair the obligations.
that grantee by reason of that law then it could not
impair the obligations and rights. That tax law will not For example, we entered into a supply agreement. You will supply
apply to him otherwise, it will violate the non- me for 30 years for 100 pesos + 12% VAT = 112P per unit. On
impairment clause. the 15thyr nag bago na ang law, ang VAT is 15% na. Paano na
tayo ngayon? Can the buyer now invoke that the new vat rate
In the case of CASSANOVA, the grantee was given a privilege and could not be imposed, kasi ang usapan natin is 12%. Can you
exemption in the exploitation of natural resources. invoke that? NO because you are not protected by the non-
impairment clause. Yan ang sinasabi nating the imposition of a
CASSANOVA vs. HORD tax which affects an existing contract, so as to increase the debt
8 Phil 125 or lessen the security of another or impose burdens on one class
and release the burden of the other does not the obligations.
FACTS: In the course of exploitation and exploration of Since VAT is an indirect tax, you can impose. Kasi shifted yan,
natural resources, it was granted a tax exemption passed on. You could impose the new law because you are not
privilege. protected by the non-impairment clause.

(8) Non-impairment of the jurisdiction of the SC to FACTS: One of the issues raised that in the enactment of
review decision on tax mattersunder Art. VIII Sec. the RA 7716 on the EVAT. Tolentino argued that the law
5(2) was third wheel. How did that happen was because the
Congress introduced the bill called the expanded added
(9) Free exercise of religious profession and value tax while the Senate introduced its own version. In
worshipunder Art. III, Sec. 5 – Freedom of religion is the bicameral senate conference committee, it was
superior to the power of taxation. different from the house version and the senate version.
The consolidated bill nag iba ang histura from the senate
(10) No public money or property shall be and house versions. The version which came out from
appropriated or used for religious purposes – in the bicam was a result of the votation of the two houses
the separation of the church and the state, the state is and it got the substantial majority of both. Nung pumasa
prohibited by the Constitution to appropriate or set it was now questioned before the SC which allegedly
aside money in favor of a certain religion except to violated the requirement under section 24 of article 6.
those religious who are with the government like in the
armed forces, in the penal colonies, in the PNP, etc. In RULING: NO
these instances, there is no violation because the
compensation that the state provides is in payment of Kase ang lumabas na different version, the bicam
services rendered. We have religious who are in the version. SC ruled that Congress has complied with the
military service, in the PNP or in the penal colonies, in requirement under Section 24 Article 6. A bill originating
leprosarium and other government institutions. Such in the House of Representatives may undergo such
will not be a violation of this provision because the extensive changes in the senate that the result may be a
appropriation or money given to them are not for rewriting of the whole. As a result of the senate action, a
religious purposes but a compensation for the services distinct bill will be produced. To insist that the substitute
rendered. must be the same as the house bill will violate the
senate's power to concur with amendments and to
(11) Exemption from real property taxes for those propose amendments. It would be violative of the co-
actually directly and exclusively used for religious, equality on the legislative power of the two houses.
charitable and educational purposes under Art. VI Sec Otherwise, it would make the house superior to the
28 (3) – the actual use include those which are senate. There is no basis in comparing the powers of
incidental to the actual use. Like the case of both houses. Legislative power is vested in congress and
in the senate and not in any particular chamber.
ABRA VALLEY vs. AQUINO
There is really no difference in the senate preserving the
FACTS: The ground floor was used for commercial house bill up to the enacting clause and writing its own
purposes, the second floor was used as the residence of version following the enacting clause, or on the other
the school director, the 3rd and upper floors were used hand, separately preserving a bill of its own on the same
as classrooms. subject matter. In either case, therefore the result are
two enacting bills on the same subject for as long as it
ISSUES: (a) Is the real property subject to real property originated in the house (the senate had a different
tax? (b) Can you determine which property is taxable and version but the two bills are on the same subject), it
which is not? therefore satisfies the constitutional requirement. It
would have been different if the bill originated in the
RULING: YES senate then sumunod lang ang house then that becomes
a violation. The constitution simply means that the
YES, because you determine the area. Ano bayung area initiative must come from the house in filling a revenue
ng ground floor, second floor, and subsequent floors, so or tax bill authorizing the increase of the public debt, bills
you could determine the scope of the exemption in terms of local application must come from the house. It does
of the usage and in terms of the width and space of the not prohibit the filling of the senate of the substitute bill
area covered by the exemption. In this case, the ground or its participation in the bill of the house. What is
floor was obviously subject to tax because it was not important therefore is that there must be a bill that will
used for educational purposes. The 3rd and subsequent originate from the house. It is no longer important that
classrooms were obviously covered by the exemption the senate will have a separate version. The senate may
because they were for educational purposes. The second adopt the house version or in the bicameral conference,
floor used as a residence of the school director was also you can make a totally different one but still on the same
exempt because the floor while used as residence of the subject matter, then there is no violation. The important
school director, it was incidental on the educational thing here is that the initiative emanated from the House
purpose. of Representatives. Tax money collected for special
purpose treated as special fund Art. VI Sec 29(3)
(12) Non-Stock and Non-Profit educational
institutions are exempt from revenue and asset (17) Veto power of the President underArt VI 27 (2) – as
taxes. a rule the President must sign the bill then you have
the effectivity of that after 30 days. If the ratified bill is
(13) Delegation to the President of the Fixed Tariff not signed by him it becomes a law after 30 days due
Rates to inaction.
(14) Power of LGU’s 11 DECEMBER 2018

Narca & Candolita
(15) Concurrence of the majority of all the members
of Congress to grant tax exemptions underArt. VI SITUS AND DOUBLE TAXATION
Sec. 24 (4)
Situs: place or state which has jurisdiction to
(16) Appropriations, revenue and tariff bills shall
impose a tax on persons, property or transactions.
originate in the HREPs under Art. VI Sec. 24
TOLENTINO vs. SECRETARY OF FINANCE

Situs is simply the place of taxation for the state which has the problem whether that shares of stocks will be subject to
jurisdiction to impose the tax on persons, property or Philippine estate tax.
transactions.
RULING: From that we departed from mobilia sequuntur
Situs is determined by: the legislature on the basis personam but we follow the rule on the place where the
of the nature of the tax, protection and benefit right is exercised. Since the shares of stocks were issued
afforded or activity to be taxed. by a Philippine corporation, even though the owner or the
stockholder is a non-resident citizen, that shares of
Q: Who determines situs? stocks would still be taxable because the Philippines is
the place where that shares of stocks is exercisable. Even
The power of taxation is legislative so the situs is determined by if the decedent who owns that shares is non-resident, the
the law-making body. The legislature determines on the basis of estate would still be subject to the Philippine estate tax
the nature of the tax, protection and benefit afforded or activity to because the place where the right is exercised or where
be taxed. the shares are, since it is in the Philippines, then the
Philippines can impose an estate tax. Therefore, in the
Since you have different subjects of taxation, you have also the case of intangible personal property. We follow now the
different rules insofar as the situs or the place of taxation relative rule: the place where the right is exercised.
to the subject or object to be taxed.
(5) INCOME – when the subject is income, taxation is
Situs of subjects of taxation: determined on citizenship, residence or the source of
(a) Persons – residence income.
(b) Real Property – place RP is situated; lexreisitae
(c) Tangible Personal Property – lexreisitae, place 1. If you are a citizen of the Philippines, you will
situated be subject to income tax.
(d) Intangible Personal Property – 2. If you are an alien, you can still be taxable if
mobiliasequunturpersonam; but follow: place you are residing in the Philippines.
where right is exercised 3. But if you are non-resident alien and you are
(e) Income – citizenship, residence, or source of earning income in the Philippines, you can still
income be taxable even if you are a non-resident
(f) Business, occupation and transactions – place because the source of the income is in the
where the business, occupation or transaction Philippines.
is exercised or conducted
(g) Gratuitous Transfer of Property (Death or Gift) (6) BUSINESS, OCCUPATION, TRANSACTIONS – in the
– citizenship, residence, or location of the case of business, occupation and transactions, the situs
property is the place where the business, occupation and
transactions are exercised or conducted.
Situs of subjects of taxation
(7) GRATUITOUS TRANSFER OF PROPERTY (DEATH OR
(1) PERSONS –when the subject or object to be taxed GIFT) – a gratuitous transfer of property, one brought
would be persons, the situs of taxation is his residence. about by succession by reason of one‟s death (donation
mortis causa) or by way of gift (donation inter
The residence of the person subject of the tax would be
vivos). We follow the rule on citizenship, residence, or
the deemed the determination of the place of taxation.
location of the property.
(2) REAL PROPERTY–when the subject is a real property,
the situs is the place where the real property is situated MULTIPLE SITUS; an object of taxation may be
or you follow the rule lex rei sitae. subject of two or more situs of taxation; due to
variance in the concept of domicile.
(3) TANGIBLE PERSONAL PROPERTY –where the
personal property has physical existence, we also follow EFFECT: Due to the variance in the concept of domicile
the rule in lex rei sitae, the place where the tangible a person or object of taxation may be taxed by several
personal property is situated. taxing jurisdictions
(4) INTANGIBLE PERSONAL PROPERTY –when the

subject is an intangible personal property, such personal MULTIPLE SITUS
property has no physical existence like the shares of
stocks, we follow the rule on mobilia sequuntur We have no tax problem or issue, when the object of taxation will
personam (the thing follows the owner). Wherever the be subject only to one situs. There is only one place of taxation.
owner is, mag sunod-sunodyung [property]. This is
where he will be taxed. The thing follows the owner. However, due to variance in the concept of domicile, the object of
taxation will be subject to two or more situs (multiple situs).
At the onset that was how the situs was determined
when it is an intangible personal property. However, we Since taxes are burdens, due to the variance in the concept of
departed from the rule on mobilia sequuntur personam, domicile, a person or object of taxation may be taxed by several
we follow now the place where the right is taxing jurisdictions.
exercised.
Like you have a case of a resident citizen who would earn income
WELLS FARGO vs. CIR in abroad, the Philippine income will be subject to the Philippine
G.R. No. L-46720 | June 28, 1940 income tax. The foreign income will be subject to foreign income
tax as well as the Philippine income tax. So the foreign income
FACTS: The decedent was non-resident citizen. One of will be taxed to the place where the income was earned as well
the properties left by his estate were shares of stocks of the place where the income earner is a resident being a resident
a Philippine corporation. If we follow the rule on mobilia citizen.
sequuntur personam, since the decedent or the estate
pertains to a Philippine shares of stocks and the decedent REMEDY: (to reduce the effects of multiple situs)
is non-resident (he was in New York). There was a (a) Tax Exemptions
(b) Tax Credit

(c) Enter into Tax Treaties on the basis of taxation because they are not on the same purpose. One
reciprocity (CGT) is for the income. The DST is for entering into a
(d) Tax Deduction transaction attached to the document. So they have
different purposes.
As a result, that would cause a burden on the part of the
taxpayer. The State should therefore provide remedies to reduce (4) For the same year or taxing period
the effect of multiple situs. (5) Same property in the territory
Principles to remember
 Absent of one element, there is no double taxation
 Direct double taxation vs. Indirect double taxation
Remedies to reduce effect of multiple situs  No double taxation: If different taxing authority; if different
jurisdiction; if different purpose; if different taxing period;
(1) TAX EXEMPTIONS – like the income of the overseas if different property
workers, the non-resident citizens earning income
abroad. All of these elements must be present. Otherwise, absent one, we
The income will be taxed in the place where the income do not have a double taxation.
was earned but we no longer tax that income for as long
as that is a non-resident citizen earning income abroad. Whether you call it direct double or indirect double, to have a
double taxation all the elements must be present.
(2) TAX CREDIT–but we do not allow a tax exemption to
the foreign income earned while a resident citizen. What CONSTITUTIONALITY OF DOUBLE TAXATION
we give is by way of tax credit.  Double taxation is not prohibited by the
Constitution
(4) TAX DEDUCTION–the foreign income of the non-  Remedy: Seek relief under the Constitution or
resident citizen prior to its exemption was taxable in the challenge it on inherent and constitutional
Philippines prior to 1987. Under that scheme, the foreign limitations; i.e. uniformity, equality, etc
income will be subject to the foreign income tax.
However, that foreign income tax isbe allowed to be The issue on double taxation is: it is not prohibited. Double
claimed as a tax deduction. That was the way we reduce taxation is not prohibited by the Constitution. So if there is a
the effects of multiple situs. That same income will be double taxation, the taxpayer who would challenge that law that
subject to tax twice but we allow the foreign income paid would result to double taxation will seek relief under the
as a tax deduction. Constitution or challenge it on the basis of inherent and
constitutional limitations. He may challenge it on the basis of
(5) ENTERING INTO TAX TREATIES OR TAX EXECUTIVE uniformity, equality or due process etc. because double taxation is
AGREEMENTS BETWEEN THE PHILIPPINES AND not prohibited.
ANOTHER COUNTRY ON THE BASIS OF
RECIPROCITY – we will grant an exemption to your FORMS OF ESCAPE
citizens in our country provided our citizens in your (1) Shifting
country will be given a similar exemption. You may enter (2) Transformation
into that tax agreement on the basis of reciprocity. (3) Evasion
(4) Amnesty
Relative to the issue of situs is double taxation. (5) Capitalization
(6) Avoidance
DOUBLE TAXATION: ELEMENTS (7) Exemption
(1) Taxing twice,
(2) By the same taxing authority, Forms of escape
(3) Within the same jurisdiction or taxing district,
for the same purpose, Going back to that same principle that taxes are burdensand
(4) For the same year or taxing period, taxpayers would like to avoid or resort to some form of escape to
(5) Same property in the territory reduce the impact of the tax.
To have a situation of double taxation, all these elements These forms of escape do not hold true in all forms of taxation. It
must be present: is peculiar only to certain types of transactions.
(1) Taxing twice (1) SHIFTING– applies to indirect taxes; transfer of

the tax burden by the person on whom it is
(2) By the same taxing authority imposed by law (statutory taxpayer) to another who
bears it.
If the taxing authorities are the Local Government Unit
and the State, there is no double taxation their because The most common type of form of escape is the principle of
these are of different taxing authorities. shifting. In the case of shifting, the shifting applies usually or
regularly to indirect taxes. You do not have shifting when it
(3) Within the same jurisdiction or taxing district, for involves direct taxes. Since the nature of the tax is indirect, it
the same purpose allows the statutory taxpayerto pass on or shift the burden of
the tax to another. And have that tax built in or added to the
Let‟s say the one is for revenue, the other one selling price.
imposition is for police power, then we have different
purposes. What the buyer pays is the price. It does not pay the tax because
the tax is already imbedded or included in the selling price. The
And in the case of the deed of sale of a real property buyer cannot say “akoangnagbabayadng-tax” because it is not the
subject to the capital gains tax (CGT) and tax that is imposed, only the burden. It is the burden that is
documentary stamp tax (DST) imposed by the same shifted, not the liability. The liability is paid by the seller who is
authority within the same jurisdiction on the same the statutory taxpayer.
subject (the real property), we do not have double

Here you have the transfer of tax burden by the person on whom method of production. There are several methods of improving
it is imposed by law (statutory taxpayer) then passes it to another the production (example: supplies or new technology, new
person who bears it. machines or new equipment to produce the product, alternatives
sources of raw materials to produce the product).
IMPACT OF TAXATION SHIFTING INCIDENCE OF
TAXATION If you would improve production by improving the method of how
you produce the product, like buying new equipment or new
Principle to remember machine, as a result of this improvement then you will be
 Direct taxes cannot be shifted even if it islegislate. producing more units. Since you will be producing more units,
then your cost of production will be spread out. The more units
produced, fixed cost become thinner(?).
Kinds of shifting
If you are going to spend 1 million and to produce 1 million
(1) FORWARD SHIFTING – it is the transfer of the tax products then your cost is 1 peso per unit (fixed cost per unit).
from the factors of production to the factors of You improve your method of production bumili kang bagong
distribution. machines or equipment.
You have the manufacturer selling it to the Your machines using the same raw materials, instead of producing
distributer.That is one shift. Then you have the 1 million units, you could produce now 1.5 million units at 1
distributor selling it to the wholesaler. Then you have million cost. Before your cost of production is 1 peso per unit.
the wholesaler selling it to the retailer. That is one Now your 1 million fixed costcould produce 1.5 million units. Your
shift. Then you have the retailer selling it to the cost now is below 1 peso.
consumer. These are forms of shifting.
With that improvement, the producer now pays the tax. Siya na
(2) BACKWARD SHIFTING – it is the transfer of the tax ang mag absorb without anymore passing the tax to the
from the point of consumption, to the factors consumers or buyers. He pays the tax and recovers his additional
distribution, to the factors of production. So in expense by improving his method production. Here, you have now
backward, the statutory taxpayer is the one shouldering the tax being transformed into a gain through the improvement of
the burden. Hindi na niya shini-shift. He is the one the production.
shouldering the burden as well as the liability.
(4) TAX EVASION (TAX DODGING)
(3) ONWARD SHIFTING – it is one where there are a
series of shifting whether forward or backward. The Now, the more common is tax evasion. Tax evasion or otherwise
taxes are shifted two or more times either forward or known as tax dodging is the use of illegal or unlawful means to
backward. defeat or lessen the payment of tax.
(2) CAPITALIZATION / TAX CAPITALIZATION (5) TAX AVOIDANCE (TAX MINIMIZATION)
The capitalization is also form of backward shiftingwhereby future It is the use of permissible or lawful methods to reduce the tax
taxes on property sold are capitalized at the time of purchase and payment.
deducted in lump sum from the selling price.
(6) TAX EXEMPTION– grant of immunity from tax;
It contemplates that kind of transaction that the futures taxes on power to tax carries with it the power to exempt
the property sold like when you consider to buy a real property.
There are several factors within which you would consider buying Nature of the power to grant exemption
one. In the course of the buying, you will negotiate for the price.
(1) National Government or State – power to exempt is
EXAMPLE: The property is sold at P3M. You will negotiate it at inherent in sovereignty; power to exempt is subject to
P1.5M. Then there is a series of negotiation until you are able to the same principles as the power to tax; i.e. legislative
buy at the P2M. You can afford it to buy at P3M but since you are in character, subject to inherent and constitutional
able to negotiate it at P2M. Then you are able to have a savings limitations.
P1M. Yung savings na yun, that will be capitalized.
The nature of the power to grant tax exemptions may
While we you could afford paying it at P3M, however you are able vary. If it is the state or the national government, the
to negotiate it at P2M, then that P1M is the tax savings. That P1M power to exempt is inherent also.
is the one whereby the future taxes on the property kasi when
you become an owner, a new liability arises. Magbabayad kang- (2) Local Government Units – no inherent power to tax,
real property tax. And where will you get the money? Meanwhile unless granted by law or by the Constitution; once
meron pa yung savings monaP1M which you will use or capitalize power to tax is granted, it carried with the power to
at the time of purchase and deduct it in lump sum from the selling exempt.
price. This P1M will be used to ____ the future taxes of that real
property. The principles we study in taxation are the same
principles we apply in the power to exempt. In other
(3) TRANSFORMATION words, since the power to tax is inherent in sovereignty,
the power to exempt is also inherent. The same
This is peculiar in the manufacturing industry. This is effected principles also apply as to the constitutional limitations.
through the process of production. The producer on whom the tax The power to exempt should also be guided by the
is imposed carries the loss of his market if he adds the tax to the principles of public purpose, territoriality, international
price, pays the tax and recovers his additional expense by comity, due process etcetera.
improving his method of production thereby turning of units at
lesser cost. Here, the tax is transformed into a gain through the The LGUs, no inherent power but once granted then they
medium of production. can exempt.
In transformation, the producer in order to have a tax savings

would have several options. One of which is to improve the

(3) Rationale – principles of public policy and public In our review on the constitutionallimitations, we have the real
interest or public benefit that will be served despite the property tax exemption on real property used for religious,
monetary loss in granting the exemption. educational, charitable purposes on the basis of their actual use.
The principle behind granting tax exemption is public policy and Then you have the tax code, NIRC and the Tariff and Customs
public interest, because the object of taxation is to raise revenue, Code.
and the state now will introduce or legislate in granting tax
exemptions. So as a result of the exemption, there is now a
revenue or monetary loss. However, the state is willing to absorb CONSTRUCTION: STRICT CONSTRUCTION
the monetary loss for as long as the public interest or there is
public benefit that will be served by reason of the exemption.  Tax exemption is construed in strictissimi juris against
the taxpayer.
For example, the exemption on the foreign income of the OFWs,  Taxation is the rule, exemption is the exception
because we no longer tax their income.For that, the  Exception: When liberal construction is applied:
governmentsuffers monetary loss but the government as a result (a) When the law expressly provides for liberal
of that monetary loss, public interest will be served later. Like in construction
the TRAIN law now, walanayung personal and additional (b) when the exemption is in favor of
exemptions, but the corresponding loss of that was compensated government, or of religious, charitable or
because the first P250,000 of their taxable income is no longer educational institutions
taxable.So, in excess of P250,000,yannaangtaxable, ang excess.
In the case of real property tax exemptions, the exemptions do
not only cover the real properties, actually, directly and
GROUNDS FOR TAX EXEMPTION exclusively used for that purpose, it includes also those which are
incidental.
(1) Based on contract;
(2) Based on public policy; or (7) Tax Amnesty – condonation of your tax liability;
(3) Created in a treaty on grounds of reciprocity or to lessen also construed strictly; taxpayer is not liable
the effects of double or multiple taxation. anymore for tax deficiency after availing the tax
amnesty.
Equity is not a ground for tax exemption It operates as a waiver on the part of the government. So one
who wishes to settle his tax liabilities and comp up with a clean
So if one is exempted, your neighborcannot complain that he slate may apply for tax amnesty and be made to pay a
should also be entitled to exemption. In one case of Florocement percentage of his liability and the rest will be condoned. We also
Corporation, Florocement was granted an exemption from tax on apply strict constriction as to tax amnesty.
the extraction of minerals and limestone. However, the raw
materials used in the mining activity are also the raw materials As a consequence of the taxpayer availing tax amnesty, he is no
used for the manufacture of cement. So Florocement now, since longer liable for any tax deficiency. In other words the
the mining activity is exempted, then sabi nila dapat yung government can no longer run after him after he avails of tax
manufacturing activity namin, exempted din, since we use the amnesty.
same raw materials. Equity is not a ground for tax exemption
because you have that principle that we follow strict construction.
The one who would invoke that he is exempted has the burden of CLASSIFICATION STATUTES –
proving that he should be grantedexemption. So in other words,
tax exemption is a personal privilege and generally revocable.  Are not tax exemption statutes
 Therefore construed liberally and not strictly
 Do not follow the ratification requirement of the majority
NATURE OF TAX EXEMPTION of the member of Congress
 Mere personal privilege; generally revocable; not Classification statutes is thatpiece of tax legislation wherein there
discriminatory is a determination of who are taxable and who are not. Is a
classificationstatute a tax exemption statute? The answer is no.
The classification statutes are not tax exemptions, therefore they
KINDS/CLASSES: are construed liberally, and they not being tax exemptions, we do
not apply the ratification requirement of the majority of members
A. As to manner of creation: of Congress.
i. Express or Affirmative exemption
ii. Implied exemption or exemption by omission
B. As to scope: Nature, Construction, Application and Sources of Tax Laws
i. Total exemption
ii. Partial exemption (1) Nature of Internal Revenue Laws
C. As to object  Not political nor penal, but CIVIL
i. Personal  Ex-post facto law or the bill of attainder not
ii. Impersonal applicable in tax statutes
(2) Construction of Tax Laws

SOURCES OF TAX EXEMPTION  legislative intent
 In case of doubt (liberal construction)
(1) Constitution  Where the language is plain and clear
(2) Tax Code (NIRC, TCC)  In case of tax exemption, strict construction
(3) Special laws
(4) Ordinances We have different laws in construction, and one of that is
(5) Treaties, etc. determining legislative intent from the deliberationsof
Congress. Adjudicating bodies ask themselves: what was the
intent of the lawmaking body? This guides adjudicators, in
so far as tax administration is concerned, and also we look

at jurisprudence to determine the correct construction of the  Cannot alter or add the statute, nor increase or
tax law. decrease the requirements of the law, not
embrace matters not covered by the statute
Another rule is the liberal construction of tax laws, because
we have the principle that taxes are burdens so we construe Tax regulations, even customs regulations, are not
itin favor of the taxpayer and against the government. legislative. So since they are not statutes, they could not
decrease or increase the requirements of tax laws. Likewise,
(3) Application of Tax Laws the regulations must only be within the ambit or the bounds
 Tax laws are applied prospectively because that of the tax laws, so the regulations therefore operate as a
will violate due process if applied retroactively. tool for the proper enforcement and execution of the law,
By way of exception we allow retroactivity intended to clarify or explain the law by providing details for
when it is not harsh or oppressive. administration and procedure.
(4) Provisions contained in Tax Statutes (8) Function

 Mandatory Provisions  Necessary for the proper enforcement and
 Directory Provisions execution of laws
 Intended to clarify or explain the law by
Mandatory provisions are intended for the security of the providing details of administration and
citizen and these are designed to ensure equality and procedure
certainty as to the nature and amount of each person‟s tax.
In case of failure to follow the mandatory provisions then (9) Requisites for Valid Regulation
there will be a corresponding consequence which will result  Must not be contrary to law and Constitution
upon failure to follow mandatory provisions.  Must be published (Official Gazette or
newspaper)
Directory provisions are designed for the information or
direction of officers or to secure methodical or systematic (10) In case of conflict with the law, regulations are
modes of proceedings. Unlike the mandatory provisions, void
failure or omission to follow directory provisions do not  If the law does not provide a penalty and the
involve a similar consequence. tax regulations provide a penalty, then that
regulation is null and void.
If a taxpayer for example fails to follow deadlines and files
his return outside of the deadline, then there is a (11) Repeal of Regulations
corresponding surcharge. Likewise, the period to protest an  Not retroactive but prospective in case of
assessment is 30 days and if you fail to protest within the repeals
periodthen the assessment becomes final. The government
is likewise given a period of 3 years to make an assessment. (12) Rulings and Opinions
If the government will make an assessment outside of the  Rendered upon request of the taxpayer to clarify
3-year period then you could invoke prescription because provisions of the law; but are revocable
the 3-year period within which to make assessment is
mandatory upon the state. Even if the assessment is made (13) Decisions
within the 3 years but the notice came out only after the 3-
year period, then you could still invoke prescription because
the assessment and the notice should be made within the 3- CIR CTA SC
year period. These are mandatory provisions and they will
render the act or proceeding invalid.
They emanate from commissioner on the onset as an
(5) Tax laws are special laws and not of general law administrative remedy then converted to judicial action to CTA
like the Civil Code; tax laws prevail over a general then finally to SC.
law
Example: Claims for refunds. As a result of the erroneous COLLECTOR COM.(BOC) CTA SC
payment of tax, you have unjust enrichment on the part of
the state, so if the taxpayer would like to recover and get a
refund for what he has paid erroneously, what is the period Or in case of tariff and customs code, administrative
withinwhich to recover? Do we follow the civil law decisionsemanates from the collector then the CIR then converted
prescriptive period for unjust enrichment, or the period to judicial action from CTA then finally the SC.
within which to claim a refund under the NIRC? While that is
a situation of unjust enrichment but since it is a tax case, LOCAL REGULAR
we do not apply the prescriptive period under the civil code. CTA SC In local
TREASURER COURTS
We apply the 2-year period under the NIRC. taxation,
administrative proceedings emanate fromlocal treasurer then
(6) Sources of Tax Laws converted to judicial action from regular court whether RTC or
 Constitution MTC, then being a tax case, the appeal from the regular courts is
 Legislations laws: NIRC, TCC, LGC, Local not brought to the CA but to the CTA and finally, the SC.
ordinances
 Administrative regulations, rulings, or opinions (14) Taxpayer’s suit
 Judicial decisions: regular courts, CTA, SC  Not just a suit by a person who is a taxpayer
 Tax treaties  It is an action of the nature of a class
 Revenue Regulations: Sec. 244 NIRC – representative suit filed to secure relief from
Secretary of Finance upon recommendation by actions of public offices involving disposal of
the CIR promulgate the rules and regulations public funds
 Necessary interest (Basis) – personal damage or
(7) Nature of the Regulations injury is not necessary but public interest
 Not legislative  lack of legal standing/locus standi may be set-
aside

 Public interest – issues if transcendental

importance; matters involving public right a. There must be a gain or profit.
- In other words, mere expectation of profit or
The rules on taxpayer‟s suit is that the one who has real party increase in the value of property is not income.
interest to file a taxpayer‟s suit should be the one who will
suffer personal damage or injury. However from b. The gain must be realized or received.
jurisprudence, it shifted now that personal damage or injury is - In the concept of realization of income or the
not anymore necessary. The rule now on taxpayer‟s suit is receipt of income, we recognize 2 principles on
public interest, not anymore personal damage and injury. Income recognition. One is on the basis of
The lack of legal standing because the person does not suffer Actual receipt, and the other one is on the
personal damage or injury is already set aside.What is now basis of Constructive receipt.
the determination is necessary interest, that there should be
public interest involved. c. The gain must not be excluded by law or treaty
from taxation.
08 JANUARY 2019 - The gain or profit is not exempted from tax.
Ibay & Acosta
INCOME TAXATION III – Accounting for the Income
For accounting purposes in accounting income, we have 2 basis,

So we will start our review on Income Taxation. Kindly schedule
either the Cash Basis or the Accrual Basis in recognizing the
our first exam which will cover the Principles and Income
income.
Taxation.
The Cash Basis follows the principle of Actual Receipt, in other
Aside from the amendments on the Income Taxation under RA
words, when we use the actual receipt as basis for accounting the
10963 – Tax Reform for Acceleration and Inclusion (TRAIN
income that is also equivalent to cash basis. Meaning, income is
Law), you have the pertinent revenue regulations which are
recognized at the time the cash is actually received.
available in the BIR website:
Unlike in the Constructive receipt, wherein it uses the Accrual
Revenue Regulations (RR)
Basis in income recognition – it means that income is already
 8-2018
recognized and earned even though actual receipt will take place
 11-2018
later, because at that point in time the income has already
 14-2018
accrued even though the actual has not yet been received.
Revenue Memorandum Circulars (RMC)
Example: Declaration of dividends.
 50-2018
 96-2018
Let us say on December the dividends were declared, and on
January the stockholder received the dividends. So, you are now
It is important to be familiar about the treatment of income under
asked, when is the dividend income earned? Was it earned in
TRAIN which can be found in RMC 50-2018. This is a Q and A of
December – at the time the dividends were declared, or was it
the income tax treatment of the 8% special tax rate under TRAIN
earned in January – when the dividends were actually received?
and the impact of that income tax rate. RMC 96-2018 is an
amendment of question number 7 in RMC 50-2018.
So, if you are using an Actual receipt or cash basis, then you
recognize the income in January because it is at that time where
The principles as regards the income tax on income taxation are
the income was received. But if you are using or recognizing
the same, walangnagbago, only the tax treatment and the rates
income on Constructive receipt or the Accrual basis on the
have changed.
accounting of the income, then as early as December when the
dividends were declared, income has already accrued. So you are
INCOME TAX PRINCIPLES allowed also to recognize income on such basis.
I – Income
IV – Approaches in the Taxation of the income
So, for purposes of our review, we have this concept of Income
on income tax principles. You have 2 known approaches in the way income is being taxed.
Now, the State has the inherent power to tax through its law
- We have that same definition that income pertains to making body. It is the State who is given the discretion as to what
the flow of wealth which goes into the hands of the will be the income tax system. So, the income tax system
taxpayer, other than return of capital. That is the recognizes whether the State will use the Global approach or the
generic concept of what income is all about. Schedular Approach.
- Income is also referred to as the earnings derived from Under the Global system, it recognizes the principle that all
services rendered like the use of labor, or from the use income are one and the same. While the Schedular system
of capital, like engaging in business or investments, or recognizes that there are different types or classes of income, you
the use of both labor and capital. have a differentiation or distinction of income.
- It also includes gains derived from dealings on property. In the case of Tan vs. De Rosario, 37 SCRA 324, according to
It does not mention on dealings on property whether the SC, the Global Approach is a tax system where the tax
real or personal, but it talks about the gains. treatment views indifferently the tax base and generally treats in
common all categories of taxable income. So you have that
Again, in the case of dealings of property, it does not involve only principle that all income are one and the same. While in the
the transactions on the property but the gains, it mentions on the Schedular this is the system employed where the income tax
gains derived from dealings on the property because if there is no treatment varies and made to depend on the kind or category of
gain, then there is no impact. taxable income of the taxpayer. It is also known as the
Segregated Approach.
II –3 requisites for the taxability of the income.

V –Sources of Income f. Sale of goods/merchandise: Place of Sale
The source of income is the place where the income is earned. It g. Interest income:Residence of the debtor or borrower
is not the place of payment which determines the source but the - In this case, the source of the income is not the
place where it is earned. It is governed by the rule on situs or the place of the creditor but the place of the borrower
place of taxation. This classification is important to determine or the debtor. It is the creditor who earns the
whether the income is taxable or not. interest income, it is the debtor who pays the
interest income. So, in the hands of the creditor,
where was the interest income earned? It is earned
VI – Situs or sourced from the residence of the debtor.
In determining the situs of the income, there are 3 ways or h. Dividends: Residence/Principal Office of the Corporation
methods within which income is determined:
i. Mining: Place where mine is located
1. Citizenship
- If you are a citizen of the State, then you will be j. Farming: Place where farm is located
subject to tax.
Classes of Income
2. Residence
- If you are an alien and you are residing in that and the Taxpayers
country, even though you are not a citizen, then on
the basis of residence you will be subject to tax. I – CLASSIFICATION OF INCOME: four major categories of
income
3. Source of Income
- Even though you are not a citizen, you are an alien 1. Compensation Income
and you are not residing in that country, you are - Gains derived from labor, employment, services,
still taxable if the source of that income will come i.e. salaries, wages, commissions etc.
from that place or that State.
2. Professional/Business Income
- Derived from the exercise of profession, business or
Income may be earned from: utilization of capital
3. Passive Income
a. Within the Philippines - Income which the taxpayer merely waits for the
b. Without or outside the Philippines amount to come in, i.e. dividends, royalties
c. Partly within and partly without interest, prizes, winnings, etc.
4. Capital Gains
VII –Forms of the Income: - Derived from the sales of assets not used in trade
or business, i.e. sale of residential house and lot,
1. Received in the form of Cash sale of personal properties for as long as not used
2. Property in business: family car, jewelry collection, shares of
3. Service stocks not traded in the stock exchange. Those
4. Combination of cash, property, or service traded in the stock exchange is not treated in
income taxation but is treated as a percentage tax.
So, when we talk about shares of stocks as capital
VIII - Determination of the source according to the kind of gains, these are not traded in the stock exchange.
income
(Because you have different items of income, then the tax II – Classification of Income Taxpayers:
treatment will be dictated by the source of that income)
1. Individuals
a. Compensation or income from services:Places of 2. Corporations
performance of service 3. Partnerships
- The source is the place of the performance of 4. Estates and Trusts
service.
- Even if you are engaged in the Philippines to do a
show, and the show is to be made in Australia for III – INDIVIDUALS
the Filipino communities there, and you are paid in
the Philippines, the question now is, in the tax The Individuals may either be:
treatment of the income, where is the source? It is  Citizens or
in the place of the performance of service, since  Aliens
you rendered your services in Australia, that income
is sourced outside or without, even though you are The Citizens may be:
paid in the Philippines.  Resident or
 Non-resident.
b. Rent: Location of the property
- When you have rental income, the source of the The Resident Citizen is taxable on all sources, within and
income is the location of the property. without. While for Non-resident citizens, the income taxable are
only the income within.
c. Royalties:Place of use of the intangibles or Intellectual
Property Right In the case of OFW, the income earned outside is not taxable, but
if they leave behind businesses in the Philippines, then that is an
d. Gain on sale of real property: Location of Property income taxable within.
e. Gain on sale of personal property:Place of Sale In the case of Aliens, whether he is a resident or non-resident,
they are taxable only on sources within.

 The Resident Alien is one who establishes his residence CO-OWNERSHIPS

in the Philippines, having stayed here for more than a
year. When 2 or more persons own a piece of property, they are co-
owners thereof. And then they decide to sell the property as co-
 In the case of Non-Resident Aliens (NRA), he may be owners, then they are taxed in their individual capacity. But if the
engaged in trade and business or not engaged in trade co-ownership now becomes an on-going concern, where the co-
or business. owned property is now used to engage in business, then the co-
ownership is now treated like a taxable corporation, it will be
 The NRA who stays here for more than 180 taxed now like a corporation.
days from the date of arrival, is engaged in
trade or business. In other words, mere co-ownership is not a taxable entity. The
 But if that alien stays here for less than 180 individual co-owners are the ones individually taxable. But when
days from the date of arrival, then he is the co-owners engages in an on-going capacity, where the
considered as not engaged in trade or property they co-owned is now being used in business, then the
business. co-ownership now is treated as a separate taxable person,
different from the personalities of the co-owners. Then, the co-
ownership becomes a taxable corporation. When the taxable
IV – CORPORATIONS corporation now distributes profits to the individual co-owners,
there is a taxable distribution of dividends.
Corporations may either be:
 Domestic
 Foreign VI – ESTATES AND TRUSTS.
Domestic corporations are taxable on all sources within and They are taxable like individuals (Sec 60-66, NIRC).
without, like that of a resident citizen. It is created under
Philippine laws.
VII – GROSS INCOME
Foreign corporations, whether resident or not are taxable only
on sources within. A foreign corporation is considered a Resident Then you have Section 32 of the NIRC, the treatment of different
Foreign Corporation if it has a license or authority to engage in items of income, the Gross income – what are included and what
business in the Philippines, otherwise, he is considered a Non- are excluded under Section 32.
Resident Foreign Corporations.
Gross income is described as income from whatever source,
including compensation for services, the conduct of trade or
V – PARTNERSHIPS business or the exercise of profession, dealings in property,
interests, rents, royalties, dividends, annuities, prizes and
Partnerships can be categorized into: winnings, pensions and a partner‟s distributive share in the net
 Business Partnership and income of a general professional partnership. (Sec. 32 of the Tax
 Professional Partnership Code as cited in CIR vs. PAL, GR No. 18066, July 7, 2009)
Business partnerships are where two or more persons group Q: What is Taxable Income?
together to engage in trade or business and it is taxed like
corporations. Taxable Income as enumerated in your Section 31, means the
pertinent items of gross income specified in this Code, less the
In the case of Professional partnerships, it is when two or deductions and/or personal and additional exemptions (under the
more persons group together for the sole purpose of exercising a TRAIN law, walana yang personal and additional exemptions), if
common profession. But when the partnership that they form will any, authorized for such types of income by this code or other
cover varied professions, now they will be taxed like a special laws. (Sec. 31 of the Tax Code as cited in CIR vs. PAL, GR
corporation. To be taxed under Section 26 of the NIRC, it must No. 18066, July 7, 2009).
only be a professional partnership for only 1 or common
profession. Under Section 26, the professional partnership is not a So under Section 32, you have the pertinent items of income. So,
taxable person but the professional partners composing the income under Section 32 is defined by the enumeration. So, you
partnership are the taxable persons in their separate and have a list of the items of income.
individual capacities. Again, if two or more professions are
exercised, it will be considered as a business partnership and will Section 32. Gross Income. -
be taxed like corporations. (A) General Definition. - Except when otherwise provided
in this Title, gross income means all income derived from
Then you have Partnerships no matter how created or whatever source, including (but not limited to) the
organized. There are persons who would group together, but it is following items:
a loose one and they do not even register it, and it engages in
business and the business is not only one transaction but it (1) Compensation for services in whatever form paid,
continues to do business, then it will be considered as a business including, but not limited to fees, salaries, wages,
partnership and it will be taxed like corporations. commissions, and similar items;
(2) Gross income derived from the conduct of trade or
So, Partnerships no matter how created or organized (except business or the exercise of a profession;
professional partnerships), includes joint stock companies, joint (3) Gains derived from dealings in property;
accounts, associations, or insurance companies, and joint- (4) Interests;
ventures/consortiums which will be taxed like corporations. (5) Rents;
(6) Royalties;
So joint ventures/consortiums undertaking construction projects (7) Dividends;
or engaging in petroleum, coal, geothermal and other energy (8) Annuities;
projects are not taxable as corporations, but only the co- (9) Prizes and winnings;
venturers/entities composing the joint venture are taxable with (10) Pensions; and
respect to their share of the taxable income. (11) Partner's distributive share from the net income
of the general professional partnership.

xxx he got sick, then by such injury or sickness he received

Section 32 (B) are what we call exclusions from the gross income. compensation through an accident or health insurance or
workmen‟s compensation, then that is excluded because they
Section 32. Gross Income. - represent receipt of capital.
xxx
(B) Exclusions from Gross Income. - The following items Or you suffered an injury and you sued the offender. As an
shall not be included in gross income and shall be offended party, you filed a case for reckless imprudence and you
exempt from taxation under this title: were awarded damages, or you entered into a compromise
agreement where the offender paid, so you have received actual
(1) Life Insurance. - The proceeds of life insurance policies paid damages for the hospitalization, moral damages, loss of income
to the heirs or beneficiaries upon the death of the insured, etc., are all these damages whether by suit or agreement
whether in a single sum or otherwise, but if such amounts are excluded? In the case of loss of earning capacity or loss of profits,
held by the insurer under an agreement to pay interest thereon, they are the losses which were paid to you in the form of
the interest payments shall be included in gross income. damages which will be considered as income, all the other forms
of damages will be excluded.
Proceeds of life insurance are excluded for the principal reason
that they are Indemnity – it pertains to the return of capital. Again, the loss of earning capacity or loss of profits will be the one
When the life covered is loss and now indemnified and taxable, but all the other forms of damages, whether by suit or
compensated by way of insurance, then naging pera na. What you agreement will be excluded.
receive is a return of capital, an indemnity from the loss,
therefore the amounts received are exclusions. (5) Income Exempt under Treaty. - Income of any kind, to the
extent required by any treaty obligation binding upon the
If there is a feature in the payment of the proceeds of life Government of the Philippines.
insurance that you are paid by instalments and there is an
interest feature in that payment, then the interest portion is the So, this is by Executive Agreement entered into by the Philippines
one that is treated as income, but not the amount pertaining to and another country, and they agree that such type of income will
the proceeds of the life insurance. be exempted.
(2) Amount Received by Insured as Return of Premium. - Example: the RP-US Military Bases Agreement, wherein the
The amount received by the insured, as a return of premiums paid income of the US Servicemen working at Clark in Subic and other
by him under life insurance, endowment, or annuity contracts, US Facilities in the Philippines are exempted from the Philippine
either during the term or at the maturity of the term mentioned in Income Tax.
the contract or upon surrender of the contract.
(6) Retirement Benefits, Pensions, Gratuities, etc.-
So, being a return of premium, they represent a return of capital,
therefore excluded. They are the amount received by the insured, (a) Retirement benefits received under Republic Act No. 7641 and
as a return of premiums paid by him, because in consideration of those received by officials and employees of private firms,
the insurance, the insured has to pay a certain amount and that is whether individual or corporate, in accordance with a reasonable
what we call the premium payments. private benefit plan maintained by the employer: Provided, That
the retiring official or employee has been in the service of the
There are insurance policies where during the life of the policy, same employer for at least ten (10) years and is not less than
the insurance company would pay certain amounts to the insured. fifty (50) years of age at the time of his retirement: Provided,
So the insured, while still alive, he would receive certain further, That the benefits granted under this subparagraph shall
payments during the life of the policy. So the question now is, are be availed of by an official or employee only once. For purposes of
the amounts received by the insured during the life of the policy, this Subsection, the term 'reasonable private benefit plan' means
an income? The answer is no. The amounts that he received are a pension, gratuity, stock bonus or profit-sharing plan maintained
return of the premium payments. Being return of premiums, they by an employer for the benefit of some or all of his officials or
are return of capital, so excluded. employees, wherein contributions are made by such employer for
the officials or employees, or both, for the purpose of distributing
(3) Gifts, Bequests, and Devises. The value of property to such officials and employees the earnings and principal of the
acquired by gift, bequest, devise, or descent: Provided, however, fund thus accumulated, and wherein it is provided in said plan
That income from such property, as well as gift, bequest, devise that at no time shall any part of the corpus or income of the fund
or descent of income from any property, in cases of transfers of be used for, or be diverted to, any purpose other than for the
divided interest, shall be included in gross income. exclusive benefit of the said officials and employees.
In the taxation of retirement benefits, pensions and gratuities,
So, you are a recipient of a gift, bequests, device or a donation they are as a rule – taxable, because they are in payment for
from a donor or decedent, are these property or amounts that you services rendered.
receive, income? No, they are a receipt of capital.
Now, they are excluded under 32 B (6) (a), when:
Let us say the property that you received from the decedent is an  The retirement benefits come from the Labor Code (LC)
apartment, that receipt is not income that is receipt of capital. But under RA 7641, and
when you, as an owner now, you have the apartments rented out  Under reasonable retirement benefit plan (RPBP) or a
and you received rental income, then the income from such retirement plan or a pension plan accredited by the BIR
property is the one that is treated as taxable income and not the and maintained by the employer for the benefit of the
property. employees.
(4) Compensation for Injuries or Sickness. - amounts

received, through Accident or Health Insurance or under RETIREMENT BENEFIT UNDER THE LABOR CODE
Workmen's Compensation Acts, as compensation for personal
injuries or sickness, plus the amounts of any damages received, The first retirement benefit is under the provisions of the LC, so
whether by suit or agreement, on account of such injuries or you follow the provisions of the LC for purposes of the exclusion.
sickness. If that laborer or employee retires less than the provisions of the
LC and the employer pays the retirement benefits, then that will
They are excluded because they are forms of indemnity from such be taxable, because you have to comply with the mandatory
accident or disability suffered by the taxpayer. He was injured or provisions of the LC.

(a) Income Derived by Foreign Government. - Income

RETIREMENT BENEFIT SET UP BY THE EMPLOYER derived from investments in the Philippines in loans, stocks,
bonds or other domestic securities, or from interest on deposits in
The second retirement benefit refers to the one set-up by the banks in the Philippines by (i) foreign governments, (ii) financing
employer, the RPBP. For purposes of the exclusion, you have institutions owned, controlled, or enjoying refinancing from
the following requirements: foreign governments, and (iii) international or regional financial
1. It must be a private benefit plan maintained by the institutions established by foreign governments.
employer which is approved by the BIR
2. The retiring employee must be in service for at least 10 The first one is the Income Derived by Foreign Government. So
years this is an example of the principle that we do not tax another
3. The age requirement – not less than 50 years of age sovereign. We do not tax them under the principle of International
4. Has availed of the benefit for only once Comity.
If under the RPBP, the employee retires less than 10 years, it will (b) Income Derived by the Government or its Political
be taxable. If he retires at least 10 years but is less than 50 years Subdivisions. - Income derived from any public utility or from
of age then it is still taxable. All the requisites must be present. the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political subdivision
The second variation of the RPBP set-up by the employer is when thereof.
the standards are not under the NIRC. For purposes of the
retirement, 15 years ang sa employer, or it may be less. For the So under this, the government does not tax itself. It has immunity
age requirement it can be more than 50 years, etc. So, when the from taxation. However, if it is a proprietary function, it is taxable.
employer sets up a higher standard than that of the NIRC, then it
must be followed should the employee retire. The rule that will (c) Prizes and Awards. - Prizes and awards made primarily in
prevail is the standard set by the employer. Absent such standard recognition of religious, charitable, scientific, educational, artistic,
set by the employer, the rule that will prevail is the standard set literary, or civic achievement but only if:
by the NIRC. i. The recipient was selected without any action on his
part to enter the contest or proceeding; and
(b) Any amount received by an official or employee or by his ii. The recipient is not required to render substantial
heirs from the employer as a consequence of separation of such future services as a condition to receiving the prize
official or employee from the service of the employer because of or award.
death, sickness or other physical disability or for any cause
beyond the control of the said official or employee. Prizes and awards are taxable. But when the prizes and awards
are under this category, then it is excluded. Missing one
Section 32 B (6) (b), pertains to the Separation Pay. requirement (as enumerated by the codal provision), then it is
taxable.
The separation pay as a rule is taxable, it becomes excluded if it
is paid on account of death, sickness or other physical disability or (d) Prizes and Awards in sports Competition. - All prizes and
for any cause beyond the control of the said official or employee, awards granted to athletes in local and international sports
in other words, the separation pay given is for Involuntary causes. competitions and tournaments whether held in the Philippines or
If it is for a Voluntary cause such as resignation, it is taxable. abroad and sanctioned by their national sports associations.
But in the case of Resignation, as an exception, even though Kung hindi sanctioned ang participation mo, then the prizes and
resigned, but the resignation was for the purpose that the new awards are taxable.
owners would have his new people to bring in, and will have a
wider people to select, the separation pay given on account of (e) 13th Month Pay and Other Benefits. - Gross benefits
that resignation is not taxable. It will be excluded because such received by officials and employees of public and private entities:
resignation is involuntary. Provided, however, That the total exclusion under this
subparagraph shall not exceed Ninety Thousand pesos (P90,000)
(c) The provisions of any existing law to the contrary which shall cover:
notwithstanding, social security benefits, retirement gratuities,
pensions and other similar benefits received by resident or non (i) Benefits received by officials and employees of the national
resident citizens of the Philippines or aliens who come to reside and local government pursuant to Republic Act No. 6686;
permanently in the Philippines from foreign government agencies (ii) Benefits received by employees pursuant to Presidential
and other institutions, private or public. Decree No. 851, as amended by Memorandum Order No. 28,
dated August 13, 1986;
So excluded yung mga social benefits or retirement benefits (iii) Benefits received by officials and employees not covered by
received from abroad by the residents, non-residents and aliens Presidential decree No. 851, as amended by Memorandum Order
residing in the Philippines. No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and Christmas
(d) Payments of benefits due or to become due to any person bonus.
residing in the Philippines under the laws of the United States (As amended by the TRAIN Law, Section 9)
administered by the United States Veterans Administration.
The maximum now is 90,000, in excess of which, it will now be
(e) Benefits received from or enjoyed under the Social Security taxable as part of your compensation income. So the 13th Month
System in accordance with the provisions of Republic Act No. pay covers all other benefits including productivity incentives and
8282. Christmas bonus etc.
(f) Benefits received from the GSIS under Republic Act No. 8291, (f) GSIS, SSS, Medicare and Other Contributions. - GSIS,
including retirement gratuity received by government officials and SSS, Medicare and Pag-ibig contributions, and union dues of
employees. individuals.
Next, we have the Miscellaneous Items. (g) Gains from the Sale of Bonds, Debentures or other
Certificate of Indebtedness. - Gains realized from the same or
(7) Miscellaneous Items. - exchange or retirement of bonds, debentures or other certificate
of indebtedness with a maturity of more than five (5) years.

In the taxation of Interests, Royalties, Prizes and Other Winnings,

(h) Gains from Redemption of Shares in Mutual Fund. - you have a final tax of 20%, these are local sources. Pero kung
Gains realized by the investor upon redemption of shares of stock foreign source yan and you are a resident citizen, the 20% will
in a mutual fund company as defined in Section 22 (BB) of this not apply, but the rates of 0-35%.
Code.
Then, royalties, except on books, as well as other literary works
and compositions which shall be subject to a final tax of 10%.
VIII – TAXATION OF INDIVIDUALS
For prizes, except for prizes amounting to 10,000 or less, shall be
I hope by this time you already have a copy of the Amendments. subject to tax, and other winnings. Winnings of 10,000 or less
Get an NIRC which is the 2018 version. from the PCSO is exempt. The winnings from the PCSO is now
taxable. The winnings amounting to 10,000 or less will be
Section 24 pertains to the Rates of Income Tax on the Personal exempted. In excess of that, over 10,000 will now be taxable.
Income of individuals, either citizen or resident aliens. You have
the tax rates beginning January 1, 2018 and December 31, 2022 In the case of the long term deposits, you still have the same
of 0% for not over 250,000, and rates of 20-35% in excess of the rates from 5-20%, pero ni lower nila:
250,000.  Less than 3 years – 20%
 3 years to 4 years – 12%
 4 years to 5 years – 5%, in case of pre-termination of
long term deposits.
Punta muna tayo sa Q and A on the application of the personal

income of the individual (RMC 50-2018).
(Dean is making an illustration on the board)
Under the provisions, in the case of individuals, we have:

A. those engaged in business or profession
B. a mixed income earner (both compensation and
business/profession), except for those subject to the
final withholding tax.
This pertains to Section 24 A (2) (b) as amended. The rates of tax

on income of Purely Self-employed individuals and/or
Professionals whose gross sales or gross receipts and other non-
operating income does not exceed the VAT threshold which is 3
million shall have the option to avail of an 8% tax on gross sales
or gross receipts and other non-operating income in excess of
250,000 in lieu of the graduated income tax rates.
If you are a mixed income earner, then the income from

compensation will be taxed under the 0-35%, and all income from
the business/profession you can avail of the option of 8%.
If you exceed the VAT threshold, then you will be subject to the
regular rates. This is the complication.
In other words, the individuals who are purely compensation

In other words, the first 250,000 of your income is not taxable, income earners will be taxed from the 0-35 %, yanyung
over that amount the rates will now be from 20-35%. Beginning graduated rates nila. The first 250,000 is exempted, in excess of
2023, the rates will become 15-35%. that the 20-35% applies.
Section 24. Income Tax Rates. –

A –Individual Engaged Purely in Business or Practice of
(A) xxx
Profession, you are categorized as:
(B) Rate of Tax on Certain Passive Income: -
1.) Non-VAT (taxable under Section 116)
2.) Other Non –VAT
(1) Interests, Royalties, Prizes and Other
3.) subject to VAT
Winnings. – A final tax at the rate of twenty percent
(20%) is hereby imposed upon the amount of interest
(1) You are Non-VAT because your gross receipts do not exceed
from any currency bank deposit and yield or any other
the 3 Million threshold. If you are under this category, you will be
monetary benefit from deposit substitutes and from
taxed under Section 116 and pay an income tax under Section 24
trust funds and similar arrangements; royalties, except
at 0-35%. But, you are given an Option to Avail of the 8% Tax
on books, as well as other literary works and musical
Rate. In other words, you may avail of:
compositions, which shall be imposed a final tax of ten
 the 0-35% or
percent (10%); prizes (except prizes amounting to ten
 opt to pay a one-time 8% tax in excess of the 250,000.
thousand pesos (10,000) or less which shall be subject
to tax under Subsection (A) of Section 24; and other
So, if you are earning 1 Million, you will be taxed ordinarily under
winnings (except winnings amounting to ten thousand
0-35%. But since you do not exceed the 3 Million threshold as
pesos (10,000) or less from Philippine Charity
Non-VAT, then you would be given an option to pay a one-time
Sweepstakes and Lotto which shall be exempt), derived
rate of 8% in excess, meaning – after the first 250,000. Yung 1
from sources within the Philippines:
Million mo less 250,000, the balance of 750,000 will be the one
xxx
subject to 8%.

For your 1Million income, if you pay under the 0-35% then you
are taxable as Non-VAT under Section 116. But, if you opt to be A 1: The personal and additional exemptions previously provided
taxed at 8%, then you are no longer taxable under Section 116. under Section 35 of the 1997 Tax Code, as amended, have been
Yan lang yung peculiar dito, the individual who is Non-VAT and removed under the TRAIN law. Starting January 1, 2018, said
taxable under Section 116. exemptions of individual taxpayers were replaced with the first
P250,000 of taxable income which is now subject to zero percent
(2) The other category of individuals – the Other Non-VAT, (0%) rate of income tax, practically exempting such income from
automatic yan sila 0-35%, they cannot avail of the option. income tax.
(3) Likewise, the VAT category who are over the 3 Million Q 2: Under the TRAIN law, is there no change in the mandatory
threshold, 0-35% yan sila for income tax purposes. deductions such as SSS, Philhealth, Pag-ibig, etc. from Gross
Compensation of employees? Please clarify.
B –Mixed Income Earners, he earns both compensation and A 2: There is no change in the mandatory deductions from gross
professional (example: one is in practice of his profession and at compensation of employees. The allowed deductions are the
the same time teaching). They are also classified into categories: employee‟s share in the SSS, GSIS, Philhealth, Pag-ibig
contributions (limited to compulsory contributions) as well as the
1.) Non-VAT (taxable under Section 116) union dues. They are deductible to arrive at the taxable
2.) Other Non-VAT compensation income.
3.) subject to VAT
They are still excluded. For purposes of the withholding, your
(1) The mixed income earner who is non-VAT and taxable under gross compensation is to be deducted by the GSIS, SSS, HDMF or
Section 116 will be taxed at 0-35%, both for his professional and Pag-Ibig, Philhealth, Union Dues contributions. You would then
compensation. But he is given the option to avail of the special have your adjusted gross compensation, which is the tax base for
tax rate of 8%. However, the 8% will apply only to the business your withholding tax. There is no change in the mandatory
or professional income, and not to the compensation income. If deductions.
you practice a profession and you teach, the income for your
practice will be ordinarily subject to Section 116 as Non-VAT Q 3: Is there a change in the non-taxability of “de minimis”
under the 0-35% rate, pwede lahat (both the compensation and benefits under the TRAIN Law?
profession) will be under the 0-35%, but you may avail of the
option. You may avail of the 8% only for your A 3: No, there is no change in the tax treatment for “de minimis”
business/professional income, not the compensation income. Your benefits. It is still considered as compensation not subject to
compensation will still be taxable at 0-35%. income tax and consequently, not subject to withholding tax, and
neither to fringe benefit tax.
However, if the mixed income earner chooses to avail of the 8%
for his business/professional income, it is already without the Q 4: What are the benefits classified/considered as “de minimis”?
benefit of the first 250,000 exclusion (unlike that of the individual Are there any updates in the amount of “de minimis” benefits?
purely self-employed, engaged in business or profession only),
because kinain na doon sa compensation mo. In taxing for your A 4: As of January 1, 2018 the following are the "de mininimis"
compensation income, yung employer mo tinax kana in excess of benefits:
the 250,000. Di mona ma avail twice yung 250,000 exclusion.
a. Monetized unused vacation leave credits of private
(2) The Other Non-VAT and employees not exceeding ten (10) days during the
year;
(3) VAT Mixed income earner are taxed at 0-35%. b. Monetized value of vacation and sick leave credits paid
to government officials and employees;
The peculiarity lang will only come in for those individuals who are c. Medical cash allowance to dependents of employees not
Non-VAT and taxable under Section 116, either you are purely exceeding P1,500.00 per employee per semester or
business or mixed. P250.00 per month;
d. Rice subsidy of P2.000 or one (1) sack of 50 kg rice per
To give an example for the Mixed Income earner, let us say month amounting to not more than P2,000.00;
meron siyang: e. Uniform and clothing allowance not exceeding P6,
 100,000 income for his compensation, and 000.00 per annum;
 another 500,000 income for his profession. f. Actual medical assistance, e.g., medical allowance to
cover medical and healthcare needs, annual
The tax rates will apply now in excess of the first 250,000, and medical/executive check-up, maternity assistance, and
such exclusion is already taken by the compensation rates. Hindi routine consultations not exceeding P10,000.00 per
na pwede mag avail of another exclusion of 250,000 sa 500,000 annum;
mo. g. Laundry allowance not exceeding P300.00 per month;
h. Employees achievement awards, e.g., for length of
Kaya yung: service or safety achievement, which must be in the
 100,000 will be taxed from 0-35% with the benefit of form of a tangible personal property other than cash or
the exclusion of 250,000. gift certificate, with an annual monetary value not
 For the 500,000 it is 8% without the benefit of the exceeding P10,000.00 received by the employee under
250,000 exclusion. an established written plan which does not discriminate
in favor of highly paid employees;
Unlike kung purely business ka, wherein you could avail of the i. Gifts given during Christmas and major anniversary
250,000 exclusion, kasi wala ka namang other income, wala ka celebrations not exceeding P5.000.00 per employee per
namang compensation. That is the complication, the rest are the annum;
same, tax rates lang ang nagbago. j. Daily meal allowance for overtime work and
night/graveyard shift not exceeding twenty-five percent
Let us go back to the Q and A under RMC 50-2018. (Please obtain (25%) of the basic minimum wage on a per region
and refer to the copy of the RMC) basis; and
k. Benefits received by an employee by virtue of a
Q 1: Are the personal exemption and additional exemption still collective bargaining agreement (CBA) and productivity
the same under the TRAIN law?

incentive schemes provided that the total annual In the case of the minimum wage earner (MWE) under Question
monetary value received from both CBA and 10, they are still excluded even before TRAIN law. The minimum
productivity incentive schemes combined do not exceed wage under Question 11 is exempt from income tax, which
ten thousand pesos (P10,000.00) per employee per includes overtime pay, nightshift and hazard pay.
taxable year.
Q 12: What if the MWE receives service charge which is not
All other benefits given by employers which are not included in included in the enumerated exemptions such as holiday pay,
the above enumeration shall not be considered as “de minimis” overtime pay, etc..will he still be exempt from income tax? If not,
benefits and hence, shall be subject to income tax as well as how will his income tax be computed?
withholding tax.
A 12: The MWE will still be exempt from income tax on his
So your employer, so as not to burden you with the withholding statutory minimum wage (SMW) including the other income
tax, could repackage your compensation benefits into de minimis earned specifically enumerated as exempt under the law.
kasi these are not taxable benefits. Kaya lang, for purposes of However, income other than those in the enumeration shall
13th month pay and retirement, hindi siya kasama. already by taxable. The taxable income shall be computed by
deducting the non-taxable/exempt portion and other deductions
Q 5: What shall be the tax treatment of the “de minimis” benefits from the gross compensation income. Then, the resulting taxable
given to employees which are beyond the prescribed amount of income shall be multiplied to the applicable income tax rate using
benefits? the prescribed tax table to get the amount of income tax due.
A 5: The benefits given in excess of the maximum amount Q 13: For those whose basic pay is more than the SMW but does
allowed as de minimis benefits shall be included as part of “other not exceed P250,000, are the other income like holiday pay, OT,
benefits” which is subject to the P90,000.00 ceiling. Any amount NDP, hazard pay and others also tax exempt?
in excess of the P90,000 shall be subject to income tax, and
consequently, to the withholding tax compensation. A 13: The employee is no longer considered a MWE since his
basic pay is more than the SMW. Thus, the amount of basic pay,
Example: Ms. A received annual clothing allowance amounting to OT pay, holiday pay, NDP pay and hazard pay shall be subject to
P10,000. Her 13th month pay is P80,000. No other benefits were income tax, and consequently, to the withholding tax on
received for the entire year. In this case, since the prescribed compensation.
maximum amount for clothing allowance is only P6,000 the
excess of P4,000 shall be added to the 13th month pay, thereby He is no longer considered a MWE, taxable nasiya but subject to
the entire benefits received amounted to P84,000. In this the limit of 250,000.
scenario, the same shall still be exempt from income tax since the Q 16: Who are not qualified to avail of the 8% Income Tax rate?
ceiling amount for these other benefits is P90,000.00.
A 16: The following individuals are not qualified to avail of the 8%
So, the benefits given in excess of the maximum amount allowed Income Tax rate:
as "de minimis" benefits shall be included as part of "other
benefits" which is subject to the P90.000.00 ceiling. (refer to Q5 a) Purely compensation income earners
of the RMC Circular). In other words, if you receive other benefits, b) VAT – registered taxpayers, regardless of the amount of
then meron ka pang 13th month pay na 30,000, (remember that gross sales/receipts and other non-operating income
the maximum exemption is 90,000) so meron ka pang 60,000 na c) Non-VAT taxpayers whose gross sales/receipts and other
naiwan sa exclusion. So yung other benefits mo, doon mo isa non-operating income exceed the P3 Million VAT
klawng employer dapat sa excess na 60,000 so that they will be threshold
relieved from taxes. d) Taxpayers who are subject to Other Percentage Taxes
Q 6: Are incentives given to employees also taxable? If yes, how under Title V of the Tax Code, as amended, except those
much is taxable? under Section 116 of the same title
e) Partners of a General Professional Partnership (GPP)
A 6: In general, any incentives given to employees shall form part since their distributive share from the GPP is already net
of the compensation subject to income tax, unless specifically of costs and expenses, and
exempted under a special law or incentives are in the nature of f) Individuals enjoying income tax exemption such as
the previously enumerated de minimis benefits. those registered under the Barangay Micro Business
Enterprise (BMBEs), etc., since taxpayers are not
Q 7: What is the treatment for the Premium on Health Card paid allowed to avail of double or multiple tax exemptions
by the employer for the “rank and file” employees, as well as under different laws, unless specifically provided by law.
those employees holding “managerial or supervisory” function?
So, you read this circular. Note of Questions 18 and 27 and 42.
A 7: Premium on Health Card paid by the employer for all They are in table form so just refer to your circular copies.
employees whether “rank and file” and managerial/supervisory,
under a group insurance shall be included as part of other benefits IX – Taxation of Professional Partnerships. (Sec 26, NIRC)
of these employees which are subject to the P90,000 threshold.
However, individual premiums (not part of group insurance) paid X – Taxation of Corporations (Sec 27-28, NIRC)
for selected employees holding managerial or supervisory
functions are considered as “fringe benefits” subject to fringe We still have the same rates for the corporation, except if
benefits tax. malabas na yung TRAIN 2, then we will have new rates for the
corporation. Rates lang ang nagbago, the treatment will be the
Q 8: What would be the treatment of the additional income as a same.
result of the benefits provided under the Atrition Law wherein
employees who are performing well will receive rewards? We have the Domestic and Foreign Corporations. The Domestic
corporations are taxable under Section 27.
A 8: The said additional income/benefits, whether in the form of
cash or reward in kind, shall form part of the compensation Section 27. Rates of Income tax on Domestic Corporations.
income subject to withholding tax on compensation. The fair –
market value of the reward in kind shall be included in the taxable (A) xxx
compensation.
(B) Proprietary Educational Institutions and Hospitals.–

Proprietary educational institutions and hospitals which are non  in case of losses,
profit shall pay a tax of ten percent (10%) on their taxable  on account of prolonged labor dispute,
income except those covered by Subsection (D) hereof: Provided,  force majeure or
that if the gross income from unrelated trade, business or other  legitimate business reverses.
activity exceeds fifty percent (50%) of the total gross income
derived by such educational institutions or hospitals from all Q: How do you work on the MCIT?
sources, the tax prescribed in Subsection (A) hereof shall be
imposed on the entire taxable income. For purposes of this (Dean makes an illustration on the board.)
Subsection, the term 'unrelated trade, business or other activity'
means any trade, business or other activity, the conduct of which Let us say you have X corporation. In 2011, the corporate income
is not substantially related to the exercise or performance by such tax due computed under the:
educational institution or hospital of its primary purpose or  NCIT = 100T
function. A 'Proprietary educational institution' is any private  while the MCIT = 150T
school maintained and administered by private individuals or
groups with an issued permit to operate from the Department of - The amount to be paid is whichever is higher;
Education, Culture and Sports (DECS), or the Commission on therefore, the corporation will pay the MCIT of
Higher Education (CHED), or the Technical Education and Skills 150T.
Development Authority (TESDA), as the case may be, in
accordance with existing laws and regulations. Thus, in 2011, there is an excess of 50T. This excess MCIT is to
The Proprietary Educational Institutions and Hospitals are be applied for the next 3 years, in the event the NCIT is higher
ordinarily taxed also at 30% of their taxable income, however, than the MCIT. The 50T excess is creditable against the tax due if
they could avail of the special tax rate of 10% on their taxable the NCIT is higher than the MCIT in the next 3 years (2012, 2013,
income if the predominant income pertains to educational and 2014).
hospital income. So, if the educational or hospital income is the
predominant income, then, the other income (the non- In 2012, the tax due under the:
educational/non-hospital) will be taxed at 10%. Otherwise, it will  NCIT = 180T
be taxed at 30%.  while MCIT = 210T
What is taxed here, whether 10% or 30%, pertains to the non- - Thus, the amount to be paid in 2012 is the MCIT.
educational or non-hospital income. Kasi yung educational and
hospital income nila, hindi taxable yun. In so far as the Can the 50T excess MCIT in 2011 be creditable? It cannot kasi
educational and hospital income, exempted yan. Pero pag meron higher yung MCIT. However, in 2012, because the MCIT is higher,
silang non-educational and non-hospital income, that is the one there is another excess of 30T. This will be creditable again for
subject to tax. Ang question lang is 10% ba or 30%. the next 3 years (2013, 2014, 2015).
(C) Government-owned or Controlled Corporations, In tax year 2013, the tax due computed under the:
Agencies or Instrumentalities. - The provisions of existing  NCIT = 220T
special or general laws to the contrary notwithstanding, all  while MCIT = only 180T
corporations, agencies, or instrumentalities owned or controlled
by the Government, except the Government Service Insurance - Thus, the amount to be paid is the NCIT.
System (GSIS), the Social Security System (SSS), the Philippine
Health Insurance Corporation (PHIC), and the local water districts But in paying the 220T, can we credit the excess in the previous
shall pay such rate of tax upon their taxable income as are years? Yes. 2013 is within the 3 years of both excess amounts of
imposed by this Section upon corporations or associations 50T and 30T. Therefore, for the year 2013, we pay only 140T.
engaged in s similar business, industry, or activity. (As amended
by the TRAIN Law)
XII – APPLICATION OF THE IMPROPERLY ACCUMULATED
Then, you have the GOCC, agencies and instrumentalities. As a EARNINGS TAX (IAET)
rule, they are taxable, unless the law or the chapter grants the
exception. GSIS, SSS, PHIC and the local water districts are This is under Section 29. It operates as a penalty tax or a sur tax.
exempted. You would be liable for this if the corporation is improperly
accumulating earnings beyond the reasonable needs of the
business.
XI – MINIMUM CORPORATE INCOME TAX (MCIT)
The rate is 10% of the improperly accumulated taxable income.
The MCIT is applicable to Domestic and Resident Foreign The purpose here is that, earnings are not allowed to be
Corporations taxable at the regular rate of 30%. If the corporation accumulated, they should be distributed and shared among the
is not subject to the 30% regular rate, then the MCIT will not stockholders, unless there is a reasonable need na mag-iponkang
apply. earnings. So, the reasonable needs of the business include,
business expansion, acquisition of property, working capital, etc.
Corporations subject to the MCIT are to compute their
taxable income twice: The improperly accumulated earnings is defined as permitting
 based on the 30% normal corporate income tax (NCIT) earnings and profits to accumulate instead of being divided or
and distributed for the purpose of avoiding income tax to the
 the 2% of the gross income MCIT – shareholders. The burden of proving that there is a need to
accumulate rests upon the corporate taxpayer.
- whichever is higher, that will be the tax that the
corporation will pay.
XIII – CORPORATIONS EXEMPTED FROM TAX
The MCIT shall be applied in the corporate quarterly returns as
well as in the corporate annual consolidated returns. Then you have the last part of Section 30. These are the
exempted corporations. You have a long list of them, and the
As to new corporations, the MCIT will begin on the 4th taxable important part there is the last paragraph which says:
year in which the corporation commenced its business.
Suspension from the MCIT is allowed: “Notwithstanding the provisions in the preceding paragraphs, the

income of whatever kind and character of the foregoing the purpose for which the corporation or association
organizations from any of their properties, real or personal, or was organized.
from any of their activities conducted for profit regardless of the
disposition made of such income, shall be subject to tax imposed If you are a member of a NSNP corporation, you are a board
under this Code.” member, you do not receive any compensation. Thank you lang.
Meaning, while the principal purpose is exempted, but if the In order to claim exemption from income tax, a corporation or
exempt corporation has transactions involving their properties, association must show that it is organized and operated
whether real or personal or they conduct activities for profit, even exclusively for religious, charitable, scientific, athletic, cultural or
if the income earned will be used back for the exempted principal educational purposes or for the rehabilitation of veterans, and
purpose, it will still be taxable. It will be subject to the normal that no part of its income inures to the benefit of any private
corporate income tax. stockholder or individual.
You have that case of CIR vs. CA and YMCA, October 14, 1998. Exception: when the NSNP corporation are taxable, we discussed
YMCA is a charitable organization, it is exempted from tax. that already, the last paragraph of Section 30.
However, in its building they have some spaces rented out to
others for a fee, thus it earns rental income. In their parking lot, 15 JANUARY 2019
they allow non-members to park and collect parking fees, so Estillore & Vega
income was also generated. When they were assessed of the
income tax, they invoked Section 30, in fact, they invoked the This is a tax table summary and the tax treatment of the taxable
Constitution on the real properties used for religious, charitable or items relative to the individual tax payers and the corporations.
educational purposes. But since this is not Property taxation, it is
Income taxation, Section 30 will apply. They invoked further that
it is an educational institution. They contend that the non- TAXABILITY OF INDIVIDUALS
educational income will be exempted if they are used for
educational purposes. But since the YMCA is not an educational You have the individuals. The tax treatment of citizens – they are
institution, but a charitable one, they cannot invoke the taxable on all sources.
Constitutional exemption as a non-stock, non-profit educational
institution. In other words, the parking fees and rentals collected (1) RESIDENT CITIZEN is one who has a permanent residence
are taxable because they are from their properties, real or or permanently stays in the Philippines or has stayed outside less
personal, or from any of their activities conducted for profit even than 183 days. So even if you stayed outside, for as long as it is
if their income were used for their exempt purposes, the income less than 183 days, you are still a resident citizens. You are still
will still be applicable. taxable on all sources within the (inaudible).
“Then main evidence of the purpose of a corporation (2) But if the citizen stays outside the Philippines 183 days or
should be its articles of incorporation and by-laws, for more, or if he is considered as an OFW performing a contract or
such purpose is required by statute to be stated in the worked abroad and has to stay there for more or less on a
articles of incorporation, and the by-laws outline the permanent basis, then he is considered a NON-RESIDENT
administrative organization of the corporation which, in CITIZEN. In so far as the non-resident citizen, they are taxable
turn, is supposed to insure or facilitate the within the Philippines – the income earned abroad is not taxable,
accomplishment of said purpose. “ (CIR vs. CA and including the interest income on the bank deposits in which ‘yung
YMCA, October 14, 1998.) kanyang remittance ‘dun pinapasok. Kasi kung meron siyang
bank account sa Pilipinas where it is used as a depository account
The Tests applied for exemption under Section 30 E of the for the remittance, that account will be tax exempt in so far as
NIRC: the interest income earned. Pero ‘yung all other income niya
which is earned in the Philippines (kung meron siyang sari-sari
Corporations or associations which apply for tax exemption ruling store or apartment dwellings na pinapaupa niya), that is an
under Section 30 E of the NIRC, as amended, must meet the income within – so that is taxable.
following tests:
(3)ALIENS. So the aliens, whether they are residents or non-
(1) Organization Test – requires that the corporation or residents, are taxable only within. You would notice in the
association‟s constitutive documents exclusively limit its purposes classification of individuals as between citizens and aliens, only
to one or more of those described in paragraph E of Section 30, the resident aliens are taxed on all sources.
as amended. An alien will considered as a resident when he stays in the
Philippines for more than 12 months from the date of arrival. He
(E) Nonstock corporation or association organized and operated would start as a non-resident alien and the start would be a non-
exclusively for religious, charitable, scientific, athletic, or cultural resident alien not engaged in trade or business (NRANETB). So,
purposes, or for the rehabilitation of veterans, no part of its net he is an alien who stays in the Philippines 180 days or less. So, if
income or asset shall belong to or inures to the benefit of any he stays in the country for 180 days or less, then that alien is a
member, organizer, officer or any specific person; non-resident alien not engaged in trade or business. If he
stays further or more than 180 days, then magbabago ‘yung
(2) Operational Test – mandates that the regular activities of classification niya. So, he will now be a non-resident alien
the corporation or association be exclusively devoted to the engaged in trade or business. So, dumating sa Pilipinas tapos
accomplishment of the purposes specified in paragraph E of umalis, you determine how long siya nag-stay bago siya umalis.
Section 30 of the NIRC, as amended. A corporation or association
fails or meet this test if a substantial part of its operations may be  If he stays here 180 days or less bago umalis, then he is
considered “activities for profit.” considered as non-resident alien not engaged in
trade or business.
Then we have the Principle of No Inurement:
- All the net income or assets of the non-stock non-  If he stayed here for more than 180 days bagoumalis,
profit (NSNP) corporation or association must be then non-resident alien engaged in trade or
devoted to its purpose/s and no part of its net business.
income or asset accrues to or benefits any member
or specific person.  If he stays further for more than 12 months from the
- Any profit must be plowed back and must be date of arrival, then nag-reside na siya dito, he will be
devoted or used altogether for the furtherance of

considered as a resident alien now. Ganoon ‘yung

movements niya, depending on the length of stay. In the case on interest, you have a tax of 20% final withholding.
Take note that this interest income are within – kung foreign
Then, you have the categories of income. source ‘yan siya for resident citizen, 0%-35%. But if you have
 Compensation Income NRANETB, you have the 25% tax.
 Business or Professional Income
 Passive Income For royalties, this is not from books, literary works and musical
 Capital Gains compositions kasi may special tax treatment „yung royalties for
books which is at 10%. Pero king hindi siya books, literary works,
or musical compositions, then your withholding rate will be 20%.
COMPENSATION INCOME, BUSINESS AND PROFESSIONAL
INCOME Then winnings and prizes which are not P10,000 or less, subject
to final withholding tax.
They are taxable under Section 24(A) from 0% to 35% except
those MWE who are exempted from income tax as early as R.A. Item number four is the royalties for books, literary works, or
9504 musical compositions, at 10%. For NRANETB that would be 25%.
Minimum Wage Earner.Their statutory minimum wage they

earn includes the holiday pay, overtime pay, night shift INTEREST ON LONGTERM INVESTMENTS
differential, hazard pay – they are all exempted. Kung
meronsilang13th month pay and other benefits, the threshold These are investments or deposits which cannot be withdrawn
would ne P90,000. In excess of P90,000, it will be taxable. within five years. So, meron ‘yan siyang lock-in na naka-attach,
unless you would pre-terminate. So, long-term investments are
For business and professional income, they are taxable for 0% to those which mature for five years or more, then it is tax free.
35% with the exemption of NRANETB kasi he will be taxed on But, in case of NRANETB it is taxable at 25% withholding.
gross which is a withholding. So, bago siya mag-alis, kung meron
siyang kinita sa Pilipinas, he will be taxable at source and the Balik tayo doon sa royalties, winnings, and prizes. If they are
source of the income will be the one who will make the foreign-sourced, you do not apply the 20% but 0%-35% kasi
withholding at 25% gross income within (GIW). Unlike before, within ‘yan siya. Withholding applies only to income within. So, if
prior to the Comprehensive Tax Reform Law, there was difficulty it is a foreign source 0%-35%.
running after the NRANETB kasi walang withholding system, kaya
the income escapes taxation. Now, the source of the income will For royalties from books within, apply mo ‘yung 10%. Pero kung
be the one required by law to make the withholding – so, without ‘yan or foreign-sourced, that would be 0%-35%.
bawasan nang 25%. Dala nalang niya ‘yung75%, then he could Below item number two, the foreign source income of the resident
take the next flight out. No need to file a return kasi trabaho na citizens and all other income subject to preferential or special rate
‘yang ng withholding agent. will be taxed also at 0%-35%.
In so far as the rest of the individuals, you have the taxability of

0% to 35%. Take note of the table under Section 24(A), the first INTEREST ON LONG TERM DEPOSITS
P250,000 is exempted. In excess of that you have the rates of
20% to 35%. Let‟s go back to interest on long term deposits of investments. In
case of pre-termination, then you have the applicable withholding
rate depending on the time it was pre-terminated:
 Four years to less than five years – 5% withholding

PRIZES  Three years to less than four years – 12% withholding
 Less than three years – 20%withholding
The other source of income are prizes of P10,000 or less. That is
with the exception of the lotto. Any prize from lotto or In the pre-termination of long-term investments abroad, basta
sweepstakes P10,000 or less is exempted. But prizes other than foreign source regardless whether it is pre-terminated or you wait
lotto and sweepstakes taxable at 0-35%. So, added ‘yan sa for the maturity, the income is taxable at 0%-35%.
kanyang regular income for individuals.
CASH AND PROPERTY DIVIDENDS

FOREIGN SOURCE
It is taxable at 10% for resident citizen, resident alien, and the
The third item is the foreign source. Remember that the non-resident citizen. But, if it is a NRAETB, 20% and for
resident citizen is taxable on all sources. So, kung may foreign NRANETB 25%.
source income yung RC, that is not subject to any preferential or
special tax rate, then it will be taxed also at 0% to 35%. Cash and property dividends includes profit distributions from
business partnerships, joint ventures, etc. including those no
In other words, all items of income taxed at 0% to 35%, will be matter how created.
added up – so that would be income from compensation, the net
income from business after the allowable deductions (whether
itemized or OSD), the other income niya. The total of that would INTEREST INCOME ON FOREIGN CURRENCY DEPOSITS
be subject to 0% to 35%. Di ‘yan siya isa-isahin then taxed by
0% to 35%. You consolidate all the income, then apply the rate This is not foreign source. These are local deposits but in foreign
because the exemption of P250,000 is only applied one time and currencies. It used to be taxable at 7.5% but double na ‘yung
not per item of income. That is the same also even before TRAIN rate niya ngayon– 15%. That is for the RC and RA. For the non-
on how we compute the income tax. residents, whether citizens on alien, exempted. If the interest in
foreign source, that is taxable at 0%-35% and not the 15%.
INTEREST, ROYALTIES, WINNINGS, AND PRIZES

CAPITAL GAINS ON THE SALE OF SHARES OF STOCKS (NOT
Except P10,000 or below kasi taxable „yan under the normal rate TRADED)
at 0%-35%.

It used to be 5% and 10%. Ngayon15% na of the net capital “Other non-operating income” means the other sources of
gains. It cuts across all types of individuals. income (example if binenta niya ‘yung kotse or jewelry and
nagka-gain siya), as long as it does not exceed the P3,000,000
SALE OF SHARES OF STOCKS (TRADED) threshold.
We apply Section 127 of the NIRC. The rate used to be ½ of 1%.

Now, 6/10 of 1% or 60% of 1% of the selling price – not as an MIXED INCOME EARNERS
income tax but as a percentage tax.
These are earning income both from compensation and from self-
employment or practice of profession. You have the same
WINNINGS FROM PHILIPPINE SWEEPSTAKES qualifications:
That used to be exempted. Ngayon, exempted nalang

‘yungP10,000 or less ‘yung winnings. Pero kung foreign source
‘yan, regardless of the amount, it is taxable. If a resident citizen Requirements:
won from a sweepstakes or lotto abroad, then that is taxable at 1. Person is non-VAT
0%-35%. Pero kung within na winnings from lotto and Philippine 2. Compensation, gross receipts or gross sales does not
sweepstakes at P10,000 or less – exempted. But if the prize is exceed P3,000,000.
more than P10,000, that is 20% withholding. It does not mean
that if you won P1,000,000, ibabawas ‘yung P10,000. No. You The compensation income shall be subject to tax under the
are taxable with the entire P1,000,000. Only if you won P10,000 graduated rate of 0%-35%. Walang option ‘yung kanyang
or less (like swer-tres or the draw during noon time or small-time compensation.
lottery), then it will be exempted.
But the income from the business or practice of profession, for as
long as it complies with the above-mentioned requirement, then
ALIENS EMPLOYED BY REGIONAL OR AREA HEADQUARTERS papasok ‘yung option.
AND REGIONAL OPERATING HEADQUARTERS OF
MULTINATIONALS If gross sales/receipts and other non-operating income does not
exceed the VAT threshold of P3,000,000 shall have the
Aliens employed by off-shore banking units and aliens employed option:
in petroleum service contractors used to enjoy the 15%  to be taxed at 8% on gross sales/receipts and other
preferential rate. Tinanggal na ‘yan. They are now subject to non-operating income in lieu of the 0%-35% and the
graduated rates of 0%-35%. This portion was vetoed by Digong. percentage tax under Section 116; or
 to be taxed at the graduated rates of 0%-35%
At the back, it says that you have four types of individual
income tax payers. Take note, wala na ‘yung in excess of P250,000. Straight siya
1. Compensation Income earner taxable at 8% on gross sales/receipts without the deduction of
2. Self-employed P250,000 because it was already deducted in the computation for
3. Professionals the compensation income. In other words, you can only avail of
4. Mixed Income earners the P250,000 at one time.
In the case of compensation income earners, they are subject Again, if you avail of the graduated rates of 0%-35%, you have
to tax at 0%-35%. the benefit of deduction (itemized or OSD). In 8%, everything is
to be taxed on gross sales/receipts without any benefit of
As a rule, self-employed and the professionals, on their deduction.
business and professional income are taxable at 0%-35%.
If you exceed the P3,000,000 threshold, you will be taxed at the
Self-employed individuals or practice of profession whose gross graduated rates of 0%-35%. No brainer na ‘yan, di nakailangan
sales or receipts and/or other non-operating income does not mag-isip – automatic graduated rates of 0%-35%.
exceed the VAT threshold of P3,000,000 shall have the
option to avail the following:
CORPORATIONS
(a) 8% tax on the gross sales or receipts and other non-
operating income in excess of P250,000 in lieu of the Wala namang nagbago until lalabas ‘tong TRAIN II. At the
graduated rates of 0%-35% under Section 24(A)(a) for moment, we are at 30%. We have:
income tax and the percentage tax under Section 116 of  Domestic Corporations
the NIRC.  Foreign Corporations
a. Resident
In other words, hindi na siya magbabayad ng income tax b. Non-resident
of 0%-35% and hindi na rin siya magbabayad ng
percentage tax. Ang babayaran niya nalang is ang one
time 8%. FOREIGN CORPORATIONS
Requirements: So, the foreign corporations are taxable on all sources within.
1. Person is non-VAT Why? The domestic, like the resident citizens, are taxable on all
2. Gross receipts or gross sales does not exceed sources within and without.
P3,000,000.  Domestic and Resident Corporations are taxed at 30%
with the benefit of the deduction
(b) The graduated rates of 0%-35%. If he avails of this,  Non-resident foreign corporations are taxed at 30% on
magbabayad pa siya nang percentage tax. Also, if he gross, without the benefit of the deduction
opts the graduated rates, there is a benefit of deduction,
whether itemized or the optional standard deduction
(OSD). Pero kung sa8% ka, you are not entitled to DOMESTIC CORPORATIONS
claim any deduction ang gross sales or receipts except
the P250,000. In case of domestic corporations, all other income not in the
regular course of business, whether within or without, will be

taxed also at 30%. So, it will be added up to your regular income

and then the consolidated taxable income taxed at 30%.
SECTION 26
The domestic and resident foreign corporations may have its MCIT
application. Partnerships may either be:
1. professional partnership
Capital gains from the sale of shares of stocks. That is 15% 2. business partnership.
and cuts across all types of corporations.
Section 26 speaks about the professional partnerships. If it is a
Percentage tax from the sale of shares of stocks.Under professional partnership exercising a common profession, then the
Section 127, that is 6/10 of 1% or 60% of 1% of the gross selling partnership is not a taxable partnership - it will be the individual
price. partners who will be taxable.
Capital gains from the sale or disposition of lands and Unlike in business partnerships, it will be taxed liked a
buildings located in the Philippines. Still 6%, the same rate corporation. And when it distributes profits to the individual
for the individuals din. Pag foreign source ito, we do not apply the business partners, then it will be treated as a distribution of
preferential rates. Subject siya at 30% added up to the regular dividends taxed at the rate depending on the individual involved,
income.
Net capital gain from the sale or exchanges or disposition SECTION 24(D)
of land and/or buildings located outside the Philippines.For
the domestic corporation, taxable at 30%. For foreign Also, in the taxation of the capital gains tax on the sale of real
corporation, they are exempted because they are taxable only on properties as capital assets in the case of individuals, the rule is
sources within. still the same. We still apply the 6% based on the selling price or
FMV, whichever is higher. Also, when you sell the property to
International carriers.The foreign corporations will have a acquire or construct a new residence, you are entitled to an
special treatment on gross Philippine billings at 2 ½%. exemption from the application of the 6% CGT.
Offshore banking units.Exempted

SECTION 33
Branch profit remittances.15% on profits applied on
remittances abroad for the resident foreign corporations. In the taxation of Fringe Benefits, you have there its special
treatment. It has the same treatment, nagbago lang 'yung rates.
Regional operating headquarters.Taxable at 10% of taxable Now, you have the grossed-up monetary value of the fringe
income and not the regular 30%. benefit multiplied by 35%. The grossed up monetary value is the
actual value divided by 65%. Ang tax base kasi is not the actual
Regional or are headquarters of multinationals. value but the grossed up monetary value.
 Exempted.
In the case of fringe benefit, one that goes to rank-and-file will
form part of compensation income subject to tax, unless if it is for
FOR OTHER PASSIVE INCOME the convenience of the employer or it is necessary and for the
regular business of the employer.
Interest from depositary banks under the expanded foreign
currency deposit system.Meaning, foreign currency deposits on Like if you have to provide meals and quarters for the driver who
local banks. has to be on-call because of the nature of the employer's
 Domestic and RFC - 15% tax on interest income profession, example a doctor. These allowances provided
 NRFC – exempted (housing, living quarters, and bills) are excluded and will not be
taxable and will not form part of the taxable income.
Royalties, yield or monetary substitutes from deposit
substitutes, trust funds and similar arrangements. If you are required to liquidate, submit receipts, and return any
 Domestic and RFC – 20% withholding excess, then that should be excluded from you taxable
 NRFC – 30% compensation income. If you are not required to liquidate, then it
will form part of you taxable compensation income.
Interest on currency bank deposits
 Domestic and RFC – 20% withholding So, as a rule, pag-receive ng rank-and-file of the fringe benefits,
 NRFC – 30% it will form part of the employee's compensation income subject
to tax. The employee pays the tax.
Cash/property dividends.
 Intercorporate dividends on domestic and RFC – The other set of benefits are those received by the supervisors
exempted and managers. Iba namang category ito of fringe benefits. Like
 NRFC – 30%, or 15% if entitled to a tax sparing credit under Section 33, these fringe benefits (list of FBT) are higher
category of it. So, if these are received by supervisors and
So, pag-foreign source naman itong passive income, we will not managers, it is taxable to the employer and not to the employee.
apply the rates. Ang taxation niyan is 30% added up to the The employer pays the tax.
regular income of the domestic corporations.
Let's say the employee was given by his employer a service
Take note of the movements of the dividends where the dividends vehicle of Lexus with an actual value of P10M. The amount will be
are given out by domestic corporations and received by: divided by 65% to come up with grossed up monetary value. So,
 Resident citizen – 10% pag i-gross up mo siya, the P10M is actually more than the P10M.
 Resident alien – 10% The gross up monetary value will now be the tax base for the tax
 Non-resident citizen – 10% that will be paid by the employer.
 NRAETB – 20%
 NRANETB –25% Section 33 is the rule that will be applied if the fringe benefit is to
 DC – 0% be given to the supervisory and managerial employees.
 RFC – 0%
 NRFC – 30% or 15% if entitled to tax sparing credit FRINGE BENEFIT NOT SUBJECT TO FRINGE BENEFIT TAX

 NON-RESIDENT ALIEN ENGAGED IN TRADE OR

Even if they are received by supervisory or managerial, if they BUSINESS (NRAETB) – allowed only to avail the
are: Itemized. No OSD for the non-residents.
1. Authorized and exempted under special law
2. Contributions of the employer for the benefit of the
employee to retirement, insurance and hospitalization ITEMIZED DEDUCTIONS (SECTION 34 A – J)
benefit plans
3. Benefits given to the rank and file employees, whether Section 34. Deductions from Gross Income. - Except for
granted under a CBA or not; taxpayers earning compensation income arising from
4. De minimis benefits personal services rendered under an employer-employee
relationship where no deductions shall be allowed under
DEDUCTIONS this Section other than under subsection (M) hereof, in
computing taxable income subject to income tax under
The deductions now are only those related to business. There are Sections 24 (A); 25 (A); 26; 27 (A), (B) and (C); and 28
no more personal and additional exemptions. While deductions (A) (1), there shall be allowed the following deductions
are matters of legislative grace, they are usually charged against from gross income;
gross income to arrive at the taxable income.
The classifications of deductions that we have are those arising (A) EXPENSES
from business, trade, or profession. The exemptions, before,
whether personal or additional, have been repealed. Wala na This category on expenses is very broad in nature as a class of
under TRAIN. business deduction because all sorts of deduction could fall into
this. If they are not in the nature that would fall under 34 (B-J),
pwede pa syadito under 34 (A) on expenses as long as they
DEDUCTIONS FROM TRADE, BUSINESS, OR PROFESSION comply those requirements above.
MAY EITHER BE:
1. ITEMIZED DEDUCTIONS – from Sections 34 (A) – (J) (1) Ordinary and Necessary Trade or Professional
(A) – Expenses; Expenses.
(B) – Interest;
(C) – Taxes; (A) Expenses. -
(D) – Losses;
(E) – Bad Debts; (1) Ordinary and Necessary Trade, Business or
(F) – Depreciation; Professional Expenses.-
(G) – Depletion;
(H) – Charitable and Other Contributions; (a) In General. - There shall be allowed as
(I) – Research and Development; and deduction from gross income all the ordinary
(J) – Pension Trusts. and necessary expenses paid or incurred
during the taxable year in carrying on or which
2. OPTIONAL STANDARD DEDUCTION (OSD) – Section are directly attributable to, the development,
34 (L) management, operation and/or conduct of the
 Individuals –40% of gross sales or gross trade, business or exercise of a profession,
receipts EXCEPTthe non-resident aliens. including:
 Corporations – 40% of gross income.
(i) A reasonable allowance for salaries, wages,
3. SPECIAL DEDUCTIONS – Section 37, and Section 61 and other forms of compensation for personal
(A) only. services actually rendered, including the
 Section 37: Insurance Companies grossed-up monetary value of fringe benefit
 Section 34 (M): REPEALED. Section 34 (M) furnished or granted by the employer to the
on premium payments is already removed employee: Provided, That the final tax imposed
under TRAIN. Section 62 has been repealed under Section 33 hereof has been paid;
also.
 Section 61 (A): Income distributed to the (ii) A reasonable allowance for travel expenses,
beneficiaries of the estates and trust is an here and abroad, while away from home in the
allowed special deduction. pursuit of trade, business or profession;
EXEMPTIONS (REPEALED UNDER TRAIN) (iii) A reasonable allowance for rentals and/or
 Exemptions for the cost of living of the taxpayer, they other payments which are required as a
are not deductible, we no longer allow personal and condition for the continued use or possession,
additional exemptions under Section 35. We have a for purposes of the trade, business or
simpler manner now to arrive at the taxable income. profession, of property to which the taxpayer
has not taken or is not taking title or in which
AFFECTED TAXPAYERS FOR THE DEDUCTIONS IN TRADE, he has no equity other than that of a lessee,
BUSINESS, OR PROFESSION user or possessor;
 INDIVIDUALS
a. Citizens; and (iv) A reasonable allowance for entertainment,
b. Resident Aliens. amusement and recreation expenses during
the taxable year, that are directly connected to
 CORPORATIONS the development, management and operation
a. Domestic Corporations; and of the trade, business or profession of the
b. Resident Foreign Corporations. taxpayer, or that are directly related to or in
furtherance of the conduct of his or its trade,
These taxpayers may avail either Itemized or the OSD. business or exercise of a profession not to
exceed such ceilings as the Secretary of
Finance may, by rules and regulations
prescribe, upon recommendation of the

Commissioner, taking into account the needs Example: The purchase of office equipment is a necessary
as well as the special circumstances, nature expense for the business of the taxpayer. But that office
and character of the industry, trade, business, equipment will last not only in the current tax year, but in the
or profession of the taxpayer: Provided, That subsequent taxable years. When you purchase let‟s say printer
any expense incurred for entertainment, and computers, top of the line office equipment, all in amounts to
amusement or recreation that is contrary to P500, 000; that P500K cannot be charged in the tax year.
law, morals public policy or public order shall in
no case be allowed as a deduction. What is the manner of claiming the deductions? Since you
could not claim that under 34 (A), then the manner of claiming it
(b) Substantiation Requirements. - No since it is a property used in business, and that equipment is
deduction from gross income shall be allowed depreciated, then you could claim that by way of depreciation
under Subsection (A) hereof unless the under Section 34 (F).
taxpayer shall substantiate with sufficient
evidence, such as official receipts or other There are deductions wherein you may not be able to claim it
adequate records: (i) the amount of the under that nature of expense; you may claim it under another
expense being deducted, and (ii) the direct type like depreciation.
connection or relation of the expense being
deducted to the development, management, Example: The taxpayer engaged an advertising company to
operation and/or conduct of the trade, promote the business for the next 5 years for P10M. So, that
business or profession of the taxpayer. amount is not an outright expense in the year when you signed
the contract, you have to pro-rate and charge so much of that
(c) Bribes, Kickbacks and Other Similar advertising expense to the 1st year, and so on. It‟s either you pro-
Payments. - No deduction from gross income rate it or you make an amortization on how you charge expenses
shall be allowed under Subsection (A) hereof for as long as it would fit the requirements as ordinary and
for any payment made, directly or indirectly, to necessary.
an official or employee of the national
government, or to an official or employee of TN: It will be an ordinary and necessary expenseif it is
any local government unit, or to an official or related to the business and chargeable to the current tax
employee of a government-owned or - year.
controlled corporation, or to an official or 2. They are paid or incurred during the taxable year;
employee or representative of a foreign 3. They are paid or incurred in carrying on or which are
government, or to a private corporation, directly attributable to the development, management,
general professional partnership, or a similar operation and/or conduct of trade, business, or
entity, if the payment constitutes a bribe or exercise of a profession;
kickback. 4. There is substantiation requirements, meaning subject
to receipts or some form of substantiation;
5. They are not contrary to law, public policy or not in the
nature of bribes, kickbacks, or other similar payments;
REQUIREMENTS FOR THE DEDUCTIBILITY: 6. If that payment of that expense requires withholding
like salaries before they are given to the employees,
1. They shall be ordinary and necessary; the employer must make the necessary withholding.
Otherwise, in the event of an assessment, absent the
This means thatthe expense is related to the business or withholding, the deduction would be disallowed.
profession of the taxpayer and it is charged during the tax year
because there are expenses where the benefit of the expense will See (i) The grossed up monetary value of the fringe benefits is
go beyond the taxable year. deductible. The tax is deductible under another category.
So, if that expense will benefit not only the current tax year, but Read (ii) (iii)(iv)
also the succeeding taxable years, then, they could not be
claimed under 34 (A). They could still be claimed as a deduction See (c)You ___ with clients and customers except bribes and
but not as an outright under 34 (A). kickbacks and other similar payments that are contrary to law,
morals, public policy and public order.
To claim them under 34 (A), you may either pro-rate, or you may
make a determination that a particular amount is attributable to
this tax year. If you could not make any attribution, then you can (2) Expenses Allowable to Private Educational
pro-rate. Institutions.
Example: Let‟s say P1M. But that expense will be good for 3 (2) Expenses Allowable to Private Educational
years. So, you could not claim P1M outright. You have to pro-rate Institutions. - In addition to the expenses allowable as
the P1M, 1/3 of that will be claimed this year, another 1/3 for the deductions under this Chapter, a private educational
2nd year and the last 1/3 on the 3rd year. institution, referred to under Section 27 (B) of this Code,
may at its option elect either: (a) to deduct expenditures
While it may be a necessary expense because it is related to otherwise considered as capital outlays of depreciable
business, it is no longer ordinary. When we say ORDINARY, that assets incurred during the taxable year for the
expense is chargeable during the current taxable year. If that expansion of school facilities or (b) to deduct allowance
benefit goes beyond the current taxable year, then you could not for depreciation thereof under Subsection (F) hereof.
charge that at 100%, only apportion that and the others will be
charged in the subsequent tax years. This is a special treatment for private educational institutions.
The manner of proportioning it is left in the hands of the taxpayer Example: If the school would construct a building, a school
whether he pro-rates it equally, or makes a manner of amortizing facility, the expenses incurred in this tax year can be claimed
the amount. outright as a deduction kase progressive man yan, let‟s say the
school building will take 2-3 years to build:
When you say NECESSARY, it is one that is related to the
business of the taxpayer.  You can collect the expense in the 1st year it can be
charged in that tax year, sa 2nd year, this is the amount

of expense incurred for that school building, claim that Tax arbitrage rule will apply when the taxpayer borrows money
as a deduction in that year, and sa 3rd year, ito yung and the money is used to invest in securities of some forms of
expense when it is submitted, claim that as a investments where it will earn interest income. So if the amount
deduction; OR borrowed is used in investments where interest income is earned,
then, the interest expense for the cost of borrowing cannot be
 You add up all the expenses, i-defer mo, ipunin mo, deducted 100%, it will be subject to the deduction of 33%.
and 3rd year when it is submitted, you claim now a
deduction not under 34 (A), but you claim now by way Do not be confused because the treatment here is not applicable
of depreciation. So the entire school building costs in all types of transactions. Ordinarily, the interest expense is
P50M, that amount will now be depreciated under 34 deductible entirely for as long as they are related to the business
(F) na. i-depreciate mo sya for the period of time, the or profession of the taxpayer. But if the money borrowed of which
number o f years that it will be useful to the private you pay an interest expense was used to acquire investment
educational institution. where interest income is earned, then you are not allowed to
claim the entire interest expense. It will be reduced by 33% of the
That treatment is only true to the private educational institution. interest income. Not 33% of the interest expense.
It could not apply to other taxpayers.
Example: Interest expense is 100,000. Interest income is 10,000.
10,000 x 33% = 3,300
(B) INTEREST 100,000 – 3,300 = 96,700 (Allowable interest expense)
(1) In General. - The amount of interest paid or (In the next bar, we are anticipating computations)
incurred within a taxable year on indebtedness in
connection with the taxpayer's profession, trade or
business shall be allowed as deduction from gross (2) Other exceptions
income: Provided, however, That the taxpayer's
otherwise allowable deduction for interest expense shall (2) Exceptions. - No deduction shall be allowed in
be reduced by forty-two percent (42%) of the interest respect of interest under the succeeding subparagraphs:
income subjected to final tax: Provided, That effective
January 1, 2009, the percentage shall be thirty-three (a) If within the taxable year an individual taxpayer
percent (33%). reporting income on the cash basis incurs an
indebtedness on which an interest is paid in advance
The interest income is to the creditor. The one who pays the through discount or otherwise: Provided, That such
interest is the debtor. The debtor is the taxpayer. He pays an interest shall be allowed as a deduction in the year the
interest expense. He borrows money to be used in business. Then indebtedness is paid: Provided, further, That if the
that servicing is a deductible expense under Section 34 (B). indebtedness is payable in periodic amortizations, the
amount of interest which corresponds to the amount of
The deductibility is one that should pertain to the trade, the principal amortized or paid during the year shall be
profession, or business of the taxpayer. allowed as deduction in such taxable year;
(2) Exceptions. - No deduction shall be allowed in No deductions shall be allowed when you are dealing with a cash
respect of interest under the succeeding subparagraphs: basis taxpayer that borrows money and the interest is paid in
advance. The cash basis taxpayer is allowed only the interest
(a) If within the taxable year an individual taxpayer expense that is attributable to that tax year. The other portion of
reporting income on the cash basis incurs an the interest expense which will not cover the current tax year
indebtedness on which an interest is paid in advance should not be charge to that year. It is charged on the next tax
through discount or otherwise: Provided, That such year.
interest shall be allowed as a deduction in the year the
indebtedness is paid: Provided, further, That if the This rule will apply only to cash basis taxpayer. Meaning, they
indebtedness is payable in periodic amortizations, the recognize income on actual receipt and expense on the actual
amount of interest which corresponds to the amount of expense. But here, it is paid in advance.
the principal amortized or paid during the year shall be
allowed as deduction in such taxable year; Example: borrowed money on March 1, 2018. Then there is a loan
of 100,000 with 12% interest per annum, hence, interest is
(b) If both the taxpayer and the person to whom the 12,000. Then the interest was paid in advance. So ang natanggap
payment has been made or is to be made are persons na lang ng borrower is 88,000. Here, interest was paid on March
specified under Section 36 (B); or 1, 2018.
(c) If the indebtedness is incurred to finance petroleum So, the interest here is good for March 1, 2018 to February 2019.
exploration. For 2018, the cash basis taxpayer is not allowed to claim the
interest expense of 12,000 as a deductible interest for 2018
If the expense is under Section 34 (B) (2) (b), the interest is because a portion of that does not belong to 2018. It belongs to
incurred to related taxpayers under Section 36 (B), then the some months in 2019. The allowed interest expense is only those
interest expense is NOT deductible. These are pautang between from March 1 to Dec 31, 2018, 10 months, 10,000. In 2019, the
related taxpayers. If the taxpayer borrow money to be used in balance of 2,000 will be claimed.
business, and the creditor is related to the taxpayer, the interest
expense is NOT allowed as a deduction. (b) If both the taxpayer and the person to whom the
payment has been made or is to be made are persons
specified under Section 36 (B); or
TAX ARBITRAGE RULE
When debtor and creditor related taxpayers, interest expense is
In the second part of 34 (B), where there is a diminution of the not deductible.
interest expense, currently at 33%, is a special treatment of the
deductibility of the interest expense, which we call the “Tax (c) If the indebtedness is incurred to finance petroleum
Arbitrage Rule.” exploration.

It is not deductible. But the interest expense can be added to the The treatment will depend whether the taxpayer benefited of not
cost of petroleum exploration and claim the deduction by way of from the deduction. If there was a benefit at the time the
depletion. deduction was made, then the refund will be subject to tax. But is
there was no tax benefit at the time the deduction was made then
the refund will not be taxable.
(3) Optional Treatment of Interest Expense
(3) Optional Treatment of Interest Expense. - At the (3) Foreign income tax for resident citizens
option of the taxpayer, interest incurred to acquire
property used in trade business or exercise of a (3) Credit Against Tax for Taxes of Foreign Countries. -
profession may be allowed as a deduction or treated as If the taxpayer signifies in his return his desire to have
a capital expenditure. the benefits of this paragraph, the tax imposed by this
Title shall be credited with:
This occurs when a taxpayer borrows money to buy a property to
be used in business. (a) Citizen and Domestic Corporation. - In the case of a
citizen of the Philippines and of a domestic corporation,
Example: taxpayers borrows money to purchase a delivery truck the amount of income taxes paid or incurred during the
through financing. The taxpayer is given 2 options: taxable year to any foreign country; and
a. Separate deduction for interest expense (NIRC Sec. 34- (b) Partnerships and Estates. - In the case of any such
B); the cost of the business asset will be deducted individual who is a member of a general professional
subject to depreciation (34-F); OR partnership or a beneficiary of an estate or trust, his
b. The cost of the financing plus the cost of the truck will proportionate share of such taxes of the general
be deducted by way of depreciation. professional partnership or the estate or trust paid or
incurred during the taxable year to a foreign country, if
his distributive share of the income of such partnership
(C) TAXES or trust is reported for taxation under this Title.
(C) Taxes. - An alien individual and a foreign corporation shall not be

allowed the credits against the tax for the taxes of
(1) In General. - Taxes paid or incurred within the foreign countries allowed under this paragraph.
taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as In the case of foreign income tax for resident citizens, it is subject
deduction, except: to a tax credit. Not as deduction in the gross income. The tax
liability will be reduced by the foreign income tax paid subject to
(a) The income tax provided for under this Title; certain conditions.
(b) Income taxes imposed by authority of any foreign

country; but this deduction shall be allowed in the case (D) LOSSES
of a taxpayer who does not signify in his return his
desire to have to any extent the benefits of paragraph (D) Losses. -
(3) of this subsection (relating to credits for taxes of
foreign countries); (1) In General. - Losses actually sustained during the
taxable year and not compensated for by insurance or
(c) Estate and donor's taxes; and other forms of indemnity shall be allowed as deductions:
(d) Taxes assessed against local benefits of a kind (a) If incurred in trade, profession or business;
tending to increase the value of the property assessed.
(b) Of property connected with the trade, business or
Provided, That taxes allowed under this Subsection, profession, if the loss arises from fires, storms,
when refunded or credited, shall be included as part of shipwreck, or other casualties, or from robbery, theft or
gross income in the year of receipt to the extent of the embezzlement.
income tax benefit of said deduction.
The Secretary of Finance, upon recommendation of the
(2) Limitations on Deductions. - In the case of a non Commissioner, is hereby authorized to promulgate rules
resident alien individual engaged in trade or business in and regulations prescribing, among other things, the
the Philippines and a resident foreign corporation, the time and manner by which the taxpayer shall submit a
deductions for taxes provided in paragraph (1) of this declaration of loss sustained from casualty or from
Subsection (C) shall be allowed only if and to the extent robbery, theft or embezzlement during the taxable year:
that they are connected with income from sources within Provided, however, That the time limit to be so
the Philippines. prescribed in the rules and regulations shall not be less
than thirty (30) days nor more than ninety (90) days
In the case of taxes, not all taxes are deductible, like VAT, from the date of discovery of the casualty or robbery,
percentage, and income tax. theft or embezzlement giving rise to the loss.
(c) No loss shall be allowed as a deduction under this

TAX BENEFIT RULE Subsection if at the time of the filing of the return, such
loss has been claimed as a deduction for estate tax
Important here is the tax benefit rule is case of tax refund. Last purposes in the estate tax return.
paragraph of Sec 34, C, 1. This occurs when the tax payer claims
a deduction for taxes. (2) Proof of Loss. - In the case of a nonresident alien
Example: It was discovered that it was erroneous slip – he individual or foreign corporation, the losses deductible
overpaid the tax. He claims now a refund, then it was granted. He shall be those actually sustained during the year
was issued a tax credit certificate or refunded. incurred in business, trade or exercise of a profession
conducted within the Philippines, when such losses are
not compensated for by insurance or other forms of

indemnity. The secretary of Finance, upon

recommendation of the Commissioner, is hereby Q: How long is he allowed to claim a deduction?
authorized to promulgate rules and regulations
prescribing, among other things, the time and manner That can be allowed only for the next 3 consecutive taxable years.
by which the taxpayer shall submit a declaration of loss
sustained from casualty or from robbery, theft or This is allowed when there is no change in the ownership of the
embezzlement during the taxable year: Provided, That business. If the ownership has changed, yet the business name is
the time to be so prescribed in the rules and regulations the same, the one who took over is not allowed to continue with
shall not be less than thirty (30) days nor more than that loss carry-over.
ninety (90) days from the date of discovery of the
casualty or robbery, theft or embezzlement giving rise to
the loss; and Capital Losses
Losses are those related to the business of the taxpayer. these (4) Capital Losses. -
losses are actually sustained during the tax year and not
compensated for by insurance or other forms of indemnity. (a) Limitations. - Loss from sales or Exchanges of capital
assets shall be allowed only to the extent provided in
Example: office building is lost by fire and not covered by Section 39.
insurance, the loss can be claimed. If it is insured 100%, then you
cannot claim a deduction. If there is partial indemnity, the (b) Securities Becoming Worthless. - If securities as
unindemnified loss can be claimed as a deduction. defined in Section 22 (T) become worthless during the
taxable year and are capital assets, the loss resulting
For loss from casualty, robbery, theft, embezzlement – must therefrom shall, for purposes of this Title, be considered
report to BIR to claim deduction. as a loss from the sale or exchange, on the last day of
such taxable year, of capital assets.
Net Operating Loss Carry-Over (NOLCO) Losses arising from capital asset transactions where no gain was
arrived at. Remember that there must be a transaction resulting
(3) Net Operating Loss Carry-Over. - The net operating into a gain or loss. Capital assets are properties not used in
loss of the business or enterprise for any taxable year business
immediately preceding the current taxable year, which
had not been previously offset as deduction from gross Example: Family car is sold to buy another car. If it is sold at
income shall be carried over as a deduction from gross gain, you have capital gain, if at loss – capital loss.
income for the next three (3) consecutive taxable years
immediately following the year of such loss: Provided, Q: What happens when you have losses, can you claim this
however, That any net loss incurred in a taxable year as a deduction?
during which the taxpayer was exempt from income tax
shall not be allowed as a deduction under this You cannot claim capital losses as a deduction against gross
Subsection: Provided, further, That a net operating loss income. Capital losses are deductible when you have capital
carry-over shall be allowed only if there has been no gains.
substantial change in the ownership of the business or
enterprise in that -
Losses from Wash Sales of Stock or Securities
(i) Not less than seventy-five percent (75%) in nominal
value of outstanding issued shares., if the business is in (5) Losses From Wash Sales of Stock or Securities. -
the name of a corporation, is held by or on behalf of the Losses from 'wash sales' of stock or securities as
same persons; or provided in Section 38.
(ii) Not less than seventy-five percent (75%) of the paid Losses are not deductible, but gains are taxable.
up capital of the corporation, if the business is in the
name of a corporation, is held by or on behalf of the
same persons.
For purposes of this subsection, the term 'net operating Wagering Losses (gambling losses)
loss' shall mean the excess of allowable deduction over
gross income of the business in a taxable year. (6) Wagering Losses. - Losses from wagering
transactions shall be allowed only to the extent of the
Provided, That for mines other than oil and gas wells, a gains from such transactions.
net operating loss without the benefit of incentives
provided for under Executive Order No. 226, as Losses are not deductible against gross income.
amended, otherwise known as the Omnibus Investments
Code of 1987, incurred in any of the first ten (10) years
of operation may be carried over as a deduction from Abandonment losses
taxable income for the next five (5) years immediately
following the year of such loss. The entire amount of the (7) Abandonment Losses. -
loss shall be carried over to the first of the five (5)
taxable years following the loss, and any portion of such (a) In the event a contract area where petroleum
loss which exceeds the taxable income of such first year operations are undertaken is partially or wholly
shall be deducted in like manner form the taxable abandoned, all accumulated exploration and
income of the next remaining four (4) years. development expenditures pertaining thereto shall be
allowed as a deduction: Provided, That accumulated
Net operating loss is one that results from the operation of the expenditures incurred in that area prior to January 1,
business ending with no income - loss. When the taxpayer will be 1979 shall be allowed as a deduction only from any
contemplating of not continuing the business. However, he would income derived from the same contract area. In all
continue and the losses may be allowed to be claimed as a cases, notices of abandonment shall be filed with the
deduction as a net operating loss carry-over.

Commissioner. amusement and recreation expenses during

the taxable year, that are directly connected to
(b) In case a producing well is subsequently abandoned, the development, management and operation
the un-amortized costs thereof, as well as the un- of the trade, business or profession of the
depreciated costs of equipment directly used therein , taxpayer, or that are directly related to or in
shall be allowed as a deduction in the year such well, furtherance of the conduct of his or its trade,
equipment or facility is abandoned by the contractor: business or exercise of a profession not to
Provided, That if such abandoned well is re-entered and exceed such ceilings as the Secretary of
production is resumed, or if such equipment or facility is Finance may, by rules and regulations
restored into service, the said costs shall be included as prescribe, upon recommendation of the
part of gross income in the year of resumption or Commissioner, taking into account the needs
restoration and shall be amortized or depreciated, as the as well as the special circumstances, nature
case may be. and character of the industry, trade, business,
or profession of the taxpayer: Provided, That
Deductible against gross income. This occurs when the tax payer any expense incurred for entertainment,
is engaged in the exploration of natural resources (eg. Oil) then amusement or recreation that is contrary to
decides to abandon the project. law, morals public policy or public order shall in
no case be allowed as a deduction.
22 JANUARY 2019
Resurreccion, G. & Geralde (b) Substantiation Requirements. - No
deduction from gross income shall be allowed
Under the current income tax system we have with the under Subsection (A) hereof unless the
amendment under TRAIN, the deductions that income taxpayers taxpayer shall substantiate with sufficient
could claim would consist now of the deductions arising from evidence, such as official receipts or other
trade, business, or profession (TBP). There is no more deduction adequate records: (i) the amount of the
for the exemptions covering personal and additional exemptions expense being deducted, and (ii) the direct
to cover cost of living (in particular, the individual taxpayers). So, connection or relation of the expense being
repealed nayun. deducted to the development, management,
operation and/or conduct of the trade,
Insofar as the deductions related to TBP, the deductions to be business or profession of the taxpayer.
claimed will either be ITEMIZED under Sec. 34 (A) to (J) or the
OPTIONAL STANDARDIZED DEDUCTION (OSD) except to the non- (c) Bribes, Kickbacks and Other Similar
resident aliens. Payments. - No deduction from gross income
shall be allowed under Subsection (A) hereof
Individuals may claim a 40% OSD from their gross sales or gross for any payment made, directly or indirectly, to
receipts while the corporations may avail the equivalent 40% of an official or employee of the national
the gross income. government, or to an official or employee of
any local government unit, or to an official or
Then, you this itemized deduction under Sec. 34 (A). employee of a government-owned or -
controlled corporation, or to an official or
(A) Expenses. - employee or representative of a foreign
government, or to a private corporation,
(1) Ordinary and Necessary Trade, Business or general professional partnership, or a similar
Professional Expenses.- entity, if the payment constitutes a bribe or
kickback.
(a) In General. - There shall be allowed as This sub-section has the following requirements:
deduction from gross income all the ordinary
and necessary expenses paid or incurred 1. They shall be ordinary and necessary;
during the taxable year in carrying on or which 2. They are paid or incurred during the taxable year;
are directly attributable to, the development, 3. They are paid or incurred in carrying on or which are
management, operation and/or conduct of the directly attributable to the development, management,
trade, business or exercise of a profession, operation and/or conduct of trade, business, or exercise
including: of a profession;
4. There is substantiation requirements, meaning subject
(i) A reasonable allowance for salaries, wages, to receipts or some form of substantiation;
and other forms of compensation for personal 5. They are not contrary to law, public policy or not in the
services actually rendered, including the nature of bribes, kickbacks, or other similar payments;
grossed-up monetary value of fringe benefit 6. If that payment of that expense requires withholding like
furnished or granted by the employer to the salaries before they are given to the employees, the
employee: Provided, That the final tax imposed employer must make the necessary withholding.
under Section 33 hereof has been paid;
On the first requisite, when you say “ordinary” [expenses], these
(ii) A reasonable allowance for travel expenses, are normal and usual to the business. “Necessary” means they
here and abroad, while away from home in the are useful or reasonable.
pursuit of trade, business or profession;
(2) Expenses Allowable to Private Educational
(iii) A reasonable allowance for rentals and/or Institutions. - In addition to the expenses allowable as
other payments which are required as a deductions under this Chapter, a private educational
condition for the continued use or possession, institution, referred to under Section 27 (B) of this Code,
for purposes of the trade, business or may at its option elect either: (a) to deduct expenditures
profession, of property to which the taxpayer otherwise considered as capital outlays of depreciable
has not taken or is not taking title or in which assets incurred during the taxable year for the
he has no equity other than that of a lessee, expansion of school facilities or (b) to deduct allowance
user or possessor; for depreciation thereof under Subsection (F) hereof.
(iv) A reasonable allowance for entertainment,

Then you have the optional treatment of the expenses relative to by the whole or half-blood), spouse, ancestors,
the private educational institutions (PEI). So, when PEIs would and lineal descendants; or
incur expenses like expansion of school facilities, it has the option 2) Except in the case of distributions in
to claim them as outright deduction in the year they were paid or liquidation, between an individual and
incurred. Or they will defer it until the facilities are completed and corporation more than fifty percent (50%) in
then claim the deductions by way of depreciation under Sec. 34 value of the outstanding stock of which is
(F). owned, directly or indirectly, by or for such
individual; or
Then you have Sec. 34 (B) on interest expense. 3) Except in the case of distributions in
liquidation, between two corporations more
than fifty percent (50%) in value of the
(B) INTEREST outstanding stock of which is owned, directly
or indirectly, by or for the same individual if
(1) In General. - The amount of interest paid or either one of such corporations, with respect to
incurred within a taxable year on indebtedness in the taxable year of the corporation preceding
connection with the taxpayer's profession, trade or the date of the sale of exchange was under the
business shall be allowed as deduction from gross law applicable to such taxable year, a personal
income: Provided, however, That the taxpayer's holding company or a foreign personal holding
otherwise allowable deduction for interest expense shall company;
be reduced by forty-two percent (42%) of the interest 4) Between the grantor and a fiduciary of any
income subjected to final tax: Provided, That effective trust; or
January 1, 2009, the percentage shall be thirty-three 5) Between the fiduciary of and the fiduciary of a
percent (33%). trust and the fiduciary of another trust if the
same person is a grantor with respect to each
REQUISITES: trust; or
1. Interest must be paid or incurred within the taxable 6) Between a fiduciary of a trust and beneficiary
year; of such trust.
2. Interest must be upon an indebtedness in connection
with the TBP of the taxpayer; Then you have Sec. 34 (B) (2) (c). They are disallowed but they
3. Interest is stipulated in writing; could be claimed by way of depletion or depreciation depending
4. The interest on the indebtedness must not be upon on what is the nature of that expense where an interest was
related taxpayers under Sec. 36 (B) of NIRC. obtained or paid in that petroleum exploration. So if the
petroleum exploration would cover expenses for exploration and
development, then that would be charged to the depletion
expense. But if the interest expense was incurred to finance the
(2) Exceptions. - No deduction shall be allowed in construction of facilities as part of its petroleum exploration then
respect of interest under the succeeding subparagraphs: that would be covered by way of depreciation.
a) If within the taxable year an individual
taxpayer reporting income on the cash basis
incurs an indebtedness on which an interest is Sec. 34 (B) (3) Optional Treatment of Interest Expense
paid in advance through discount or otherwise:
Provided, That such interest shall be allowed a (3) Optional Treatment of Interest Expense. - At the
a deduction in the year the indebtedness is option of the taxpayer, interest incurred to acquire
paid: Provided, further, That if the property used in trade business or exercise of a
indebtedness is payable in periodic profession may be allowed as a deduction or treated as
amortizations, the amount of interest which a capital expenditure.
corresponds to the amount of the principal
amortized or paid during the year shall be Here, a property was acquired to be used in business but was
allowed as deduction in such taxable year; acquired through financing. The option here is that the interest is
b) If both the taxpayer and the person to whom claimed as a separate deduction. Or the interest is added to the
the payment has been made or is to be made cost of that property acquired and claimed as a capital
are persons specified under Section 36 (B); or expenditure and the deduction is by way of depreciation.
c) If the indebtedness is incurred to finance
petroleum exploration.
Sec. 34 (C) TAXES
EXCEPTIONS here were discussed in ___ on the application of
Tax Arbitrage Rule where the interest expense is further reduced (1) In General. - Taxes paid or incurred within the
by 33% of the interest income. taxable year in connection with the taxpayer's
profession, trade or business, shall be allowed as
The allowed deduction will be the interest expense that is deduction, except:
attributable to the tax year. So, if it is paid in advance, only the a) The income tax provided for under this Title;
portion of the interest that is covered by the tax year is the b) Income taxes imposed by authority of any
allowed deduction. If the portion would not pertain to the current foreign country; but this deduction shall be
tax year, then that interest expense will be covered in the next allowed in the case of a taxpayer who does not
tax year. signify in his return his desire to have to any
extent the benefits of paragraph (3) of this
Then you have interest expense between related taxpayers under subsection (relating to credits for taxes of
Sec. 36 (B). It is also disallowed under Sec. 34 (B) (2) (b). foreign countries);
c) Estate and donor's taxes; and
Sec. 36 (B) Losses from Sales or Exchanges of Property. d) Taxes assessed against local benefits of a kind
– In computing net income, no deductions shall in any tending to increase the value of the property
case be allowed in respect of losses from sales or assessed.
exchanges of property directly or indirectly –
1) Between members of a family.For purposes of Provided, That taxes allowed under this Subsection,
this paragraph, the family of an individual shall when refunded or credited, shall be included as part of
include only his brothers and sisters (whether gross income in the year of receipt to the extent of the

income tax benefit of said deduction. option of the taxpayer and irrespective of the method of
accounting employed in keeping his books, be taken in
(2) Limitations on Deductions. - In the case of a the year which the taxes of the foreign country were
nonresident alien individual engaged in trade or business incurred, subject, however, to the conditions prescribed
in the Philippines and a resident foreign corporation, the in Subsection (C)(5) of this Section.
deductions for taxes provided in paragraph (1) of this
Subsection (C) shall be allowed only if and to the extent If the taxpayer elects to take such credits in the year in
that they are connected with income from sources within which the taxes of the foreign country accrued, the
the Philippines. credits for all subsequent years shall be taken upon the
same basis and no portion of any such taxes shall be
(3) Credit Against Tax for Taxes of Foreign Countries. - allowed as a deduction in the same or any succeeding
If the taxpayer signifies in his return his desire to have year.
the benefits of this paragraph, the tax imposed by this
Title shall be credited with: (7) Proof of Credits. - The credits provided in Subsection
a) Citizen and Domestic Corporation. - In the case (C)(3) hereof shall be allowed only if the taxpayer
of a citizen of the Philippines and of a domestic establishes to the satisfaction of the Commissioner the
corporation, the amount of income taxes paid following:
or incurred during the taxable year to any a) The total amount of income derived from
foreign country; and sources without the Philippines;
b) Partnerships and Estates. - In the case of any b) The amount of income derived from each
such individual who is a member of a general country, the tax paid or incurred to which is
professional partnership or a beneficiary of an claimed as a credit under said paragraph, such
estate or trust, his proportionate share of such amount to be determined under rules and
taxes of the general professional partnership or regulations prescribed by the Secretary of
the estate or trust paid or incurred during the Finance; and
taxable year to a foreign country, if his c) All other information necessary for the
distributive share of the income of such verification and computation of such credits.
partnership or trust is reported for taxation
under this Title. Taxes – all taxes, national or local paid or incurred within the tax
year in connection with TBP allowed as deduction
An alien individual and a foreign corporation shall not be
allowed the credits against the tax for the taxes of
foreign countries allowed under this paragraph. EXCEPT:
1. Philippine income tax
(4) Limitations on Credit. - The amount of the credit 2. Transfer taxes (estate and donor‟s taxes)
taken under this Section shall be subject to each of the 3. Foreign income tax, unless availed as tax credit
following limitations: 4. Special assessment of special levy by LGUs
a) The amount of the credit in respect to the tax
paid or incurred to any country shall not Foreign income tax paid by resident citizen and domestic
exceed the same proportion of the tax against corporation is availed as a tax credit in the Philippine income tax
which such credit is taken, which the and NOT as a tax deduction. Here, you do not charge as foreign
taxpayer's taxable income from sources within income tax as a deduction on gross income but availed by way of
such country under this Title bears to his entire a tax credit.
taxable income for the same taxable year; and
b) The total amount of the credit shall not exceed
the same proportion of the tax against which Deductible Taxes:
such credit is taken, which the taxpayer's 1. Percentage tax
taxable income from sources without the 2. Excise tax
Philippines taxable under this Title bears to his 3. Local taxes
entire taxable income for the same taxable 4. Fringe benefit tax
year. 5. Documentary stamp tax
(5) Adjustments on Payment of Incurred Taxes. - If

accrued taxes when paid differ from the amounts Non-deductible Taxes:
claimed as credits by the taxpayer, or if any tax paid is 1. VAT
refunded in whole or in part, the taxpayer shall notify
the Commissioner; who shall redetermine the amount of Rule on recovery of tax refund: taxes earlier claimed as a
the tax for the year or years affected, and the amount of deduction when refunded or credited shall be included as part of
tax due upon such redetermination, if any, shall be paid gross income in the year of receipt to the extent of the income tax
by the taxpayer upon notice and demand by the benefit of said deduction. (tax benefit rule)
Commissioner, or the amount of tax overpaid, if any,
shall be credited or refunded to the taxpayer. In the So, the income recognition of a tax refund will be made when the
case of such a tax incurred but not paid, the time the deduction is made, you were able to benefit in the
Commissioner as a condition precedent to the allowance deduction by way of paying a lesser tax at the time the deduction
of this credit may require the taxpayer to give a bond was made. But if at the time of the deduction was made, the
with sureties satisfactory to and to be approved by the taxpayer was not able to benefit in the deduction, despite
Commissioner in such sum as he may require, recovery by way of refund, there is no need to recognize an
conditioned upon the payment by the taxpayer of any income. But if you a benefit of that deduction, in the event of
amount of tax found due upon any such recovery later on by way of refund, the taxpayer is made to
redetermination. recognize the taxable income for that refund.
The bond herein prescribed shall contain such further

conditions as the Commissioner may require. Sec. 34 (D) LOSSES (*Please see previous citation for this
subsection)
(6) Year in Which Credit Taken. - The credits provided
for in Subsection (C)(3) of this Section may, at the REQUISITES:

1. Loss must be actual (not anticipated) But from among these collectibles, there are debts there which
2. Loss must be sustained in a closed and completed can no longer be collected. So, they have become worthless. But
transaction it is upon the burden of the taxpayer to determine that [the
3. Loss must not be compensated for by the insurance or collectibles] have become worthless and could no longer be
other forms of indemnity collected. Efforts must be done by the taxpayer to determine
4. Loss must be liquidated or and charged-off during the worthlessness. Like sending demand letters to the debtors. But
tax year despite these efforts (without necessarily resorting to legal
5. Loss must have been incurred in the TBP of the taxpayer action), debtors still did not pay. At that time, the taxpayer may
or of property used in business decide and ascertain that the collection is no longer possible.
RULES ON LOSSES
Rule on bad debts recovery: bad debts previously claimed as
Net Operating Loss Carry-Over (NOLCO) is deductible against deduction and later on recovered shall be included as part of
gross income within the 3 consecutive tax years provided there is gross income in the year of recovery to the extent of the income
no substantial change in ownership. tax benefit of the said deduction. (tax benefit rule)
Capital losses are deductible when there are capital gains, not Dean: At the time you claimed the deduction for bad debts, you
deductible against gross income. Losses are derived from capital were able to have a tax benefit. Meaning, you paid a lesser tax by
asset transactions under Sec. 39 (capital loss and capital gain). reason of that deduction. Then later on, there was recovery.
Income now is to be recognized and that is a taxable income. But
Dean: Capital losses arise when there is a capital asset at the time the deduction for bad debts was made there was no
transaction and the resulting transaction is that there is loss. tax benefit, then, in the event of recovery, there is no need to
recognize a taxable income.
Securities becoming worthless (Sec. 22 (T)) which are capital
assets are treated as capital losses. But if in the hands of Sec. 34 (F) DEPRECIATION
stock/securities trader/broker they are no longer considered as
capital assets because the securities are used in business. Unlike (F) Depreciation. - (1) General Rule. - There shall be
a taxpayer where the securities are not used in business, then the allowed as a depreciation deduction a reasonable
resulting transaction may either be a capital gain or capital loss. allowance for the exhaustion, wear and tear (including
reasonable allowance for obsolescence) of property used
But in the hands of a stock/securities trader/broker, securities in the trade or business.
becoming worthless are ordinarily losses or treated as bad debts.
In the case of property held by one person for life with
Losses from wash sales of stocks and securities (Sec. 38) – remainder to another person, the deduction shall be
not deductible computed as if the life tenant were the absolute owner
of the property and shall be allowed to the life tenant.
Wagering losses – gambling losses are not deductible against
gross income; deductible only when there are gambling/wagering In the case of property held in trust, the allowable
gains deduction shall be apportioned between the income
beneficiaries and the trustees in accordance with the
Abandonment losses – deductible from gross income since they pertinent provisions of the instrument creating the trust,
arise from exploration and development expenditures (extractive or in the absence of such provisions, on the basis of the
industry). trust income allowable to each.
Sec. 34 (E) BAD DEBTS (2) Use of Certain Methods and Rates. - The term
"reasonable allowance" as used in the preceding
(E) Bad Debts. - (1) In General. - Debts due to the paragraph shall include, but not limited to, an allowance
taxpayer actually ascertained to be worthless and computed in accordance with rules and regulations
charged off within the taxable year except those not prescribed by the Secretary of Finance, upon
connected with profession, trade or business and those recommendation of the Commissioner, under any of the
sustained in a transaction entered into between parties following methods:
mentioned under Section 36 (B) of this Code: Provided, a) The straight-line method;
That recovery of bad debts previously allowed as b) Declining-balance method, using a rate not
deduction in the preceding years shall be included as exceeding twice the rate which would have
part of the gross income in the year of recovery to the been used had the annual allowance been
extent of the income tax benefit of said deduction. computed under the method described in
Subsection (F) (1);
(2) Securities Becoming Worthless. - If securities, as c) The sum-of-the-years-digit method; and
defined in Section 22 (T), are ascertained to be d) any other method which may be prescribed by
worthless and charged off within the taxable year and the Secretary of Finance upon recommendation
are capital assets, the loss resulting therefrom shall, in of the Commissioner.
the case of a taxpayer other than a bank or trust
company incorporated under the laws of the Philippines (3) Agreement as to Useful Life on Which Depreciation
a substantial part of whose business is the receipt of Rate is Based. - Where under rules and regulations
deposits, for the purpose of this Title, be considered as a prescribed by the Secretary of Finance upon
loss from the sale or exchange, on the last day of such recommendation of the Commissioner, the taxpayer and
taxable year, of capital assets. the Commissioner have entered into an agreement in
writing specifically dealing with the useful life and rate of
REQUISITES: depreciation of any property, the rate so agreed upon
1. There is a valid and existing debt shall be binding on both the taxpayer and the national
2. The obligation/debt is connected with TBP and not Government in the absence of facts and circumstances
between related parties/taxpayers under Sec. 36 (B) not taken into consideration during the adoption of such
3. The debt is actually ascertained to be worthless and agreement.
could no longer be collected
4. The debt is charged-off within tax year The responsibility of establishing the existence of such
Dean: On Requisite 1: When a taxpayer is engaged in TBP, he has facts and circumstances shall rest with the party
collectibles (accounts receivables). These are from his debtors. initiating the modification.

fixtures, office vehicle, equipment). These properties, while being

Any change in the agreed rate and useful life of the used in business, they are not ordinary expenses deductible under
depreciable property as specified in the agreement shall Sec. 34 (A). While these properties are necessary expenses, they
not be effective for taxable years prior to the taxable are not ordinary. Hence, the manner in which to claim them as a
year in which notice in writing by certified mail or deduction is under Sec. 34 (F).
registered mail is served by the party initiating such
change to the other party to the agreement: Provided,
however, that where the taxpayer has adopted such METHODS:
useful life and depreciation rate for any depreciable and
claimed the depreciation expenses as deduction from his (1) Straight-line method – spreads the depreciation over
gross income, without any written objection on the part the useful life of the property/asset used in business
of the Commissioner or his duly authorized
representatives, the aforesaid useful life and Annual Depreciation [AD] = (Cost of Property [CP] –
depreciation rate so adopted by the taxpayer for the Scrap Value [SV])/ Estimated Life [EL]
aforesaid depreciable asset shall be considered binding
for purposes of this Subsection. Example:
Cost of Property - P 1, 000, 000
(4) Depreciation of Properties Used in Petroleum Estimated Life - 10 years
Operations. - An allowance for depreciation in respect of Estimated Scrap Value - P 50, 000
all properties directly related to production of petroleum
initially placed in service in a taxable year shall be AD = (CP –SV)/ EL
allowed under the straight-line or declining-balance = (1, 000, 000 – 50, 000)/10
method of depreciation at the option of the service = (950, 000)/10
contractor. = P 95, 000
However, if the service contractor initially elects the Hence, you can claim an annual deduction of P 95, 000
declining-balance method, it may at any subsequent for the next 10 years.
date, shift to the straight-line method.
Take note that if the property was acquired, let us say, on
The useful life of properties used in or related to July 1 of the tax year, you do not claim the entire P 95,
production of petroleum shall be ten (10) years of such 000. You could only claim the proportionate value from
shorter life as may be permitted by the Commissioner. July to December (6 months) of that tax year.
Properties not used directly in the production of Value of depreciation for July to December
petroleum shall be depreciated under the straight-line = 95, 000 x *(6/12)
method on the basis of an estimated useful life of five = P 47, 500
(5) years.
*6 months over 12 months in 1 year
(5) Depreciation of Properties Used in Mining Operations.
- an allowance for depreciation in respect of all Hence, only P 47, 500 can be claimed as a deduction by
properties used in mining operations other than depreciation.
petroleum operations, shall be computed as follows:
a) At the normal rate of depreciation if the
expected life is ten (10) years or less; or (2) Declining balance method – uses a rate (usually 1.5 or
b) Depreciated over any number of years between 2 times the straight line rate) to the declining book value
five (5) years and the expected life if the latter of the property/asset.
is more than ten (10) years, and the
depreciation thereon allowed as deduction from Rate = (1/ Estimated Life) x 2 or 1.5
taxable income: Provided, That the contractor
notifies the Commissioner at the beginning of Depreciation expenses = Rate x Book Value
the depreciation period which depreciation rate
allowed by this Section will be used. Book Value = (Cost of Property) – (Accumulated
Depreciation)
(6) Depreciation Deductible by Nonresident Aliens
Engaged in Trade or Business or Resident Foreign
Corporations. - In the case of a nonresident alien (3) Sum of the Years Digit (SYD) method –
individual engaged in trade or business or resident
foreign corporation, a reasonable allowance for the Annual Depreciation [AD]= (Cost – Scrap value) x
deterioration of Property arising out of its use or (No. of Remaining Years or Life/Sum of the Years)
employment or its non-use in the business trade or
profession shall be permitted only when such property is Example:
located in the Philippines. Cost of the Property [CP] - P 1, 000, 000
Depreciation – deduction for the exhaustion, wear and tear, or Scrap Value [SV] – P 50, 000
obsolescence on the use of the property in the TBP of the Estimated Life [EL] – 5 years
taxpayer. It is a cost recovery method of an expense which
ordinarily cannot be considered as ordinary and necessary If the life of the property is 5 years, then you add the
business expense under Sec. 34 (A). sum of the years. That is:
Dean: The property subject to depreciation is being used in Sum of the Years(SY) = 5 years + 4 years + 3
business. In case of a family car, while that is a property subject years + 2 years + 1 year
to depreciation, you cannot claim a deduction by depreciation as it = 15
is not used in business.
For the First Year:
Depreciation is a cost-recovery method because at the time you AD = (CP – SV) x (No. of remaining years/SY)
acquired the property, you cannot claim that outright as a = (1, 000, 000 – 50, 000) x (5 years/15)
deduction in the year it was acquired (like office furniture and = (950, 000) x (5/15)

= P 316, 666.67 Sec. 34 (G) DEPLETION OF OIL AND GAS WELLS AND
MINES
For the Second Year:
AD = (CP – SV) x (No. of remaining years/SY) (G) Depletion of Oil and Gas Wells and Mines. - (1) In
= (1, 000, 000 – 50, 000) x (4 years/15) General. - In the case of oil and gas wells or mines, a
= (950, 000) x (4/15) reasonable allowance for depletion or amortization
= P 253, 333.33 computed in accordance with the cost-depletion method
shall be granted under rules and regulations to be
For the Third Year: prescribed by the Secretary of finance, upon
AD = (CP – SV) x (No. of remaining years/SY) recommendation of the Commissioner. Provided, That
= (1, 000, 000 – 50, 000) x (3 years/15) when the allowance for depletion shall equal the capital
= (950, 000) x (3/15) invested no further allowance shall be granted:
= P 190, 000 Provided, further, That after production in commercial
quantities has commenced, certain intangible
For the Fourth Year: exploration and development drilling costs: (a) shall be
AD = (CP – SV) x (No. of remaining years/SY) deductible in the year incurred if such expenditures are
= (1, 000, 000 – 50, 000) x (2 years/15) incurred for non-producing wells and/or mines, or (b)
= (950, 000) x (2/15) shall be deductible in full in the year paid or incurred or
= P 126, 666.67 at the election of the taxpayer, may be capitalized and
amortized if such expenditures incurred are for
For the Fifth Year: producing wells and/or mines in the same contract area.
AD = (CP – SV) x (No. of remaining years/SY)
= (1, 000, 000 – 50, 000) x (1 year/15) "Intangible costs in petroleum operations" refers to any
= (950, 000) x (1/15) cost incurred in petroleum operations which in itself has
= P 63, 333.33 no salvage value and which is incidental to and
necessary for the drilling of wells and preparation of
Take note, there is a declining rate as the property is being used wells for the production of petroleum: Provided, That
towards its remaining life, which is similar to Declining Balance said costs shall not pertain to the acquisition or
Method (DBM). While you have a fixed annual rate in the declining improvement of property of a character subject to the
balance, peroyung book value nyaang subject to reducement. So, allowance for depreciation except that the allowances for
it declines. The rate is fixed but the book value is variable. depreciation on such property shall be deductible under
this Subsection.
Comparing Sum of the Years Digit [SYD] with Straight-line Any intangible exploration, drilling and development
Method [SLM]: expenses allowed as a deduction in computing taxable
income during the year shall not be taken into
Example (using SLM): consideration in computing the adjusted cost basis for
*using the same values in SYD sample computation the purpose of computing allowable cost depletion.
AD = (CD – SV)/ EL
= (950, 000)/5 years (2) Election to Deduct Exploration and Development
= P 190, 000 Expenditures. - In computing taxable income from
mining operations, the taxpayer may at his option,
[Note: The terms “cost”, “cost of depreciation”, and “cost of deduct exploration and development expenditures
property” are one and the same.] accumulated as cost or adjusted basis for cost depletion
as of date of prospecting, as well as exploration and
As you can see in the example for SYD, in the first year, the development expenditures paid or incurred during the
annual depreciation is P 316, 666.67. And in the second year, it is taxable year: Provided, That the amount deductible for
P 253, 333.33. You can see that the value declines in the exploration and development expenditures shall not
succeeding years. The depreciation is reduced or lessened exceed twenty-five percent (25%) of the net income
towards its remaining life. from mining operations computed without the benefit of
any tax incentives under existing laws.
But in the SLM (see example), regardless of the usage of the
property, the depreciation is fixed at P 190, 000 for the next 5 The actual exploration and development expenditures
years. minus twenty-five percent (25%) of the net income from
mining shall be carried forward to the succeeding years
These are acceptable methods of accounting depreciation. It is until fully deducted.
upon the taxpayer to what depreciation method he is going to
use. The election by the taxpayer to deduct the exploration
and development expenditures is irrevocable and shall
Going back to SYD, bakitmalakiang depreciation during its early be binding in succeeding taxable years. "Net income
life perobumababa going towards its remaining life? Because at from mining operations", as used in this Subsection,
the early life of the property, it is when it was being used the shall mean gross income from operations less "allowable
most. Peropagdatingng third year or fourth year, the property deductions" which are necessary or related to mining
breaks down. (Kami sad Dean, nagbreak down sa third year ug operations. "Allowable deductions" shall include mining,
fourth year. Lol) milling and marketing expenses, and depreciation of
properties directly used in the mining operations.
Sa straight-line, the annual depreciation is the same
kahitnakatambaylangyung property dyan, let us say, a truck. This paragraph shall not apply to expenditures for the
acquisition or improvement of property of a character
(4) Unit of Production Method which is subject to the allowance for depreciation.
(5) Working Hours Method
In no case shall this paragraph apply with respect to
OR any method which may be prescribed by the Dept. of Finance amounts paid or incurred for the exploration and
upon recommendation of the Commissioner of Internal Revenue. development of oil and gas.
The term "exploration expenditures" means

expenditures paid or incurred for the purpose of What if after several years, the mineral land has been fully
ascertaining the existence, location, extent or quality of exhausted but you only recovered 60% of your EDE? How can you
any deposit of ore or other mineral, and paid or incurred recover the remaining 40%? There is now abandonment losses.
before the beginning of the development stage of the You could claim that as a deduction kungmeronkang gross
mine or deposit. income.
The term "development expenditures" means

expenditures paid or incurred during the development Sec. 34 (H) CHARITABLE AND OTHER CONTRIBUTIONS
stage of the mine or other natural deposits.
(H) Charitable and Other Contributions. - (1) In General.
The development stage of a mine or other natural - Contributions or gifts actually paid or made within the
deposit shall begin at the time when deposits of ore or taxable year to, or for the use of the Government of the
other minerals are shown to exist in sufficient Philippines or any of its agencies or any political
commercial quantity and quality and shall end upon subdivision thereof exclusively for public purposes, or to
commencement of actual commercial extraction. accredited domestic corporation or associations
organized and operated exclusively for religious,
(3) Depletion of Oil and Gas Wells and Mines Deductible charitable, scientific, youth and sports development,
by a Nonresident Alien individual or Foreign Corporation. cultural or educational purposes or for the rehabilitation
- In the case of a nonresident alien individual engaged in of veterans, or to social welfare institutions, or to non-
trade or business in the Philippines or a resident foreign government organizations, in accordance with rules and
corporation, allowance for depletion of oil and gas wells regulations promulgated by the Secretary of finance,
or mines under paragraph (1) of this Subsection shall be upon recommendation of the Commissioner, no part of
authorized only in respect to oil and gas wells or mines the net income of which inures to the benefit of any
located within the Philippines. private stockholder or individual in an amount not in
excess of ten percent (10%) in the case of an individual,
Depletion – method of claiming deduction for the invested capital and five percent (5 %) in the case of a corporation, of
of an extractive industry, i.e. oil and gas wells and mines. It is a the taxpayer's taxable income derived from trade,
cost-recovery method for the exploration and development business or profession as computed without the benefit
expenditures paid or incurred by an extractive industry. of this and the following subparagraphs.
Dean: Prior to the production of a mine site, meronkang initial (2) Contributions Deductible in Full. - Notwithstanding
costs that you have to spend. These are the exploration and the provisions of the preceding subparagraph, donations
development expenses. to the following institutions or entities shall be
deductible in full;
Take note of meaning of the following under the law:
1. Exploration expenditures a) Donations to the Government. - Donations to
2. Development expenditures the Government of the Philippines or to any of
its agencies or political subdivisions, including
Dean: Prior to the commercial extraction or production, the fully-owned government corporations,
taxpayer these two expenditures. These are all accumulated. exclusively to finance, to provide for, or to be
Hindi mo pa yanna-re-recover kasimagsisimulaka pa lang. The used in undertaking priority activities in
manner, therefore, of recovering exploration and development education, health, youth and sports
expenses is by way of depletion. development, human settlements, science and
culture, and in economic development
Depletion is the exhaustion of natural resources like mines, oil, according to a National Priority Plan
and gas wells, due to production ____. determined by the National Economic and
Development Authority (NEDA), in consultation
So, the usual computation of cost depletion is: with appropriate government agencies,
including its regional development councils and
private philantrophic persons and institutions:
Provided, That any donation which is made to
the Government or to any of its agencies or
political subdivisions not in accordance with the
Annual Depletion Cost= Depletion Rate x No.of Mineral Units said annual priority plan shall be subject to the
Extracted limitations prescribed in paragraph (1) of this
Subsection;
Example: b) Donations to Certain Foreign Institutions or
Exploration and Devt. Expenditures = P 2 billion International Organizations. - Donations to
Estimated Units of Minerals Extracted = P 2 billion foreign institutions or international
No. of Minerals Extracted – 10, 000, 000 units organizations which are fully deductible in
pursuance of or in compliance with
For Depletion Rate - agreements, treaties, or commitments entered
[ ] into by the Government of the Philippines and
the foreign institutions or international
organizations or in pursuance of special laws;
c) Donations to Accredited Nongovernment
For Annual Depletion - Organizations. - The term "nongovernment
Annual Depletion = DR x No. of Minerals Extracted organization" means a non profit domestic
= 1 x 10, 000, 000 corporation:
= P 10, 000, 000
1) Organized and operated exclusively
At the time that there is exhaustion of the resources, then you‟d for scientific, research, educational,
be able now to recover the entirety of exploration and character-building and youth and
development expenditures [EDE]. sports development, health, social
welfare, cultural or charitable
purposes, or a combination thereof,

no part of the net income of which and regulations prescribed by the Secretary of Finance,
inures to the benefit of any private upon recommendation of the Commissioner.
individual;
2) Which, not later than the 15th day of Take note of what are these contributions specifically stated on
the third month after the close of the Sec. 34 (H) (1).
accredited nongovernment
organizations taxable year in which Dean: You would notice that this has nothing to do in TBP. But the
contributions are received, makes law recognizes the taxpayer‟s sense of social responsibility and
utilization directly for the active allows deduction from that contribution.
conduct of the activities constituting
the purpose or function for which it is The deductions here may be full or partial.
organized and operated, unless an
extended period is granted by the A. Contributions deductible in full:
Secretary of Finance in accordance  Donations to government – areas of priority
with the rules and regulations to be development determined by NEDA
promulgated, upon recommendation  Donations to Foreign Institutions or International
of the Commissioner; Organizaions
3) The level of administrative expense of  Donations to accredited non-government organizations –
which shall, on an annual basis, tax free donee institution accredited by PCNC (Philippine
conform with the rules and Council for NGO Certification)
regulations to be prescribed by the When you donate to the government, there is no automatic
Secretary of Finance, upon deduction in full. The donation must be to an area of priority
recommendation of the development determined by NEDA. So, NEDA has a list of the
Commissioner, but in no case to national priority plan.
exceed thirty percent (30%) of the
total expenses; and If the donations given were not in accordance with the three
4) The assets of which, in the even of above, then donation will not be given full deductibility but only
dissolution, would be distributed to partial.
another nonprofit domestic
corporation organized for similar
purpose or purposes, or to the state B. Contributions with Partial Deductibility
for public purpose, or would be  Individual – in an amount not in excess of 10% of
distributed by a court to another taxable income from TBP, without the benefit of this
organization to be used in such deduction
manner as in the judgment of said  Corporation – in an amount not in excess of 5% of
court shall best accomplish the taxable income without the benefit of this deduction.
general purpose for which the
dissolved organization was organized. The amount of deduction allowed will depend whether you are an
Subject to such terms and conditions individual or a corporation. In case of an individual taxpayer, the
as may be prescribed by the deductibility will be subject to an amount not in excess of 10%
Secretary of Finance, the term taxable income from TBP without the benefit of this deduction.
"utilization" means: Meaning, whichever is lower kasimerong actual deduction (the
(i) Any amount in cash or in kind amount that you actually gave) and the restriction or the
(including administrative expenses) limitation under the law. So, whichever is lower, that is the
paid or utilized to accomplish one or allowed deductibility.
more purposes for which the
accredited nongovernment
organization was created or Sec. 34 (I) RESEARCH AND DEVELOPMENT
organized.
(ii) Any amount paid to acquire an (I) Research and Development. - (1) In General. - a
asset used (or held for use) directly taxpayer may treat research or development
in carrying out one or more purposes expenditures which are paid or incurred by him during
for which the accredited the taxable year in connection with his trade, business
nongovernment organization was or profession as ordinary and necessary expenses which
created or organized. are not chargeable to capital account.
An amount set aside for a specific project which comes The expenditures so treated shall be allowed as
within one or more purposes of the accredited deduction during the taxable year when paid or incurred.
nongovernment organization may be treated as a
utilization, but only if at the time such amount is set (2) Amortization of Certain Research and Development
aside, the accredited nongovernment organization has Expenditures. - At the election of the taxpayer and in
established to the satisfaction of the Commissioner that accordance with the rules and regulations to be
the amount will be paid for the specific project within a prescribed by the Secretary of Finance, upon
period to be prescribed in rules and regulations to be recommendation of the Commissioner, the following
promulgated by the Secretary of Finance, upon research and development expenditures may be treated
recommendation of the Commissioner, but not to exceed as deferred expenses:
five (5) years, and the project is one which can be better a) Paid or incurred by the taxpayer in connection
accomplished by setting aside such amount than by with his trade, business or profession;
immediate payment of funds. b) Not treated as expenses under paragraph 91)
hereof; and
(3) Valuation. - The amount of any charitable c) Chargeable to capital account but not
contribution of property other than money shall be chargeable to property of a character which is
based on the acquisition cost of said property. subject to depreciation or depletion.
(4) Proof of Deductions. - Contributions or gifts shall be In computing taxable income, such deferred expenses
allowable as deductions only if verified under the rules shall be allowed as deduction ratably distributed over a

period of not less than sixty (60) months as may be million pesos accumulated which was deferred by the taxpayer for
elected by the taxpayer (beginning with the month in the last four years will now be claimed as a deduction. But this is
which the taxpayer first realizes benefits from such not outright. It is to be ratably distributed for the very least of 5
expenditures). years or more. So, if you distribute the 5 million for five years,
then, beginning that year, ma-recognize naang 1 million as a
The election provided by paragraph (2) hereof may be deduction.
made for any taxable year beginning after the effectivity
of this Code, but only if made not later than the time
prescribed by law for filing the return for such taxable On Sec. 34 (J) PENSION TRUST
year.
(J) Pension Trusts. - An employer establishing or
The method so elected, and the period selected by the maintaining a pension trust to provide for the payment
taxpayer, shall be adhered to in computing taxable of reasonable pensions to his employees shall be allowed
income for the taxable year for which the election is as a deduction (in addition to the contributions to such
made and for all subsequent taxable years unless with trust during the taxable year to cover the pension
the approval of the Commissioner, a change to a liability accruing during the year, allowed as a deduction
different method is authorized with respect to a part or under Subsection (A) (1) of this Section ) a reasonable
all of such expenditures. amount transferred or paid into such trust during the
taxable year in excess of such contributions, but only if
The election shall not apply to any expenditure paid or such amount (1) has not theretofore been allowed as a
incurred during any taxable year for which the taxpayer deduction, and (2) is apportioned in equal parts over a
makes the election. period of ten (10) consecutive years beginning with the
year in which the transfer or payment is made.
(3) Limitations on Deduction - This Subsection shall not
apply to: In the case of pension trust, the deductions contemplated are
a) Any expenditure for the acquisition or contributions made by the employer to the pension fund for the
improvement of land, or for the improvement retirement or pensions of its employees.
of property to be used in connection with
research and development of a character which When a taxpayer sets up a pension trust for the first time, it has
is subject to depreciation and depletion; and to put in so much to cover the past services or the length of
b) Any expenditure paid or incurred for the service of the current employees. The contribution to set up the
purpose of ascertaining the existence, location, pension trust is not deductible outright. The amount to cover the
extent, or quality of any deposit of ore or other past services or the length of service of the current employees will
mineral, including oil or gas. have to be amortized for a period of 10 years. This does not
include the annual contribution for the current service.
Before, there was no deduction for the research and development
as an itemized deduction. But this is allowed even before Sec. 34 Example: If you put in P 100 million to cover the past services
(I) because that is covered under Sec. 34 (A) as ordinary and and you need to P 10 million annually to cover the current length
necessary business expense. of service, then, that P 100 million cannot be claimed outright as
a deduction in the year [it was put in]. That P 100 million will be
Under Sec. 34 (I), the taxpayer has the option to claim deduction amortized or be claimed as a deduction for 10 years. So, you
for research and development. The first option is that it may be claim P 10 million annually to cover the 1/10 of the contribution to
recognized as a deduction under Sec. 34 (A). set up the fund plus the annual contribution for the current
service which is P 10 million. Hence, you put in a total of P 20
The second option is under Sec. 34 (I) which is to defer the million.
deduction of the expense when the taxpayer now is able to realize
benefit from such expenditure, then, it will not begin to claim the On the 11th year, only the annual contribution for the current
deduction. It could be distributed for a period not less 60 months service will be deduction as the employer has fully recovered his
or five years beginning the month in which the taxpayer first expense of P 100 million in the last 10 years.
realizes benefits from such expenditure.
Example: There is an R&D within the taxpayer‟s premises. This Sec. 34 (K) – not discussed
year, a research was made on something to develop a product
and taxpayer incurred 1 million pesos. That 1 million incurred
during that year may either be: Sec. 34 (L) OPTIONAL STANDARD DEDUCTION
1. deferred under Sec. 34 (I); or
2. you can claim it outright as a deduction under Sec. 34 (L) Optional Standard Deduction. - In lieu of the
(A) deductions allowed under the preceding Subsections, an
individual subject to tax under Section 24, other than a
For the second year, the taxpayer incurred 500,000 for the same nonresident alien, may elect a standard deduction in an
product. Again, you have the two options. But if you opted to amount not exceeding forty percent (40%) of his gross
defer, nag-accumulate nang 1.5 million since you spent 1 million income, as the case may be. In the case of a corporation
on the first year plus 500k on the second year. subject to tax under Sections 27 (A) and 28 (A) (1), it
may elect a standard deduction in an amount not
On the third year, you incurred 2 million for the same product. If exceeding forty percent (40%) of its gross income as
you again opt to defer, you accumulate. Now, you have 3.5 defined in Section 32 of this Code.
million.
Unless the taxpayer signifies in his return his intention
On the fourth year, you spent another 1.5 million. That 1.5 million to elect the optional standard deduction, he shall be
will be added to the 3.5 million if you still opt to defer. Now, it is 5 considered as having availed himself of the deductions
million. But this year, you were able to come up with the new allowed in the preceding Subsections.
product, which you will launch to the market on the following
year. Such election when made in the return shall be
irrevocable for the taxable year for which the
On the following year, since it is now the year in which the return is made: Provided, That an individual who is
taxpayer would realize the benefit of that expenditure, the 5 entitled to and claimed for the optional standard

deduction shall not be required to submit with his tax exchange upon which the entire amount of gain or loss
return such financial statements otherwise required was recognized by law), or has entered into a contact or
under this Code: Provided, further, That a general option so to acquire, substantially identical stock or
professional partnership and the partners securities, then no deduction for the loss shall be
comprising such partnership may avail of the allowed under Section 34 unless the claim is made by a
optional standard deduction only once, either by dealer in stock or securities and with respect to a
the general professional partnership or the transaction made in the ordinary course of the business
partners comprising the partnership: Provided, of such dealer.
finally, That except when the Commissioner otherwise
permits, the said individual shall keep such records (B) If the amount of stock or securities acquired (or
pertaining to his gross sales or gross receipts, or the covered by the contract or option to acquire) is less than
said corporation shall keep such records pertaining to his the amount of stock or securities sold or otherwise
gross income as defined in Section 32 of this Code disposed of, then the particular shares of stock or
during the taxable year, as may be required by the rules securities, the loss form the sale or other disposition of
and regulations promulgated by the Secretary of which is not deductible, shall be determined under rules
Finance, upon recommendation of the Commissioner. and regulations prescribed by the Secretary of Finance,
upon recommendation of the Commissioner.
Notwithstanding the provisions of the preceding Sub-
sections, the Secretary of Finance, upon (C) If the amount of stock or securities acquired (or
recommendation of the Commissioner, after a public covered by the contract or option to acquire which)
hearing shall have been held for this purpose, may resulted in the non-deductibility of the loss, shall be
prescribe by rules and regulations, limitations or ceilings determined under rules and regulations prescribed by
for any of the itemized deductions under Subsections (A) the Secretary of Finance, upon recommendation of the
to (J) of this section: Provided, That for purposes of Commissioner.
determining such ceilings or limitations, the Secretary of
Finance shall consider the following factors: (1) Losses from wash sales are not deductible but the gains are
adequacy of the prescribed limits on the actual taxable.
expenditure requirements of each particular industry;
and (2) effects of inflation on expenditure levels: Wash sale – is the sale or other disposition of stocks or securities
Provided, further, That no ceilings shall further be which are substantially identical stocks or securities purchased or
imposed on items of expense already subject to ceilings acquired 30 day before the sale or 30 days after the sale. So, it is
under present law. either of the two.
OSD will not apply to non-resident aliens. It will only be applicable It involves a simultaneous purchase and sale of stocks.
to individuals to citizens or resident aliens engaged in trade or
business. They are allowed to claim OSD, in lieu of the itemized Example: You have existing 100 shares from X Corporation. You
deductions, of 40% of gross sales or gross receipts. In the case of then acquired similar or identical shares. After acquiring, you sold
corporation, it is 40% of its gross income. your previous shares [the 100 shares from X Corp.] at a loss.
Note that you acquired the identical shares 30 days before your
The intention to elect OSD should be availed on the first quarterly sale of your shares from X Corp. Can you claim deduction for the
return of the taxpayer. Otherwise, he is deemed to have availed loss? You cannot. That is a wash sale.
the itemized. Such election shall be irrevocable for the tax year
when the return is made. Hindi ka pwedeng mag-hybrid during So, the acquisition here is either 30 days before or 30 days after
the tax year. the sale.
In the case of a general professional partnership (GPP), when a From 2016 3rd year TSN:
GPP avails of OSD, then, yung share ng isang general partner
from the GPP can no longer claim a deduction from that income. 30 days BEFORE SALE OF STOCKS/ 30 days AFTER Sale
It is because the GPP has already made the deduction. While the sale
partnership may not be taxable, but once it avails a deduction, SECURITIES
the individual partner bringing in his share can no longer claim • acquire • acquire
• resulted at loss
similar/identical similar/identical
another deduction. One time lang. In other words, kung hindi shares from that shares/securities
nag-deduct yung GPP, ang bitbit nung individual partner is gross. which taxpayer from thatwhich
So, kung gross ang nasa kanya for his individual share, then he is shall sell at loss taxpayer have sold
allowed to claim a deduction.
“xxx a general professional partnership and the partners

comprising such partnership may avail of the optional
standard deduction only once, either by the general
profession partnership or the partners comprising the Example from 2016 3rd year TSN:
partnership xxx”
2010: T had X Corpo shares
Another rule is that the individual partner in a GPP cannot avail 100 @ P 10.00 per share = P1,000 (cost)
the optional 8% in lieu of the graduated rates. In other words,
professional partners only use the graduated rates. 2016: X Corpo Shares at P 5.00 per share
Aug. 2016:
Sec. 38.LOSSES FROM WASH SALES OF STOCK OR T acquired 150 shares from X Corp at 5php
SECURITIES = P 750.00
Sept. 2016:
(A) In the case of any loss claimed to have been
T sold his 2010 shares to X Corp at 5php
sustained from any sale or other disposition of shares of
= 5 x 100 = 500
stock or securities where it appears that within a period
beginning thirty (30) days before the date of such sale
Cost = 1,000
or disposition and ending thirty (30) days after such
Loss = 500
date, the taxpayer has acquired (by purchase or by

(D) Net Capital Loss Carry-over. - If any taxpayer, other

In 2010, the cost of that share was 1,000. So when he than a corporation, sustains in any taxable year a net
sold that, he lost. There was a loss of 500. Ordinarily, capital loss, such loss (in an amount not in excess of the
that loss would be deductible, but since the acquisition net income for such year) shall be treated in the
was through a wash sale, technically he did not incur a succeeding taxable year as a loss from the sale or
loss because he was able to replenish and acquire exchange of a capital asset held for not more than
similar shares by reason that 30 days before he sold twelve (12) months.
such shares, he also purchased a similar or identical (E) Retirement of Bonds, Etc. - For purposes of this
shares. So,„di siyalugi. Because what he had sold at a Title, amounts received by the holder upon the
loss where already recovered earlier when he acquired retirement of bonds, debentures, notes or certificates or
similar or identical shares. That is why 30 days before other evidences of indebtedness issued by any
sale the taxpayer acquired from that which the taxpayer corporation (including those issued by a government or
will sell at a loss. political subdivision thereof) with interest coupons or in
registered form, shall be considered as amounts
In 2010 he acquired that at 10php, received in exchange therefor. cralaw
bumagsakyungpresyo so he had no choice but to sell.
But if it was a loss, why would he acquire similar shares? (F) Gains or Losses From Short Sales, Etc. - For
Eh luginanga, to sell what you have already have over purposes of this Title –
the last 6 years. The law says these losses will not be 1) Gains or losses from short sales of property
deductible. Because it is a transaction resulting in a shall be considered as gains or losses from
wash sale. sales or exchanges of capital assets; and
2) Gains or losses attributable to the failure to
exercise privileges or options to buy or sell
Sec. 39 CAPITAL GAINS AND LOSSES property shall be considered as capital gains or
losses.
(A) Definitions. - As used in this Title -
Take note of the definition of capital assets. As a rule, capital
(1) Capital Assets. - The term "capital assets" means assets are properties of taxpayer which are not used in TBP.
property held by the taxpayer (whether or not connected Those properties used in business are what we call “ordinary
with his trade or business), but does not include stock in assets”. When there is a transaction involving ordinary assets,
trade of the taxpayer or other property of a kind which then we can have an ordinary gain or ordinary loss. But in case of
would properly be included in the inventory of the transactions involving capital assets, then we can have a net
taxpayer if on hand at the close of the taxable year, or capital gain or net capital loss.
property held by the taxpayer primarily for sale to
customers in the ordinary course of his trade or In the taxation of capital assets, you have these rules:
business, or property used in the trade or business, of a 1. The 6% capital gains tax on the sale of real property as
character which is subject to the allowance for capital assets based on the fair market value or the
depreciation provided in Subsection (F) of Section 34; or selling price whichever is higher.
real property used in trade or business of the taxpayer. 2. Capital gains tax in the shares of stock not traded which
is now at 15% based on the net capital gain on the sale
(2) Net Capital Gain. - The term "net capital gain" of such shares
means the excess of the gains from sales or exchanges 3. 6/10 (60%) of 1% on the gross selling price or the gross
of capital assets over the losses from such sales or value in money for the sale, barter or exchange of
exchanges. shares of stock which are traded (Sec. 127, NIRC)
(3) Net Capital Loss. - The term "net capital loss" means In the case of the sale of shares of stocks which are capital
the excess of the losses from sales or exchanges of assets, there is a specific tax treatment. It is either 6/10 of 1%
capital assets over the gains from such sales or under Sec. 127 or the 15% rate. For real properties, it is 6%.
exchanges.
In the case of Sec. 39, its rules will apply to all other capital
(B) Percentage Taken Into Account. - In the case of a assets which are neither real properties nor shares of stocks.
taxpayer, other than a corporation, only the following
percentages of the gain or loss recognized upon the sale
or exchange of a capital asset shall be taken into RULES under Sec. 39:
account in computing net capital gain, net capital loss,
and net income: There is a recognition in the gain or loss depending on the length
1) One hundred percent (100%) if the capital of time (holding period) within which the asset was held.
asset has been held for not more than twelve
(12) months; and If the asset was held before its sale 1 year or less, then, 100% of
2) Fifty percent (50%) if the capital asset has the gain or loss is recognized.
been held for more than twelve (12) months.
Example 1: You acquired a jewelry this year for P 1 million and
(C) Limitation on Capital Losses. - Losses from sales or you sold the jewelry within the same year for P 1.2 million, you
exchanges of capital assets shall be allowed only to the have a gain of P 200k. The entire gain is recognized.
extent of the gains from such sales or exchanges.If a
bank or trust company incorporated under the laws of Example 2: If you acquire the jewelries 5 years ago for P 1 million
the Philippines, a substantial part of whose business is and you sold it now (after 5 years) for P 1.2 million, there is a
the receipt of deposits, sells any bond, debenture, note, gain of P 200k. Are you allowed to claim 100% gain of the 200k?
or certificate or other evidence of indebtedness issued
by any corporation (including one issued by a A: If the property was held for more than 1 year before the sale,
government or political subdivision thereof), with then only 50% of the gain or losses are recognized.
interest coupons or in registered form, any loss resulting
from such sale shall not be subject to the foregoing Hence, in the 2nd example, although the actual gain is P 200k, the
limitation and shall not be included in determining the allowed capital gain is only 50% which is P 100k because it was
applicability of such limitation to other losses. held for more than 1 year before the sale.

This rule will apply also when you end up with a loss. only exchange of capital. If the property is exchanged on account
of merger or consolidation then such exchange will not result in
Example: If you purchased jewelries this year at P 1 million but any taxable gain or loss because here the shares of stock will be
sold them at P 800k within the same year, the entire loss of P exchanged to shares of stock on account of merger or
200k is recognized. consolidation.
But if you were able to acquire the property 5 years ago and sold In exchange of property to shares of stock instead of putting cash
it now at P 800k, only the P 100k of the loss is recognized. or money you bring in real property as contribution in exchange of
that shares of stock is issued the exchange is non-taxable.
CAPITAL LOSSES AND CAPITAL GAINS The reason for the no gain or loss recognition is that there is no
resulting income. So you are the Shareholder of A corporation nag
So, after having losses and gains during the year, capital losses merge sa B corporation and the surviving company is B, there is
and capital gains. Capital losses are deducted over capital gains. exchange of capital lang so no gains. On account if consolidation,
a new corporation was formed so your shares will be issued by
Now, the holding period whether recognized 100% or 50% gains the new corporation or a new corporation was put up in you put in
or loss will not apply to corporations only to the individuals, so the your real property as your contribution in exchange for shares of
corporation the entire amount, sa individual naman 100% or stock, that is an exchange of capital and thus no gain or loss is
50%. The consolidate deduct the net capital loses to the net recognized.
capital gains, you will have the net capital gains or net capital
loss.
If you have net capital gains and you are an individual subject to
tax at 0%-35% under the current tax, the net gain is subject to USE OF INVENTORY
the regular tax.
Then also you have use of inventory. This is section 41. The use
Now, how will this affect the individual taxpayer availing the 8% of inventory to determine taxable income. The taxpayer is
option? If the individual in his regular income is availing the 8%, required under section 40 to use such method of valuing its
the net capital gains can also avail the 8% as long as the 3 Million inventory which shall be used in subsequent taxable years. The
VAT threshold has not yet been breached. The 8% when you go method will require approval from the BIR then you have the
back to the provision under section (34?24? audio not clear) the inventory method of determining taxable income. This is
optional 8% will cover not only the regular income of the applicable to businesses which are selling merchandise.
individual but will also include the other non-operating income.
The 8% will not cover only the gross sales or receipts from the
practice or from the income but also the other non-operating ACCOUNTING PERIODS AND METHODS
income or the net capital gains for as long as it does not exceed
the VAT Threshold of 3M. Then you have the accounting, the periods and methods. The
taxpayer may either select calendar or fiscal year. Individuals
Kung Corporation naman we do not have any problem with that are required only to use calendar year. Corporation may
add it to the regular income subject to the 30% income tax. What use either calendar or fiscal year. Change in accounting period
if there is a net capital loss? It is not taxable. In the case of a n will require approval from the BIR for corporation only and not to
individual if the consolidation of capital gains and capital loss the individuals. From fiscal to calendar, calendar to fiscal and
produces net capital loss, it will use the NET CAPITAL LOSS fiscal to another fiscal to has to ask approval from the BIR.
CARRY OVER and treat it as a new or fresh capital loss in the
next taxable year. It is restricted by the (law? Code? Audio not Now as to the method of accounting income or deductions,
clear) and you are not allowed to claim the entirety but subject to taxpayer may use cash or accrual basis. For purposes of
the amount not exceeding the net income in the year capital loss consistency, the taxpayer cannot use a hybrid method of
was sustained. accounting income and deduction. Sa income cash basis while on
deductions accrual that is not allowed. If the taxpayer uses cash
In other words if during the time, your Net Capital Loss was basis or actual receipt in accounting income that should also be
100,000 and your net income in the year of Net Capital Loss was used in accounting for the deduction. If the taxpayer recognize
50,000, then the 100,000 net capital loss cannot be carried, it income on constructive or accrual that method should also be
should be the amount not exceeding 50,000. It is only 50,000 used in recognizing deductions. Change in accounting method will
that can be carried over for individual. The Net capital loss carry also require permission from the BIR.
over is not applicable to corporation.
Section 48 accounting for long-term contracts, building,
installation or construction contracts covering a period in excess
SHORT SELLING of 1 year. You have the % of completion method of accounting for
long term contracts.
Next item, short selling is a selling of property which is not yet
owned by the taxpayer. Now in case of short selling this is treated
as gains or losses on sale of capital assets. So short selling is SHIFT OF TAX PERIODS
simply the selling of property not yet owned by the taxpayer on
the date of sale. Now when there is a shift of tax periods under section 47. The
taxpayer is required to file a short period return kasi meron yang
“butal” by reason of the shifting amy months na di pa covered
SECTION 40: NO GAIN OR LOSS RECOGNITION because of the shift, taxpayer is required to finish a short period
return resulting from the change in taxable period.
Then you have section 40. What we will take up in section 50 is
the no gain or loss recognition. So section 40 provides for the Example, calendar year ends in December 31 mag shift ka to
rules of no gain or loss recognition. Ordinarilythe selling price less Fiscal year Starting on June 1. So there is the a short period from
cost you may have gain or loss, if you sold the property less than Jan 1 to May 31 therefore mag file ka ng short period return for
its cost example 100,000 selling price and the cost is 150,000 you the months na “butal” resulting from the change of accounting
end up with a loss, while if you sell it at 150,000 selling price and period.
100,000 loss, you will have a gain. Under section 40 paragraph(c)
exchange of property will not result in gain or loss, here there is

INCOME ON INSTALLMENT BASIS Q: Where to file?
Under section 49, taxpayer reporting income on installment basis. (B) Where to File. - Except in cases where the Commissioner
Taxpayer who regularly sells by installment may report income by otherwise permits, the return shall be filed with an authorized
installment basis. (Dean gave an example of sellers reporting agent bank, Revenue District Officer, Collection Agent or duly
income on installment basis ex. Seller of house, lands, etc) authorized Treasurer of the city or municipality in which such
person has his legal residence or principal place of
Under section 50, if there is an issue on whether the income is business in the Philippines, or if there be no legal residence or
earned by the taxpayer or not or the deductions by on or the place of business in the Philippines, with the Office of the
other, there is a basis of allocation of income or deduction under Commissioner.
section 50 which empowers the BIR to distribute, apportion or
allocate the gross income or deductions between or among such Q: When to file?
organization, trade or business, if he determined that such
distribution, apportionment or allocation is necessary in order to (C) When to File. -
prevent evasion of taxes or clearly to reflect the income of any
such organization, trade or business. (1) The return of any individual specified above shall be
filed on or before the fifteenth (15th) day of April
EXAMPLE: 10 corporation sharing security guards should share of each year covering income for the preceding taxable
the deductions of security expenses. year.
Now returns and payment of taxes (2) Individuals subject to tax on capital gains;
SEC. 51.Individual Return. - (a) From the sale or exchange of shares of stock not
traded thru a local stock exchange as prescribed under
(A) Requirements. - Section 24(C)shall file a return within thirty (30)
days after each transaction and a final
(1) Except as provided in paragraph (2) of this consolidated return on or before April 15 of each
Subsection, the following individuals are required to file year covering all stock transactions of the
an income tax return: preceding taxable year; and
(a) Every Filipino citizen residing in the Philippines; (b) From the sale or disposition of real property under
Section 24(D) shall file a return within thirty (30)
(b) Every Filipino citizen residing outside the Philippines, days following each sale or other disposition.
on his income from sources within the Philippines;
(c) Every alien residing in the Philippines, on income SELF-EMPLOYED

derived from sources within the Philippines; and
For individuals, self-employed engaged in business or practice of
(d) Every nonresident alien engaged in trade or business profession you have the Quarterly income tax return. The first
or in the exercise of profession in the Philippines. quarter is on May 15, 2nd quarter on August 15, 3rd quarter on
November 15 and the consolidated return on April 15, there is no
(2) The following individuals shall not be required to file 4th quarter return.
an ITR.
CORPORATE RETURNS
(a) An individual whose taxable income does not exceed
250,000 under setion 24(A)(2)(a): provided that a For corporate returns under section 52. The Corporation may
citizen of the Philippines and any alien individual either choose Calendar or Fiscal year. The quarterly returns (1st,
engaged in business or practice of profession within the 2nd, 3rd) are filed within 60 days from the close of the taxable
Philippines shall file an income tax return, regardless of quarter. The annual return on the 15th day of the 4th month
the amount of gross income. following the end of the taxable year or on April 15. On fiscal year
you have your equivalent.
(b) An individual with respect to pure compensation
income, [35] as defined in Section 32 (A)(1), derived For corporation contemplating dissolution or
from sources within the Philippines, the income tax on reorganization section 52 (c) provides:
which has been correctly withheld under the provisions
of Section 79 of this Code: Provided, That an individual Return of Corporation Contemplating Dissolution or
deriving compensation concurrently from two or more Reorganization. - Every corporation shall, within
employers at any time during the taxable year shall file thirty (30) days after the adoption by the
an income tax return. corporation of a resolution or plan for its
dissolution, or for the liquidation of the whole or
(c) An individual whose sole income has been subjected any part of its capital stock, including a corporation
to final withholding tax pursuant to Section 57(A) of this which has been notified of possible involuntary
Code; and dissolution by the Securities and Exchange
Commission, or for its reorganization, render a
(d) A minimum wage earner as defined in section 22 correct return to the Commissioner, verified under
(HH) of this Code or an individual who is exempt from oath, setting forth the terms of such resolution or
income tax pursuant to the provisions of this Code and plan and such other information as the Secretary of
other laws, general or special. Finance, upon recommendation of the
commissioner, shall, by rules and regulations,
Under subsection (a) of paragraph (2), the withholding tax prescribe.
certificate is equivalent to Income tax return so there is no need
to file another return. After the filing of the annual return under section 203 of the NIRC
as amended by the TRAIN law, the BIR has 3 years after deadline
Under subsection (C), if it is purely Final Withholding Tax then not from the filing but on the deadline of the returns to subject
there is no need to file an income tax return. the return to assessment and determine whether or not the

amount of tax paid is correct and whether or not the income is administrator. The person managing the properties of the estate
reflected truthfully. should take care of the payment of the tax.
Then you have the withholding of taxes. One of the feature of the When two or more trusts are created from the same (trustor/
tax code is to simplify the withholding tax system. The collection deed of trust/ grantor? Audio not clear). The taxable income of
and payment of the tax at the source. the trust is consolidated and the payment of the trust is shared by
proportion of the trust depending on the share of the income.
FORMS OF WITHHOLDING The estates and trusts are also entitled to deductions. The taxable
income of estates and trusts shall be deducted by the amount of
Under the Income tax system we have forms of income distributed by the beneficiaries, meaning the amount of
withholding: income given to the beneficiaries is treated as a DEDUCTIBLE
amount from the taxable income of estates and trusts.
(1) Withholding tax includes Final Withholding tax,
withholding of final taxes on passive income and capital The deduction for personal exemption that is repealed under the
gains. TRAIN LAW. So the estates and trusts pay the tax on graduated
rates (first 250,000 is exempted).
From the source of income the tax is already collected
and you will receive income net of tax. In bank Then the revocable trust, in the case of revocable trust. The
deposists, the interest income the withholding is done grantor can revoke a trust at any time so if it is a revocable trust,
by the banks. The withholding agent is the person the separate and distinct personality is NOT APPLCIABLE, the
required by law to withhold the tax. The BIR cannot run income of the trust is added to the income of the grantor and the
after the taxpayer if the withholding agent fails to remit grantor is taxed when you have a revocable trust.
the withholding.
Now also you have a trust created in the benefit of the grantor, so
What is the remedy of the taxpayer if he is sent with again no separate and distinct personality. Treated as similar to
assessment when the withholding agent failed to remit revocable trust.
the WT to the BIR, the income earner or the taxpayer
can file a protest. In the case of estates and trusts these are fiduciary returns,
because you are filing a return for the benefit of somebody for the
(2) Creditable Withholding Tax, in the case of CWT the estate and trustor, respectively. The Income Tax Return for
payors will pay an amount to the income recipient. The estates and trusts are the same with the ITR of the individuals.
payor are to make withholding sila ang withholding
agent, the recipient will then receive the amount net of
withholding. The withholding rate is 5% or 10%. OTHER TAX REQUIREMENTS
When the payor pays the payee 100,000 ang The other tax requirements is the disposition of income tax
matanggap ng recipient is 90,000 but this is with returns, publication of lists of taxpayers and filers shall constitute
withholding certificate, in other words 100,000 report public records and be open to inspection as such upon the order
as taxable income and claim 10,000 as tax credit. Hindi of the President of the Philippines under rules and regulations to
90,000 ang I report mo as income but 100,000 be prescribed by the Secretary of Finance upon recommendation
of the Commissioner.
(3) Withholding tax on wages, this is required on the
employer on the wages paid to their employees or The Commissioner may, in each year, cause to be prepared and
workers. The end of the taxable year the employer is published in any newspaper the lists containing the names and
required to make a reconciliation that tax withheld addresses of persons who have filed income tax returns.
equals that of the tax due para hindi na amgbabayad
ng extra ang employees. If the employee has no other Now a foreign tax entity can ask tax activities of a taxpayer from
source of income then the Withholding Tax Return is the CIR provided that the country of which the foreign tax entity
equivalent to Income Tax Return so there is no need to is a citizen has an agreement with the Philippines.
file another ITR.
DISTRIBUTION OF DIVIDENDS OR ASSETS
(4) Quarterly income tax return of the corporation,
the quarterly return 1st 2nd and 3rd is also a form of Now we have the distribution of the dividends or assets by a
withholding. Since you paid the taxes on the last 3 corporation. For accounting purposes when a corporation
quarters practically you pay the tax on the 4th quarter distributes all of its assets in cases of dissolution to its
only or the annual return. The same goes with the shareholders, the gain or loss realized by the shareholder is
individuals who are engaged in business or practice of recognized as a taxable gain or deductible loss in its …(Audio not
profession are required to file quarterly returns (may clear )
15, august 15, November 15) the annual return after
the end of the calendar year. When Dividends are distributed it is sourced from the
accumulated retained earnings, the dividends is a taxable
ESTATES AND TRUSTS distribution. When Stock dividends are distributed instead of cash
ibigay nila they issue their own shares of stock, such distribution
Now for estates and trusts, under our income tax system they are is NOT a taxable distribution as it is only a transfer of capital to
treated as separate persons. They are taxable on basis of income the stockholder. However if stock dividends are cancelled or
earned or realized pending the settlement of the estate for all the redeemed later on after 4 years they were recalled in exchange
properties held and they will be taxed like individuals, with the for cash then the exchange now is considered as taxable
exception of the pension (trust) forming a pension, profit sharing distribution, but the stock dividend is not taxable because it is a
plan for the benefit of the employee is not taxable. So the transfer of surplus to capital.
employees‟ pension trust, any income earned from the investment
of pension trust is exempted on tax. SEC. 76. - Final Adjustment Return. – Every
corporation liable to tax under Section 27 shall file a
The beneficiary of the estate are separate and distinct from the final adjustment return covering the total taxable
taxable estate. It is the estate that is taxed or the executor or income for the preceding calendar or fiscal year. If the
sum of the quarterly tax payments made during the said

taxable year is not equal to the total tax due on the

entire taxable income of that year, the corporation shall
either:
(A) Pay the balance of tax still due; or
(B) Carry-over the excess credit; or
(C) Be credited or refunded with the excess amount

paid, as the case may be.
In case the corporation is entitled to a tax credit or

refund of the excess estimated quarterly income taxes
paid, the excess amount shown on its final adjustment
return may be carried over and credited against the
estimated quarterly income tax liabilities for the taxable
quarters of the succeeding taxable years. Once the
option to carry-over and apply the excess
quarterly income tax against income tax due for
the taxable quarters of the succeeding taxable
years has been made, such option shall be
considered irrevocable for that taxable period and
no application for cash refund or issuance of a tax
credit certificate shall be allowed therefor.
In other words, if you have a carry-over yung 200,000 sa 2015.

In 2015 ang na credit lang is 100,000 so may sobra ka pang
100,000 can you apply for refund? Di na pwede kasi irrevocable
na yan. You can credit that through carry over until 100,000 is
fully utilized, unless there is “FRESH” Credit then a new option will
arise. For as long as the 200,000 still exist that excess credit must
be carried over in the subsequent taxable years because once
availed the carry over cannot be revoked. That is the how
IRREVOCABILITY PRINCIPLE is applied hindi yung tax refund
irrevocable No, walang irrevocability sa tax refund or tax credit
ang gawin mo lang jan is you wait sa refund mo or hindi.
In the case of tax refund or credit you will now apply, you will
have it refunded or issued a tax credit certificated then you wait.
Unlike in the Carry Over, you continue crediting. Now in the
course of crediting and the old amount is fully utilized and a new
credit arises then the option now is open, you can have it carried
over or you can apply for refund, so yun yung application for the
irrevocability.
In other words if the taxpayer opted for the carry over excess
credit such option is irrevocable for the taxable period and no
application for refund shall forever be allowed. The carry over
period shall be allowed for the taxable quarters of the next
succeeding taxable years. You have this principle of irrevocability
of the carry-over of excess tax credit.
*Transcribers note
Walang #5 na mention si dean sa types of withholding tax up to
number 4 lang.
End of Tax 1 Review Coverage

(MKGumboc)
"Do the difficult things while they are easy and do the
great things while they are small. A journey of a thousand
miles must begin with a single step."
~ Lao Tzu

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FIRST EXAM TAXATION LAW REVIEW

Dean Manuel P. Quibod || 4-Manresa 2018-2019

Object of the tax

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |1

MANILA MEMORIAL PARK vs. DSWD

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |2

permanent reduction in total revenues is a forced subsidy

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |3

PROGRESSIVE SYSTEM OF TAXATION

PRINCIPLES OF A SOUND TAX SYSTEM

Distinction of Taxation with Police Power and Eminent

Since taxation is legislative, courts cannot interfere or question (1) As to similarities:

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CLASSIFICATIONS AND DISTINCTIONS  Special Assessment/Levy –

As to who bears the burden Kung wala ka nakinabang

As to determination of amount  License Fee/Permit Fee

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |5

Mambulao had a liability for forest charges and there is a

The ordinance was upheld. There is no violation of equal

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |6

posing the question that “Had the tax refund been

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EXCEPTION: When retroactivity is not harsh or

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |8

Shell. So Shell questioned the validity of the ordinance,

MANILA RACE HORSES vs. DELA FUENTE

ISSUE: Is there a substantial distinction? TOLENTINO vs. SECRETARY OF FINANCE

(6) No imprisonment for non-payment of poll tax PRIVATE CONTRACT

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(14) Power of LGU’s 11 DECEMBER 2018

TOLENTINO vs. SECRETARY OF FINANCE

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(4) INTANGIBLE PERSONAL PROPERTY –when the

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(1) Taxing twice (1) SHIFTING– applies to indirect taxes; transfer of

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(2) CAPITALIZATION / TAX CAPITALIZATION (5) TAX AVOIDANCE (TAX MINIMIZATION)

In transformation, the producer in order to have a tax savings

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(2) Construction of Tax Laws

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(4) Provisions contained in Tax Statutes (8) Function

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 Public interest – issues if transcendental

INCOME TAXATION III – Accounting for the Income

For accounting purposes in accounting income, we have 2 basis,

II –3 requisites for the taxability of the income.

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V –Sources of Income f. Sale of goods/merchandise: Place of Sale

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 The Resident Alien is one who establishes his residence CO-OWNERSHIPS

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xxx he got sick, then by such injury or sickness he received

(4) Compensation for Injuries or Sickness. - amounts

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(a) Income Derived by Foreign Government. - Income

ACOSTA.CANDOLITA.CEBALLOS.ESTILLORE.GERALDE.IBAY.JARDINEL.NARCA. RESURRECCION,G.VEGA Page |20