TAXATION LAW 1

TAXATION v. POLICE POWER

General Principles
POLICE
TAXATION
POWER
Taxation
- It is the inherent power of the sovereign Promotion of
Primarily to
Purpose general
exercised thru legislature to raise revenues raise revenue
welfare
to defray the necessary expenses of the
Limited to the
government. Taxes
cost of
Amount of imposed
regulation or
Taxes Exaction depends upon
issuance of
- These are enforced proportional contributions the Congress
license
from persons and properties levied by the state No direct
by virtue of its sovereignty for the support of the benefit but
government and all its public needs. Improves the only a safer
Benefits general community
Purposes of Taxation Received condition of and healthy
1. Primary- to raise funds in able for the state to the society economic
promote general welfare and protection for the standard of
society
people.
It is inferior to
2. Secondary or Non-Revenue Superior to
Non- the non-
 Sumptuary or Regulatory- taxation may be impairment of impairment
the non-
used as an implement of police power to impairment
Contracts clause of the
promote the general welfare of the people. clause
Constitution
 If the main purpose of charging a particular No transfer of
fee is to raise revenue for the government, property
Taxes paid will
it is taxation. But if the main purpose of Transfer of rights, but a
be deemed a
charging a particular fee is to regulate an Property restraint in
part of the
Rights the exercise
activity, it is an exercise or implementation public funds
of property
of police power. rights
 Taxation can be used in the exercise of Covers all Covers all
police power. For example, sin taxes (high persons, persons,
excise taxes imposed on cigarettes) are for the Scope properties and properties,
purposes of raising revenues and at the excises rights and
same time to regulate the consumption of (privilege) privileges
cigarettes.
3. Compensatory- the progressive system of
taxation prevents the undue concentration of TAXATION v. EMINENT DOMAIN
wealth in the hands of few individuals.
EMINENT
 It is system of progressive taxation because TAXATION
DOMAIN
more taxes are collected from those who
have more wealth than those who have few. Taking a
Primarily to particular
Purpose
Nature of Taxation raise revenue property for
1. Inherent attribute of sovereignty public use
 No need for constitutional conferment. General
benefit of the
Constitutional provisions do not give rise the Compensation citizens for
Just
power to tax, but merely imposed limitations compensation
civilized
and guidelines on the exercise of taxation. society
 It is not inherent to local government. The Applies to
Constitution authorizes LGUs to impose classes of
taxes subject to laws that may be persons, Applies to
promulgated or passed upon the legislature. properties and particular
Application
2. Legislative in character excises as property to be
may be expropriated
 It is the Congress which can pass upon the
determined by
tax. the legislature
 Extent of authority of the legislature: CONES
Coverage, Object, Nature, Extent, Situs

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 TAXATION LAW 1
Theories and Basis of Taxation
1. Lifeblood Doctrine
 Without taxes, the government can neither
exist nor endure.
 No injunction rule: As a general rule,
collection of taxes cannot be the subject of
injunction
 Cannot be subject of Compensation or
prohibition against set-off of taxes, as a
general rule.
2. Necessity
 The exercise of power to tax emanates from
necessity.
3. Benefits-Protection or Symbiotic
Relationship
 Involves the power of the state to demand
and receive taxes based on the reciprocal
duties of support and protection between the
State and its citizens.
Basic Principles of Sound Tax System (Canons of
Taxation) FAT
1. Fiscal Adequacy
 Every tax system, for it to be considered
sound, must be able to collect sufficient
amount of taxes/revenue in order to defray
the expenditures of the government.
2. Administrative Feasibility
 The tax system should be capable of being
effectively and efficiently administered
and enforced for the least inconvenience to
the taxpayers.
 Example is the cause-benefit analysis
3. Theoretical Justice
 The taxes to be collected must be based on
the taxpayer’s ability to pay.
 Progressive system of taxation, the higher
the income, the higher tax to be collected;
lesser income, lesser tax to be collected.
 Regressive system of taxation, higher
income, lesser taxes to be collected; lower
income, more taxes to be collected.
- Rationale: To motivate low income
earners to work harder to raise them up to
higher income bracket.
LIMITATIONS IN TAXATION
1. INHERENT limitations exist by the very increment of
taxation.
2. CONSTITUTIONAL limitations are found in the
constitution.
NOTE: Both are applicable to national taxes only
3. STATUTORY limitations are applicable only in local
taxes- found in the Local Government Code which sets
out specific limitations and guidelines for levying and
imposition of local taxes.
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1. INHERENT LIMITATIONS
1. Public Purpose- for the promotion of general
welfare.
Illustration:
Taxes are collected to support a sugar industry. The law
was questioned because it does not comply with the
public purpose requirement of taxation. The Supreme
Court explained that public purpose does not necessarily
mean that it should benefit all, as long as it satisfies the
“general welfare” of the public.
2. Legislative in nature- the power of taxation is lodged
in the Congress.
- Exceptions to the non-delegability of power to
tax:
a. Imposition of local taxes by the local
government units, which is expressly conferred
by the Constitution under Sec. 5, Art. X.
b. Delegation of power to the President under
Sec. 28, Art. VI in fixing tariff rates.
Q: It is provided in the VAT Reform Act that the VAT
rate is 10%. The same law confers to the President
the authority to increase it to 12% upon
recommendation of the Secretary of Finance, upon
meeting certain and identified criteria. Is there a
violation of the non delegation of legislative
authorities to the President?
A: NONE. There is a valid delegation because what was
delegated is not really the determination of the law, but
merely the implementation. The president, thru the
Secretary of Finance, merely implemented the provision
of the law.
3. Territoriality- the taxing power of the country is
limited to persons, properties and privileges exercised or
located within the jurisdiction. It is in consonance with
the benefit-protection theory.
4. International Comity- refers to the respect accorded
by nations to each other because they are sovereign
equals.
Illustration:
Can we impose taxes over properties of the US
Embassy located in the Philippines? NO.
5. Exemption of government entities, agencies and
instrumentalities.
- unless a law expressly provides otherwise.
- GOCC‟s, unless a law specifically provides
otherwise, are taxable.
 TAXATION LAW 1
2. CONSTITUTIONAL LIMITATIONS
Article III. Section 20. No person shall be imprisoned
for debt or non-payment of a poll tax.
- Poll tax (cedula or community tax) is levied on
persons who are residents within a territory of a
particular taxing authority without regard to real
property, business or occupation.
Article VI. Section 28. 1. The rule of taxation shall be
uniform and equitable. The Congress shall evolve a
progressive system of taxation.
- Uniformity- taxable particulars of the same
class should be taxed at the same rate.
- Equitability- taxation must be based on the
ability to pay of the taxpayers- the higher the
capacity of the taxpayer to pay, the higher the
income tax that must be levied upon him.
- Taxation is progressive when the tax rate
increases as the income of the taxpayer
increases.
Illustration:
A particular taxpayer is earning P100 a day. The VAT is
12pesos. The disposable income is 88pesos. This is
regressive because it is more detrimental to those
belonging to lower bracket.
3 kinds of Taxation:
1. Progressive
2. Regressive
3. Proportional- a fixed rate imposed regardless of
salary.
Article VI. Section 28. 2. The Congress may, by law,
authorize the President to fix within specified limits,
and subject to such limitations and restrictions as it may
impose, tariff rates, import and export quotas, tonnage
and wharfage dues, and other duties or imposts within
the framework of the national development program of
the Government.
- “Flexible tariff clause”
Article VI. Section 28. 3. Charitable institutions,
churches and parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands,
buildings, and improvements, actually, directly, and
exclusively used for religious, charitable, or educational
purposes shall be exempt from taxation.
- Only pertains to real property taxes, unless
exempted by a particular law.
Illustration:
A particular charitable institution is earning an income. It
is exempted not under the Constitution but under
Section 30(E) of NIRC.
Article XIV. Section 4. 3. All revenues and assets of
non-stock, non-profit educational institutions used
actually, directly, and exclusively for educational
purposes shall be exempt from taxes and duties. Upon
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the dissolution or cessation of the corporate existence of
such institutions, their assets shall be disposed of in the
manner provided by law.
Illustration:
1. UST is exempt from real property tax and income tax,
without any exception. There must be a proof that the
income is actually, directly and exclusively for
educational purposes to be able to claim exemption.
2. A lot, owned by UP, was leased to Ayala. Ayala
introduced improvements. Real property tax is not
imposed only on land. It can be imposed on buildings
and improvements. The basis of imposition of real
property tax is not on ownership, but on usage.
Q: A government agency leases a portion of its land
to McDonalds. Is the lot exempt from real property
tax?
A: NO.
Article VI. Section 28. 4. No law granting any tax
exemption shall be passed without the concurrence of a
majority of all the Members of the Congress.
- Voting separately- majority of the Senate,
majority of the House.
Article VI. Section 27. 2. The President shall have the
power to veto any particular item or items in an
appropriation, revenue, or tariff bill, but the veto shall not
affect the item or items to which he does not object.
- “Item veto”
Article X. Section 5. Each local government unit shall
have the power to create its own sources of revenues
and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide,
consistent with the basic policy of local autonomy. Such
taxes, fees, and charges shall accrue exclusively to
the local governments.
Q: Can the Congress abolish the power to tax by the
LGUs?
A: NO. The authority is granted by the Constitution.
Article VI. Section 24. All appropriation, revenue or
tariff bills, bills authorizing increase of the public debt,
bills of local application, and private bills shall originate
exclusively in the House of Representatives, but the
Senate may propose or concur with amendments.
- Substituted bill from the Senate does not
violate the Constitution, as long as there is an
originating bill from the House.
Article III. Section 1. No person shall be deprived of life,
liberty, or property without due process of law, nor shall
any person be denied the equal protection of the laws.
- Substantial due process- intrinsic validity of
the law itself.
- Procedural due process- right to be heard.
 TAXATION LAW 1
- It must be for public purpose, and not arbitrary
and confiscatory.
- Equal protection
a. There must be substantial distinction.
b. Applies to present and future conditions.
c. Applies equally to members of the same
class.
d. Classification must be germane to the
purposes of the law.
STAGES of TAXATION (LAP)
1. Levy/Imposition- enactment of the tax laws
(Congress)
2. Assessment and Correction- implementation of the
tax law (Executive, i.e., BIR or BoC)
3. Payment- by taxpayer
4. Refund*
CHARACTERISTICS of TAXATION
1. Enforced contributions
2. Generally payable in money
3. Proportional in character, since taxes are based on
one’s ability to pay
4. Levied on persons, property, or exercise of a right
or privilege
5. Levied by the State having jurisdiction
6. Levied by the legislature
7. Levied for a public purpose
8. Paid at regular periods or intervals
KINDS of TAXES
1. As to subject or object
a. Personal, capitation, or poll tax- taxes of a
fixed amount upon all persons of a certain class
within the jurisdiction of the taxing power without
regard to the amount of their property or the
occupations of businesses in which they may be
engaged (e.g. community tax)
b. Property Tax- taxes assessed on all property or
all property of a certain class within the
jurisdiction of the taxing power (e.g. real estate
tax)
c. Excise or privilege tax- taxes laid upon the
manufacture, sale or consumption of
commodities within the country; upon licenses to
pursue certain occupations and upon corporate
privileges (e.g. value-added tax)
2. As to burden or incidence
- Impact- who is the responsible party to remit the
tax to the government?
- Incidence- who shoulders the burden?
a. Direct Taxes- wherein both the tax liability as
well as the impact or burden of the tax falls on
the same person (e.g. corporate and individual
income tax)
b. Indirect Taxes- wherein the tax liability falls on
one person but the burden thereof may be
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shifted or passed to another. (e.g. value-added
tax, other percentage taxes, documentary stamp
tax)
3. As to tax rates
a. Specific Tax- which imposes a specific sum by
the head or number or by some standard of
weight or measurement and which requires no
assessment beyond a listing and classification of
the subjects to be taxed (e.g. taxes on distilled
spirits)
b. Ad Valorem- tax upon the value of the article or
thing subject of taxation (e.g. real estate tax)
c. Mixed- a choice between ad valorem or specific
depending on the condition attached.
4. As to the imposing authority
a. National (internal revenue taxes)- taxes levied
by the National Government (e.g. national
internal revenue taxes)
b. Local (real property tax, municipal tax)- taxes
levied by the local governments subject to such
guidelines and limitations as the Congress may
provide (e.g. real estate tax)
CONSTRUCTION AND INTERPRETATION
1. Tax Laws
- As a general rule, tax laws must be construed
strictly against the government and liberally
in favour of the taxpayer.
 Exception: If the tax law refers to a grant of
tax exemption, in which case, it must be
strictly construed against the taxpayer
and liberally in favour of the government.
- But this statutory construction applies only in
case of doubtful interpretation of the law.
(General rule: If the law is clear and there is no
room for interpretation, apply the law)
2. Tax Exemption, Tax Deduction, Tax Refund
- Construed strictly against the taxpayer and
liberally in favour of the State.
Tax Exemption
- Is a grant of immunity, express or implied, to
particular persons, corporations or taxpayer from
which similarly situated taxpayers are obliged to
pay, while the others are still liable to pay taxes.
- Majority vote of the Congress, voting separately,
is required to grant tax exemption.
- Requisites, before a taxpayer can claim tax
exemption:
 There must be a law clearly specifying the
tax exemption being claimed by the
taxpayer; and
 The taxpayer must be able to prove that the
particular provision of law applies to him.
 TAXATION LAW 1
Tax Deduction b. Where the facts subsequently gathered
- Applies to all taxpayers situated in the same by the BIR are materially different from the
class. facts on which the ruling is based; or
c. Where the taxpayer acted in bad faith.
Tax Amnesty
- Grant of immunity granted to a particular Sources of Tax Laws
member of class only. 1. Constitution
2. NIRC
3. Tax Rules and Regulations 3. Tariff and Customs Code
- Construed strictly against the taxpayer and 4. Local Government Code
liberally in favour of the government. 5. Local Tax Ordinances
6. Tax treaties and international agreements
Revenue Regulations (RR) Issuances signed by the 7. Special Laws
Secretary of Finance upon 8. Jurisprudence
Example: RR 2-98 recommendation of the 9. RRs and administrative rulings issued by BIR or
- It is the second Commissioner of Internal BoC
revenue regulation in Revenue that specify,
the year 1998 prescribe and define rules
and regulations for the Q: Can a tax law be contained in a resolution?
effective enforcement of the A: NO, it must be in the form of ordinance.
provisions of Tax Code
Revenue Memorandum Issuances that provide Double Taxation
Orders (RMO) directives and instructions - There is no constitutional prohibition against
prescribe guidelines and double taxation.
outline processes, operations, - 2 types:
activities and procedures in
the implementation of policies 1. Strict sense (Direct)
of the BIR.
- Unconstitutional, in violation of equal
Revenue Memorandum Issuances that publish
Circulars (RMC) pertinent and applicable protection and uniformity clauses
portions, as well as, of the Constitution.
Example: RMC-50-2018 amplification/clarification of - Two or more taxes are imposed on:
- Clarifications in the laws, rules and regulations. SPA-JPK
TRAIN Law a. Same subject matter
b. Same purpose
Q: There is an error committed by previous c. Same taxing authority
Commissioner in the issuance of RMO. Can this d. Same taxing jurisdiction
error be rectified by subsequent Commissioner? e. Same taxing period
A: YES, because the government is not estopped from f. Taxes are of the same kind and
the mistakes of its agent. character

APPLICATION OF TAX LAWS 2. Broad sense (Indirect)

- Tax laws, including its rules and regulations, are
applied, as a general rule, prospectively.
 Exception: If it is expressly contained in
the statute that there would be retroactive
application.
 Exception to the exception: If it is nullified
on the ground of violation of due process,
because the law is harsh and oppressive.
- Sec. 246, NIRC provides for the non-retroactivity
of rulings. Any revocation, modification or
reversal of the rules and regulations
promulgated in accordance with the Tax Code,
or Circulars promulgated by the Commissioner,
shall not be given retroactive application, if the
revocation, modification or reversal will be
prejudicial to the taxpayer.
 Exceptions:
a. Where the taxpayer deliberately misstates
or omits material facts from his return or any
document required of him by the BIR;
- Permissible
- Some elements of direct double taxation
are missing.
Q: Upon the death of A, his estate was passed on to
his successors, subject to estate tax. Aside from
estate tax, transfer tax is also to be paid for the
conveyance of the property. Is there a direct double
taxation?
A: NONE. The taxing authority for the estate tax is the
national government, whereas, the transfer tax is the
local government. Moreover, the subject matter of estate
tax is the privilege to transfer thru succession, whereas,
the subject matter of transfer tax is the property. Lastly,
estate tax and transfer tax are of different kind and
character.

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 TAXATION LAW 1
Q: Income receipts are subject of income taxes, at TAXES DEBTS
the same time, of VAT. Is there double taxation? Cannot be subject of
A: YES, but it is in its broad sense. The subject matter of compensation for the reason
income tax is the privilege of earning income, while, VAT that the government and the
These are due to the
is the privilege to engage in business. Also, both have taxpayers are not creditors
government in its corporate
and debtors of each other.
taxing periods- income tax, annually, while, VAT, These are due to the
capacity.
quarterly. government in its sovereign
capacity.
Modes of Eliminating/Minimizing Double Taxation The money judgment against
1. Tax Credit- is an amount subtracted from the The payment of taxes arises the government is the
taxpayer’s tax due to arrive at the tax liability from law. obligation which will arise
payable to the BIR. from a contract.
- International Double Taxation- two
different taxing authorities- one is in the TAX AMNESTY v. TAX EXEMPTION
Philippines and the other is abroad. TAX AMNESTY TAX EXEMPTION
 If a resident citizen pays income tax abroad,
it may be deemed as a tax credit in the The immunity
covers criminal,
Philippines. civil and The immunity
2. Tax Deductions Scope administrative covers civil liability
3. Tax Exemption liability arising from only.
4. Tax Treaties non-payment of
taxes.
Escape from Taxation General pardon to
Granted in favour
1. Shifting Grantee of a particular
all taxpayers.
- Transfer of the burden of the tax by the class only.
original payer on whom the tax was Application Retroactively. Prospectively.
assessed or imposed to another.
- Applicable only for indirect taxes, e.g., Compromise
VAT, Excise tax, Percentage tax - A contract whereby the parties, by
reciprocal concessions, avoid litigation
2. Tax Avoidance or put an end to one already
- A scheme to minimize tax liability within commenced.
the limits provided by law. - Taxpayer represents himself, and the
- Example: One can claim 40% Optional government is represented by the
Standard Deduction (OSD) even without Commissioner of Internal Revenue.
presenting a receipt. - Sec. 204, NIRC: Compromise on
internal revenue taxes may be granted
3. Tax Evasion on the following grounds:
- It minimizes or eliminates tax liability a. Reasonable doubt as to the validity of
using fraudulent or illegal means. assessment against the taxpayer.
b. Financial incapacity of the taxpayer.
Equitable Recoupment
- There is an application for tax refund Taxpayer Suit
which must be filed within 2 years from - Requisites:
payment. The period has lapsed. On the 1. Public funds arising from collection
other hand, there is an existing tax of taxes are illegally disbursed or
liability. There can be no offsetting of allocated.
the prescribed tax refund against such 2. Taxpayer is affected.
existing tax liability.
- It is inapplicable in the Philippines
No Injunction Rule
Compensation and Set-off - As a general rule, a taxpayer cannot file
- Art. 1278, NCC: Two persons, in their an injunction case to prevent the action
own right, are creditors and debtors of of the government in its assessment or
each other. collection of taxes.
- Taxes are not subject of o Exception: Only when the case is
compensation/set-off because are not before the CTA
debts. - Rationale: Lifeblood Theory
- Applies only to taxes imposed only
under the NIRC/national taxes.

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 TAXATION LAW 1

Income Taxation Q: A, a Filipino, has a bank deposit in US. What is

the income component?
SITUS OF TAXATION (Sec. 42, NIRC) A: Interests from bank deposits. In a bank deposit, the
- “Place of income”. It determines whether your creditor is the depositor and the debtor is the bank. The
income is from within or from without. bank is in US. Therefore, the interest income is an
income from without.
Sources of
Within Without Dividends declared by a foreign corporation:
Gross Income
- Gross Income from PH sources
a. The loan was
Gross Income Global
used here in the
Other than those - If GI from PH sources is greater than or
PH.
Interests derived from equal to 50%, the corresponding
sources within. percentage would be the income from
b. The debtor is
within; but if less than 50%, it is without.
in the PH.
a. From a
Q: GI from PH is 70M and GI from worldwide is 100M.
domestic
The dividends declared by the foreign corp. are
corporation,
Dividends 1000. How much income from within and how much
regardless of
(cash/property) - from without?
the place of
Return on A: 70%, multiplied by 1000=700, within; 300, without.
investments. declaration. If less than
50%, 0 from
Note: Stock b. From a foreign within.
dividends are not Q: GI from PH is 30M and GI from worldwide is 100M.
corporation, if GI
taxable. Taxable only The dividends declared by the foreign corp. are
upon sale. from PH
1000. How much income from within and how much
sources is
from without?
greater than or
A: 30%. Hence, income from within is 0, and from
equal to 50%.
without is 1000.
Performed in the Performed
Services
PH outside PH TAXPAYERS (Sec. 23, NIRC)
a. Rentals of a. Rentals of
personal/real personal/real INDIVIDUALS
Rentals and property located property located Filipino citizens and residing
Royalties in the PH. outside the PH. Resident (RC)
in the Ph
Filipino citizens but residing
Royalties- are
income paid for a
b. In case of b. In case of outside PH.
use of a right or royalties, where royalties, where - Who establishes to the
privilege, e.g., the the satisfaction if the
franchise. rights/privileged rights/privileged Commissioner the fact of
is exercised in is exercised his physical presence
abroad with intention to
the PH. outside the PH.
reside therein;
Sale of Real Located outside - Who leaves the PH
Property
Located in PH
the PH during the taxable year
Sale of Personal to reside abroad either
Property as an immigrant or for
employment on a
permanent basis;
Note: Purchased Non-resident (NRC)
- One who works and
(buy and sell; derives income from
trading)
abroad and whose
Produced The place of sale employment requires
The place of him to be physically
(manufacturing; is outside the
sale is in the PH. present abroad most of
conversion)- PH.
determining factor is the time during the
place of taxable year;
manufacture and - Who has been
place of sale. previously considered a
Hence, income is
partly from within and
NRC and who arrives in
partly from without. the PH at any time
during the taxable year
to reside permanently in

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Resident Alien (RA)
Non-resident Alien engaged
in trade/business (NRAETB)
Non-resident Alien not
engaged in trade/business
(NRANETB)
TAXATION LAW 1
the PH with respect to
his income derived from
sources abroad.
Individuals whose residence
is within the PH and are not
citizens thereof.
PASSIVE INCOME- income derived from within the
PH, subject to final tax.
Passive Income on Citizens
Final Tax
and Resident Aliens
20%
Except:
- interest under the expanded
Interest on bank deposits,
foreign currency deposit
yields or other monetary
system, 15%
benefits

NOTE: A NRA who stays for more than 180 days in the - interest on long term
deposits (maturity of more
PH, they shall be deemed as NRAETB.
than 5 years), EXEMPT
G.R.: 20%
Importance of knowing individual taxpayers: Xpn: 10%, for sale of literary
RCs are taxable for their income from within and without Royalties
works, books and musical
PH sources; others are taxable from within only. compositions
G.R.: 20%
Corporation Xpn: Regular income tax
Prizes
Incorporated and organized subject to Sec. 24(A), for less
Domestic under PH laws, regardless of than or equal to 10,000
place of business G.R.: 20%
Incorporated and organized Xpn: Exempt, for PCSO
Foreign Other winnings
under foreign laws winnings amounting to less
Engaged in trade/business in than or equal to 10,000
- Resident (RFC)
the PH Dividends declared by 10%
- Non-resident Not engaged in domestic corporations
(NRFC) trade/business in the PH Share in net income of 10%
NOTE: Domestic corporations are taxable for their partnership
income from within and without PH sources; Others are
taxable from within only. Illustrations:
Sec. 42 Sec. 23 Sec. 24
Q: BMW, organized under the laws of Germany, has Deposit BDO- within RA- within 20%
its distributor in the PH organized under PH laws. Foreign deposit- without RA- within no
Can the distributor be considered domestic or Interest on foreign bank RC- within
Regular income tax
deposits- without and without
foreign corporation?
Royalties from books- RC- within
A: Domestic. 10%
within and without
Prize from tawag ng If 11,000- 20%
Q: Sun Life, as parent company, was incorporated tanghalan- within RA- within 5,000- Regular
under Canadian laws. It has subsidiary corporation income tax
in the PH fully owned by the parent company. But Prize from The Voice RC- within
Regular income tax
the subsidiary is incorporated in the PH. Is the UK- without and without
subsidiary, domestic or foreign corporation? San Miguel Corp.
A: Domestic. Regardless of the existence of a parent declared dividends- RA- within 10%
company, the test is whether the corporation is within
incorporated or organized under PH laws. Foreign Corp declared
dividends; GI
percentage from PH RC- within
Regular income tax
sources over worldwide and without
TAXATION ON INDIVIDUALS (Sec. 24) income is 60%- partly
within and partly without
Tests: Boxing winnings in Las RC- within
Regular income tax
1. Is the transaction taxable in the PH? Vegas- without and without
- Analyze first Sec. 42 and refer to Sec.
23. CAPITAL GAINS TAX ON SHARES
2. What is the applicable tax? - Requisites:
- Refer first to Sec. 42 on situs; then Sec. 1. Sale of shares of domestic corporation
23 on kinds of taxpayers; and Sec. 22 2. Not listed in the Philippine Stock Exchange
on tax applicability - If the requisites are met, the applicable tax is
15% of net capital gains
- Net capital gains= Selling price – Cost of
shares

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 TAXATION LAW 1
- If listed in PSE, 6/10 of 1% of gross selling price; Section 24(A)
it is in the nature of a percentage tax. Kind of
Tax Treatment
Tax
Tax Base
- If listed in the PSE, exempted from income tax Income Earner Applicability
Purely Compensation Taxable
Graduated
Illustration: Compensation Income income
Sec. 42 Sec. 23 Sec. 24 Graduated Taxable
Share is not listed, income
15% or
San Miguel Corp.- within RA- within
Business Gross
If listed, .60% Purely Earning sales/Gross
income or
Foreign Corp., sold RC- within from Business receipts
Regular income tax professional
shares in the PH- within and without or Practice and Non-
income 8%
operating
CAPITAL GAINS TAX ON REAL PROPERTY income in
excess of
- Requisites:
250K
1. Sale of real property located in the PH
a.
2. Real property must be classified as capital Compensation Taxable
asset Graduated
income income
- Ordinary Assets (Sec. 39)- assets which are for
sale or use, in the ordinary course of business; AND
all other assets are CAPITAL ASSETS
- Applicable rate, 6% of gross selling price/fair Graduated Taxable
market value Mixed income
- Doctrine of Presumed Gain: no need to prove b. Business or
that there is an income or gain from the income or Gross
transaction. professional sales/Gross
- Exception: Principal residence- Requisites income receipts
a. Sale of principal residence 8% and Non-
operating
b. The proceeds must be fully utilized in
income
acquiring new principal residence
c. The acquisition of the new principal
Illustration:
residence must occur within 18 months
Taxable income= 1M per year
d. Within 30 days from the date of the sale
Income bracket= over 800K but not over 2M (see codal)
of the old principal residence, inform
130,000 + [30% x (1M-800K)]= 190,000 (Tax Due)
BIR the intention to acquire new
principal residence and intention to avail
Requisites to avail 8% Option:
of the exemption
a. Taxpayer must be non-VAT registered
e. Tax exemption must be availed only
b. Gross sales/Gross receipts and Non-operating
once in every 10 years.
income, should not exceed the VAT threshold
(3M)
Illustration:
Sec. 42 Sec. 23 Sec. 24
Sale of house and lot
Disqualified to avail 8% Option:
NRA- within 6% a. Purely Compensation income earner
located in PH- within
RC as real b. Taxpayer is VAT registered
Sale of land in c. Gross sales/Gross receipts and Non-operating
estate Regular income tax
Batangas- within
agent- within income exceed 3M
Sale of house and lot in RC- within d. Taxpayers subject to percentage tax other that
Regular income tax
California- without and without Sec. 116.
e. Partners of General Professional Partnership
SECTION 24(A), NIRC f. Those who are exempt from income tax under
special laws
Benefits of the 8% Option:
a. It is an option, in lieu of the graduated income
tax rate.
b. No liability for 3% percentage tax under Sec.
116.

9 |g j u
 TAXATION LAW 1
Section 25, NIRC TAX ON CORPORATIONS
Passive CGT on CGT on All other
Income Shares Property income Exclusions to the term „corporation‟
Non- -Interest on 1. General Professional Partnership- is an entity the
resident bank sole purpose of which is to exercise common profession.
alien deposits,
- No part of the income is derived from engaging in any
engaged yields or
in trade or other
trade or business.
business monetary 2. Joint venture or consortium- requisites:
benefits  The joint venture or consortium is
-Royalties formed for undertaking construction
6% of
-Prizes projects or energy operations;
gross
-Other
selling  There must be a service contract with
winnings 15% of the government.
price/fair Graduated
=10% FWT net
market Income 3. Co-ownership- two or more persons own a property
capital
value Tax for the purpose of co-management of the property.
-Dividends gains
whichever
declared by
is higher Q: A and B bought a property. For quite some time,
domestic
corporations they sold the same. They gained profit. Is there co-
-Share in ownership or partnership?
net income A: Co-ownership since it is only an isolated transaction.
of
partnership NOTE: Test of whether it is partnership or co-ownership:
=20% FWT
Habituality of transaction. If so, it is a partnership.

Non- 6% of Q: Why is it important to know distinction of a

resident gross partnership from a co-ownership?
15% of A: A co-ownership is not a taxable entity. The incidental
alien not selling
net
engaged N/A price/fair 25% FWT income from such co-ownership is not taxable itself, but
capital
in trade or market the share of the co-owners in the income of the co-
gains
business value ownership.

NOTE: Other winnings of NRA-ETB is not included TAX ON DOMESTIC CORPORATIONS (Sec. 27)
TAXATION of GENERAL PROFESSIONAL Passive CGT on CGT on All other
PARTNERSHIP (Sec. 26, NIRC) income Shares Lands and income
- The GPP in itself is not a taxable entity because Buildings
it only acts as a “pass-through” entity where its - Interest on General
income is ultimately passed to the partners. bank Rule:
- Distributive share on the net income of the deposits,
partnership: divided equally yields and i. RCIT:
 Apply Sec. 24. other
6% of
30% of
gross
monetary taxable
Q: The distributive share on the net income of the selling
benefits: 20% 15% of Net income
partnership is 300K. A, B and C, all resident citizens, price/fair
Capital or
with 100K each. What is the applicable tax rate? market
- Royalties: Gains ii. MCIT:
A: Graduated Income Tax. They cannot avail of the 8% value
20% 2% of
option. whichever
gross
is higher
-Inter- income
NOTE: The 10% tax rate on distributive share on the net corporate
income of the partnership applies to TAXABLE dividends: whichever
PARTNERSHIPS. exempt is higher
NOTES:
1. Intercorporate: Domestic corporation declaring
dividends to DC or RFC.
2. For DC, the CGT is limited on the sale of lands and
buildings classified as capital assets located in the
Philippines.
th
3. Application of MCIT: beginning of the 4 taxable
year immediately following the year in which the
corporation commenced its operation.

10 |g j u
 TAXATION LAW 1
Rules on MCIT Application: TAX ON RESIDENT FOREIGN
1. Excess MCIT is the excess of MCIT over RCIT. CORPORATIONS (Sec. 28-A)
2. Excess MCIT applies only against RCIT.
3. Excess MCIT can be applied only in the immediately 3 Passive income CGT on Shares All other
succeeding taxable years. income

CARRY FORWARD ON EXCESS MCIT - Interest on bank General Rule:

deposits, yields and
Year1 Year2 Year 3 Year 4 Year 5 i. RCIT: 30% of
other monetary
benefits: 20% Not over 100K: taxable income
Gross 2,000 500 400 2,000 10,000
5% of Net
Income or
Allowable 1,990 450 370 1,980 5,000 Capital Gains
- Royalties: 20% ii. MCIT: 2% of
Deductions gross income
Taxable 10 50 30 20 5,000 In excess of
-Inter-corporate
Income 100K: 10%
dividends: exempt whichever is
Tax Due 40 15 9 40 1,500
higher
RCIT 3 15 (- 9 (-9) 6 1,500
15) (-34)
MCIT 40 10 8 40 200 NOTES:
Excess 37 22 13 cannot 1. Inter-corporate: RFC receive dividends from DC may
MCIT (expires apply also be exempt.
on Year (incurred 2. No CGT on Lands and Buildings because they are
4) new prohibited by law, but they can own a condominium unit,
excess which can be sold as capital asset. However, the sale
MCIT: transaction is not subject to CGT because no such
34) provision under the Code. It can be treated as all other
Tax 0 0 40 1,466
income.
Payable
3. MCIT is applicable.
NOTE: Tax Due is MCIT or RCIT whichever is higher.
Q: For February, the net gain is 80, 000; on March,
Reliefs against MCIT
the net gain is 120, 000. What would be the
1. Commences after 4 years.
applicable rates?
2. Secretary of Finance is authorized to suspend MCIT
A: February: 5%.
when the corporation suffer losses on account of:
March: The 100, 000 is subject to 10%; 20, 000 is
a. Labor Dispute
subject to 5%.
b. Force majeure
c. Legitimate business reverses.
EXCEPTIONS TO APPLICATION OF RCIT/MCIT
Domestic Corporation is not subject to RCIT or
International Carriers 25% of gross Philippine
MCIT:
billings
1. Proprietary educational institution or non-profit
hospital- preferential tax rate of 10% of taxable income Offshore Banking Units exempt
-Exception: RCIT is applied if it fails the Branch for Profit 15% of the total profits
predominance test- if the gross income from Remittances applied or earmarked for
unrelated activities over gross income (total) is remittance
greater than or equal to 50%, RCIT of 30% is applied. Regional or Area exempt
Headquarters
2. Exempt GOCCs, e.g., SSS, GSIS, PHIC, Regional Operating 10% on taxable income
LWD, PhilHealth Headquarters

Q: Company A is a foreign corporation. It

established a subsidiary in the Philippines. This
subsidiary remitted a portion of its income to
Company A. Is it subject to Branch for Profit
Remittance tax?
A: NO. A Branch for Profit Remittance tax applies to a
branch remitting income to its mother company. A
subsidiary corporation is a domestic corporation, not a
branch.

11 |g j u
 TAXATION LAW 1
Q: Jollibee Philippines has its branch in Hong Kong.
The Hong Kong branch remitted to the Philippines
its income. Is it subject to Branch for Profit
Remittance tax?
A: NO. A Branch for Profit Remittance tax applies to
outflow not to inflow.
Branch for Profit Remittances; Elements-
1. There is a foreign corporation;
2. Has branch in the Philippines; and,
3. The flow of the money must be from the Philippines to
the outside.
Regional or Area Headquarters
- These are administrative offices communicating and
coordinating offices in the Asia-Pacific.
d. In compliance with any loan covenant or pre-
existing obligation;
e. Distribution of income is prohibited by law;
-Existence of treasury shares; otherwise, there
is a violation of Trust Fund Doctrine.
f. In case of subsidiaries of foreign corporations in
the Philippines.
Corporations which IAET does not apply: BPI-TENG
1. Banks and other non-bank financial intermediaries;
2. Publicly-held corporations;
3. Insurance companies;
4. Taxable Partnerships;
5. Enterprises duly registered with the Philippine
Economic Zone Authority;
6. Non-taxable joint ventures; and
7. General Professional Partnerships.

TAX ON NONRESIDENT FOREIGN Presumption of Improper Accumulation- the fact that

CORPORATIONS (Sec. 28-B) a corporation is a mere holding company or investment
company shall be prima facie evidence of a purpose to
CGT on Shares All other income avoid the tax upon its shareholders or members.

EXEMPTION FROM TAX

Not over 100K: 5% of ON CORPORATIONS (Sec. 30)
30% of gross income
net capital gains
Cases:
Exception: Tax pairing
In excess of 100K: 10%
rule on dividends- 15%
CIR v. St. Luke’s: The income for charity works shall be
exempt from income tax; whereas, the income from
paying patients will be subject to preferential rate of 10%
EXCEPTIONS TO APPLICATION OF 30%
- According to Sec. 30 (e) and (g), St. Luke’s is exempt.
But according to the last paragraph thereof, any income
Owner/Lessor of 25% of gross income
derived from property, real or personal, or activity
Cinematographic Films
conducted for profit, is subject to income tax.
Owner/Lessor of Vessels 4 ½% of gross rentals,
- The test of taxability is the SOURCE OF INCOME.
chartered by Philippine lease or charter leases
- The last paragraph of Sec. 30 is without force and
Nationals
effect in so far as non-stack, non-profit educational
Owner/Lessor of Aircraft, 7 ½% of gross rentals or institution is concerned. The test of taxability is the USE
Machineries and other fees OF INCOME.
Equipment
Q: A group of lawyers formed an association for the
purpose of promotion of good governance. Can this
IMPROPERLY ACCUMULATED be classified as GPP?
EARNINGS TAX (Sec. 29) A: NO. The purpose of GPP is the exercise of common
profession. But under Sec. 30 (g), they can be classified
- 10% as civic organization for the promotion of social welfare.
- It is not in lieu of the dividends tax. It is a form of
penalty. CIR v. DLSU: The income from concessionaires is an
income derived from any activity for profit.
“Reasonable Needs” of the business- a defense to - In order to claim exemption under the Constitution,
avoid IAET: there must be a proof that such profit is used actually,
a. Allowance for the increase in the accumulation directly and exclusively for educational purpose.
of earnings up to 100% paid-up capital;
b. For definite corporate expansion NOTE: For non-stock, non-profit educational institution,
project/programs which must be approved by there must be a proof that such profit is used actually,
the Board; directly and exclusively for educational purpose. But
c. Earnings reserved for acquisition of building, for all other corporation, Sec. 30 of NIRC applies.
plants or equipment which must be approved by
the Board;

12 |g j u
 TAXATION LAW 1
GROSS INCOME (Sec. 32)
- It includes all income from whatever source.
Q: You received money from another through loan.
Will that be part of gross income?
A: NO. It is not a flow of wealth, but only a borrowed
capital.
“Capital” is a fund or a property existing at a point in
time which is used to generate the income.
“Income” is a flow of wealth arising from the use of the
capital.
“Exclusions” are not considered as gross income:
1. They are not really an income but capital or,
2. Though they are income component, they are
specifically excluded by the law.
“Deductions” are items deducted from the gross
income.
ITEMS OF EXCLUSIONS
1. Life Insurance
- The amount received by heirs as proceeds of life
insurance.
- The premium is capital.
- Exception: Sec. 36-A (4), premiums paid on any life
insurance policy covering the life of any officer or
employee, or of any person financially interested in any
trade or business carried on by the taxpayer, individual
or corporate, when the taxpayer is directly or indirectly a
beneficiary under such policy is not considered a
deduction.
- If payment of insurance proceeds is by installment, it
bears interest. The interest income component is not an
excluded income, hence, taxable.
2. Amounts received by insured as return of
premium
- The amount received from the matured insurance
which was preterminated.
3. Gifts, Bequests, and Devises
- Donations
Q: A owes B a sum of money. A renders a service in
favor of B. Thereafter, B did not collect the debt
owed by A on account of that service rendered. Is
there condonation?
A: YES. However, it is not excluded because there is no
donation on account of the services rendered in lieu of
the debt owed by A from B- there was a consideration.
4. Compensation for Injuries or Sickness
- Amounts received as compensation for personal
injuries or sickness, plus the amounts of any damages
received on account of such injuries or sickness.
13 |g j u
Q: Is moral damages excluded?
A: YES, on account of physical injuries, death or
sickness suffered.
Q: In a libel case, the accused paid for moral
damages because of the victim’s tarnished
reputation. Is the moral damages excluded from the
gross income?
A: NO, moral injuries are not exclusions.
5. Income exempt under treaty
6. Retirement Benefits, pensions, gratuities, etc.
- Elements under RA 7641:
1. 60-65 years of age;
2. Rendered at last 5 years of service; and
3. No retirement benefit plan arranged by the
employer.
- If there is a private benefit plan, can claim retirement
benefits- elements:
1. There must be a reasonable private benefit
plan maintained by the employer, approved by
the BIR;
2. Must be employed for at least 10 years;
3. Not less than 50 years of age; and
4. The employee must avail such benefit only
once.
- Separation pay- if separated from service involuntarily
because of death, sickness or other physical disability or
for any cause beyond the control of the employee, it is
exempt from income tax.
- The provisions of any existing law to the contrary
notwithstanding, social security benefits, retirement
gratuities, pensions, received by RC or NRC or RA
from foreign government agencies and other
institutions, private or public.
- Benefits from United States Veterans
Administration.
- Pensions from SSS and GSIS.
7. Miscellaneous Items
- Income derived by a foreign government- principle of
International Comity
- Income derived by the government or its political
subdivisions
- Prizes and Awards made primarily in recognition of
religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
a. The recipient was selected without any
action on his part to enter the contest or
proceeding; and,
b. The recipient is not required to render
substantial future services as a condition to
receiving the prize or award.
- Prizes and Awards in Sports Competition- it must be
sanctioned by the national sports associations
th
- 13 month pay and other benefits
- PhilHealth, GSIS, SSS, Medicare, Pag-IBIG and
Union Dues- removed from compensation income.
 TAXATION LAW 1
FRINGE BENEFITS (Sec. 33)
- These are goods, services or other benefits granted in
kind or in cash by the employer to the employee.
- These are additional benefits granted for the personal
advantage and benefit of the employee and not of the
employer.
- The compensation is not the fringe benefit
contemplated by law.
- Fringe Benefit Tax (FBT) is a final withholding tax for
the fringe benefit given by the employer to the
supervisory or managerial employee.
- 35% of gross monetary value
NOTE: If the recipient of fringe benefits is a rank and file
employee, regardless of the amount is not subject to
FBT, but can be subject of normal income tax.
FBT NOT Applicable:
1. FB given to rank and file employees;
2. FB is necessary to the trade or business;
3. FB is for the convenience of the employee;
4. FB which are authorized and exempted from tax
under special laws;
5. Contributions of the employer for the benefit of the
employee to retirement, insurance, and hospitalization
benefit plans; and,
6. De minimis benefits which are benefits of small
amount given to the employee, e.g., clothing allowance,
rice allowance, etc.
Illustration:
Vehicle- 1M
There is an assumption that 1M is the net benefit where
the tax complement is deducted; hence, it needs to be
grossed up.
This is subject to 35%; so, 100% less 35% is 65%
Divide 1M to 65% which is 1, 538, 461.54- this is the
gross monetary value.
1, 538, 461.54 x 35% = 538, 461.54 –this is the FBT.
NOTE: If the question is, “what is the applicable FBT?”
the answer is, it depends who is the employee (RC,
NRC, RA, NRA)
th
13 Month Pay has threshold of 90, 000, which is
exempted and the excess is taxable.
a. De minimis threshold- the excess will form
th
part of the 13 month pay and other benefits.
th
b. 90, 000 threshold- the 13 month pay and
other benefits beyond this threshold will be
subject to income tax.
14 |g j u
ALLOWABLE DEDUCTIONS (Sec. 34)
ALLOWABLE DEDUCTION v. EXCLUSION
ALLOWABLE DEDUCTION EXCLUSION
Items not considered in
determining gross income
They are not really an
Items deducted against gross income but capital, or
income Though they are income
component, they are
specifically excluded by
the law.
Both decreases the taxable income
- Compensation income earners have no allowable
deductions, i.e., employees.
DEDUCTIONS FROM GROSS INCOME
1. Business or Professional Expenses, requisites:
a. It must be ordinary and necessary;
b. paid or incurred during taxable year; it
depends on what basis of accounting:
- Accrual basis- expense is recognized
when it is incurred not when it is paid.
It is applied when the problem is silent.
- Cash basis- the recognition of the
expense is not the time when it is
incurred but when it is paid.
- it includes: salaries and wages, travel
expenses, rentals.
- entertainment, amusement and recreation
expenses- should not exceed the ceiling set
forth by the Secretary of Finance.
- If engaged in the sale of goods, the
ceiling is .5% of net sales; if sale of
service, the ceiling is 1% of net
revenue.
Illustration:
The gross income of a law firm is 30M. It expends 20M
travel expenses a year. It is necessary, but not ordinary;
hence, not an allowable deduction.
CIR v. Atlas Consolidated Mining: An expense is
“necessary” when the expenditure is appropriate and
helpful to the development of the taxpayer’s business; it
is an “ordinary” expense when it connotes payment
which is normal in relation to the business of the
taxpayer.
Q: The legal services was rendered in 2018 but was
paid in 2019. It was claimed as a deduction only in
2019. Is it an allowable deduction for 2019?
A: NO, since according to the accrual basis of
accounting, the basis of recognition must be in 2018
which is the proper period when such was incurred.
 TAXATION LAW 1
“SUBSTANTIATION REQUIREMENT”- it must be
substantiated with sufficient evidence such as but not
limited to official receipts, vouchers, affidavit or other
adequate records.
- It must contain the amount of expense being
deducted. It must be shown that it is ordinary
and necessary to the business of the taxpayer
by indicating the nature of such expense.
Bribes, kickbacks and other similar payments cannot
be claimed as deduction because it is contrary to law,
good morals and public policy.
Expenses Allowable to Private Educational
Institutions
- “capital expenditures” are expenditures of a
material amount the benefit of which will extend
for usually more than one (1) year. These should
be capitalized in the books as they should be
recognized as assets.
Q: J constructed a building worth 10M. Can it be
claimed as allowable deduction?
A: NO, because capital expenditure, as a general rule,
can be recognized as asset and not as an outright
deduction. The allowed deduction is the depreciation.
Let’s say that the life of the building is 10 years. The
depreciation for 10 years is 1M. On year 1, it recognizes
an allowable deduction of 1M; year 2, 1M; and so forth
and so on until the amount reaches 10M. It is like
spreading the cost.
- For Private Educational Institutions, they are
allowed an option:
a. Outright claim of deduction, or
b. Claim depreciation.
2. Interest
- The indebtedness must be related to the
taxpayer‟s business. If it is a personal loan of
the taxpayer, it cannot be claimed as an
allowable deduction.
3. Taxes; not considered allowable deductions-
a. Income Tax;
b. Income taxes imposed by authority of any
foreign country- if already claimed as tax
credit.
c. Estate and donor’s taxes;
d. Taxes assessed against local benefits of a
kind tending to increase the value of the
property assessed- “special assessment tax”
e. Stock transaction tax.
15 |g j u
4. Losses, requisites-
a. Actually sustained during the taxable year;
b. Not compensated by insurance;
c. Must arise, either:
i. In the course of trade, business, or
profession;
ii. Casualty losses.
d. There must be a declaration of loss filed with
the BIR;
e. The loss should not be claimed as deduction
for estate tax purposes in the estate tax return.
Illustration:
A particular business was razed by fire. The book value
of the destroyed properties was 10M. The business has
insurance of 7M. 3M is the deductible expense.
Net Operating Loss Carry-over (NOLCO)
- It is the excess of the allowable deduction over the
gross income.
- It can be carried forward in the next three (3)
succeeding taxable year.
- Requisite: there must be no substantial change in the
ownership of business or enterprise-
a. Not less than 75% in the nominal value of
the outstanding issued shares, if the business is
in the name of the corporation, is held by or on
behalf of the same persons; or,
b. Not less than 75% of the paid-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.
5. Bad debts
- Uncollected receivables related to the business.
- There must be proof that it is already worthless
- Demand letters or filed court action - Write off
the receivables with the BIR.
TAX BENEFIT RULE- in case of recovery of a previous
expense, it will be recognized as part of the gross
income to the extent of the income tax benefit
derived.
6. Charitable and Other Contributions
a. Contributions or gifts to or for the use of the
Government of the Philippines exclusively for
public purposes, or associations organized
and operated exclusively for religious,
charitable, scientific, youth and sports
development, or to social welfare institutions, or
to NGOs, where no part of the net income inures
to the benefit of any private stockholder or
individual in an amount not in excess of 10%
in the case of individual, and 5% in case of
corporation.
b. Donations to the Government shall be
deductible in full if such are to be used in
undertaking priority activities in education,
health, youth, and sports development, human
 TAXATION LAW 1
settlements, science and culture, and in
economic development according to a National
Priority Plan determined by the National
Economic and Development Authority (NEDA).
Any donation not in accordance with the annual
priority plan shall be subject to 10% or 5%
limitations.
c. Donations to private institutions deductible in
full; Elements-
i. Donations must be made in favour of a
qualified and accredited donee institution
which is for charitable, educational, religious or
cultural purpose, accredited by Philippine
Counsel of NGOs Commission (PCNC);
ii. The donor must be engaged in business or
practice of profession;
Illustration:
Atty. L, an employee of Divina Law, is not
engaged in business or practice of profession,
for taxation purposes. However, Divina Law
itself can claim deductions for its donations
because it is engaged in business or practice of
profession.
iii. The donor shall give notice of donation on
every donation (of at least 50, 000) to the
Revenue District Office which has jurisdiction
over the place of business of the donor within 30
days after the receipt by the qualified donee
institution of the certificate of donation; and
iv. The certificate of donation must contain
undertaking that not more than 30% of the
donation shall be used for administrative
purposes.
7. Additional Requirements for Deductibility of
Certain Payments
- The withholding tax has been withheld has been paid
to the BIR.
- If not withheld, the amount which should have been
able to claim as expense will not be considered as
allowable deduction under Sec. 34(K).
“WITHHOLDING TAX SYSTEM”
- The income payor is also constituted as the
withholding tax agent, who facilitates the collection of
withholding tax to be remitted to the BIR, in behalf of the
income earner.
Illustration:
Rent transaction
Lessee: ABC Corporation
Lessor: LMM (Individual)
Gross rent: 100, 000
Under RR 2-98: subject to 5% FWT
Instead of paying 100, 000 to LMM, ABC Corp. will pay
only 95, 000. (100, 000 x 5%= 5, 000[to be withheld and
remitted])
16 |g j u
At LMM’s perspective: at the end of the year, he sums all
his income- for example, 600K. He has liability
amounting to 30K. Hence, 25K is to be paid with the
government since the 5K remitted is considered as
deduction. It is sometimes called “tax credit” which is
sourced from creditable withholding tax.
Here, if the transaction is subject to withholding and the
ABC Corp. did not withhold the appropriate taxes, the
whole 100K cannot be claimed as a deduction.
Types of Withholding Tax:
1. Final Withholding Tax (FWT)
- Final settlement on the tax liability accruing from a
particular transaction. It is no longer credited against the
income tax due.
2. Creditable Withholding Tax (CWT)
- Partial and advanced payment on the total tax liability
accruing from a particular transaction. It can be credited
against income tax due.
3. Expanded Withholding Tax (EWT)
- It is a form of CWT, which can be credited against
income tax due.
Transactions Subject to Withholding: All other
purchases of goods or services provided they are
classified as follows: Identity of Income Payor:
i. If the income payor is a “large taxpayer”; or
ii. If the income payor is included in the top
20,000 private corporations; or
iii. If the Income tax payor is included in the top
5, 000 individuals,
The payment for the purchase of goods shall be subject
to 1% EWT or the payment of services shall be subject
to 2% EWT.
8. Optional Standard Deductions (OSD)
- In lieu of the allowable deductions
- For the benefit of the BIR and taxpayer: if the taxpayer
opts to pay OSD, no need for the latter to present
evidence to support it and the former to cross check
official receipts as evidence.
- It is 40% of gross sales or gross receipts for
individuals; 40% of gross income for corporations.
- It can be claimed when, (1) no official receipts; or (2)
no/lesser deductions.
NOTE: GPP must file zero return as income tax returns.
Illustration:
A’s share in the GPP- 100K
Rental income- 500K
Sale- 600K
Total: 1.2M
A can claim deductions/OSD if it is only related to the
Rental income and Sale since his share in GPP,
technically, the allowable deductions is already
deducted.
 TAXATION LAW 1
ITEMS NOT DEDUCTIBLE (Sec. 36) Capital Asset
= GS or GR – Cost= Gain (shall form part of the GI; no
1. Personal, living or family expenses. impact on the AD)
2. Any amount paid out for new buildings or for
permanent improvements, or for betterments made to 3 RULES:
increase the value of any property or estate. a. Limitation on Capital Loss: Capital Loss can only be
3. Any amount expended in restoring property or in recognized to the extent of the Capital Gains, such that if
making good the exhaustion thereof. the Capital Loss would be greater than Capital Gains,
4. Premiums paid on any life insurance policy covering nothing will be added on the Gross Income.
the life of any officer or employee, or of any person
financially interested in any trade or business carried on Transaction 1:
by the taxpayer, individual or corporate, when the Selling Price- 100K
taxpayer is directly or indirectly a beneficiary under such - Cost- 150K
policy is not considered a deduction. Loss 50K;hence, GI=0

CAPITAL GAINS AND LOSSES (Sec. 39)
Ordinary Assets are:
1. Those assets held for sale in the ordinary course of
trade or business; or,
2. If the assets are being used in the trade or business.
Q: L is engaged in business of merchandising. He
has a land where the principal office is situated. Are
the office building and land ordinary assets?
A: YES, because even though it is not held for sale in
the business of merchandising, the building is being
used in the trade or business.
Q: ABC Corp. is engaged in merchandising which
owns a parcel of land in Laguna and has a main
office in Manila. The parcel of land is being leased. Is
the land an ordinary or capital asset?
A: Capital asset.
Transaction 2:
Selling Price- 200K
- Cost- 100K
Gain 100K
The net capital loss can be recognized only up to the
extent of the net capital gain.
Gain 100K – Loss 50K= Net Gain 50K
b. Holding Period Rule:
i. If the holding period of the assets is 12 months or less,
the gain or loss will be recognized in its full amount
(100%)
ii. If the holding period is more than 12 months, the gain
or loss can be recognized for 50%
Selling Price- 100K (acquired in 2016, sold in 2019;
holding period is more than 12 months)
- Cost- 50K
Gain 50K x 50%= 25K

NOTE: For realty companies, all real properties are Selling Price- 100K (holding period is less than 12
classified as ordinary assets, regardless of use. months)
- Cost- 150K
Computation of Gain: Loss 50K x 100%=50K
Gross Selling Price or Gross Receipt – Cost
Hence, the GI to be declared is Zero since Loss is
Illustration: greater than Gain, applying the Limitation on Capital
GI – AD= TI Loss

Ordinary Asset c. Net Capital Loss Carry-Over (NeCaLCO): If the

Gross Selling Price or Gross Receipt (shall form part of Capital Loss is greater than Capital Gains the amount
the GI) - Cost (shall form part of the AD); No effect on can be carried over for the next succeeding year as a
the TI because the two are distinct. deduction in full.

Selling Price (GI)- 100K Capital Loss 50K

Cost(AD)- 150K -Capital Gain 25K
50K Loss is recognized. Net Loss 25K
It can be carried over for one year.

Sequence of Application of the above Rules:

1. Holding Period Rule: applies to individuals only
2. Limitation on Capital Loss: applies to corporations
and individuals
3. NeCaLCO: applies to individuals only

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 TAXATION LAW 1
NOTE: The above rules shall be applied to all capital a. The employee is receiving purely compensation
asset transactions, except: income;
a. Sale of real property located in the PH which b. The employee has only one employer;
is subject to 6% CGT; c. The employee’s income tax has been withheld
b. Sale of shares of stock of DC not listed in the correctly by the employer.
stock exchange which is subject to 15% CGT.
Sec.39 excludes CGT transactions which are FWT. DISTRIBUTION OF DIVIDENDS OR ASSETS BY
CORPORATIONS (Sec. 73)
TAX FREE EXCHANGE; Requisites-
1. The transferee of the assets is a corporation; Liquidating Dividends Stock Dividends
2. The transferee exchanges its shares of stocks or Final dividends given to Declaration of dividends in
properties to the transferor; stockholders upon the form of stocks from the
3. The transfer is made by a person, natural or juridical, liquidation of the declaring corporation.
acting alone, or together with others not exceeding 5 corporation.
persons; Recapitalization.
4. As a result of the exchange, the transferor must Subject to income tax Not subject to income tax,
obtain control over the transferee. unless shares are sold.
Such sale is subject to
“Control” means the acquisition of at least 51% of the CGT or Stock transaction
shares of stocks of the corporation. tax.

NOTE: The transfer must be SOLELY in KIND to be tax FISCAL ADJUSTMENT RETURN (Sec. 76)
free. However, a transfer of shares of stocks or
properties WITH ASSUMPTION OF LIABILITY shall be - Applies to corporations which are required to pay their
tax free. taxes and file the final adjustment return quarterly and
annually.
DETERMINATION OF AMOUNT AND RECOGNITION
OF GAIN OR LOSS (Sec. 40) Illustration:
Q1: 20K
Q2: 30K
Basis for Determining Gain or Loss from Sale or Q3: 10K
Disposition of Property: 60K
1. The cost of property acquired by purchase;
2. The fair market price or value as of the date of 1. Annual ITR Q1 to Q4 (Tax Due): 100K
acquisition, acquired by inheritance; Less: Tax Credit (60K)
- Time of acquisition= death of the decedent Tax Payable: 40K
3. If acquired by donation, the cost basis shall be the
same as if it would be in the hands of the donor or If Tax Due > Tax Credit
the last preceding owner or fair market value, - Taxpayer shall pay the balance
whichever is higher.
2. Annual ITR Q1 to Q4 (Tax Due): 10K
INDIVIDUAL RETURNS (Sec. 51) Less: Tax Credit (60K)
Tax Payable: -50K (excess)
Who are not required to file Income Tax Return?
1. An individual whose taxable income does not If Tax Due < Tax Credit
exceed 250, 000 except if individual is engaged in - Carry-over; or
business or practice of profession within the PH; - Apply for tax refund or tax credit.
2. Purely compensation income earner or those who
are subject to substituted filing system; University Physicians Services Inc. v. CIR:
3. Individual whose sole income has been subjected to  Once the corporation opted to carry-over, the
FWT; same shall be irrevocable, and no application
- If any of the income is subject to any for cash refund or tax credit shall be applied.
withholding tax transactions, file ITR.
4. Minimum wage earner.

SUBSTITUTED FILING SYSTEM; Requisites-

- The employer, who remits the full amount of tax that
should have been paid by the employee, shall also file
for the return in behalf of the employee.

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